BENHAM CALIFORNIA TAX FREE TRUST /, 485BPOS, 1996-09-03

BENHAM CALIFORNIA TAX FREE TRUST /
485BPOS, 1996-09-03

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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
-----

File No. 2-82734:

Pre-Effective Amendment No.____

Post-Effective Amendment No._23_ X
-----
and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
-----

File No. 811-3706:

Amendment No._27_

BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS
(Exact Name of Registrant as Specified in Charter)

4500 Main Street, Kansas City, MO 64141-6200
(Address of Principal Executive Offices)

Registrant's Telephone Number, including Area Code: 415-965-8300

Douglas A. Paul
General Counsel
1665 Charleston Road, Mountain View, CA 94043
(Name and Address of Agent for Service)

Approximate Date of Proposed Public Offering: Immediately, upon effectiveness
(first offered 8/1/84)

It is proposed that this filing become effective:

__X__ immediately upon filing pursuant to paragraph (b) of Rule 485
_____ on (date) pursuant to paragraph (b) of Rule 485
_____ 60 days after filing pursuant to paragraph (a) of Rule 485
_____ on (date) pursuant to paragraph (a)(1) of Rule 485
_____ 75 days after filing pursuant to paragraph (a) (2) of Rule 485
_____ on (date) pursuant to paragraph (a)(2) of Rule 485

- --------------------------------------------------------------------------------
Registrant has elected to register an indefinite number of shares of beneficial
interest under the Securities Act of 1933 pursuant to Rule 24f-2 under the
Investment Company Act of 1940. On October 25, 1995, the Registrant filed a Rule
24f-2 Notice on Form 24f-2 with respect to its fiscal year ended August 30,
1995.

<PAGE>
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS
1933 Act Post-Effective Amendment No. 223
1940 Act Amendment No. 27

FORM N-1A
CROSS-REFERENCE SHEET

BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS
1933 Act Post-Effective Amendment No. 223
1940 Act Amendment No. 27

FORM N-1A
CROSS-REFERENCE SHEET

PART A: PROSPECTUS

ITEM PROSPECTUS CAPTION

1 Cover Page

2 Transaction and Operating Expense Table

3 Financial Highlights, Performance

4 Investment Management, Further Information About the Funds, Investment
Objectives of the Funds, Information About Investment Policies of the
Funds, Risk Factors and Investment Techniques, Other Investment
Practices

5 Investment Management

5A Not Applicable

6 Further Information About the Funds, How to Redeem Shares, Cover Page,
Distributions, Taxes

7 Cover Page, Distribution of Fund Shares, How to Open an Account, Share
Price, Transfer and Administrative Services

8 How to Redeem Shares, Transfer and Administrative Services

9 Not Applicable

PART B: STATEMENT OF ADDITIONAL INFORMATION

ITEM STATEMENT OF ADDITIONAL INFORMATION CAPTION

10 Cover Page

11 Table of Contents

12 Not Applicable

13 Investment Policies and Techniques, Investment Restrictions, Portfolio
Transactions

14 Trustee and Officers

15 Additional Purchase and Redemption Information, Trustees and Officers

16 Investment Advisory Services, Administrative and Transfer Agent
Services, Expense Limitation Agreement, About the Trust

17 Portfolio Transactions

18 About the Trust

19 Additional Purchase and Redemption Information, Valuation of Portfolio
Securities

20 Taxes

21 Additional Purchase and Redemption Information

22 Performance

23 Cover Page

<PAGE>
BENHAM

California Tax-Free &
Municipal Funds

Prospectus

SEPTEMBER 3,
1996

BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS
- --------------------------------------------------------------------------------

The BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND, BENHAM CALIFORNIA
MUNICIPAL MONEY MARKET FUND, BENHAM CALIFORNIA TAX-FREE LIMITED-TERM FUND
(formerly known as the Benham California Tax-Free Short-Term Fund), BENHAM
CALIFORNIA TAX-FREE INTERMEDIATE-TERM FUND, BENHAM CALIFORNIA TAX-FREE LONG-TERM
FUND, BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND and BENHAM CALIFORNIA TAX-FREE
INSURED FUND (the "Funds") are series of the Benham California Tax-Free and
Municipal Funds, a member of the Twentieth Century family of funds, a family
that includes 66 no-load mutual funds covering a variety of investment
opportunities. Seven of the funds are described in this Prospectus. Their
investment objectives are listed on the inside cover of this Prospectus. The
other funds are described in separate prospectuses.

NO-LOAD MUTUAL FUNDS

Twentieth Century offers retail investors a full line of no-load funds,
investments that have no sales charges or commissions. The Funds offered by this
Prospectus have no 12b-1 plan or other deferred sales charges.

INVESTMENTS IN THE FUNDS ARE NOT INSURED OR GUARANTEED BY THE U.S.
GOVERNMENT OR ANY OTHER AGENCY. THERE IS NO ASSURANCE THAT THE MONEY MARKET
FUNDS WILL BE ABLE TO MAINTAIN A $1.00 SHARE PRICE.

This Prospectus gives you information about the Funds that you should know
before investing. Please read this Prospectus carefully and retain it for future
reference. Additional information is included in the Statement of Additional
Information dated September 3, 1996 and filed with the Securities and Exchange
Commission ("SEC"). It is incorporated into this Prospectus by reference. To
obtain a copy without charge, call or write:

Twentieth Century Mutual Funds
4500 Main Street o P.O. Box 419200
Kansas City, MO 64141-6200 o 1-800-345-2021
International calls: 816-531-5575
Telecommunications Device for the Deaf:
1-800-634-4113 o In Missouri: 816-753-1865
Internet: http://www.twentieth-century.com

- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<PAGE>

INVESTMENT OBJECTIVES OF THE FUNDS
- --------------------------------------------------------------------------------

BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND
AND BENHAM CALIFORNIA MUNICIPAL MONEY MARKET FUND

are money market funds which seek to obtain as high a level of interest
income exempt from federal and California income taxes as is consistent with
prudent investment management and conservation of shareholders' capital.
THERE CAN BE NO ASSURANCE THAT THESE FUNDS WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE PER SHARE.

MINIMUM INITIAL INVESTMENT: $2,500.

BENHAM CALIFORNIA TAX-FREE LIMITED-TERM FUND,
BENHAM CALIFORNIA TAX-FREE INTERMEDIATE-TERM FUND,
AND BENHAM CALIFORNIA TAX-FREE LONG-TERM FUND

seek to obtain as high a level of interest income exempt from federal and
California income taxes as is consistent with prudent investment management
and conservation of shareholders' capital.

MINIMUM INITIAL INVESTMENT: $5,000.

BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND

seeks to provide as high a level of current income exempt from federal and
California income taxes as is consistent with its investment policies, which
permit investment in lower-rated and unrated municipal securities.

MINIMUM INITIAL INVESTMENT: $5,000.

BENHAM CALIFORNIA TAX-FREE INSURED FUND

seeks to provide as high a level of current income exempt from federal and
California income taxes as is consistent with safety of principal through
investment in insured California municipal securities.

MINIMUM INITIAL INVESTMENT: $5,000.

AN INVESTMENT IN THE FUNDS IS NEITHER INSURED NOR GUARANTEED
BY THE U.S. GOVERNMENT.

For ease of reference, the Funds sometimes will be referred to in this
Prospectus by their investment category or fund type. The Benham California
Tax-Free Money Market Fund (the "Tax-Free Money Market Fund") and the Benham
California Municipal Money Market Fund (the "Municipal Money Market Fund")
are referred to as the "Money Market Funds". The Benham California Tax-Free
Limited-Term Fund (the "Tax-Free Limited-Term Fund") the Benham California
Tax-Free Intermediate-Term Fund (the "Tax-Free Intermediate-Term Fund"), the
Benham California Tax-Free Long-Term Fund (the "Tax-Free Long-Term Fund"),
the Benham California Municipal High-Yield Fund, (the "Municipal High-Yield
Fund"), and the Benham California Tax-Free Insured Fund (the "Tax-Free
Insured Fund") are referred to as the "Variable Price Funds".

EACH OF THE FUNDS CONCENTRATES ITS INVESTMENTS GEOGRAPHICALLY BY
INVESTING IN SECURITIES ISSUED BY AGENCIES, INSTRUMENTALITIES AND
MUNICIPALITIES OF THE STATE OF CALIFORNIA. BECAUSE OF THIS CONCENTRATION, THE
FUNDS MAY BE RISKIER THAN SIMILAR MUTUAL FUNDS WITH NO GEOGRAPHIC
CONCENTRATION.

There is no assurance that the Funds will achieve their respective investment
objectives.
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED BY THE FUNDS TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR IN OTHER
PRINTED OR WRITTEN MATERIAL ISSUED BY OR FOR THE FUNDS, AND YOU SHOULD NOT
RELY ON ANY OTHER INFORMATION OR REPRESENTATION.

TABLE OF CONTENTS
- --------------------------------------------------------------------------------

TRANSACTION AND OPERATING EXPENSE TABLE.............4
FINANCIAL HIGHLIGHTS................................5

INFORMATION REGARDING THE FUNDS

INVESTMENT POLICIES OF THE FUNDS...................12
Benham California Tax-Free Money Market
Fund, Benham California Municipal Money
Market Fund, Benham California Tax-Free
Limited-Term Fund, Benham California Tax-
Free Intermediate-Term Fund and Benham
California Tax-Free Long-Term Fund..............12
Benham California Municipal High-Yield Fund......13
Benham California Tax-Free Insured Fund..........13
Portfolio Investment Quality and
Maturity Guidelines.............................13
RISK FACTORS AND INVESTMENT TECHNIQUES.............15
Basic Fixed Income Investment Risks..............15
California Obligations...........................16
Special Considerations Regarding the
Municipal High-Yield Fund.......................17
Tax-Free Insured Fund: Insurance Feature.........17
Municipal Securities.............................17
TAX-EXEMPT SECURITIES..............................19
OTHER INVESTMENT PRACTICES,
THEIR CHARACTERISTICS AND RISKS..................19
Portfolio Turnover...............................19
When-Issued and Forward Commitment
Agreements......................................20
Interest Rate Futures Contracts and
Options Thereon.................................20
Restricted and Illiquid Securities...............20
Cash Management..................................21
Other Techniques.................................21
PERFORMANCE ADVERTISING............................21

HOW TO INVEST WITH TWENTIETH CENTURY AND THE BENHAM GROUP

HOW TO OPEN AN ACCOUNT.............................23
By Mail..........................................23
By Wire..........................................23
By Exchange......................................24
In Person........................................24
SUBSEQUENT INVESTMENTS.............................24
By Mail..........................................24
By Telephone.....................................24
By Wire..........................................24
In Person........................................24
AUTOMATIC INVESTMENT PLAN..........................24
HOW TO EXCHANGE FROM ONE ACCOUNT
TO ANOTHER.......................................24
By Mail..........................................25
By Telephone.....................................25
HOW TO REDEEM SHARES...............................25
By Mail..........................................25
By Telephone.....................................25
By Check-A-Month.................................25
Other Automatic Redemptions......................25
REDEMPTION PROCEEDS................................25
By Check.........................................25
By Wire and ACH..................................25
REDEMPTION OF SHARES IN
LOW-BALANCE ACCOUNTS.............................26
SIGNATURE GUARANTEE................................26
SPECIAL INVESTOR SERVICES..........................26
Automated Information Line.......................26
CheckWriting.....................................26
Open Order Service...............................27
Tax-Qualified Retirement Plans...................27
IMPORTANT POLICIES REGARDING
YOUR INVESTMENTS.................................28
REPORTS TO SHAREHOLDERS............................29
EMPLOYER-SPONSORED RETIREMENT PLANS AND
INSTITUTIONAL ACCOUNTS..........................29

ADDITIONAL INFORMATION YOU SHOULD KNOW

SHARE PRICE........................................30
When Share Price is Determined...................30
How Share Price is Determined....................30
Where to Find Information About Share Price......31
DISTRIBUTIONS......................................31
TAXES..............................................31
Tax-Deferred Accounts............................31
Taxable Accounts.................................31
Special Tax Information..........................33
MANAGEMENT.........................................34
Investment Management............................34
Code of Ethics...................................35
Transfer and Administrative Services.............36
Distribution of Fund Shares......................36
Expenses.........................................36
FURTHER INFORMATION ABOUT THE FUNDS................37

TRANSACTION AND OPERATING EXPENSE TABLE
- ------------------------------------------------------------------------------------------------------------------------------------

Benham Benham Benham Benham Benham Benham
California California California California California California Benham
Tax-Free Municipal Tax-Free Tax-Free Tax-Free Municipal California
Money Market Money Market Limited-Term Intermediate- Long-Term High Yield Tax-Free
SHAREHOLDER Fund Fund Fund Term Fund Fund Fund Insured Fund
TRANSACTION EXPENSES:
<S> <C> <C> <C> <C> <C> <C> <C>
Maximum Sales Load Imposed
on Purchases none none none none none none none
Maximum Sales Load Imposed
on Reinvested Dividends none none none none none none none
Deferred Sales Load none none none none none none none
Redemption Fee(1) none none none none none none none
Exchange Fee none none none none none none none
ANNUAL FUND
OPERATING EXPENSES:(2)
(as a percentage of net assets)
Management Fees (net of
expense limitation) .29% .29% .29% .29% .29% .29% .29%
12b-1 Fees none none none none none none none
Other Expenses .23% .27% .22% .20% .20% .23% .22%
Total Fund Operating Expenses .52% .56% .51% . 49% .49% .52% .51%

Example: You would pay the following expenses on a $1,000 investment,
assuming a 5% annual return and redemption at the end of each time period:

1 year $ 5 $ 6 $ 5 $ 5 $ 5 $ 5 $ 5
3 years 17 18 16 16 16 17 16
5 years 29 31 29 27 27 29 29
10 years 65 70 64 62 62 65 64
</TABLE>

(1)Redemption proceeds sent by wire are subject to a $10 processing fee.

(2)Benham Management Corporation (the "Manager") has agreed to limit each Fund's
total operating expenses to specified percentages of each Fund's average
daily net assets. The agreement provides that the Manager may recover amounts
absorbed on behalf of the Fund during the preceding 11 months if, and to the
extent that, for any given month, Fund expenses were less than the expense
limit in effect at that time. The current expense limits for the Benham
California Tax-Free Money Market Fund and the Benham Municipal Money Market
Fund are .53% and .60%, respectively, of average daily net assets. The
current expense limit for the remaining Funds is .59% of average daily net
assets. These expense limitations are subject to annual renewal in June.

Each Fund pays the Manager management fees equal to an annualized percentage
of each Fund's average daily net assets. Other expenses include administrative
and transfer agent fees paid to Twentieth Century Services, Inc.

The purpose of the above table is to help you understand the various costs
and expenses that you, as a shareholder, will bear directly or indirectly in
connection with an investment in the shares of the Funds. The example set forth
above assumes reinvestment of all dividends and distributions and uses a 5%
annual rate of return as required by SEC regulations.

NEITHER THE 5% RATE OF RETURN NOR THE EXPENSES SHOWN ABOVE SHOULD BE
CONSIDERED INDICATIONS OF PAST OR FUTURE RETURNS AND EXPENSES. ACTUAL RETURNS
AND EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS

TAX-FREE MONEY MARKET FUND

The Financial Highlights for each of the periods presented have been
audited by KPMG Peat Marwick LLP, independent auditors (except as noted). Their
reports appear in each Fund's annual report to shareholders which are
incorporated by reference into the Statement of Additional Information. The
semiannual and the annual reports contain additional performance information and
will be made available upon request and without charge.

For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31

Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------

PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
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............ .0162 .0328 .0207 .0209 .0298 .0420 .0510 .0559 .0464 .0383
Net Realized and
Unrealized Losses
on Investments..... 0 (.0003) 0 0 0 0 0 0 (.0053) 0
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Total Income
From Investment
Operations........ .0162 .0325 .0207 .0209 .0298 .0420 .0510 .0559 .0411 .0383
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Less Distributions
Dividends from
Net Investment
Income............ (.0162) (.0325) (.0207) (.0209) (.0298) (.0420) (.0510) (.0559) (.0411) (.0383)
Distributions from Net
Realized Capital Gains 0 0 0 0 0 0 0 0 0 0
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Total Distributions (.0162) (.0325) (.0207) (.0209) (.0298) (.0420) (.0510) (.0559) (.0411) (.0383)
------- ------ ------ ------ ------ ------ ------ ------ ------ -------
Net Asset Value at
End of Period........ $ 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
======= ====== ====== ====== ====== ====== ====== ====== ====== =======
TOTAL RETURN*........ 1.63% 3.31% 2.09% 2.13% 3.00% 4.23% 5.23% 5.70% 4.24% 3.88%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands of dollars) $433,365 414,099 371,074 338,731 321,307 361,007 463,130 490,700 328,532 318,095
Ratio of Expenses to
Average Daily
Net Assets+........ .52%** .52% .50% .51% .54% .56% .56% .59% .63% .67%
Ratio of Net
Investment Income
to Average Daily
Net Assets+........ 3.27%** 3.28% 2.07% 2.09% 2.98% 4.20% 5.10% 5.59% 4.10% 3.83%

- ------------------------------------------------------------------------------------------------------------------------------------
+ The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements.

* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.

** Annualized.
</TABLE>

- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
MUNICIPAL MONEY MARKET FUND

For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 (except as noted)

Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1996 1995 1994 1993 1992 1991+
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------

PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period..........$ 1.00 1.00 1.00 1.00 1.00 1.00
Income From Investment Operations
Net Investment Income......................... .0168 .0331 .0213 .0221 .0344 .0293
Net Realized and Unrealized Losses on Investments 0 (.0003) 0 0 0 0
------- ------ ------ ------ ------ ------
Total Income From Investment Operations...... .0168 .0328 .0213 .0221 .0344 .0293
------- ------ ------ ------ ------ ------
Less Distributions
Dividends from Net Investment Income.......... (.0168) (.0328) (.0213) (.0221) (.0344) (.0293)
Distributions from Net Realized Capital Gains. 0 0 0 0 0 0
------- ------ ------ ------ ------ ------
Total Distributions.......................... (.0168) (.0328) (.0213) (.0221) (.0344) (.0293)
------- ------ ------ ------ ------ ------
Net Asset Value at End of Period................ $ 1.00 1.00 1.00 1.00 1.00 1.00
======= ====== ====== ====== ====== ======
TOTAL RETURN*................................... 1.69% 3.35% 2.15% 2.25% 3.63% 3.04%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in
thousands of dollars)....................... $197,729 191,722 243,701 247,621 254,823 136,860
Ratio of Expenses to Average Daily Net Assets++ .56%** .53% .51% .46% .07% 0%
Ratio of Net Investment Income to Average
Daily Net Assets++.......................... 3.35%** 3.31% 2.13% 2.21% 3.44% 4.39%**

- ------------------------------------------------------------------------------------------------------------------------------------
+ From December 31, 1990 (commencement of operations) through August 31, 1991.

++ The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements.

* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.

** Annualized.
</TABLE>
6

- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
TAX-FREE LIMITED-TERM FUND

For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 (except as noted)

Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1996 1995 1994 1993 1992+
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------

PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C>
Net Asset Value at Beginning of Period..................... $10.23 10.12 10.34 10.12 10.00
Income From Investment Operations
Net Investment Income.................................... .2129 .4148 .3766 .3840 .1012
Net Realized and Unrealized Gains (Losses) on Investments .0699 .1099 (.1832) .2227 .1200
------- ------- ------- ------- -------
Total Income From Investment Operations................. .2828 .5247 .1934 .6067 .2212
------- ------- ------- ------- -------
Less Distributions
Dividends from Net Investment Income..................... (.2128) (.4147) (.3761) (.3867) (.1012)
Distributions from Net Realized Capital Gains............ 0 0 0 0 0
Distributions in Excess of Net Realized Capital Gains.... 0 0 (.0373) 0 0
------- ------- ------- ------- -------
Total Distributions..................................... (.2128) (.4147) (.4134) (.3867) (.1012)
-------- ------- ------- ------- -------
Net Asset Value at End of Period........................... $10.30 10.23 10.12 10.34 10.12
======== ======= ======= ======= =======
TOTAL RETURN*.............................................. 2.79% 5.33% 1.90% 6.15% 1.47%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period (in thousands of dollars).... $98,895 104,723 120,627 114,019 52,171
Ratio of Expenses to Average Daily Net Assets++.......... .51%** .51% .51% .36% 0%
Ratio of Net Investment Income to Average Daily Net Assets++ 4.14%** 4.10% 3.68% 3.76% 4.08%**
Portfolio Turnover Rate.................................. 38.00% 49.75% 65.66% 54.42% 19.37%

- ------------------------------------------------------------------------------------------------------------------------------------
+ From June 1, 1992 (commencement of operations) through August 31, 1992.

++ The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements.

* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.

** Annualized.
</TABLE>
7

- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
TAX-FREE INTERMEDIATE-TERM FUND

For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31

PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period.. $11.06 10.86 11.36 10.85 10.49 10.13 10.14 10.06 10.30 10.56
Income From
Investment Operations
Net Investment Income .2717 .5414 .5354 .5582 .5853 .6038 .6184 .6305 .6294 .6241
Net Realized and Unrealized
Gains (Losses) on
Investments....... .2097 .2000 (.4104) .5285 .3600 .3600 (.0100) .0800 (.2400) (.2600)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Income From
Investment Operations .4814 .7414 .1250 1.0867 .9453 .9638 .6084 .7105 .3894 .3641
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less Distributions
Dividends from Net
Investment Income. (.2714) (.5414) (.5351) (.5592) (.5853) (.6038) (.6184) (.6305) (.6294) (.6241)
Distributions from Net
Realized Capital Gains 0 0 (.0752) (.0175) 0 0 0 0 0 0
Distributions in Excess
of Net Realized
Capital Gains..... 0 0 (.0147) 0 0 0 0 0 0 0
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions (.2714) (.5414) (.6250) (.5767) (.5853) (.6038) (.6184) (.6305) (.6294) (.6241)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value at
End of Period........ $11.27 11.06 10.86 11.36 10.85 10.49 10.13 10.14 10.06 10.30
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN*........ 4.39% 7.09% 1.11% 10.42% 9.18% 9.74% 6.16% 7.28% 3.90% 3.53%
- ------------

SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands
of dollars)........ $438,404 417,550 448,293 444,460 304,988 241,496 191,217 167,444 157,300 166,966
Ratio of Expenses to
Average Daily
Net Assets+........ .49%** .48% .48% .50% .52% .55% .58% .60% .64% .67%
Ratio of Net Investment
Income to Average
Daily Net Assets+.. 4.85%** 5.02% 4.82% 5.05% 5.50% 5.84% 6.08% 6.25% 6.19% 5.92%
Portfolio Turnover Rate 24.01% 25.44% 43.80% 26.76% 48.70% 28.58% 20.05% 39.89% 47.01% 51.94%

- ------------------------------------------------------------------------------------------------------------------------------------

+ The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements.

* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.

** Annualized.

</TABLE>
8

- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
TAX-FREE LONG-TERM FUND

For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31

PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period.. $10.94 10.88 12.02 11.44 11.00 10.45 10.67 10.36 10.54 11.42
Income From
Investment Operations
Net Investment Income .3068 .6229 .6266 .6649 .6878 .6987 .7060 .7388 .7436 .7675
Net Realized and
Unrealized Gains (Losses)
on Investments..... .4499 .1183 (.7101) .8460 .4400 .5500 (.2200) .3100 (.1800) (.8011)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Income (Loss) From
Investment Operations .7567 .7412 (.0835) 1.5109 1.1278 1.2487 .4860 1.0488 .5636 (.0336)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Less Distributions
Dividends from Net
Investment Income. (.3067) (.6231) (.6261) (.6658) (.6878) (.6987) (.7060) (.7388) (.7436) (.7675)
Distributions from Net
Realized Capital Gains 0 (.0581) (.4304) (.2651) 0 0 0 0 0 (.0789)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total Distributions (.3067) (.6812) (1.0565) (.9309) (.6878) (.6987) (.7060) (.7388) (.7436) (.8464)
-------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net Asset Value
at End of Period..... $11.39 10.94 10.88 12.02 11.44 11.00 10.45 10.67 10.36 10.54
======== ======= ======= ======= ======= ======= ======= ======= ======= =======
TOTAL RETURN*........ 6.96% 7.21% (.78)% 14.02% 10.58% 12.26% 4.66% 10.39% 5.61% (.31)%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands of dollars) $293,729 276,085 277,477 338,075 275,880 247,244 197,394 179,737 143,191 179,523
Ratio of Expenses to
Average Daily
Net Assets+........ .49%** .49% .48% .49% .52% .55% .57% .58% .63% .65%
Ratio of Net Investment
Income to Average Daily
Net Assets+........ 5.43%** 5.84% 5.51% 5.76% 6.14% 6.48% 6.64% 6.98% 7.19% 6.87%
Portfolio Turnover Rate 25.27% 59.92% 61.93% 55.11% 71.59% 37.80% 74.11% 78.08% 34.52% 81.54%

* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.

** Annualized.

</TABLE>
9

- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
MUNICIPAL HIGH-YIELD FUND

For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 (except as noted)

Feb. 29, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31, Aug. 31,
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987+
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------------

PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period.. $9.11 9.06 9.66 9.12 8.84 8.54 8.68 8.45 8.69 10.00
Income From
Investment Operations
Net Investment Income .2780 .5612 .5629 .5703 .5809 .5879 .6266 .6611 .6527 .4509
Net Realized and
Unrealized Gains
(Losses) on Investments .2698 .0497 (.4793) .5401 .2800 .3000 (.1400) .2300 (.2400) (1.3100)
------- ------ ------ ------- ------- ------- ------ ------- ------ --------
Total Income (Loss)
From Investment
Operations........ .5478 .6109 .0836 1.1104 .8609 .8879 .4866 .8911 .4127 (.8591)
------- ------ ------ ------- ------- ------- ------ ------- ------ --------
Less Distributions
Dividends from Net
Investment Income. (.2778) (.5609) (.5627) (.5704) (.5809) (.5879) (.6266) (.6611) (.6527) (.4509)
Distributions from
Net Realized
Capital Gains..... 0 0 (.1208) 0 0 0 0 0 0 0
Distributions in
Excess of Net Realized
Capital Gains..... 0 0 (.0001) 0 0 0 0 0 0 0
------- ------ ------ ------- ------- ------- ------ ------- ------ --------
Total Distributions (.2778) (.5609) (.6836) (.5704) (.5809) (.5879) (.6266) (.6611) (.6527) (.4509)
------- ------ ------ ------- ------- ------- ------ ------- ------ --------
Net Asset Value at
End of Period........ $9.38 9.11 9.06 9.66 9.12 8.84 8.54 8.68 8.45 8.69
======= ====== ====== ======= ======= ======= ====== ======= ====== ========
TOTAL RETURN*........ 6.06% 7.09% .87% 12.61% 10.11% 10.75% 5.77% 10.86% 5.17% (10.19)%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands of dollars) $129,937 116,166 116,000 114,564 79,949 65,741 44,602 32,631 13,169 8,434
Ratio of Expenses to
Average Daily
Net Assets++....... .52%** .51% .51% .55% .56% .50% .24% 0% 0% 0%
Ratio of Net Investment
Income to Average
Daily Net Assets++. 5.97%** 6.30% 6.02% 6.14% 6.54% 6.79% 7.23% 7.67% 7.85% 7.50%**
Portfolio Turnover Rate 26.75% 40.00% 42.55% 27.40% 32.51% 47.41% 103.74% 49.54% 142.86% 57.42%

- ------------------------------------------------------------------------------------------------------------------------------------

+ From December 30, 1986 (commencement of operations) through August 31, 1987.

++ The ratio for the six months ended February 29, 1996, includes expenses paid through expense offset arrangements.

* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.

