BENHAM MUNICIPAL TRUST, 497, 1996-02-02

BENHAM MUNICIPAL TRUST
497, 1996-02-02

Previous: BENHAM MUNICIPAL TRUST, 497, 1996-02-02

Next: MEDICAL IMAGING CENTERS OF AMERICA INC, DEFS14A, 1996-02-02

BENHAM ARIZONA AND NATIONAL MUNICIPAL FUNDS
Series of Benham Municipal Trust
Supplement Dated December 15, 1995
to the Prospectus and Statement of
Additional Information Dated September 30, 1995

1. The following individual has been appointed to the Board of Trustees of the
Funds in addition to those listed in the current Prospectus:

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).

2. On page 21 of the Prospectus, the fourth paragraph under the heading "SHARE
PRICE" is deleted. All remaining references in the Prospectus and Statement of
Additional Information to the net asset value being calculated at "12 p.m.
Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for all
other Benham funds" are hereby changed to "the close of the Exchange, usually 12
p.m. Pacific Time for Benham Target Maturities Trust and 1 p.m. Pacific Time for
all other Benham funds."

3. On page 25 of the Prospectus under the sub-heading "PROCESSING YOUR
PURCHASE", the second and third sentences are replaced with the following:

An investment received and accepted before the close of business of the
Exchange, normally 1:00 p.m. Pacific Time, will be included in your account
balance the same day. If the investment is received after the close of
business of the Exchange, usually 1:00 p.m. Pacific Time, it will be
credited to your account the following business day.

4. On page 25 of the Prospectus, the following sentence is to be inserted
under the sub-heading "TELEPHONE TRANSACTIONS" after the last sentence of the
first paragraph:

ONCE YOUR TELEPHONE ORDER HAS BEEN PLACED, IT MAY NOT BE MODIFIED OR
CANCELLED.

5. On page 25 of the Prospectus, the following sentence is to be inserted
under the sub-heading "CONFIRMATION AND QUARTERLY STATEMENTS" after the second
sentence:

However, beginning September of 1996, Automatic Investment Services
transactions will not be confirmed immediately but rather will be confirmed
on your next consolidated quarterly statement.

6. On page 27 of the Prospectus, the following replaces the last two sentences
of the last paragraph under the sub-heading "OPEN ORDER SERVICE":

All orders and cancellation of orders received by one hour prior to the
close of the Exchange, usually 12 p.m. Pacific Time, will be considered to
be effective the same day. All orders and cancellation of orders not
received one hour prior to the close of the Exchange, usually 12 p.m.
Pacific Time, will be considered effective the following business day.
<PAGE>

BENHAM ARIZONA
AND NATIONAL
MUNICIPAL FUNDS

Arizona Municipal Intermediate-Term Fund
National Tax-Free Money Market Fund
National Tax-Free Intermediate-Term Fund
National Tax-Free Long-Term Fund

Prospectus * September 30, 1995

[picture of the Arizona
state flag]

[company logo] The Benham Group
Part of the Twentieth Century Family of Mutual Funds

<PAGE>

- -------------------
[information in left margin of page]
THE BENHAM GROUP
1665 Charleston Road
Mountain View, California 94043

FUND INFORMATION
1-800-331-8331
1-415-965-4274

SHAREHOLDER RELATIONS
1-800-321-8321
1-415-965-4222

TDD SERVICE
1-800-624-6338
1-415-965-4764

BENHAM GROUP REPRESENTATIVES ARE AVAILABLE BY TELEPHONE WEEKDAYS FROM 5 A.M. TO
5 P.M. PACIFIC TIME.
- -------------------

BENHAM ARIZONA INTERMEDIATE-TERM FUND
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND
BENHAM NATIONAL TAX-FREE INTERMEDIATE-TERM FUND
BENHAM NATIONAL TAX-FREE LONG-TERM FUND

Series of Benham Municipal Trust

Prospectus * September 30, 1995

BENHAM MUNICIPAL TRUST (Trust) is a no-load, open-end mutual fund consisting of
eight portfolios, four of which are described in this Prospectus.

BENHAM ARIZONA MUNICIPAL INTERMEDIATE-TERM FUND (Arizona Intermediate-Term Fund)
seeks to obtain as high a level of current income exempt from Arizona and
regular federal income tax as is consistent with prudent investment management
and conservation of shareholders' capital.

BENHAM NATIONAL TAX-FREE MONEY MARKET FUND (National Money Market Fund), Benham
National Tax-Free Intermediate-Term Fund (National Intermediate-Term Fund), and
Benham National Tax-Free Long-Term Fund (National Long-Term Fund) seek as high a
level of interest income exempt from federal income taxes as is consistent with
prudent investment management, while seeking to conserve shareholders' capital.

Investments in the Money Market Fund listed above are neither insured nor
guaranteed by the U.S. government. There is no assurance that the Fund will be
able to maintain a $1.00 share price.

Mutual Fund shares are not insured by the FDIC, the Federal Reserve Board, or
any other agency.

AS WITH ALL MUTUAL FUNDS, 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.

Each Fund invests primarily in municipal debt obligations that pay interest
exempt from federal income tax. The Arizona Intermediate-Term Fund also seeks to
earn income exempt from Arizona state income tax.

2
<PAGE>

Share prices for the Arizona Intermediate-Term Fund and the National
Intermediate-Term and Long-Term Funds will vary. These three Funds are referred
to collectively as the "Variable-Price Funds."

Please read this Prospectus carefully and retain it for future reference. It is
designed to help you decide if the Funds' goals match your own. A Statement of
Additional Information (SAI) for each Fund (also dated September 30, 1995) has
been filed with the Securities and Exchange Commission (SEC) and is incorporated
herein by reference. For a free copy, call or write The Benham Group.

SUMMARY OF FUND EXPENSES
The tables below illustrate the fees and expenses an investor in any of the
Funds would incur directly or indirectly. The figures shown for each Fund are
based on historical expenses, adjusted to reflect the expense limitation
agreement in effect as of June 1, 1995.

================================================================================
A. SHAREHOLDER TRANSACTION EXPENSES
For All Funds Described in This Prospectus
- --------------------------------------------------------------------------------

Sales load imposed on purchases...................................... None
Sales load imposed on reinvested dividends........................... None
Deferred sales load.................................................. None
Redemption fee....................................................... None
Exchange fee......................................................... None

================================================================================
B ANNUAL FUND OPERATING EXPENSES*
As a Percentage of Average Daily Net Assets
- --------------------------------------------------------------------------------
INVESTMENT TOTAL FUND
ADVISORY 12B-1 OTHER OPERATING
FEE FEE EXPENSES EXPENSES

Arizona Intermediate-Term Fund .14% None .55% .69%
National Money Market Fund .35 None .29 .64
National Intermediate-Term Fund .39 None .30 .69
National Long-Term Fund .36 None .33 .69

*Benham Management Corporation (BMC) has agreed to limit each Funds' total
operating expenses to a specified percentage of each Fund's average daily net
assets as illustrated on page 4. These expense limits are effective until May
31, 1996. The contract provides that 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, Fund expenses were less than the expense limit in effect at that
time. The expense limitation is subject to annual renewal in June. If the
expense limitations were not in effect, each Fund's advisory fee, other expenses
and total operating expenses would be as follows: Arizona Intermediate-Term
Fund: .46%, .55%, and 1.01%, National Money Market Fund: .46%, .29%, and .75%,
National Intermediate-Term Fund: .46%, .30% and .76%, and National Long-Term
Fund: .46%, .33%, and .79%.

3
<PAGE>

Each Fund pays BMC investment advisory fees equal to an annualized percentage of
Fund average daily net assets. Other expenses include administrative and
transfer agent fees paid to Benham Financial Services, Inc. (BFS).

================================================================================
CONTRACTUAL EXPENSE LIMITS
- --------------------------------------------------------------------------------

Each Fund's contractual expense limits for 1994 and 1995 (effective June 1,
1995) are indicated in the table below. Each limit is stated as a percentage of
the Fund's average daily net assets.
1995 1994

Arizona Intermediate-Term Fund .69% .66%
National Money Market Fund .64 .66
National Intermediate-Term Fund .69 .66
National Long-Term Fund .69 .66

================================================================================
C. EXAMPLE OF EXPENSES
- --------------------------------------------------------------------------------

The following table illustrates the expenses a shareholder would pay on a $1,000
investment in each Fund over periods of one, three, five, and ten years. These
figures are based on expenses shown in Table B and assume (i) a 5% annual return
and (ii) full redemption at the end of each time period.

ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS

Arizona Intermediate-Term Fund $7 $22 $38 $86
National Money Market Fund 7 20 36 80
National Intermediate-Term Fund 7 22 38 86
National Long-Term Fund 7 22 38 86

We include this table to help you understand the various costs and expenses that
you, as a shareholder, will bear either directly or indirectly. THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES OR
PERFORMANCE; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN, AND THE
FUND MAY NOT REALIZE THE 5% HYPOTHETICAL RATE OF RETURN REQUIRED BY THE SEC FOR
THIS EXAMPLE.

FINANCIAL HIGHLIGHTS

The information presented on the following pages has been audited by KPMG Peat
Marwick LLP, independent auditors. Their unqualified report on the financial
statements and financial highlights is included in the Funds' Annual Reports,
which are part of the Funds' respective Statements of Additional Information.

4
<PAGE>

================================================================================
BENHAM ARIZONA MUNICIPAL INTERMEDIATE-TERM FUND
Year ended May 31, 1995, and for the period April 11, 1994 (commencement of
operations), through May 31, 1994.
- --------------------------------------------------------------------------------
1995 1994
PER-SHARE DATA
- --------------
Net Asset Value at Beginning of Period................. $10.13 10.00

Income from Investment Operations

Net Investment Income.................................. .5149 .0684

Net Realized and Unrealized Gains on Investments....... .2200 .1300
------ ------
Total Income From Investment Operations................ .7349 .1984
------ ------
Less Distributions

Dividends from Net Investment Income................... (.5149) (.0684)

Distributions from Net Realized Capital Gains.......... 0 0
------ ------
Total Distributions.................................... (.5149) (.0684)
------ ------
Net Asset Value at End of Period....................... $ 10.35 10.13
====== ======
TOTAL RETURN+.......................................... 7.52% 1.99%
- ------------

SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at End of Period
(in thousands of dollars)..............................$ 19,778 7,187

Ratio of Expenses to
Average Daily Net Assets............................... 0% 0%

Ratio of Expenses to
Average Daily Net Assets
(Before Reimbursement)................................. 1.01% 2.33%*

Ratio of Net Investment
Income to Average Daily Net Assets..................... 5.16% 5.08%*

Ratio of Net Investment
Income to Average Net Daily Assets
(Before Reimbursement)................................. 4.15% 2.75%*

Portfolio Turnover Rate................................ 33.22% 18.14%

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

* Annualized.

