USAA STATE TAX FREE TRUST, 485BPOS, 1997-07-31

USAA STATE TAX FREE TRUST
485BPOS, 1997-07-31

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As filed with the Securities and Exchange Commission on July 31, 1997.

1933 Act File No. 33-65572
1940 Act File No. 811-7852

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 6
---

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 X
Amendment No. 7
---

USAA STATE TAX-FREE TRUST
(Exact Name of Registrant as Specified in Charter)

9800 FREDERICKSBURG RD., SAN ANTONIO, TX 78288
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, including Area Code (210) 498-0600

Michael D. Wagner, Secretary
USAA STATE TAX-FREE TRUST 9800
Fredericksburg Rd.
SAN ANTONIO, TX 78288-0227
(Name and Address of Agent for Service)

Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.

It is proposed that this filing will become effective under Rule 485

___ immediately upon filing pursuant to paragraph (b)
_x_ on August 1, 1997 pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)(1)
___ on (date) pursuant to paragraph (a)(1)
___ 75 days after filing pursuant to paragraph (a)(2)
___ on (date) pursuant to paragraph (a)(2)

If appropriate, check the following box:

___ This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.

DECLARATION PURSUANT TO RULE 24f-2

The Registrant has heretofore registered an indefinite number of shares of the
Florida Tax-Free Income Fund, Florida Tax-Free Money Market Fund, Texas Tax-
Free Income Fund, and Texas Tax-Free Money Market Fund pursuant to Rule 24f-2
under the Investment Company Act of 1940. The Registrant filed its Rule 24f-2
notice for the Florida Tax-Free Income Fund, Florida Tax-Free Money Market Fund,
Texas Tax-Free Income Fund and Texas Tax-Free Money Market Fund for the fiscal
year ended March 31, 1997 on May 27, 1997.

Exhibit Index on Page 117-118

Page 1 of 185

<PAGE>

USAA STATE TAX-FREE TRUST

CROSS REFERENCE SHEET

PART A

FORM N-1A ITEM NO. SECTION IN PROSPECTUS

1. Cover Page....................................... Same

2. Synopsis......................................... Fees and Expenses

3. Condensed Financial
Information................................... Financial Highlights
Performance Information

4. General Description
of Registrant................................. Investment Objectives
and Policies
Other Investment
Information
Description of Shares

5. Management of the Fund........................... Management of the Trust
Service Providers

6. Capital Stock and Other
Securities.................................... Dividends, Distributions
and Taxes
Description of Shares

7. Purchase of Securities
Being Offered................................. Purchase of Shares
Conditions of Purchase
and Redemption
Exchanges
Other Services
Share Price Calculation

8. Redemption or Repurchase......................... Redemption of Shares
Conditions of Purchase
and Redemption
Exchanges
Other Services

9. Legal Proceedings................................ Not Applicable

<PAGE>

USAA STATE TAX-FREE TRUST

CROSS REFERENCE SHEET

PART B

FORM N-1A ITEM NO. SECTION IN STATEMENT OF
ADDITIONAL INFORMATION

10. Cover Page...................................... Same

11. Table of Contents............................... Same

12. General Information and
History...................................... Not Applicable

13. Investment Objectives
and Policies................................. Investment Policies
Investment Restrictions
Special Risk
Considerations
Portfolio Transactions

14. Management of the
Registrant................................... Trustees and Officers of
the Trust

15. Control Persons and
Principal Holders
of Securities................................ Trustees and Officers of
the Trust

16. Investment Advisory and
Other Services............................... Trustees and Officers of
the Trust
The Trust's Manager
General Information

17. Brokerage Allocation and
Other Practices.............................. Portfolio Transactions

18. Capital Stock and Other
Securities................................... Further Description of
Shares

19. Purchase, Redemption and
Pricing of Securities
Being Offered................................ Valuation of Securities
Additional Information
Regarding Redemption
of Shares
Investment Plans

20. Tax Status...................................... Certain Federal Income
Tax Considerations
Florida Taxation
(Florida Funds
Statement of Additional
Information only)

21. Underwriters.................................... The Trust's Manager

22. Calculation of Performance
Data......................................... Calculation of
Performance Data

23. Financial Statements............................ General Information

<PAGE>

PART A

Prospectuses for the

Florida Tax-Free Income, Florida Tax-Free Money Market,
Texas Tax-Free Income and Texas Tax-Free Money Market Funds

are included herein

<PAGE>

Part A

Prospectus for the

Florida Tax-Free Income Fund and
Florida Tax-Free Money Market Fund

<PAGE>

USAA FLORIDA FUNDS
AUGUST 1, 1997 PROSPECTUS

USAA FLORIDA TAX-FREE INCOME FUND and USAA FLORIDA TAX-FREE MONEY MARKET FUND
(collectively, the Funds or the Florida Funds) are two of four no-load mutual
funds offered by USAA State Tax-Free Trust (the Trust). The Funds are managed by
USAA Investment Management Company (the Manager).

WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES?
The Funds have a common objective of providing Florida investors with a
high level of current interest income that is exempt from federal income taxes
and shares that are exempt from the Florida intangible personal property tax.
The Florida Tax-Free Money Market Fund has a further objective of preserving
capital and maintaining liquidity. Each Fund has separate investment policies to
achieve its objective.
The FLORIDA TAX-FREE INCOME FUND invests primarily in long-term high grade
Florida tax-exempt securities. The Fund's average portfolio maturity is not
restricted, but is expected to be greater than 10 years.
Page 9.
The FLORIDA TAX-FREE MONEY MARKET FUND invests in high quality Florida
tax-exempt securities with maturities of 397 days or less. The Manager will
maintain a dollar-weighted average portfolio maturity of no more than 90 days.
The Fund will endeavor to maintain a constant net asset value per share of
$1.00. Page 9.

HOW DO YOU BUY?
Fund shares are sold on a continuous basis at the net asset value per share
without a sales charge. Make your initial investment directly with the Manager
by mail, in person, or in certain instances, by telephone. Page 13.

HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day
that the net asset value is calculated. Page 15.

Shares of the Florida Funds are authorized for sale only to residents of
the State of Florida. The delivery of this Prospectus shall not constitute an
offer in any state in which shares of the Florida Funds may not lawfully be
made.

SHARES OF THE USAA FLORIDA FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF,
OR GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR
ANY OTHER GOVERNMENT AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.

This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Florida Funds that you should
know before investing.

If you would like more information about the Funds, you may call
1-800-531-8181 to request a free copy of the most recent financial report and/or
the Funds' Statement of Additional Information (SAI), dated August 1, 1997. The
SAI has been filed with the Securities and Exchange Commission (SEC) and is
incorporated by reference into this Prospectus (meaning it is legally a part of
the Prospectus).

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

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

AN INVESTMENT IN THE FLORIDA TAX-FREE MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. THIS FUND
MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND
THEREFORE AN INVESTMENT IN THE FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER
TYPES OF MONEY MARKET FUNDS.
- --------------------------------------------------------------------------------

<PAGE>

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

PAGE
SUMMARY DATA
Fees and Expenses.............................................. 3
Financial Highlights........................................... 4
Performance Information........................................ 6

USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds............................ 7
Using Mutual Funds in an Investment Program.................... 8

INVESTMENT PORTFOLIO INFORMATION
Investment Objectives and Policies............................. 9
Florida Tax-Free Income Fund................................ 9
Florida Tax-Free Money Market Fund.......................... 9
Other Investment Information................................... 10

SHAREHOLDER INFORMATION
Purchase of Shares............................................. 13
Redemption of Shares........................................... 15
Conditions of Purchase and Redemption.......................... 17
Exchanges...................................................... 18
Other Services................................................. 18
Share Price Calculation........................................ 19
Dividends, Distributions and Taxes............................. 20
Management of the Trust........................................ 22
Description of Shares.......................................... 23
Service Providers.............................................. 24
Telephone Assistance Numbers................................... 24
- --------------------------------------------------------------------------------

<PAGE>

FEES AND EXPENSES

The following summary, which is based on actual expenses and average net assets
(ANA) of each Fund for the year ended March 31, 1997, is provided to assist you
in understanding the expenses you will bear directly or indirectly as a Fund
investor.

SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO EACH FUND)
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases........................................ None
Sales Load Imposed on Reinvested Dividends............................. None
Deferred Sales Load.................................................... None
Redemption Fee*........................................................ None
Exchange Fee........................................................... None

ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF ANA)
- --------------------------------------------------------------------------------

FLORIDA FLORIDA
TAX-FREE TAX-FREE
INCOME MONEY MARKET
FUND FUND

Management Fees, net of reimbursements................. .32% .32%
12b-1 Fees............................................. None None
Other Expenses, net of reimbursements
Transfer Agent Fees**.............................. .06% .06%
Custodian Fees..................................... .06% .06%
All Other Expenses................................. .06% .06%
--- ---
Total Other Expenses................................... .18% .18%
--- ---
Total Fund Operating Expenses, net of reimbursements... .50% .50%
=== ===
- -------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
** The Funds pay USAA Shareholder Account Services an annual fixed fee per
account for its services. See TRANSFER AGENT in the SAI, page 15.

During the year, the Manager voluntarily limited each Fund's annual
expenses to .50% of its ANA and reimbursed the Funds for all expenses in excess
of the limitation. The Management Fees, Other Expenses, and Total Fund Operating
Expenses reflect all such expense reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fees, Other Expenses, and Total
Fund Operating Expenses as a percentage of ANA for each of the Funds would have
been as follows: Florida Tax-Free Income Fund, .39%, .18%, and .57%; and Florida
Tax-Free Money Market Fund, .39%, .18%, and .57%. The Manager has voluntarily
agreed to continue to limit each Fund's annual expenses until August 1, 1998, to
.50% of its ANA and will reimburse the Funds for all expenses in excess of the
limitation.

EXAMPLE OF EFFECT OF FUND EXPENSES
- --------------------------------------------------------------------------------
You would pay the following expenses on a $1,000 investment in one of the Funds
below, assuming (1) 5% annual return and (2) redemption at the end of the
periods shown:

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------

Florida Tax-Free Income Fund .............. $ 5 $ 16 $ 28 $ 63
Florida Tax-Free Money Market Fund ........ $ 5 $ 16 $ 28 $ 63

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

<PAGE>

FINANCIAL HIGHLIGHTS

The following per share operating performance for a share outstanding throughout
each period in the four-year period ended March 31, 1997, has been audited by
KPMG Peat Marwick LLP. This table should be read in conjunction with the Funds'
financial statements for the year ended March 31, 1997, and the auditors' report
thereon, that appear in the Funds' Annual Report. Further performance
information is contained in the Annual Report and is available upon request
without charge.

FLORIDA TAX-FREE INCOME FUND:

<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
YEAR ENDED MARCH 31,
-------------------
1997 1996 1995 1994*
---- ---- ---- -----

Net asset value at
beginning of period $ 9.26 $ 9.09 $ 8.98 $ 10.00
Net investment income .52 .52 .49 .21
Net realized and
unrealized gain (loss) .07 .17 .11 (1.02)
Distributions from net
investment income (.52) (.52) (.49) (.21)
--------- -------- -------- -------
Net asset value at
end of period $ 9.33 $ 9.26 $ 9.09 $ 8.98
========= ======== ======= =======
Total return (%)** 6.51 7.66 7.01 (8.22)
Net assets at end of
period (000) $ 95,483 $69,079 $42,891 $24,948
Ratio of expenses to
average net assets (%) .50(a) .50(a) .50(a) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 5.57(a) 5.52(a) 5.59(a) 4.63(a)(b)
Portfolio turnover (%) 44.75 88.20 71.76 284.11

</TABLE>

- --------------
* Fund commenced operations October 1, 1993.
** Assumes reinvestment of all dividend income and capital gains distributions
during the period.
(a) Based on actual expenses for the period, after giving effect to
reimbursements of expenses by the Manager. Absent such reimbursements, the
Fund's ratios would have been:

YEAR ENDED MARCH 31,
--------------------
1997 1996 1995 1994*
---- ---- ---- ----
Ratio of expenses to
average net assets (%) .57 .67 .81 1.33(b)
Ratio of net investment income
to average net assets (%) 5.50 5.35 5.28 3.80(b)

(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.

<PAGE>

FINANCIAL HIGHLIGHTS CONT.

FLORIDA TAX-FREE MONEY MARKET FUND:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>

YEAR ENDED MARCH 31,
--------------------
1997 1996 1995 1994*
---- ---- ---- -----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .03 .01
Distributions from net
investment income (.03) (.03) (.03) (.01)
------- ------- ------- -------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00 $ 1.00
======= ======= ======= =======
Total return (%)** 3.20 3.51 2.86 .96
Net assets at end of
period (000) $87,053 $71,224 $52,225 $29,877
Ratio of expenses to
average net assets (%) .50(a) .50(a) .50(a) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 3.15(a) 3.45(a) 2.97(a) 1.98(a)(b)
</TABLE>

- --------------
* Fund commenced operations October 1, 1993.
** Assumes reinvestment of all dividend income distributions during the period.
(a) Based on actual expenses for the period, after giving effect to
reimbursements of expenses by the Manager. Absent such reimbursements, the
Fund's ratios would have been:

YEAR ENDED MARCH 31,
--------------------
1997 1996 1995 1994*
---- ---- ---- -----
Ratio of expenses to
average net assets (%) .57 .64 .72 1.11(b)
Ratio of net investment income
to average net assets (%) 3.08 3.31 2.75 1.37(b)

(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.

5
<PAGE>

PERFORMANCE INFORMATION

Performance information should be considered in light of each Fund's investment
objective and policies and market conditions during the time periods for which
it is reported. Historical performance should not be considered as
representative of the future performance of either Fund.
The Trust may quote a Fund's total return or yield in advertisements and
reports to shareholders or prospective investors. A Fund's performance may also
be compared to that of other mutual funds with similar investment objectives and
relevant indexes that are referenced in APPENDIX B to the SAI. Standard total
return and yield results reported by the Funds do not take into account
recurring and nonrecurring charges for optional services which only certain
shareholders elect and which involve nominal fees, such as the $10 fee for a
delivery of redemption proceeds by wire transfer.
Further information concerning yield and total return is included in the
Trust's SAI.

TOTAL RETURN - FLORIDA TAX-FREE INCOME FUND. The Fund's average annual total
return is computed by determining the average annual compounded rate of return
for a specified period which, when applied to a hypothetical $1,000 investment
in the Fund at the beginning of the period, would produce the redeemable value
of that investment at the end of the period, assuming reinvestment of all
dividends and distributions during the period.

YIELD - FLORIDA TAX-FREE INCOME FUND. The Fund may advertise performance in
terms of a 30-day yield quotation. The yield quotation is computed by dividing
the net investment income per share earned during the period by the offering
price per share on the last day of the period. This income is then annualized.
For purposes of the yield calculation, interest income is computed based on the
yield to maturity of each debt obligation in a Fund's portfolio and all
recurring charges are recognized.

YIELD - FLORIDA TAX-FREE MONEY MARKET FUND. The Fund may advertise its yield and
effective yield. The yield of the Fund refers to the income generated by an
investment in the Fund over a seven-day period (which period will be stated in
the advertisement). This income is then annualized, that is, the amount of
income generated by the investment during the week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the income
earned by an investment in the Fund is assumed to be reinvested. The effective
yield will be slightly higher than the yield because of the compounding effect
of this assumed reinvestment.

TAX EQUIVALENT YIELD - The Funds may also utilize tax equivalent yields with
adjustments for assumed income tax rates. See APPENDIX C - TAXABLE EQUIVALENT
YIELD TABLES in the SAI for illustrations of this
yield.

<PAGE>

USAA FAMILY OF NO-LOAD MUTUAL FUNDS

The USAA Family of No-Load Mutual Funds includes a variety of Funds, each with
different objectives and policies. In combination, these Funds are designed to
provide investors with the opportunity to formulate their own investment
program. You may exchange any shares you hold in any one USAA Fund for shares in
any other USAA Fund. For more complete information about the Funds in the USAA
Family of Funds, including charges and expenses, call the Manager for a
Prospectus. Read it carefully before you invest or send money.

USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*

USAA INVESTMENT TRUST
Income Strategy Fund
Growth and Tax Strategy Fund
Balanced Strategy Fund
Cornerstone Strategy Fund
Growth Strategy Fund
Emerging Markets Fund
Gold Fund
International Fund
World Growth Fund
GNMA Trust
Treasury Money Market Trust

USAA TAX EXEMPT FUND, INC.
Long-Term Fund
Intermediate-Term Fund
Short-Term Fund
Tax Exempt Money Market Fund
California Bond Fund*
California Money Market Fund*
New York Bond Fund*
New York Money Market Fund*
Virginia Bond Fund*
Virginia Money Market Fund*

USAA MUTUAL FUND, INC.
Aggressive Growth Fund
Science & Technology Fund
Growth Fund
First Start Growth Fund
S&P 500 Index Fund**
Growth & Income Fund
Income Stock Fund
Income Fund
Short-Term Bond Fund
Money Market Fund

* Available for sale only to residents of these specific states.
** S&P is a trademark of The McGraw-Hill Companies, Inc., and has been
licensed for use. The Product is not sponsored, sold or promoted by
Standard & Poor's and Standard & Poor's makes no representation regarding
the advisability of investing in the Product.

7
<PAGE>

USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM

I. THE IDEA BEHIND MUTUAL FUNDS

Mutual funds provide small investors some of the advantages enjoyed by wealthy
investors. A relatively small investment can buy part of a widely diversified
portfolio. That portfolio is managed by investment professionals, relieving the
shareholder of the need to make individual stock or bond selections. The
investor also enjoys conveniences, such as daily pricing, liquidity, and in the
case of the USAA Family of Funds, no sales charge. The portfolio, because of its
size, has lower transaction costs on its trades than most individuals would
have. As a result each shareholder owns an investment that in earlier times
would have been available only to very wealthy people.

II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the shareholder is foregoing
some investment decisions, but must still make others. The decisions foregone
are those involved with choosing individual securities. The Fund Manager will
perform that function. In addition, the Manager will arrange for the safekeeping
of securities, auditing the annual financial statements, and daily valuation of
the Fund, as well as other functions.
The shareholder, however, retains at least part of the responsibility for
an equally important decision. This decision includes determining a portfolio of
mutual funds that balances the investor's investment goals with his or her
tolerance for risk. It is likely that this decision may involve the use of more
than one fund of the USAA Family of Funds.
For example, assume a shareholder wishes to pursue the higher yields
usually available in the long-term bond market, but is also concerned about the
possible price swings of the long-term bonds. He or she could divide investments
between the Florida Tax-Free Income Fund and the Florida Tax-Free Money Market
Fund. This would create a portfolio with a higher yield than that of the money
market and less volatility than that of the long-term market. This is just one
example of how an individual could combine funds to create a portfolio tailored
to his or her own risk and reward goals.

III. USAA'S FAMILY OF FUNDS
The Manager offers investors another alternative in its asset strategy funds,
the Income Strategy, Growth and Tax Strategy, Balanced Strategy, Cornerstone
Strategy, and Growth Strategy Funds. These unique mutual funds provide a
professionally managed diversified investment portfolio within a mutual fund.
These Funds are designed for the shareholder who prefers to delegate the asset
allocation process to an investment manager. The Funds are structured to achieve
diversification across a number of investment categories.
Whether you prefer to create your own mix of mutual funds or use an asset
strategy fund, the USAA Family of Funds provides a broad range of choices
covering just about any investor's investment objectives. Our sales
representatives stand ready to inform you of your choices and to help you craft
a portfolio which meets your needs.

8
<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

INVESTMENT OBJECTIVES
The Florida Tax-Free Income Fund and Florida Tax-Free Money Market Fund have a
common investment objective of providing Florida investors with a high level of
current interest income that is exempt from federal income taxes and shares that
are exempt from the Florida intangible personal property tax. The Florida
Tax-Free Money Market Fund has a further objective of preserving capital and
maintaining liquidity.

INVESTMENT POLICIES
The Manager will pursue this common objective by investing each Fund's assets
primarily in debt obligations issued by the State of Florida, its political
subdivisions and instrumentalities, and by other governmental entities if, in
the opinion of counsel, the interest from such obligations is excluded from
gross income for federal income tax purposes and the obligations are exempt from
the Florida intangible personal property tax. It is a fundamental policy of each
Fund that during normal market conditions at least 80% of the Fund's net assets
will consist of Florida tax-exempt securities and at least 80% of the Fund's
annual income will be exempt from federal income taxes and excluded from the
calculation of federal alternative minimum taxes for individual taxpayers.