** Annualized.
</TABLE>
10

- ------------------------------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
TAX-FREE INSURED FUND

For a Share Outstanding Throughout the Six Months Ended February 29 (Unaudited) and the Years Ended August 31 (except as noted)

PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value at
Beginning of Period.. $ 9.89 9.67 10.64 9.97 9.47 9.00 9.23 8.80 9.07 10.00
Income From
Investment Operations
Net Investment Income .2688 .5320 .5267 .5470 .5705 .5733 .5889 .6026 .6246 .4370
Net Realized and
Unrealized Gains (Losses)
on Investments.... .3906 .2200 (.6922) .7588 .5000 .4700 (.2300) .4300 (.2700) (.9300)
-------- ------ ------- ------- ------- ------- ------ ------- ------ -------
Total Income (Loss)
From Investment
Operations........ .6594 .7520 (.1655) 1.3058 1.0705 1.0433 .3589 1.0326 .3546 (.4930)
-------- ------ ------- ------- ------- ------- ------ ------- ------ -------
Less Distributions
Dividends from Net
Investment Income. (.2694) (.5320) (.5263) (.5477) (.5705) (.5733) (.5889) (.6026) (.6246) (.4370)
Distributions from
Net Realized
Capital Gains..... 0 0 (.2082) (.0881) 0 0 0 0 0 0
Distributions in Excess of
Net Realized
Capital Gains..... 0 0 (.0700) 0 0 0 0 0 0 0
-------- ------ ------- ------- ------- ------- ------ ------- ------ -------
Total Distributions (.2694) (.5320) (.8045) (.6358) (.5705) (.5733) (.5889) (.6026) (.6246) (.4370)
-------- ------ ------- ------- ------- ------- ------ ------- ------ -------
Net Asset Value at
End of Period........ $10.28 9.89 9.67 10.64 9.97 9.47 9.00 9.23 8.80 9.07
======== ====== ======= ======= ======= ======= ====== ======= ====== =======
TOTAL RETURN*........ 6.71% 8.09% (1.68)% 13.74% 11.67% 11.87% 3.96% 12.04% 4.58% (8.51)%
- ------------
SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands of dollars)$190,473 178,913 189,439 223,440 145,965 94,951 59,870 42,569 29,531 12,748
Ratio of Expenses to
Average Daily
Net Assets++....... .51%** .50% .49% .52% .55% .59% .61% .66% 0% 0%
Ratio of Net Investment
Income to Average
Daily Net Assets++. 5.26%** 5.54% 5.20% 5.37% 5.90% 6.18% 6.43% 6.62% 7.39% 7.11%**
Portfolio Turnover Rate 19.45% 40.45% 47.12% 60.94% 53.73% 37.59% 117.47% 73.02% 145.29% 21.04%

- ------------------------------------------------------------------------------------------------------------------------------------

+ From December 30, 1986 (commencement of operations) through August 31, 1987.

++ The ratios for the six months ended February 29, 1996 include expenses paid through expense offset arrangements.

* Total return figures assume reinvestment of dividends and capital gain distributions and are not annualized.

** Annualized.
</TABLE>
11

INFORMATION REGARDING THE FUNDS
- --------------------------------------------------------------------------------

INVESTMENT POLICIES
OF THE FUNDS

The Funds have adopted certain investment restrictions that are set
forth in the Statement of Additional Information. Those restrictions, as well
as the investment objectives of the Funds identified on the inside front
cover page of this Prospectus and any other investment policies designated as
"fundamental" in this Prospectus or in the Statement of Additional
Information, cannot be changed without shareholder approval. The Funds have
implemented additional investment policies and practices to guide their
activities in the pursuit of their respective investment objectives. These
policies and practices, which are described throughout this Prospectus, are
not designated as fundamental policies and may be changed without shareholder
approval.

Each Fund is a "diversified company" as defined in the Investment
Company Act of 1940 (the "1940 Act"), with the exception of the Municipal
Money Market Fund which is a "non-diversified company." This means that, with
respect to 75% of its total assets, each Fund will not invest more than 5% of
its total assets in the securities of a single issuer. As a result of new
rules applicable to all money market funds, the Municipal Money Market Fund
will also seek to meet this test.

To meet federal tax requirements for qualifications as a regulated
investment company, each Fund must limit its investments so that at the close
of each quarter of its taxable year (1) no more than 25% of its total assets
are invested in the securities of a single issuer (other than the U.S
government or a regulated investment company), and (2) with respect to at
least 50% of its total assets, no more than 5% of its total assets are
invested in the securities of a single issuer.

Each Fund intends to remain fully invested in municipal obligations. As
a fundamental policy, each Fund will invest at least 80% of its net assets in
California municipal obligations. The remaining 20% of net assets may be
invested in (1) municipal obligations issued in other states, (2) municipal
obligations issued by territories or possessions of the U.S., such as Puerto
Rico, and (3) U.S. government obligations. For temporary defensive purposes,
each Fund may invest more than 20% of its net assets in these obligations.
For liquidity purposes, each Variable Price Fund may invest up to 5% of its
total assets in shares of the Money Market Funds.

The Funds will invest at least 80% of its net assets in obligations with
interest exempt from regular federal income tax. The Municipal Money Market
and Municipal High-Yield Funds, unlike the other Funds, may invest
substantially all of their assets in securities which are subject to the
alternative minimum tax.

The descriptions that follow are designed to help you determine whether
a Fund fits your investment objectives. You may want to pursue more than one
objective by investing in other funds in the Twentieth Century family of
funds.

For an explanation of the securities ratings referred to in the
following discussion, see "Other Information" in the Statement of Additional
Information.

BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND, BENHAM CALIFORNIA MUNICIPAL
MONEY MARKET FUND, BENHAM CALIFORNIA TAX-FREE LIMITED-TERM FUND, BENHAM
CALIFORNIA INTERMEDIATE-TERM FUND, AND BENHAM CALIFORNIA TAX-FREE LONG-TERM
FUND

These Funds seek to obtain as high a level of interest income exempt
from federal and California income taxes as is consistent with prudent
investment management and conservation of shareholders' capital.

BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND

The Municipal High-Yield Fund seeks to provide as high a level of
current income exempt from federal and California income taxes as is
consistent with its investment policies, which permit investment in
lower-rated and unrated municipal securities.

BENHAM CALIFORNIA TAX-FREE INSURED FUND

The Tax-Free Insured Fund seeks to provide as high a level of current
income exempt from federal and California income taxes as is consistent with
safety of principal through investment in insured California municipal
securities.

PORTFOLIO INVESTMENT QUALITY AND MATURITY GUIDELINES

The Money Market Funds may be appropriate for investors seeking share
price stability who can accept the lower yields that short-term obligations
typically provide. To offer investors the potential for higher yields, the
Variable Price Funds invest in obligations with longer maturities.

MONEY MARKET FUNDS

In selecting investments for the Money Market Funds, the Manager adheres
to regulatory guidelines concerning the quality and maturity of money market
fund investments as well as to internal guidelines designed to minimize
credit risk. In particular, each Fund:

(1) Buys only U.S. dollar-denominated obligations with remaining
maturities of 13 months or less (and variable- and floating-rate
obligations with demand features that effectively shorten their
maturities to 13 months or less);

(2) Maintains a dollar-weighted average maturity of 60 days or less; and

(3) Restricts its investments to high-quality obligations determined by
the Manager, pursuant to procedures established by the board of
trustees, to present minimal credit risks.

To be considered high-quality, an obligation must be:

(1) A U.S. government obligation; or

(2) Rated (or issued by an issuer rated with respect to a class of
comparable short-term obligations) in one of the two highest rating
categories for short-term obligations by at least two nationally
recognized statistical rating agencies ("rating agencies") (or one if
only one has rated the obligation); or

(3) An unrated obligation judged by the Manager, pursuant to guidelines
established by the board of trustees, to be of quality comparable to
the securities listed above.

While it adheres to the same quality and maturity criteria as Tax-Free
Money Market Fund, Municipal Money Market Fund may purchase private activity
municipal securities. The interest from these securities is treated as a
tax-preference item in calculating federal alternative minimum tax (AMT)
liability. In the past, private activity securities have provided somewhat
higher yields than comparable municipal securities whose interest is not a
tax-preference item. Under normal circumstances, the Manager expects to
invest between 50% and 80% of Municipal Money Market Fund's total assets in
private activity securities. Therefore, the Fund is designed for investors
who do not expect to pay alternative minimum taxes. See "Taxes" on page 31
for more information.

VARIABLE PRICE FUNDS

The quality and maturity criteria of the Variable Price Funds is as
follows:

TAX-FREE LIMITED-TERM FUND
TAX-FREE INTERMEDIATE-TERM FUND
TAX-FREE LONG-TERM FUND

The Tax-Free Limited-Term, Tax-Free Intermediate-Term and Tax-Free Long-Term
Funds have identical policies governing the quality of securities in which
they may invest. The Funds differ in their maturity criteria as depicted in
the table on the next page.

- --------------------------------------------------------------------------------
TYPICAL WEIGHTED
MATURITY OF AVERAGE PORTFOLIO
FUND INVESTMENTS MATURITY

- --------------------------------------------------------------------------------
Tax-Free one to one to
Limited-Term five years five years

- --------------------------------------------------------------------------------
Tax-Free four or five to ten
Intermediate-Term more years years

- --------------------------------------------------------------------------------
Tax-Free seven or ten or
Long-Term more years more years
- --------------------------------------------------------------------------------

In terms of credit quality, each of the Tax-Free Limited-Term, Tax-Free
Intermediate-Term and Tax-Free Long-Term Funds restricts its investments to:

(1) Municipal bonds rated, when acquired, within the four highest categories
designated by a rating agency;

(2) Municipal notes (including variable-rate demand obligations) and
tax-exempt commercial paper rated, when acquired, within the two highest
categories designated by a rating agency; and

(3) Unrated obligations judged by the Manager, under the direction of the
board of trustees, to be of quality comparable to the securities listed
above.

MUNICIPAL HIGH-YIELD FUND

Like Tax-Free Long-Term Fund, Municipal High-Yield Fund invests
primarily in long- and intermediate-term California municipal obligations and
maintains a weighted average portfolio maturity of ten or more years.
Although Municipal High-Yield Fund typically invests a significant portion of
its assets in investment-grade bonds, the Manager does not adhere to specific
rating criteria in selecting investments for this Fund. The Fund invests in
securities rated or judged by the Manager to be of below investment-grade
quality (e.g., bonds rated BB/Ba or lower, which are sometimes referred to as
"junk bonds") or unrated bonds. The Municipal High Yield Fund currently
expects to invest between 20% and 40% of its total assets in below investment
grade securities.

Many issuers of medium- and lower-quality bonds choose not the have
their obligations rated, and a large portion of the Municipal High-Yield
Fund's portfolio may consist of obligations that, when acquired, were not
rated. While there is no limit on the percentage of assets the Fund may
invest in unrated securities, the Manager will not select investments for the
Fund that, at the time of purchase (1) are not paying interest, (2) are rated
C (lowest grade) by Moody's Investors Service, Inc. (Moody's) or C or D by
Standard & Poor's Corporation (S&P), or (3) are considered by the Manager,
under direction of the trustees, to be of a quality as low as obligations
rated C or D by Moody's or S&P. See "Other Information" in the Statement of
Additional Information" for a summary of bond ratings.

Municipal High-Yield Fund may invest in investment-grade municipal
obligations if the Manager considers it appropriate to do so. Investments of
this nature may be made due to market considerations (e.g., a limited supply
of medium- and lower-grade municipal obligations) or to increase liquidity of
the Fund. Investing in high-grade obligations may lower the Fund's return.

Municipal High-Yield Fund may purchase private activity municipal
securities. The interest from these securities is treated as a tax-preference
item in calculating federal AMT liability. Under normal circumstances, the
advisor expects to invest between 10% and 30% of the Fund's total assets in
private activity securities. Therefore, the Fund is better suited for
investors who do not expect alternative minimum tax liability. See "Taxes",
on page 31 for more information.

TAX-FREE INSURED FUND

Tax-Free Insured Fund invests primarily in long-term municipal
obligations covered by insurance that guarantees the timely payment of
interest and repayment of principal. The Fund maintains a weighted average
portfolio maturity of ten or more years.

Under normal conditions, at least 65% of the Fund's total assets are
invested in insured municipal obligations. Securities held by the Fund may be
(1) insured under a new-issue insurance policy obtained by the issuer of the
security, (2) insured under a secondary market insurance policy purchased by
the Fund or a previous bondholder, (3) insured under a "while-in-portfolio"
insurance policy purchased by the Fund, (4) secured by an escrow or trust
account holing U.S. government securities, or (5) rated AAA by a rating
agency based upon the issuer's credit quality.

Tax-Free Insured Fund may also invest in short-term securities carrying
one of the two highest ratings designated by a rating agency. For more
information about the Fund's insurance feature, see page 17.

RISK FACTORS AND
INVESTMENT TECHNIQUES

The Funds are designed for individuals in upper tax brackets seeking
income free from federal and California personal income taxes. By themselves,
the Funds do not constitute balanced investment plans. When choosing between
the Funds, you should consider relative yield potential together with
potential changes in share price, because these two factors determine each
Fund's total return to investors.

BASIC FIXED INCOME
INVESTMENT RISKS

The Money Market Funds may be appropriate for investors who would like
to (1) earn income at tax-exempt money market rates while preserving their
investment or (2) use a money market fund as part of a long-term, balanced
investment portfolio consisting of money market instruments, bonds and
stocks.

The Variable Price Funds are quite distinct from one another; these
Funds offer a range of potential for income and total return based on their
respective quality and maturity criteria.

The basic risk factors you should consider before making an investment
in one or more of the Funds are described in the following paragraphs.

INTEREST RATE RISK

One feature the Funds have in common is their susceptibility to changing
interest rates. For both Money Market Funds, interest rate changes affect the
level of income the Funds generate for shareholders. For the Variable Price
Funds, changing interest rates affect not only the level of income the Funds
generate for shareholders, but their share prices as well. In general, when
interest rates rise, the Variable Price Funds' share prices decline; when
interest rates decline, their share prices rise.

This pattern is due to the time value of money. A bond's worth is
determined by the present value of its future cash flows. Consequently,
changing interest rates have a greater effect on the present value of a
long-term bond than a short-term bond.

CREDIT RISK

In selecting investments for each Fund, the Manager carefully considers
the creditworthiness of parties to be relied upon for the timely payment of
interest and repayment of principal.

In many cases, these parties include not only the issuer of the
obligation, but a bank or other financial intermediary who offers a letter of
credit or another form of guarantee on the obligation.

LIQUIDITY RISK

A security's rating reflects the opinions of the rating agencies that
issue them and are not absolute standards of quality. Because of the cost of
obtaining credit ratings, some issuers forego them. Under the direction of
the board of trustees, the Manager may buy unrated bonds for the Funds if
these securities are judged to be of a quality consistent with the Funds'
investment policies. Similarly, on behalf of the Variable Price Funds, the
Manager may purchase securities whose ratings are not consistent with the
Funds' rating criteria but which the Manager judges under the direction of
the board of trustees to present credit risks consistent with the Funds'
quality standards. With the exception of Municipal High-Yield Fund (which may
invest without limitation in unrated securities), each Fund may invest up to
10% of its net assets in unrated securities. Unrated securities may be less
liquid than rated securities.

The Limited-Term, Intermediate-Term and Long-Term Funds may invest up to
25% of their total assets in securities rated Baa or BBB- (the lowest
investment grade category). Such securities are medium-grade investment
obligations that may have speculative characteristics. Changes in economic
conditions or other circumstances are more likely to lead to a weakened
capacity for such obligations to make principal and interest payments.

CONCENTRATION RISK

Each of the Funds described in this Prospectus may invest 25% or more of
its total assets in obligations that generate income from similar types of
projects (in particular, projects in health care, electric, water/sewer,
education, and transportation). Political or economic developments affecting
a single issuer or industry or similar types of projects may have a
significant effect on Fund performance.

CALL RISK

Many municipal obligations are issued with a call feature (call features
include a date on which the issuer has reserved the right to redeem the
obligation prior to maturity). An obligation may be called for redemption
before the Manager would otherwise choose to eliminate it from a Fund's
holdings. A call may also reduce an obligation's yield to maturity.

CALIFORNIA OBLIGATIONS

Because the Funds invest primarily in California municipal securities,
each Fund's yield and share price are affected by political and economic
developments within the State of California.

California municipal budgets have been strained in recent years.
"Proposition 13" and similar California constitutional, statutory, and
legislative initiatives have restricted the ability of California taxing
entities to increase real property taxes and other tax revenues.

State and local revenues are also adversely affected by the recent
recession, the worst in the state since the 1930's. California has
experienced a net loss of approximately 750,000 jobs since 1990. However, net
job growth has occurred since early 1994 and all the jobs lost since the
recession have now been replaced. The state government's response to these
events in the early 1990's resulted in reductions in the amount of and rate
of growth in the aid to counties, cities and school districts. The impact of
these reductions has been lessened by the state's recent economic recovery.

However, any events which affect the revenue received by the state and
local bodies in California can have an impact on the Funds. For example,
recent developments at the federal level, particularly federal welfare
reform, may

have the effect of offsetting the revenue gains achieved in the last two
years. The ability of state and local entities to make scheduled payments of
interest and principal on their outstanding debt obligations could be
negatively affected by such events.

For further information about the risks associated with investing in
California obligations, please see the Statement of Additional Information.

SPECIAL CONSIDERATIONS REGARDING THE
MUNICIPAL HIGH-YIELD FUND

Municipal High-Yield Fund is designated for long-term investors who can
accept the risks associated with seeking a high level of current income from
long- or intermediate-term, medium- or lower-quality California municipal
bonds.

Medium- to lower-rated and unrated municipal bonds frequently are traded
in markets with a limited number of participants. These conditions may limit
the availability of bonds eligible for purchase by the Fund and the
availability of ready buyers for bonds the Manager wants to sell on behalf of
the Fund. Adverse publicity and changing investor perceptions, whether or not
they are based on fundamental analysis, may affect the value and liquidity of
lower-quality bonds, especially in markets with a low volume of trading.

Lower-quality and unrated bonds may be more sensitive to adverse
economic changes in specific localities or among specific types of projects
and generally are regarded as speculative. There is no guarantee that
interest payments or principal repayments will be made when due. A delay in
debt service payment or other deterioration in credit quality could
negatively affect the Fund's performance.

However, under the direction of the trustees, the Manager attempts to
reduce the risks of investing in medium- and lower- rated and unrated
municipal obligations through active portfolio management, diversification,
thorough credit analysis, and attention to developments and trends in the
economy and the financial markets. More than the other Funds described in
this Prospectus, Municipal High-Yield Fund relies on the Manager's credit
analysis to achieve its investment objective.

TAX-FREE INSURED FUND:
INSURANCE FEATURE

Insurance attached to securities held in Tax-Free Insured Fund's
portfolio provides for the timely payment of interest and repayment of
principal on those securities; however, this insurance does not guarantee the
market value of the securities or the value of the Fund's shares.

A bond issuer may purchase new-issue insurance to enhance the credit
quality of a security. By paying a premium and meeting the insurer's
underwriting standards, the bond issuer obtains a credit rating for its bonds
comparable to the rating assigned to the insurer's claims-paying ability.

A bondholder may purchase a secondary market insurance policy for a
particular bond after it is issued. The Fund expects to limit its purchases
of securities insured under new-issue or secondary market insurance policies
to those insured by companies whose claims-paying ability is rated AAA by a
rating agency at the time of the purchase. New-issue and secondary market
insurance policies cannot be canceled; they continue in force as long as the
bonds are outstanding.

MUNICIPAL SECURITIES

Municipal securities are issued to raise money for a variety of public
purposes, including general financing for state and local governments as well
as financing for specific projects and public facilities. Municipal
securities may be backed by the full taxing power of a municipality, the
revenues from a specific project, or the credit of a private organization.
The following discussion provides a brief description of some securities the
Funds may buy. The Funds are not limited by this discussion, and they may buy
other types of securities and enter into other types of transac-

tions that meet their respective quality, maturity, and liquidity
requirements.

MUNICIPAL NOTES typically have maturities of 13 months or less and are
used to provide short-term capital or to meet cash flow demands.

GENERAL OBLIGATION BONDS are backed by the taxing power of the issuer.

REVENUE BONDS are backed by the revenues derived from a specific
project, system, or facility. Industrial development bonds are a type of
revenue bond backed by the credit of a private issuer.

VARIABLE- AND FLOATING-RATE DEMAND OBLIGATIONS have interest rate
adjustment formulas designed to stabilize their market values. These
obligations normally have maturities in excess of one year but carry demand
features permitting the holders to demand repayment of principal at any time
or at specified intervals. With respect to the Money Market Funds, such
intervals may not exceed 13 months.

TENDER OPTION BONDS are created by combining an intermediate- or
long-term fixed-rate tax-exempt bond with a tender agreement that gives the
holder the option to tender the bond at face value. Tender option bonds
purchased by the Funds are structured with rates that are reset weekly or at
regular intervals.

A sponsor may terminate a tender option agreement if, for example, the
issuer of the underlying bond defaults on interest payments, or the
underlying bond is downgraded or becomes taxable. Under such circumstances, a
Fund might then own a bond that does not meet its quality or maturity
criteria.

The Manager monitors the credit quality of bonds underlying the Funds'
tender option bond holdings and will sell or put back a tender option bond if
the rating on the underlying bond falls below the second-highest rating
designated by a rating agency. In addition, each Fund limits its investments
in tender option bonds to 15% of net assets.

MUNICIPAL LEASE OBLIGATIONS are issued by state and local governments to
acquire land and a wide variety of equipment and facilities. These
obligations typically are not fully backed by the issuing municipality's
ability to assess taxes to meet its debt obligations. If the state or local
government does not make appropriations for the following year's lease
payments, the lease may terminate, with the possibility of default on the
lease obligation and loss to investors.

Prior to purchasing a municipal lease obligation (or a participation
interest in such obligations) and on a regular basis thereafter, pursuant to
guidelines adopted by the board of trustees, the Manager evaluates the credit
quality and liquidity of the obligation. In making this evaluation, the
Manager considers various credit factors, such as the necessity of the
project; the issuer's credit quality, future borrowing plans, and sources of
revenue pledged for lease repayment; general economic conditions in the
region where the security is issued; liquidity indictors such as dealer
activity; and with regard to unrated obligations the likelihood such lease
will not be canceled.

ZERO-COUPON MUNICIPAL SECURITIES do not make regular interest payments.
Instead, they are sold at a deep discount to their face value. In calculating
daily dividends, the Funds take into account, as income, a portion of the
difference between these securities' purchase prices and face values. Because
zero-coupon securities do not pay current income, their prices can be very
volatile when interest rates change.

The Variable Price Funds may invest in INVERSE FLOATERS to generate
higher tax-exempt yields than are offered by other instruments. Inverse
floaters bear interest rates that move inversely to market interest rates.
Generally, the interest rate on the inverse floater is computed as the
difference between an above-market fixed rate of interest and a floating rate
determined by reference to a market-based or bond-specific interest rate.

Since inverse floaters are long-term bonds, the value of these
securities may be volatile when market interest rates change. In addition,
there is no guarantee that the Manager will find a ready buyer for inverse
floaters. The Money Market Funds may not invest in inverse floaters.

AMT BONDS (MUNICIPAL MONEY MARKET AND MUNICIPAL HIGH YIELD FUNDS ONLY)
typically are tax-exempt "private activity" bonds issued after August 7,
1986, whose proceeds are directed at least in part to a private, for-profit
organization. Although the interest income from AMT bonds is exempt from
regular federal income tax, that income is a tax preference item for purposes
of the AMT.

In addition, corporate investors should note that all income from a Fund
may be part of an adjustment to AMT under Section 55 of the Internal Revenue
Code and the environmental tax under Internal Revenue Code Section 59A. The
AMT is a special separate tax that applies to certain taxpayers who have
certain adjustments to income or tax preference items.

TAX-EXEMPT SECURITIES

Historically, interest paid on securities issued by states, cities,
counties, school districts and other political subdivisions of the United
States has been exempt from federal income taxes. Legislation since 1985,
however, affects the tax treatment of certain types of municipal bonds issued
after certain dates and, in some cases, subjects the income from certain
bonds to differing tax treatment depending on the tax status of its
recipient.

The Municipal Money Market Fund and the Municipal High-Yield Fund should
be expected to invest some portion of their assets in bonds which, in the
hands of some holders, would be subject to the AMT, as long as management
determines it is in the best interest of shareholders generally to invest in
such securities. (See "Taxes," page 31.)

The tax-equivalent yield is based on the current double tax-exempt yield
and your combined federal and state marginal tax rate. Assuming all the
Funds' dividends are tax-exempt in California (which may not always be the
case) and that your California taxes are fully deductible for federal income
tax purposes, you can calculate your tax equivalent yield for the Funds using
the followning equation:

Fund's Double Tax-Free Yield Your Tax-
------------------------------------------- = Equivalent
(100% - Federal Tax Rate)(100% - California Yield
Tax Rate)

OTHER INVESTMENT PRACTICES,
THEIR CHARACTERISTICS AND RISKS

For additional information regarding the investment practices of any of
the Funds, see the Statement of Additional Information.

PORTFOLIO TURNOVER

The portfolio turnover rates of the Variable Price Funds are shown in
the Financial Highlights tables on pages 5, 6, 7, 8, 9, 10 and 11 of this
Prospectus.

With respect to each series of shares, investment decisions to purchase
and sell securities are based on the anticipated contribution of the security
in question to the particular Fund's objectives. The rate of portfolio
turnover is irrelevant when management believes a change is in order to
achieve those objectives and, accordingly, the annual portfolio turnover rate
cannot be accurately anticipated.

The portfolio turnover of each Fund may be higher than other mutual
funds with similar investment objectives. A high turnover rate involves
correspondingly higher transaction costs that are borne directly by a Fund.
It may also affect the character of capital gains, if any, realized and
distributed by a Fund since short-term capital gains are taxable as ordinary
income.

WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS

Each of the Funds may sometimes purchase new issues of securities on a
when-issued or forward commitment basis when, in the opinion of the Manager,
such purchases will further the investment objectives of the Fund. The price
of when-issued securities is established at the time commitment to purchase
is made. Delivery of and payment for these securities typically occurs 15 to
45 days after the commitment to purchase. Market rates of interest on debt
securities at the time of delivery may be higher or lower than those
contracted for on the security. Accordingly, the value of each security may
decline prior to delivery, which could result in a loss to the Fund.

INTEREST RATE FUTURES CONTRACTS AND OPTIONS THEREON

The Variable Price Funds may buy and sell interest rate futures
contracts relating to debt securities ("debt futures," i.e., futures relating
to indexes on types or groups of bonds) and write and buy put and call
options relating to interest rate futures contracts.

For options sold, a fund will segregate cash or high-quality debt
securities equal to the value of securities underlying the option unless the
option is otherwise covered.

A fund will deposit in a segregated account with its custodian bank
high-quality debt obligations maturing in one year or less, or cash, in an
amount equal to the fluctuating market value of long futures contracts it has
purchased, less any margin deposited on its long position. It may hold cash
or acquire such debt obligations for the purpose of making these deposits.

The Variable Price Funds may use futures and options transactions to
maintain cash reserves while remaining fully invested, to facilitate trading,
to reduce transaction costs, or to pursue higher investment returns when a
futures contract is priced more attractively than its underlying security or
index.

Since futures contracts and options thereon can replicate movements in
the cash markets for the securities in which a fund invests without the large
cash investments required for dealing in such markets, the may subject a fund
to greater and more volatile risks than might otherwise be the case. The
principal risks related to the use of such instruments are (1) the offsetting
correlation between movements in the market price of the portfolio
investments (held or intended) being hedged and in the price of the futures
contract or option may be imperfect; (2) possible lack of a liquid secondary
market for closing out futures or option positions; (3) the need of
additional portfolio management skills and techniques; and (4) losses due to
unanticipated market price movements. For a hedge to be completely effective,
the price change of the hedging instrument should equal the price change of
the securities being hedged. Such equal price changes are not always possible
because the investment underlying the hedging instrument may not be the same
investment that is being hedged.