5
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================
BENHAM NATIONAL TAX-FREE MONEY MARKET FUND
Years ended May 31
- ------------------------------------------------------------------------------------------------------

1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
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 .0295 .0191 .0210 .0340 .0499 .0556 .0568 .0484 .0431 .0505

Net Realized and
Unrealized Losses
on Investments 0 0 0 0 0 0 0 (.0074) 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Total Income From
Investment Operations .0295 .0191 .0210 .0340 .0499 .0556 .0568 .0410 .0431 .0505
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Less Distributions

Dividends from Net
Investment Income (.0295)(.0191) (.0210) (.0340) (.0499) (.0556) (.0568) (.0410) (.0431) (.0505)

Distributions from Net
Realized Capital Gains 0 0 0 0 0 0 0 0 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Total Distributions (.0295)(.0191) (.0210) (.0340) (.0499) (.0556) (.0568) (.0410) (.0431)(.0505)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

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+ 2.95% 1.92 2.12 3.48 5.13 5.68 5.80 4.19 4.37 5.15
- ------------

SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at
End of Period (in
millions of dollars) $92.0 109.8 109.9 111.1 111.2 93.0 93.9 71.0 80.1 42.8

Ratio of Expenses to
Average Daily
Net Assets .66% .67 .68 .57 .50 .50 .50 .31 .25 .19

Ratio of Net
Investment Income
to Average Daily
Net Assets 2.88% 1.89 2.10 3.40 4.99 5.56 5.68 4.10 4.31 5.05

+ Total return figures assume reinvestment of dividends and capital gain distributions.
</TABLE>

6
<PAGE>
<TABLE>
<CAPTION>
======================================================================================================
BENHAM NATIONAL TAX-FREE INTERMEDIATE-TERM FUND
Years ended May 31
- ------------------------------------------------------------------------------------------------------

1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $10.60 10.90 10.48 10.33 10.03 9.97 9.98 9.87 9.91 9.55

Income from
Investment Operations

Net Investment Income .5039 .5106 .5189 .5639 .6062 .6132 .6312 .6331 .6412 .7240

Net Realized and
Unrealized Gains
(Losses) on Investments .1467 (.1856) .5278 .2721 .3103 .0600 (.0100) .1100 (.0400) .3600
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Total Income From
Investment Operations .6506 .3250 1.0467 .8360 .9165 .6732 .6212 .7431 .6012 1.0840
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Less Distributions

Dividends from Net
Investment Income (.5039) (.5106) (.5189) (.5639) (.6062) (.6132) (.6312) (.6331) (.6412) (.7240)

Distributions from
Net Realized
Capital Gains (.0367) (.1144) (.1078) (.1221) (.0103) 0 0 0 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Total Distributions (.5406) (.6250) (.6267) (.6860) (.6165) (.6132) (.6312) (.6331) (.6412) (.7240)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

NET ASSET VALUE
AT END OF PERIOD $10.71 10.60 10.90 10.48 10.33 10.03 9.97 9.98 9.87 9.91
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN+ 6.40% 2.93 10.26 8.28 9.43 6.95 6.44 7.75 6.03 11.82
- ------------

SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at
End of Period (in
millions of dollars)$ 64.9 70.9 67.6 44.3 34.2 24.6 21.3 20.1 19.5 12.2

Ratio of Expenses to
Average Daily
Net Assets .66% .67 .72 .65 .50 .50 .50 .50 .50 .27

Ratio of Net Investment
Income to Average
Daily Net Assets 4.82% 4.61 4.81 5.38 5.97 6.12 6.36 6.34 6.27 7.41

Portfolio
Turnover Rate 47.48% 46.11 36.31 84.96 54.98 142.06 49.07 54.31 26.31 44.29

+ TOTAL RETURN FIGURES ASSUME REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS.
</TABLE>

7
<PAGE>
<TABLE>
<CAPTION>
===========================================================================================================================
BENHAM NATIONAL TAX-FREE LONG-TERM FUND
Years ended May 31
- ---------------------------------------------------------------------------------------------------------------------------

1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
PER-SHARE DATA
- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE AT
BEGINNING OF PERIOD $11.26 11.92 11.26 11.05 10.87 11.02 10.51 10.79 11.37 10.56

Income From
Investment Operations

Net Investment Income .6213 .6221 .6280 .6685 .7166 .7187 .7655 .7731 .8389 .9435

Net Realized and
Unrealized Gains
(Losses) on Investments .2651 (.4154) .9243 .4333 .2610 (.1000) .5100 (.2800) (.5800) .8100
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Total Income From
Investment Operations .8864 .2067 1.5523 1.1018 .9776 .6187 1.2755 .4931 .2589 1.7535
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Less Distributions

Dividends from Net
Investment Income (.6213) (.6221) (.6280) (.6685) (.7166) (.7187) (.7655) (.7731) (.8389) (.9435)

Distributions from
Net Realized
Capital Gains (.0551) (.2446) (.2643) (.2233) (.0810) (.0500) 0 0 0 0
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

Total Distributions (.6764) (.8667) (.8923) (.8918) (.7976) (.7687) (.7655) (.7731) (.8389) (.9435)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----

NET ASSET VALUE AT
END OF PERIOD $11.47 11.26 11.92 11.26 11.05 10.87 11.02 10.51 10.79 11.37
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
TOTAL RETURN+ 8.29% 1.54 14.61 10.42 9.48 5.80 12.56 4.32 2.39 17.34
- ------------

SUPPLEMENTAL DATA AND RATIOS
- ----------------------------
Net Assets at
End of Period (in
millions of dollars) $ 47.3 57.3 54.2 42.1 35.1 43.7 33.4 25.2 24.0 22.8

Ratio of Expenses to
Average Daily
Net Assets .66% .67 .72 .65 .50 .50 .50 .50 .50 .26

Ratio of Net Investment
Income to Average
Daily Net Assets 5.59% 5.16 5.40 6.00 6.57 6.58 7.14 7.27 7.11 8.61

Portfolio
Turnover Rate 34.09% 39.37 105.14 148.26 150.07 214.76 69.49 76.11 102.45 57.45

+ TOTAL RETURN FIGURES ASSUME REINVESTMENT OF DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS.
</TABLE>

8
<PAGE>

INVESTMENT OBJECTIVES

THE ARIZONA INTERMEDIATE-TERM FUND seeks to obtain as high a level of current
income exempt from Arizona and regular federal income tax as is consistent with
prudent investment management and conservation of shareholders' capital.

THE NATIONAL TAX-FREE FUNDS each seek as high a level of interest income exempt
from federal income taxes as is consistent with prudent investment management,
while seeking to conserve shareholders' capital.

Each Fund's investment objective is fundamental and may not be changed without
shareholder approval. Unless otherwise noted, the other policies described in
this Prospectus are not fundamental and may be changed by the board of trustees.
There is no guarantee that any Fund described in this Prospectus will achieve
its investment objective.

INVESTMENT POLICIES

ARIZONA INTERMEDIATE-TERM FUND

The Arizona Intermediate-Term Fund is a "non-diversified company" as defined in
the Investment Company Act of 1940. However, the Fund intends to meet federal
tax requirements for qualification as a regulated investment company, as
described in the Fund's Statement of Additional Information.

The Fund intends to remain fully invested in municipal obligations (obligations
issued by or on behalf of a state, its political subdivisions, agencies, and
instrumentalities). As a fundamental policy, the Fund will invest at least 80%
of its net assets in obligations with interest exempt from the regular federal
income tax, including the alternative minimum tax.

In addition, the Fund will invest at least 65% of its net assets in Arizona
municipal obligations (obligations issued by or on behalf of the state of
Arizona, its political subdivisions, agencies, and instrumentalities).

The remaining 35% of net assets may be invested in (i) obligations issued by
other states and their political subdivisions, (ii) obligations issued by U.S.
territories or possessions such as Puerto Rico, and (iii) U.S. government
securities. Under exceptional market or economic conditions, the Fund may invest
more than 35% of its net assets in these securities.

- -------------------
[information in right margin of page]
Each Fund intends to remain fully invested in municipal obligations.
- -------------------

9
<PAGE>

- -------------------
[information in left margin of page]
The Arizona Intermediate-Term Fund invests primarily in municipal obligations
with maturities of four or more years.
- -------------------

The Fund is authorized, under normal conditions to invest as much as 100% of its
net assets in municipal obligations for which the interest is a tax preference
item for purposes of the federal alternative minimum tax (AMT). If you are or
become subject to the AMT, a portion of your income distributions that are
exempt from the regular federal income tax may not be exempt from the AMT.
Interest from AMT bonds is considered to be exempt from federal income tax for
purposes of the 80% policy noted above.

The Fund invests primarily in intermediate-term Arizona municipal obligations
with maturities of four or more years. The weighted average portfolio maturity
is five to ten years.

In terms of quality, the Fund 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 short-term
categories designated by a rating agency; and

(3) Unrated obligations judged by BMC, under the direction of the board of
trustees, to be of comparable quality.

See the Appendix for a summary of bond ratings.

BENHAM NATIONAL TAX-FREE FUNDS

Each Fund is a "diversified company" as defined in the Investment Company Act of
1940. 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. This policy is fundamental.

Each Fund intends to remain fully invested in municipal obligations, although
for temporary defensive purposes, each may invest a portion of its assets in
U.S. government securities, the interest income from which is subject to federal
income tax. Each Fund may also invest up to 20% of its assets in securities
issued by U.S. territories or possessions, such as Puerto Rico, provided that
the interest on these securities is exempt from the regular federal income tax.

10
<PAGE>

Fund-specific investment policies are set forth in the following paragraphs.

In selecting investments for the NATIONAL MONEY MARKET FUND, BMC 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, the 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 BMC,
under the direction of the board of trustees, to present minimal credit
risks.

To be considered high-quality, an obligation must be

(1) A U.S. government obligation;

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

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

The NATIONAL INTERMEDIATE-TERM AND LONG-TERM FUNDS have identical policies
governing the quality of securities in which they may invest, as described
below. The Funds differ in their maturity criteria as follows:

The NATIONAL INTERMEDIATE-TERM FUND invests primarily in municipal obligations
with maturities of four or more years. Its weighted average maturity ranges from
five to ten years.

The NATIONAL LONG-TERM FUND invests primarily in long-term municipal
obligations. It maintains a weighted average maturity of ten or more years.

- -------------------
[information in right margin of page]
The National Intermediate-Term Fund invests primarily in municipal obligations
with maturities of four or more years.
- -------------------
11
<PAGE>

- -------------------
[information in left margin of page]
The National Long-Term Fund invests primarily in long-term municipal
obligations.
- -------------------

In terms of quality, each of these Funds restricts its investments to

(1) Municipal bonds rated, when acquired, within the three 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 BMC under the direction of the board of
trustees to be of comparable quality.

See the Appendix on page 41 for a summary of bond ratings.

SUITABILITY

The ARIZONA INTERMEDIATE-TERM FUND is designed for individuals in upper tax
brackets seeking income free from Arizona state and regular federal income
taxes, although the Fund may generate some taxable income. Because of this
emphasis on tax-exempt income, the Fund does not constitute a balanced
investment plan.

The NATIONAL MONEY MARKET FUND intends to pursue a stable $1.00 share price by
limiting its average maturity to 60 days or less. To offer investors the
potential for higher yields, the NATIONAL INTERMEDIATE-TERM FUND invests in
obligations with longer maturities. The NATIONAL LONG-TERM FUND generally offers
the highest current yields but, of the three National Funds, is also the most
susceptible to share price fluctuations.

Each Fund described in this Prospectus offers a range of potential for income
and total return based on its maturity criteria. The market value of the
investments for each Fund will change over time in response to a number of
factors, which are summarized in the following paragraphs.

Interest Rate Risk: One feature the Funds have in common is their susceptibility
to changing interest rates. For the National Money Market Fund, interest rate
changes affect the level of income the Fund generates for shareholders. For the
Variable-Price Funds, changing interest rates affect not only the level of
income the Funds

12
<PAGE>

generate for shareholders, but the 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, BMC carefully considers the
creditworthiness of parties and their reliability 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 other
form of guarantee on the obligation.

Liquidity Risk: Securities ratings reflect 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, BMC 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, BMC may purchase
securities whose ratings are not consistent with the Funds' rating criteria, but
which BMC judges, under the direction of the board of trustees, to present
credit risks consistent with the Funds' quality standards.

Each of the National Funds may invest up to 10% of its assets in unrated
securities. The Arizona Intermediate-Term Fund may invest up to 15% of its net
assets in unrated securities. Unrated securities may be less liquid than rated
securities.