FLORIDA TAX-FREE INCOME FUND. Under normal market conditions, the Manager will
invest the assets of the Fund so that at least 50% of the total market value of
the tax-exempt securities is rated within the three highest long-term rating
categories (at least A) by Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), or Fitch Investors Service, Inc. (Fitch), in the
highest short-term rating category by Moody's, S&P, or Fitch, or, if a security
is not rated by those rating agencies, it must be of equivalent investment
quality as determined by the Manager. In no event will a security be purchased
for the Fund unless it is rated at least investment grade; i.e., rated by
Moody's, S&P, or Fitch at least in the fourth highest rating category for
long-term securities, in the second highest rating category for short-term
securities, or, if not rated by those rating agencies, determined by the Manager
to be of equivalent investment quality. Securities rated in the lowest level of
investment grade have speculative characteristics since adverse economic
conditions and changing circumstances are more likely to have an adverse impact
on such securities.

If the rating of a security is downgraded, the Manager will determine
whether it is in the best interest of the Fund's shareholders to continue to
hold such security in the Fund's portfolio. Unless otherwise directed by the
Board of Trustees, if downgrades result in more than 5% of the Fund's net assets
being invested in securities that are less than investment grade quality, the
Manager will take immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets. For a more complete
description of tax-exempt securities and their ratings, see APPENDIX A to the
SAI.
The Fund's average portfolio maturity is not restricted, but is expected to
be greater than ten years. In determining a security's maturity for purposes of
calculating the Fund's average maturity, estimates of the expected time for its
principal to be paid may be used. This can be substantially shorter than its
stated final maturity. For a discussion of the method of calculating the average
weighted maturity of the Fund's portfolio, see INVESTMENT POLICIES in the SAI.
The net asset value (NAV) per share of the Florida Tax-Free Income Fund will
fluctuate with portfolio maturity, the quality of securities held, and inversely
to interest rate levels.

9
<PAGE>

FLORIDA TAX-FREE MONEY MARKET FUND. The Fund will purchase only high quality
securities that qualify as "eligible securities" under the SEC rules applicable
to money market mutual funds. These securities must also be determined by the
Manager to present minimal credit risk. In general, the category of eligible
securities may include a security that is:
(1) issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof including "prerefunded" and "escrowed to maturity"
tax-exempt securities;
(2) rated in one of the two highest categories for short-term securities by at
least two Nationally Recognized Statistical Rating Organizations (NRSROs),
or by one NRSRO if the security is rated by only one NRSRO;
(3) unrated but issued by an issuer or guaranteed by a guarantor that has other
comparable short-term debt obligations so rated; or
(4) unrated but determined to be of comparable quality by the Manager.

If a security is downgraded after purchase, the Manager will follow written
procedures adopted by the Trust's Board of Trustees and a determination will be
made as to whether it is in the best interest of the Fund's shareholders for the
Fund to continue to hold the security.

Current NRSROs include Moody's, S&P, Fitch, Duff & Phelps Inc., Thompson
BankWatch, Inc., and IBCA Inc. For a description of tax-exempt securities and
their ratings, see APPENDIX A to the SAI.
Consistent with regulatory requirements, the Manager will purchase
securities with remaining maturities of 397 days or less and will maintain a
dollar-weighted average portfolio maturity of no more than 90 days. The Fund
will endeavor to maintain a constant net asset value of $1.00 per share,
although there is no assurance that it will be able to do so.

OTHER INVESTMENT INFORMATION

The investment objectives of the Funds may not be changed without shareholder
approval. In view of the risks inherent in all investments in securities, there
is no assurance that these objectives will be achieved. The investment policies
and techniques used to pursue the Funds' objectives may be changed without
shareholder approval, except as otherwise noted. Further information regarding
the Funds' investment policies and restrictions is provided in the SAI.

TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest; revenue bonds, which are payable from the revenue
derived from a particular facility or class of facilities or, in some cases,
from annual appropriations made by the state legislature for the repayment of
interest and principal or other specific revenue source, but not from the
general taxing power; lease obligations backed by the municipality's covenant to
budget for the payments due under the lease obligation; and certain types of
industrial development bonds issued by or on behalf of public authorities to
obtain funds for privately-operated facilities, provided that the interest paid
on such securities qualifies as exempt from federal income taxes.
The value of the securities in which a Fund will invest generally fluctuates
inversely with changes in prevailing interest rates. Changes in the
creditworthiness of issuers and changes in other market factors such as the
relative supply of and demand for tax-exempt bonds also create value
fluctuations.

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Each Fund may on a temporary basis due to market or other conditions invest
up to 100% of its assets in short-term securities whether or not exempt from
federal income taxes. Such taxable securities may consist of obligations of the
U. S. Government, its agencies or instrumentalities, and repurchase agreements
secured by such instruments; certificates of deposit of domestic banks having
capital, surplus and undivided profits in excess of $100 million; banker's
acceptances of similar banks; commercial paper; and other corporate debt
obligations.

INVESTMENT TECHNIQUES

VARIABLE RATE SECURITIES - Each Fund may invest in tax-exempt securities that
bear interest at rates which are adjusted periodically to market rates. These
interest rate adjustments can both raise and lower the income generated by such
securities. These changes will have the same effect on the income earned by a
Fund depending on the proportion of such securities held.
The market value of fixed coupon securities fluctuates with changes in
prevailing interest rates, increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value of variable rate
securities, however, is less affected by changes in prevailing interest rates
because of the periodic adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the impact of interest rate
fluctuations on the value of these securities. The market value of tax-exempt
variable rate securities usually tends toward par (100% of face value) at
interest rate adjustment time.
In the case of the Florida Tax-Free Money Market Fund only, any variable
rate instrument with a demand feature will be deemed to have a maturity equal to
either the date on which the underlying principal amount may be recovered
through demand or the next rate adjustment date consistent with applicable
regulatory requirements.

PUT BONDS - Each Fund may invest in tax-exempt securities (including securities
with variable interest rates) which may be redeemed or sold back (put) to the
issuer of the security or a third party prior to stated maturity (put bonds).
Such securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer. For the Florida Tax-Free Income Fund, maturity
for put bonds is deemed to be the date on which the put becomes exercisable.
Generally, maturity for put bonds for the Florida Tax-Free Money Market Fund is
determined as stated under Variable Rate Securities.

ZERO COUPON BONDS - Each Fund may invest in zero coupon bonds. A zero coupon
bond is a security that is sold at a deep discount from its face value, makes no
periodic interest payments, and is redeemed at face value when it matures. The
lump sum payment at maturity increases the price volatility of the zero coupon
bond to changes in interest rates when compared to a bond that distributes a
semiannual coupon payment. In calculating its dividend, each Fund records as
income the daily amortization of the purchase discount.

WHEN-ISSUED SECURITIES - Each Fund may invest in new issues of tax-exempt
securities offered on a when-issued basis; that is, delivery and payment take
place after the date of the commitment to purchase, normally within 45 days.
Both price and interest rate are fixed at the time of commitment. The Funds do
not earn interest on the securities until settlement, and the market value of
the securities may fluctuate between purchase and settlement. Such securities
can be sold before settlement date.
Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of the cash and segregated securities at least equal to the
amount of such commitments by the Fund. On the settlement date, the Fund

11
<PAGE>

will meet its obligations from then available cash, sale of segregated
securities, sale of other securities, or sale of the when-issued securities
themselves.

MUNICIPAL LEASE OBLIGATIONS - Each Fund may invest in municipal lease
obligations and certificates of participation in such obligations (collectively,
lease obligations). A lease obligation does not constitute a general obligation
of the municipality for which the municipality's taxing power is pledged,
although the lease obligation is ordinarily backed by the municipality's
covenant to budget for the payments due under the lease obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non- appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. In evaluating a potential investment in such a lease
obligation, the Manager will consider: (1) the credit quality of the obligor,
(2) whether the underlying property is essential to a governmental function, and
(3) whether the lease obligation contains covenants prohibiting the obligor from
substituting similar property if the obligor fails to make appropriations for
the lease obligation.

LIQUIDITY - The Florida Tax-Free Income Fund and Florida Tax-Free Money Market
Fund may invest up to 15% and 10%, respectively, of their net assets in illiquid
securities.
Lease obligations and certain put bonds that are subject to restrictions on
transfer may be determined to be liquid in accordance with the guidelines
established by the Board of Trustees.
In determining the liquidity of a lease obligation, the Manager will
consider: (1) the frequency of trades and quotes for the lease obligation, (2)
the number of dealers willing to purchase or sell the lease obligation and the
number of other potential purchasers, (3) dealer undertakings to make a market
in the lease obligation, (4) the nature of the marketplace trades, including the
time needed to dispose of the lease obligation, the method of soliciting offers,
and the mechanics of transfer, (5) whether the lease obligation is of a size
that will be attractive to institutional investors, (6) whether the lease
obligation contains a non-appropriation clause and the likelihood that the
obligor will fail to make an appropriation therefor, and (7) such other factors
as the Manager may determine to be relevant to such determination.
In determining the liquidity of put bonds with restrictions on transfer, the
Manager will evaluate the credit quality of the party (the Put Provider) issuing
(or unconditionally guaranteeing performance on) the unconditional put or demand
feature of the put bond.

INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:

(1) Neither Fund may borrow money, except that a Fund may borrow money for
temporary or emergency purposes in an amount not exceeding 33 1/3% of its
total assets (including the amount borrowed) less liabilities (other than
borrowings). Neither Fund will purchase securities when its borrowings
exceed 5% of its total assets.

(2) Neither Fund may invest 25% or more of its total assets in securities
issued in connection with the financing of projects with similar
characteristics, such as toll road revenue bonds, housing revenue bonds or
electric power project revenue bonds or in industrial revenue bonds which
are based, directly or indirectly, on the credit of private entities of any
one industry. However, each Fund reserves the right to invest more than 25%
of its total assets in tax-exempt industrial revenue bonds.

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<PAGE>

(3) Neither Fund will, with respect to 75% of its total assets, purchase the
securities of any issuer (except Government Securities, as such term is
defined in the Investment Company Act of 1940, as amended (1940 Act)) if,
as a result, the Fund would own more than 10% of the outstanding voting
securities of such issuer or the Fund would have more than 5% of the value
of its total assets invested in the securities of such issuer.

RISK FACTORS
Each Fund is subject to credit and market risks, which will be intensified by
concentration in obligations issued by or on behalf of Florida public
authorities. For this reason, the Funds are affected by political, economic,
legal, regulatory or other developments which constrain the taxing, spending and
revenue collection authority of Florida issuers or otherwise affect the ability
of Florida issuers to pay interest, repay principal or any premium. AN
INVESTMENT IN THE FLORIDA TAX-FREE MONEY MARKET FUND MAY BE RISKIER THAN AN
INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS BECAUSE OF THIS CONCENTRATION.
In addition, because each Fund invests in securities backed by banks and
other financial institutions, changes in the credit quality of these
institutions could cause losses to a Fund and affect its share price.
Other considerations affecting the Funds' investments in Florida
obligations are summarized in the SAI under SPECIAL RISK CONSIDERATIONS.

PURCHASE OF SHARES

OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.

TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.

EFFECTIVE DATE
When you make a purchase, your purchase price will be the NAV per share next
determined after the Fund receives your request in proper form. The NAV of each
Fund is determined at the close of the regular trading session of the New York
Stock Exchange (NYSE) each day the Exchange is open. If a Fund receives your
request prior to that time, your purchase price will be the NAV per share
determined for that day. If a Fund receives your request after the NAV per share
is calculated, the purchase will be effective on the next business day.
Because of the more lengthy clearing process and the need to convert
foreign currency, a check drawn on a foreign bank will not be deemed received
for the purchase of shares until such time as the check has cleared and the
Manager has received good funds, which may take up to four to six weeks.
Furthermore, a bank charge may be assessed in the clearing process, which will
be deducted from the amount of the purchase. To avoid a delay in the
effectiveness of your purchase, the Manager suggests that you convert your
foreign check to U.S. dollars prior to investment in the Funds.

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<PAGE>

PURCHASE OF SHARES

MINIMUM INVESTMENTS
- -------------------

Initial Purchase: $3,000

Additional Purchases: $50 - (Except transfers from brokerage accounts
into the Florida Money Market Fund, which are
exempt from minimum)

HOW TO PURCHASE:
- ---------------

MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
o To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
o To exchange by mail, call 1-800-531-8448 for instructions.

IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio

AUTOMATICALLY o Additional purchases on a regular basis can be deducted from
VIA a bank account, paycheck, income-producing investment or
ELECTRONIC from a USAA money market account. Sign up for these services
FUNDS when opening an account or call 1-800-531-8448 to add these
TRANSFER services.
(EFT) o Purchases through payroll deduction ($25 minimum each pay
period with no initial investment) can be made by any
employee of USAA, its subsidiaries or affiliated companies.

BANK WIRE o To add to an account, instruct your bank (which may charge
a fee for the service) to wire the specified amount to the
Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA [Fund Name]
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________

PHONE o If you have an existing USAA account and would like to open
1-800-531-8448 a new account or if you would like to exchange to another
USAA fund, call for instructions. The new account must have
the same registration as your existing account.
o To add to an account, intermittent (as-needed) purchases
can be deducted from your bank account through our Buy/Sell
Service. Call for instructions.

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REDEMPTION OF SHARES

You may redeem shares of a Fund by any of the following methods on any day the
NAV per share is calculated. Redemptions will be effective on the day
instructions are received in accordance with the requirements set forth below.
However, if instructions are received after the NAV per share calculation,
redemption will be effective on the next business day.

REDEMPTION PROCEEDS
Redemption proceeds are distributed within seven days after the effective date
of redemption. Payment for redemption of shares purchased by check or electronic
funds transfer will not be disbursed until the purchase check or electronic
funds transfer has cleared, which could take up to 15 days from the purchase
date. If you are considering redeeming shares soon after purchase, you should
purchase by bank wire or certified check to avoid delay.
In addition, the Trust may elect to suspend the redemption of shares or
postpone the date of payment during any period that the NYSE is closed, or
trading in the markets the Trust normally utilizes is restricted, or during any
period that redemption is otherwise permitted to be suspended by the SEC.

HOW TO REDEEM:
- -------------

WRITTEN, o Send your written instructions to:
FAX, OR USAA Shareholder Account Services
TELEGRAPH 9800 Fredericksburg Rd., San Antonio, TX 78288
o Send a signed fax to 1-800-292-8177, or send a telegraph to
USAA Shareholder Account Services.

Written redemption requests must include the following: (1) a letter of
instruction or stock assignment, and stock certificate (if issued), specifying
the Fund and the number of shares or dollar amount to be redeemed; (2)
signatures of all owners of the shares exactly as their names appear on the
account; (3) other supporting legal documents, if required, as in the case of
estates, trusts, guardianships, custodianships, partnerships, corporations, and
pension and profit-sharing plans; and (4) method of payment.

PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.

Telephone redemption is automatically established when you complete your
application. The Fund will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine, and if it does not, it may
be liable for any losses due to unauthorized or fraudulent instructions.
Information is obtained prior to any discussion regarding an account including:
(1) USAA number or account number, (2) the name(s) on the account registration,
and (3) social security number or tax identification number for the account
registration. In addition, all telephone communications with a shareholder are
recorded, and confirmations of all account transactions are sent to the address
of record.

Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.

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<PAGE>

METHODS OF PAYMENT:
- ------------------

BANK WIRE o Allows redemptions to be sent directly to your bank account.

Establish this service when you apply for your account, or later upon
request. Please obtain precise wiring instructions from your financial
institution. USAA Shareholder Account Services (Transfer Agent) deducts a wire
fee from the account for the redemption by wire. The fee as of the date of this
Prospectus is $10 ($25 for wires to a foreign bank) and is subject to change at
any time. The fee is paid to State Street Bank and Trust Company (SSB) and the
Transfer Agent for their services in connection with the wire redemption. Your
financial institution may also charge a fee for receiving funds by wire.

AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions
VIA EFT can be credited to your bank account.

Establish any of our electronic investing services when you apply for your
account, or later upon request.

CHECK o A check payable to the registered shareholder(s) will be
REDEMPTION mailed to the address of record.

This check redemption privilege is automatically established when your
application is completed and accepted. There is a 15-day waiting period before a
check redemption can be processed following a telephone address change. Should
you wish to redeem shares within the 15 days following a telephone address
change, you may do so by providing written instructions by mail or facsimile.

CHECKWRITING o Checks can be issued for your Florida Tax-Free Money
Market Fund account.

To establish your checkwriting privilege (CWP), complete the signature card
which accompanies the application form or Shareholder Services Guide, or request
and complete the signature card separately. There is no charge for the use of
checks nor for subsequent reorders. This privilege is subject to SSB's rules and
regulations governing checking accounts. Checks must be written for an amount of
at least $250. Checks written for less than $250 will be returned. Checkwriting
may not be used to close an account because the value of the account changes
daily as dividends are accrued.
When a check is presented to the Transfer Agent for payment, a sufficient
number of full and fractional shares in the investor's account will be redeemed
to cover the amount of the check. Checks will be returned if there are
insufficient shares to cover the amount of the check. Presently, there is a $15
processing fee assessed against an account for any redemption check not honored
by a clearing or paying agent. A check paid during the month will be returned to
the shareholder by separate mail. Checkwriting fees are subject to change at any
time. The Trust, the Transfer Agent and SSB each reserve the right to change or
suspend the checkwriting privilege upon 30 days' written notice to participating
shareholders. See the SAI for further information.

You may request that the Transfer Agent stop payment on a check. The
Transfer Agent will use its best efforts to execute stop payment instructions,
but does not guarantee that such efforts will be effective. A $10 charge will be
made for each stop payment requested by a shareholder.

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<PAGE>

CONDITIONS OF PURCHASE AND REDEMPTION

NONPAYMENT
If any order to purchase shares is cancelled due to nonpayment or if the Trust
does not receive good funds either by check or electronic funds transfer, the
Transfer Agent will treat the cancellation as a redemption of shares purchased,
and you will be responsible for any resulting loss incurred by the Fund or the
Manager. If you are a shareholder, the Transfer Agent can redeem shares from any
of your account(s) as reimbursement for all losses. In addition, you may be
prohibited or restricted from making future purchases in any of the USAA Family
of Funds. A $15 fee is charged for all returned items, including checks and
electronic funds transfers.

TRANSFER OF SHARES
You may transfer Fund shares to another person by sending written instructions
to the Transfer Agent. The account must be clearly identified, and you must
include the number of shares to be transferred, the signatures of all registered
owners, and all stock certificates, if any, which are the subject of transfer.
You also need to send written instructions signed by all registered owners and
supporting documents to change an account registration due to events such as
divorce, marriage, or death. If a new account needs to be established, you must
complete and return an application to the Transfer Agent.

ACCOUNT BALANCE
Beginning in September 1998, and occurring each September thereafter, the
Transfer Agent will assess a small balance account fee of $12 to each
shareholder account with a balance, at the time of assessment, of less than
$2,000. The fee will be used to reduce total transfer agency fees paid by each
Fund to the Transfer Agent. Accounts exempt from the fee include: (1) any
account regularly purchasing additional shares each month through an automatic
investment plan; (2) any account registered under the Uniform Gifts/Transfers to
Minors Act (UGMA or UTMA); (3) all (non IRA) money market fund accounts; (4) any
account whose registered owner has an aggregate balance of $50,000 or more
invested in USAA mutual funds; and (5) all IRA accounts (for the first year the
account is open).

TRUST RIGHTS The Trust reserves the right to:

(1) reject purchase or exchange orders when in the best interest of the Trust;

(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;

(3) impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the
protection of remaining investors (for example, if excessive market-timing
share activity unfairly burdens long-term investors); provided, however,
this 1% charge will not be imposed upon shareholders unless authorized by
the Board of Trustees and the required notice has been given to
shareholders;

(4) require a signature guarantee for purchases, redemptions, or changes in
account information in those instances where the appropriateness of a
signature authorization is in question. The section ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI contains information on
acceptable guarantors;

(5) redeem an account with a total value of less than $500 of either Fund,
subject to certain limitations described in ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI.

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<PAGE>

EXCHANGES

EXCHANGE PRIVILEGE

The Exchange Privilege is automatically established when you complete your
application. You may exchange shares among Funds in the USAA Family of Funds,
provided you do not hold these shares in stock certificate form and that the
shares to be acquired are offered in your state of residence. Only Florida
residents may exchange into a Florida Fund. Exchange redemptions and purchases
will be processed simultaneously at the share prices next determined after the
exchange order is received. For federal income tax purposes, an exchange between
Funds is a taxable event. Accordingly, when exchanging shares, you may realize a
capital gain or loss.

The Funds have undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.