The ordinary spreads between prices in the cash and futures markets, due
to the differences in the natures of those markets, are subject to
distortion. Due to the possibility of distortion, a correct forecast of
general interest rate trends by management may still not result in a
successful transaction. Management may be incorrect in its expectations as to
the extent of various interest rate movements or the time span within which
the movements take place.

See the Statement of Additional Information for further information
about these instruments and their risks.

RESTRICTED AND ILLIQUID SECURITIES

The Funds may, from time to time, purchase Rule 144A securities when
they present attractive investment opportunities that otherwise meet the
Funds' criteria for selection. Rule 144A securities are securities that are
privately placed with and traded among qualified institutional buyers

rather than the general public. Although Rule 144A securities are considered
"restricted securities," they are not necessarily illiquid.

With respect to securities eligible for resale under Rule 144A, the
staff of the SEC has taken the position that the liquidity of such securities
in the portfolio of a fund offering redeemable securities is a question of
fact for the board of trustees to determine, such determination to be based
upon a consideration of the readily available trading markets and the review
of any contractual restrictions. Accordingly, the board of trustees is
responsible for developing and establishing the guidelines and procedures for
determining the liquidity of Rule 144A securities. As allowed by Rule 144A,
the board of trustees of the Funds has delegated the day-to-day function of
determining the liquidity of Rule 144A securities to the Manager. The board
retains the responsibility to monitor the implementation of the guidelines
and procedures it has adopted.

Since the secondary market for such securities is limited to certain
qualified institutional investors, the liquidity of such securities may be
limited accordingly and a fund may, from time to time, hold a Rule 144A
security that is illiquid. In such an event, the Manager will consider
appropriate remedies to minimize the effect on such fund's liquidity. No Fund
may invest more than 10% of its total assets in illiquid securities
(securities that may not be sold within seven days at approximately the price
used in determining the net asset value of Fund shares).

CASH MANAGEMENT

Each of the Variable Price Funds may invest up to 5% of its total assets
in any money market fund advised by the Manager, provided that the investment
is consistent with the Fund's investment policies and restrictions.

OTHER TECHNIQUES

The Manager may buy other types of securities or employ other portfolio
management techniques on behalf of the Funds. When SEC guidelines require it
to do so, a Fund will set aside cash or appropriate liquid assets in a
segregated account to cover its obligations. See the Funds' Statement of
Additional Information for a more detailed discussion of these investments
and some of the risks associated with them.

PERFORMANCE ADVERTISING

From time to time, the Funds may advertise performance data. Fund
performance may be shown by presenting one or more performance measurements,
including cumulative total return or average annual total return, yield,
effective yield and tax-equivalent yield (for tax-exempt funds).

CUMULATIVE TOTAL RETURN data is computed by considering all elements of
return, including reinvestment of dividends and capital gains distributions,
over a stated period of time. AVERAGE ANNUAL TOTAL RETURN is determined by
computing the annual compound return over a stated period of time that would
have produced a fund's cumulative total return over the same period if the
fund's performance had remained constant throughout.

A quotation of YIELD reflects a fund's income over a stated period
expressed as a percentage of the fund's share price. In the case of the Money
Market Funds, yield is calculated by measuring the income generated by an
investment in the Fund over a seven-day period (net of expenses). This income
is then annualized, that is, the amount of income generated by the investment
over the seven day period is assumed to be generated over each similar period
each week throughout a full year and is shown as a percentage of the
investment. The EFFECTIVE YIELD is calculated in a similar manner but, when
annualized, the income earned by the investment is assumed to be reinvested.
The effective yield will be slightly higher than the yield because of the
compounding effect on the assumed reinvestment.

With respect to the Variable Price Funds, yield is calculated by adding
over a 30-day (or one-month) period all interest and dividend income (net of
fund expenses) calculated on each day's market values, dividing this sum by
the average number of Fund shares outstanding during the period, and
expressing the result as a percentage of the Fund's share price on the last
day of the 30-day (or one month) period. The percentage is then annualized.
Capital gains and losses are not included in the calculation.

Yields are calculated according to accounting methods that are
standardized in accordance with SEC rules. The SEC yield should be regarded
as an estimate of the fund's rate of investment income, and it may not equal
the fund's actual income distribution rate, the income paid to a
shareholder's account, or the income reported in the Fund's financial
statements.

A tax-equivalent yield demonstrates the taxable yield necessary to
produce after-tax yield equivalent to that of a mutual fund which invests in
exempt obligations. (See "Tax-Exempt Securities," page 19, for a description
of the formula used in comparing yields to tax-equivalent yields.)

Each Fund may also include in advertisements data comparing performance
with the performance of non-related investment media, published editorial
comments and performance rankings compiled by independent organizations (such
as Lipper Analytical Services or Donoghue's Money Fund Report) and
publications that monitor the performance of mutual funds. Performance
information may be quoted numerically or may be presented in a table, graph
or other illustration. In addition, fund performance may be compared to
well-known indices of market performance. A fund's performance may also be
compared, on a relative basis, to the other funds in our fund family. This
relative comparison, which may be based upon historical or expected fund
performance, volatility or other fund characteristics, may be presented
numerically, graphically or in text. The performance of a fund may also be
combined or blended with other funds in our fund family, and that combined or
blended performance may be compared to the same indices to which individual
funds may be compared.

All performance information advertised by the Funds is historical in
nature and is not intended to represent or guarantee future results. The
value of Fund shares when redeemed may be more or less than their original
cost.

HOW TO INVEST WITH TWENTIETH CENTURY AND THE BENHAM GROUP
- --------------------------------------------------------------------------------

The following section explains how to invest with Twentieth Century and
The Benham Group, including purchases, redemptions, exchanges and special
services. You will find more detail about doing business with us by referring
to the Investor Services Guide that you will receive when you open an
account.

If you own or are considering purchasing Fund shares through an
employer-sponsored retirement plan or through a bank, broker-dealer or other
financial intermediary, the following sections, as well as the information
contained in our Investor Services Guide, may not apply to you. Please read
"Employer-Sponsored Retirement Plans and Institutional Accounts," page 29.

HOW TO OPEN AN ACCOUNT

To open an account, you must complete and sign an application,
furnishing your taxpayer identification number. (You must also certify
whether you are subject to withholding for failing to report income to the
IRS.) Investments received without a certified taxpayer identification number
will be returned.

The minimum investment is $2,500 for the Money Market Funds and $5,000
for the Variable Price Funds.

The minimum investment requirements may be different for some types of
retirement accounts. Call one of our Investor Services Representatives for
information on our retirement plans, which are available for individual
investors or for those investing through their employers.

Please note: If you register your account as belonging to multiple
owners (e.g., as joint tenants), you must provide us with specific
authorization on your application in order for us to accept written or
telephone instructions from a single owner. Otherwise, all owners will have
to agree to any transactions that involve the account (whether the
transaction request is in writing or over the telephone).

You may invest in the following ways:

BY MAIL

Send a completed application and check or money order payable in U.S.
dollars to Twentieth Century.

BY WIRE

You may make your initial investment by wiring funds. To do so, call us
or mail a completed application and provide your bank with the following
information:

RECEIVING BANK AND ROUTING NUMBER:
Commerce Bank, N.A. (101000019)

BENEFICIARY (BNF):
Twentieth Century Services, Inc.
4500 Main St., Kansas City, MO 64111

BENEFICIARY ACCOUNT NUMBER (BNF ACCT):
2804918

REFERENCE FOR BENEFICIARY (RFB):
Twentieth Century account number into which you are investing. If more
than one, leave blank and see Bank to Bank Information below.

ORIGINATOR TO BENEFICIARY (OBI):
Name and address of owner of account into which you are investing.

BANK TO BANK INFORMATION
(BBI OR FREE FORM TEXT):
o Taxpayer identification or social security number
o If more than one account, account numbers and amount to be invested in
each account.
o Current tax year, previous tax year or rollover designation if an IRA.
Specify whether IRA, SEP-IRA or SARSEP-IRA.

BY EXCHANGE

Call 1-800-345-2021 from 7 a.m. to 7 p.m. Central time to get
information on opening an account by exchanging from another Twentieth
Century or Benham account. See below for more information on exchanges.

IN PERSON

If you prefer to work with a representative in person, please visit one
of our Investors Centers, located at:

4500 Main Street
Kansas City, MO 64111

1665 Charleston Road
Mountain View, CA 94043

2000 S. Colorado Blvd.
Denver, CO 80222.

SUBSEQUENT INVESTMENTS

Subsequent investments may be made by an automatic bank, payroll or
government direct deposit (see "Automatic Investment Plan," this page) or by
any of the methods below. The minimum investment requirement for subsequent
investments: $250 for checks submitted without the remittance portion of a
previous statement or confirmation, $50 for all other types of subsequent
investments.

BY MAIL

When making subsequent investments, enclose your check with the
remittance portion of the confirmation of a previous investment. If the
remittance slip is not available, indicate your name, address and account
number on your check or a separate piece of paper. (Please be aware that the
investment minimum for subsequent investments is higher without a remittance
slip.)

BY TELEPHONE

Once your account is open, you may make investments by telephone if you
have authorized us (by choosing "Full Services" on your application) to draw
on your bank account. You may call an Investor Services Representative or use
our Automated Information Line.

BY WIRE

You may make subsequent investments by wire. Follow the wire transfer
instructions on page 23 and indicate your account number.

IN PERSON

You may make subsequent investments in person at one of our Investors
Centers. The locations of our three Investors Centers are listed on this
page.

AUTOMATIC INVESTMENT PLAN

You may elect on your application to make investments automatically by
authorizing us to draw on your bank account regularly. Such investments must
be at least the equivalent of $50 per month. You also may choose an automatic
payroll or government direct deposit. If you are establishing a new account,
check the appropriate box under "Automatic Investments" on your application
to receive more information. If you would like to add a direct deposit to an
existing account, please call one of our Investor Services Representatives.

HOW TO EXCHANGE FROM
ONE ACCOUNT TO ANOTHER

As long as you meet any minimum initial investment requirements, you may
exchange your Fund shares to our other funds up to six times per year per
account. For any single exchange, the shares of each fund being acquired must
have a value of at least $100.

However, we will allow investors to set up an Automatic Exchange Plan between
any two funds in the amount of at least $50 per month. See our Investor
Services Guide for further information about exchanges.

BY MAIL

You may direct us in writing to exchange your shares from one Twentieth
Century or Benham account to another. For additional information, please see
our Investor Services Guide.

BY TELEPHONE

You can make exchanges over the phone (either with an Investor Services
Representative or using our Automated Information Line--see page 26) if you
have authorized us to accept telephone instructions. You can authorize this
by selecting "Full Services" on your application or by calling us at
1-800-345-2021 to receive the appropriate form.

HOW TO REDEEM SHARES

We will redeem or "buy back" your shares at any time. Redemptions will
be made at the next net asset value determined after a complete redemption
request is received.

Please note that a request to redeem shares in an IRA or 403(b) plan
must be accompanied by an executed IRS Form W4-P and a reason for withdrawal
as specified by the IRS.

BY MAIL

Your written instructions to redeem shares may be made either by a
redemption form, which we will send to you upon request, or by a letter to
us. Certain redemptions may require a signature guarantee. Please see
"Signature Guarantee," page 26.

BY TELEPHONE

If you have authorized us to accept telephone instructions, you may
redeem your shares by calling an Investor Services Representative.

BY CHECK-A-MONTH

If you have at least a $10,000 balance in your account, you may redeem
shares by Check-A-Month. A Check-A-Month plan automatically redeems enough
shares each month to provide you with redemption proceeds in an amount you
choose (minimum $50). To set up a Check-A-Month plan, please call to request
our Check-A-Month brochure.

OTHER AUTOMATIC REDEMPTIONS

You may elect to make redemptions automatically by authorizing us to
send funds directly to you or to your account at a bank or other financial
institution. To set up automatic redemptions, call one of our Investor
Services Representatives.

REDEMPTION PROCEEDS

Please note that shortly after a purchase of shares is made by check or
electronic draft (also known as an ACH draft) from your bank, we may wait up
to 15 days or longer to send redemption proceeds (to allow your purchase
funds to clear). No interest is paid on the redemption proceeds after the
redemption is processed but before your redemption proceeds are sent.

Redemption proceeds may be sent to you in one of the following ways:

BY CHECK

Ordinarily, all redemption checks will be made payable to the registered
owner of the shares and will be mailed only to the address of record. For
more information, please refer to our Investor Services Guide.

BY WIRE AND ACH

You may authorize us to transmit redemption proceeds by wire or ACH.
These services will be effective 15 days after we receive the authorization.

Your bank will usually receive wired funds within 48 hours of
transmission. Funds transferred by ACH may be received up to seven days after
transmission. Wired funds are subject to a $10 fee to cover bank wire
charges, which is deducted from redemption proceeds. Once the funds are
transmitted, the time of receipt and the funds' availability are not under
our control.

REDEMPTION OF SHARES
IN LOW-BALANCE ACCOUNTS

Whenever the shares held in an account have a value of less than the
required minimum, a letter will be sent advising you of the necessity to
bring the value of the shares held in the account up to the minimum. If
action is not taken within 90 days of the letter's date, the shares held in
the account will be redeemed and proceeds from the redemption will be sent by
check to your address of record. We reserve the right to increase the
investment minimums.

SIGNATURE GUARANTEE

To protect your accounts from fraud, some transactions will require a
signature guarantee. Which transactions will require a signature guarantee
will depend on which service options you elect when you open your account.
For example, if you choose "In Writing Only," a signature guarantee will be
required when:

o Redeeming more than $25,000
o Establishing or increasing a Check-A-Month or automatic transfer on
an existing account.

You may obtain a signature guarantee from a bank or trust company,
credit union, broker- dealer, securities exchange or association, clearing
agency or savings association, as defined by federal law.

For a more in-depth explanation of our signature guarantee policy, or if
you live outside the United States and would like to know how to obtain a
signature guarantee, please consult our Investor Services Guide.
We reserve the right to require a signature guarantee on any
transaction, or to change this policy at any time.

SPECIAL INVESTOR SERVICES

We offer several service options to make your account easier to manage.
These are listed on the account application. Please make note of these
options and elect the ones that are appropriate for you. Be aware that the
"Full Services" option offers you the most flexibility. You will find more
information about each of these service options in our Investor Services
Guide.

Our special investor services include:

AUTOMATED INFORMATION LINE

We offer an Automated Information Line, 24 hours a day, seven days a
week, at 1-800-345-8765. By calling the Automated Information Line, you may
listen to fund prices, yields and total return figures. You may also use the
Automated Information Line to make investments into your accounts (if we have
your bank information on file) and obtain your share balance, value and most
recent transactions. If you have authorized us to accept telephone
instructions, you also may exchange shares from one fund to another via the
Automated Information Line. Redemption instructions cannot be given via the
Automated Information Line.

CHECKWRITING

We offer CheckWriting as a service option for your account in either of
the Money Market Funds. CheckWriting allows you to redeem shares in your
account by writing a draft ("check") against your account balance. (Shares
held in certificate form may not be redeemed by check.) There is no limit on
the number of checks you can write, but each one must be for at least $100.

When you write a check, you will continue to receive dividends on all
shares until your check

is presented for payment to our clearing bank. If you redeem all shares in
your account by check, any accrued distributions on the redeemed shares will
be paid to you in cash on the next monthly distribution date.

If you want to add CheckWriting to an existing account that offers
CheckWriting, contact us by phone or mail for an appropriate form. For a new
account, you may elect CheckWriting on your purchase application by choosing
the "Full Services" option. CheckWriting is not available for any account
held in an IRA or 403(b) plan.

CheckWriting redemptions may only be made on checks provided by us.
Currently, there is no charge for checks or for the CheckWriting service.

We will return checks drawn on insufficient funds or on funds from
investments made by means other than by wire within the previous 15 days.
Neither the company nor our clearing bank will be liable for any loss or
expenses associated with returned checks. Your account may be assessed a $15
service charge for checks drawn on insufficient funds.

A stop payment may be ordered on a check written against your account.
We will use reasonable efforts to stop a payment, but we cannot guarantee
that we will be able to do so. If we are successful in fulfilling a
stop-payment order, your account may be assessed a $15 fee.

OPEN ORDER SERVICE

Through our open order service, you may designate a price at which to
buy shares of a variable price fund by exchange from one of our money market
funds, or a price at which to sell shares of a variable price fund by
exchange to one of our money market funds. The designated purchase price must
be equal to or lower, or the designated sale price equal to or higher, than
the variable price fund's net asset value at the time the order is placed, If
the designated price is met within 90 calendar days, we will execute your
exchange order automatically at that price (or better). Open orders not
executed within 90 days will be canceled.

If the fund you have selected deducts a distribution from its share
price, your order price will be adjusted accordingly so the distribution does
not inadvertently trigger an open order transaction on your behalf. If you
close or re-register the account from which the shares are to be redeemed,
your open order will be canceled.

Because of their time-sensitive nature, open order transactions are
accepted only by telephone or in person. These transactions are subject to
exchange limitations described in each fund's prospectus, except that orders
and cancellations received before 2 p.m. Central time are effective the same
day, and orders or cancellations received after 2 p.m. Central time are
effective the next business day.

TAX-QUALIFIED RETIREMENT PLANS

Each fund is available for your tax-deferred retirement plan. Call or
write us and request the appropriate forms for:

o Individual Retirement Accounts ("IRAs")
o 403(B) plans for employees of public school systems and non-profit
organizations
o Profit sharing plans and pension plans for corporations and other
employers.

If your IRA and 403(b) accounts do not total $10,000, each account is
subject to an annual $10 fee, up to a total of $30 per year.

You can also transfer your tax-deferred plan to us from another company
or custodian. Call or write us for a "Request to Transfer" form.

IMPORTANT POLICIES REGARDING
YOUR INVESTMENTS

Every account is subject to policies that could affect your investment.
Please refer to the Investor Services Guide for further information about the
policies discussed below, as well as further detail about the services we
offer.

(1) We reserve the right for any reason to suspend the offering of shares
for a period of time, or to reject any specific purchase order
(including purchases by exchange). Additionally, purchases may be
refused if, in the opinion of the manager, they are of a size that
would disrupt the management of the Fund.

(2) We reserve the right to make changes to any stated investment
requirements, including those that relate to purchases, transfers and
redemptions. In addition, we may also alter, add to or terminate any
investor services and privileges. Any changes may affect all
shareholders or only certain series or classes of shareholders.

(3) Shares being acquired must be qualified for sale in your state of
residence.

(4) Transactions requesting a specific price and date, other than open
orders, will be refused.

(5) If a transaction request is made by a corporation, partnership,
trust, fiduciary, agent or unincorporated association, we will
require evidence satisfactory to us of the authority of the
individual making the request.

(6) We have established procedures designed to assure the authenticity of
instructions received by telephone. These procedures include
requesting personal identification from callers, recording telephone
calls, and providing written confirmations of telephone transactions.
These procedures are designed to protect shareholders from
unauthorized or fraudulent instructions. If we do not employ
reasonable procedures to confirm the genuineness of instructions,
then we may be liable for losses due to unauthorized or fraudulent
instructions. The company, its transfer agent and investment adviser
will not be responsible for any loss due to instructions they
reasonably believe are genuine.

(7) All signatures should be exactly as the name appears in the
registration. If the owner's name appears in the registration as Mary
Elizabeth Jones, she should sign that way and not as Mary E. Jones.

(8) Unusual stock market conditions have in the past resulted in an
increase in the number of shareholder telephone calls. If you
experience difficulty in reaching us during such periods, you may
send your transaction instructions by mail, express mail or courier
service, or you may visit one of our Investors Centers. You may also
use our Automated Information Line if you have requested and received
an access code and are not attempting to redeem shares.

(9) If you fail to provide us with the correct certified taxpayer
identification number, we may reduce any redemption proceeds by $50
to cover the penalty the IRS will impose on us for failure to report
your correct taxpayer identification number on information reports.

(10) We will perform special inquiries on shareholder accounts. A research
fee of $15 may be applied.

REPORTS TO SHAREHOLDERS

At the end of each calendar quarter, we will send you a consolidated
statement that summarizes all of your Twentieth Century and Benham holdings,
as well as an individual statement for each fund you own that reflects all
year-to-date activity in your account. You may request a statement of your
account activity at any time.

With the exception of most automatic transactions, each time you invest,
redeem, transfer or exchange shares, we will send you a confirmation of the
transactions. See the Investor Services Guide for more detail.

Carefully review all the information relating to transactions on your
statements and confirmations to ensure that your instructions were acted on
properly. Please notify us immediately in writing if there is an error. If
you fail to provide notification of an error with reasonable promptness,
i.e., within 30 days of non-automatic transactions or within 30 days of the
date of your consolidated quarterly statement, in the case of automatic
transactions, we will deem you to have ratified the transaction.

No later than January 31st of each year, we will send you reports that
you may use in completing your U.S. income tax return. See the Investor
Services Guide for more information.

Each year, we will send you an annual and a semiannual report relating
to your fund, each of which is incorporated herein by reference. The annual
report includes audited financial statements and a list of portfolio
securities as of the fiscal year end. The semiannual report includes
unaudited financial statements for the first six months of the fiscal year,
as well as a list of portfolio securities at the end of the period. You also
will receive an updated prospectus at least once each year.
Please read these materials carefully as they will help you understand your
fund.

EMPLOYER-SPONSORED
RETIREMENT PLANS AND
INSTITUTIONAL ACCOUNTS

Information contained in our Investor Services Guide and in the "How to
Invest" sections beginning on page 23 pertain to shareholders who invest
directly with Twentieth Century rather than through an employer-sponsored
retirement plan or through a financial intermediary. If you own or are
considering purchasing Fund shares through an employer-sponsored retirement
plan, your ability to purchase shares of the Funds, exchange them for shares
of other Twentieth Century or Benham funds, or redeem them will depend on the
terms of your plan. If you own or are considering purchasing Fund shares
through a bank, broker-dealer, insurance company or other financial
intermediary, your ability to purchase, exchange and redeem shares will
depend on your agreement with, and the policies of, such financial
intermediary.

You may reach one of our Institutional Investor Service Representatives
by calling 1-800-345-3533 to request information about our funds, to obtain a
current prospectus or to get answers to any questions about our Funds that
you are unable to obtain through your plan administrator or financial
intermediary.

ADDITIONAL INFORMATION YOU SHOULD KNOW
- --------------------------------------------------------------------------------

SHARE PRICE
WHEN SHARE PRICE IS DETERMINED

The price of your shares is also referred to as their net asset value.
Net asset value is determined by calculating the total value of a fund's
assets, deducting total liabilities and dividing the result by the number of
shares outstanding. Net asset value is determined at the close of regular
trading on each day that the New York Stock Exchange (the "Exchange") is
open.

Investments and requests to redeem or exchange shares will receive the
share price next determined after receipt by us of the investment, redemption
or exchange request. For example, investments and requests to redeem or
exchange shares received by us or our authorized agents before the close of
business on the Exchange, usually 3 p.m. Central time, are effective on, and
receive the price determined, that day as of the close of the Exchange.
Investment, redemption and exchange requests received thereafter are
effective on, and receive the price determined as of, the close of the
Exchange on the next day the Exchange is open.

Investments are considered received only when your check or wired funds
are received by us. Wired funds are considered received on the day they are
deposited in our bank account if your telephone call is received before the
close of business on the Exchange, usually 3 p.m. Central time and the money
is deposited that day.

Investments by telephone pursuant to your prior authorization to us to
draw on your bank account are considered received at the time of your
telephone call.

Investment and transaction instructions received by us on any business
day by mail prior to the close of business on the Exchange will receive that
day's price. Investments and instructions received after that time will
receive the price determined on the next business day.

If you invest in Fund shares through an employer-sponsored retirement
plan or other financial intermediary, it is the responsibility of your plan
record-keeper or financial intermediary to transmit your purchase, exchange
and redemption requests to the Fund's transfer agent prior to the applicable
cut-off time for receiving orders and to make payment for any purchase
transactions in accordance with the Fund's procedures or any contractual
arrangement with the Fund or the Fund's distributor in order for you to
receive that day's price.

HOW SHARE PRICE IS DETERMINED

The valuation of assets for determining net asset value may be
summarized as follows:

Portfolio securities of each Fund, except as otherwise noted, listed or
traded on a domestic securities exchange are valued at the last sale price on
that exchange. Portfolio securities primarily traded on foreign securities
exchanges are generally valued at the preceding closing values of such
securities on the exchange where primarily traded. If no sale is reported, or
if local convention or regulation so provides, the mean of the latest bid and
asked prices is used. Depending on local convention or regulation, securities
traded over-the-counter are priced at the mean of the latest bid and asked
prices, or at the last sale price. When market quotations are not readily
available, securities and other assets are valued at fair value as determined
in accordance with procedures adopted by the board of trustees.

Debt securities not traded on a principal securities exchange are valued
through valuations obtained from a commercial pricing service or at the most
recent mean of the bid and asked prices provided by investment dealers in
accordance with procedures established by the board of trustees.

Pursuant to a determination by the Money Market Funds' board of trustees
and Rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act"),
portfolio securities of the Funds are valued at amortized cost. When a
security is valued at amortized cost, it is valued at its cost when
purchased, and thereafter by assuming

a constant amortization to maturity of any discount or premium, regardless of
the impact of fluctuating interest rates on the market value of the
instrument.

WHERE TO FIND INFORMATION ABOUT SHARE PRICE

The net asset values of the Funds are published in leading newspapers
daily. The yields of the Money Market Funds are published weekly in leading
financial publications and daily in many local newspapers. The net asset
values, as well as yield information on the Funds and all the other funds in
the Twentieth Century family of funds, may be obtained by calling us.

DISTRIBUTIONS

At the close of each day including Saturdays, Sundays and holidays, net
income of the Variable Price Funds is determined and declared as a
distribution. The distribution will be paid monthly.

You will begin to participate in the distributions the day AFTER your
purchase is effective. (See "When Share Price is Determined," page 30.) If
you redeem shares, you will receive the distribution declared for the day of
the redemption. If all shares are redeemed (other than by CheckWriting), the
distribution on the redeemed shares will be included with your redemption
proceeds.

Distributions from net realized securities gains, if any, generally are
declared and paid once a year, but the Funds may make distributions on a more
frequent basis to comply with the distribution requirements of the Internal
Revenue Code, in all events in a manner consistent with the provisions of the
1940 Act.

Participants in employer-sponsored retirement or savings plans must
reinvest all distributions. For shareholders investing through taxable
accounts, distributions will be reinvested unless you elect to receive them
in cash. Distributions of less than $10 generally will be reinvested.
Distributions made shortly after a purchase by check or ACH may be held up to
15 days. You may elect to have distributions on shares held in Individual
Retirement Accounts and 403(b) plans paid in cash only if you are 591/2 years
old or permanently and totally disabled. Distribution checks normally are
mailed within seven days after the record date. Please consult our Investor
Service Guide for further information regarding your distribution options.

The board of trustees may elect not to distribute capital gains in whole
or in part to take advantage of loss carryovers.

TAXES

Each Fund has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code, which means that to the
extent its income is distributed to shareholders, it pays no income taxes.

TAX-DEFERRED ACCOUNTS

If the Funds' shares are purchased through tax-deferred accounts, such
as a qualified employer-sponsored retirement or savings plan, income and
capital gains distributions paid by the Funds will generally not be subject
to current taxation, but will accumulate in your account under the plan on a
tax-deferred basis.

Employer-sponsored retirement and savings plans are governed by complex
tax rules. If you elect to participate in your employer's plan, consult your
plan administrator, your plan's summary plan description, or a professional
tax advisor regarding the tax consequences of participation in the plan,
contributions to, and withdrawals or distributions from the plan.

TAXABLE ACCOUNTS

If fund shares are purchased through taxable accounts, distributions of
net investment income and net short-term capital gains are taxable to you as
ordinary income, except as described below. The dividends from net income of
the Variable Price Funds do not qualify for the 70%

dividends-received deduction for corporations since they are derived from
interest income. Dividends representing income derived from tax-exempt bonds
generally retain the bonds' tax-exempt character in a shareholder's hands.
Distributions from net long-term capital gains are taxable as long-term
capital gains regardless of the length of time you have held the shares on
which such distributions are paid. However, you should note that any loss
realized upon the sale or redemption of shares held for six months or less
will be treated as a long-term capital loss to the extent of any distribution
of long-term capital gain to you with respect to such shares.