The Arizona Intermediate-Term Fund may invest 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 of such obligations to make principal and interest payments.

- -------------------
[information in right margin of page]
One feature the Funds have in common is their susceptibility to changing
interest rates.
- -------------------

13
<PAGE>

Concentration Risk: Each of the Funds described in this Prospectus may invest
25% or more of its 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 (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
BMC would otherwise choose to eliminate it from a Fund's holdings. A call may
also reduce an obligation's yield to maturity.

ARIZONA OBLIGATIONS (Arizona Intermediate-Term Fund only)

Because the Arizona Intermediate-Term Fund invests primarily in Arizona
municipal securities, its yield and share price are affected by political and
economic conditions and developments within Arizona. The following summary is
derived from official statements of the state of Arizona as well as from other
publicly available documents. This summary has not been independently verified
by the Fund and does not purport to be a complete description of the conditions
and developments in Arizona that may affect the Fund. For further information
about the risks associated with investing in Arizona obligations, please see the
Fund's Statement of Additional Information.

Arizona has been, and is projected to continue to be, one of the faster-growing
areas in the United States. During the last several decades, the state has
outpaced most other regions of the country in population and personal income
growth, gross state product, and job creation, although growth has slowed
somewhat in recent years. During the last 25 years, the state's emphasis on the
mining and agricultural employment sectors has diminished, and significant job
growth has occurred in the areas of aerospace, information technology,
construction, finance, insurance, and real estate.

Under its constitution, the state of Arizona is not permitted to issue general
obligation bonds secured by the full faith and credit of the state. However,
certain

14
<PAGE>

agencies and instrumentalities of the state are authorized to issue bonds
secured by revenues from specific projects and activities, and state and local
government units may enter into lease transactions. The particular source of
payments and security for an Arizona municipal obligation is detailed in the
instruments themselves and in related offering materials.

Limitations imposed under Arizona law on taxation and bonded indebtedness may
affect the ability of the issuers to generate revenues to satisfy their debt
obligations. Arizona is required by law to maintain a balanced budget. In the
past, the state has used a combination of spending reductions and tax increases
to avoid potential budgetary shortfalls and may be required to do so again.

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 pages provide a
brief description of some of the securities the Fund may buy. The Funds are not
limited by this discussion, and they may buy other types of securities and enter
into other types of transactions that meet their 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 needs.

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 National Money Market Fund, such intervals may not exceed 13
months.

- -------------------
[information in right margin of page]
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.
- -------------------

15
<PAGE>

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
Fund are structured with rates that are reset weekly or at other 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.

BMC monitors the credit quality of bonds underlying a Fund's 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 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, BMC evaluates the credit quality and liquidity
of the obligation. In making this evaluation, BMC 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 indicators such as dealer activity; and with regard to unrated
obligations, the likelihood such lease will not be cancelled.

ZERO-COUPON MUNICIPAL SECURITIES do not make regular interest payments. Instead,
they are sold at a deep discount from their face value. In calculating daily
dividends, the Funds take into account, as income, a

16
<PAGE>

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, and vice versa.
Generally, the interest rate on these securities 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 BMC would find a ready buyer for inverse floaters. The Money Market Fund
may not invest in inverse floaters.

AMT BONDS (ARIZONA INTERMEDIATE-TERM FUND ONLY) are typically 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 the Fund may
be part of an adjustment to AMT income under Internal Revenue Code Section 55
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. The Arizona Intermediate-Term
Fund is authorized to invest as much as 100% of its assets in AMT bonds.

INVESTMENT PRACTICES

WHEN-ISSUED AND FORWARD-COMMITMENT AGREEMENTS

When-issued securities and forward-commitment agreements fix a security's price
and yield for future payment and delivery. The market value of a security may
change during this period, or a party to the agreement may fail to pay for the
security. Either of these situations could affect the market value of the Fund's
assets.

17
<PAGE>

FUTURES AND OPTIONS CONTRACTS (Variable-Price Funds)

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.

Some futures contract strategies present a substantial risk of loss, due to both
the low margin deposits required and the high degree of leverage involved in
futures pricing. A relatively small movement in a futures contract may result in
immediate, substantial gains or losses to the contract holder. Gains from
futures and options transactions are not exempt from federal income tax when
distributed to shareholders.

CASH MANAGEMENT (VARIABLE-PRICE FUNDS ONLY)

For cash management purposes, each Variable-Price Fund may invest up to 5% of
its assets in any Benham money market fund, provided that the investment is
consistent with the Fund's investment policies and restrictions.

RESTRICTED AND ILLIQUID SECURITIES

A portion of each Fund's assets may be invested in obligations that are subject
to restrictions on resale (restricted securities). Certain restricted securities
may be deemed liquid pursuant to guidelines established by the board of
trustees.

OTHER INVESTMENT MANAGEMENT TECHNIQUES

BMC 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 portfolio obligations. See the Statement of Additional Information for
a more detailed discussion of those investments and some of the risks associated
with them.

18
<PAGE>

PERFORMANCE

Mutual Fund performance is commonly measured as yield or total return, it is
based on historical fund performance and may be quoted in advertising and sales
literature. Past performance is no guarantee of future results.

The NATIONAL MONEY MARKET FUND YIELD is calculated based on the income generated
by investments in the Fund over a seven-day period, expressed as an annual
percentage rate. The Fund's EFFECTIVE YIELDS are calculated similarly, although
these figures will be slightly higher than the Fund's yield because they assume
that income earned from the Fund's investments is reinvested.

FOR EACH OF THE VARIABLE-PRICE FUNDS, yields are a way of showing the rate of
income a Fund earns on its investments as a percentage of its share price. To
calculate yield, each Fund takes the interest it earned from its portfolio of
investments for a 30-day period (net of expenses), divides it by the average
number of shares entitled to receive dividends, and expresses the result as an
annualized percentage rate based on the Fund's share price at the end of the
30-day period.

EACH FUND MAY QUOTE TAX-EQUIVALENT YIELDS, which show the taxable yields an
investor would have to earn before taxes to equal the Fund's tax-free yields.
The tax-equivalent yield for the ARIZONA INTERMEDIATE-TERM FUND is based on the
current double tax-exempt yield and your combined federal and state marginal tax
rate.

Assuming that all of the Fund's dividends are tax-exempt in Arizona (which may
not always be the case) and that your Arizona taxes are fully deductible for
federal income tax purposes, you can calculate your tax-equivalent yield for a
Fund using the following equation:

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

For example, if as an Arizona resident, your federal and Arizona tax rates were
36% and 7%, respectively, and the Fund's double tax-free yield were 5%, your
calculation would be as follows:

.05 = .084 = 8.4%
------------
(1-.36)(1-.07)

- -------------------
[information in right margin of page]
Performance data and a discussion of factors that affected performance during
the Funds' most recent reporting period are included in the Funds' semiannual
and annual reports to shareholders.
- -------------------

19
<PAGE>

- -------------------
[information in left margin of page]
Each Fund may quote tax-equivalent yields, which show the taxable yields an
investor would have to earn before taxes to equal the Fund's tax-free yields.
- -------------------

In this example, your return on a double tax-free investment yielding 5% would
be higher than on a taxable investment with comparable quality and maturity
characteristics yielding below 8.4%.

You can calculate your tax-equivalent yield for a NATIONAL TAX-FREE FUND (taking
into account only federal income taxes and not any applicable state taxes) by
using the following equation:

Fund's Tax-Free Yield
- ------------------------------- = Your Tax-
100% - Your Federal Tax Bracket Equivalent Yield

For example, if you were in the 36% federal income tax bracket, and the fund's
federally tax-free yield were 5%, your calculation would be as follows:

.05 = .078 = 7.8%
--------
1 - .36

In this example, your return on a federally tax-free investment yielding 5%
would be higher than on a taxable investment with comparable quality and
maturity characteristics yielding below 7.8%. If only a portion of a Fund's
income were tax-exempt, only that portion would be adjusted in the calculation.

TOTAL RETURN represents the Fund's changes over a specified time period,
assuming reinvestment of dividends and capital gains, if any. CUMULATIVE TOTAL
RETURN illustrates the Fund's actual performance over a stated period of time.
AVERAGE ANNUAL TOTAL RETURN is a hypothetical rate of return that illustrates
the annually compounded return that would have produced the same cumulative
total return if the Fund's performance had been constant over an entire period.
Average annual total returns smooth out variations in the Fund's performance;
they are not the same as year-by-year results.

Performance data and a discussion of factors that affected performance during
the Fund's most recent reporting period are included in the Trust's semiannual
and annual reports to shareholders. These reports are routinely delivered to the
Fund's shareholders. For a free copy, call one of the Fund Information numbers
on page 22.

20
<PAGE>

SHARE PRICE

The price of your shares is their net asset value next determined after receipt
of your instruction to purchase, convert or redeem. 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 on each day that the New York Stock Exchange is open.

Investments and requests to redeem shares will receive the share price next
determined after receipt by Benham of the investment or redemption request. For
example, investments and requests to redeem shares received by Benham before the
close of business on the New York Stock Exchange are effective on, and will
receive the price determined, that day as of the close of the Exchange.
Redemption 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 Benham. Wired funds are considered received on the day they are
deposited in Benham's bank account if they are deposited before the close of
business on the Exchange, usually 1:00 p.m. Pacific Time.

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

Investment and transaction instructions received by Benham on any business day
by mail at its office prior to the close of business on the Exchange, usually
1:00 p.m. Pacific Time, will receive that day's price. Investments and
instructions received after that time, will receive the price determined on the
next business day.

SECURITIES HELD BY THE NATIONAL MONEY MARKET FUND are valued on the basis of
amortized cost. This method involves initially valuing a security at its cost
and thereafter assuming a constant amortization to maturity of any discount or
premium paid at the time of purchase, rather than determining the security's
market value from day to day.

21
<PAGE>

- -------------------
[information in left margin of page]
Overnight and special delivery mail (e.g., Federal Express, Express Mail,
Priority Mail) should be sent to our street address: 1665 Charleston Rd.
Mountain View, California 94043. Failure to do so may result in transaction
delays.
- -------------------

MOST SECURITIES HELD BY THE VARIABLE-PRICE FUND are priced at market value using
prices obtained daily from an independent pricing service. Other securities are
priced at fair market value as determined in good faith pursuant to guidelines
established by the Fund's board of trustees.

HOW TO INVEST

To open an account, you must complete and sign an application. If an application
is not enclosed with this Prospectus, you may request one by calling one of the
Fund Information numbers listed below. If you prefer, we will fill out your
application over the telephone and mail it to you for your signature. Separate
forms are required to establish Benham-sponsored retirement plan accounts (see
pages 32 and 33).

Benham Group Representatives are available at the telephone numbers listed below
weekdays from 5:00 a.m. to 5:00 p.m. Pacific Time. For your protection, Benham
records all telephone conversations with its telephone representatives.

FUND INFORMATION: for information about any Benham fund or other investment
product, call 1-800-331-8331 or 1-415-965-4274.

SHAREHOLDER RELATIONS: to open an account or make transactions in an existing
account, call 1-800-321-8321 or 1-415-965-4222.

Benham shareholders may make transactions and obtain prices, yields, and total
return information for all Benham funds with TeleServ, our 24-hour automated
telephone information service. Dial 1-800-321-8321 and press 1.

22
<PAGE>

HOW TO BUY SHARES (Retirement investors, see pages 32 and 33).

MAKE YOUR INVESTMENT CHECK PAYABLE TO THE BENHAM GROUP. Mail
the check with your completed application to

The Benham Group
P.O. Box 7730
San Francisco, CA 94120-9853

For ADDITIONAL INVESTMENTS, enclose an investment slip
preprinted with the account number to which your investment
should be credited. If the payee information provided on the
check does not agree with the information preprinted on the
investment slip, we will follow the instructions preprinted on
the slip.