EXCHANGE LIMITATIONS, EXCESSIVE TRADING
To minimize Fund costs and to protect the Funds and their shareholders from
unfair expense burdens, the Funds restrict excessive exchanges. Exchanges out of
any Fund in the USAA Family of Funds are limited for each account to six per
calendar year except that there is no limitation on exchanges out of the Tax
Exempt Short- Term Fund, Short-Term Bond Fund, or any of the money market funds
in the USAA Family of Funds.

OTHER SERVICES

INVESTMENT PLANS

AUTOMATIC INVESTMENT PLANS - You may establish an automatic investment plan by
completing the appropriate forms, if any. At the time you sign up for any of the
following investment plans that utilize the electronic funds transfer service,
you will choose the day of the month (the effective date) on which you would
like to regularly purchase shares. When this day falls on a weekend or holiday,
the electronic transfer will take place on the last business day before the
effective date. Call the Manager to obtain instructions. More information about
these preauthorized plans is contained in the SAI.

o INVESTRONIC(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.

o DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.

o AUTOMATIC PURCHASE PLAN - The periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.

o BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.

o SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.

o DIRECTED DIVIDENDS - If you own shares in more than one of the Funds in the
USAA Family of Funds, you may direct that dividends and/or capital gain
distributions earned in one fund be used to purchase shares automatically in
another fund.

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<PAGE>

SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your Florida Tax-Free
Income Fund account except:

(1) a reinvested dividend;
(2) a payment you make under the InvesTronic(R), Direct Purchase Service,
Automatic Purchase Plan, or Directed Dividends investment plans; or
(3) a redemption you make under the Systematic Withdrawal Plan.

If you own shares in the Florida Tax- Free Money Market Fund, you will
receive a confirmation for purchases or redemptions by check and exchanges. If
that money market fund account had activity other than reinvested dividends,
such as wire purchases or redemptions or purchases under the InvesTronic(R),
Direct Purchase Service, Automatic Purchase Plan or Directed Dividends
investment plans, you will receive a monthly statement that will reflect
quarter-to-date account activity.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive a Fund's
financial statements with a summary of its investments and performance at least
semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.

TELEPHONE ASSISTANCE
Call our telephone assistance numbers for specific forms, a copy of the SAI, the
most recent Annual Report and/or Semiannual Report, or if you have any questions
concerning any of the services offered.

SHARE PRICE CALCULATION

The price at which shares of the Funds are purchased and redeemed by
shareholders is equal to the NAV per share determined on the effective date of
the purchase or redemption.

WHEN
The NAV per share for each Fund is calculated at the close of the regular
trading session of the NYSE, which is usually 4:00 p.m. Eastern Time. You may
buy and sell Fund shares at the NAV per share without a sales charge.

HOW
The NAV per share is calculated by adding the value of all securities and other
assets in a Fund, deducting liabilities, and dividing by the number of shares
outstanding. Securities of the Florida Tax-Free Income Fund are valued each
business day at their current market value as determined by a pricing service
approved by the Board of Trustees. Securities which cannot be valued by the
pricing service, and all other assets, are valued in good faith at fair value
using methods determined by the Manager under the general supervision of the
Board of Trustees. In addition, securities purchased with maturities of 60 days
or less and all securities of the Florida Tax-Free Money Market Fund are stated
at amortized cost.
For additional information, see VALUATION OF SECURITIES in the SAI.

19
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS
Net investment income of each Fund is accrued daily and distributed to
shareholders on the last business day of each month. Net capital gains, if any,
generally will be distributed at least annually. The Funds intend to make such
additional distributions as may be necessary to avoid the imposition of any
federal excise tax.
All shares purchased will begin accruing dividends on the day following the
effective date of the purchase and will receive dividends through the effective
date of redemption.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex-dividend date. Any
capital gain distribution paid by the Florida Tax-Free Income Fund will reduce
the NAV per share by the amount of the distribution. An investor should consider
carefully the effects of purchasing shares of the Florida Tax-Free Income Fund
shortly before any capital gain distribution. Although in effect a return of
capital, these distributions are subject to taxes. If a shareholder becomes a
resident of a state other than Florida, a check for proceeds of income dividends
will be mailed to such shareholder monthly, and a check for any capital gain
distribution will be mailed after the distribution is paid.

Any dividend or distribution payment returned to the Manager as not
deliverable will be invested in the shareholder's Fund account at the
then-current NAV per share. If any check for the payment of dividends or
distributions is not cashed within six months from the date on the check, it
becomes void. The amount of the check will then be invested in the shareholder's
Fund account at the then-current NAV per share.

FEDERAL TAXES
The exemption of interest income for federal income tax purposes does not
necessarily result in exemption under the income or other tax laws of any state
or local taxing authority. The following discussion relates only to generally
applicable federal income tax provisions in effect as of the date of this
Prospectus. Therefore, shareholders are urged to consult their own tax advisers
about the status of distributions from a Fund in their own states and
localities.

FUND - Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). By
complying with the applicable provisions of the Code, neither Fund will be
subject to federal income tax on its net investment income and net capital gains
(capital gains in excess of capital losses) distributed to shareholders.

SHAREHOLDER - Dividends of net tax-exempt interest income paid by a Fund are
excluded from a shareholder's gross income for federal income tax purposes.
Dividends from taxable net investment income and distributions of net short-term
capital gains are taxable to shareholders as ordinary income, whether received
in cash or reinvested in additional shares. However, it is expected that any
taxable net investment income will be minimal in relation to the tax-exempt
interest generated by a Fund.

Distributions of net long-term capital gains are taxable as long-term
capital gains whether received in cash or reinvested in additional shares, and
regardless of the length of time the investor has held the shares of a Fund.

20
<PAGE>

Redemptions, including exchanges, are subject to income tax, based on the
difference between the cost of shares when purchased and the price received upon
redemption or exchange.
Tax-exempt interest from private activity bonds (for example, industrial
development revenue bonds) issued after August 7, 1986, although otherwise
exempt from federal tax, is treated as a tax preference item for purposes of the
alternative minimum tax. For corporations, all tax-exempt interest will be
considered in calculating the alternative minimum tax as part of the adjusted
current earnings.

WITHHOLDING - Each Fund is required by federal law to withhold and remit to the
U.S. Treasury a portion of the income dividends and capital gain distributions
and proceeds of redemptions paid to any non-corporate shareholder who fails to
furnish the Fund with a correct tax identification number, who underreports
dividend or interest income, or who fails to certify that he is not subject to
withholding. To avoid this withholding requirement, you must certify on your
application, or on a separate Form W-9 supplied by the Transfer Agent, that your
tax identification number is correct and that you are not currently subject to
backup withholding.

FLORIDA TAXATION
The following is only a summary of some of the important Florida tax
considerations generally affecting the Funds and their shareholders. This
discussion is not intended as a substitute for careful planning. Potential
investors in the Funds should consult their tax advisers with specific reference
to their own tax situations.
Dividends and distributions paid by the Funds to individuals who are
residents of Florida are not taxable by Florida, because Florida does not impose
a personal income tax. Dividends and distributions by the Funds will be subject
to Florida corporate income taxes. Accordingly, investors in the Funds,
including in particular corporate investors that may be subject to the Florida
corporate income tax, should consult their tax advisers with respect to the
application of the Florida corporate income tax to the receipt of Fund dividends
and distributions and to the investor's Florida tax situation in general.

Florida imposes a tax on intangible personal property owned by Florida
residents. The Funds received a ruling from the Florida Department of Revenue
that if, on the last business day of any calendar year, the Funds' investments
consist solely of assets exempt from the Florida intangible personal property
tax, shares of the Funds owned by Florida residents will be exempt from the
Florida intangible personal property tax in the following year. Assets exempt
from the Florida intangible personal property tax include obligations issued by
the State of Florida and its political subdivisions, municipalities, and public
authorities; obligations of the U.S. Government, its agencies and certain
territories and possessions such as Puerto Rico, the Virgin Islands, and Guam;
and cash. If shares of the Funds are subject to Florida intangible personal
property tax, because less than 100% of the Funds' assets on the last business
day of the calendar year consist of assets exempt from the Florida intangible
personal property tax, only the portion of the net asset value of shares of the
Funds that is attributable to obligations of the U.S. Government will be exempt
from taxation.

21
<PAGE>

MANAGEMENT OF THE TRUST

The business affairs of the Trust are subject to the supervision of the Board of
Trustees.

The Manager, USAA Investment Management Company (IMCO), was organized in
May 1970 and is an affiliate of United Services Automobile Association (USAA), a
large diversified financial services institution. As of the date of this
Prospectus, the Manager had approximately $35 billion in total assets under
management. The Manager's mailing address is at 9800 Fredericksburg Rd., San
Antonio, TX 78288.

Officers and employees of the Manager are permitted to engage in personal
securities transactions subject to restrictions and procedures set forth in the
Joint Code of Ethics adopted by the Trust and the Manager. Such restrictions and
procedures include substantially all of the recommendations of the Advisory
Group of the Investment Company Institute and comply with SEC rules and
regulations.

ADVISORY AGREEMENT
The Manager serves as the manager and investment adviser of the Trust, providing
services under an Advisory Agreement. Under the Advisory Agreement, the Manager
is responsible for the management of the business affairs, investment
portfolios, and placement of brokerage orders, subject to the authority of and
supervision by the Board of Trustees.
For its services under the Advisory Agreement, each Fund pays the Manager
an annual fee which is computed as a percentage of the aggregate ANA of both
Funds combined. The fee is accrued daily, paid monthly, and allocated between
the Funds based on the relative net assets of each. The management fee is
computed at .50% of the first $50,000,000 ANA, .40% of that portion over
$50,000,000 and not over $100,000,000 ANA, and .30% of that portion over
$100,000,000 ANA. For the fiscal year ended March 31, 1997, the fees paid to the
Manager, net of reimbursements, were .32% of ANA of each Fund.

OPERATING EXPENSES
For the fiscal year ended March 31, 1997, the Manager limited each Fund's total
operating expenses to .50% of its ANA. The Manager reimbursed the Florida
Tax-Free Income Fund $54,750 and the Florida Tax-Free Money Market Fund $56,434
for expenses in excess of the limitation. The Manager has voluntarily agreed to
continue to limit each Fund's annual expenses until August 1, 1998, to .50% of
its ANA and will reimburse the Funds for all expenses in excess of the
limitation.

PORTFOLIO MANAGERS
The following individuals are primarily responsible for managing the Funds.

FLORIDA TAX-FREE INCOME FUND
Robert R. Pariseau, Assistant Vice President of Fixed Income Investments since
June 1995, has managed the Fund since May 1995. He has 13 years investment
management experience working for IMCO, where he has held various positions in
Fixed Income and Equity Investments. Mr. Pariseau earned the Chartered Financial
Analyst (CFA) designation in 1987 and is a member of the Association for
Investment Management and Research (AIMR), San Antonio Financial Analysts
Society, Inc. (SAFAS), and the National Federation of Municipal Analysts (NFMA).
He holds an MBA from Lindenwood College and a BS from the U.S. Naval Academy.

22
<PAGE>

FLORIDA TAX-FREE MONEY MARKET FUND
John C. Bonnell, Executive Director of Money Market Funds since May 1996, has
managed the Fund since May 1996. He has eight years investment management
experience working for IMCO, where he has held various positions in Fixed Income
Investments. Mr. Bonnell earned the CFA designation in 1994 and is a member of
the AIMR, the SAFAS, the NFMA and the Southern Municipal Finance Society. He
holds an MBA from St. Mary's University and a BBA from the University of Texas
at San Antonio.

DESCRIPTION OF SHARES

The Trust is an open-end management investment company established as a business
trust under the laws of the State of Delaware pursuant to a Master Trust
Agreement dated June 21, 1993. The Trust is authorized to issue an unlimited
number of shares of beneficial interest of separate portfolios at $.001 par
value. Four such portfolios have been established, two of which are described in
this Prospectus. Each Fund is classified as diversified. Under the Master Trust
Agreement, the Board of Trustees is authorized to create new portfolios in
addition to those already existing without shareholder approval.

Under the Master Trust Agreement, no annual meeting of shareholders is
required. Ordinarily, no shareholder meeting will be held unless required by the
1940 Act. The Trustees may fill vacancies on the Board or appoint new Trustees
provided that immediately after such action at least two-thirds of the Trustees
have been elected by shareholders. Shareholders are entitled to one vote per
share (with proportionate voting for fractional shares) irrespective of the
relative net asset value of the shares. For matters affecting an individual
portfolio, a separate vote of the shareholders of that portfolio is required.
Shareholders holding an aggregate of at least 10% of the outstanding shares of
the Trust may request a meeting of shareholders at any time for the purpose of
voting to remove one or more of the Trustees, and the Trust will assist
shareholders in communicating with other shareholders in connection with such a
meeting.

23
<PAGE>

SERVICE PROVIDERS

UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.

TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.

CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.

LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.

INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.

TELEPHONE ASSISTANCE

(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.

For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE

MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066

MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777

<PAGE>

Part A

Prospectus for the

Texas Tax-Free Income Fund and
Texas Tax-Free Money Market Fund

<PAGE>

USAA TEXAS FUNDS
AUGUST 1, 1997 PROSPECTUS

USAA TEXAS TAX-FREE INCOME FUND and USAA TEXAS TAX-FREE MONEY MARKET FUND
(collectively, the Funds or the Texas Funds) are two of four no-load mutual
funds offered by USAA State Tax-Free Trust (the Trust). The Funds are managed by
USAA Investment Management Company (the Manager).

WHAT ARE THE INVESTMENT OBJECTIVES AND POLICIES?
The Funds have a common objective of providing Texas investors with a high
level of current interest income that is exempt from federal income taxes. The
Texas Tax-Free Money Market Fund has a further objective of preserving capital
and maintaining liquidity. Each Fund has separate investment policies to achieve
its objective.
The TEXAS TAX-FREE INCOME FUND invests primarily in long-term high grade
Texas tax-exempt securities. The Fund's average portfolio maturity is not
restricted, but is expected to be greater than 10 years.
Page 9.
The TEXAS TAX-FREE MONEY MARKET FUND invests in high quality Texas
tax-exempt securities with maturities of 397 days or less. The Manager will
maintain a dollar-weighted average portfolio maturity of no more than 90 days.
The Fund will endeavor to maintain a constant net asset value per share of
$1.00. Page 9.

HOW DO YOU SELL?
You may redeem Fund shares by mail, telephone, fax, or telegraph on any day that
the net asset value is calculated. Page 15.

Shares of the Texas Funds are authorized for sale only to residents of the
State of Texas. The delivery of this Prospectus shall not constitute an offer in
any state in which shares of the Texas Funds may not lawfully be made.

SHARES OF THE USAA TEXAS FUNDS ARE NOT DEPOSITS OR OTHER OBLIGATIONS OF, OR
GUARANTEED BY, THE USAA FEDERAL SAVINGS BANK, ARE NOT INSURED BY THE FDIC OR ANY
OTHER GOVERNMENT AGENCY, AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE
LOSS OF THE PRINCIPAL AMOUNT INVESTED.

This Prospectus, which should be read and retained for future reference,
provides information regarding the Trust and the Texas Funds that you should
know before investing.

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

AN INVESTMENT IN THE TEXAS TAX-FREE MONEY MARKET FUND IS NEITHER INSURED NOR
GUARANTEED BY THE U.S. GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE FUND
WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. THIS FUND
MAY INVEST A SIGNIFICANT PERCENTAGE OF ITS ASSETS IN A SINGLE ISSUER, AND
THEREFORE AN INVESTMENT IN THE FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER
TYPES OF MONEY MARKET FUNDS.
- --------------------------------------------------------------------------------

<PAGE>

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

USING MUTUAL FUNDS
USAA Family of No-Load Mutual Funds............................ 7
Using Mutual Funds in an Investment Program.................... 8

INVESTMENT PORTFOLIO INFORMATION
Investment Objectives and Policies............................. 9
Texas Tax-Free Income Fund................................. 9
Texas Tax-Free Money Market Fund........................... 9
Other Investment Information................................... 10

2
<PAGE>

FEES AND EXPENSES

SHAREHOLDER TRANSACTION EXPENSES (APPLICABLE TO EACH FUND)
- --------------------------------------------------------------------------------
Sales Load Imposed on Purchases................................... None
Sales Load Imposed on Reinvested Dividends........................ None
Deferred Sales Load............................................... None
Redemption Fee*................................................... None
Exchange Fee...................................................... None

ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF ANA)
- --------------------------------------------------------------------------------
TEXAS TEXAS
TAX-FREE TAX-FREE
INCOME MONEY MARKET
FUND FUND
------ ------------

Management Fees, net of reimbursements................ .00% .00%
12b-1 Fees............................................ None None
Other Expenses, net of reimbursements
Transfer Agent Fees**.............................. .00% .00%
Custodian Fees..................................... .42% .50%
All Other Expenses................................. .08% .00%
--- ---
Total Other Expenses.................................. .50% .50%
--- ---
Total Fund Operating Expenses, net of reimbursements .50% .50%
=== ===
- --------------
* A shareholder who requests delivery of redemption proceeds by wire transfer
will be subject to a $10 fee. See REDEMPTION OF SHARES - BANK WIRE.
** The Funds pay USAA Shareholder Account Services an annual fixed fee per
account for its services. See TRANSFER AGENT in the SAI, page 17.

During the year, the Manager voluntarily limited each Fund's annual
expenses to .50% of its ANA and reimbursed the Funds for all expenses in excess
of the limitation. The Management Fees, Other Expenses, and Total Fund Operating
Expenses reflect all such expense reimbursements by the Manager. Absent such
reimbursements, the amount of the Management Fees, Other Expenses, and Total
Fund Operating Expenses as a percentage of ANA for each of the Funds would have
been as follows: Texas Tax-Free Income Fund, .50%, .85%, and 1.35%; and Texas
Tax-Free Money Market Fund, .50%, 1.27%, and 1.77%. The Manager has voluntarily
agreed to continue to limit each Fund's annual expenses until August 1, 1998, to
.50% of its ANA and will reimburse the Funds for all expenses in excess of the
limitation.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- ---------
Texas Tax-Free Income Fund ................ $ 5 $ 16 $ 28 $ 63
Texas Tax-Free Money Market Fund .......... $ 5 $ 16 $ 28 $ 63

THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.

3
<PAGE>

FINANCIAL HIGHLIGHTS

The following per share operating performance for a share outstanding throughout
each period in the three-year period ended March 31, 1997, has been audited by
KPMG Peat Marwick LLP. This table should be read in conjunction with the Funds'
financial statements for the year ended March 31, 1997, and the auditors' report
thereon, that appear in the Funds' Annual Report. Further performance
information is contained in the Annual Report and is available upon request
without charge.

TEXAS TAX-FREE INCOME FUND:
YEAR ENDED MARCH 31,
--------------------
1997 1996 1995*
---- ---- -----
Net asset value at
beginning of period $ 10.45 $10.21 $10.00
Net investment income .59 .58 .34
Net realized and
unrealized gain .13 .36 .21
Distributions from net
investment income (.59) (.58) (.34)
Distributions of realized
capital gains (.20) (.12) -
------- ------ ------
Net asset value at
end of period $ 10.38 $10.45 $10.21
======= ====== ======
Total return (%)** 7.06 9.42 5.75
Net assets at end of
period (000) $11,206 $8,053 $6,446
Ratio of expenses to
average net assets (%) .50(a) .50(a) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 5.63(a) 5.51(a) 5.56(a)(b)
Portfolio turnover (%) 86.17 71.14 49.63
- --------------
* Fund commenced operations August 1, 1994.
** Assumes reinvestment of all dividend income and capital gains distributions
during the period.
(a) Based on actual expenses for the period, after giving effect to
reimbursements of expenses by the Manager. Absent such reimbursements, the
Fund's ratios would have been:

YEAR ENDED MARCH 31,
--------------------
1997 1996 1995*
---- ---- -----
Ratio of expenses to
average net assets (%) 1.35 1.66 2.40(b)
Ratio of net investment income
to average net assets (%) 4.78 4.35 3.66(b)

(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.

4
<PAGE>

FINANCIAL HIGHLIGHTS CONT.