Distributions of capital gains are taxable to you regardless of whether
they are taken in cash or reinvested, even if the value of your shares is
below your cost. If you purchase shares shortly before a capital gain
distribution, you must pay income taxes on the distribution, even though the
value of your investment (plus cash received, if any) will not have
increased. In addition, the share price at the time you purchase shares may
include unrealized gains in the securities held in the investment portfolio
of the Fund. If these portfolio securities are subsequently sold and the
gains are realized, they will, to the extent not offset by capital losses, be
paid to you as a distribution of capital gains and will be taxable to you as
short-term or long-term capital gains.

In January of the year following the distribution, we or your financial
intermediary will send you a Form 1099-DIV notifying you of the status of
your distributions for federal income tax purposes. The Funds anticipate that
substantially all of the dividends to be paid by the Funds will be exempt
from federal income taxes to an individual unless, due to that person's own
tax situation, he or she is subject to the AMT. In that case, it is likely
that a portion of the dividends will be taxable to that shareholder while
remaining tax-exempt in the hands of most other shareholders. The Funds will
advise shareholders of the percentage, if any, of the dividends not exempt
from federal income tax, and the percentage, if any, subject to the
individual AMT should a shareholder be subject to it.

Distributions may also be subject to state and local taxes, even if all
or a substantial part of such distribution are derived from interest on U.S.
government obligations which, if you received them directly, would be exempt
from state income tax. However, most but not all states allow this tax
exemption to pass through to Fund shareholders when a Fund pays distributions
to its shareholders. You should consult your tax adviser about the tax status
of such distributions in your own state.

If you have not complied with certain provisions of the Internal Revenue
Code and Regulations, we are required by federal law to withhold and remit to
the IRS 31% of reportable payments (which may include dividends, capital
gains distributions and redemptions). Those regulations require you to
certify that the social security number or tax identification number you
provide is correct and that you are not subject to 31% withholding for
previous under-reporting to the IRS. You will be asked to make the
appropriate certification on your application. PAYMENTS REPORTED BY US THAT
OMIT YOUR SOCIAL SECURITY NUMBER OR TAX IDENTIFICATION NUMBER WILL SUBJECT US
TO A PENALTY OF $50, WHICH WILL BE CHARGED AGAINST YOUR ACCOUNT IF YOU FAIL
TO PROVIDE THE CERTIFICATION BY THE TIME THE REPORT IS FILED, AND IS NOT
REFUNDABLE.

Redemption of shares of a fund (including redemptions made in an
exchange transaction) will be a taxable transaction for federal income tax
purposes and shareholders will generally recognize a gain or loss in an
amount equal to the difference between the basis of the shares and the amount
received. Assuming that shareholders hold such shares as a capital asset, the
gain or loss will be a capital gain or loss and will generally be long term
if shareholders have held such shares for a period of more than one year. If
a loss is realized on the redemption of Fund shares, the reinvestment in
additional Fund shares within 30 days before or after the redemp-

tion may be subject to the "wash sale" rules of the Internal Revenue Code,
resulting in a postponement of the recognition of such loss for federal
income tax purposes.

SPECIAL TAX INFORMATION

Each Fund intends to invest a sufficient portion of its assets in state
and municipal obligations so that it will qualify to pay "exempt-interest
dividends" to shareholders. Such exempt-interest dividends are generally
excludable from a shareholder's gross income for federal tax purposes. If a
Fund earned federally taxable income from any of its investments, the income
would be distributed to shareholders as a taxable dividend as described
above.

MUNICIPAL SECURITIES

Opinions relating to the validity of municipal securities and the
exemptions of interest thereon from federal income tax are rendered by bond
counsel to the issuers. The Funds and the Manager rely on the opinion of bond
counsel and do not undertake any independent investigation of proceedings
relating to the issuance of state or municipal securities. The Funds may
invest in various instruments that are not traditional state and local
obligations and that are believed to generate interest excludable from
taxable income under Internal Revenue Code Section 103, including, but not
limited to, municipal lease obligations and inverse floaters. Although the
Funds may invest in these instruments, they cannot guarantee the tax-exempt
status of the income earned thereon from any other investment.

AMT LIABILITY

To the extent that either of the Municipal Money Market Fund and the
Municipal High-Yield Fund invest in municipal obligations (private activity
bonds) whose interest is treated as a tax preference item in calculating AMT
liability, shareholders who calculate AMT liability will be required to
include a portion of the Fund's dividends as a tax preference item in making
this calculation. In addition, corporate shareholders may be required to
include all dividends and distributions by the Fund in an adjustment of
alternative minimum taxable income for purposes of the AMT and the
environmental tax imposed under Internal Revenue Code Sections 55 and 59A,
respectively.

EXEMPT-INTEREST DIVIDENDS

Exempt-interest dividends of a Fund, although exempt from regular
federal income tax, are includable in the tax base for determining the extent
to which social security or railroad retirement benefits will be subject to
federal income tax.

Distributions from net short-term capital gains and all or a portion of
gains realized upon the disposition of market discount bonds are federally
taxable as ordinary income. Long-term capital gains distributions designated
as capital gain dividends are federally taxable as long-term capital gains,
regardless of how long you have held your shares. Distributions generally are
subject to the same tax treatment, whether they are received in cash or in
additional shares. Distributions declared to shareholders of record in
October, November or December and paid in January of the following year are
treated as if paid on December 31st.

If a Fund qualifies to pay exempt-interest dividends, its income
dividends will be exempt from California personal income tax to the extent
that the Fund's dividends are derived from interest on California state
tax-free obligations. Distributions derived from obligations other than
California state tax-free obligations, as well as distributions from short-
or long-term capital gains and any other taxable income or gains, are subject
to California personal income tax. The Funds' dividends are not exempt from
California state franchise or corporate income taxes. Shareholders who are
domiciled outside of California may be subject to income, personal property,
intangibles or other taxes in their respective states.

You may realize a taxable gain or loss when you redeem (sell) or
exchange shares of a Variable Price Fund. For most types of accounts,
proceeds from your redemption transactions will be reported to the IRS
annually. However, because the tax treatment depends on your purchase price
and your personal tax situation, your should keep regular account statements
to use in determining your tax liability.

If your hold Fund shares for six months or less, the deduction of any
loss realized upon redemption is disallowed to the extent that you received
"exempt-interest dividends" on those shares. All shareholders are required to
report the receipt of dividends and distributions, including exempt-interest
dividends, on their federal income tax returns.

Shareholders should be aware that redeeming shares of a Fund after
tax-exempt interest income has been accrued by a Fund but before that income
has been distributed as a dividend may be disadvantageous. Any gain on such
redemption will be taxable, even though the gain may be attributable in part
to the accrued tax-exempt interest that might have qualified as an
exempt-interest dividend if distributed as a dividend rather than as
redemption proceeds.

MANAGEMENT

INVESTMENT MANAGEMENT

The Funds are series of the Benham California Tax-Free and Municipal
Funds (the "Trust"). Under the laws of the Commonwealth of Massachusetts, the
board of trustees is responsible for managing the business and affairs of the
Trust. Acting pursuant to an investment management agreement entered into
with the Trust, Benham Management Corporation (the "Manager") serves as the
investment manager of the Funds. Its principal place of business is 1665
Charleston Road, Mountain View, California 94043. The Manager has been
providing investment advisory services to investment companies and other
clients since 1971.

The Manager supervises and manages the investment portfolio of each of
the Funds and directs the purchase and sale of their investment securities.
The Manager utilizes a team of portfolio managers, assistant portfolio
managers and analysts acting together to manage the assets of the Funds. The
team meets regularly to review portfolio holdings and to discuss purchase and
sale activity. The team adjusts holdings in the Funds' portfolios and the
Funds' asset mix as it deems appropriate in pursuit of the Funds' investment
objectives. Individual portfolio manager members of the team may also adjusts
portfolio holdings of the Funds or of sectors of the Funds as necessary
between team meetings.

In June 1995, Twentieth Century Companies, Inc. ("TCC") acquired Benham
Management International, Inc., the then-parent company of the Manager. TCC
is the parent company of Investors Research Corporation ("IRC"), which
provides investment management services to the Twentieth Century family of
funds. In the acquisition, the Manager became a wholly owned subsidiary of
TCC. Certain employees of the Manager provide investment management services
to the Twentieth Century family of funds, while certain Twentieth Century
employees provide investment management services to Benham funds.

The portfolio manager members of the teams managing the Funds described
in this Prospectus and their work experience for the last five years are
listed as follows:

G. DAVID MACEWEN, Vice President, the Manager, is the manager of the
portfolio management team which manages the Funds and has primary
responsibility for the day-to-day operations of the Tax-Free Long-Term and
Tax-Free Insured Funds. Mr. MacEwen joined Benham in 1991 as a Senior
Municipal Portfolio Manager, and also currently maintains principal
management responsibility for the Benham Florida Municipal Intermediate-Term,
and Benham National Tax-Free Long-Term Funds. Mr.

MacEwen is also a member of the team that manages the Twentieth Century
Investors Tax-Exempt Long-Term Fund. Mr. MacEwen is a member of the
Association of Investment Management and Research (AIMR) and the Securities
Analysts of San Francisco. Mr. MacEwen has an MBA in finance from the
University of Delaware and a BA in Economics from Boston University.

TODD PARDULA, Municipal Portfolio Manager, the Manager, is directly
responsible for the management of the Money Market Funds. Before he was
promoted to Portfolio Manager, Mr. Pardula, who joined Benham in 1990. Was an
Associate Municipal Credit Analyst for two years. Prior to that, he was a
Customer Service Representative in the Investor Services Department. Mr.
Pardula is a Chartered Financial Analyst and a member of the Securities
Analysts of San Francisco and the California Society of Municipal Analysts.
He has a BS degree in Finance from Santa Clara University.

JOEL SILVA, Municipal Portfolio Manager, the Manager, is directly
responsible for the Management of the California Tax-Free Limited-Term Fund.
Before being promoted to Portfolio Manager, Mr. Silva was a municipal bond
trader. Mr. Silva is a Registered Representative and has a BS degree from
California Polytechnic University and an MBA from California State University
in Hayward. Mr. Silva also manages the Benham National Tax-Free
Intermediate-Term Fund.

STEVEN M. PERMUT, Senior Portfolio Manager and Manager of Municipal
Research, the Manager, is primarily responsible for the management of the
California Municipal High-Yield Fund. Mr. Permut is currently
Secretary-Treasurer of the California Society of Municipal Analysts and a
member of the National Federation of Municipal Analysts. He has a bachelor's
degree in Business and Geography from State University of New York, Oneonta.

COLLEEN M. DENZLER, Senior Municipal Portfolio Manager, is primarily
responsible for the day-to-day operations of the Benham California Tax-Free
Intermediate-Term Fund and the Benham Arizona Municipal Intermediate-Term
Fund. Prior to joining the Manager in January 1996, Ms. Denzler was a
Portfolio Manager with Calvert Group for 10 years, specializing in state
tax-exempt portfolios. Ms. Denzler is a Chartered Financial Analyst and is a
member of the Association for Investment Management and Research (AIMR) and
the Washington Soceity of Investment Analysts. Ms. Denzler has a Bachelor's
degree in Finance from Radford University.

The activities of the Manager are subject only to directions of the
Trust's Board of trustees. For the services provided to the Funds, the
Manager receives an annual fee which cannot exceed .50% of average daily net
assets. The Manager's fee drops to a marginal rate of .19% of average daily
net assets as the Trust's assets increase.

CODE OF ETHICS

The Trust and the Manager have adopted a Code of Ethics, which restricts
personal investing practices by employees of the Manager and its affiliates.
Among other provisions, the Code of Ethics requires that employees with
access to information about the purchase or sale of securities in the Funds'
portfolios obtain preclearance before executing personal trades. With respect
to portfolio managers and other investment personnel, the Code of Ethics
prohibits acquisition of securities in an initial public offering, as well as
profits derived from the purchase and sale of the same security within 60
calendar days. These provisions are designed to ensure that the interests of
the fund shareholders come before the interests of the people who manage
those funds.

TRANSFER AND ADMINISTRATIVE SERVICES

Twentieth Century Services, Inc., 4500 Main Street, Kansas City,
Missouri, 64111, ("TCS") acts as transfer, administrative services and
dividend paying agent for the Funds. TCS provides facilities, equipment and
personnel to the Funds and is paid for such services by the Funds. For
administrative services, each Fund pays TCS a monthly fee equal to its pro
rata share of the dollar amount derived from applying the average daily net
assets of all of the Funds managed by the Manager. The administrative fee
rate ranges from .11% to .08% of average daily net assets, dropping as assets
managed by the Manager increase. For transfer agent services, each Fund pays
TCS a monthly fee for each shareholder account maintained and for each
shareholder transaction executed during that month.

The Funds charge no sales commissions, or "loads," of any kind. However,
investors who do not choose to purchase or sell Fund shares directly from TCS
may purchase or sell Fund shares through registered broker-dealers and other
qualified service providers, who may charge investors fees for their
services. These broker-dealers and service providers generally provide
shareholder, administrative and/or accounting services which would otherwise
be provided by TCS as the Funds' transfer agent. To accommodate these
investors, the Manager and its affiliates have entered into agreements with
some broker-dealers and service providers to provide these services. Fees for
such services are borne normally by the Funds at the rates normally paid to
TCS, which would otherwise provide the services. Any distribution expenses
associated with these arrangements are borne by the Manager.

From time to time, special services may be offered to shareholders who
maintain higher share balances in our family of funds. These services may
include the waiver of minimum investment requirements, expedited confirmation
of shareholder transactions, newsletters and a team of personal
representatives. Any expenses associated with these special services will be
paid by the Manager or its affiliates.

The Manager and TCS are both wholly owned by Twentieth Century
Companies, Inc. James E. Stowers Jr., Chairman of the board of directors of
TCC, controls TCC by virtue of his ownership of a majority of its common
stock.

DISTRIBUTION OF FUND SHARES

The Funds' shares are distributed by Twentieth Century Securities, Inc.
(the "Distributor"), a registered broker-dealer and an affiliate of the
Manager. The Manager pays all expenses for promoting sales of, and
distributing the Fund shares offered by this Prospectus. The Funds do not pay
any commissions or other fees to the Distributor or to any other
broker-dealers or financial intermediaries in connection with the
distribution of Fund shares.

EXPENSES

Each Fund pays certain operating expenses directly, including, but not
limited to: custodian, audit, and legal fees; fees of the independent
directors or trustees; costs of printing and mailing prospectuses, statements
of additional information, proxy statements, notices, and reports to
shareholders; insurance expenses; and costs of registering the Fund's shares
for sale under federal and state securities laws. See the Funds' Statement of
Additional Information for a more detailed discussion of independent trustee
compensation.

FURTHER INFORMATION
ABOUT THE FUNDS

The Trust was organized as a Massachusetts business trust on February
18, 1983. The Trust is a registered open-end management investment company.
Its business and affairs are managed by its officers under the direction of
its board of trustees.

The principal office of the Trust is Twentieth Century Tower, 4500 Main
Street, P.O. Box 419200, Kansas City, Missouri 64141-6200. All inquiries may
be made by mail to that address, or by phone to 1-800-345-2021. (For
international callers:
816-531-5575.)

The Funds are individual series of the Trust which issues shares with no
par value. The assets belonging to each series of shares are held separately
by the custodian and in effect each series is a separate fund.

Each share, irrespective of series, is entitled to one vote for each
dollar of net asset value applicable to such share on all questions, except
those matters which must be voted on separately by the series of shares
affected. Matters affecting only one Fund are voted upon only by that Fund.

Shares have non-cumulative voting rights, which means that the holders
of more than 50% of the shares voting for the election of trustees can elect
all of the trustees if they choose to do so, and in such event the holders of
the remaining less-than 50% of the shares will not be able to elect any
person or persons to the board of trustees.

Unless required by the 1940 Act, it will not be necessary for the Trust
to hold annual meetings of shareholders. As a result, shareholders may not
vote each year on the election of trustees or the appointment of auditors.
However, pursuant to the Trust's by-laws, the holders of shares representing
at least 10% of the votes entitled to be cast may request that the Trust hold
a special meeting of shareholders. The Trust will assist in the communication
with other shareholders.

WE RESERVE THE RIGHT TO CHANGE ANY OF OUR POLICIES, PRACTICES AND
PROCEDURES DESCRIBED IN THIS PROSPECTUS, INCLUDING THE STATEMENT OF
ADDITIONAL INFORMATION, WITHOUT SHAREHOLDER APPROVAL EXCEPT IN THOSE
INSTANCES WHERE SHAREHOLDER APPROVAL IS EXPRESSLY REQUIRED.

THIS PROSPECTUS CONSTITUTES AN OFFER TO SELL SECURITIES OF A FUND ONLY
IN THOSE STATES WHERE THE FUND'S SHARES HAVE BEEN REGISTERED OR OTHERWISE
QUALIFIED FOR SALE. A FUND WILL NOT ACCEPT APPLICATIONS FROM PERSONS RESIDING
IN STATES WHERE THE FUND'S SHARES ARE NOT REGISTERED.

BENHAM
California Tax-Free &
Municipal Funds

Prospectus
September 3, 1996

TWENTIETH CENTURY MUTUAL FUNDS
and THE BENHAM GROUP
- --------------------------------------------

P.O. Box 419200
Kansas City, Missouri
64141-6200
- --------------------------------------------
Person-to-person assistance:
1-800-345-2021 or 816-531-5575
- --------------------------------------------
Automated Information Line:
1-800-345-8765
- --------------------------------------------
Telecommunications Device for the Deaf:
1-800-634-4113 or 816-753-1865
- --------------------------------------------
Fax: 816-340-7962
- --------------------------------------------
Internet: http://www.twentieth-century.com
- --------------------------------------------
BENHAM CALIFORNIA TAX-FREE
AND MUNICIPAL FUNDS
- --------------------------------------------------------------------------------
BN-BKT-5487 [recycled logo]
9608 Recycled

<PAGE>
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS

California Tax-Free Money Market Fund
California Municipal Money Market Fund
California Tax-Free Limited-Term Fund
(formerly known as California Tax-Free Short-Term Fund)
California Tax-Free Intermediate-Term Fund
California Tax-Free Long-Term Fund
California Municipal High-Yield Fund
California Tax-Free Insured Fund

4500 Main Street
Kansas City, MO 64111

Person-to-Person Assistance: 1-800-345-2021 or 816-531-5575
Automated: 1-800-345-8765

STATEMENT OF ADDITIONAL INFORMATION

September 3, 1996

This Statement is not a prospectus, but should be read in conjunction with the
Trust's current Prospectus dated September 3, 1996. The Trust's Annual Reports
for the fiscal year ended August 31, 1995 are incorporated herein by reference.
To obtain a copy of the Prospectus or the Annual Reports, call or write
Twentieth Century Mutual Funds.

TABLE OF CONTENTS
Page

Investment Policies and Techniques 2
Special Considerations Regarding California Municipal Securities 11
Investment Restrictions 18
Portfolio Transactions 21
Valuation of Portfolio Securities 22
Performance 23
Taxes 26
About the Trust 29
Trustees and Officers 30
Investment Advisory Services 33
Transfer and Administrative Services 34
Direct Fund Expenses 35
Expense Limitation Agreement 35
Other Information 36

Note: Throughout this document, Tax-Free Money Market Fund and Municipal Money
Market Fund are referred to collectively as the Money Market Funds. Likewise,
Tax-Free Limited-Term Fund, Tax-Free Intermediate-Term Fund, Tax-Free Long-Term
Fund, Municipal High-Yield Fund, and Tax-Free Insured Fund are referred to
collectively as the Variable-Price Funds.

INVESTMENT POLICIES AND TECHNIQUES

The following pages provide a more detailed description of the securities and
investment practices identified in the Prospectus. Unless otherwise noted, the
policies described in this Statement of Additional Information are not
fundamental and may be changed by the board of trustees.

MUNICIPAL NOTES

Municipal notes are issued by state and local governments or government entities
to provide short-term capital or to meet cash flow needs.

TAX ANTICIPATION NOTES (TANs) are issued in anticipation of seasonal tax
revenues, such as ad valorem property, income, sales, use, and business taxes,
and are payable from these future taxes. Tax anticipation notes usually are
general obligations of the issuer. General obligations are secured by the
issuer's pledge of its full faith and credit (i.e., taxing power) for the
payment of principal and interest.

REVENUE ANTICIPATION NOTES (RANs) are issued with the expectation that receipt
of future revenues, such as federal revenue sharing or state aid payments, will
be used to repay the notes. Typically, these notes also constitute general
obligations of the issuer.

BOND ANTICIPATION NOTES (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.

TAX-EXEMPT COMMERCIAL PAPER is an obligation with a stated maturity of 365 days
or less issued to finance seasonal cash flow needs or to provide short-term
financing in anticipation of longer-term financing.

REVENUE ANTICIPATION WARRANTS, or reimbursement warrants, are issued to meet the
cash flow needs of the State of California at the end of a fiscal year and in
the early weeks of the following fiscal year. These warrants are payable from
unapplied money in the State's General Fund, including the proceeds of revenue
anticipation notes issued following enactment of a State budget or the proceeds
of refunding warrants issued by the State.

MUNICIPAL BONDS

Municipal bonds, which generally have maturities of more than one year when
issued, are designed to meet longer-term capital needs. These securities have
two principal classifications: general obligation bonds and revenue bonds.

GENERAL OBLIGATION (GO) BONDS are issued by states, counties, cities, towns, and
regional districts to fund a variety of public projects, including construction
of and improvements to schools, highways, and water and sewer systems. General
obligation bonds are backed by the issuer's full faith and credit based on its
ability to levy taxes for the timely payment of interest and repayment of
principal, although such levies may be constitutionally or statutorily limited
as to rate or amount.

REVENUE BONDS are not backed by an issuer's taxing authority; rather, interest
and principal are secured by the net revenues from a project or facility.
Revenue bonds are issued to finance a variety of capital projects, including
construction or refurbishment of utility and waste disposal systems,

highways, bridges, tunnels, air and sea port facilities, schools, and hospitals.
Many revenue bond issuers provide additional security in the form of a
debt-service reserve fund that may be used to make payments of interest and
repayments of principal on the issuer's obligations. Some revenue bond
financings are further protected by a state's assurance (without obligation)
that it will make up deficiencies in the debt-service reserve fund.

INDUSTRIAL DEVELOPMENT BONDS (IDBs), a type of revenue bond, are issued by or on
behalf of public authorities to finance privately operated facilities. These
bonds are used to finance business, manufacturing, housing, athletic, and
pollution control projects, as well as public facilities such as mass transit
systems, air and sea port facilities, and parking garages. Payment of interest
and repayment of principal on an IDB depends solely on the ability of the
facility's user to meet financial obligations, and on the pledge, if any, of the
real or personal property financed. The interest earned on IDBs may be subject
to the federal alternative minimum tax.

VARIABLE- AND FLOATING-RATE DEMAND OBLIGATIONS

The Funds may buy variable- and floating-rate demand obligations (VRDOs and
FRDOs). These obligations carry rights that permit holders to demand payment of
the unpaid principal plus accrued interest, from the issuers or from financial
intermediaries. Floating-rate securities have interest rates that change
whenever there is a change in a designated base rate; variable-rate instruments
provide for a specified, periodic adjustment in the interest rate, which
typically is based on an index. These rate formulas are designed to result in a
market value for the VRDO or FRDO that approximates par value.

OBLIGATIONS WITH TERM PUTS ATTACHED

Each Fund may invest in fixed-rate bonds subject to third party puts and in
participation interests in such bonds held by a bank in trust or otherwise.
These bonds and participation interests have tender options or demand features
that permit the Funds to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof.

Benham Management Corporation (BMC), the Funds' investment advisor, expects that
the Funds will pay more for securities with puts attached than for securities
without these liquidity features. BMC may buy securities with puts attached to
keep a Fund fully invested in municipal securities while maintaining sufficient
portfolio liquidity to meet redemption requests or to facilitate management of
the Funds' investments. To ensure that the interest on municipal securities
subject to puts is tax-exempt to the Funds, BMC limits the Funds' use of puts in
accordance with applicable interpretations and rulings of the Internal Revenue
Service.

Because it is difficult to evaluate the likelihood of exercise or the potential
benefit of a put, puts normally will be determined to have a value of zero,
regardless of whether any direct or indirect consideration is paid. Accordingly,
puts as separate securities are not expected to affect the Funds' weighted
average maturities. When the Fund has paid for a put, the cost will be reflected
as unrealized depreciation on the underlying security for the period the put is
held. Any gain on the sale of the underlying security will be reduced by the
cost of the put.

There is a risk that the seller of a put will not be able to repurchase the
underlying obligation when (or if) a Fund attempts to exercise the put. To
minimize such risks, the Funds will purchase obligations with puts attached only
from sellers deemed creditworthy by BMC.

TENDER OPTION BONDS

Tender option bonds (TOBs) were created to increase the supply of high-quality,
short-term tax-exempt obligations, and thus they are of particular interest to
the Money Market Funds. However, any of the Funds may purchase these
instruments.

TOBs are created by municipal bond dealers who purchase long-term tax-exempt
bonds in the secondary market, place the certificates in trusts, and sell
interests in the trusts with puts or other liquidity guarantees attached. The
credit quality of the resulting synthetic short-term instrument is based on the
guarantor's short-term rating and the underlying bond's long-term rating.

There is some risk that a remarketing agent will renege on a tender option
agreement if the underlying bond is downgraded or defaults. Because of this, BMC
monitors the credit quality of bonds underlying the Funds' TOB holdings and
intends to sell or put back any TOB if the rating on its underlying bond falls
below the second-highest rating category designated by a nationally recognized
statistical rating agency (a "rating agency.")

BMC also takes steps to minimize the risk that the Fund may realize taxable
income as a result of holding TOBs. These steps may include consideration of (a)
legal opinions relating to the tax-exempt status of the underlying municipal
bonds, (b) legal opinions relating to the tax ownership of the underlying bonds,
and (c) other elements of the structure that could result in taxable income or
other adverse tax consequences.

After purchase, BMC monitors factors related to the tax-exempt status of the
Fund's TOB holdings in order to minimize the risk of generating taxable income.

WHEN-ISSUED AND FORWARD COMMITMENT AGREEMENTS

The Funds may engage in municipal securities transactions on a when-issued or
forward commitment basis in which the transaction price and yield are each fixed
at the time the commitment is made, but payment and delivery occur at a future
date (typically 15 to 45 days later).

When purchasing securities on a when-issued or forward commitment basis, the
Fund assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. While the Fund will make commitments to purchase or sell
securities with the intention of actually receiving or delivering them, it may
sell the securities before the settlement date if doing so is deemed advisable
as a matter of investment strategy.

In purchasing securities on a when-issued or forward commitment basis, the Fund
will maintain until the settlement date a segregated account consisting of cash,
cash equivalents, or high-quality liquid securities in an amount sufficient to
meet the purchase price. When the time comes to pay for when-issued securities,
the Fund will meet its obligations with available cash, through the sale of
securities, or, although it would not normally expect to do so, by selling the
when-issued securities themselves (which may have a market value greater or less
than the Fund's payment obligation). Selling securities to meet when-issued or
forward commitment obligations may generate capital gains or losses.

The Funds may sell a security and at the same time make a commitment to purchase
the same security at a future date and specified price. Conversely, the Funds
may purchase a security and at

the same time make a commitment to sell the same security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as "dollar-roll" or "cash-and-carry" transactions. For example, a
broker-dealer may seek to purchase a particular security that the Funds own. The
Funds will sell that security to the broker-dealer and simultaneously enter into
a forward commitment agreement to buy it back at a future date. This type of
transaction generates income for the Funds if the dealer is willing to execute
the transaction at a favorable price in order to acquire a specific security. In
purchasing "dollar rolls" or "cash-and-carry" transactions, the Fund will
maintain until the settlement date a segregated account consisting of cash, cash
equivalents, or high-quality liquid securities in an amount sufficient to meet
the purchase price.