If you do not have a preprinted investment slip, send your
check with written instructions indicating the fund name and
the account number. If the payee information provided on the
check does not agree with the written instructions, we will
follow the written instructions.

You may also invest your check in person at a Benham Investor
Center. One is located at 1665 Charleston Road in Mountain
View, California; the other is located at 2000 South Colorado
Boulevard, Suite 1000, in Denver, Colorado.

WE WILL NOT ACCEPT CASH INVESTMENTS OR THIRD-PARTY CHECKS. We
will, however, accept properly endorsed second-party checks
made payable to the investor(s) to whose account the investment
is to be credited.

We will also accept checks drawn on foreign banks or foreign
branches of domestic banks and checks that are not drawn in
U.S. dollars (U.S. $100 minimum). The cost of collecting
payment on such checks will be passed on to the investor. These
costs may be substantial, and settlement may involve
considerable delays.

Investors will be charged $5 for every investment check
returned unpaid.

23
<PAGE>

If you wish to OPEN AN ACCOUNT BY BANK WIRE, please call our
Shareholder Relations Department for more information and an
account number. Bank wire investments should be addressed as
follows:

State Street Bank and Trust Company
Boston, Massachusetts
ABA Routing Number 011000028
Beneficiary = Benham Municipal Trust: [Benham Fund Name]
AC [Your Fund's State Street Account Number (see below)]
FBO [Your Name, Your Benham Fund Account Number]

Benham Fund Names and State Street Bank
Account Numbers:

Benham Arizona Municipal
Intermediate-Term Fund................. 0505 944 9
Benham National Tax-Free
Money Market Fund...................... 0505 931 6
Benham National Tax-Free
Intermediate-Term Fund................. 0505 929 0
Benham National Tax-Free
Long-Term Fund......................... 0505 921 7

- --------------------------------------------------------------------------------
BY EXCHANGE Minimum initial investment: $1,000
Minimum additional investment: $100

You may exchange your shares for shares of any other Benham
fund registered for sale in your state if you have received the
fund's prospectus. Exchanges may be made by telephone (for
identically registered accounts only), by written request, or
in person. Certain restrictions apply; please see page 26 for
details. You may open a new account by exchange provided that
you meet the minimum initial investment requirement.

- --------------------------------------------------------------------------------
AUTOMATIC Minimum: $25
INVESTMENT
SERVICES These services are offered with respect to additional
investments only. See details on page 27.

24
<PAGE>

PROCESSING YOUR PURCHASE

Shares will be purchased at the next NAV calculated after your investment is
received and accepted by Benham or an authorized subtransfer agent. Investments
received and accepted before the close of business of the NYSE, normally 1:00
p.m. Pacific Time, will be included in your account balance the same day. After
1:00 p.m. Pacific Time, they will be credited the following business day. The
Fund reserves the right to refuse any investment.

TELEPHONE TRANSACTIONS

Shareholders may order certain transactions (e.g., exchanges, wires, some types
of redemptions) by telephone. This privilege is granted to Benham fund
shareholders automatically; you need not specifically request this service, and
you may not specifically decline it.

The Benham Group will not be liable for losses resulting from unauthorized or
fraudulent instructions if it follows procedures designed to verify the caller's
identity. BMC will request personal identification, record telephone calls, and
send confirmation statements for every telephone transaction to the
shareholder's record address. The Funds reserve the right to revise or terminate
telephone transaction privileges at any time.

CONFIRMATION AND QUARTERLY STATEMENTS

All transactions are summarized on quarterly account statements. In addition,
for every transaction that you request, a confirmation statement will be mailed
to your record address. Please review these statements carefully. If you believe
we have processed the transaction you requested incorrectly, please notify us as
soon as possible. If you fail to notify us of an error with reasonable
promptness, i.e., within 30 days of the date of your confirmation statement, we
will deem you to have ratified the transaction.

25
<PAGE>

- -------------------
[information in left margin of page]
The free exchange privilege is a convenient way to buy shares in other Benham
funds if your investment goals change.
- -------------------

SHAREHOLDER SERVICES

EXCHANGE PRIVILEGE

You may exchange your shares for shares of equivalent value in any other Benham
fund registered for sale in your state. An exchange request will be processed
the same day if it is received before the funds' NAVs are calculated (one hour
prior to the close of the NYSE, usually 12:00 noon Pacific Time, for Benham
Target Maturities Trust, and at the close of the NYSE, usually 1:00 p.m. Pacific
Time, for all other Benham funds).

The Benham Group discourages trading in response to short-term market
fluctuations. Such activity may encumber BMC's ability to invest the funds'
assets in accordance with their respective investment objectives and policies
and may be disadvantageous to other shareholders. In addition, an exchange out
of variable-price funds generally will generate taxable gains or losses to the
shareholder. More than six exchanges per calendar year out of a variable-price
fund may be deemed an abuse of the exchange privilege. For purposes of
determining the number of exchanges made, accounts under common ownership or
control will be aggregated.

Currently, there are no restrictions on exchanges out of the National Money
Market Fund. However, each Benham fund reserves the right to modify or revoke
the exchange privilege of any shareholder or to limit or reject any exchange.
Although each fund will attempt to give shareholders prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time.

OPEN ORDER SERVICE

The Benham Group's Open Order Service allows you to designate a price at which
to buy or sell shares of a variable-price fund by exchange from a money market
fund. To place a "buy" order, you designate a purchase price that is equal to or
lower than the current NAV. To place a "sell" order, designate a sales price
that is equal to or higher than the current NAV. If the designated price is met
within 90 calendar days, we will automatically execute your order. If you are
buying shares of a variable-price fund, we will exchange money from your money
market account to purchase them. If you are selling shares of a variable-price
fund, we will transfer

26
<PAGE>

the proceeds of that sale to your money market account. If you do not have a
money market account, we will open one for you when we execute your Open Order.

If the fund you have selected deducts a distribution from its share price, your
order price will be adjusted accordingly so that the distribution does not
inadvertently trigger an Open Order transaction on your behalf. If you close or
reregister the account from which shares are to be redeemed, your Open Order
will be canceled. Because of their time-sensitive nature, Open Order
transactions may be made by telephone or in person. These transactions are
subject to the exchange limitations described in each fund's prospectus, except
that orders and cancellations received before 12:00 p.m. Pacific Time are
effective the same day. After 12:00 p.m. Pacific Time, they are effective the
following business day.

AUTOMATIC INVESTMENT SERVICES (AIS)

TREASURY DIRECT allows you to deposit interest and principal payments from
Treasury securities directly into a Benham fund account.

PAYROLL DIRECT allows you to deposit any amount of your paycheck directly into a
Benham fund account.

GOVERNMENT DIRECT allows you to deposit your entire U.S. government payment
directly into a Benham fund account.

BANK DIRECT allows you to deposit a fixed amount from your bank account directly
into a Benham fund account on the 1st and/or the 15th of each month (or the next
business day).

DIRECTED DIVIDENDS allow you to invest all or part of your dividend earnings
from one Benham fund account in one or more other Benham fund accounts. You may
choose to receive a portion of your dividends in cash and to invest the
remainder in other Benham fund accounts.

SYSTEMATIC EXCHANGES allow you to exchange from one Benham fund account to
another Benham fund account on the 1st and/or the 15th day of each month (or the
next business day).

For more information about any of these services, call our Shareholder Relations
Department at 1-800-321-8321 or 1-415-965-4222.

27
<PAGE>

BROKER-DEALER TRANSACTIONS

The Benham Group charges no sales commissions, or "loads" of any kind. However,
investors may purchase and sell shares through registered broker-dealers, who
may charge fees for their services.

The Benham Group will accept orders for the purchase of shares from authorized
broker-dealers who agree in writing to pay in full for such shares in
immediately available funds no later than 1:00 p.m. Pacific Time the following
business day.

TDD SERVICE FOR THE HEARING IMPAIRED

TDD users may contact The Benham Group at 1-800-624-6338 or 1-415-965-4764.
California residents may wish to contact us through the California Relay Service
(CRS) at 1-800-735-2929.

Your transaction requests via CRS will be handled on a recorded line. The Benham
Group cannot accept responsibility for instructions miscommunicated by CRS.
Please review your confirmation statements carefully and notify us immediately
if you find an error.

EMERGENCY SERVICES

The Benham Group has established an alternate operations site from which we can
access customer accounts and the mainframe computers used by the Benham funds in
the event of an emergency. Telephone lines and terminals are currently in place.
If our regular service is interrupted, the following numbers will automatically
connect you to this site.

From within the U.S., including Alaska and Hawaii: 1-800-321-8321.

From all foreign countries, call collect, 1-303-759-9337 or 1-510-820-1409. The
operator will request your Benham fund account number before accepting the call.

HOW TO REDEEM YOUR INVESTMENT

When you place an order to redeem shares, your shares will be redeemed at the
next NAV calculated after The Benham Group or an authorized subtransfer agent
has received your redemption request in good order. The Funds' NAVs are usually
calculated at 1:00 p.m. Pacific Time. See page 21.

28
<PAGE>

Barring extraordinary circumstances prescribed by law, redemption proceeds are
mailed within seven calendar days. However, The Benham Group reserves the right
to withhold the proceeds until the investment has matured (i.e., your payment
has cleared); see maturity periods below.

================================================================================
DRAWN FROM A MATURITY PERIOD
TYPE OF INVESTMENT CALIFORNIA BANK? (IN BUSINESS DAYS)
- --------------------------------------------------------------------------------
Checks, cashiers' checks,
and bank money orders Yes 5 days
- --------------------------------------------------------------------------------
Same as above No 8 days
- --------------------------------------------------------------------------------
U.S. Treasury checks,
Traveler's checks,
U.S. Postal money orders,
Benham checks, bank wires,
and AIS Deposits* N/A 1 day

*Does not include bank direct deposits, which take 8 business days to mature.

================================================================================

If you hold shares in certificate form, redemption requests must be accompanied
by properly endorsed certificates.

If you want to keep your account open, please maintain a balance of shares worth
at least $1,000. If your account balance falls to less than $1,000 due to
redemption, your account may be closed, but not without at least 30 days' notice
and an opportunity to increase your account balance to the $1,000 minimum. Your
shares will be redeemed at the NAV calculated on the day your account is closed.
Proceeds will be mailed to the record address.

This policy applies to Benham's Individual Retirement Accounts (IRAs), excluding
SEP-IRAs, except that shareholders will receive at least 120 days' written
notice and an opportunity to increase their account balance before their
accounts are closed. Investors wishing to open a Benham-sponsored retirement
account should see pages 32 and 33 for details.

UNCASHED CHECKS

We may reinvest at the Fund's current NAV any distribution or redemption check
that remains uncashed for six months. Until we receive instructions to the
contrary, subsequent distributions will be reinvested in the original account.
Uncashed redemption checks may be reinvested in an identically registered
account.

29
<PAGE>

HOW TO REDEEM SHARES (Retirement investors, see pages 32 and 33).

================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
BY TELEPHONE The Benham Group will accept telephone redemption requests for
any amount if the proceeds are to be sent to your
predesignated bank account. Redemptions of $25,000 or less
payable to the registered account owner(s) may also be ordered
by telephone. All other redemption requests must be made in
writing.

- --------------------------------------------------------------------------------
IN WRITING Send a letter of instruction to

The Benham Group
Shareholder Relations Department
1665 Charleston Road
Mountain View, California 94043

Your letter of instruction should specify
* Your name
* Your account number
* The name of the Fund from which you wish to redeem shares
* The dollar amount or number of shares you wish to redeem

For your protection, written redemption requests must be
accompanied by SIGNATURE GUARANTEES under the following
circumstances

* Redemption proceeds go to a party other than the registered
account owner(s)
* Redemption proceeds go to an account other than your
predesignated bank account
* Redemption proceeds go to the registered account owner(s),
but the amount exceeds $25,000

If you have instructed The Benham Group to require more than
one signature on written redemption requests, each of the
required number of signers must have his or her signature
guaranteed on the redemption requests. Signature guarantees
may be provided by banks, savings and loan associations,
savings banks, credit unions, stock brokerage firms, or a
Benham Investor Center.