TEXAS TAX-FREE MONEY MARKET FUND:
YEAR ENDED MARCH 31,
--------------------
1997 1996 1995*
---- ---- -----
Net asset value at
beginning of period $ 1.00 $ 1.00 $ 1.00
Net investment income .03 .03 .02
Distributions from net
investment income (.03) (.03) (.02)
------ ------ ------
Net asset value at
end of period $ 1.00 $ 1.00 $ 1.00
====== ====== ======
Total return (%)** 3.22 3.49 2.09
Net assets at end of
period (000) $5,280 $4,695 $3,881
Ratio of expenses to
average net assets (%) .50(a) .50(a) .50(a)(b)
Ratio of net investment
income to average net
assets (%) 3.17(a) 3.42(a) 3.18(a)(b)
- --------------
* Fund commenced operations August 1, 1994.
** Assumes reinvestment of all dividend income distributions during the period.
(a) Based on actual expenses for the period, after giving effect to
reimbursements of expenses by the Manager. Absent such reimbursements, the
Fund's ratios would have been:

YEAR ENDED MARCH 31,
--------------------
1997 1996 1995*
---- ---- -----
Ratio of expenses to
average net assets (%) 1.77 2.02 2.63(b)
Ratio of net investment income
to average net assets (%) 1.90 1.90 1.05(b)

(b) Annualized. The ratio is not necessarily indicative of 12 months of
operations.

5
<PAGE>

PERFORMANCE INFORMATION

TOTAL RETURN - TEXAS TAX-FREE INCOME FUND. The Fund's average annual total
return is computed by determining the average annual compounded rate of return
for a specified period which, when applied to a hypothetical $1,000 investment
in the Fund at the beginning of the period, would produce the redeemable value
of that investment at the end of the period, assuming reinvestment of all
dividends and distributions during the period.

YIELD - TEXAS TAX-FREE INCOME FUND. The Fund may advertise performance in terms
of a 30-day yield quotation. The yield quotation is computed by dividing the net
investment income per share earned during the period by the offering price per
share on the last day of the period. This income is then annualized. For
purposes of the yield calculation, interest income is computed based on the
yield to maturity of each debt obligation in the Fund's portfolio and all
recurring charges are recognized.

YIELD - TEXAS TAX-FREE MONEY MARKET FUND. The Fund may advertise its yield and
effective yield. The yield of the Fund refers to the income generated by an
investment in the Fund over a seven-day period (which period will be stated in
the advertisement). This income is then annualized, that is, the amount of
income generated by the investment during the week is assumed to be generated
each week over a 52-week period and is shown as a percentage of the investment.
The effective yield is calculated similarly but, when annualized, the
income earned by an investment in the Fund is assumed to be reinvested. The
effective yield will be slightly higher than the yield because of the
compounding effect of this assumed reinvestment.

TAX EQUIVALENT YIELD - The Funds may also utilize tax equivalent yields with
adjustments for assumed income tax rates. See APPENDIX C - TAXABLE EQUIVALENT
YIELD TABLE in the SAI for illustrations of this
yield.

6
<PAGE>

USAA FAMILY OF NO-LOAD MUTUAL FUNDS

USAA STATE TAX-FREE TRUST
Florida Tax-Free Income Fund*
Florida Tax-Free Money Market Fund*
Texas Tax-Free Income Fund*
Texas Tax-Free Money Market Fund*

7
<PAGE>

USING MUTUAL FUNDS IN AN INVESTMENT PROGRAM

I. THE IDEA BEHIND MUTUAL FUNDS

II. USING FUNDS IN AN INVESTMENT PROGRAM
In choosing a mutual fund as an investment vehicle, the shareholder is foregoing
some investment decisions, but must still make others. The decisions foregone
are those involved with choosing individual securities. The Fund Manager will
perform that function. In addition, the Manager will arrange for the safekeeping
of securities, auditing the annual financial statements, and daily valuation of
the Fund, as well as other functions.
The shareholder, however, retains at least part of the responsibility for
an equally important decision. This decision includes determining a portfolio of
mutual funds that balances the investor's investment goals with his or her
tolerance for risk. It is likely that this decision may involve the use of more
than one fund of the USAA Family of Funds.
For example, assume a shareholder wishes to pursue the higher yields
usually available in the long-term bond market, but is also concerned about the
possible price swings of the long-term bonds. He or she could divide investments
between the Texas Tax-Free Income Fund and the Texas Tax- Free Money Market
Fund. This would create a portfolio with a higher yield than that of the money
market and less volatility than that of the long-term market. This is just one
example of how an individual could combine funds to create a portfolio tailored
to his or her own risk and reward goals.

8
<PAGE>

INVESTMENT OBJECTIVES AND POLICIES

INVESTMENT OBJECTIVES
The Funds have a common investment objective of providing Texas investors with a
high level of current interest income that is exempt from federal income taxes.
The Texas Tax-Free Money Market Fund has a further objective of preserving
capital and maintaining liquidity.

INVESTMENT POLICIES
The Manager will pursue this common objective by investing each Fund's assets
primarily in debt obligations issued by the State of Texas, its political
subdivisions and instrumentalities, and by other governmental entities if, in
the opinion of counsel, the interest from such obligations is excluded from
gross income for federal income tax purposes. It is a fundamental policy of each
Fund that during normal market conditions at least 80% of the Fund's net assets
will consist of Texas tax-exempt securities and at least 80% of the Fund's
annual income will be exempt from federal income taxes and excluded from the
calculation of federal alternative minimum taxes for individual taxpayers.
Texas currently imposes no personal state income tax. In the event Texas
enacts a personal state income or similar tax, the Texas Funds will thereafter
attempt to seek a high level of current interest income also exempt from such
tax. The ability of the Funds to pursue this further policy, of course, will be
affected by the actual form of such a tax.

TEXAS TAX-FREE INCOME FUND. Under normal market conditions, the Manager will
invest the assets of the Fund so that at least 50% of the total market value of
the tax-exempt securities is rated within the three highest long-term rating
categories (at least A) by Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), or Fitch Investors Service, Inc. (Fitch), in the
highest short-term rating category by Moody's, S&P, or Fitch, or, if a security
is not rated by those rating agencies, it must be of equivalent investment
quality as determined by the Manager. In no event will a security be purchased
for the Fund unless it is rated at least investment grade; i.e., rated by
Moody's, S&P, or Fitch at least in the fourth highest rating category for
long-term securities, in the second highest rating category for short-term
securities, or, if not rated by those rating agencies, determined by the Manager
to be of equivalent investment quality. Securities rated in the lowest level of
investment grade have speculative characteristics since adverse economic
conditions and changing circumstances are more likely to have an adverse impact
on such securities.

If the rating of a security is downgraded, the Manager will determine
whether it is in the best interest of the Fund's shareholders to continue to
hold such security in the Fund's portfolio. Unless otherwise directed by the
Board of Trustees, if downgrades result in more than 5% of the Fund's net assets
being invested in securities that are less than investment grade quality, the
Manager will take immediate action to reduce the Fund's holdings in such
securities to 5% or less of the Fund's net assets. For a more complete
description of tax-exempt securities and their ratings, see APPENDIX A to the
SAI.
The Fund's average portfolio maturity is not restricted, but is expected to
be greater than ten years. In determining a security's maturity for purposes of
calculating the Fund's average maturity, estimates of the expected time for its
principal to be paid may be used. This can be substantially shorter than its
stated final maturity. For a discussion of the method of calculating the average
weighted maturity of the Fund's portfolio, see INVESTMENT POLICIES in the SAI.
The net asset value (NAV) per share of the Texas Tax-Free Income Fund will
fluctuate with portfolio maturity, the quality of

9
<PAGE>

securities held, and inversely to interest rate levels.

TEXAS TAX-FREE MONEY MARKET FUND. The Fund will purchase only high quality
securities that qualify as "eligible securities" under the SEC rules applicable
to money market mutual funds. These securities must also be determined by the
Manager to present minimal credit risk. In general, the category of eligible
securities may include a security that is:

(1) issued or guaranteed by the U.S. Government or any agency or
instrumentality thereof, including "prerefunded" and "escrowed to
maturity" tax-exempt securities;

(2) rated in one of the two highest categories for short-term securities by at
least two Nationally Recognized Statistical Rating Organizations (NRSROs),
or by one NRSRO if the security is rated by only one NRSRO;

(3) unrated but issued by an issuer or guaranteed by a guarantor that has
other comparable short-term debt obligations so rated; or

(4) unrated but determined to be of comparable quality by the Manager.

OTHER INVESTMENT INFORMATION

TAX-EXEMPT SECURITIES
These securities include general obligation bonds, which are secured by the
issuer's pledge of its full faith, credit and taxing power for the payment of
principal and interest; revenue bonds, which are payable from the revenue
derived from a particular facility or class of facilities or, in some cases,
from annual appropriations made by the state legislature for the repayment of
interest and principal or other specific revenue source, but not from the
general taxing power; lease obligations backed by the municipality's covenant to
budget for the payments due under the lease obligation; and certain types of
industrial development bonds issued by or on behalf of public authorities to
obtain funds for privately-operated facilities, provided that the interest paid
on such securities qualifies as exempt from federal income taxes.
The value of the securities in which a Fund will invest generally
fluctuates inversely with changes in prevailing interest rates. Changes in the
creditworthiness of issuers and changes in other market factors such as the
relative supply of and demand

<PAGE>

for tax-exempt bonds also create value fluctuations.

Each Fund may on a temporary basis due to market or other conditions invest
up to 100% of its assets in short-term securities whether or not exempt from
federal income taxes. Such taxable securities may consist of obligations of the
U.S. Government, its agencies or instrumentalities, and repurchase agreements
secured by such instruments; certificates of deposit of domestic banks having
capital, surplus and undivided profits in excess of $100 million; banker's
acceptances of similar banks; commercial paper; and other corporate debt
obligations.

INVESTMENT TECHNIQUES
VARIABLE RATE SECURITIES - Each Fund may invest in tax-exempt securities that
bear interest at rates which are adjusted periodically to market rates. These
interest rate adjustments can both raise and lower the income generated by such
securities. These changes will have the same effect on the income earned by a
Fund depending on the proportion of such securities held.
The market value of fixed coupon securities fluctuates with changes in
prevailing interest rates, increasing in value when interest rates decline and
decreasing in value when interest rates rise. The value of variable rate
securities, however, is less affected by changes in prevailing interest rates
because of the periodic adjustment of their coupons to a market rate. The
shorter the period between adjustments, the smaller the impact of interest rate
fluctuations on the value of these securities. The market value of tax-exempt
variable rate securities usually tends toward par (100% of face value) at
interest rate adjustment time.
In the case of the Texas Tax-Free Money Market Fund only, any variable rate
instrument with a demand feature will be deemed to have a maturity equal to
either the date on which the underlying principal amount may be recovered
through demand or the next rate adjustment date consistent with applicable
regulatory requirements.

PUT BONDS - Each Fund may invest in tax-exempt securities (including securities
with variable interest rates) which may be redeemed or sold back (put) to the
issuer of the security or a third party prior to stated maturity (put bonds).
Such securities will normally trade as if maturity is the earlier put date, even
though stated maturity is longer. For the Texas Tax-Free Income Fund, maturity
for put bonds is deemed to be the date on which the put becomes exercisable.
Generally, maturity for put bonds for the Texas Tax-Free Money Market Fund is
determined as stated under Variable Rate Securities.

Cash or high quality liquid debt securities equal to the amount of the
when-issued commitments are segregated at the Fund's custodian bank. The
segregated securities are valued at market, and daily adjustments are made to
keep the value of

<PAGE>

the cash and segregated securities at least equal to the amount of such
commitments by the Fund. On the settlement date, the Fund will meet its
obligations from then available cash, sale of segregated securities, sale of
other securities, or sale of the when-issued securities themselves.

MUNICIPAL LEASE OBLIGATIONS - Each Fund may invest in municipal lease
obligations and certificates of participation in such obligations (collectively,
lease obligations). A lease obligation does not constitute a general obligation
of the municipality for which the municipality's taxing power is pledged,
although the lease obligation is ordinarily backed by the municipality's
covenant to budget for the payments due under the lease obligation.
Certain lease obligations contain "non-appropriation" clauses which
provide that the municipality has no obligation to make lease obligation
payments in future years unless money is appropriated for such purpose on a
yearly basis. Although "non-appropriation" lease obligations are secured by the
leased property, disposition of the property in the event of foreclosure might
prove difficult. In evaluating a potential investment in such a lease
obligation, the Manager will consider: (1) the credit quality of the obligor,
(2) whether the underlying property is essential to a governmental function, and
(3) whether the lease obligation contains covenants prohibiting the obligor from
substituting similar property if the obligor fails to make appropriations for
the lease obligation.

LIQUIDITY - The Texas Tax-Free Income Fund and Texas Tax-Free Money Market Fund
may invest up to 15% and 10%, respectively, of their net assets in illiquid
securities.
Lease obligations and certain put bonds that are subject to restrictions on
transfer may be determined to be liquid in accordance with the guidelines
established by the Board of Trustees.
In determining the liquidity of a lease obligation, the Manager will
consider: (1) the frequency of trades and quotes for the lease obligation, (2)
the number of dealers willing to purchase or sell the lease obligation and the
number of other potential purchasers, (3) dealer undertakings to make a market
in the lease obligation, (4) the nature of the marketplace trades, including the
time needed to dispose of the lease obligation, the method of soliciting offers,
and the mechanics of transfer, (5) whether the lease obligation is of a size
that will be attractive to institutional investors, (6) whether the lease
obligation contains a non-appropriation clause and the likelihood that the
obligor will fail to make an appropriation therefor, and (7) such other factors
as the Manager may determine to be relevant to such determination.
In determining the liquidity of put bonds with restrictions on transfer,
the Manager will evaluate the credit quality of the party (the Put Provider)
issuing (or unconditionally guaranteeing performance on) the unconditional put
or demand feature of the put bond.

INVESTMENT RESTRICTIONS
The following restrictions may not be changed without shareholder approval:

12
<PAGE>

on the credit of private entities of any one industry. However, each Fund
reserves the right to invest more than 25% of its total assets in tax-exempt
industrial revenue bonds.

(3) Neither Fund will, with respect to 75% of its total assets, purchase the
securities of any issuer (except Government Securities, as such term is
defined in the Investment Company Act of 1940, as amended (1940 Act)) if, as
a result, the Fund would own more than 10% of the outstanding voting
securities of such issuer or the Fund would have more than 5% of the value
of its total assets invested in the securities of such issuer.

RISK FACTORS
The Texas Funds' investment concentration in debt obligations issued by the
State, its political subdivisions and instrumentalities, and by other
governmental entities involves greater risks than if they invested in the
securities of a broader range of issuers. The Texas Funds' yield and the value
of their portfolios can be affected by political and economic developments
within the State, and by the financial condition of the State, its public
authorities and political subdivisions. In the past, Texas voters have passed
amendments to the Texas Constitution and other measures that limit the taxing
and spending authority of Texas governmental entities, and future voter
initiatives could result in adverse consequences affecting the financial
condition of the State and/or its obligations. AN INVESTMENT IN THE TEXAS
TAX-FREE MONEY MARKET FUND MAY BE RISKIER THAN AN INVESTMENT IN OTHER TYPES OF
MONEY MARKET FUNDS BECAUSE OF THIS CONCENTRATION.
In addition, because each Fund invests in securities backed by banks and
other financial institutions, changes in the credit quality of these
institutions could cause losses to a Fund and affect its share price.
Other considerations affecting the Funds' investments in Texas obligations
are summarized in the SAI under SPECIAL RISK CONSIDERATIONS.

PURCHASE OF SHARES

OPENING AN ACCOUNT
You may open an account and make an investment by any of the following methods.
A complete, signed application is required together with a check for each new
account.

TAX ID NUMBER
We require that each shareholder named on the account provide the Trust with a
social security number or tax identification number to avoid possible tax
withholding requirements.

EFFECTIVE DATE
When you make a purchase, your purchase price will be the NAV per share next
determined after the Fund receives your request in proper form. The NAV of each
Fund is determined at the close of the regular trading session of the New York
Stock Exchange (NYSE) each day the Exchange is open. If a Fund receives your
request prior to that time, your purchase price will be the NAV per share
determined for that day. If a Fund receives your request after the NAV per share
is calculated, the purchase will be effective on the next business day.
Because of the more lengthy clearing process and the need to convert foreign
currency, a check drawn on a foreign bank will not be deemed received for the
purchase of shares until such time as the check has cleared and the Manager has
received good funds, which may take up to four to six weeks. Furthermore, a bank
charge may be assessed in the clearing process, which will be deducted from the
amount of the purchase. To avoid a delay in the effectiveness of your purchase,
the Manager suggests that you convert your foreign check to U.S. dollars prior
to investment in the Funds.

<PAGE>

PURCHASE OF SHARES

MINIMUM INVESTMENTS
- ------------------

Initial Purchase: $3,000

Additional Purchases: $50 - (Except transfers from brokerage accounts
into the Texas Money Market Fund, which are
exempt from minimum)

HOW TO PURCHASE:
- ---------------

MAIL o To open an account, send your application and check to:
USAA Investment Management Company
9800 Fredericksburg Rd., San Antonio, TX 78288
To add to your account, send your check and the "Invest by
Mail" stub that accompanies your fund's transaction
confirmation to the Transfer Agent:
USAA Shareholder Account Services
9800 Fredericksburg Rd., San Antonio, TX 78288
o To exchange by mail, call 1-800-531-8448 for instructions.

IN PERSON o To open an account, bring your application and check to:
USAA Investment Management Company
USAA Federal Savings Bank
10750 Robert F. McDermott Freeway, San Antonio

BANK WIRE o To add to an account, instruct your bank (which may
charge a fee for the service) to wire the specified amount
to the Fund as follows:
State Street Bank and Trust Company, Boston, MA 02101
ABA#011000028
Attn: USAA [Fund Name]
USAA AC-69384998
Shareholder(s) Name(s)_________________
Shareholder(s) Account Number___________________

<PAGE>

REDEMPTION OF SHARES

HOW TO REDEEM:
- -------------

PHONE o Call toll free 1-800-531-8448, in San Antonio, 456-7202.

Redemption by telephone, fax, or telegraph is not available for shares
represented by stock certificates.

15
<PAGE>

METHODS OF PAYMENT:
- ------------------

BANK WIRE o Allows redemptions to be sent directly to your bank account.

AUTOMATICALLY o Systematic (regular) or intermittent (as-needed) redemptions
VIA EFT can be credited to your bank account.

Establish any of our electronic investing services when you apply for your
account, or later upon request.

CHECK o A check payable to the registered shareholder(s) will be
REDEMPTION mailed to the address of record.

CHECKWRITING o Checks can be issued for your Texas Tax-Free Money Market
Fund account.

16
<PAGE>

CONDITIONS OF PURCHASE AND REDEMPTION

TRUST RIGHTS The Trust reserves the right to:

(1) reject purchase or exchange orders when in the best interest of the Trust;

(2) limit or discontinue the offering of shares of any portfolio of the Trust
without notice to the shareholders;

(3) impose a redemption charge of up to 1% of the net asset value of shares
redeemed if circumstances indicate a charge is necessary for the protection
of remaining investors (for example, if excessive market-timing share
activity unfairly burdens long-term investors); provided, however, this 1%
charge will not be imposed upon shareholders unless authorized by the Board
of Trustees and the required notice has been given to shareholders;

(5) redeem an account with a total value of less than $500 of either Fund,
subject to certain limitations described in ADDITIONAL INFORMATION
REGARDING REDEMPTION OF SHARES in the SAI.

17
<PAGE>

EXCHANGES

EXCHANGE PRIVILEGE

The Exchange Privilege is automatically established when you complete your
application. You may exchange shares among Funds in the USAA Family of Funds,
provided you do not hold these shares in stock certificate form and that the
shares to be acquired are offered in your state of residence. Only Texas
residents may exchange into a Texas Fund. Exchange redemptions and purchases
will be processed simultaneously at the share prices next determined after the
exchange order is received. For federal income tax purposes, an exchange between
Funds is a taxable event. Accordingly, when exchanging shares, you may realize a
capital gain or loss.

The Funds have undertaken certain procedures regarding telephone
transactions. See REDEMPTION OF SHARES - PHONE.

OTHER SERVICES

INVESTMENT PLANS

o INVESTRONIC(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.

o AUTOMATIC PURCHASE PLAN - The periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.

o BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.

o SYSTEMATIC WITHDRAWAL PLAN - The periodic redemption of shares from one of
your accounts permitting you to receive a fixed amount of money monthly or
quarterly.

18
<PAGE>

SHAREHOLDER STATEMENTS AND REPORTS
You will receive a confirmation after each transaction in your Texas Tax-Free
Income Fund account except:
(1) a reinvested dividend;
(2) a payment you make under the InvesTronic(R), Direct Purchase Service,
Automatic Purchase Plan, or Directed Dividends investment plans; or
(3) a redemption you make under the Systematic Withdrawal Plan.