As an operating policy, each Fund will not commit more than 50% of its total
assets to when-issued or forward commitment agreements. If fluctuations in the
value of securities held cause more than 50% of a Fund's total assets to be
committed under when-issued or forward commitment agreements, BMC need not sell
such agreements, but it will be restricted from entering into further agreements
on behalf of the Fund until the percentage of assets committed to such
agreements is below 50% of total assets.

MUNICIPAL LEASE OBLIGATIONS

Each Fund may invest in municipal lease obligations. These obligations, which
may take the form of a lease, an installment purchase, or a conditional sale
contract, are issued by state and local governments and authorities to acquire
land and a wide variety of equipment and facilities. Generally, the Funds will
not hold such obligations directly as a lessor of the property but will purchase
a participation interest in a municipal lease obligation from a bank or other
third party.

Municipal leases frequently carry risks distinct from those associated with
general obligation or revenue bonds. State constitutions and statutes set forth
requirements that states and municipalities must meet to incur debt. These may
include voter referenda, interest rate limits, or public sale requirements.
Leases, installment purchases, or conditional sale contracts (which normally
provide for title to the leased asset to pass to the government issuer) have
evolved as a way for government issuers to acquire property and equipment
without meeting constitutional and statutory requirements for the issuance of
debt.

Many leases and contracts include nonappropriation clauses, which provide that
the governmental issuer has no obligation to make future payments under the
lease or contract unless money is appropriated for such purposes by the
appropriate legislative body on a yearly or other periodic basis. Municipal
lease obligations also may be subject to abatement risk. For example,
construction delays or destruction of a facility as a result of an uninsurable
disaster that prevents occupancy could result in all or a portion of a lease
payment not being made.

California and its municipalities are the largest issuers of municipal lease
obligations in the United States.

INVERSE FLOATERS (VARIABLE-PRICE FUNDS)

The Variable-Price Funds may hold inverse floaters. An inverse floater is a type
of derivative that bears an interest rate that moves inversely to market
interest rates. As market interest rates rise, the interest rate on inverse
floaters goes down, and vice versa. Generally, this is accomplished by

expressing the interest rate on the inverse floater as an above-market fixed
rate of interest, reduced by an amount determined by reference to a market-based
or bond-specific floating interest rate (as well as by any fees associated with
administering the inverse floater program).

Inverse floaters may be issued in conjunction with an equal amount of Dutch
Auction floating-rate bonds (floaters), or a market-based index may be used to
set the interest rate on these securities. Floaters and inverse floaters may be
brought to market by a broker-dealer who purchases fixed-rate bonds and places
them in a trust or by an issuer seeking to reduce interest expenses by using a
floater/inverse floater structure in lieu of fixed-rate bonds.

In the case of a broker-dealer structured offering (where underlying fixed-rate
bonds have been placed in a trust), distributions from the underlying bonds are
allocated to floater and inverse floater holders in the following manner:

(i) Floater holders receive interest based on rates set at a Dutch Auction,
which is typically held every 28 to 35 days. Current and prospective
floater holders bid the minimum interest rate that they are willing to
accept on the floaters, and the interest rate is set just high enough to
ensure that all of the floaters are sold.

(ii) Inverse floater holders receive all of the interest that remains on the
underlying bonds after floater interest and auction fees are paid.

Procedures for determining the interest payment on floaters and inverse floaters
brought to market directly by the issuer are comparable, although the interest
paid on the inverse floaters is based on a presumed coupon rate that would have
been required to bring fixed-rate bonds to market at the time the floaters and
inverse floaters were issued.

Where inverse floaters are issued in conjunction with floaters, inverse floater
holders may be given the right to acquire the underlying security (or to create
a fixed-rate bond) by calling an equal amount of corresponding floaters. The
underlying security may then be held or sold. However, typically, there are time
constraints and other limitations associated with any right to combine interests
and claim the underlying security.

Floater holders subject to a Dutch Auction procedure generally do not have the
right to "put back" their interests to the issuer or to a third party. If a
Dutch Auction fails, the floater holder may be required to hold its position
until the underlying bond matures, during which time interest on the floater is
capped at a predetermined rate.

The secondary market for floaters and inverse floaters may be limited. The
market value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds. The interest rates on inverse floaters may be significantly
reduced, even to zero, if interest rates rise.

LOWER-QUALITY BONDS (MUNICIPAL HIGH-YIELD FUND)

As indicated in the Prospectus, an investment in the Municipal High-Yield Fund
carries greater risk than an investment in the other Funds because the Fund may
invest without limitation in lower-rated bonds and unrated bonds judged by BMC
to be of comparable quality (collectively, "lower-quality bonds").

While the market values of higher-quality bonds tend to correspond to market
interest rate changes, the market values of lower-quality bonds tend to reflect
the financial condition of their issuers.

Projects financed through the issuance of lower-quality bonds are often highly
leveraged. The issuer's ability to service its debt obligations may be adversely
affected by an economic downturn, a period of rising interest rates, the
issuer's inability to meet projected revenue forecasts, or a lack of needed
additional financing.

Lower-quality bonds generally are unsecured and often are subordinated to other
obligations of the issuer. These bonds frequently have call or buy-back features
that permit the issuer to call or repurchase the bond from the holder. Premature
disposition of a lower-quality bond due to a call or buy-back feature,
deterioration of the issuer's creditworthiness, or a default may make it
difficult for BMC to manage the flow of income to the Fund, which may have
negative tax implications for shareholders.

The market for lower-quality bonds tends to be concentrated among a smaller
number of dealers than the market for higher-quality bonds. This market is
dominated by dealers and institutions (including mutual funds), rather than by
individuals. To the extent that a secondary trading market for lower-quality
bonds exists, it may not be as liquid as the secondary market for higher-quality
bonds. Limited liquidity in the secondary market may adversely affect market
prices and hinder BMC's ability to dispose of particular bonds when it
determines that it is in the best interest of the Fund to do so. Reduced
liquidity may also hinder BMC's ability to obtain market quotations for purposes
of valuing the Fund's portfolio and determining its net asset value.

BMC continually monitors securities to determine their relative liquidity.

The Fund may incur expenses in excess of its ordinary operating expenses if it
becomes necessary to seek recovery on a defaulted lower-quality bond.

LIMITED-TERM SECURITIES (VARIABLE-PRICE FUNDS)

Under certain circumstances, the Tax-Free Long-Term Fund, Municipal High-Yield
Fund, and Tax-Free Insured Fund may invest in short-term municipal or U.S.
government securities, including money market instruments (short-term
securities). Except as otherwise required for temporary defensive purposes, BMC
does not expect these Funds' investments in short-term securities to exceed 35%
of total assets. If a Fund invests in U.S. government securities, a portion of
dividends paid to shareholders will be taxable at the federal level, and may be
taxable at the state level, as ordinary income. However, BMC intends to minimize
such investments and, when suitable short-term municipal securities are
unavailable, may allow the Funds to hold cash to avoid generating taxable
dividends.

Pursuant to an exemptive order from the Securities and Exchange Commission, each
Variable-Price Fund may invest up to 5% of its total assets in shares of the
Money Market Funds to facilitate cash management provided that the investment is
consistent with the Funds' investment policies and restrictions. To avoid
generating dividend income subject to the federal alternative minimum tax (AMT),
the Variable-Price Funds (excluding Municipal High-Yield Fund) will limit their
Money Market Fund investments to Tax-Free Money Market Fund. Municipal
High-Yield Fund, which ordinarily invests in AMT securities, may invest up to 5%
of its total assets in shares of either of the Money Market Funds.

CONCENTRATION OF ASSETS IN OBLIGATIONS ISSUED TO FINANCE SIMILAR PROJECTS OR
FACILITIES

From time to time, a significant portion of a Fund's assets may be invested in
municipal obligations related to the extent that economic, business, or
political developments affecting one of these obligations could affect the other
obligations in a similar manner. For example, if a Fund invested a significant
portion of its assets in utility bonds and a state or federal government agency
or legislative body promulgated or enacted new environmental protection
requirements for utility providers, projects financed by utility bonds could
suffer as a class. Additional financing might be required to comply with the new
environmental requirements, and outstanding debt might be downgraded in the
interim. Among other factors that could negatively affect bonds issued to
finance similar types of projects are state and federal legislation regarding
financing for municipal projects, pending court decisions relating to the
validity or means of financing municipal projects, material or manpower
shortages, and declining demand for projects or facilities financed by the
municipal bonds.

FUTURES AND OPTIONS (VARIABLE-PRICE FUNDS)

Each Variable-Price Fund may enter into futures contracts, options, or options
on futures contracts. Some futures and options strategies, such as selling
futures, buying puts, and writing calls, hedge a Fund's investments against
price fluctuations. Other strategies, such as buying futures, writing puts, and
buying calls, tend to increase market exposure. The Funds do not use futures and
options transactions for speculative purposes.

Although other techniques may be used to control a Fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a Fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.

FUTURES CONTRACTS provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price. Futures
contracts are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. government agency. The Funds may engage in
futures and options transactions based on securities indexes such as the Bond
Buyer Index of Municipal Bonds that are consistent with the Fund's investment
objectives. The Fund may also engage in futures and options transactions based
on specific securities such as U.S. Treasury bonds or notes.

Bond Buyer Municipal Bond Index futures contracts differ from traditional
futures contracts in that when delivery takes place, no bonds change hands.
Instead, these contracts settle in cash at the spot market value of the Bond
Buyer Municipal Bond Index. Although other types of futures contracts by their
terms call for actual delivery or acceptance of the underlying securities, in
most cases the contracts are closed out before the settlement date. A futures
position may be closed by taking an opposite position in an identical contract
(i.e., buying a contract that has previously been sold or selling a contract
that has previously been bought).

To initiate and maintain open positions in a futures contract, a Fund would be
required to make a good faith margin deposit in cash or government securities
with a futures broker or custodian. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimum initial

margin requirements are established by the futures exchanges and may be revised.
In addition, brokers may establish deposit requirements that are higher than the
exchange minimums.

Once a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, the contract holder is
required to pay additional "variation" margin. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to or
from the futures broker for as long as the contract remains open and do not
constitute margin transactions for purposes of the Funds' investment
restrictions.

RISKS RELATED TO FUTURES AND OPTIONS TRANSACTIONS. Futures and options prices
can be volatile, and trading in these markets involves certain risks. If BMC
applies a hedge at an inappropriate time or judges interest rate trends
incorrectly, futures and options strategies may lower a Fund's return.

A Fund could suffer losses if it were unable to close out its position because
of an illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when BMC considers it appropriate or desirable to do so. In the
event of adverse price movements, a Fund would be required to continue making
daily cash payments to maintain its required margin. If the Fund had
insufficient cash, it might have to sell portfolio securities to meet daily
margin requirements at a time when BMC would not otherwise elect to do so. In
addition, a Fund may be required to deliver or take delivery of instruments
underlying futures contracts it holds. BMC will seek to minimize these risks by
limiting the contracts entered into on behalf of the Funds to those traded on
national futures exchanges and for which there appears to be a liquid secondary
market.

A Fund could suffer losses if the prices of its futures and options positions
were poorly correlated with its other investments, or if securities underlying
futures contracts purchased by a Fund had different maturities than those of the
portfolio securities being hedged. Such imperfect correlation may give rise to
circumstances in which a Fund loses money on a futures contract at the same time
that it experiences a decline in the value of its "hedged" portfolio securities.
A Fund could also lose margin payments it has deposited with a margin broker,
if, for example, the broker became bankrupt.

Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of the trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond the limit. However, the daily limit
governs only price movement during a particular trading day and, therefore, does
not limit potential losses. In addition, the daily limit may prevent liquidation
of unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.

OPTIONS ON FUTURES. By purchasing an option on a futures contract, a Fund
obtains the right, but not the obligation, to sell the futures contract (a put
option) or to buy the contract (a call option) at a

fixed strike price. A Fund can terminate its position in a put option by
allowing it to expire or by exercising the option. If the option is exercised,
the Fund completes the sale of the underlying security at the strike price.
Purchasing an option on a futures contract does not require a Fund to make
margin payments unless the option is exercised.

Although they do not currently intend to do so, the Funds may write (or sell)
call options that obligate it to sell (or deliver) the option's underlying
instrument upon exercise of the option. While the receipt of option premiums
would mitigate the effects of price declines, the Funds would give up some
ability to participate in a price increase on the underlying security. If a Fund
were to engage in options transactions, it would own the futures contract at the
time a call were written and would keep the contract open until the obligation
to deliver it pursuant to the call expired.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. Each Variable-Price
Fund may enter into futures contracts, options, or options on futures contracts,
provided that such obligations represent no more than 20% of the Fund's net
assets. Under the Commodity Exchange Act, a Fund may enter into futures and
options transactions (a) for hedging purposes without regard to the percentage
of assets committed to initial margin and option premiums, or (b) for other than
hedging purposes, provided that assets committed to initial margin and option
premiums do not exceed 5% of the Fund's net assets. To the extent required by
law, each Fund will set aside cash and appropriate liquid assets in a segregated
account to cover its obligations related to futures contracts and options.

The Funds intend to comply with tax rules applicable to regulated investment
companies, including a requirement that capital gains from the sale of
securities held less than three months constitute less than 30% of a Fund's
gross income for each fiscal year. Gains on some futures contracts and options
are included in this 30% calculation, which may limit the Funds' investments in
such instruments.

MUNICIPAL BOND INSURERS (TAX-FREE INSURED FUND)

Securities held by Tax-Free Insured Fund may be (a) insured under a new-issue
insurance policy obtained by the issuer of the security, (b) insured under a
secondary market insurance policy purchased by the Fund or a previous bond
holder, or (c) insured under a "when-in-portfolio" policy held by the Fund. The
following paragraphs provide some background on the bond insurance organizations
most frequently relied upon for municipal bond insurance in the U.S.

AMBAC Indemnity Corporation (AMBAC Indemnity) is a Wisconsin-domiciled stock
insurance corporation with admitted assets of approximately $2.1 billion
(unaudited) and statutory capital of approximately $1.2 billion (unaudited) as
of December 31, 1994. Statutory capital consists of AMBAC Indemnity's
policyholders' surplus and statutory contingency reserve. AMBAC Indemnity is a
wholly owned subsidiary of AMBAC Inc., a publicly-held company. Moody's
Investors Service, Inc. (Moody's) and Standard & Poor's Corporation (S&P) have
rated AMBAC Indemnity's claims-paying ability Aaa and AAA, respectively.

Financial Guaranty Insurance Company (FGIC) is a wholly owned subsidiary of FGIC
Corporation, a Delaware corporation with admitted assets of $2.1 billion and a
statutory capital base of $1.1 billion as of December 31, 1994. Statutory
capital consists of total capital and surplus as well as contingency reserve.
FGIC's claims-paying ability was rated Aaa/AAA/AAA by Moody's, S&P, and Fitch,
respectively.

Municipal Bond Investors Assurance Corporation (MBIA) is a monoline insurance
company organized as a New York corporation. As of December 31, 1994, MBIA
(consolidated) had admitted

assets of $3.4 billion (unaudited), total liabilities of $1.6 billion
(unaudited), and total capital and surplus of $1.7 billion (unaudited). All bond
issues insured by MBIA are rated "Aaa" by Moody's and all short-term loans
insured by MBIA "MIG-1." All bond issues insured by MBIA are rated "AAA" by S&P.

SPECIAL CONSIDERATIONS REGARDING CALIFORNIA MUNICIPAL SECURITIES

As briefly discussed in the Prospectus, the Funds are susceptible to political,
economic, and regulatory events that affect issuers of California municipal
obligations. These include possible adverse affects of California constitutional
amendments, legislative measures, voter initiatives, and other matters described
below.

The following information about risk factors is provided in view of the Funds'
policies of concentrating their assets in California municipal securities. This
information is based on recent official statements relating to securities
offerings of California issuers, although it does not constitute a complete
description of the risk associated with investing in securities of these
issuers. While BMC has not independently verified the information contained in
the official statements, it has no reason to believe the information is
inaccurate.

ECONOMIC OVERVIEW

California's economy is the largest among the 50 states and one of the largest
in the world. The State's population of over 30 million as of 1990, representing
approximately 12% of the U.S. population, grew by 27% in the 1980s. Total
personal income, an estimated $703 billion in 1994, accounted for approximately
12% of personal income nationwide. In 1994, total employment increased 260,000
from 1993 levels of 13.8 million. Jobs are concentrated in the service, trade,
and manufacturing sectors.

From mid-1990 to late 1993, the State's economy suffered its worst recession
since the 1930s, with recovery starting later than for the nation as a whole.
The State has experienced the worst job losses of any post-war recession.
Prerecession job levels may not be realized until near the end of the decade.
The largest job losses have been in Southern California, led by declines in the
aerospace and construction industries. Weakness statewide occurred in
manufacturing, construction, services and trade. Additional military base
closures will have further adverse effects on the State's economy later in the
decade.

Since the start of 1994, the California economy has shown signs of steady
recovery and growth. The State Department of Finance reports net job growth,
particularly in construction and related manufacturing, wholesale and retail
trade, transportation, recreation and services. This growth has offset the
continuing but slowing job losses in the aerospace industry and restructuring of
the finance and utility sectors. Unemployment in the State was down
substantially in 1994 from its 10% peak in January, 1994, but still remains
higher than the national average rate. Retail sales were up strongly in 1994
from year-earlier figures. Delay or slowdown in recovery will adversely affect
State revenues.

CONSTITUTIONAL LIMITATIONS ON TAXES

Many California issuers rely on ad valorem property taxes as a source of
revenue. The taxing powers of California local governments and districts are
limited by Article XIIIA of the California Constitution, enacted by voters in
1978 and commonly known as "Proposition 13." Article XIIIA limits to 1% of full
cash value the rate of ad valorem taxes on real property and restricts the

reassessment of property to 2% per year, except where new construction or
changes of ownership have occurred (subject to a number of exemptions). Taxing
entities may, however, raise ad valorem taxes above the 1% limit to pay debt
service on voter-approved bonded indebtedness. The U.S. Supreme Court has upheld
Proposition 13 against claims that it has unlawfully resulted in widely varying
tax liability on similarly situated properties.

Article XIIIA also requires voters of any governmental unit to give two-thirds
approval to levy any "special tax." Subsequent court decisions, however, have
allowed non-voter approved "general taxes" so long as they are not dedicated to
a specific use. In response to these decisions, voters adopted an initiative in
1986 that imposed new limits on the ability of local government entities to
raise or levy general taxes without voter approval. Based upon a 1991
intermediate appellate court decision, it was believed that significant parts of
this initiative, known as "Proposition 62", were unconstitutional. On September
28, 1995, the California Supreme Court rendered a decision in the case of Santa
Clara County Local Transportation Authority v. Guardino which rejected the prior
decision and upheld Proposition 62, while striking down a 1/2 cent sales tax for
transportation purposes which was approved by a majority, but less than 2/3,
vote. Proposition 62 does not apply to charter cities, but other local
governments may be constrained in raising any taxes without voter approval.

CONSTITUTIONAL LIMITATIONS ON APPROPRIATIONS

The State and its local governments are subject to an annual appropriations
limit imposed by Article XIIIB of the California Constitution. This article was
enacted by voters in 1979 and was significantly amended by Propositions 98 and
111 in 1988 and 1990, respectively. Article XIIIB prohibits the State and
subject local governments from spending "appropriations subject to limitation"
in excess of an appropriations limit. The appropriations limit is adjusted
annually to reflect population changes and changes in the cost of living as well
as transfers of responsibility between government units. "Appropriations subject
to limitation" are authorizations to spend "proceeds of taxes" consisting of tax
revenues and certain other charges and fees to the extent that such proceeds
exceed the cost of providing the product or service.
However, proceeds of taxes exclude most State subventions to local governments.

"Excess revenues" under Article XIIIB are measured over a two-year cycle. Local
governments must return any excess revenues to taxpayers through tax rate
reductions. The State must refund 50% of any excess and pay the other 50% to
schools and community colleges. With the application of more liberal annual
adjustment factors since 1988 and depressed revenues since 1990 due to the
recession, few governments are currently operating near their spending limits,
but this condition may change over time. Local governments may, by voter
approval, exceed their spending limits for a limited time.

Because of the complex nature of Articles XIIIA and XIIIB, the ambiguities and
possible inconsistencies in their terms, and the impossibility of predicting
future appropriations, population changes, changes in the cost of living, or the
probability of continuing legal challenges, it is difficult to measure the full
impact of these Articles on the California municipal market or on the ability of
California issuers to pay debt service on their obligations.

OBLIGATIONS OF THE STATE OF CALIFORNIA

As of October 1, 1995, the State had approximately $18.4 billion of general
obligation bonds outstanding, and approximately $3.3 billion remained authorized
but unissued. Of the State's outstanding general obligation debt, 22% is
presently self-liquidating (i.e., program revenues are

expected to be sufficient to reimburse the General Fund for debt service
payments). In fiscal 1994-95, debt service on general obligation bonds and
lease-purchase debt was approximately 5.25% of General Fund revenues.

The State's principal sources of General Fund revenues for fiscal 1993-94 were
the California personal income tax (44% of total revenues), the sales tax (35%),
bank and corporation taxes (12%), and the gross premium tax on insurance (3%).
Historically, the State has paid the principal of and interest on its general
obligation bonds, lease-purchase debt, and short-term obligations when due.

General. Throughout the 1980's, State spending increased rapidly as the State
population and economy also grew rapidly, including increased spending for many
assistance programs to local governments, which were constrained by Proposition
13 and other laws. The largest State program is assistance to local public
school districts. In 1988, an initiative (Proposition 98) was enacted which
(subject to suspension by a two-thirds vote of the Legislature and the Governor)
guarantees local school districts and community college districts a minimum
share of State General Fund revenues (currently about 33%).

Since the start of 1990-91 Fiscal Year, the State has faced adverse economic,
fiscal, and budget conditions. The economic recession seriously affected State
tax revenues. It also caused increased expenditures for health and welfare
programs. The State is also facing a structural imbalance in its budget with the
largest programs supported by the General Fund (education, health, welfare and
corrections) growing at rates higher than the growth rates for the principal
revenue sources of the General Fund. These structural concerns will be
exacerbated in coming years by the expected need to substantially increase
capital and operating funds for corrections as a result of a "Three Strikes" law
enacted in 1994.

Recent Budgets. As a result of these factors, among others, from the late 1980's
until 1992-93, the State had a period of nearly chronic budget imbalance, with
expenditures exceeding revenues in four out of six years, and the State
accumulated and sustained a budget deficit in the budget reserve, the Special
Fund for Economic Uncertainties ("SFEU") approaching $2.8 billion at its peak at
June 30, 1993. Starting in the 1990-91 Fiscal Year and for each year thereafter,
each budget required multibillion dollar actions to bring projected revenues and
expenditures into balance and to close large "budget gaps" which were
identified. The Legislature and Governor eventually agreed on a number of
different steps to produce Budget Acts in the years 1991-92 to 1994-95,
including:

o significant cuts in health and welfare program expenditures;

o transfers of program responsibilities and funding from the State to local
governments, coupled with some reduction in mandates on local government;

o transfer of about $3.6 billion in annual local property tax revenues from
cities, counties, redevelopment agencies and some other districts to local
school districts, thereby reducing State funding for schools;

o reduction in growth of support for higher education programs, coupled with
increases in student fees;

o revenue increases (particularly in the 1991-92 Fiscal Year budget), most of
which were for a short duration;

o increased reliance on aid from the federal government to offset the costs of
incarcerating, educating and providing health and welfare services to
undocumented aliens (although these efforts have produced much less federal
aid than the State Administration has requested); and

o various one-time adjustments and accounting changes.

Despite these budget actions, the effects of the recession led to large,
unanticipated deficits in the SFEU, as compared to projected positive balances.
By the start of the 1993-94 Fiscal Year, the accumulated deficit was so large
(almost $2.8 billion) that it was impractical to budget to retire it in one
year, so a two-year program was implemented, using the issuance of revenue
anticipation warrants to carry a portion of the deficit over the end of the
fiscal year. When the economy failed to recover sufficiently in 1993-94, a
second two-year plan was implemented in 1994-95, to carry the final retirement
of the deficit into 1995-96.

The combination of stringent budget actions cutting State expenditures, and the
turnaround of the economy by late 1993, finally led to the restoration of
positive financial results. While General Fund revenues and expenditures were
essentially equal in FY 1992-93 (following two years of excess expenditures over
revenues), the General Fund had positive operating results in FY 1993-94 and
1994-95, which have reduced the accumulated budget deficit to around $600
million as of June 30, 1995.

A consequence of the accumulated budget deficits in the early 1990's, together
with other factors such as disbursement of funds to local school districts
"borrowed" from future fiscal years and hence not shown in the annual budget,
was to significantly reduce the State's cash resources available to pay its
ongoing obligations. When the Legislature and the Governor failed to adopt a
budget for the 1992-93 Fiscal Year by July 1, 1992, which would have allowed the
State to carry out its normal annual cash flow borrowing to replenish its cash
reserves, the State Controller was forced to issue registered warrants ("IOUs")
to pay a variety of obligations representing prior years' or continuing
appropriations, and mandates from court orders. Available funds were used to
make constitutionally-mandated payments, such as debt service on bonds and
warrants. Between July 1 and September 4, 1992 the State Controller issued a
total of approximately $3.8 billion of registered warrants. After that date, all
remaining outstanding registered warrants (about $2.9 billion) were called for
redemption from proceeds of the issuance of 1992 Interim Notes after the budget
was adopted.

The State's cash condition became so serious in late spring of 1992 that the
State Controller was required to issue revenue anticipation warrants maturing in
the following fiscal year in order to pay the State's continuing obligations.
The State was forced to rely increasingly on external debt markets to meet its
cash needs, as a succession of notes and warrants (both forms of short-term cash
flow financing) were issued in the period from June 1992 to July 1994, often
needed to pay previously-maturing notes or warrants. These borrowings were used
also in part to spread out the repayment of the accumulated budget deficit over
the end of a fiscal year.

The State issued $7.0 billion of short-term debt in July 1994 to meet its cash
flow needs and to finance the deferral of part of the accumulated budget deficit
to the 1995-96 fiscal year. In order to assure repayment of $4 billion of this
borrowing which matures on April 25, 1996, the State enacted legislation (the
"Trigger Law") which can lead to automatic, across-the-board cuts in General
Fund expenditures in either the 1994-95 or 1995-96 fiscal years if cash flow
projections made at certain times during those years show deterioration from the
projections made in July 1994 when the borrowings were made. On November 15,
1994, the State Controller as part of the Trigger Law reported that the cash
position of the General Fund on June 30, 1995 would be about $580 million better
than earlier projected, so no automatic budget adjustments were required in
1994-95. The Controller's report showed that loss of federal funds was offset by
higher revenues, lower expenditures, and certain other increases in cash
resources.

Current Budget. For the first time in four years, the State entered the 1995-96
fiscal year with strengthening revenues based on an improving economy. The major
feature of the Governor's proposed Budget, a 15% phased tax cut, was rejected by
the Legislature.

The 1995-96 Budget Act was signed by the Governor on August 3, 1995, 34 days
after the start of the fiscal year. The Budget Act projects General Fund
revenues and transfers of $44.1 billion, a 3.5 percent increase from the prior
year. Expenditures are budgeted at $43.4 billion, a 4 percent increase. The
Department of Finance projects that, after repaying the last of the carryover
budget deficit, there will be a positive balance of less than $30 million in the
budget reserve, the Special Fund for Economic Uncertainties, at June 30, 1996,
providing no margin for adverse results during the year.

The Department of Finance projects cash flow borrowings in the 1995-96 Fiscal
Year will be the smallest in many years, comprising about $2 billion of notes to
be issued in April, 1996, and maturing by June 30, 1996. With full payment of $4
billion of revenue anticipation warrants on April 25, 1996, the Department sees
no further need for borrowing over the end of the fiscal year. The Department
projects that available internal cash resources to pay State obligations will be
almost $2 billion at June 30, 1996. This "cushion" will be re-examined by the
State Controller on October 15, 1995, in the last step under the "Trigger Law"
process. If the Controller believes the available internal cash resources on
June 30, 1996 will, in fact, be zero or less, her report would start a process
which could lead to automatic budget cuts starting in December, 1995.