30
<PAGE>

================================================================================
METHOD INSTRUCTIONS
- --------------------------------------------------------------------------------
IN WRITING Shareholders must appear in person with identification to
(continued) obtain a signature guarantee. Notary public certifications are
not accepted in lieu of signature guarantees.

BFS may require written consent of all account owners prior to
acting on the written instructions of any account owner.

- --------------------------------------------------------------------------------
BY CHECK Investors automatically receive a free book of checks upon
opening an account in the National Money Market Fund. Checks
may be drawn to the order of any payee in any amount of $100
or more. There is no charge for additional checks, and there
are no per-check fees.

Each check must bear the signatures of those authorized to act
on the account. Check redemptions will be charged against your
account as of the date the check is received by First
Interstate Bank of California, the collecting bank.

The check-writing option may be terminated or modified by the
board of trustees. Checks may not be used to close an account.

- --------------------------------------------------------------------------------
BY BANK WIRE If you included bank wire information on your account
application or made subsequent arrangements to accommodate
bank wire redemptions, you may wire funds to your bank by
calling 1-800-321-8321 or 1-415-965-4222. The minimum amount
for a bank wire redemption is $1,000. Allow at least two
business days for redemption proceeds to be credited to your
bank account.

- --------------------------------------------------------------------------------
BY EXCHANGE See details on page 26.

- --------------------------------------------------------------------------------
AUTOMATIC DIRECTED PAYMENTS. You may arrange for periodic redemp-
REDEMPTION tions from your Benham fund account to your bank
SERVICES account or to another designated payee.

SYSTEMATIC EXCHANGES. You may arrange for periodic exchange
redemptions from one Benham fund account to another Benham
fund account.

31
<PAGE>

ABOUT BENHAM-SPONSORED RETIREMENT PLANS

Retirement plans offer investors a number of benefits, including the chance to
reduce current taxable income and to take advantage of tax-deferred compounding.
Retirement plan accounts require a special application; please let our
Shareholder Relations Department know if you want to establish this type of
account. We suggest that you consult your tax advisor before establishing a
retirement plan account. The minimum account balance for all Benham Individual
Retirement Accounts (IRAs), excluding SEP-IRAs, is $1,000. If your balance falls
below the $1,000 per fund account (continued on the next page)

================================================================================
PLAN TYPE AVAILABLE TO MAXIMUM ANNUAL CONTRIBUTION
PER PARTICIPANT
- --------------------------------------------------------------------------------
Contributory An employed indi- $2,000 or 100% of compensation
IRA vidual under age 70 1/2. (whichever is less).

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

Spousal IRA A nonworking spouse $2,250 (can be split between
(under age 70 1/2) of a Spousal and Contributory IRAs,
wage earner. provided that no IRA receives
more than a total of $2,000).
- --------------------------------------------------------------------------------

Rollover IRA An individual with a None, as long as total amount is
distribution from an eligible.
employer's retirement
plan or a rollover IRA.
- --------------------------------------------------------------------------------

SEP-IRA A self-employed indi- $22,500 or 15% of compensation
vidual or a business. (whichever is less).*

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

Money Same as for SEP-IRA. $30,000 or 25% of compensation
Purchase Plan (whichever is less). Annual
(Keogh) contribution is mandatory.*
- --------------------------------------------------------------------------------

Profit Same as for SEP-IRA. $22,500 or 15% of compensation
Sharing Plan (whichever is less). Annual
(Keogh) contribution is optional.*
- --------------------------------------------------------------------------------

* Self-employed individuals should consult IRS Publication 560 for their annual
contribution limits.

32
<PAGE>

(continued from the previous page)
minimum, your account may be closed (see page 29 for details). This distribution
may result in a taxable event and a possible penalty for early withdrawal. The
minimum fund account balance for all other Benham-sponsored retirement plan
accounts is $100. Benham charges no fees for its IRAs but does charge low
maintenance fees for its Keoghs.

YOU MUST COMPLETE SPECIFIC FORMS TO TAKE DISTRIBUTIONS (I.E., REDEEM SHARES)
FROM A BENHAM-SPONSORED RETIREMENT PLAN ACCOUNT. PLEASE CALL OUR SHAREHOLDER
RELATIONS DEPARTMENT AT 1-800-321-8321 FOR ASSISTANCE.

================================================================================
DEADLINE FOR
OPENING ACCOUNT CONTRIBUTION DEADLINES
- --------------------------------------------------------------------------------

You may open an account anytime, Annual contributions can be made
but the deadline for establishing from January 1 through April 15 of
and funding an IRA for the prior the following tax year up to the
tax year is April 15. year you turn age 70 1/2.
- --------------------------------------------------------------------------------

Same as for Contributory IRA. Same as for Contributory IRA.

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

You may open a Rollover IRA Eligible rollover contributions must
account anytime. be made within 60 days of receiving
your distribution. There is no age
limit on rollover contributions.
- --------------------------------------------------------------------------------

You may open an account anytime, Must be made by employer's tax
but the deadline for establishing and filing deadline (including
funding an account for the prior tax extensions).
year is the employer's tax deadline
(including extensions).
- --------------------------------------------------------------------------------

The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.

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

The end of the employer's plan Same as for SEP-IRA.
year, usually December 31.

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

For all Benham-sponsored retirement plans, you may begin taking distributions at
age 59 1/2. You must begin to take required distributions by April 1 of the year
after you turn age 70 1/2. You may take distributions from your IRA or SEP-IRA
before you reach age 59 1/2; however, a penalty may apply.

33
<PAGE>

- -------------------
[information in left margin of page]
Each January you will be informed of the tax status of dividends and capital
gain distributions for the previous year.
- -------------------

DISTRIBUTIONS AND TAXES

DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS

NATIONAL MONEY MARKET FUND. Dividends are declared daily and distributed on the
last business day of the month.

VARIABLE-PRICE FUND. Dividends are declared daily, accrued throughout the month,
and distributed on the last business day of the month.

ALL FUNDS. Net capital gains, if any, are declared and distributed once a year
in December.

DISTRIBUTION OPTIONS. You may choose to receive dividends and capital gain
distributions in cash or to reinvest them in additional shares. (See "Directed
Dividends" on page 27 for further information.) Please indicate your choice on
your account application or contact our Shareholder Relations Department. See
page 29 for a description of our policy regarding uncashed distribution checks.

TAXES

Each Fund intends to qualify annually as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986 (Code), as amended, by
distributing all or substantially all of its net investment income and net
realized capital gains to shareholders each year.

Interest earned by a Fund from municipal and other tax-exempt obligations
generally is exempt from the regular federal income tax. 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.

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.

34
<PAGE>

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 gain 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 record shareholders in October, November, or December
and paid in January of the following year are treated as if paid on December 31.

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, you should keep your regular account statements to use in determining
your taxes.

If you 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.

BUYING A DIVIDEND. The timing of your investment could have undesirable tax
consequences. If you open a new account or buy more shares for your current
account just before the day a dividend or distribution is reflected in your
Fund's share price, you will receive a portion of your investment back as a
taxable dividend or distribution.

35
<PAGE>

Deductions for interest expense incurred (or deemed to be incurred) to acquire
or carry shares of a Fund may be subject to limitations that reduce or eliminate
the deductions.

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, BMC, and the Funds' counsel 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 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 or from any
other investment.

BACKUP WITHHOLDING. The Funds are required by federal law to withhold 31% of
reportable dividends and capital gain distributions (as well as redemptions from
Variable-Price Funds) payable to shareholders who have not complied with IRS
regulations. These regulations require you to certify on your account
application or on IRS Form W-9 that your social security or taxpayer
identification number (TIN) is correct and that you are not subject to backup
withholding from previous underreporting to the IRS, or that you are exempt from
backup withholding.

The Benham Group may refuse to sell shares to investors who have not complied
with this requirement, either before or at the time of purchase. Until we
receive your certified tax certification, we may redeem your shares in the Funds
at any time.

AMT Liability. To the extent that the Arizona Intermediate-Term Fund invests 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 to

36
<PAGE>

alternative minimum taxable income for purposes of the AMT and the environmental
tax imposed under Code Sections 55 and 59A, respectively.

Under a ruling by the Arizona Department of Revenue, shareholders who are
otherwise subject to Arizona income tax will not be subject to such tax on Fund
dividends to the extent that such dividends are attributable to either (i)
obligations of the state of Arizona or its political subdivisions or (ii)
obligations issued by the governments of Guam, Puerto Rico, or the Virgin
Islands.

In addition, Fund dividends that are attributable to interest payments on direct
obligations of the U.S. government will not be subject to Arizona income tax if,
as intended, the Fund qualifies as a regulated investment company under
Subchapter M of the Code. Other distributions from the Fund, however, such as
distributions of short-term or long-term capital gains or income earned on
obligations of other states, will generally be subject to Arizona income tax.
Shareholders who are domiciled outside of Arizona may be subject to income,
personal property, intangibles, or similar taxes in their respective states and
localities.

Shareholders should consult their tax advisor about other state and local tax
consequences of their investment in a Fund.

MANAGEMENT INFORMATION

ABOUT THE TRUST

Benham Municipal Trust is a registered open-end management investment company
that was organized as a Massachusetts business trust on May 1, 1984 (the Trust
was formally known as "Benham National Tax-Free Trust"). Four of the Trust's
eight series are described in this Prospectus. Additional series may be created
from time to time.

A board of trustees oversees the Funds' activities and is responsible for
protecting shareholders' interests in the Fund. The Trust is neither required
nor expected to hold annual meetings, although special meetings may be called
for purposes such as electing or removing trustees or amending a series'
advisory agreement or investment policies. The number of votes you are entitled
to is based upon the dollar value of your investment. Each series of

- -------------------
[information in right margin of page]
The Benham Group serves more than 350,000 investors.
- -------------------

37
<PAGE>

- -------------------
[information in left margin of page]
Benham Financial Services, Inc. provides administrative and transfer agent
services to the Funds.
- -------------------

the Trust votes separately on matters that pertain to it exclusively. Voting
rights are not cumulative.

THE BENHAM GROUP

Benham Management Corporation (BMC) is investment advisor to the funds in The
Benham Group, which currently constitute more than $11 billion in assets. BMC,
incorporated in California in 1971, became a wholly owned subsidiary of
Twentieth Century Companies, Inc. (TCC), a Delaware corporation, on June 1,
1995, upon the merger of Benham Management International, Inc., BMC's former
parent, into TCC. TCC is a holding company that owns the operating companies
that provide the investment management, transfer agency, shareholder service,
and other services for the Twentieth Century family of funds, which now includes
the Benham Group. The combined company offers 62 mutual funds and has combined
assets of more than $41 billion.

Benham Management Corporation (BMC) supervises and manages the investment
portfolios of The Benham Group and directs the purchase and sale of its
investment securities. BMC utilizes teams of portfolio managers, assistant
portfolio managers and analysts acting together to manage the assets of the
funds. The teams meet regularly to review portfolio holdings and to discuss
purchase and sale activity. The teams adjust holdings in the Funds' portfolios
as they deem appropriate in pursuit of the funds' investment objectives.
Individual portfolio manager members of the team may also adjust portfolio
holdings of the funds as necessary between team meetings.