If you own shares in the Texas Tax-Free Money Market Fund, you will receive
a confirmation for purchases or redemptions by check and exchanges. If that
money market fund account had activity other than reinvested dividends, such as
wire purchases or redemptions or purchases under the InvesTronic(R), Direct
Purchase Service, Automatic Purchase Plan or Directed Dividends investment
plans, you will receive a monthly statement that will reflect quarter-to-date
account activity.
At the end of each quarter, you will receive a consolidated statement for
all of your mutual fund accounts, regardless of account activity. The fourth
quarter consolidated statement will reflect all account activity for the prior
tax year. There will be a $10 fee charged for copies of historical statements
for other than the prior tax year for any one account. You will receive a Fund's
financial statements with a summary of its investments and performance at least
semiannually.
In an effort to reduce expenses and respond to shareholders' requests to
reduce mail, the Trust intends to consolidate mailings of Annual and Semiannual
Reports to households having multiple accounts with the same address of record.
One copy of each report will be furnished to that address. You may request
additional reports by notifying the Trust.

SHARE PRICE CALCULATION

The price at which shares of the Funds are purchased and redeemed by
shareholders is equal to the NAV per share determined on the effective date of
the purchase or redemption.

HOW
The NAV per share is calculated by adding the value of all securities and other
assets in a Fund, deducting liabilities, and dividing by the number of shares
outstanding. Securities of the Texas Tax-Free Income Fund are valued each
business day at their current market value as determined by a pricing service
approved by the Board of Trustees. Securities which cannot be valued by the
pricing service, and all other assets, are valued in good faith at fair value
using methods determined by the Manager under the general supervision of the
Board of Trustees. In addition, securities purchased with maturities of 60 days
or less and all securities of the Texas Tax-Free Money Market Fund are stated at
amortized cost.
For additional information, see VALUATION OF SECURITIES in the SAI.

19
<PAGE>

DIVIDENDS, DISTRIBUTIONS AND TAXES

DIVIDENDS AND DISTRIBUTIONS
Net investment income of each Fund is accrued daily and distributed to
shareholders on the last business day of each month. Net capital gains, if any,
generally will be distributed at least annually. The Funds intend to make such
additional distributions as may be necessary to avoid the imposition of any
federal excise tax.
All shares purchased will begin accruing dividends on the day following the
effective date of the purchase and will receive dividends through the effective
date of redemption.
All income dividends and capital gain distributions are automatically
reinvested, unless the shareholder specifies otherwise. The share price will be
the net asset value of the Fund shares computed on the ex- dividend date. Any
capital gain distribution paid by the Texas Tax-Free Income Fund will reduce the
NAV per share by the amount of the distribution. An investor should consider
carefully the effects of purchasing shares of the Texas Tax-Free Income Fund
shortly before any capital gain distribution. Although in effect a return of
capital, these distributions are subject to taxes. If a shareholder becomes a
resident of a state other than Texas, a check for proceeds of income dividends
will be mailed to such shareholder monthly, and a check for any capital gain
distribution will be mailed after the distribution is paid.

20
<PAGE>

REPORTING - Each Fund will report annually to its shareholders the federal tax
status of dividends and distributions paid or declared by each Fund during the
preceding calendar year, including the portion of the dividends constituting
interest on private activity bonds, and the percentage and source, on a
state-by-state basis, of interest income earned on tax-exempt securities held by
the Fund during the preceding year. TEXAS TAXATION Texas does not currently
impose an income tax on individuals. Therefore, dividends and distributions paid
by the Funds to individuals who are residents of Texas are not subject to a
Texas personal income tax. If Texas eventually enacts a personal income tax,
investors will need to consult with their own tax advisors with respect to the
possible taxation of dividends and distributions.
Texas imposes a franchise tax on each corporation that does business in the
state or that is chartered or authorized to do business in the state. It is a
tax on the privilege of doing business within the state, measured by a
corporation's net taxable capital and by its net taxable earned surplus. Because
the Funds are series of a registered open-end investment company organized as a
Delaware business trust, they themselves are not subject to the Texas franchise
tax. A corporate investor in the Funds subject to the Texas franchise tax,
however, must include distributions it receives from the Funds in its
calculation of net taxable capital. All distributions from the Funds that are
exempt from federal income tax, though, are exempt from the portion of the Texas
franchise tax based on taxable earned surplus.

21
<PAGE>

MANAGEMENT OF THE TRUST

The business affairs of the Trust are subject to the supervision of the Board of
Trustees.

OPERATING EXPENSES
For the fiscal year ended March 31, 1997, the Manager limited each Fund's total
operating expenses to .50% of its ANA. The Manager reimbursed the Texas Tax-Free
Income Fund $80,460 and the Texas Tax-Free Money Market Fund $64,834 for
expenses in excess of the limitation. The Manager has voluntarily agreed to
continue to limit each Fund's annual expenses until August 1, 1998, to .50% of
its ANA and will reimburse the Funds for all expenses in excess of the
limitation.

PORTFOLIO MANAGERS
The following individuals are primarily responsible for managing the Funds.

TEXAS TAX-FREE INCOME FUND
Robert R. Pariseau, Assistant Vice President of Fixed Income Investments since
June 1995, has managed the Fund since May 1995. He has 13 years investment
management experience working for IMCO, where he has held various positions in
Fixed Income and Equity Investments. Mr. Pariseau earned the Chartered Financial
Analyst (CFA) designation in 1987 and is a member of the Association for
Investment Management and Research (AIMR), San Antonio Financial Analysts
Society, Inc. (SAFAS), and the National Federation of Municipal Analysts (NFMA).
He holds an MBA from Lindenwood College and a BS from the U.S. Naval Academy.

22
<PAGE>

TEXAS TAX-FREE MONEY MARKET FUND
John C. Bonnell, Executive Director of Money Market Funds since May 1996, has
managed the Fund since May 1996. He has eight years investment management
experience working for IMCO, where he has held various positions in Fixed Income
Investments. Mr. Bonnell earned the CFA designation in 1994 and is a member of
the AIMR, the SAFAS, the NFMA and the Southern Municipal Finance Society. He
holds an MBA from St. Mary's University and a BBA from the University of Texas
at San Antonio.

DESCRIPTION OF SHARES

<PAGE>

SERVICE PROVIDERS

UNDERWRITER/ USAA Investment Management Company
DISTRIBUTOR 9800 Fredericksburg Rd., San Antonio, Texas 78288.

TRANSFER USAA Shareholder Account Services
AGENT 9800 Fredericksburg Rd., San Antonio, Texas 78288.

CUSTODIAN State Street Bank and Trust Company
P.O. Box 1713, Boston, Massachusetts 02105.

LEGAL Goodwin, Procter & Hoar LLP
COUNSEL Exchange Place, Boston, Massachusetts 02109.

INDEPENDENT KPMG Peat Marwick LLP
AUDITORS 112 East Pecan, Suite 2400, San Antonio, Texas 78205.

TELEPHONE ASSISTANCE

(Call toll free - Central Time)
Monday-Friday 8:00 a.m. to 8:00 p.m.
Saturday 8:30 a.m. to 5:00 p.m.

For further information on mutual funds:
1-800-531-8181
In San Antonio 456-7211
For account servicing, exchanges or redemptions:
1-800-531-8448
In San Antonio 456-7202
RECORDED 24 HOUR SERVICE

MUTUAL FUND PRICE QUOTES
(From any phone)
1-800-531-8066
In San Antonio 498-8066

MUTUAL FUND TOUCHLINE(R)
(From Touchtone phones only)
For account balance, last transaction or fund prices:
1-800-531-8777
In San Antonio 498-8777

<PAGE>

PART B

Statements of Additional Information for the

Florida Tax-Free Income and Florida Tax-Free Money
Market Funds and Texas Tax-Free Income and
Texas Tax-Free Money Market Funds

are included herein

<PAGE>

Part B

Statement of Additional Information for the

Florida Tax-Free Income and
Florida Tax-Free Money Market Funds

<PAGE>

[USAA EAGLE LOGO]

USAA STATE STATEMENT OF
TAX-FREE ADDITIONAL INFORMATION
TRUST August 1, 1997

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

USAA STATE TAX-FREE TRUST
FLORIDA FUNDS

USAA STATE TAX-FREE TRUST (the Trust) is a registered investment company
offering shares of four no-load mutual funds, two of which are described in this
Statement of Additional Information (SAI): the Florida Tax-Free Income Fund and
Florida Tax-Free Money Market Fund (collectively, the Funds or the Florida
Funds). Each Fund is classified as diversified and has a common investment
objective of providing Florida investors with a high level of current interest
income that is exempt from federal income taxes and shares that are exempt from
the Florida intangible personal property tax. The Florida Tax-Free Money Market
Fund has a further objective of preserving capital and maintaining liquidity.

You may obtain a free copy of a Prospectus for the Florida Funds dated August 1,
1997, by writing to USAA State Tax-Free Trust, 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. The Prospectus
provides the basic information you should know before investing in the Funds.
This SAI is not a Prospectus and contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide you
with additional information regarding the activities and operations of the Trust
and the Funds, and should be read in conjunction with the Prospectus.

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

TABLE OF CONTENTS

PAGE
2 Valuation of Securities
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
5 Investment Restrictions
6 Special Risk Considerations
8 Portfolio Transactions
9 Further Description of Shares
10 Certain Federal Income Tax Considerations
11 Florida Taxation
12 Trustees and Officers of the Trust
14 The Trust's Manager
15 General Information
16 Calculation of Performance Data
17 Appendix A - Tax-Exempt Securities and Their Ratings
20 Appendix B - Comparison of Portfolio Performance
23 Appendix C - Taxable Equivalent Yield Tables
24 Appendix D - Dollar-Cost Averaging

<PAGE>

VALUATION OF SECURITIES

Shares of each Fund are offered on a continuing best efforts basis through USAA
Investment Management Company (IMCO or the Manager). The offering price for
shares of each Fund is equal to the current net asset value (NAV) per share. The
NAV per share of each Fund is calculated by adding the value of all its
portfolio securities and other assets, deducting its liabilities, and dividing
by the number of shares outstanding.

A Fund's NAV per share is calculated each day, Monday through Friday,
except days on which the New York Stock Exchange (NYSE) is closed. The NYSE is
currently scheduled to be closed on New Year's Day, Martin Luther King Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving, and Christmas, and on the preceding Friday or subsequent Monday
when one of these holidays falls on a Saturday or Sunday, respectively.

The investments of the FLORIDA TAX-FREE INCOME FUND are valued each
business day by a pricing service (the Service) approved by the Board of
Trustees. The Service uses the mean between quoted bid and asked prices or the
last sale price to price securities when, in the Service's judgment, these
prices are readily available and are representative of the securities' market
values. For many securities, such prices are not readily available. The Service
generally prices these securities based on methods which include consideration
of yields or prices of tax-exempt securities of comparable quality, coupon,
maturity and type, indications as to values from dealers in securities, and
general market conditions. Securities purchased with maturities of 60 days or
less are stated at amortized cost which approximates market value. Repurchase
agreements are valued at cost. Securities which cannot be valued by the Service,
and all other assets, are valued in good faith at fair value using methods
determined by the Manager under the general supervision of the Board of
Trustees.

The value of the FLORIDA TAX-FREE MONEY MARKET FUND'S securities is stated
at amortized cost which approximates market value. This involves valuing a
security at its cost and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates. While this method provides certainty in valuation, it may result in
periods during which the value of an instrument, as determined by amortized
cost, is higher or lower than the price the Fund would receive upon the sale of
the instrument.

The valuation of the Florida Tax-Free Money Market Fund's portfolio
instruments based upon their amortized cost is subject to the Fund's adherence
to certain procedures and conditions. Consistent with regulatory requirements,
the Manager will only purchase securities with remaining maturities of 397 days
or less and will maintain a dollar-weighted average portfolio maturity of no
more than 90 days. The Manager will invest only in securities that have been
determined to present minimal credit risk and that satisfy the quality and
diversification requirements of applicable rules and regulations of the
Securities and Exchange Commission (SEC).

The Board of Trustees has established procedures designed to stabilize the
Florida Tax-Free Money Market Fund's price per share, as computed for the
purpose of sales and redemptions, at $1.00. There can be no assurance, however,
that the Fund will at all times be able to maintain a constant $1.00 NAV per
share. Such procedures include review of the Fund's holdings at such intervals
as is deemed appropriate to determine whether the Fund's NAV calculated by using
available market quotations deviates from $1.00 per share and, if so, whether
such deviation may result in material dilution or is otherwise unfair to
existing shareholders. In the event that it is determined that such a deviation
exists, the Board of Trustees will take such corrective action as it regards
necessary and appropriate. Such action may include selling portfolio instruments
prior to maturity to realize capital gains or losses or to shorten average
portfolio maturity, withholding dividends, or establishing a NAV per share by
using available market quotations.

ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES

The value of a shareholder's investment at the time of redemption may be more or
less than the cost at purchase, depending on the value of the securities held in
each Fund's portfolio. Requests for redemption which are subject to any special
conditions, or which specify an effective date other than as provided herein,
cannot be accepted. A gain or loss for tax purposes may be realized on the sale
of shares, depending upon the price when redeemed.

The Board of Trustees may cause the redemption of an account with a total
value of less than $500 provided (1) the value of the account has been reduced,
for reasons other than market action, below the minimum initial investment in
such Fund at the time of the establishment of the account, (2) the account has
remained below the minimum level for six months, and (3) 60 days' prior written
notice of the proposed redemption has been sent to the shareholder. Shares will
be redeemed at the NAV on the date fixed for redemption by the Board of
Trustees. Prompt payment will be made by mail to the last known address of the
shareholder.

2
<PAGE>

The Trust reserves the right to suspend the right of redemption or
postpone the date of payment (1) for any periods during which the NYSE is
closed, (2) when trading in the markets the Trust normally utilizes is
restricted, or an emergency exists as determined by the SEC so that disposal of
the Trust's investments or determination of its NAV is not reasonably
practicable, or (3) for such other periods as the SEC by order may permit for
protection of the Trust's shareholders.

For the mutual protection of the investor and the Funds, the Trust may
require a signature guarantee. If required, EACH signature on the account
registration must be guaranteed. Signature guarantees are acceptable from FDIC
member banks, brokers, dealers, municipal securities dealers, municipal
securities brokers, government securities dealers, government securities
brokers, credit unions, national securities exchanges, registered securities
associations, clearing agencies and savings associations. A signature guarantee
for active duty military personnel stationed abroad may be provided by an
officer of the United States Embassy or Consulate, a staff officer of the Judge
Advocate General, or an individual's commanding officer.

REDEMPTION BY CHECK

Shareholders in the Florida Tax-Free Money Market Fund may request that checks
be issued for their account. Checks must be written in the amount of at least
$250.

Checks issued to shareholders of the Fund will be sent only to the person
in whose name the account is registered and only to the address of record. The
checks must be manually signed by the registered owner(s) exactly as the account
is registered. For joint accounts the signature of either or both joint owners
will be required on the check, according to the election made on the signature
card. Dividends will continue to be earned by the shareholder until the shares
are redeemed by the presentation of a check.

When a check is presented to USAA Shareholder Account Services (Transfer
Agent) for payment, a sufficient number of full and fractional shares in the
investor's account will be redeemed to cover the amount of the check. If an
investor's account is not adequate to cover the amount of a check, the check
will be returned unpaid. Because the value of each account changes as dividends
are accrued on a daily basis, checks may not be used to close an account.

Tthe Transfer Agent will return to the shareholder checks paid during the
month by separate mail. The checkwriting privilege will be subject to the
customary rules and regulations of State Street Bank and Trust Company (State
Street Bank or the Custodian) governing checking accounts. There is no charge to
the shareholder for the use of the checks or for subsequent reorders of checks.

The Trust reserves the right to assess a processing fee against a
shareholder's account for any redemption check not honored by a clearing or
paying agent. Currently, this fee is $15 and is subject to change at any time.
Some examples of such dishonor are improper endorsement, checks written for an
amount less than the minimum check amount, and insufficient or uncollectible
funds.

The Trust, the Transfer Agent and State Street Bank each reserve the right
to change or suspend the checkwriting privilege upon 30 days' written notice to
participating shareholders.

INVESTMENT PLANS

The following investment plans are made available by the Trust to shareholders
of the Funds. At the time you sign up for any of the following investment plans
that utilize the electronic funds transfer service, you will choose the day of
the month (the effective date) on which you would like to regularly purchase
shares. When this day falls on a weekend or holiday, the electronic transfer
will take place on the last business day before the effective date. You may
terminate your participation in a plan at any time. Please call the Manager for
details and necessary forms or applications.

AUTOMATIC PURCHASE OF SHARES

INVESTRONIC(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.

DIRECT PURCHASE SERVICE - The periodic purchase of shares through electronic
funds transfer from an employer (including government allotments), an
income-producing investment, or an account with a participating financial
institution.

AUTOMATIC PURCHASE PLAN - The periodic transfer of funds from a USAA money
market fund to purchase shares in another non-money market USAA mutual fund.
There is a minimum investment required for this program of $5,000 in the money
market fund, with a monthly transaction minimum of $50.

BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.

3
<PAGE>

Participation in these systematic purchase plans will permit a shareholder
to engage in dollar-cost averaging. For additional information concerning the
benefits of dollar-cost averaging, see APPENDIX D.

SYSTEMATIC WITHDRAWAL PLAN

If a shareholder in a single investment account (accounts in different Funds
cannot be aggregated for this purpose) owns shares having a NAV of $5,000 or
more, the shareholder may request that enough shares to produce a fixed amount
of money be liquidated from the account monthly or quarterly. The amount of each
withdrawal must be at least $50. Using the electronic funds transfer service,
shareholders may choose to have withdrawals electronically deposited at their
bank or other financial institution. They may also elect to have checks mailed
to a designated address.

Such a plan may be initiated by depositing shares worth at least $5,000
with the Transfer Agent and by completing a Systematic Withdrawal Plan
application, which may be requested from the Manager. The shareholder may
terminate participation in the plan at any time. There is no charge to the
shareholder for withdrawals under the Systematic Withdrawal Plan. The Trust will
not bear any expenses in administering the plan beyond the regular transfer
agent and custodian costs of issuing and redeeming shares. The Manager will bear
any additional expenses of administering the plan.

Withdrawals will be made by redeeming full and fractional shares on the
date selected by the shareholder at the time the plan is established. Withdrawal
payments made under this plan may exceed dividends and distributions and, to
this extent, will involve the use of principal and could reduce the dollar value
of a shareholder's investment and eventually exhaust the account. Reinvesting
dividends and distributions helps replenish the account. Because share values
and net investment income can fluctuate, shareholders should not expect
withdrawals to be offset by rising income or share value gains.

Each redemption of shares may result in a gain or loss, which must be
reported on the shareholder's income tax return. Therefore, a shareholder should
keep an accurate record of any gain or loss on each withdrawal.

INVESTMENT POLICIES

The section captioned INVESTMENT OBJECTIVES AND POLICIES in the Prospectus
describes the fundamental investment objectives and the investment policies
applicable to each Fund and the following is provided as additional information.

CALCULATION OF PORTFOLIO WEIGHTED AVERAGE MATURITIES

Weighted average maturity is derived by multiplying the value of each investment
by the number of days remaining to its maturity, adding these calculations, and
then dividing the total by the value of the Fund's portfolio. An obligation's
maturity is typically determined on a stated final maturity basis, although
there are some exceptions to this rule.

With respect to obligations held by the Florida Tax-Free Income Fund, if
it is probable that the issuer of an instrument will take advantage of a
maturity-shortening device, such as a call, refunding, or redemption provision,
the date on which the instrument will probably be called, refunded, or redeemed
may be considered to be its maturity date. Also, the maturities of securities
subject to sinking fund arrangements are determined on a weighted average life
basis, which is the average time for principal to be repaid. The weighted
average life of these securities is likely to be substantially shorter than
their stated final maturity. In addition, for purposes of the Fund's investment
policies, an instrument will be treated as having a maturity earlier than its
stated maturity date if the instrument has technical features such as puts or
demand features which, in the judgment of the Manager, will result in the
instrument being valued in the market as though it has the earlier maturity.

The Florida Tax-Free Money Market Fund will determine the maturity of an
obligation in its portfolio in accordance with Rule 2a-7 under the Investment
Company Act of 1940, as amended (1940 Act).