The principal features of the 1995-96 Budget Act, in addition to those noted
above, are additional cuts in health and welfare expenditures (some of which are
subject to approvals or waivers by the federal government); assumed receipt of
an additional $473 million of federal aid for illegal immigrant costs; and an
increase in per-pupil funding for public schools and community colleges, the
first such significant increase in four years.

In July 1994, all three of the rating agencies that rate the State's long-term
debt lowered their ratings of the State's general obligation bonds. Moody's
Investors Service, Inc. lowered its rating from "Aa" to "A1," Standard & Poor's
Ratings Group lowered its rating from "A+" to "A" and termed the bond outlook as
"stable," and Fitch Investors Service, Inc. lowered its rating from "AA" to "A."
The credit quality of obligations issued by local California issuers is not
directly related to the quality of obligations issued by the State, and the
State has no obligation to make payments on local debt obligations in the event
of default. As described below, the State's fiscal problems have placed
considerable pressure on local governments.

Finally, the State is involved in certain legal proceedings that, if decided
against the State, may require the State to make significant future expenditures
or substantially impair revenues.

OBLIGATIONS OF OTHER ISSUERS

Property tax revenues received by local governments declined more than 50%
following passage of Proposition 13 in 1978. Subsequently, the California
legislature enacted measures to provide for the redistribution of the State's
General Fund surplus to local agencies, the reallocation of certain State
revenues to local agencies, and the assumption of certain government functions
by the State to assist the State's municipalities. However, in response to the
fiscal crisis at the State level, the Legislature in 1992-93 and 1993-94
effectively reversed the post-Proposition 13 "bailout" aid and directed over $3
billion of city, county, and special district property taxes to school
districts, which enabled the State to reduce its aid to schools by the same
amount. Part of this shortfall is to be covered by a 0.5% sales tax allocated to
local government public safety purposes. The 0.5% sales tax increase was imposed
by Proposition 172, which was approved by a majority of voters at the statewide
election on November 2, 1993.

Even with these cuts and property tax shifts, over 70% of the State General Fund
expenditures are for local government assistance. To the extent that the State
is constrained by its Article XIIIB appropriations limit, its obligation to
conform to Proposition 98, or other fiscal considerations, the absolute level or
rate of growth of State assistance to local governments may be reduced. Any such
reductions in State aid could compound the serious fiscal constraints already
experienced by many local governments, particularly counties.

ORANGE COUNTY BANKRUPTCY

On December 6, 1994, Orange County, California (the "County") together with the
pooled investment funds (the "Pools") filed for protection under Chapter 9 of
the federal Bankruptcy Code, after reports that the Pools had suffered
significant market losses in its investments caused a liquidity crisis for the
Pools and the County. More than 180 other public entities, most but not all
located in the County, were also depositors in the Pools. The County estimated
the Pools' loss at about $1.69 billion, or 23% of its initial deposits of around
$7.5 billion. Many of the entities which kept moneys in the Pools, including the
County, faced cash flow difficulties because of the bankruptcy filing and may be
required to reduce programs or capital projects. Moody's and Standard and Poor's
have suspended, reduced to below investment grade levels, or placed on "Credit
Watch" various securities of the County and the entities participating in the
Pools.

On May 2, 1995, the Bankruptcy Court approved a settlement agreement covering
claims of the other participating entities against the County and the Pools.
Most participants have received in cash 80% (90% for school districts) of their
Pools' investment; the balance is to be paid in the future. The County succeeded
in deferring, by consent, until June 30, 1996, the repayment of $800 million of
short-term obligations due in July and August, 1995; these notes are, however,
considered to be in default by Moody's and S&P. On June 27, 1995, County voters
turned down a proposal for temporary 0.5% increase in local sales tax, making
the County's fiscal recovery much harder.

A new financial plan has been implemented based largely on transfer of moneys to
the County from other local government entities, and further expenditure cuts.

The State of California has no obligation with respect to any obligations or
securities of the County or any of the other participating entities.

CALIFORNIA ASSESSMENT AND SPECIAL TAX BONDS may be adversely affected by a
general decline in real estate values or a further slowdown in real estate sales
activity. In many cases, such bonds are secured by land that is undeveloped at
the time of issuance but is expected to be developed within a few years. In the
event of continued reductions or slowdowns, development may not occur or may be
delayed, thereby increasing the risk of default on the bonds. Because the
special assessments or taxes securing these bonds are not the personal liability
of the owners of the property assessed, the lien on the property is the only
security for the bonds. Moreover, in most cases, the issuer of these bonds is
not required to make payments on the bonds in the event of delinquency in the
payment of assessments or taxes, except from amounts, if any, in a reserve fund
established for the bonds.

Certain CALIFORNIA LONG-TERM LEASE OBLIGATIONS, though typically payable from a
municipality's general fund, are subject to "abatement" in the event the
facility being leased is unavailable for beneficial use and occupancy by the
municipality during the term of the lease. Abatement is not a default, and there
may be no remedies available to the holders of the certificates in the event
abatement occurs and available reserves and insurance are inadequate. For
example, several years

ago the Richmond Unified School District entered into a lease transaction in
which certain existing properties of the District were sold and leased back in
order to obtain funds to cover operating deficits. Following a fiscal crisis in
which the District's finances were taken over by a State receiver, the District
failed to make rental payments on this lease, resulting in a lawsuit by the
trustee for the certificate of participation holders in which the State was
named a defendant (on the grounds that it controlled the District's finances).
One of the defenses raised in answer to this lawsuit was the invalidity of the
original lease transaction. The trial court ruled in favor of the trustee.
Although a settlement of this case is now expected, any ultimate judgment
against the trustee may have adverse implications for lease transactions of a
similar nature issued by other California municipalities.

The repayment of INDUSTRIAL DEVELOPMENT BONDS secured by real property may be
affected by California laws limiting foreclosure rights of creditors. Securities
backed by health care and hospital revenues may be affected by changes in State
regulations governing cost reimbursements to health care providers under
Medi-Cal (the State's Medicaid program), including the policy of awarding
exclusive contracts to certain hospitals.

Limitations on ad valorem property taxes may particularly affect "TAX
ALLOCATION" BONDS issued by California redevelopment agencies. Such bonds are
secured solely by the increase in assessed valuation of a redevelopment project
area after the start of redevelopment activity. In the event that assessed
values in the redevelopment project area decline (e.g., because of a natural
disaster such as an earthquake), the tax increment revenue may be insufficient
to make principal and interest payments on these bonds. Both Moody's and S&P
suspended ratings on California tax allocation bonds after the enactment of
Articles XIIIA and XIIIB and have only resumed such ratings on a selective
basis.

In addition, Proposition 87, approved by California voters in 1988, requires
that any increase in project area property tax revenues produced by an increase
in the property tax rate go directly to the taxing entity on whose behalf the
taxes are levied to repay that entity's general obligation indebtedness. As a
result, although redevelopment agencies (typical issuers of tax allocation
bonds) continue to receive additional taxes collected on increases in the
assessed value of the taxable property in the project area, they no longer
receive that portion of any increase attributable to an increase in the property
tax rate.

The effect of these various constitutional and statutory changes upon the
ability of California municipal issuers to pay interest and principal on their
obligations remains unclear. Other measures affecting the taxing or spending
authority of California or its political subdivisions may be approved or enacted
in the future. Legislation may be introduced that would modify existing taxes or
other revenue-generating measures, or that would further limit or,
alternatively, increase the ability of state and local governments to impose new
taxes or increase existing taxes. It is not possible to determine the effect of
such legislation on the ability of state or local government entities to pay the
interest on, or repay the principal of, California municipal obligations.

Most of California is within an active geologic region subject to major seismic
activity. California municipal obligations held by the Funds could be affected
by interruptions of revenues due to damaged facilities, income tax deductions
for casualty losses, or property tax assessment reductions. Compensatory
financial assistance could be constrained by the inability of (i) an issuer to
have obtained earthquake insurance coverage at reasonable rates, (ii) an insurer
to perform on its contracts of insurance in the event of widespread losses, or
(iii) the federal or state governments to appropriate sufficient funds within
their respective budget limitations.

INVESTMENT RESTRICTIONS

The Funds' investment restrictions set forth below. Except for those designated
as operating policies, the restrictions are fundamental and may not be changed
without approval of "a majority of the outstanding votes of shareholders" of the
Fund, as determined in accordance with the Investment Company Act of 1940.

EACH MONEY MARKET FUND MAY NOT:

(1) Borrow money in excess of 33 % of the market value of its total assets,
and then only from a bank and as a temporary measure to satisfy redemption
requests for extraordinary or emergency purposes, and provided that
immediately after any such borrowing there is an asset coverage of at
least 300 per centum for all such borrowings. To secure any such
borrowing, each Money Market Fund may not mortgage, pledge, or hypothecate
in excess of 33 % of the value of its total assets. Each Money Market Fund
will not purchase any security while borrowings representing more than 5%
of its total assets are outstanding.

(2) Act as an underwriter of securities issued by others, except to the extent
that the purchase of municipal securities or other permitted investments
directly from the issuer thereof or from an underwriter for an issuer, and
the later disposition of such securities in accordance with the Fund's
investment policies and techniques, may be deemed to be an underwriting.

(4) Engage in any short-selling operations.

(5) Make loans to others, except in accordance with the Fund's investment
objective and policies.

(6) Purchase any equity securities in any companies, including warrants or
bonds with warrants attached, or any preferred stocks, convertible bonds,
or convertible debentures.

(7) Engage in margin transactions or in transactions involving puts, calls,
straddles, or spreads, except that it may purchase and hold securities
with rights to put securities to the seller (standby commitments) in
accordance with its investment techniques.

(8) Invest in securities that are not readily marketable or the disposition of
which is restricted under federal securities laws (collectively, "illiquid
securities") if, as a result, more than 10% of the Fund's net assets would
be invested in illiquid securities.

(9) Issue or sell any class of senior security as defined in the Investment
Company Act of 1940 except to the extent that notes evidencing temporary
borrowings or the purchase of securities on a when-issued or
delayed-delivery basis might be deemed such.

(10) Acquire or retain the securities of any other investment company except in
connection with a merger, consolidation, acquisition, or reorganization.

(11) Purchase or retain securities of any issuer if, to the knowledge of the
Trust's management, those officers and trustees of the Trust and of its
investment advisor, who each own beneficially more than 0.5% of the
outstanding securities of such issuer, together own beneficially more than
5% of such securities. However, such restrictions will not apply to
holdings of issuers of industrial development bonds.

(12) Acquire securities for the purpose of exercising control over management
of the issuer.

(13) As an operating policy, purchase any security if, as a result, more than
5% of the value of the Fund's total assets would be invested in the
securities of issuers that at the time of purchase had been in operation
for less than three years, except obligations issued or guaranteed by the
U.S. government or its agencies and municipal securities (for this
purpose, the period of operation of any issuer will include the period of
operation of any predecessor or unconditional guarantor of such issuer),
provided, however, that for the purpose of this limitation, industrial
development bonds issued by non-governmental users will not be deemed
municipal securities.

(14) Purchase any security if, as a result, 25% or more of the value of the
Fund's total assets would be invested in the securities of issuers having
their principal business activities in the same industry. However, this
limitation does not apply to securities issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities or to municipal
securities of any type.

EACH VARIABLE-PRICE FUND MAY NOT:

(1) Borrow money in excess of 33 % of the market value of its total assets,
and then only from a bank and as a temporary measure to satisfy redemption
requests for extraordinary or emergency purposes, and provided that
immediately after any such borrowing there is an asset coverage of at
least 300% for all such borrowings. To secure any such borrowing, each
Variable-Price Fund may not mortgage, pledge, or hypothecate in excess of
33 % of the value of its total assets. (The deposit of assets in escrow in
connection with the writing of covered put and call options and collateral
arrangements with respect to initial or variation margin deposits for
futures contracts will not be deemed to be a pledge of the Fund's assets.)
Each Variable-Price Fund will not purchase any security while borrowings
representing more than 5% of its total assets are outstanding.

(2) Act as an underwriter of securities issued by others, except to the extent
that the purchase of municipal securities, or other permitted investments,
directly from the issuer thereof or from an underwriter for an issuer, and
the later disposition of such securities in accordance with the Fund's
investment policies and techniques, may be deemed to be an underwriting.

(3) Purchase, sell, or invest in real estate, commodities, commodity
contracts, foreign exchange, or interests in oil, gas, or other mineral
exploration or development programs, provided that this limitation will
not prohibit the purchase of municipal securities and other debt
securities secured by real estate or interests therein and will not
prohibit the Fund from purchasing, selling, or entering into options on
securities or indexes of securities, futures contracts, options on futures
contracts, or any other interest rate hedging instrument, subject to the
Fund's compliance with applicable provisions of the federal securities or
commodities laws.

(4) Engage in any short-selling operations, except that the Fund may purchase,
sell, or enter into short positions in options on securities or indexes of
securities, futures contracts, options on futures contracts, and any other
interest rate hedging instrument as may be permitted under the federal
securities or commodities laws.

(5) Make loans to others, except in accordance with the Fund's investment
objective and policies.

(6) Purchase any equity securities in any company, including warrants or bonds
with warrants attached, or any preferred stocks, convertible bonds, or
convertible debentures.

(7) Engage in margin transactions, except that it may purchase, sell, or enter
into positions in options on securities or indexes of securities, futures
contracts, options on futures contracts, and other interest rate hedging
instruments, and may make margin deposits in connection therewith, and may
purchase and hold securities with rights to put securities to the seller
(standby commitments) in accordance with its investment policies.

(8) Invest in securities that are not readily marketable or the disposition of
which is restricted under federal securities laws (collectively "illiquid
securities") if, as a result, more than 10% of the Fund's net assets would
be invested in illiquid securities.

(9) Issue or sell any class of senior security as defined in the Investment
Company Act of 1940 except to the extent that transactions in options,
futures, options on futures, and other interest rate hedging instruments,
notes evidencing temporary borrowings, or the purchase of securities on a
when-issued or delayed-delivery basis might be deemed such.

(10) Acquire or retain the securities of any other investment company except
that the Fund may, for temporary purposes, purchase shares of a money
market mutual fund, subject to such restrictions as may be imposed by (i)
the Investment Company Act of 1940 and rules thereunder, or (ii) any State
in which shares of the Fund are registered, and may acquire shares of any
investment company in connection with a merger, consolidation,
acquisition, or reorganization.

(11) Purchase or retain securities of any issuer if, to the knowledge of the
Trust's management, those officers and trustees of the Trust and of its
investment advisor, who each beneficially own more than 0.5% of the
outstanding securities of such issuer, together beneficially own more than
5% of such securities. However, such restrictions will not apply to
holdings of the issuers of industrial development bonds.

(12) Acquire securities for the purpose of exercising control over management
of the issuer.

Unless otherwise indicated, with the exception of the percentage limitations on
borrowing, the restrictions apply at the time transactions are entered into.
Accordingly, any later increase or decrease beyond the specified limitation
resulting from a change in the Fund`s net assets will not be considered in
determining whether it has complied with its investment restrictions.

For purposes of the Funds' investment restrictions, the party identified as the
"issuer" of a municipal security depends on the form and conditions of the
security. When the assets and revenues of a political subdivision are separate
from those of the government that created the subdivision and the security is
backed only by the assets and revenues of the subdivision, the subdivision is
deemed the sole issuer. Similarly, in the case of an IDB, if the bond were
backed only by the assets and revenues of a non-governmental user, the
non-governmental user would be deemed the sole issuer. If, in either case, the
creating government or some other entity were to guarantee the security, the
guarantee would be considered a separate security and treated as an issue of the
guaranteeing entity.

PORTFOLIO TRANSACTIONS

Each Fund's assets are invested by BMC in a manner consistent with the Fund's
investment objectives, policies, and restrictions and with any instructions the
board of trustees may issue from time to time. Within this framework, BMC is
responsible for making all determinations as to the purchase and sale of
portfolio securities and for taking all steps necessary to implement securities
transactions on behalf of the Funds. In placing orders for the purchase and sale
of portfolio securities, BMC will use its best possible price and execution and
will otherwise place orders with broker-dealers subject to and in accordance
with any instructions the board of trustees may issue from time to time. BMC
will select broker-dealers to execute portfolio transactions on behalf of the
Funds solely on the basis of best price and execution.

Under normal conditions, the Variable-Price Funds' annual portfolio turnover
rates are not expected to exceed 100%. Because a higher turnover rate increases
transaction costs and may increase taxable capital gains, BMC carefully weighs
the potential benefits of short-term investing against these considerations.

The Variable-Price Funds' portfolio turnover rates for the fiscal years ended
August 31, 1995 and 1994, are indicated in the following table.

PORTFOLIO TURNOVER RATES
FISCAL YEAR FISCAL YEAR
FUND 1995 1994

Tax-Free Limited-Term Fund 49.75% 65.66%
Tax-Free Intermediate-Term Fund 25.44 43.80
Tax-Free Long-Term Fund 59.92 61.93
Municipal High-Yield Fund 40.00 42.55
Tax-Free Insured Fund 40.45 47.12

Investment decisions are made for each Fund independently from those made for
other funds advised by BMC. From time to time, however, two or more funds
advised by BMC may hold the same security. When two or more funds are
simultaneously engaged in purchasing or selling a security, the prices and
amounts are allocated in a manner believed by BMC to be equitable to each of the
funds involved. In some instances, simultaneous transactions could have a
detrimental effect on the price or value of a security as far as the
participating funds are concerned. In other instances, however, the ability to
participate in volume transactions will produce better prices and executions for
the funds.

VALUATION OF PORTFOLIO SECURITIES

Each Fund's net asset value per share ("NAV") is calculated by Twentieth Century
Services, Inc. (TCS), as of the close of business of the New York Stock Exchange
(the "Exchange") each day the Exchange is open for business, usually at 3:00
p.m. Central Time. The Exchange has designated the following holiday closings
for 1996: New Year's Day (observed), Presidents` Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (observed).
Although TCS expects the same holiday schedule to be observed in the future, the
Exchange may modify its holiday schedule at any time.

BMC typically completes its trading on behalf of each Fund in various markets
before the Exchange closes for the day. Each Fund's share price is calculated by
adding the value of all portfolio securities and other assets, deducting
liabilities, and dividing the result by the number of shares outstanding.
Expenses and interest earned on portfolio securities are accrued daily.

MONEY MARKET FUNDS. Securities held by the Money Market Funds are valued at
amortized cost. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium paid at the time of purchase. Although this method provides certainty in
valuation, it generally disregards the effect of fluctuating interest rates on
an instrument's market value. Consequently, the instrument's amortized cost
value may be higher or lower than its market value, and this discrepancy may be
reflected in the Funds' yields. During periods of declining interest rates, for
example, the daily yield on Fund shares computed as described above may be
higher than that of a fund with identical investments priced at market value.
The converse would apply in a period of rising interest rates.

The amortized cost valuation method is permitted in accordance with Rule 2a-7
under the Investment Company Act of 1940. Under the Rule, a fund holding itself
out as a money market fund must adhere to certain quality and maturity criteria.
In particular, such a fund must limit is investments to U.S. dollar-denominated
instruments determined by its directors or trustees to present minimal credit
risks and that are (a) high-grade obligations rated in accordance with
applicable rules in one of the two highest rating categories for short-term
obligations by at least two rating agencies (or by one if only one has rated the
obligation) or (b) unrated obligations judged by the advisor, under the
direction of the fund's directors or trustees, to be of comparable quality.
Further, pursuant to Rule 2a-7, a money market fund must maintain a
dollar-weighted average portfolio maturity of 90 days or less and purchase
instruments with remaining maturities of 397 days or less.

The trustees have established procedures designed to stabilize the Money Market
Funds' NAV at $1.00 per share, to the extent reasonably possible. These
procedures require the Trust's chief financial officer to notify the trustees
immediately if, at any time, the Funds' weighted average maturity exceeds 90
days, or its NAV, as determined by using available market quotations, deviates

from its amortized cost per share by .25% or more. If such deviation exceeds
.40%, a meeting of the board of trustees' audit committee will be called to
consider what actions, if any, should be taken. If such deviation exceeds .50%,
the Trust's chief financial officer is instructed to adjust daily dividend
distributions immediately to the extent necessary to reduce the deviation to
.50% or lower and to call a meeting of the board of trustees to consider further
action.

The Board of Trustees monitors the levels of illiquid securities, however if the
levels are exceeded, they will take action to rectify these levels.

Actions the board may consider under these circumstances include (a) selling
portfolio securities prior to maturity, (b) withholding dividends or
distributions from capital, (c) authorizing a one-time dividend adjustment, (d)
discounting share purchases and initiating redemptions in kind, or (e) valuing
portfolio securities at market price for purposes of calculating NAV.

VARIABLE-PRICE FUNDS. Securities held by the Variable-Price Funds normally are
priced by an independent pricing service, provided that such prices are believed
by BMC to reflect the fair market value of portfolio securities.

Because there are hundreds of thousands of municipal issues outstanding, and the
majority of them do not trade daily, the prices provided by pricing services are
generally determined without regard to bid or last sale prices. In valuing
securities, the pricing services generally take into account institutional
trading activity, trading in similar groups of securities, and any developments
related to specific securities. The methods used by the pricing service and the
valuations so established are reviewed by BMC under the general supervision of
the board of trustees. There are a number of pricing services available, and
BMC, on the basis of ongoing evaluation of these services, may use other pricing
services or discontinue the use of any pricing service in whole or in part.

Securities not priced by a pricing service are valued at the mean between the
most recently quoted bid and ask prices provided by broker-dealers. The
municipal bond market is typically a "dealer market"; that is, dealers buy and
sell bonds for their own accounts rather than for customers. As a result, the
spread, or difference between bid and asked prices, for certain municipal bonds
may differ substantially among dealers.

Securities maturing within 60 days of the valuation date may be valued at cost,
plus or minus any amortized discount or premium, unless the trustees determine
that this would not result in fair valuation of a given security. Other assets
and securities for which quotations are not readily available are valued in good
faith at their fair value using methods approved by the board of trustees.

PERFORMANCE

The Funds may quote performance in various ways. Historical performance
information will be used in advertising and sales literature.

For the MONEY MARKET FUNDS, yield quotations are based on the change in the
value of a hypothetical investment (excluding realized gains and losses from the
sale of securities and unrealized appreciation and depreciation of securities)
over a seven-day period (base period) and stated as a percentage of the
investment at the start of the base period (base-period return). The base-period
return is then annualized by multiplying by 365/7 with the resulting yield
figure carried to at least the nearest hundredth of one percent.

Calculations of effective yield begin with the same base-period return used to
calculate yield, but the return is then annualized to reflect weekly compounding
according to the following formula:
365/7
Effective Yield = [(Base-Period Return) + 1) ] - 1

The Money Market Funds' yields and effective yields for the seven-day period
ended June 30, 1996, were as follows:

Money Market Fund 7-Day Yield Effective Yield

Tax-Free Money Market Fund 2.86% 2.90%
Municipal Money Market Fund 2.93 2.97

For the Variable-Price Funds, yield quotations are based on the investment
income per share earned during a particular 30-day period, less expenses accrued
during the period (net investment income), and are computed by dividing the
Fund's net investment income by its share price on the last day of the period
according to the following formula:

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

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

The Variable-Price Funds' yields for the 30-day period ended June 30, 1996, were
as follows:

Variable-Price Fund 30-Day Yield

Tax-Free Limited-Term Fund 3.91%
Tax-Free Intermediate-Term Fund 4.57
Tax-Free Long-Term Fund 5.16
Municipal High-Yield Fund 5.74
Tax-Free Insured Fund 5.15

Total returns quoted in advertising and sales literature reflect all aspects of
a Fund's return, including the effect of reinvesting dividends and capital gain
distributions and any change in the Fund's NAV during the period.

Average annual total returns are calculated by determining the growth or decline
in value of a hypothetical historical investment in a Fund over a stated period
and then calculating the annually compounded percentage rate that would have
produced the same result if the rate of growth or decline in value had been
constant throughout the period. For example, a cumulative total return of 100%
over 10 years would produce an average annual return of 7.18%, which is the
steady annual rate that would equal 100% growth on a compounded basis in 10
years. While average annual total returns are a convenient means of comparing
investment alternatives, investors should realize that the Funds' performance is
not constant over time but changes from year-to-year and that average annual
total returns represent averaged figures as opposed to actual year-to-year
performance.

The Funds' average annual total returns for the one-year, five-year, and
ten-year or life-of-fund periods ended June 30, 1996, are indicated in the table
below.

AVERAGE ANNUAL TOTAL RETURNS

Fund One-Year Five-Year Ten-Year Life-of-Fund*

Tax-Free Money Market Fund(1) 3.18% 2.76% 3.70% 3.92%
Municipal Money Market Fund(2) 3.29 2.98 - 3.12
Tax-Free Limited-Term Fund(3) 4.14 - - 4.56
Tax-Free Intermediate-Term Fund(1) 5.64 6.66 6.47 6.91
Tax-Free Long-Term Fund(1) 7.69 7.73 7.39 8.39
Municipal High-Yield Fund(4) 8.53 7.91 - 6.27
Tax-Free Insured Fund(4) 6.83 7.78 - 6.58

(1) Commenced operations on November 9, 1983.
(2) Commenced operations on December 31, 1990.
(3) Commenced operations on June 1, 1992.
(4) Commenced operations on December 30, 1986.

In addition to average annual total returns, each Fund may quote unaveraged or
cumulative total returns reflecting the simple change in value of an investment
over a stated period. Average annual and cumulative total returns may be quoted
as percentages or as dollar amounts and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Total returns may be broken down into their components of income and
capital (including capital gains and changes in share price) to illustrate the
relationship of these factors and their contributions to total return.

The Funds' performance may be compared with the performance of other mutual
funds tracked by mutual fund rating services or with other indexes of market
performance. This may include comparisons with funds that, unlike Twentieth
Century funds, are sold with a sales charge or deferred sales charge. Sources of
economic data that may be considered in making such comparisons may include, but
are not limited to, U.S. Treasury bill, note, and bond yields, money market fund
yields, U.S. government debt and percentage held by foreigners, the U.S. money
supply, net free reserves, and yields on current-coupon GNMAs (source: Board of
Governors of the Federal Reserve System); the federal funds and discount rates
(source: Federal Reserve Bank of New York); yield curves for U.S. Treasury
securities and AA/AAA-rated corporate securities (source: Bloomberg Financial
Markets); yield curves for AAA-rated tax-free municipal securities (source:
Telerate); yield curves for foreign government securities (sources: Bloomberg
Financial Markets and Data Resources, Inc.); total returns on foreign bonds
(source: J.P. Morgan Securities Inc.); various U.S. and foreign government
reports; the junk bond market (source: Data Resources, Inc.); the CRB Futures
Index (source: Commodity Index Report); the price of gold (sources: London
a.m./p.m. fixing and New York Comex Spot Price); rankings of any mutual fund or
mutual fund category tracked by Lipper Analytical Services, Inc. or Morningstar,
Inc.; mutual fund rankings published in major, nationally distributed
periodicals; data provided by the Investment Company Institute; Ibbotson
Associates, Stocks, Bonds, Bills, and Inflation; major indexes of stock market
performance; and indexes and historical data supplied by major securities
brokerage or investment advisory firms. The Fund may also utilize reprints from
newspapers and magazines furnished by third parties to illustrate historical
performance.

The Fund's shares are sold without a sales charge (load). No-load funds offer an
advantage to investors when compared to load funds with comparable investment
objectives and strategies. If an investor pays $10,000 to buy shares of a load
fund with an 8.5% sales charge, $850 of that $10,000 is paid as a commission to
a salesperson, leaving only $9,150 to put to work for the investor. Over time,
the difference between paying a sales load and not paying one can have a
significant effect on an investor's total return. The Mutual Fund Education
Alliance provides a comparison of $10,000 invested in each of two mutual funds,
one with an 8.5% sales load and one without a sales load. Assuming a compounded
annual growth rate of 10% for both investments, the no-load fund investment is
worth $25,937 after ten years, and the load fund investment is worth only
$23,732.