Mr. G. David MacEwen, Portfolio Manager, has primary responsibility for the
day-to-day operations of all series of the Trust. He also manages the following
Benham California Tax-Free and Municipal Funds: Tax-Free Short-Term Fund,
Tax-Free Intermediate-Term Fund, Tax-Free Long-Term Fund, and Tax-Free Insured
Fund. Before joining BMC in 1991, Mr. MacEwen was Vice President-Municipal
Portfolio Manager at Provident Institutional Management Corporation in
Wilmington, Delaware (1986 to 1991).

38
<PAGE>

ADVISORY AND SERVICE FEES

For investment advice and portfolio management services, each Fund pays BMC a
monthly investment advisory fee equal to its pro rata share of the dollar amount
derived from applying the Trust's average daily net assets to an investment
advisory fee schedule.

The investment advisory fee rate cannot exceed .50% of average daily net assets,
and it drops to a marginal rate of .19% of average daily net assets as Trust
assets increase.

The following table illustrates investment advisory fees paid by the Funds for
the fiscal year ended May 31, 1995. For each Fund, the figures shown represent
investment advisory fees as a percentage of the Fund's average daily net assets
and as a dollar amount per $1,000 of the Fund's average daily net assets.

INVESTMENT ADVISORY FEES*

Arizona Intermediate-Term Fund 0% $0
National Money Market Fund .37% $3.70
National Intermediate-Term Fund .35% $3.50
National Long-Term Fund .33% $3.30

*Net of expense limitation as described on pages 3 and 40.

To avoid duplicative investment advisory fees, the variable-price funds do not
pay BMC investment advisory fees with respect to assets invested in shares of
any money market fund advised by BMC.

BFS, a wholly owned subsidiary of TCC, is the Funds' agent for transfer and
administrative services. For administrative services, each Fund pays BFS 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 in The Benham Group.
The administrative fee rate ranges from .11% to .08% of average daily net
assets, dropping as Benham Group assets increase. For transfer agent services,
each Fund pays BFS a monthly fee for each shareholder account maintained and for
each shareholder transaction executed during that month.

- -------------------
[information in right margin of page]
Benham Management Corporation provides investment advice and portfolio
management services to the Funds.
- -------------------
39
<PAGE>

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

EXPENSE LIMITATION AGREEMENTS

An expense limitation agreement between BMC and the Funds is described on page
3.

The following table illustrates each Fund's total operating expenses for the
fiscal year ended May 31, 1995, as a percentage of the Fund's average daily net
assets and as a dollar amount per $1,000 of the Fund's average daily net assets.

TOTAL OPERATING EXPENSES*

Arizona Intermediate-Term Fund 0% $0
National Money Market Fund .66% $6.60
National Intermediate-Term Fund .66% $6.60
National Long-Term Fund .66% $6.60

*Net of expense limitation as described above and on page 3.

DISTRIBUTION OF SHARES

Benham Distributors, Inc. (BDI), and BMC distribute and market Benham products
and services. BMC pays all expenses for promoting sales of and distributing the
Funds' shares. The Funds do not pay commissions to, or receive compensation
from, broker-dealers.

BDI is a wholly owned subsidiary of TCC.

40
<PAGE>

APPENDIX

================================================================================
SUMMARY OF BOND RATINGS*
- --------------------------------------------------------------------------------
INVESTMENT GRADE MOODY'S S&P

Highest quality Aaa AAA
High quality Aa AA
Upper medium grade A A
Medium grade Baa BBB

LOWER QUALITY

Moderately speculative Ba BB
Speculative B B
Highly speculative Caa CCC
Poor quality Ca CC
Lowest quality, no interest C C
In default, in arrears _ D

*Please refer to the Funds' Statements of Additional Information for a more
complete discussion of the ratings assigned by Moody's and S&P.

41
<PAGE>

INVESTMENT ADVISOR

BENHAM MANAGEMENT CORPORATION
1665 Charleston Road
Mountain View, California 94043

DISTRIBUTOR

BENHAM DISTRIBUTORS, INC.
1665 Charleston Road
Mountain View, California 94043

CUSTODIAN

STATE STREET BANK AND TRUST COMPANY
225 Franklin Street
Boston, Massachusetts 02101

TRANSFER AGENT

BENHAM FINANCIAL SERVICES, INC.
1665 Charleston Road
Mountain View, California 94043

INDEPENDENT AUDITORS

KPMG PEAT MARWICK LLP
3 Embarcadero Center
San Francisco, California 94111

TRUSTEES

James M. Benham
Ronald J. Gilson
Myron S. Scholes
Kenneth E. Scott
Ezra Solomon
Isaac Stein
James E. Stowers III
Jeanne D. Wohlers

42
<PAGE>

THE BENHAM GROUP OF INVESTMENT COMPANIES

Capital Preservation Fund
Capital Preservation Fund II
Benham Government Agency Fund
Benham Prime Money Market Fund
Benham Short-Term Treasury and Agency Fund
Benham Treasury Note Fund
Benham Long-Term Treasury and Agency Fund
Benham Adjustable Rate Government Securities Fund
Benham GNMA Income Fund
Benham Target Maturities Trust
Benham California Tax-Free and Municipal Funds*
Benham National Tax-Free Money Market Fund
Benham National Tax-Free Intermediate-Term Fund
Benham National Tax-Free Long-Term Fund
Benham Florida Municipal Money Market Fund**
Benham Florida Municipal Intermediate-Term Fund**
Benham Arizona Municipal Intermediate-Term Fund***
Benham Gold Equities Index Fund
Benham Income & Growth Fund
Benham Equity Growth Fund
Benham Utilities Income Fund
Benham Global Natural Resources Index Fund
Benham European Government Bond Fund
Benham Capital Manager Fund

* Available only to residents of California, Arizona, Colorado, Hawaii, Nevada,
New Mexico, Oregon, Texas, Utah, and Washington.

** Available only to residents of Florida, California, Georgia, Illinois,
Michigan, New Jersey, New York, and Pennsylvania.

***Available only to residents of Arizona, California, Colorado, Nevada, Oregon,
Washington, and Texas.

43
<PAGE>

NOTES:

<PAGE>

NOTES:

<PAGE>

NOTES:

<PAGE>

CONTENTS

Summary of Fund Expenses .................. 3
Financial Highlights ...................... 4
Investment Objectives ..................... 9
Investment Policies ....................... 9
Suitability ............................... 12
Municipal Securities ...................... 15
Investment Practices ...................... 17
Performance ............................... 19
Share Price ............................... 21
How to Invest ............................. 22
Shareholder Services ...................... 26
Exchange Privilege ..................... 26
Open Order Service ..................... 26
Automatic Investment Services .......... 27
Broker-Dealer Transactions ............. 28
TDD Service ............................ 28
Emergency Services ..................... 28
How to Redeem Your Investment ............. 28
Distributions and Taxes ................... 34
Dividends and Capital Gain Distributions 34
Taxes .................................. 34
Management Information .................... 37
About the Trust ........................ 37
The Benham Group ....................... 38
Advisory and Service Fees .............. 39
Expense Limitation Agreements .......... 40
Distribution of Shares ................. 40
Appendix .................................. 41

E212

<PAGE>
BENHAM ARIZONA MUNICIPAL INTERMEDIATE-TERM FUND

A SERIES OF BENHAM MUNICIPAL TRUST

THE BENHAM GROUP(R)
1665 Charleston Road
Mountain View, California 94043

Shareholder Relations: 1-800-321-8321 or 1-415-965-4222
Fund Information: 1-800-331-8331 or 1-415-965-4274

STATEMENT OF ADDITIONAL INFORMATION

SEPTEMBER 30, 1995

This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus dated September 30, 1995. The Fund's Annual Report for
the fiscal year ended May 31, 1995, is included in this Statement of Additional
Information. To obtain a copy of the Prospectus, call or write The Benham Group.

TABLE OF CONTENTS

Page
----
Investment Policies and Techniques 2
Special Considerations Regarding Arizona Municipal Securities 9
Investment Restrictions 10
Portfolio Transactions 12
Valuation of Portfolio Securities 12
Performance 13
Taxes 15
About the Trust 18
Trustees and Officers 19
Investment Advisory Services 20
Administrative and Transfer Agent Services 22
Direct Fund Expenses 22
Expense Limitation Agreements 22
Additional Purchase and Redemption Information 23
Other Information 23
Financial Statements 28

1
<PAGE>

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.

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,

2
<PAGE>

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 its 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 Fund 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

The 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 Fund to tender (or put) their bonds to an institution at
periodic intervals and to receive the principal amount thereof.

Benham Management Corporation (BMC), the Fund's investment advisor, expects that
the Fund will pay more for securities with puts attached than for securities
without these liquidity features. BMC may buy securities with puts attached to
keep the Fund fully invested in municipal securities while maintaining
sufficient portfolio liquidity to meet redemption requests or to facilitate
management of the Fund's investments. To ensure that the interest on municipal
securities subject to puts is tax-exempt to the Fund, BMC limits the Fund's 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 Fund's 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) the Fund attempts to exercise the put. To
minimize such risks, the Fund 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. 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.

3
<PAGE>

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 Fund's 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 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 (i)
legal opinions relating to the tax-exempt status of the underlying municipal
bonds, (ii) legal opinions relating to the tax ownership of the underlying
bonds, and (iii) 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 Fund 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, each
Fund assumes the rights and risks of ownership, including the risk of price and
yield fluctuations. While a Fund will make commitments to purchase or sell
securities with the intention of actually receiving or delivering them, it may
nevertheless sell the securities before the settlement date if deemed advisable
as a matter of investment strategy.

In purchasing securities on a when-issued or forward-commitment basis, a Fund
will establish and maintain until the settlement date a segregated account
consisting of cash, U.S. government securities, or other high-quality liquid
debt 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, through sales of 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 taxable 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.

As an operating policy, the Fund will not commit greater 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 the 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

4
<PAGE>

agreements on behalf of the Fund until the percentage of assets committed to
such agreements is below 50% of total assets.

MUNICIPAL LEASE OBLIGATIONS

The 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 Fund 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, and 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 providing 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.

INVERSE FLOATERS

The Fund may buy or sell 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.

5
<PAGE>

(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. Changes
in the market value of inverse floaters tend to be significantly greater than
those of fixed-rate bonds because of the way interest payments are determined.
The interest rates on inverse floaters may be significantly reduced, even to
zero, if interest rates rise.

SHORT-TERM SECURITIES

Under certain circumstances, the 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 the Fund's investments in short-term securities to exceed 35% of
total assets. If the 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. BMC intends to minimize such
investments, however, and may allow the Fund to hold cash to avoid generating
taxable dividends when suitable short-term municipal securities are unavailable.

Pursuant to an exemptive order that BMC received from the Securities and
Exchange Commission, for liquidity purposes, the Fund may invest up to 5% of its
assets in shares of a money market fund advised by BMC provided that the
investment is consistent with the Fund's investment policies and restrictions.

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

From time to time, a significant portion of the 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 the 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

6
<PAGE>

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 the projects or facilities financed by the
municipal bonds.

FUTURES AND OPTIONS

The 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 the Fund's investments against price
fluctuations. Other strategies, such as buying futures, writing puts, and buying
calls, tend to increase market exposure. The Fund does not use futures and
options transactions for speculative purposes.

Although other techniques may be used to control the Fund's exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While the 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 Fund 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
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, the 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 Fund's investment
restrictions.

7
<PAGE>

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 the Fund's return.

The 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, the 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, the 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 it enters into on behalf of the Fund to those traded on
national futures exchanges and for which there appears to be a liquid secondary
market.