REPURCHASE AGREEMENTS

Each Fund may invest up to 5% of its net assets in repurchase agreements. A
repurchase agreement is a transaction in which a security is purchased with a
simultaneous commitment to sell the security back to the seller (a commercial
bank or recognized securities dealer) at an agreed upon price on an agreed upon
date, usually not more than seven days from the date of purchase. The resale
price reflects the purchase price plus an agreed upon market rate of interest
which is unrelated to the coupon rate or maturity of the purchased security. A
repurchase agreement involves the obligation of the seller to pay the agreed
upon price, which obligation is in effect secured by the value of the underlying
security. In these transactions, the securities purchased by a Fund will have a
total value equal to or in excess of the amount of the repurchase obligation and
will be held by the Funds' custodian until repurchased. If the seller defaults
and the value of the underlying security declines, a Fund may incur a loss and
may incur expenses in selling the collateral. If the seller seeks relief under
the bankruptcy laws, the disposition of the collateral may be delayed or
limited. Any

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investments in repurchase agreements will give rise to income which will not
qualify as tax-exempt income when distributed by a Fund.

OTHER POLICIES

Each Fund may lend its securities and engage in short sells against the box. The
Florida Tax-Free Income Fund may also invest in options, financial futures
contracts and options on financial futures contracts. However, the Funds do not
intend to engage in any of these practices during the coming year without first
supplying further information in the Prospectus.

INVESTMENT RESTRICTIONS

The following investment restrictions have been adopted by the Trust for and are
applicable to each Fund. These restrictions may not be changed for any given
Fund without approval by the lesser of (1) 67% or more of the voting securities
present at a meeting of the Fund if more than 50% of the outstanding voting
securities of the Fund are present or represented by proxy or (2) more than 50%
of the Fund's outstanding voting securities. The investment restrictions of one
Fund may be changed without affecting those of the other Fund.

Under the restrictions, neither Fund will:

(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except Government Securities, as such term is defined in the 1940
Act) if, as a result, the Fund would own more than 10% of the outstanding
voting securities of such issuer or the Fund would have more than 5% of
the value of its total assets invested in the securities of such issuer;
for purposes of this limitation, identification of the "issuer" will be
based on a determination of the source of assets and revenues committed to
meeting interest and principal payments of each security; for purposes of
this limitation the State of Florida or other jurisdictions and each of
its separate political subdivisions, agencies, authorities and
instrumentalities shall be treated as a separate issuer;

(2) Borrow money, except that a Fund may borrow money for temporary or
emergency purposes in an amount not exceeding 33 1/3% of its total assets
(including the amount borrowed) less liabilities (other than borrowings),
nor will either Fund purchase securities when its borrowings exceed 5% of
its total assets;

(3) Purchase any securities which would cause 25% or more of the value of that
Fund's total assets at the time of such purchase to be invested in
securities the interest upon which is derived from revenues or projects
with similar characteristics, such as toll road revenue bonds, housing
revenue bonds, electric power project revenue bonds, or in industrial
revenue bonds which are based, directly or indirectly, on the credit of
private entities of any one industry; provided that the foregoing
limitation does not apply with respect to investments in U.S. Treasury
Bills, other obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, and, in the case of the Florida Tax-Free
Money Market Fund, certificates of deposit and banker's acceptances of
domestic banks;

(4) Issue senior securities, except as permitted under the 1940 Act;

(5) Underwrite securities of other issuers, except to the extent that it may
be deemed to act as a statutory underwriter in the distribution of any
restricted securities or not readily marketable securities;

(6) Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent investments in
securities secured by real estate or interests therein);

(7) Lend any securities or make any loan if, as a result, more than 33 1/3% of
its total assets would be lent to other parties, except that this
limitation does not apply to purchases of debt securities or to repurchase
agreements; or

(8) Purchase or sell commodities or commodities contracts except that the
Florida Tax-Free Income Fund may invest in financial futures contracts,
options thereon and similar instruments.

ADDITIONAL RESTRICTIONS

The following restrictions are not considered to be fundamental policies of the
Funds. The Trust's Board of Trustees may change these additional restrictions
without notice to or approval by the shareholders.

Neither Fund will:

(1) Pledge, mortgage or hypothecate its assets to any extent greater than
33 1/3% of the value of its total assets;

(2) Purchase or retain securities of any issuer if any officer or Trustee of
the Trust or its Manager owns individually more than one-half of one
percent (1/2%) of the securities of that issuer, and collectively the
officers and Trustees of the Trust and Manager together own more than 5%
of the securities of that issuer;

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(3) The Florida Tax-Free Income Fund may not invest more than 15% of the value
of its net assets and the Florida Tax-Free Money Market Fund may not
invest more than 10% of the value of its net assets in illiquid securities
(including repurchase agreements maturing in more than seven days);

(4) Purchase securities on margin or sell securities short except that a Fund
may obtain short-term credits necessary for the clearance of securities
transactions and make short sales against the box; for purposes of the
restriction the deposit or repayment of initial or variation margin in
connection with financial futures contracts or related options will not be
deemed to be a purchase of securities on margin by a Fund;

(5) Purchase securities of other investment companies except to the extent
permitted by applicable law;

(6) Purchase or sell puts, calls, straddles or spreads or any combination
thereof, except to the extent permitted by applicable law; or

(7) Purchase interests in oil, gas, or other mineral exploration or
development programs, except that it may purchase securities of issuers
whose principal business activities fall within such areas.

SPECIAL RISK CONSIDERATIONS

The information set forth below is derived from official statements prepared in
connection with the issuance of bonds of the State of Florida (the "State") and
other sources that are generally available to investors. The information is
provided as general information intended to give a brief and historical
description and is not intended to indicate future or continuing trends in the
financial or other positions of the State or of local governmental units located
in the State. The Trust has not independently verified this information.

THE FLORIDA ECONOMY. Throughout the 1980s, the State's unemployment rate,
generally, tracked below that of the nation. In the nineties, the trend was
reversed, until 1995 and 1996, where the State's unemployment rate again tracked
below the U.S. The State's unemployment rate for 1996 was 5.3%, while the
national average was 5.4%. The State's unemployment rate for 1997 is projected
to be 5.1%, while the national average is projected to be 5.3%.

Personal income in the State has been growing strongly the last several
years and has generally outperformed both the nation as a whole and the
Southeast in particular. The reasons for this are twofold: first, the State's
population has expanded at a very strong pace; and second, the State's economy
since the early seventies has diversified in such a way as to provide a broader
economic base. From 1985 through 1995, the State's per capita income rose an
average of 5.0% per year, while the national per capita income increased an
average of 4.9%. For 1995, the State's per capita personal income rose an
average of 5.8% while the national per capita personal income rose 5.0%. In
1995, per capita personal income in Florida was $22,916, while the national per
capita personal income was $20,645. The structure of the State's income differs
from that of the nation and the Southeast. Because the State has a
proportionately greater retirement age population, property income (dividends,
interest and rent) and transfer payments (social security and pension benefits,
among other sources of income) are a relatively more important source of income.
For example, Florida's employment income in 1995, represented 60.6% of total
personal income, while the nation's share of total personal income in the form
of wages and salaries and other labor benefits was 70.8%. Transfer payments,
such as social security, are occasionally subject to legislative change.

The State's strong population growth is one main reason why its economy
has typically performed better than the nation as a whole. In 1980, the State
was ranked seventh among the 50 states with a population of 9.7 million people.
The State has continued to grow since then and as of April 1, 1996 ranks fourth
with an estimated population of 14.4 million. Since 1987, the State's average
annual rate of population increase has been approximately 2.2% as compared to an
approximately 1.0% average annual increase for the nation as a whole. While
annual growth in the State's population is expected to decline somewhat, it is
still expected to grow approximately 230,000 per year throughout the 1990s,
however, no assurance can be given that such growth will continue.

Tourism is one of the State's most important industries. Approximately
42.9 million people visited the State in 1995, as reported by the Florida
Department of Commerce. By the end of this fiscal year, 42.7 million domestic
and international tourists are expected to have visited this State. The State
expects 44.7 million visitors in 1997-98. The State's tourism still appears to
be suffering from the effects of negative publicity regarding crime against
tourists in the State. Also, factors such as "product maturity" of the State's
vacation package, higher prices, and more aggressive marketing by competing
vacation destinations, could be contributory causes of the tourism slowdown.
Notably, in fiscal year 1993-94, the State experienced a 4.0% drop in the number
of tourists.

Until recently, the State has had a dynamic construction industry, with
single and multi-family housing starts accounting for approximately 8.1% of
total U.S. housing starts in 1996, while the State's population was only 5.5% of
the nation's total population. The reason for such a dynamic construction
industry was the rapid

<PAGE>

growth of the State's population. Since 1985, total housing starts have averaged
approximately 148,000 per year. Total housing starts were 118,400 in 1996, and
are projected to be 115,500 in 1997.

The Florida economy is expected to grow at a moderate pace, but will
continue to outperform the U.S. as a whole. An important element of Florida's
economic outlook is the construction sector. Multi-family starts have been slow
to recover in the State from the early 90's recession, but are now showing
stronger growth. Overall, the Florida economy appears to be in line with the
U.S. economy and is expected to experience steady growth over the next couple of
years.

FLORIDA REVENUES AND EXPENDITURES. Financial operations of the State
covering all receipts and expenditures are maintained through the use of four
funds--General Revenue Fund, Trust Funds, Working Capital Fund and the Budget
Stabilization Fund. In fiscal year 1995-96, the State derived approximately 66%
of its total direct revenues to these funds from State taxes and fees. Federal
funds and other special revenues accounted for the remaining revenues. Major
sources of tax revenues to the General Revenue Fund are the sales and use tax,
corporate income tax, intangible personal property tax, and beverage tax, which
amounted to 69%, 7%, 4%, and 4%, respectively, of total General Revenue Fund
receipts. State expenditures are categorized for budget and appropriation
purposes by type of fund and spending unit, which are further subdivided by line
item. In fiscal year 1995-96, appropriations from the General Revenue Fund for
education, health and welfare, and public safety amounted to approximately 51%,
31% and 14%, respectively, of total General Revenues.

The estimated General Revenue plus Working Capital and Budget
Stabilization funds available to the State for fiscal year 1996-97 total
$16,617.4 million, a 6.7% increase over 1995-96. Compared to effective
appropriations from General Revenues plus Working Capital and Budget
Stabilization funds for fiscal year 1996-97 of $15,537.2 million, this results
in unencumbered reserves estimated at $1,080.2 million at the end of fiscal year
1996-97. Estimated fiscal year 1997-98 General Revenue plus Working Capital and
Budget Stabilization funds available total $17,537.3 million, a 5.5% increase
over fiscal year 1996-97.

The sales and use tax is the greatest single source of tax receipts in the
State. For the State fiscal year ended June 30, 1996, receipts from this source
were $11,461 million, an increase of 7.4% from fiscal year 1994-95. The second
largest source of State tax receipts is the Motor Fuel Tax. Preliminary data
show collections from this source in State fiscal year ending June 30, 1996,
were $1,923 million. However, these revenues are almost entirely dedicated trust
funds for specific purposes and are not included in the State General Revenue
Fund. Alcoholic beverage tax revenues totalled $441.5 million for the State
fiscal year ending June 30, 1996. The receipts of corporate income tax for the
fiscal year ended June 30, 1996 were $1,162.7 million, an increase of 9.3% from
the previous fiscal year. Gross Receipt tax collections for fiscal year 1995-96
totalled $543.3 million, an increase of 6.9% over the previous fiscal year.
Documentary stamp tax collections totalled $775.2 million during fiscal year
1995-96, increasing 11.5% from the previous fiscal year. The intangible personal
property tax is a tax on stocks, bonds, notes, governmental leaseholds, certain
limited partnership interests, mortgages and other obligations secured by liens
on Florida realty, and other intangible personal property. Total collections
from intangible personal property taxes were $895.9 million during fiscal year
ending June 30, 1996, a 9.5% increase from the previous fiscal year. Severance
taxes totalled $77.2 million during fiscal year 1995-96, up 26.1% from the
previous fiscal year. In November, 1986, the voters of the State approved a
constitutional amendment to allow the State to operate a lottery. Fiscal year
1995-96 produced ticket sales of $2.07 billion of which education received
approximately $788.1 million.

The State Constitution does not permit a state or local personal income
tax. An amendment to the State Constitution by the electors of the State is
required to impose a personal income tax in the State.

Since January 1, 1994, property valuations for homestead property have
been subject to a growth cap. Growth in the just (market) value of property
qualifying for the homestead exemption is limited to 3% or the change in the
Consumer Price Index, whichever is less. If the property changes ownership or
homestead status, it is to be re-valued at full just value on the next tax roll.
Although the impact of the growth cap cannot be determined, it may have the
effect of causing local government units in the State to rely more on non-ad
valorem revenues to meet operating and other requirements normally funded with
ad valorem tax revenues.

An amendment to the State Constitution was approved by statewide ballot in
the November 8, 1994, general election which is commonly referred to as the
"Limitation on State Revenues Amendment." This amendment provides that State
revenues collected for any fiscal year shall be limited to State revenues
allowed under the amendment for the prior fiscal year plus an adjustment for
growth. Growth is defined as an amount equal to the average annual rate of
growth in State personal income over the most recent twenty quarters times the
State revenues allowed under the amendment for the prior fiscal year. State
revenues collected for any fiscal year in excess of this limitation are required
to be transferred to the Budget Stabilization Fund until the fund reaches the
maximum balance specified in Section 19(g) of Article III of the State
Constitution, and thereafter is required to be refunded to taxpayers as provided
by general law. The

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<PAGE>

limitation on State revenues imposed by the amendment may be increased by the
Legislature, by a two-thirds vote of each house.

The term "State revenues," as used in the amendment, means taxes, fees,
licenses, and charges for services imposed by the Legislature on individuals,
businesses, or agencies outside State government. However, the term "State
revenues" does not include: (1) revenues that are necessary to meet the
requirements set forth in documents authorizing the issuance of bonds by the
State; (2) revenues that are used to provide matching funds for the federal
Medicaid program with the exception of the revenues used to support the Public
Medical Assistance Trust Fund or its successor program and with the exception of
State matching funds used to fund elective expansions made after July 1, 1994;
(3) proceeds from the State lottery returned as prizes; (4) receipts of the
Florida Hurricane Catastrophe Fund; (5) balances carried forward from prior
fiscal years; (6) taxes, licenses, fees and charges for services imposed by
local, regional, or school district governing bodies; or (7) revenue from taxes,
licenses, fees and charges for services required to be imposed by any amendment
or revision to the State Constitution after July 1, 1994. The amendment took
effect on January 1, 1995, and was first applicable to State fiscal year
1995-96.

It should be noted that many of the provisions of the amendment are
ambiguous, and likely will not be clarified until State courts have ruled on
their meanings. Further, it is unclear how the Legislature will implement the
language of the amendment and whether such implementing legislation itself will
be the subject of further court interpretation.

The Fund cannot predict the impact of the amendment on State finances. To
the extent local governments traditionally receive revenues from the State which
are subject to, and limited by, the amendment, the future distribution of such
State revenues may be adversely affected by the amendment.

According to the Office of the Comptroller, Department of Banking and
Finance of the State, as of February 21, 1996, the State maintains a high bond
rating from Moody's Investors Service (Aa2), Standard & Poor's Ratings Group
(AA+), and Fitch Investors Service, Inc. (AA) on all of its general obligation
bonds. Such ratings may be revised and downgraded at any time by such rating
agencies. Outstanding general obligation bonds at June 30, 1996 totalled almost
$7.4 billion and were issued to finance capital outlay for educational projects
of both local school districts and state universities, environmental protection
and highway construction. The State has issued over $805 million of general
obligation bonds since July 1, 1996.

PORTFOLIO TRANSACTIONS

The Manager, pursuant to the Advisory Agreement dated June 25, 1993, and subject
to the general control of the Trust's Board of Trustees, places all orders for
the purchase and sale of Fund securities. Purchases of Fund securities are made
either directly from the issuer or from dealers who deal in tax-exempt
securities. The Manager may sell Fund securities prior to maturity if
circumstances warrant and if it believes such disposition is advisable. In
connection with portfolio transactions for the Trust, the Manager seeks to
obtain the best available net price and most favorable execution for its orders.
The Manager has no agreement or commitment to place transactions with any
broker-dealer and no regular formula is used to allocate orders to any
broker-dealer. However, the Manager may place security orders with brokers or
dealers who furnish research or other services to the Manager as long as there
is no sacrifice in obtaining the best overall terms available. Payment for such
services would be generated only through purchase of new issue fixed income
securities.

Such research and other services may include, for example: advice
concerning the value of securities, the advisability of investing in,
purchasing, or selling securities, and the availability of securities or the
purchasers or sellers of securities; analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy, and
performance of accounts; and various functions incidental to effecting
securities transactions, such as clearance and settlement. The Manager
continuously reviews the performance of the broker-dealers with whom it places
orders for transactions. The receipt of research from broker-dealers that
execute transactions on behalf of the Trust may be useful to the Manager in
rendering investment management services to other clients (including affiliates
of the Manager), and conversely, such research provided by broker-dealers who
have executed transaction orders on behalf of other clients may be useful to the
Manager in carrying out its obligations to the Trust. While such research is
available to and may be used by the Manager in providing investment advice to
all its clients (including affiliates of the Manager), not all of such research
may be used by the Manager for the benefit of the Trust. Such research and
services will be in addition to and not in lieu of research and services
provided by the Manager, and the expenses of the Manager will not necessarily be
reduced by the receipt of such supplemental research. See THE TRUST'S MANAGER.

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<PAGE>

purchased for other customers in order to obtain best execution and lower
brokerage commissions, if any. In such event, allocation of the securities so
purchased or sold, as well as the expenses incurred in the transaction, will be
made by the Manager in the manner it considers to be most equitable and
consistent with its fiduciary obligations to all such customers, including the
Trust. In some instances, this procedure may impact the price and size of the
position obtainable for the Trust.

The tax-exempt security market is typically a "dealer" market in which
investment dealers buy and sell bonds for their own accounts, rather than for
customers, and although the price may reflect a dealer's mark-up or mark-down,
the Trust pays no brokerage commissions as such. In addition, some securities
may be purchased directly from issuers.

PORTFOLIO TURNOVER RATE

The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year.

The rate of portfolio turnover will not be a limiting factor when the
Manager deems changes in the Florida Tax-Free Income Fund's portfolio
appropriate in view of its investment objective. For example, securities may be
sold in anticipation of a rise in interest rates (market decline) or purchased
in anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another security of comparable quality may
be purchased at approximately the same time in order to take advantage of what
the Fund believes to be a temporary disparity in the normal yield relationship
between the two securities. These yield disparities may occur for reasons not
directly related to the investment quality of particular issues or the general
movement of interest rates, such as changes in the overall demand for or supply
of various types of tax-exempt securities.

For the last two fiscal years the Florida Tax-Free Income Fund's portfolio
turnover rates were as follows:

1996. . . . . 88.20% 1997 . . . . . 44.75%

Portfolio turnover rates have been calculated excluding short-term
variable rate securities, which are those with put date intervals of less than
one year.

FURTHER DESCRIPTION OF SHARES

The Trust is authorized to issue shares of beneficial interest in separate
portfolios. Four such portfolios have been established, two of which are
described in this SAI. Under the Master Trust Agreement, the Board of Trustees
is authorized to create new portfolios in addition to those already existing
without shareholder approval.

Each Fund's assets and all income, earnings, profits and proceeds thereof,
subject only to the rights of creditors, are specifically allocated to such
Fund. They constitute the underlying assets of each Fund, are required to be
segregated on the books of account, and are to be charged with the expenses of
such Fund. Any general expenses of the Trust not readily identifiable as
belonging to a particular Fund are allocated on the basis of the Funds' relative
net assets during the fiscal year or in such other manner as the Board
determines to be fair and equitable. Each share of each Fund represents an equal
proportionate interest in that Fund with every other share and is entitled to
dividends and distributions out of the net income and capital gains belonging to
that Fund when declared by the Board.

Under the Trust's Master Trust Agreement, no annual or regular meeting of
shareholders is required. Thus, there will ordinarily be no shareholder meeting
unless otherwise required by the 1940 Act. Under certain circumstances, however,
shareholders may apply to the Trustees for shareholder information in order to
obtain signatures to request a shareholder meeting. Moreover, pursuant to the
Master Trust Agreement, any Trustee may be removed by the vote of two-thirds of
the outstanding Trust shares and holders of 10% or more of the outstanding
shares of the Trust can require Trustees to call a meeting of shareholders for
the purpose of voting on the removal of one or more Trustees. On any matter
submitted to the shareholders, the holder of each Fund share is entitled to one
vote per share (with proportionate voting for fractional shares) regardless of
the relative net asset values of the Funds' shares. However, on matters
affecting an individual Fund, a separate vote of the shareholders of that Fund
is required. Shareholders of a Fund are not entitled to vote on any matter which
does not affect that Fund but which requires a separate vote of another Fund.
Shares do not have cumulative voting rights, which means that holders of more
than 50% of the shares voting for the election of Trustees can elect 100% of the
Trust's Board of Trustees, and the holders of less than 50% of the shares voting
for the election of Trustees will not be able to elect any person as a Trustee.