TAXES

FEDERAL INCOME TAX

Each Fund intends to qualify annually as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). By
so qualifying, a Fund will be exempt from federal and California income taxes to
the extent that it distributes substantially all of its net investment income
and net realized capital gains to shareholders. The tax rules applicable to
regulated investment companies include, among others, a requirement that gains
from the sale of securities held less than three months constitute less than 30%
of a Fund's gross income for each taxable year.

Certain of the bonds purchased by the Funds may be treated as bonds that were
originally issued at a discount. Original issue discount represents interest for
federal income tax purposes and can generally be defined as the difference
between the price at which a security was issued and its stated redemption price
at maturity. Original issue discount, although no cash is actually received by a
Fund until the maturity of the bond, is treated for federal income tax purposes
as income earned by a Fund over the term of the bond, and therefore is subject
to the distribution requirements of the Code. The annual amount of income earned
on such a bond by a Fund generally is determined on the basis of a constant
yield to maturity that takes into account the semiannual compounding of accrued
interest. Original issue discount on an obligation with interest exempt from
federal income tax will constitute tax-exempt interest income to the Fund.

In addition, some of the bonds may be purchased by a Fund at a discount that
exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless a Fund elects to include market discount in
income in tax years to which it is attributable). Generally, market discount
accrues on a daily basis for each day the bond is held by a Fund on a straight
line basis over the time remaining to the bond's maturity. In the case of any
debt security having a fixed maturity date of not more than one year from date
of issue, the gain realized on disposition generally will be treated as
short-term capital gain. In general, gain realized on disposition of a security
held less than one year is treated as short-term capital gain.

It is intended that each Fund's assets will be sufficiently invested in
municipal securities so that each Fund will be eligible to pay "exempt-interest
dividends" (as defined in the Code) to shareholders. A Fund's dividends payable
from net tax-exempt interest earned from municipal securities will qualify to be
designated as exempt-interest dividends if, at the close of each quarter of the
Fund's taxable year, at least 50% of the value of the Fund's total assets
consists of municipal securities.

Exempt-interest dividends distributed to shareholders are not included in
shareholders' gross income for regular federal income tax purposes. The
percentage of income that is tax-exempt is applied uniformly to all
distributions made during each calendar year. This percentage may differ from
the actual percentage of tax-exempt income received during any particular month.

Distributions of net investment income received by a Fund from investment in
debt securities other than municipal securities, of ordinary income realized
upon the disposition of tax-exempt market discount bonds, and any net realized
short-term capital gains distributed by the Fund will be taxable to shareholders
as ordinary income. Because the Funds' investment income is derived from
interest rather than dividends, no portion of such distributions is eligible for
the dividends-received deduction available to corporations.

Under the Code, any distribution of a Fund's net realized long-term capital
gains designated by the Fund as a capital gain dividend is taxable to
shareholders as long-term capital gains, regardless of the length of time shares
are held. If a capital gain dividend is paid with respect to any shares of a
Fund sold at a loss after being held for six months or less, the loss will be
treated as a long-term capital loss for tax purposes. The Code also provides
that if a shareholder holds shares of a Fund for six months or less, the
deduction of any loss on the sale or exchange of those shares is disallowed to
the extent that the shareholder received exempt-interest dividends with respect
to those shares.

As of August 31, 1995, the Funds' had the following capital loss carryovers:
Tax-Free Money Market Fund $740,889 scheduled to expire on August 31, 1996, and
Municipal Money Market Fund $3,865, Tax-Free Limited-Term Fund $608,877,
Tax-Free Intermediate-Term Fund $1,686,723, Tax-Free Long-Term Fund $498,209,
Municipal High-Yield Fund $425,261, and Tax-Free Insured Fund $1,230,778
scheduled to expire on August 31, 2003. When a Fund has a capital loss
carryover, it does not make capital gain distributions until the loss has been
offset or expired.

Interest on certain types of industrial development bonds (small issues and
obligations issued to finance certain exempt facilities that may be leased to or
used by persons other than the issuer) is not exempt from federal income tax
when received by "substantial users" or persons related to substantial users as
defined in the Code. The term "substantial user" includes any "non-exempt
person" who regularly uses in trade or business part of a facility financed from
the proceeds of industrial development bonds. The Funds may invest periodically
in industrial development bonds and, therefore, may not be appropriate
investments for entities that are substantial users of facilities financed by
industrial development bonds or "related persons" of substantial users.
Generally, an individual will not be a related person of a substantial user
under the Code unless he or his immediate family (spouse, brothers, sisters,
ancestors and lineal descendants) owns directly or indirectly in aggregate more
than 50% in the equity value of the substantial user.

From time to time, proposals have been introduced in Congress for the purpose of
restricting or eliminating the federal income tax exemption for interest on
municipal securities, and similar proposals may be introduced in the future. If
such a proposal were enacted, the availability of municipal securities for
investment by the Funds and the Funds' NAVs would be adversely affected. Under
these circumstances, the trustees would re-evaluate the Funds' investment
objectives and policies and would consider either changes in the structure of
the Trust or its dissolution.

ALTERNATIVE MINIMUM TAX

While the interest on bonds issued to finance essential state and local
government operations is generally exempt from regular federal income tax,
interest on certain "private activity" bonds issued after August 7, 1986, while
exempt from regular federal income tax, constitutes a tax-preference item for
taxpayers in determining alternative minimum tax liability under the Code and
income tax provisions of several states.

Municipal Money Market Fund and Municipal High-Yield Fund may each invest in
private activity bonds. The interest on private activity bonds could subject a
shareholder to, or increase liability under, the federal alternative minimum
tax, depending on the shareholder's tax situation. The interest on California
private activity securities is not subject to the California alternative minimum
tax when it is earned (either directly or through investment in a mutual fund)
by a California taxpayer. However, if either Fund were to invest in private
activity securities of non-California issuers (due to a limited supply of
appropriate California municipal obligations, for example), the interest on
those securities would be included in California alternative minimum taxable
income.

All distributions derived from interest exempt from regular federal income tax
may subject corporate shareholders to, or increase their liability under, the
alternative minimum tax because these distributions are included in the
corporation's "adjusted current earnings."

In addition, a deductible "environmental tax" of 0.12% is imposed on a
corporation's modified alternative minimum taxable income in excess of $2
million. The environmental tax will be imposed even if the corporation is not
required to pay an alternative minimum tax. To the extent that exempt-interest
dividends paid by a Fund are included in alternative minimum taxable income,
corporate shareholders may be subject to the environmental tax.

The Trust will inform Municipal Money Market Fund and Municipal High-Yield Fund
shareholders annually of the amount of distributions derived from interest
payments on private activity bonds.

STATE AND LOCAL TAXES

California law concerning the payment of exempt-interest dividends is similar to
federal law. Assuming each Fund qualifies to pay exempt-interest dividends under
federal and California law, and to the extent that dividends are derived from
interest on tax-exempt bonds of California state or local governments, such
dividends will also be exempt from California personal income tax. The Trust
will inform shareholders annually as to the amount of distributions from each
Fund that constitute exempt-interest dividends and dividends exempt from
California personal income tax. The Funds' dividends are not exempt from
California state franchise or corporate income taxes.

The Funds' dividends may not qualify for exemption under income or other tax
laws of state or local taxing authorities outside California. Shareholders
should consult their tax advisors or state or local tax authorities about the
status of distributions from the Funds in this regard.

The information above is only a summary of some of the tax considerations
affecting the Funds and their shareholders; no attempt has been made to discuss
individual tax consequences. A prospective investor should consult his or her
tax advisor or state or local tax authorities to determine whether the Funds are
suitable investments based on his or her tax situation.

ABOUT THE TRUST

Benham California Tax-Free and Municipal Funds (the Trust) is a registered
open-end management investment company that was organized as a Massachusetts
business trust on February 18, 1983. (The Trust was formerly known as "Benham
California Tax-Free Trust"). Currently, there are seven series of the Trust, as
follows: Tax-Free Money Market Fund, Municipal Money Market Fund, Tax-Free
Limited-Term Fund (formerly known as Tax-Free Short-Term Fund), Tax-Free
Intermediate-Term Fund, Tax-Free Long-Term Fund, Municipal High-Yield Fund, and
Tax-Free Insured Fund. The board of trustees may create additional series from
time to time.

The Declaration of Trust permits the trustees to issue an unlimited number of
full and fractional shares of beneficial interest without par value, which may
be issued in series (funds). Shares issued are fully paid and nonassessable and
have no preemptive, conversion, or similar rights.

Each series votes separately on matters affecting that series exclusively.
Voting rights are not cumulative, so that investors holding more than 50% of the
Trust's (i.e., all series') outstanding shares may elect a board of trustees.
The Trust has instituted dollar-based voting, meaning that the number of votes
you are entitled to is based upon the dollar value of your investment. The
election of trustees is determined by the votes received from all Trust
shareholders, without regard to whether a majority of shareholders of any one
series voted in favor of a particular nominee or all nominees as a group.
Shareholders have equal rights as to dividends and distributions declared by
their series and in the net assets of such series upon its liquidation or
dissolution. Shares of each series have equal voting rights, although each
series votes separately on matters affecting that series exclusively.

Shareholders of a Massachusetts business trust could, under certain
circumstances, be held personally liable for its obligations. However, the
Declaration of Trust contains an express disclaimer of shareholder liability for
acts or obligations of the Trust. The Declaration of Trust also provides for
indemnification and reimbursement of expenses of any shareholder held personally
liable for obligations of the Trust. The Declaration of Trust provides that the
Trust will, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. The Declaration of Trust further provides that the Trust may maintain
appropriate insurance (for example, fidelity, bonding, and errors and omissions
insurance) for the protection of the Trust, its shareholders, trustees,
officers, employees, and agents to cover possible tort and other liabilities.
Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which both inadequate
insurance exists and the Trust itself is unable to meet its obligations.

CUSTODIAN BANK: State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02101, is custodian of the Trust's assets. Services
provided by the custodian bank include (a) settling portfolio purchases and
sales, (b) reporting failed trades, (c) identifying and collecting portfolio
income, and (d) providing safekeeping of securities. The custodian takes no part
in determining the Fund's investment policies or in determining which securities
are sold or purchased by the Fund. Effective October 7, 1996, Chase Manhattan
Bank, 4 Chase Metrotech Center, Brooklyn, NY 11245 will provide the custodian
services for the Fund.

INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 1000 Walnut, Suite 1600, Kansas
City, Missouri 64106, serves as the Trust's independent auditors. KPMG audits
the annual report and provides tax and other services.

TRUSTEES AND OFFICERS

The Trust's activities are overseen by a board of trustees, including seven
independent trustees. The individuals listed below whose names are marked by an
asterisk (*) are "interested persons" of the Trust (as defined in the Investment
Company Act of 1940) by virtue of, among other considerations, their affiliation
with either the Trust; the Trust's investment advisor, Benham Management
Corporation (BMC); the Trust's agent for transfer and administrative services,
Twentieth Century Services, Inc. (TCS); the Trust's distribution agent,
Twentieth Century Securities, Inc.; the parent corporation, Twentieth Century
Companies, Inc. (TCC) or TCC's subsidiaries; or other funds advised by BMC. The
trustees listed below serve as trustees or directors of other funds managed by
BMC. Unless otherwise noted, a date in parentheses indicates the date the
trustee or officer began his or her service in a particular capacity. The
trustees' and officers' address with the exception of Mr. Stowers III and Ms.
Roepke is 1665 Charleston Road, Mountain View, California 94043. The address of
Mr. Stowers III and Ms. Roepke is 4500 Main Street, Kansas City, Missouri 64111.

TRUSTEES

*JAMES M. BENHAM, chairman of the board of trustees (1985), president and chief
executive officer (1996). Mr. Benham is also chairman of the boards of Benham
Financial Services, Inc. (BFS) (1985), BMC (1971), and Benham Distributors, Inc.
(BDI) (1988); president of BMC (1971), and BDI (1988); and a member of the board
of governors of the Investment Company Institute (1988). Mr. Benham has been in
the securities business since 1963, and he frequently comments through the media
on economic conditions, investment strategies, and the securities markets.

ALBERT A. EISENSTAT, independent trustee (1995). Mr. Eisenstat is an independent
director of each of Commercial Metals Co. (1982), Sungard Data Systems (1991)
and Business Objects S/A (1994). Previously, he served as vice president of
corporate development and corporate secretary of Apple Computer and served on
its Board of Directors (1985 to 1993).

RONALD J. GILSON, independent trustee (1995). Mr. Gilson is the Charles J.
Meyers Professor of Law and Business at Stanford Law School (1979) and the Mark
and Eva Stern Professor of Law and Business at Columbia University School of Law
(1992); counsel to Marron, Reid & Sheehy (a San Francisco law firm, 1984).

MYRON S. SCHOLES, independent trustee (1983). Mr. Scholes is a principal of
Long-Term Capital Management (1993). He is also Frank E. Buck Professor of
Finance at the Stanford Graduate School of Business (1983) and a director of
Dimensional Fund Advisors (1982) and the Smith Breeden Family of Funds (1992).
From August 1991 to June 1993, Mr. Scholes was a managing director of Salomon
Brothers Inc. (securities brokerage).

KENNETH E. SCOTT, independent trustee (1983). Mr. Scott is Ralph M. Parsons
Professor of Law and Business at Stanford Law School (1972) and a director of
RCM Capital Funds, Inc. (June 1994).

EZRA SOLOMON, independent trustee (1983). Mr. Solomon is Dean Witter Professor
of Finance Emeritus at the Stanford Graduate School of Business, where he served
as Dean Witter Professor of Finance from 1965 to 1990, and a director of
Encyclopedia Britannica.

ISAAC STEIN, independent trustee (1992). Mr. Stein is former chairman of the
board (1990 to 1992) and chief executive officer (1991 to 1992) of Esprit de
Corp. (clothing manufacturer). He is a member of the board of Raychem
Corporation (electrical equipment, 1993), president of Waverley Associates, Inc.
(private investment firm, 1983), and a director of ALZA Corporation
(pharmaceuticals, 1987). He is also a trustee of Stanford University (1994) and
chairman of Stanford Health Services (hospital, 1994).

*JAMES E. STOWERS III, trustee (1995). Mr. Stowers III is president and director
of Twentieth Century Investors, Inc., TCI Portfolios, Inc., Twentieth Century
World Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth
Century Capital Portfolios, Inc., Twentieth Century Institutional Portfolios,
Inc., Twentieth Century Companies, Inc., Investors Research Corporation and
Twentieth Century Services, Inc.

JEANNE D. WOHLERS, independent trustee (1985). Ms. Wohlers is a private investor
and an independent director and partner of Windy Hill Productions, LP.
Previously, she served as vice president and chief financial officer of Sybase,
Inc. (software company, 1988 to 1992).

OFFICERS

*JAMES M. BENHAM, president and chief executive officer (1996).

*DOUGLAS A. PAUL, secretary (1988), vice president (1990), and general counsel
(1990); secretary, vice president and general counsel of BMC, BFS, BDI and all
of the funds in the Benham Group.

*ANN N. McCOID, CPA, controller (1987); controller of BFS and all of the funds
in the Benham Group.

*MARYANNE ROEPKE, CPA, chief financial officer and treasurer (1995); vice
president, treasurer and principal accounting officer, Twentieth Century
Strategic Asset Allocations; vice president and treasurer, Twentieth Century
Investors, Inc., Twentieth Century World Investors, Inc., Twentieth Century
Capital Portfolios, Inc., Twentieth Century Premium Reserves, Inc. and TCI
Portfolios, Inc.; vice president, Twentieth Century Services, Inc.

The table below summarizes the compensation that the trustees of the Funds
received for the Funds' fiscal year ended August 31, 1995, as well as the
compensation received for serving as a director or trustee of all other funds
managed by BMC.

<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED
August 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------

Name of Aggregate Pension or Estimated Total
Trustee* Compensation Retirement Benefits Annual Benefits Compensation
From Accrued As Part of Upon Retirement From Fund and
The Fund Fund Expenses Fund Complex**
Paid to Trustees

- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Ronald J. Gilson $0 Not Applicable Not Applicable $0
- ---------------------------------------------------------------------------------------------------------------------------
Myron S. Scholes $1649 (Money Market) Not Applicable Not Applicable $64,375
1324 (MuniMM)
1091 (Limited-Term)
1730 (Inter.-Term))
1413 (Long-Term)
1077 (High-Yield)
1216 (Insured)
- ---------------------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $1669 (Money Market) Not Applicable Not Applicable $64,626
1427 (MuniMM)
1017 (Limited-Term)
1745 (Inter.-Term))
1582 (Long-Term)
1386 (High-Yield)
1408 (Insured)
- ---------------------------------------------------------------------------------------------------------------------------
Ezra Solomon $1948 (Money Market) Not Applicable Not Applicable $66,794
1437 (MuniMM)
1123 (Limited-Term)
2042 (Inter.-Term))
1615 (Long-Term)
1247 (High-Yield)
1370 (Insured)
- ---------------------------------------------------------------------------------------------------------------------------
Isaac Stein $1787 (Money Market) Not Applicable Not Applicable $65,626
1349 (MuniMM)
1079 (Limited-Term)
1883 (Inter.-Term))
1637 (Long-Term)
1149 (High-Yield)
1306 (Insured)
- ---------------------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $1836 (Money Market) Not Applicable Not Applicable $66,876
1428 (MuniMM)
1142 (Limited-Term)
1927 (Inter.-Term))
1542 (Long-Term)
1130 (High-Yield)
1298 (Insured)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Interested trustees receive no compensation for their services as such.

** Twentieth Century family of funds includes 66 no-load mutual funds.

As of July 31, 1996, the Trust's officers and trustees, as a group, owned
less than 1% of each Fund's total shares outstanding except for the Tax-Free
Money Market Fund of which they owned as a group, 2.68% of the Fund's total
shares outstanding.

INVESTMENT ADVISORY SERVICES

Each Fund has an investment advisory agreement with Benham Management
Corporation (BMC) dated June 1, 1995, that was approved by shareholders on May
31, 1995.

BMC is a California corporation and a wholly owned subsidiary of Twentieth
Century Companies (TCC), a Delaware corporation. BMC, as well as BFS and BDI,
became wholly owned subsidiaries of TCC on June 1, 1995, upon the merger of
Benham Management International (BMI), the former parent of BFS and BDI, into
TCC. BMC has served as investment advisor to the Funds since the Funds'
inception. TCC is a holding company that owns all of the stock of the operating
companies that provide the investment management, transfer agency, shareholder
service, and other services for the Twentieth Century funds. James E. Stowers,
Jr., controls TCC by virtue of his ownership of a majority of its common stock.
BMC has been a registered investment advisor since 1971 and is investment
advisor to other funds in managed by BMC.

Each Fund's agreement with BMC continues for an initial period of two years and
thereafter from year to year provided that, after the initial two year period,
it is approved at least annually by vote of either a majority of the Fund's
outstanding voting securities or by vote of a majority of the Trust's trustees,
including a majority of those trustees who are neither parties to the agreement
nor interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval.

Each Fund's agreement is terminable on 60 days' written notice, either by the
Fund or by BMC, to the other party, and terminates automatically in the event of
its assignment.

Pursuant to the investment advisory agreement, BMC provides the Fund with
investment advice and portfolio management services in accordance with the
Fund's investment objectives, policies, and restrictions. BMC determines what
securities will be purchased and sold by the Fund and assist the Trust's
officers in carrying out decisions made by the board of trustees.

For these services, each Fund pays BMC a monthly investment advisory fee based
on its prorata share of the dollar amount derived from applying a percentage of
the Fund's average daily net assets to the following investment advisory fee
schedule:

.50% of the first $100 million
.45% of the next $100 million
.40% of the next $100 million
.35% of the next $100 million
.30% of the next $100 million
.25% of the next $1 billion
.24% of the next $1 billion
.23% of the next $1 billion
.22% of the next $1 billion
.21% of the next $1 billion
.20% of the next $1 billion
.19% of net assets over $6.5 billion

Investment advisory fees paid by each Fund for the fiscal periods ended August
31, 1995, 1994, and 1993, are indicated in the following table. Fee amounts are
net of reimbursements as described under the section titled "Net Reimbursements
(Recoupments)."

INVESTMENT ADVISORY FEES

Fiscal Fiscal Fiscal
Fund 1995 1994 1993

Tax-Free Money Market Fund 1,118,609 1,077,091 971,085
Municipal Money Market Fund 638,989 717,967 641,024
Tax-Free Limited-Term Fund 320,571 351,908 93,724
Tax-Free Intermediate-Term Fund 1,219,371 1,329,806 1,063,698
Tax-Free Long-Term Fund 788,383 883,146 896,034
Municipal High-Yield Fund 317,026 325,337 278,723
Tax-Free Insured Fund 505,500 601,906 516,661

TRANSFER AND ADMINISTRATIVE SERVICES

Twentieth Century Services, Inc., 4500 Main Street, Kansas City, Missouri,
64111, (TCS) acts as transfer, administrative services and dividend paying agent
for the Funds. TCS provides facilities, equipment and personnel to the Funds and
is paid for such services by the Fund. For administrative services, each Fund
pays TCS a monthly fee equal to its pro rata share of the dollar amount derived
from applying the average daily net assets of all of the Fund managed by the
Manager to the following administrative fee rate schedule:

Group Assets Administrative Fee Rate

up to $4.5 billion .11%
up to $6 billion .10
up to $9 billion .09
over $9 billion .08

For transfer agent services, each Fund pays BFS monthly fees of $1.1875 for each
shareholder account maintained and $1.35 for each shareholder transaction
executed during the month.

Administrative service and transfer agent fees paid by each Fund to BFS for the
fiscal years ended August 31, 1995, 1994, and 1993, are indicated in the
following table. Fee amounts are net of expense limitations as described below.

ADMINISTRATIVE FEES
FISCAL FISCAL FISCAL
FUND 1995 1994 1993

Tax-Free Money Market Fund 372,776 367,012 299,721
Municipal Money Market Fund 213,037 244,617 244,111
Tax-Free Limited-Term Fund 106,880 119,911 79,630
Tax-Free Intermediate-Term Fund 406,453 453,129 330,077
Tax-Free Long-Term Fund 262,741 300,842 277,267
Municipal High-Yield Fund 105,659 110,808 86,440
Tax-Free Insured Fund 168,491 205,042 160,502

TRANSFER AGENT FEES
FISCAL FISCAL FISCAL
FUND 1995 1994 1993

Tax-Free Money Market Fund 245,317 254,089 246,329
Municipal Money Market Fund 157,812 183,077 197,083
Tax-Free Limited-Term Fund 60,682 64,485 49,061
Tax-Free Intermediate-Term Fund 195,808 198,370 161,303
Tax-Free Long-Term Fund 125,758 127,791 131,512
Municipal High-Yield Fund 66,032 64,349 58,189
Tax-Free Insured Fund 95,075 105,575 94,213

DIRECT FUND EXPENSES

Each Fund pays certain operating expenses that are not assumed by BMC or TCS.
These include fees and expenses of the independent trustees; custodian, audit,
tax preparation, and pricing fees; fees of outside counsel and counsel employed
directly by the Trust; costs of printing and mailing prospectuses, statements of
additional information, proxy statements, notices, confirmations, and reports to
shareholders; fees for registering the Fund's shares under federal and state
securities laws; brokerage fees and commissions (if any); trade association
dues; costs of fidelity and liability insurance policies covering the Fund;
costs for incoming WATS lines maintained to receive and handle shareholder
inquiries; and organizational costs.

EXPENSE LIMITATION AGREEMENT

BMC may recover amounts absorbed on behalf of the Fund during the preceding 11
months if, and to the extent that, for any given month, the Fund's expenses were
less than the expense limitation in effect at that time.

Each Fund's contractual expense limitation is subject to annual renewal. The
expense limits in effect until May 31, 1997 are as follows: Tax-Free Money
Market Fund .53%, Municipal Money Market Fund .60%, Tax-Free Limited-Term Fund
.59%, Tax-Free Intermediate-Term Fund .59%, Tax-Free Long-Term Fund .59%,
Municipal High-Yield Fund .59%, and Tax-Free Insured Fund .59% of average daily
net assets.

Net reimbursements for the fiscal years ended August 31, 1995, 1994 and 1993,
are indicated in the table below.

NET REIMBURSEMENTS (RECOUPMENTS)

FISCAL FISCAL FISCAL
FUND 1995 1994 1993

Tax-Free Money Market Fund 0 0 0
Municipal Money Market Fund 0 0 152,087
Tax-Free Limited-Term Fund 0 (11,338) 161,581
Tax-Free Intermediate-Term Fund 0 0 0
Tax-Free Long-Term Fund 0 0 0
Municipal High-Yield Fund 0 0 (18,372)
Tax-Free Insured Fund 0 0 0

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

While the Funds are designed for California investors, they are also offered for
sale to investors in certain other western states.

The Funds' shares are continuously offered at net asset value. Share
certificates are issued (without charge) only when requested in writing.
Certificates are not issued for fractional shares. Dividend and voting rights
are not affected by the issuance of certificates.

The Benham Group may reject or limit the amount of an investment to prevent any
one shareholder or affiliated group from controlling the Trust or one of its
series; to avoid jeopardizing a series' tax status; or whenever, in management's
opinion, such rejection is in the Trust's or a series' best interest.

The Benham Group charges neither fees nor commissions on the purchase and sale
of Benham fund shares. BFS may, however, charge fees for special services
requested by a shareholder or necessitated by acts or omissions of a
shareholder. For example, BFS may charge a fee for processing dishonored
investment checks or stop-payment requests. BFS charges $10 per hour for account
research requested by investors. This charge will be assessed, for example, when
a shareholder request requires more than one hour of research on historical
account records. The fees charged are based on the estimated costs of performing
shareholder-requested services and are not intended to increase income to BFS.

Share purchases and redemptions are governed by California law.

OTHER INFORMATION

The Funds' investment advisor has been continuously registered with the SEC
under the Investment Advisers Act of 1940 since December 14, 1971. The Trust has
filed a registration statement under the Securities Act of 1933 and the
Investment Company Act of 1940 with respect to the shares offered. Such
registrations do not imply approval or supervision of the Trust or the advisor
by the SEC.

For further information, please refer to the registration statement and exhibits
on file with the SEC in Washington, D.C. These documents are available upon
payment of a reproduction fee. Statements in the Prospectus and in this
Statement of Additional Information concerning the contents of contracts or
other documents, copies of which are filed as exhibits to the registration
statement, are qualified by reference to such contracts or documents.

MUNICIPAL SECURITIES RATINGS

Securities rating descriptions provided under this heading are excerpted from
publications of Moody's Investors Service, Inc. and Standard & Poor's
Corporation.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S MUNICIPAL BOND RATINGS:

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

Aa: Bonds rated "Aa" are judged to be of high quality by all standards. Together
with the Aaa group, they compose what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as in Aaa securities, or fluctuation of protective elements may be
of greater amplitude, or there may be other elements present that make long-term
risks appear somewhat larger than in Aaa securities.

A: Bonds rated "A" possess many favorable investment attributes and are to be
considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.

Baa: Bonds rated "Baa" are considered medium-grade obligations; i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present, but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.

Ba: Bonds rated "Ba" are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate and thereby not well safeguarded during
both good and bad times in the future. Uncertainty of position characterizes
bonds in this class.

B: Bonds rated "B" generally lack characteristics of a desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be limited.

Caa: Bonds rated "Caa" are of poor standing. Such issues may be in default, or
there may be elements of danger present with respect to principal or interest.

Ca: Bonds rated "Ca" represent obligations that are speculative to a high
degree. Such issues are often in default or have other marked shortcomings.

C: Bonds rated "C" are the lowest-rated class of bonds, and issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing.