The 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 the Fund had different maturities than those of
the portfolio securities being hedged. Such imperfect correlation might give
rise to circumstances in which the Fund lost money on a futures contract at the
same time that it experienced a decline in the value of its hedged portfolio
securities. The Fund could also lose margin payments it had 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, the 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. The 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 the Fund to make margin payments unless the
option is exercised. Although it does not currently intend to do so, the Fund
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 Fund would
give up some ability to participate in a price increase on the underlying
security. If the 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. The Fund may enter
into futures contracts, options, or options on futures contracts, provided that
such obligations represent no more

8
<PAGE>

than 20% of the Fund's net assets. Under the Commodity Exchange Act, the Fund
may enter into futures and options transactions (i) for hedging purposes without
regard to the percentage of assets committed to initial margin and option
premiums or (ii) 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, the Fund will set aside cash and appropriate
liquid assets in a segregated account to cover its obligations related to
futures contracts and options.

The Fund intends to comply with tax rules applicable to regulated investment
companies, including a requirement that gains from the sale of securities and
certain other instruments held less than three months constitute less than 30%
of the 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 Fund's
investments in such instruments.

SPECIAL CONSIDERATIONS REGARDING ARIZONA MUNICIPAL SECURITIES

As briefly discussed in the Prospectus, the Fund is susceptible to political,
economic, and regulatory events that affect issuers of Arizona municipal
obligations. The following information about risk factors is provided in view of
the Fund's policy of concentrating its assets in Arizona municipal securities.
This information is based on certain official statements of the state of Arizona
published in connection with the issuance of specific Arizona municipal
securities as well as from other publicly available sources. 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.

Located in the country's sunbelt, Arizona has been, and is projected to continue
to be, one of the faster growing areas in the United States. Over the last
several decades, the state has outpaced most other regions of the country in
population and personal income growth, gross state product, and job creation.

Geographically, Arizona is the nation's sixth largest state in terms of area. It
is divided into three distinct topographic regions: the northern third which is
high plateau country traversed by deep canyons, such as Grand Canyon National
Park; central Arizona which is rugged, mountainous, and heavily forested; and
the southern third which encompasses desert areas and flat, fertile agricultural
lands in valleys between mountains rich in mineral deposits. These topographic
areas all have different climates, which have distinctively influenced
development in each region. Land ownership is vested largely in the federal and
state governments: 32% is owned by the federal government, 28% is held as
Federal Trust Land (Indian), 17% is in private ownership, and 13% is held by the
state, leaving approximately 10% held in other categories.

Over the last twenty-five years, the state's emphasis on the mining and
agricultural employment sectors has diminished, and significant job growth has
occurred in the areas of aerospace and high technology, construction, finance,
insurance, and real estate. Arizona's economy has continued to grow in recent
years, although at a slower rate of growth than was experienced in earlier
periods.

Under its constitution, the state of Arizona is not permitted to issue general
obligation bonds secured by the full faith and credit of the state. However,
certain agencies and instrumentalities of the state are authorized to issue
bonds secured by revenues from specific projects and activities, and the state
and local governmental units may enter into lease transactions. The particular
source of payments and security for an Arizona municipal obligation is detailed
in the instruments themselves and in related offering materials.

9
<PAGE>

The state and local governmental units are subject to limitations imposed by
Arizona law with respect to ad valorem taxation, bonded indebtedness, the amount
of annual increases in taxes, and other matters. These limitations may affect
the ability of the issuers to generate revenues to satisfy their debt
obligations. There are periodic attempts in the form of voter initiatives and
legislative proposals to further limit the amount of annual increases in taxes
that may be levied without voter approval. If such a proposal were enacted,
there might be an adverse impact on state or local government financing.

Arizona is required by law to maintain a balanced budget. In the past, the state
has used a combination of spending reductions and tax increases to avoid
potential budgetary shortfalls and may be required to do so again in the future.

INVESTMENT RESTRICTIONS

The Fund's investment restrictions set forth below are fundamental and may not
be changed without approval of "a majority of the outstanding voting securities"
of the Fund, as defined in the Investment Company Act of 1940.

THE FUND MAY NOT

(1) Borrow money, except from a bank as a temporary measure to satisfy
redemption requests or for extraordinary or emergency purposes and provided
that the Fund maintains asset coverage of at least 300% for all such
borrowings. The Fund may borrow money for temporary or emergency purposes
from other funds or portfolios for which BMC is the investment advisor or
from a joint account of such funds or portfolios as permitted by federal
regulatory agencies. Before such borrowing from another fund would be
permissible, the Fund would need to obtain exemptive relief from the staff
of the SEC. The Fund has no current intention to obtain such relief.

(2) Act as an underwriter of securities issued by others, except to the extent
that the Fund may be considered an underwriter within the meaning of the
Securities Act of 1933 in the disposition of restricted securities, and
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 or sell real estate, unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or
securities of issuers engaged in the real estate business); physical
commodities or contracts relating to physical commodities; or interests in
oil, gas and/or mineral exploration or development programs or leases. This
restriction shall not be deemed to prohibit the Fund from purchasing or
selling currencies; entering into futures contracts on securities,
currencies, or on indexes of such securities or currencies, or any other
financial instruments; and purchasing and selling options on such futures
contracts.

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

(5) Issue senior securities, except as permitted under the Investment Company
Act of 1940.

The Fund is also subject to the following restrictions, which are not
fundamental and may therefore be changed by the board of trustees without
shareholder approval.

10
<PAGE>

THE FUND MAY NOT

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

(b) Sell securities short, unless it owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short, and provided
that transactions in options and futures contracts are not deemed to
constitute short sales of securities.

(c) Purchase securities on margin, except that the Fund may obtain such
short-term credits as are necessary for the clearance of transactions, and
provided that margin payments in connection with futures contracts and
options on futures contracts shall not constitute the purchase of
securities on margin.

(d) 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. The Fund may not invest more than 10%
of its net assets in repurchase agreements providing for settlement in more
than seven days, or options that are traded in the over-the-counter market
and investments hedged by such options.

(e) Acquire or retain the securities of any other investment company if, as a
result, more than 3% of such investment company's outstanding shares would
be held by the Fund, more than 5% of the value of the Fund's assets would
be invested in shares of such investment company, or more than 10% of the
value of the Fund's assets would be invested in shares of investment
companies in the aggregate, or except in connection with a merger,
consolidation, acquisition, or reorganization.

(f) Invest in securities of an issuer that, together with any predecessor or
unconditional guarantor, has been in operation for less than three years
if, as a result, more than 5% of the total assets of the Fund would then be
invested in such securities, except obligations issued or guaranteed by the
U.S. government or its agencies and municipal securities.

(g) 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.

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 Fund's 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 is backed
only by the assets and revenues of a nongovernmental user, the nongovernmental
user is 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 would be treated as an issue of the
guaranteeing entity.

11
<PAGE>

PORTFOLIO TRANSACTIONS

The 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 Fund.

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 Fund solely on the basis of best price
and execution.

Under normal conditions, the Fund's annual portfolio turnover rate is 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 Fund's portfolio turnover rate for the fiscal period from April 11, 1994
(commencement of operations) through May 31, 1994, was 18.14%, and for the year
ended May 31, 1995, was 33.22%.

Investment decisions are made for the 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

The Fund's net asset value per share (NAV) is determined by Benham Financial
Services, Inc. (BFS) at 1:00 p.m. Pacific Time each day the New York Stock
Exchange (NYSE) is open for business. The NYSE has designated the following
holiday closings for 1996: New Year's Day (observed), Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day (observed).
Although BFS expects the same holiday schedule to be observed in the future, the
NYSE may modify its holiday schedule at any time.

The 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.

Securities held by the Fund are normally priced by an independent pricing
service, provided that such prices are believed by BMC to reflect the fair
market value of portfolio securities.

Because the majority of outstanding municipal issues 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

12
<PAGE>

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. The
amortized cost 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. While 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
Fund's yield. 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.

PERFORMANCE

The Fund's yields and total returns may be quoted in advertising and sales
literature. Yields and total return will vary, and past performance should not
be considered an indication of future results.

Yield quotations for the Fund 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.

For the 30-day period ended May 31, 1995, the Fund's yield was 4.94%.

Total returns quoted in advertising and sales literature reflect all aspects of
the 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 the 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

13
<PAGE>

decline in value had been constant throughout the period. For example, a
cumulative return of 100% over ten 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 ten years. While average annual total returns are a
convenient means of comparing investment alternatives, investors should realize
that the Fund's 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.

Performance for the fiscal year ended May 31, 1995 is listed in the chart below:

INTERMEDIATE-TERM FUND

One Year 7.52%
Since Inception 8.45

In addition to average annual total returns, the 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 a dollar amount and may be calculated for a single
investment, a series of investments, or a series of redemptions over any time
period. Performance information may be quoted numerically or in a table, graph,
or similar illustration.

The Fund's 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 Benham funds,
are sold with a sales charge or deferred sales charge. Sources of economic data
that may be used for 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.

14
<PAGE>

The Benham Group has distinguished itself as an innovative provider of low-cost,
true no-load mutual funds. Among other innovations, The Benham Group established
the first no-load fund that invests primarily in zero-coupon U.S. Treasury
securities, the first no-load double tax-free California short-term bond fund,
the first no-load adjustable rate government securities fund, and the first
no-load utilities fund designed to pay monthly dividends.

TAXES

FEDERAL INCOME TAX

The Fund intends to qualify annually as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986 (the Code), as amended. By so
qualifying, each Fund will not incur federal and Arizona income taxes on its net
investment income and on net realized capital gains to the extent distributed to
shareholders.

It is intended that the Fund's assets will be sufficiently invested in municipal
securities to qualify to pay "exempt-interest dividends" (as defined in the
Code) to shareholders. The Fund's dividends payable from net tax-exempt interest
earned from municipal securities will qualify as exempt-interest dividends if,
at the close of each quarter of its taxable year, at least 50% of the value of
its total assets consists of municipal securities. Exempt-interest dividends
distributed to shareholders are not included in shareholders' gross income for
purposes of the regular federal income tax. 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.

The Fund will determine periodically which distributions will be designated as
exempt-interest dividends. If the Fund earns income that is not eligible to be
designated as exempt-interest dividends, the Fund, nonetheless, intends to
distribute such income. Such distributions will be subject to federal, state,
and local taxes, as applicable, in the hands of shareholders.

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

The timing of your investment could have undesirable tax consequences. If you
open an account or buy shares for your account before the day a dividend or
distribution is declared, you may receive a portion of your investment back as
taxable income if that dividend or distribution is not an exempt-interest
dividend.

Under the Code, any distribution from the Fund's net realized long-term capital
gains is taxable to shareholders as long-term capital gains, regardless of the
length of time shares have been held.

As of May 31, 1995, the Fund had a capital loss carryover of $4,892, which was
scheduled to expire on May 31, 2003. When a Fund has a capital loss carryover,
it does not make capital gain distributions to shareholders until the loss
carryover has been offset or expired.

15
<PAGE>

The Fund intends 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 the 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 investments in such
instruments.

Upon the sale or exchange of shares, a shareholder generally will realize a
taxable gain or loss depending upon his/her basis in the shares. Such gain or
loss will be treated as a capital gain or loss if the shares are capital assets
in the shareholder's hands and will be long-term if the shareholder's holding
period for the shares is more than one year and, generally, will otherwise be
short-term. However, any loss realized upon a sale or redemption of shares
within six months of their purchase will be treated as long-term capital loss to
the extent of capital gain dividends received on such shares.

Any loss realized from a disposition of Fund shares held for six months or less
will be disallowed to the extent that dividends received from the Fund have been
designated as exempt-interest dividends. Any loss realized on a sale or exchange
of Fund shares also will be disallowed to the extent that the shares disposed of
are replaced (including replacement through reinvesting of dividends and capital
gain distributions in the Fund) within a period of 61 days beginning 30 days
before and ending 30 days after the disposition of the shares. In such a case,
the basis of the shares acquired will be adjusted to reflect the disallowed
loss.