Shareholders of a particular Fund might have the power to elect all of the
Trustees of the Trust because that Fund has a majority of the total outstanding
shares of the Trust. When issued, each Fund's shares are fully paid and
nonassessable, have no pre-emptive or subscription rights, and are fully
transferable. There are no conversion rights.

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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

TAXATION OF THE FUNDS

Each Fund intends to qualify as a regulated investment company under Subchapter
M of the Internal Revenue Code of 1986, as amended (the Code). Accordingly, each
Fund will not be liable for federal income taxes on its taxable net investment
income and net capital gains (capital gains in excess of capital losses) that
are distributed to shareholders, provided that each Fund distributes at least
90% of its net investment income and net short-term capital gain for the taxable
year.

To qualify as a regulated investment company, a Fund must, among other
things, (1) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of stock, securities or foreign currencies, or other
income derived with respect to its business of investing in such stock,
securities or currencies (the 90% test); (2) derive in each taxable year less
than 30% of its gross income from the sale or other disposition of stock or
securities held less than three months (the 30% test), and (3) satisfy certain
diversification requirements at the close of each quarter of the Fund's taxable
year. Furthermore, to pay tax-exempt interest income dividends, at least 50% of
the value of each Fund's total assets at the close of each quarter of its
taxable year must consist of obligations the interest of which is exempt from
federal income tax. Each Fund intends to satisfy this requirement.

The Code imposes a nondeductible 4% excise tax on a regulated investment
company that fails to distribute during each calendar year an amount at least
equal to the sum of (1) 98% of its taxable net investment income for the
calendar year, (2) 98% of its capital gain net income for the twelve-month
period ending on October 31, and (3) any prior amounts not distributed. Each
Fund intends to make such distributions as are necessary to avoid imposition of
this excise tax.

For federal income tax purposes, debt securities purchased by the Funds
may be treated as having original issue discount. Original issue discount
represents interest income for federal income tax purposes and can generally be
defined as the excess of the stated redemption price at maturity of a debt
obligation over the issue price. Original issue discount is treated for federal
income tax purposes as earned by the Funds, whether or not any income is
actually received, and therefore is subject to the distribution requirements of
the Code. However, original issue discount with respect to tax-exempt
obligations generally will be excluded from the Funds' taxable income, although
such discount will be included in gross income for purposes of the 90% test and
the 30% test described previously. Original issue discount with respect to
tax-exempt securities is accrued and added to the adjusted tax basis of such
securities for purposes of determining gain or loss upon sale or at maturity.
Generally, the amount of original issue discount is determined on the basis of a
constant yield to maturity which takes into account the compounding of accrued
interest. An investment in a stripped bond or stripped coupon will result in
original issue discount.

Debt securities may be purchased by the Funds at a market discount. Market
discount occurs when a security is purchased at a price less than the original
issue price adjusted for accrued original issue discount, if any. The Funds
intend to defer recognition of accrued market discount until maturity or other
disposition of the bond. For securities purchased at a market discount, the gain
realized on disposition will be treated as taxable ordinary income to the extent
it does not exceed accrued market discount on the bond.

The Funds may also purchase debt securities at a premium, i.e., at a
purchase price in excess of face amount. With respect to tax-exempt securities,
the premium must be amortized to the maturity date but no deduction is allowed
for the premium amortization. The amortized bond premium will reduce the Funds'
adjusted tax basis in the securities. For taxable securities, the premium may be
amortized if the Funds so elect. The amortized premium on taxable securities is
first offset against interest received on the securities and then allowed as a
deduction, and, for securities issued after September 27, 1985, must be
amortized under an economic accrual method.

TAXATION OF THE SHAREHOLDERS

Taxable distributions are generally included in a shareholder's gross income for
the taxable year in which they are received. Dividends declared in October,
November, or December and made payable to shareholders of record in such a month
will be deemed to have been received on December 31, if a Fund pays the dividend
during the following January. It is expected that none of the Funds'
distributions will qualify for the corporate dividends-received deduction.

To the extent that a Fund's dividends distributed to shareholders are
derived from interest income exempt from federal income tax and are designated
as "exempt-interest dividends" by a Fund, they will be excludable from a
shareholder's gross income for federal income tax purposes. Shareholders who are
recipients of Social Security benefits should be aware that exempt-interest
dividends received from a Fund are includible in their "modified adjusted gross
income" for purposes of determining the amount of such Social Security benefits,
if any, that are required to be included in their gross income.

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All distributions of investment income during the year will have the same
percentage designated as tax-exempt. This method is called the "average annual
method." Since the Funds invest primarily in tax-exempt securities, the
percentage will be substantially the same as the amount actually earned during
any particular distribution period.

A shareholder of the Florida Tax-Free Income Fund should be aware that a
redemption of shares (including any exchange into another USAA Fund) is a
taxable event and, accordingly, a capital gain or loss may be recognized. If a
shareholder receives an exempt-interest dividend with respect to any share and
such share has been held for six months or less, any loss on the redemption or
exchange will be disallowed to the extent of such exempt-interest dividend.
Similarly, if a shareholder of the Fund receives a distribution taxable as
long-term capital gain with respect to shares of the Fund and redeems or
exchanges shares before he has held them for more than six months, any loss on
the redemption or exchange (not otherwise disallowed as attributable to an
exempt-interest dividend) will be treated as long-term capital loss.

The Funds may invest in private activity bonds. Interest on certain
private activity bonds issued after August 7, 1986, is an item of tax preference
for purposes of the Federal Alternative Minimum Tax (AMT), although the interest
continues to be excludable from gross income for other purposes. AMT is a
supplemental tax designed to ensure that taxpayers pay at least a minimum amount
of tax on their income, even if they make substantial use of certain tax
deductions and exclusions (referred to as tax preference items). Interest from
private activity bonds is one of the tax preference items that is added to
income from other sources for the purposes of determining whether a taxpayer is
subject to the AMT and the amount of any tax to be paid. For corporate
investors, alternative minimum taxable income is increased by 75% of the amount
by which adjusted current earnings (ACE) exceeds alternative minimum taxable
income before the ACE adjustment. For corporate taxpayers, all tax-exempt
interest is considered in calculating the AMT as part of the ACE. Prospective
investors should consult their own tax advisers with respect to the possible
application of the AMT to their tax situation.

Opinions relating to the validity of tax-exempt securities and the
exemption of interest thereon from federal income tax are rendered by recognized
bond counsel to the issuers. Neither the Manager's nor the Funds' counsel makes
any review of the basis of such opinions.

FLORIDA TAXATION

TAXATION OF THE FUNDS

If the Funds have tax nexus with Florida, such as through the location within
Florida of the Trust or Funds' activities or those of their advisers, then the
Florida Funds will be subject to Florida corporate income tax. In addition, if
the Funds' intangible assets have a taxable situs in Florida, then the Funds
will be subject to Florida's intangible personal property tax. The Funds intend
to operate so as not to be subject to Florida taxation.

TAXATION OF THE SHAREHOLDERS

Florida does not impose an income tax on individuals. Thus, dividends and
distributions paid by the Funds to individuals who are residents of Florida are
not taxable by Florida. Florida imposes an income tax on corporations and
similar entities at a rate of 5.5%. Dividends and distributions of investment
income and capital gains by the Funds will be subject to the Florida corporate
income tax. Accordingly, investors in the Funds, including, in particular,
investors that may be subject to the Florida corporate income tax, should
consult their tax advisers with respect to the application of the Florida
corporate income tax to the receipt of Fund dividends and distributions and to
the investor's Florida tax situation in general.

Florida imposes a tax on intangible personal property owned by Florida
residents. Shares in the Funds constitute intangible personal property for
purposes of the Florida intangible personal property tax. Thus, unless an
exemption applies, shares in the Funds will be subject to the Florida intangible
personal property tax. Florida provides an exemption for shares in an investment
fund if the Fund's portfolio of assets consists solely of assets exempt from the
Florida intangible personal property tax. Assets exempt from the Florida
intangible personal property tax include obligations issued by the State of
Florida and its political subdivisions, municipalities, and public authorities;
obligations of the U.S. Government, its agencies, and certain territories and
possessions such as Puerto Rico, the Virgin Islands, and Guam; and cash.

The Funds received a ruling from the Florida Department of Revenue that
if, on the last business day of any calendar year, the Funds' assets consist
solely of assets exempt from the Florida intangible personal property tax,
shares of the Funds owned by Florida residents will be exempt from the Florida
intangible personal property tax in the following year. If shares of the Funds
are subject to the Florida intangible personal property tax, because less than
100% of the Funds' assets on the last business day of the calendar year consist
of assets exempt from the Florida intangible personal property tax, only the
portion of the NAV of a share of the Funds that is attributable to obligations
of the U.S. Government will be exempt from taxation.

11
<PAGE>

TRUSTEES AND OFFICERS OF THE TRUST

The Board of Trustees of the Trust consists of seven Trustees. Set forth below
are the Trustees and officers of the Trust, and their respective offices and
principal occupations during the last five years. Unless otherwise indicated,
the business address of each is 9800 Fredericksburg Rd., San Antonio, TX 78288.

Robert G. Davis 1, 2
Trustee and Chairman of the Board of Trustee
Age: 50

President, Chief Executive Officer, Director and Vice Chairman of the Board of
Directors of USAA Capital Corporation and several of its subsidiaries and
affiliates (1/97-present); Director, Chairman, President, and Chief Executive
Officer, USAA Financial Planning Network, Inc. (1/97-present); Director, Vice
Chairman, Executive Vice President, and Chief Operating Officer, USAA Financial
Planning Network, Inc. (9/96-1/97); Special Assistant to Chairman, United
Services Automobile Association (USAA) (6/96-12/96); President and Chief
Executive Officer, Banc One Credit Corporation (12/95-6/96); and President and
Chief Executive Officer, Banc One Columbus, (8/91-12/95). Mr. Davis also serves
as a Trustee and Chairman of the Board of Trustees of USAA Investment Trust and
as a Director and Chairman of the Boards of Directors of USAA Investment
Management Company (IMCO), USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc.,
USAA Shareholder Account Services, USAA Federal Savings Bank and USAA Real
Estate Company.

Michael J.C. Roth 1, 2
Trustee, President and Vice Chairman of the Board of Trustees
Age: 55

Chief Executive Officer, IMCO (10/93-present); President, Director and Vice
Chairman of the Board of Directors, IMCO (1/90-present). Mr. Roth serves as
President, Trustee and Vice Chairman of the Board of Trustees of USAA Investment
Trust, as President, Director and Vice Chairman of the Boards of Directors of
USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc. and USAA Shareholder Account
Services, as Director of USAA Life Insurance Company and as Trustee and Vice
Chairman of USAA Life Investment Trust.

John W. Saunders, Jr. 1, 2, 4
Trustee and Vice President
Age: 62

Senior Vice President, Fixed Income Investments, IMCO (10/85-present). Mr.
Saunders serves as a Trustee and Vice President of USAA Investment Trust, as a
Director of IMCO, Director and Vice President of USAA Mutual Fund, Inc. and USAA
Tax Exempt Fund, Inc., as Senior Vice President of USAA Shareholder Account
Services, and as Vice President of USAA Life Investment Trust.

Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Trustee
Age: 52

President, Postal Addvantage (7/92-present); Consultant, Nancy Harkins Stationer
(8/91-12/95). Mrs. Dreeben serves as a Trustee of USAA Investment Trust and as a
Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.

Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Trustee
Age: 62

Retired. Assistant General Manager for Finance, San Antonio City Public Service
Board (1976-1996). Mr. Freeman serves as a Trustee of USAA Investment Trust and
as a Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.

<PAGE>

Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Trustee
Age: 51

Manager, Statistical Analysis Section, Southwest Research Institute (8/75-
present). Dr. Mason serves as a Trustee of USAA Investment Trust and as a
Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.

Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Trustee
Age: 54

Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Trustee of USAA Investment Trust and as a Director of USAA Mutual Fund,
Inc. and USAA Tax Exempt Fund, Inc.

Michael D. Wagner 1
Secretary
Age: 49

Vice President, Corporate Counsel, USAA (1982-present). Mr. Wagner has held
various positions in the legal department of USAA since 1970 and serves as Vice
President, Secretary and Counsel, IMCO and USAA Shareholder Account Services;
Secretary, USAA Investment Trust, USAA Mutual Fund, Inc. and USAA Tax Exempt
Fund, Inc., and as Vice President, Corporate Counsel, for various other USAA
subsidiaries and affiliates.

Alex M. Ciccone 1
Assistant Secretary
Age: 47

Vice President, Compliance, IMCO (12/94-present); Vice President and Chief
Operating Officer, Commonwealth Shareholder Services (6/94-11/94); and Vice
President, Compliance, IMCO (12/91-5/94). Mr. Ciccone serves as Assistant
Secretary of USAA Investment Trust, USAA Mutual Fund, Inc. and USAA Tax Exempt
Fund, Inc.

Sherron A. Kirk 1
Treasurer
Age: 52

Vice President, Controller, IMCO (10/92-present); Vice President, Corporate
Financial Analysis, USAA (9/92- 10/92); Assistant Vice President, Financial
Plans and Support, USAA (8/91-9/92). Mrs. Kirk serves as Treasurer of USAA
Investment Trust, USAA Mutual Fund, Inc., and USAA Tax Exempt Fund, Inc. and as
Vice President, Controller of USAA Shareholder Account Services.

Dean R. Pantzar 1
Assistant Treasurer
Age: 38

Executive Director, Mutual Fund Accounting, IMCO (10/95-present); Director,
Mutual Fund Accounting, IMCO (12/94-10/95); Senior Manager, KPMG Peat Marwick
LLP (7/88-12/94). Mr. Pantzar serves as Assistant Treasurer of USAA Mutual Fund,
Inc., USAA Investment Trust, and USAA Tax Exempt Fund, Inc.
- ---------------

1 Indicates those Trustees and officers who are employees of the Manager or
affiliated companies and are considered "interested persons" under the 1940
Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee

Between the meetings of the Board of Trustees and while the Board is not
in session, the Executive Committee of the Board of Trustees has all the powers
and may exercise all the duties of the Board of Trustees in the management of
the business of the Trust which may be delegated to it by the Board. The Pricing
and Investment Committee of the Board of Trustees acts upon various
investment-related issues and other matters which have been delegated to it by
the Board. The Audit Committee of the Board of Trustees reviews the financial
statements and the auditor's reports and undertakes certain studies and analyses
as directed by the Board. The Corporate Governance Committee of the Board of
Trustees maintains oversight of the organization, performance, and effectiveness
of the Board and independent Trustees.

13
<PAGE>

In addition to the previously listed Trustees and/or officers of the Trust
who also serve as Directors and/or officers of the Manager, the following
individuals are Directors and/or executive officers of the Manager: Harry W.
Miller, Senior Vice President, Investments (Equity); Carl W. Shirley, Senior
Vice President, Insurance Company Portfolios; and John J. Dallahan, Senior Vice
President, Investment Services. There are no family relationships among the
Trustees, officers and managerial level employees of the Trust or its Manager.

The following table sets forth information describing the compensation of
the current Trustees of the Trust for their services as Trustees for the fiscal
year ended March 31, 1997.

Name Aggregate Total Compensation
of Compensation from the USAA
Trustee From the Trust Family of Funds (b)
- ------- -------------- ------------------
George E. Brown* $ 5,370 $ 25,600
Robert G. Davis None (a) None (a)
Barbara B. Dreeben 7,605 36,600
Howard L. Freeman, Jr. 7,605 36,600
Robert L. Mason* 2,235 11,000
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker 7,605 36,600
- ----------------

* Effective January 1, 1997, Robert L. Mason replaced George E. Brown as a
Trustee on the Board of Trustees. Mr. Brown retired on December 31, 1996.

(a) Robert G. Davis, Michael J.C. Roth, and John W. Saunders, Jr. are
affiliated with the Trust's investment adviser, IMCO, and, accordingly,
receive no remuneration from the Trust or any other Fund of the USAA Family
of Funds.

(b) At March 31, 1997, the USAA Family of Funds consisted of four registered
investment companies offering 33 individual funds. Each Trustee presently
serves as a Trustee or Director of each investment company in the USAA
Family of Funds. In addition, Michael J.C. Roth presently serves as a
Trustee of USAA Life Investment Trust, a registered investment company
advised by IMCO, consisting of seven funds offered to investors in a fixed
and variable annuity contract with USAA Life Insurance Company. Mr. Roth
receives no compensation as Trustee of USAA Life Investment Trust.

All of the above Trustees are also Trustees/Directors of the other funds
for which IMCO serves as investment adviser. No compensation is paid by any fund
to any Trustee/Director who is a director, officer, or employee of IMCO or its
affiliates. No pension or retirement benefits are accrued as part of fund
expenses. The Trust reimburses certain expenses of the Trustees who are not
affiliated with the investment adviser. As of June 30, 1997, the officers and
Trustees of the Trust and their families as a group owned beneficially or of
record less than 1% of the outstanding shares of the Trust.

The Trust knows of no one person who, as of June 30, 1997, held of record
or owned beneficially 5% or more of either Fund's shares.

THE TRUST'S MANAGER

As described in the Prospectus, USAA Investment Management Company is the
Manager and investment adviser, providing services under the Advisory Agreement.
The Manager, organized in May 1970, has served as investment adviser and
underwriter for USAA State Tax-Free Trust from its inception.

In addition to managing the Trust's assets, the Manager advises and
manages the investments for USAA and its affiliated companies as well as those
of USAA Investment Trust, USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc. and
USAA Life Investment Trust. As of the date of this SAI, total assets under
management by the Manager were approximately $35 billion, of which
approximately $20 billion were in mutual fund portfolios.

ADVISORY AGREEMENT

Under the Advisory Agreement, the Manager provides an investment program,
carries out the investment policy and manages the portfolio assets for each
Fund. The Manager is authorized, subject to the control of the Board of Trustees
of the Trust, to determine the selection, amount and time to buy or sell
securities for each Fund. In addition to providing investment services, the
Manager pays for office space, facilities, business equipment and accounting
services (in addition to those provided by the Custodian) for the Trust. The
Manager compensates all personnel, officers and Trustees of the Trust if such
persons are also employees of the Manager or its affiliates. For these services
under the Advisory Agreement, the Trust has agreed to pay the Manager a fee
computed as described under MANAGEMENT OF THE TRUST in the Prospectus.
Management fees are computed and accrued daily and payable monthly.

<PAGE>

Except for the services and facilities provided by the Manager, the Funds
pay all other expenses incurred in their operations. Expenses for which the
Funds are responsible include taxes (if any), brokerage commissions on portfolio
transactions (if any), expenses of issuance and redemption of shares, charges of
transfer agents, custodians and dividend disbursing agents, cost of preparing
and distributing proxy material, costs of printing and engraving stock
certificates, auditing and legal expenses, certain expenses of registering and
qualifying shares for sale, fees of Trustees who are not interested persons (not
affiliated) of the Manager, costs of typesetting, printing and mailing the
Prospectus, SAI and periodic reports to existing shareholders, and any other
charges or fees not specifically enumerated. The Manager pays the cost of
printing and mailing copies of the Prospectus, the SAI, and reports to
prospective shareholders.

The Advisory Agreement will remain in effect until June 25, 1998, for each
Fund and will continue in effect from year to year thereafter for each Fund as
long as it is approved at least annually by a vote of the outstanding voting
securities of such Fund (as defined by the 1940 Act) or by the Board of Trustees
(on behalf of such Fund) including a majority of the Trustees who are not
interested persons of the Manager or (otherwise than as Trustees) of the Trust,
at a meeting called for the purpose of voting on such approval. The Advisory
Agreement may be terminated at any time by either the Trust or the Manager on 60
days' written notice. It will automatically terminate in the event of its
assignment (as defined in the 1940 Act).

From time to time the Manager may, without prior notice to shareholders,
waive all or any portion of fees or agree to reimburse expenses incurred by a
Fund. Any such waiver or reimbursement may be terminated by the Manager at any
time without prior notice to shareholders. The Manager has voluntarily agreed to
limit each Fund's expenses to .50% of its ANA until August 1, 1998, and will
reimburse the Funds for all expenses in excess of the limitations.

For the last three fiscal years, management fees were as follows:

1995 1996 1997
---- ---- ----
Florida Tax-Free Income Fund $158,406 $239,649 $322,603
Florida Tax-Free Money Market Fund $187,847 $256,697 $301,693

Because the Funds' expenses exceeded the Manager's voluntary expense
limitation, the Manager did not receive management fees to which it would have
been entitled as follows:

1995 1996 1997
---- ---- ----
Florida Tax-Free Income Fund $104,638 $96,718 $54,750
Florida Tax-Free Money Market Fund $ 90,717 $85,352 $56,434

UNDERWRITER

The Trust has an agreement with the Manager for exclusive underwriting and
distribution of the Funds' shares on a continuing best efforts basis. This
agreement provides that the Manager will receive no fee or other compensation
for such distribution services.