NOTE: Moody's may apply the numerical modifier "1" for municipally-backed bonds
and modifiers "1," "2," and "3" for corporate-backed municipal bonds. The
modifier "1" indicates that the security ranks in the higher end of its generic
rating category; the modifier "2" indicates a mid-range ranking; and the
modifier "3" indicates that the issue ranks in the lower end of its generic
rating category.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S RATINGS OF NOTES AND
VARIABLE-RATE DEMAND OBLIGATIONS:

Moody's ratings for state and municipal short-term obligations are designated
Moody's Investment Grade or MIG. Such ratings recognize the differences between
short-term credit and long-term risk. Short-term ratings on issues with demand
features (variable-rate demand obligations) are differentiated by the use of the
VMIG symbol to reflect such characteristics as payment upon periodic demand
rather than on fixed maturity dates and payments relying on external liquidity.

MIG 1/VMIG 1: This designation denotes best quality. There is strong protection
present through established cash flows, superior liquidity support, or
demonstrated broad-based access to the market for refinancing.

MIG 2/VMIG 2: This denotes high quality. Margins of protection are ample,
although not as large as in the preceding group.

DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S TAX-EXEMPT COMMERCIAL PAPER
RATINGS:

Moody's commercial paper ratings are opinions of the ability of issuers to
punctually repay those promissory obligations that have an original maturity not
exceeding nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. The following designations, all judged to be
investment grade, indicate the relative repayment ability of rated issuers of
securities in which the Funds may invest.

PRIME - 1: Issuers rated "Prime - 1" (or supporting institutions) have a
superior ability for repayment of senior short-term promissory obligations.

PRIME - 2: Issuers rated "Prime - 2" (or supporting institutions) have a strong
ability for repayment of senior short-term promissory obligations.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR MUNICIPAL BONDS:

INVESTMENT GRADE

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

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

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

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

SPECULATIVE

BB, B, CCC, CC: Debt rated in these categories is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. While such debt will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.

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

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

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

CC: The rating "CC" typically is applied to debt subordinated to senior debt
assigned an actual or implied "CCC" debt rating.

C: The "C" rating is typically applied to debt subordinated to senior debt
assigned an actual or implied "CCC-" debt rating. The "C" rating may be used to
cover a situation in which a bankruptcy petition has been filed, but debt
service payments are continued.

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

D: Debt rated "D" is in default, and payment of interest and/or repayment of
principal is in arrears.

PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR INVESTMENT-GRADE
MUNICIPAL NOTES AND SHORT-TERM DEMAND OBLIGATIONS:

SP-1: Issues carrying this designation have a very strong or strong capacity to
pay principal and interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+) designation.

SP-2: Issues carrying this designation have a satisfactory capacity to pay
principal and interest.

DESCRIPTION OF STANDARD & POOR'S CORPORATION'S RATINGS FOR DEMAND OBLIGATIONS
AND TAX-EXEMPT COMMERCIAL PAPER:

A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more than
365 days. The two rating categories for securities in which the Funds may invest
are as follows:

A-1: This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) designation.

A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."

DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S RATINGS FOR MUNICIPAL BONDS:

INVESTMENT GRADE

AAA: Bonds considered to be investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay interest and repay
principal that is unlikely to be affected by reasonably foreseeable events.

AA: Bonds considered to be investment grade and of very high credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA." Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issuers is generally rated "F-1+."

A: Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.

BBB: Bonds considered to be investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to have adverse impact on these bonds and therefore impair timely
payment. The likelihood that the ratings of these bonds will fall below
investment grade is higher than for bonds with higher ratings.

PLUS (+) MINUS (-): Plus and minus signs are used with a rating symbol to
indicate the relative position of a credit within the rating category. Plus and
minus signs, however, are not used in the "AAA" category.

SPECULATIVE

BB: Bonds are considered speculative. The obligor's ability to pay interest and
repay principal may be affected over time by adverse economic changes. However,
business and financial alternatives can be identified that could assist the
obligor in satisfying its debt service requirements.

B: Bonds are considered highly speculative. While bonds in this class are
currently meeting debt service requirements, the probability of continued timely
payment of principal and interest reflects the obligor's limited margin or
safety and the need for reasonable business and economic activity throughout the
life of the issue.

CCC: Bonds have certain identifiable characteristics that, if not remedied, may
lead to default. The ability to meet obligations requires an advantageous
business and economic environment.

CC: Bonds are minimally protected. Default in payment of interest and/or
principal seems probable over time.

C: Bonds are in imminent default in payment of interest or principal.

DDD/DD/D: Bonds are in default on interest and/or principal payments. Such bonds
are extremely speculative and should be valued on the basis of their ultimate
recovery value in liquidation or reorganization of the obligor. "DDD" represents
the highest potential for recovery on these bonds, and "D" represents the lowest
potential for recovery.

DESCRIPTION OF FITCH INVESTORS SERVICE, INC.'S RATINGS FOR INVESTMENT-GRADE
MUNICIPAL NOTES AND SHORT-TERM DEMAND OBLIGATIONS:

F-1+: EXCEPTIONALLY STRONG CREDIT QUALITY. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

F-1: VERY STRONG CREDIT QUALITY. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated
"F-1+."

QUALITY OF PORTFOLIO SECURITIES HELD BY THE VARIABLE PRICE FUNDS

The table below provides a summary of ratings assigned to obligations held by
each of the Variable Price Funds. These figures are dollar-weighted averages of
month-end holdings during fiscal 1995, presented as a percentage of total
investments. For obligations with different ratings assigned by different rating
agencies, the highest rating assigned is the one relied upon to create this
table. The percentages are historical and are not necessarily indicative of
current or future portfolio holdings, which may vary in quality.

AAA/AAA AA/AA A BAA/BBB NR
Tax-Free Short-Term 53% 24% 23% - -
Tax-Free Intermediate-Term 54 22 24 - -
Tax-Free Long-Term 29 23 48 - -
Municipal High-Yield 6 4 32 31 27
Tax-Free Insured 100 - - - -

41
<PAGE>
BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS

1933 Act Post-Effective Amendment No. 23
1940 Act Amendment No. 27
- --------------------------------------------------------------------------------

PART C OTHER INFORMATION

Item 24. Financial Statements and Exhibits

(a) FINANCIAL STATEMENTS. Audited financial statements for each series of
the Trust for the fiscal year ended August 31, 1995, are filed herein
as included in the Trust's Statement of Additional Information by
reference to the Annual Report dated August 31, 1995, filed on
October 27, 1995 (Accession # 717316-95-000008).

(b) EXHIBITS.

(1) Amended Declaration of Trust dated May 31, 1995, is
incorporated herein by reference to Exhibit 1(d) of
Post-Effective Amendment No. 22 filed on October 27, 1995
(Accession # 717316-95-000007).

(2) Amended and Restated Bylaws dated May 17, 1995 are
incorporated herein by reference to Exhibit 2(d) of
Post-Effective Amendment No. 22 filed on October 27, 1995
(Accession # 717316-95-000007).

(3) Not applicable.

(4) Specimen copy of Tax-Free Short-Term Fund's share certificate
is incorporated herein by reference to Exhibit 4 to
Post-Effective Amendment No. 16.

(5) Investment Advisory Agreement between Benham California
Tax-Free and Municipal Funds: Tax-Free Short-Term Fund, Benham
California Tax-Free and Municipal Funds: Tax-Free Money Market
Fund, Benham California Tax-Free and Municipal Funds:
Municipal Money Market Fund, Benham California Tax-Free and
Municipal Funds: Tax-Free Intermediate-Term Fund, Benham
California Tax-Free and Municipal Funds: Tax-Free Long-Term
Fund, Benham California Tax-Free and Municipal Funds:
Municipal High-Yield Fund, Benham California Tax-Free and
Municipal Funds: Tax-Free Insured Fund and BMC, dated June 1,
1995, is incorporated herein by reference to Exhibit 5(a) of
Post-Effective Amendment No. 22 filed on October 27, 1995
(Accession # 717316-95-000007).

(6) Distribution Agreement between Benham California Tax-Free and
Municipal Funds and Twentieth Century Securities, Inc. dated
as of September 3, 1996, is incorporated herein by reference
to Exhibit 6 of Post-Effective Amendment No. 29 to the
Registration Statement of the Benham Government Income Trust
filed on August 30, 1996 (Accession # 773674-96-000007).

(7) Not applicable.

(8) 1993 Omnibus Custodian Agreement between the Benham Group of
Funds (including Benham California Tax-Free and Municipal
Funds) and State Street Bank and Trust Company, dated August
10, 1993, is incorporated herein by reference to Exhibit 8 to
Post-Effective Amendment No. 20 filed on October 27, 1995.

(9) Administrative Services and Transfer Agency Agreement between
Benham California Tax-Free and Municipal Funds and Twentieth
Century Services, Inc. dated as of September 3, 1996, is
incorporated herein by reference to Exhibit 9 of
Post-Effective Amendment No. 29 to the Registration Statement
of the Benham Government Income Trust filed on August 30, 1996
(Accession # 773674-96-000007).

(10) Opinion and consent of counsel as to the legality of the
securities being registered, dated October 25, 1996 is
incorporated herein by reference to Rule 24f-2 Notice filed on
October 31, 1995 (Accession # 717316-95-000011).

(11) Consent of KPMG Peat Marwick, LLP, independent auditors, is
included herein.

(12) Not applicable.

(13) Not applicable.

(14) Not applicable.

(15) Not applicable.

(16) Schedule for computation of each performance quotation
provided in response to Item 22 is included herein.

(17) Power of Attorney dated August 22, 1995, is incorporated
herein by reference to Exhibit 17 of Post-Effective Amendment
No. 22 filed on October 27, 1995 (Accession #
717316-95-000007).

Item 25. Persons Controlled by or Under Control with Registrant.

Not applicable

Item 26. Number of Holders of Securities.

As of July 31, 1996, each Series of the Registrant had the following number of
record shareholders.

Municipal Money Market Fund 4120
Tax-Free Money Market Fund 7140
Tax-Free Limited-Term Fund 1748
Tax-Free Intermediate-Term Fund 7306
Tax-Free Long-Term Fund 4956
Municipal High-Yield Fund 2559
Tax-Free Insured Fund 3702

Item 27. Indemnification.

As stated in Article VII, Section 3 of the Declaration of Trust, incorporated
herein by reference to Exhibit 1 to the Registration Statement, "The Trustees
shall be entitled and empowered to the fullest extent permitted by law to
purchase insurance for and to provide by resolution or in the Bylaws for
indemnification out of Trust assets for liability and for all expenses
reasonably incurred or paid or expected to be paid by a Trustee or officer in
connection with any claim, action, suit, or proceeding in which he or she
becomes involved by virtue of his or her capacity or former capacity with the
Trust. The provisions, including any exceptions and limitations concerning
indemnification, may be set forth in detail in the Bylaws or in a resolution
adopted by the Board of Trustees."

Registrant hereby incorporates by reference, as though set forth fully herein,
Article VI of the Registrant's Bylaws, amended on May 17, 1995, appearing as
Exhibit 2 of this Post-Effective Amendment No. 23.

Item 28. Business and Other Connections of Investment Advisor.

The Registrant's investment advisor, Benham Management Corporation, provides
investment advisory services for various collective investment vehicles and
institutional clients and serves as investment advisor to a number of open-end
investment companies.

Item 29. Principal Underwriters.

The Registrant's distribution agent, Twentieth Century Securities, Inc., is
distribution agent to Capital Preservation Fund, Inc., Capital Preservation Fund
II, Inc., Benham California Tax-Free and Municipal Funds, Benham Government
Income Trust, Benham Municipal Trust, Benham Target Maturities Trust, Benham
Equity Funds, Benham International Funds, Benham Investment Trust, Benham
Manager Funds, TCI Portfolios, Inc., Twentieth Century Capital Portfolios, Inc.,
Twentieth Century Investors, Inc., Twentieth Century Premium Reserves, Inc.,
Twentieth Century Strategic Allocations, Inc. and Twentieth Century World
Investors, Inc. The information required with respect to each director, officer
or partner of Twentieth Century Securities is incorporated herein by reference
to Twentieth Century Securities' Form B-D filed on November 21, 1985 (SEC File
No. 8-35220; Firm CRD No. 17437).

Item 30. Location of Accounts and Records.

Benham Management Corporation, the Registrant's investment advisor, maintains
its principal office at 1665 Charleston Road, Mountain View, CA 94043. The
Registrant and its agent for transfer and administrative services, Twentieth
Century Services, maintain their principal office at 4500 Main St., Kansas City,
MO 64111. Twentieth Century Services maintains physical possession of each
account, book, or other document, and shareholder records as required by
ss.31(a) of the 1940 Act and rules thereunder. The computer and data base for
shareholder records are located at Central Computer Facility, 401 North Broad
Street, Sixth Floor, Philadelphia, PA 19108.

Item 31. Management Services.

Not applicable.

Item 32. Undertakings.

Registrant undertakes to furnish each person to whom a Prospectus is delivered
with a copy of the Registrant's latest report to shareholders, upon request and
without charge.

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment No. 23/Amendment No. 27 to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Mountain View, and State of
California, on the 30th day of August, 1996. I hereby certify that this
Amendment meets the requirements for immediate effectiveness pursuant to Rule
485(b).

BENHAM CALIFORNIA TAX-FREE AND MUNICIPAL FUNDS

By: /s/ Douglas A. Paul
Douglas A. Paul
Vice President, Secretary, and General Counsel

Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment No. 23/Amendment No. 27 has been signed below by the following persons
in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Date
<S> <C> <C>
* Chairman of the Board of Directors, President, August 30, 1996
- --------------------------------- and Chief Executive Officer
James M. Benham

* Director August 30, 1996
- ---------------------------------
Albert A. Eisenstat

* Director August 30, 1996
- ---------------------------------
Ronald J. Gilson

* Director August 30, 1996
- ---------------------------------
Myron S. Scholes

* Director August 30, 1996
- ---------------------------------
Kenneth E. Scott

* Director August 30, 1996
- ---------------------------------
Ezra Solomon

* Director August 30, 1996
- ---------------------------------
Isaac Stein

* Director August 30, 1996
- ---------------------------------
James E. Stowers III

* Director August 30, 1996
- ---------------------------------
Jeanne D. Wohlers

* Chief Financial Officer, Treasurer August 30, 1996
- ---------------------------------
Maryanne Roepke

</TABLE>

/s/ Douglas A. Paul
*by Douglas A. Paul, Attorney in Fact (pursuant to a Power of Attorney dated
March 4, 1996).

EXHIBIT DESCRIPTION

EX-99.B1 Amended Declaration of Trust dated May 31, 1995, is incorporated
herein by reference to Exhibit 1(d) of Post-Effective Amendment No.
22 filed on October 27, 1995 (Accession # 717316-95-000007).

EX-99.B2 Amended and Restated Bylaws dated May 17, 1995 are incorporated
herein by reference to Exhibit 2(d) of Post-Effective Amendment No.
22 filed on October 27, 1995 (Accession # 717316-95-000007).

EX-99.B4 Specimen copy of Tax-Free Short-Term Fund's share certificate
is incorporated herein by reference to Exhibit 4 to Post-Effective
Amendment No. 16.

EX-99.B5 Investment Advisory Agreement between Benham California Tax-Free and
Municipal Funds: Tax-Free Short-Term Fund, Benham California
Tax-Free and Municipal Funds: Tax-Free Money Market Fund, Benham
California Tax-Free and Municipal Funds: Municipal Money Market
Fund, Benham California Tax-Free and Municipal Funds: Tax-Free
Intermediate-Term Fund, Benham California Tax-Free and Municipal
Funds: Tax-Free Long-Term Fund, Benham California Tax-Free and
Municipal Funds: Municipal High-Yield Fund, Benham California
Tax-Free and Municipal Funds: Tax-Free Insured Fund and BMC, dated
June 1, 1995, is incorporated herein by reference to Exhibit 5(a) of
Post-Effective Amendment No. 22 filed on October 27, 1995 (Accession
# 717316-95-000007).

EX-99.B6 Distribution Agreement between Benham California Tax-Free and
Municipal Funds and Twentieth Century Securities, Inc. dated as of
September 3, 1996, is incorporated herein by reference to Exhibit 6
of Post-Effective Amendment No. 29 to the Registration Statement of
the Benham Government Income Trust filed on August 30, 1996
(Accession # 773674-96-000007).

EX-99.B8 1993 Omnibus Custodian Agreement between the Benham Group of
Funds (including Benham California Tax-Free and Municipal Funds) and
State Street Bank and Trust Company, dated August 10, 1993, is
incorporated herein by reference to Exhibit 8 to Post-Effective
Amendment No. 20).

EX-99.B9 Administrative Services and Transfer Agency Agreement between Benham
California Tax-Free and Municipal Funds and Twentieth Century
Services, Inc. dated as of September 3, 1996,. is incorporated
herein by reference to Exhibit 9 of Post-Effective Amendment No. 29
to the Registration Statement of the Benham Government Income Trust
filed on August 30, 1996 (Accession # 773674-96-000007).

EX-99.B10 Opinion and consent of counsel as to the legality of the securities
being registered, dated October 25, 1996 is incorporated herein by
reference to Rule 24f-2 Notice filed on October 31, 1995 (Accession
# 717316-95-000011).

EX-99.B11 Consent of KPMG Peat Marwick, LLP, independent auditors, is included
herein.

EX-99.B16 Schedule for computation of each performance quotation provided in
response to Item 22 is included herein.

EX-99.B17 Power of Attorney dated August 22, 1995, is incorporated herein by
reference to Exhibit 17 of Post-Effective Amendment No. 22 filed on
October 27, 1995 (Accession # 717316-95-000007).

EX-27.4.1 FDS - California Tax-Free Money Market Fund

EX-27.4.2 FDS - Municipal Money Market Fund

EX-27.5.3 FDS - California Tax-Free Intermediate-Term Fund

EX-27.5.4 FDS - California Tax-Free Long-Term Fund

EX-27.5.5 FDS - California Municipal High-Yield Fund

EX-27.5.6 FDS - California Tax-Free Insured Fund

EX-27.5.7 FDS - California Tax-Free Short-Term Fund

Consent of Independent Auditors

The Board of Trustees and Shareholders
Benham California Tax-Free and Municipal Funds:

We consent to the inclusion in Benham California Tax-Free and Municipal Funds'
Post-Effective Amendment No. 23 to the Registration Statement No. 2-82734 on
Form N-1A under the Securities Act of 1933 and Amendment No. 27 to the
Registration Statement No. 811-3706 filed on Form N-1A under the Investment
Company Act of 1940 of our reports dated October 9, 1995 on the financial
statements and financial highlights of the Benham California Municipal Money
Market Fund, Benham California Tax-Free Money Market Fund, Benham California
Tax-Free Limited-Term Fund, Benham California Tax-Free Intermediate-Term Fund,
Benham California Tax-Free Long-Term Fund, Benham California Tax-Free Insured
Fund and California Municipal High-Yield Fund (the seven funds comprising the
Benham California Tax-Free and Municipal Funds) for the periods indicated
therein, which reports have been incorporated by reference into the Statements
of Additional Information of Benham California Tax-Free and Municipal Funds. We
also consent to the reference to our firm under the heading "Financial
Highlights" in the Prospectus and under the heading "About the Trust" in the
Statements of Additional Information which are incorporated by reference in the
Prospectus.

/s/KPMG Peat Marwick LLP

Kansas City, Missouri
August 30, 1996

BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND
YIELD CALCULATION
JUNE 30, 1996

365/7
Effective Yield: [ (Base Period Return) + 1) ] - 1

7 Day Yield = 2.86%

7 Day Effective Yield = 2.90%

<PAGE>

BENHAM CALIFORNIA MUNICIPAL MONEY MARKET FUND
YIELD CALCULATION
JUNE 30, 1996

365/7
Effective Yield: [ (Base Period Return) + 1) ] - 1

7 Day Yield = 2.93%

7 Day Effective Yield = 2.97%

<PAGE>

BENHAM CALIFORNIA TAX-FREE INTERMEDIATE-TERM FUND
YIELD CALCULATION
JUNE 30, 1996

[ ( A-B ) 6 ]
Formula: Yield = 2[ (------- + 1) - 1 ]
[ ( C*D ) ]

A = Investment income earned during the period.

B = Expenses accrued for the period (net of reimbursements).

C = The average daily number of shares outstanding during the period that were
entitled to receive dividends.

D = The per share price on the last day of the period.

Calculation:

A = $1,815,854.31

B = $168,028.39

C = 39,676,428.570

D = $11.00

Yield = 4.57%

<PAGE>

BENHAM CALIFORNIA TAX-FREE LONG-TERM FUND
YIELD CALCULATION
JUNE 30, 1996

[ ( A-B ) 6 ]
Formula: Yield = 2[ (------- + 1) - 1 ]
[ ( C*D ) ]

A = Investment income earned during the period.

B = Expenses accrued for the period (net of reimbursements).

C = The average daily number of shares outstanding during the period that were
entitled to receive dividends.

D = The per share price on the last day of the period.

Calculation:

A = $1,316,195.31

B = $109,438.03

C = 25,743,492.889

D = $11.02

Yield = 5.16%

<PAGE>

BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND
YIELD CALCULATION
JUNE 30, 1996

[ ( A-B ) 6 ]
Formula: Yield = 2[ (------- + 1) - 1 ]
[ ( C*D ) ]

A = Investment income earned during the period.

B = Expenses accrued for the period (net of reimbursements).

C = The average daily number of shares outstanding during the period that were
entitled to receive dividends.

D = The per share price on the last day of the period.

Calculation:

A = $705,023.01

B = $54,737.25

C = 14,865,252.386

D = $9.25

Yield = 5.74%

<PAGE>

BENHAM CALIFORNIA TAX-FREE INSURED FUND
YIELD CALCULATION
JUNE 30, 1996

[ ( A-B ) 6 ]
Formula: Yield = 2[ (------- + 1) - 1 ]
[ ( C*D ) ]

A = Investment income earned during the period.

B = Expenses accrued for the period (net of reimbursements).

C = The average daily number of shares outstanding during the period that were
entitled to receive dividends.

D = The per share price on the last day of the period.

Calculation:

A = $870,275.61

B = $72,423.58

C = 18,932,439.178

D = $9.93

Yield = 5.15%

<PAGE>

BENHAM CALIFORNIA TAX-FREE LIMITED-TERM FUND
YIELD CALCULATION
JUNE 30, 1996

[ ( A-B ) 6 ]
Formula: Yield = 2[ (------- + 1) - 1 ]
[ ( C*D ) ]

A = Investment income earned during the period.

B = Expenses accrued for the period (net of reimbursements).

C = The average daily number of shares outstanding during the period that were
entitled to receive dividends.

D = The per share price on the last day of the period.

Calculation:

A = $361,876.06

B = $40,736.43

C = 9,764,332.770

D = $10.18

Yield = 3.91%

<PAGE>
BENHAM CALIFORNIA TAX-FREE MONEY MARKET FUND
AVERAGE ANNUAL TOTAL RETURN
JUNE 30, 1996

( ERV ) 1/N
Formula: T = (-----) - 1
( P )

P = A hypothetical initial payment of $1,000.

ERV = Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period.

N = Number of years.

T = Average annual total return.

P ERV N T
Calculation: --------- --------- -------- -------

One Year $1,000.00 $1,031.80 1.000000 3.18%

Five Years $1,000.00 $1,145.83 5.000000 2.76%

Ten Years $1,000.00 $1,438.09 10.000000 3.70%

Date Of Inception* $1,000.00 $1,626.59 12.652054 3.92%

TR=Total return for period. TR=(ERV/P) - 1 62.66%

*Date Of Inception: November 9, 1983

<PAGE>

BENHAM CALIFORNIA TAX-FREE INTERMEDIATE-TERM FUND
AVERAGE ANNUAL TOTAL RETURN
JUNE 30, 1996

( ERV ) 1/N
Formula: T = (-----) - 1
( P )

P = A hypothetical initial payment of $1,000.

ERV = Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period.

N = Number of years.

T = Average annual total return.

P ERV N T
Calculation: --------- --------- -------- -------

One Year $1,000.00 $1,056.40 1.000000 5.64%

Five Years $1,000.00 $1,380.41 5.000000 6.66%

Ten Years $1,000.00 $1,871.86 10.000000 6.47%

Date Of Inception* $1,000.00 $2,328.85 12.652054 6.91%

TR=Total return for period. TR=(ERV/P) - 1 132.88%

*Date Of Inception: November 9, 1983

<PAGE>

BENHAM CALIFORNIA MUNICIPAL HIGH-YIELD FUND
AVERAGE ANNUAL TOTAL RETURN
JUNE 30, 1996

( ERV ) 1/N
Formula: T = (-----) - 1
( P )

P = A hypothetical initial payment of $1,000.

ERV = Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period.

N = Number of years.

T = Average annual total return.

P ERV N T
Calculation: --------- --------- -------- -------

One Year $1,000.00 $1,085.30 1.000000 8.53%

Five Years $1,000.00 $1,463.22 5.000000 7.91%

Ten Years

Date Of Inception* $1,000.00 $1,783.01 9.509589 6.27%

TR=Total return for period. TR=(ERV/P) - 1 78.30%

*Date Of Inception: December 30, 1986

<PAGE>

BENHAM CALIFORNIA TAX-FREE INSURED FUND
AVERAGE ANNUAL TOTAL RETURN
JUNE 30, 1996

( ERV ) 1/N
Formula: T = (-----) - 1
( P )

P = A hypothetical initial payment of $1,000.

ERV = Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period.

N = Number of years.

T = Average annual total return.

P ERV N T
Calculation: --------- --------- -------- -------

One Year $1,000.00 $1,068.30 1.000000 6.83%

Five Years $1,000.00 $1,454.42 5.000000 7.78%

Ten Years

Date Of Inception* $1,000.00 $1,833.09 9.509589 6.58%

TR=Total return for period. TR=(ERV/P) - 1 83.31%

*Date Of Inception: December 30, 1986

<PAGE>

BENHAM CALIFORNIA MUNICIPAL MONEY MARKET FUND
AVERAGE ANNUAL TOTAL RETURN
JUNE 30, 1996

( ERV ) 1/N
Formula: T = (-----) - 1
( P )

P = A hypothetical initial payment of $1,000.

ERV = Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period.

N = Number of years.

T = Average annual total return.

P ERV N T
Calculation: --------- --------- -------- -------

One Year $1,000.00 $1,032.90 1.000000 3.29%

Five Years $1,000.00 $1,158.15 5.000000 2.98%

Ten Years

Date Of Inception* $1,000.00 $1,184.24 5.504109 3.12%

TR=Total return for period. TR=(ERV/P) - 1 18.42

*Date Of Inception: December 31, 1990

<PAGE>

BENHAM CALIFORNIA TAX-FREE LIMITED-TERM FUND
AVERAGE ANNUAL TOTAL RETURN
JUNE 30, 1996

( ERV ) 1/N
Formula: T = (-----) - 1
( P )

P = A hypothetical initial payment of $1,000.

ERV = Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period.

N = Number of years.

T = Average annual total return.

P ERV N T
Calculation: --------- --------- -------- -------

One Year $1,000.00 $1,041.40 1.000000 4.14%

Five Years

Ten Years

Date Of Inception* $1,000.00 $1,199.79 4.084931 4.56%

TR=Total return for period. TR=(ERV/P) - 1 19.98%

*Date Of Inception: June 1, 1992

<PAGE>

BENHAM CALIFORNIA TAX-FREE LONG-TERM FUND
AVERAGE ANNUAL TOTAL RETURN
JUNE 30, 1996

( ERV ) 1/N
Formula: T = (-----) - 1
( P )

P = A hypothetical initial payment of $1,000.

ERV = Ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the period.

N = Number of years.

T = Average annual total return.

P ERV N T
Calculation: --------- --------- -------- -------

One Year $1,000.00 $1,076.90 1.000000 7.69%

Five Years $1,000.00 $1,451.05 5.000000 7.73%

Ten Years $1,000.00 $2,040.04 10.000000 7.39%

Date Of Inception* $1,000.00 $2,771.31 12.652054 8.39%

TR=Total return for period. TR=(ERV/P) - 1 177.13%

*Date Of Inception: November 9, 1983

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<NAME> BENHAM CALIFORNIA TAX FREE & MUNICIPAL FUNDS
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