Interest on certain types of industrial development bonds 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 "nonexempt person" who regularly uses in trade or business part of a
facility financed from the proceeds of industrial development bonds. The Fund
may invest periodically in industrial development bonds and, therefore, may not
be an appropriate investment 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, and lineal descendants) owns directly or indirectly in
aggregate more than 50% of the equity value of the substantial user.

Certain options, futures contracts, and forward contracts in which the Fund may
invest are "section 1256 contracts." Gains or losses on section 1256 contracts
generally are considered 60% long-term and 40% short-term capital gains or
losses (60-40). Also, section 1256 contracts held by the Fund at the end of each
taxable year (and, in some cases, for purposes of the 4% excise tax, on October
31 of each year) are marked to market with the result that unrealized gains or
losses are treated as though they were realized.

The hedging transactions undertaken by the Fund may result in straddles for
federal income tax purposes. The straddle rules may affect the character of
gains (or losses) realized by the Fund. In addition, losses realized by the Fund
on positions that are part of a straddle may be deferred under the straddle
rules, rather than being taken into account in calculating the taxable income
for the taxable year in which such losses are realized. Because only a few
regulations implementing the straddle rules have been promulgated, the tax
consequences to the Fund of hedging transactions are not entirely clear. The
hedging transactions may increase the amount of short-term capital gains
realized by the Fund, which are taxed as ordinary income when distributed to
shareholders.

The Fund may make one or more of the elections available under the Code that are
applicable to straddles. If the Fund makes any of the elections, the amount,
character, and timing of the recognition

16
<PAGE>

of gains or losses from the affected straddle positions will be determined under
rules that vary according to the elections made. The rules applicable under
certain of the elections may operate to accelerate the recognition of gains or
losses from the affected straddle positions.

Because application of the straddle rules may affect the character of gains or
losses, defer losses, and/or accelerate the recognition of gains or losses from
the affected straddle positions, the amount that must be distributed to
shareholders and that will be taxed to shareholders as ordinary income or a
long-term capital gain may be substantially more or less than for a fund that
did not engage in such hedging transactions.

Opinions relating to the tax status of interest derived from individual
municipal securities are rendered by bond counsel to the issuer. The Funds, the
investment manager, and the Fund's counsel do not review the proceedings
relating to the issuance of state or municipal securities on the basis of bond
counsel opinions..

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 Fund and the Fund's NAV would be adversely affected. Under
these circumstances, the trustees would reevaluate the Fund's 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 tax-exempt, interest on certain nonessential
or private activity securities issued after August 7, 1986, while tax-exempt for
regular federal income tax purposes, constitutes a tax-preference item for
taxpayers in determining alternative minimum tax liability under the Code and
income tax provisions of several states. The interest on private activity
securities could subject a shareholder to, or increase liability under, the
federal alternative minimum tax, depending on the shareholder's tax situation.

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.

The Trust will inform shareholders annually as to the dollar amount of
distributions derived from interest payments on private activity securities.

STATE AND LOCAL TAXES

Under a ruling by the Arizona Department of Revenue, shareholders who are
otherwise subject to Arizona income tax will not be subject to such tax on
dividends paid by the Fund to the extent that such dividends are attributable to
either (i) obligations of the State of Arizona or its political subdivisions
thereof or (ii) obligations issued by the governments of Guam, Puerto Rico, or
the Virgin Islands. In addition, dividends paid by the Fund that are
attributable to interest payments on direct obligations of the United States
government will not be subject to Arizona income tax so long as the Fund
qualifies as a regulated investment company under subchapter M of the Code.
Other distributions from the Fund, however, such as distributions of short-term
or long-term capital gains, will generally not be exempt from Arizona income
tax.

17
<PAGE>

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

The information above is only a summary of some of the tax considerations
affecting the Fund and its shareholders. No attempt has been made to discuss
individual tax consequences. To determine whether the Fund is a suitable
investment based on his or her tax situation, a prospective shareholder may wish
to consult a tax advisor.

ABOUT THE TRUST

Benham Municipal Trust is a registered open-end management investment company
that was organized as a Massachusetts business trust on May 1, 1984 (the Trust
was formerly known as "Benham National Tax-Free Trust"). One of the Trust's
eight series are described in this Statement of Additional Information. 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.

The series votes separately on matters affecting that series exclusively. Voting
rights are not cumulative; 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. The shareholder has rights to
dividends and distributions declared by the Fund and in the net assets of such
Fund upon its liquidation or dissolution proportionate to his or her share
ownership interest in the Fund.

The 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 (i) settling portfolio purchases and
sales, (ii) reporting failed trades, (iii) identifying and collecting portfolio
income, and (iv) 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.

18
<PAGE>

INDEPENDENT AUDITORS: KPMG Peat Marwick LLP, 3 Embarcadero Center, San
Francisco, CA 94111, 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 five
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,
Benham Financial Services, Inc. (BFS); the Trust's distribution agent, Benham
Distributors, Inc. (BDI); 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 in The Benham Group.
Unless otherwise noted, dates in parentheses indicate the dates the trustee or
officer began his or her service in a particular capacity. The trustees' and
officers' address is 1665 Charleston Road, Mountain View, California 94043 and
4500 Main Street, Kansas City, Missouri 69111.

*JAMES M. BENHAM, chairman of the board of trustees (1985). Mr. Benham is also
chairman of the boards of BFS (1985), BMC (1971), and 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.

RONALD J. GILSON, independent trustee (1995); 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 (1985). 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 (1985). 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 (1985). 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).

19
<PAGE>

*JAMES E. STOWERS III, trustee (1995); president and director, Twentieth Century
Investors, Inc.; president and director, TCI Portfolios, Inc., Twentieth Century
World Investors, Inc., Twentieth Century Premium Reserves, Inc., Twentieth
Century Capital 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).

*BRUCE R. FITZPATRICK, vice president (1985).

*JOHN T. KATAOKA, president, and chief executive officer (1984).

*DOUGLAS A. PAUL, secretary (1988), vice president (1990), and general counsel
(1990).

*ANN N. MCCOID, controller (1987).

*MARYANNE ROEPKE, chief financial officer (1995).

The table below summarizes the compensation that the trustees received from the
Fund for the Fund's fiscal year ended March 31, 1995, as well as the
compensation received for serving as a director or trustee of all other Benham
funds.
<TABLE>
<CAPTION>
TRUSTEE COMPENSATION FOR THE FISCAL YEAR ENDED
MARCH 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 $353 Not Applicable Not Applicable $67,999
- -----------------------------------------------------------------------------------------------------------------
Kenneth E. Scott $352 Not Applicable Not Applicable $76,500
- -----------------------------------------------------------------------------------------------------------------
Ezra Solomon $363 Not Applicable Not Applicable $79,251
- -----------------------------------------------------------------------------------------------------------------
Isaac Stein $356 Not Applicable Not Applicable $72,001
- -----------------------------------------------------------------------------------------------------------------
Jeanne D. Wohlers $360 Not Applicable Not Applicable $75,500
- -----------------------------------------------------------------------------------------------------------------

+ Elected on May 31, 1995, and received no compensation for fiscal year.
* The Benham Group fund complex currently consists of 41 investment companies.
</TABLE>

As of August 31, 1995, the Trust's officers and trustees, as a group, owned less
than 1% of the Fund's outstanding shares.

INVESTMENT ADVISORY SERVICES

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

20
<PAGE>

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 Fund since the Fund's
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 The Benham Group.

The 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 a majority of the Fund's outstanding
shares or by vote of a majority of the Fund's directors, including a majority of
those directors 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.

The agreement is terminable on sixty 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 assists the Fund's
officers in carrying out decisions made by the board of directors.

For these services, the Fund pays BMC a monthly investment advisory fee based on
its pro rata share of the dollar amount derived from applying the Fund's average
daily net assets to the following investment advisory fee rate 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; and
.19% of net assets over $6.5 billion;

Investment advisory fees paid by the Fund to BMC for the fiscal period ended May
31, 1995, is indicated in the following table. Fee amounts are net of expense
limitations/recoupments as described below.

FISCAL PERIOD INVESTMENT ADVISORY FEES

Year ended 5/31/95 0
April 11, 1994-May 31, 1995 0

21
<PAGE>

ADMINISTRATIVE AND TRANSFER AGENT SERVICES

BFS, a wholly owned subsidiary of TCC, is the Trust's agent for transfer and
administrative services. For administrative services, the Fund pays BFS a
monthly fee based on its pro rata share of the dollar amount derived from
applying the average daily net assets of all of the funds in The Benham Group to
the following administrative fee schedule:

GROUP ASSETS ADMINISTRATIVE FEE RATE

up to $4.5 billion .11%
up to $6.0 billion .10
up to $9.0 billion .09
over $9.0 billion .08

This fee rate schedule was approved by the board of trustees on February 7,
1994.

For transfer agent services, the Fund pays BFS monthly fees of $1.3958 for each
shareholder account maintained and $1.35 for each shareholder transaction
executed during that month.

Due to reimbursements, the Fund paid no administrative services or transfer
agent fees to BFS during the fiscal period from April 11, 1994 (commencement of
operations), through May 31, 1994, and for the year ended May 31, 1995.

DIRECT FUND EXPENSES

The Fund pays certain operating expenses that are not assumed by BMC or BFS.
These include fees and expenses of the independent trustees; custodian, audit,
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; 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 AGREEMENTS

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 limit in effect at that time.

The Funds' contractual expense limit is subject to annual renewal. The expense
limit for the year ended May 31, 1995 was .66% of average daily net assets.
Effective June 1, 1995, the expense limit was .69% of average daily net assets.

Net reimbursements paid by BMC for the fiscal year ended May 31, 1995, were
$139,257.

22
<PAGE>

ADDITIONAL PURCHASE AND REDEMPTION INFORMATION

The Fund's shares are available only to residents of Arizona, California,
Colorado, Nevada, Oregon, Washington, and Texas. The Fund's 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 matrix
below shows the names, addresses, and holdings of all shareholders of record who
owned more than 5% of a Fund's outstanding shares.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
FUND SHAREHOLDER # OF SHARES HELD % OF TOTAL
NAME AND ADDRESS SHARES OUTSTANDING
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term Charles Schwab & Co. 254,208.524 12.3998
Fund 101 Montgomery Street
San Francisco, CA 94104

Louis R. Becker 116,564.141 5.6858
5625 N. 12th Avenue
Phoenix, AZ 85013-1753
- ---------------------------------------------------------------------------------------
</TABLE>

As of August 31, 1995, to the knowledge of the Trust, no other shareholder was
the beneficial shareholder or record shareholder of more than 5% of a Fund's
shares outstanding.

The Benham Group charges neither fees nor commissions on the purchase and sale
of Benham fund shares. However, BFS may 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.

OTHER INFORMATION

The Fund's investment advisor, Benham Management Corporation (BMC), has been
continuously registered with the Securities and Exchange Commission 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 Securities
and Exchange Commission.

For further information, refer to the registration statement and exhibits on
file with the Securities and Exchange Commission in Washington, D.C. These
documents are available upon payment of a

23
<PAGE>

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 that are 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 that are rated "Aa" are judged to be of high quality by all standards.
Together with the Aaa group, they constitute 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 that are rated "A" possess many favorable investment attributes and are
to be considered as upper medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment sometime in the future.

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

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

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

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

24
<PAGE>

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 a 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.

25
<PAGE>

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 that is
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 that is 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, it 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 that is assigned an actual or implied
"B" or "B-" rating.

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

C: The "C" rating is typically applied to debt subordinated to senior debt that
is assigned an actual or implied "CCC-" debt rating. The "C" rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The "CI" rating is reserved for income bonds on 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.

26
<PAGE>

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."