TRANSFER AGENT

The Transfer Agent performs transfer agent services for the Trust under a
Transfer Agency Agreement. Services include maintenance of shareholder account
records, handling of communications with shareholders, distribution of Fund
dividends and production of reports with respect to account activity for
shareholders and the Trust. For its services under the Transfer Agency
Agreement, each Fund pays the Transfer Agent an annual fixed fee of $26.00 per
account. The fee is subject to change at any time.

The fee to the Transfer Agent includes processing of all transactions and
correspondence. Fees are billed on a monthly basis at the rate of one-twelfth of
the annual fee. In addition, the Funds pay all out-of-pocket expenses of the
Transfer Agent and other expenses which are incurred at the specific direction
of the Trust.

GENERAL INFORMATION

CUSTODIAN

State Street Bank and Trust Company, P.O. Box 1713, Boston, MA 02105, is the
Trust's Custodian. The Custodian is responsible for, among other things,
safeguarding and controlling the Trust's cash and securities, handling the
receipt and delivery of securities and collecting interest on the Trust's
investments.

COUNSEL

Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Trust in connection with the shares offered by the
Prospectus.

15
<PAGE>

INDEPENDENT AUDITORS

KPMG Peat Marwick LLP, 112 East Pecan, Suite 2400, San Antonio, TX 78205, is the
Trust's independent auditor. In this capacity, the firm is responsible for
auditing the annual financial statements of the Funds and reporting thereon.

FINANCIAL STATEMENTS

The financial statements of the Funds and the Independent Auditors' Report
thereon for the fiscal year ended March 31, 1997, are included in the Annual
Report to Shareholders of that date and are incorporated herein by reference.
The Manager will deliver a copy of the Annual Report free of charge with each
SAI requested.

CALCULATION OF PERFORMANCE DATA

Information regarding total return and yield of each Fund is provided under
PERFORMANCE INFORMATION in the Prospectus. See VALUATION OF SECURITIES herein
for a discussion of the manner in which each Fund's price per share is
calculated.

TOTAL RETURN

The Florida Tax-Free Income Fund may advertise performance in terms of average
annual total return for 1-, 5-, and 10-year periods, or for such lesser period
as the Fund has been in existence. Average annual total return is computed by
finding the average annual compounded rates of return over the periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:

P(1 + T)N = ERV

Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1-, 5-, or 10-year periods at
the end of the year or period

The calculation assumes all charges are deducted from the initial $1,000
payment and assumes all dividends and distributions by such Fund are reinvested
at the price stated in the Prospectus on the reinvestment dates during the
period, and includes all recurring fees that are charged to all shareholder
accounts.

The date of commencement of operations for the Florida Tax-Free Income
Fund was October 1, 1993. The Fund's average annual total returns for the
following periods ended March 31, 1997 were:

1 year . . . . 6.51% Since inception . . . . 3.45%

YIELD

The Florida Tax-Free Income Fund may advertise performance in terms of a 30-day
yield quotation. The 30- day yield quotation is computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:

YIELD = 2 left [ left ({a-b} over cd + 1 right)^6 - 1 right]

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

For purposes of the yield calculation, interest income is computed based
on the yield to maturity of each debt obligation in the Fund's portfolio and all
recurring charges are recognized.

The Fund's 30-day yield for the period ended March 31, 1997 was 5.56%.

YIELD - FLORIDA TAX-FREE MONEY MARKET FUND

When the Florida Tax-Free Money Market Fund quotes a current annualized yield,
it is based on a specified recent seven-calendar-day period. It is computed by
(1) determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account having a balance of one share at the beginning
of the period, (2) dividing the net change in account value by the value of the
account at the beginning of the base period to obtain the base return, then (3)
multiplying the base period return by 52.14 (365/7). The resulting yield figure
is carried to the nearest hundredth of one percent.

16
<PAGE>

The calculation includes (1) the value of additional shares purchased with
dividends on the original share, and dividends declared on both the original
share and any such additional shares, and (2) any fees charged to all
shareholder accounts, in proportion to the length of the base period and the
Fund's average account size.

The capital changes excluded from the calculation are realized capital
gains and losses from the sale of securities and unrealized appreciation and
depreciation. The Fund's effective (compounded) yield will be computed by
dividing the seven-day annualized yield as defined above by 365, adding 1 to the
quotient, raising the sum to the 365th power, and subtracting 1 from the result.

Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.

Yield for 7-day Period ended 03/31/97 was 3.04%
Effective Yield for 7-day Period ended 03/31/97 was 3.09%

TAX EQUIVALENT YIELD

A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent yield"
means converting a tax-exempt yield to a pretax equivalent so that a meaningful
comparison can be made between a tax-exempt municipal fund and a fully taxable
fund. The Florida Money Market Fund may advertise performance in terms of a tax
equivalent yield based on the 7-day yield or effective yield and the Florida
Income Fund may advertise performance in terms of a 30-day tax equivalent yield.

To calculate a tax equivalent yield, the Florida investor must know his
Effective Marginal Tax Rate or EMTR. Assuming an investor can fully itemize
deductions on his or her federal tax return, the EMTR is the sum of the federal
marginal tax rate and the Florida Intangibles Personal Property Tax effect
adjusted to reflect the deductibility of the Intangibles Tax from federal income
tax.

The computation of the Florida intangible tax effect is a multi-step
process. Since the intangible tax is a tax upon assets, and not income, an
investor may reduce his intangibles tax liability by choosing investments that
are exempt from the Florida Intangibles Tax. In APPENDIX C, we have provided a
table to estimate the effect the intangibles tax may have upon an investor's
EMTR. The Florida Intangibles Property Tax effect is determined by the
investor's filing status, individual or joint, and the fair market value of
intangible assets subject to the intangibles tax. The formula is:

Florida Intangible Tax Effect = Intangible Tax
Liability / Intangible Assets

The formula for computing the EMTR to compare with fully taxable
securities subject to both federal income and Florida intangible taxes is:

EMTR = Federal Marginal Tax Rate + [Florida Intangible Tax
Effect x (1-Federal Marginal Tax Rate)]

The tax equivalent yield is then computed by dividing the tax-exempt yield
of a fund by the complement of the EMTR. The complement, for example, of an EMTR
of 36.08% is 63.92%, that is (1.00-0.3608= 0.6392).

Tax Equivalent Yield = Tax Exempt Yield /
(1-Effective Marginal Tax Rate)

Based on a federal marginal tax rate of 36% and intangible assets of
$300,000 filing jointly, the tax equivalent yields for the Florida Tax-Free
Income and Florida Tax-Free Money Market Funds for the period ended March 31,
1997 were 8.70% and 4.76%, respectively. See APPENDIX C for tax equivalent yield
table.

APPENDIX A - TAX-EXEMPT SECURITIES AND THEIR RATINGS

TAX-EXEMPT SECURITIES

Tax-exempt securities generally include debt obligations issued by states and
their political subdivisions, and duly constituted authorities and corporations,
to obtain funds to construct, repair or improve various public facilities such
as airports, bridges, highways, hospitals, housing, schools, streets, and water
and sewer works. Tax-exempt securities may also be issued to refinance
outstanding obligations as well as to obtain funds for general operating
expenses and for loans to other public institutions and facilities.

The two principal classifications of tax-exempt securities are "general
obligations" and "revenue" or "special tax" bonds. General obligation bonds are
secured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise or other tax, but not
from general tax revenues. The Funds may also invest in tax-exempt private
activity bonds, which in most cases are revenue bonds and generally do not have
the pledge of the credit of the issuer. The payment of the principal and
interest on such industrial revenue bonds is dependent solely on the ability of
the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed as
security for such payment. There are, of course, many variations in the terms
of, and the security underlying tax-exempt securities. Short-term obligations

17
<PAGE>

issued by states, cities, municipalities or municipal agencies, include Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and Short-Term Discount Notes.

The yields of tax-exempt securities depend on, among other things, general
money market conditions, conditions of the tax-exempt bond market, the size of a
particular offering, the maturity of the obligation, and the rating of the
issue. The ratings of Moody's Investors Service, Inc. (Moody's), Standard &
Poor's Ratings Group (S&P), Fitch Investors Service, Inc. (Fitch), Duff & Phelps
Inc., Thompson BankWatch, Inc., and IBCA Inc. represent their opinions of the
quality of the securities rated by them. It should be emphasized that such
ratings are general and are not absolute standards of quality. Consequently,
securities with the same maturity, coupon and rating may have different yields,
while securities of the same maturity and coupon but with different ratings may
have the same yield. It will be the responsibility of the Manager to appraise
independently the fundamental quality of the tax-exempt securities included in a
Fund's portfolio.

RATINGS

EXCERPTS FROM MOODY'S BOND (TAX-EXEMPT SECURITIES) RATINGS:

Aaa Bonds which 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 edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.

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

A Bonds which 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 which suggest a susceptibility to impairment sometime in
the future.

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

NOTE: THOSE BONDS IN THE AA, A, AND BAA GROUPS WHICH MOODY'S BELIEVES POSSESS
THE STRONGEST INVESTMENT ATTRIBUTES ARE DESIGNATED BY THE SYMBOLS AA1, A1, AND
BAA1.

EXCERPTS OF MOODY'S RATINGS OF SHORT-TERM LOANS (STATE AND TAX-EXEMPT NOTES):

Moody's ratings for state and tax-exempt notes and other short-term obligations
are designated Moody's Investment Grade (MIG). Symbols used will be as follows:

MIG-1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.

MIG-2 This designation denotes high quality. Margins of protection are ample
although not so large as in the preceding group.

EXCERPTS OF MOODY'S RATING OF COMMERCIAL PAPER:

Prime-1 Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:

o Leading market positions in well-established industries.
o High rates of return on funds employed.
o Conservative capitalization structures with moderate reliance on
debt and ample asset protection.
o Broad margins in earning coverage of fixed financial charges and
high internal cash generation.
o Well-established access to a range of financial markets and assured
sources of alternate liquidity.

Prime-2 Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
This will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.

18
<PAGE>

EXCERPTS FROM S&P'S BOND RATINGS:

AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

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

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

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

PLUS (+) OR MINUS (-): THE RATINGS FROM AA TO BBB MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.

EXCERPTS OF S&P'S RATINGS OF TAX-EXEMPT NOTES:

SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term
of the notes.

EXCERPTS OF S&P'S RATING OF COMMERCIAL PAPER:

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

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

EXCERPTS OF FITCH'S RATINGS OF BONDS:

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

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

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

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

PLUS (+) AND MINUS (-): PLUS AND MINUS SIGNS ARE USED WITH A RATING SYMBOL TO
INDICATE THE RELATIVE POSITION OF A CREDIT WITHIN THE RATING CATEGORY. PLUS AND
MINUS SIGNS, HOWEVER, ARE NOT USED IN THE AAA CATEGORY.

EXCERPTS OF FITCH'S RATINGS TO COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT AND
TAX-EXEMPT NOTES:

F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely
payment.

F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.

F-2 Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is
not as great as for issues assigned F-1+ and F-1 ratings.

EXCERPTS FROM DUFF & PHELPS LONG-TERM RATING SCALE:

AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

19
<PAGE>

AA High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.

A Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.

BBB Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.

EXCERPTS FROM DUFF & PHELPS COMMERCIAL PAPER RATING SCALE:

D-1+ Highest certainty of timely payment. Short-term liquidity, including
internal operating factors and/or access to alternative sources of
funds, is outstanding, and safety is just below risk-free U.S.
Treasury short-term obligations.

D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.

D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.

D-2 Good certainty of timely payment. Liquidity factors and company
fundamentals are sound. Although ongoing funding needs may enlarge
total financing requirements, access to capital markets is good. Risk
factors are small.

THOMPSON BANKWATCH, INC.

TBW-1 The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis.

TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.

TBW-3 The lowest investment-grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal
and external) than those with higher ratings, the capacity to service
principal and interest in a timely fashion is considered adequate.

IBCA INC.

A1 Obligations supported by the highest capacity for timely repayment.
Where issues possess a particularly strong credit feature, a rating of
A1+ is assigned.

A2 Obligations supported by a satisfactory capacity for timely repayment
although such capacity may be susceptible to adverse changes in
business, economic or financial conditions.

A3 Obligations supported by an adequate capacity for timely repayment.
Such capacity is more susceptible to adverse changes in business,
economic or financial conditions than for obligations in higher
categories.

B Obligations for which the capacity for timely repayment is susceptible
to adverse changes in business, economic or financial conditions.

C Obligations for which there is a high risk of default or which are
currently in default.

APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE

Occasionally, we may make comparisons in advertising and sales literature
between the Funds contained in this SAI and other Funds in the USAA Family of
Funds. These comparisons may include such topics as risk and reward, investment
objectives, investment strategies, and performance.

Fund performance also may be compared to the performance of broad groups
of mutual funds with similar investment goals or unmanaged indexes of comparable
securities. Evaluations of Fund performance made by independent sources may be
used in advertisements concerning the Fund, including reprints of, or selections
from, editorials or articles about the Fund. The Fund or its performance may
also be compared to products and services not constituting securities subject to
registration under the Securities Act of 1933 such as, but not limited to,
certificates of deposit and money market accounts. Sources for performance
information and articles about the Fund may include the following:

AAII JOURNAL, a monthly association magazine for members of the American
Association of Individual Investors.

ARIZONA REPUBLIC, a newspaper which may cover financial and investment news.

AUSTIN AMERICAN-STATESMAN, a newspaper which may cover financial news.

BARRON'S, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.

20
<PAGE>

THE BOND BUYER, a daily newspaper which covers bond market news.

BUSINESS WEEK, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds.

CHICAGO TRIBUNE, a newspaper which may cover financial news.

CONSUMER REPORTS, a monthly magazine which from time to time reports on
companies in the mutual fund industry.

DALLAS MORNING NEWS, a newspaper which may cover financial news.

DENVER POST, a newspaper which may quote financial news.

FINANCIAL PLANNING, a monthly magazine that periodically features companies in
the mutual fund industry.

FINANCIAL SERVICES WEEK, a weekly newspaper which covers financial news.

FINANCIAL WORLD, a monthly magazine which may periodically review mutual fund
companies.

FORBES, a national business publication that periodically reports the
performance of companies in the mutual fund industry.

FORTUNE, a national business publication that periodically rates the performance
of a variety of mutual funds.

FUND ACTION, a mutual fund news report.

HOUSTON CHRONICLE, a newspaper which may cover financial news.

HOUSTON POST, a newspaper which may cover financial news.

IBC/DONOGHUE'S MONEYLETTER, a biweekly newsletter which covers financial news
and from time to time rates specific mutual funds.

IBC'S MONEY MARKET INSIGHT, a monthly money market industry analysis prepared by
IBC USA, Inc.

INCOME AND SAFETY, a monthly newsletter that rates mutual funds.

INVESTECH, a bimonthly investment newsletter.

INVESTMENT ADVISOR, a monthly publication directed primarily to the advisor
community; includes ranking of mutual funds using a proprietary methodology.

INVESTMENT COMPANY INSTITUTE, a national association of the American Investment
Company industry.

INVESTOR'S BUSINESS DAILY, a newspaper which covers financial news.

KIPLINGER'S PERSONAL FINANCE MAGAZINE, a monthly investment advisory publication
that periodically features the performance of a variety of securities.

LIPPER ANALYTICAL SERVICES, INC.'S FIXED INCOME FUND PERFORMANCE ANALYSIS, a
monthly publication of industry-wide mutual fund performance averages by type of
fund.

LIPPER ANALYTICAL SERVICES, INC.'S MUTUAL FUND PERFORMANCE ANALYSIS, a weekly
and quarterly publication of industry-wide mutual fund performance averages by
type of fund.

LOS ANGELES TIMES, a newspaper which may cover financial news.

LOUIS RUKEYSER'S WALL STREET, a publication for investors.

MEDICAL ECONOMICS, a monthly magazine providing information to the medical
profession.

MONEY, a monthly magazine that features the performance of both specific funds
and the mutual fund industry as a whole.

MONEY FUND REPORT, a weekly publication of the Donoghue Organization, Inc.,
reporting on the performance of the nation's money market funds, summarizing
money market fund activity, and including certain averages as performance
benchmarks, specifically: (1) Taxable Money Fund Averages: "100% U.S. Treasury"
and "First Tier" and (2) Tax-Free Money Fund Averages: "Stockbroker and General
Purpose" and "State Specific Stockbroker and General Purpose."

MORNINGSTAR 5 STAR INVESTOR, a monthly newsletter which covers financial news
and rates mutual funds produced by Morningstar, Inc. (a data service which
tracks open-end mutual funds).

MUNI BOND FUND REPORT, a monthly newsletter which covers news on the municipal
bond market and features performance data for municipal bond mutual funds.

MUNIWEEK, a weekly newspaper which covers news on the municipal bond market.

MUTUAL FUND FORECASTER, a monthly newsletter that ranks mutual funds.

MUTUAL FUND INVESTING, a newsletter covering mutual funds.

21
<PAGE>

MUTUAL FUND PERFORMANCE REPORT, a monthly publication of industry-wide mutual
fund averages produced by Morningstar, Inc.

MUTUAL FUND MAGAZINE, a monthly publication reporting on mutual fund investing.

MUTUAL FUND SOURCE BOOK, an annual publication produced by Morningstar, Inc.
which describes and rates mutual funds.

MUTUAL FUND VALUES, a biweekly guidebook to mutual funds produced by
Morningstar, Inc.

NEWSWEEK, a national business weekly.

NEW YORK TIMES, a newspaper which may cover financial news.

NO LOAD FUND INVESTOR, a newsletter covering companies in the mutual fund
industry.

PERSONAL INVESTOR, a monthly magazine which from time to time features mutual
fund companies and the mutual fund industry.

SAN ANTONIO BUSINESS JOURNAL, a weekly newspaper that periodically covers mutual
fund companies as well as financial news.

SAN ANTONIO EXPRESS-NEWS, a newspaper which may cover financial news.

SAN FRANCISCO CHRONICLE, a newspaper which may cover financial news.

SMART MONEY, a monthly magazine featuring news and articles on investing and
mutual funds.

USA TODAY, a newspaper which may cover financial news.

U.S. NEWS AND WORLD REPORT, a national business weekly that periodically reports
mutual fund performance data.

WALL STREET JOURNAL, a Dow Jones and Company, Inc. newspaper which covers
financial news.

WASHINGTON POST, a newspaper which may cover financial news.

WEISENBERGER MUTUAL FUNDS INVESTMENT REPORT, a monthly newsletter that reports
on both specific mutual fund companies and the mutual fund industry as a whole.

WORTH, a magazine which covers financial and investment subjects including
mutual funds.

YOUR MONEY, a monthly magazine directed towards the novice investor.

In addition to the sources above, performance of our Funds may also be
tracked by Lipper Analytical Services, Inc. Each Fund will be compared to
Lipper's appropriate fund category according to objective and portfolio
holdings. The Florida Tax-Free Income Fund will be compared to funds in Lipper's
Florida tax-exempt bond funds category, and the Florida Tax-Free Money Market
Fund to funds in Lipper's Florida short-term tax-exempt bond funds category.
Footnotes in advertisements and other sales literature will include the time
period as applicable for any rankings used.

For comparative purposes, unmanaged indices of comparable securities or
economic data may be cited. Examples include the following:

- Shearson Lehman Hutton Bond Indices, indices of fixed-rate debt issues
rated investment grade or higher which can be found in the BOND MARKET
REPORT.

- Bond Buyer Indices, indices of debt of varying maturities including revenue
bonds, general obligation bonds, and U.S. Treasury bonds which can be found
in MUNIWEEK and THE BOND BUYER.

Other sources for total return and other performance data which may be
used by the Fund or by those publications listed previously are Morningstar,
Inc., Schabaker Investment Management, and Investment Company Data, Inc. These
are services that collect and compile data on mutual fund companies.

22
<PAGE>

APPENDIX C - TAXABLE EQUIVALENT YIELD TABLES

FEDERAL INCOME TAX RATES
(INCLUDES EFFECT OF FLORIDA INTANGIBLES TAX)

Assuming a Federal
Marginal Tax Rate of: 28% 31% 36% 39.6%
and Assuming a Florida
Intangibles Tax Effect of: * 0.12% 0.12% 0.12% 0.12%
The Effective Marginal
Tax Rate would be: 28.09% (a) 31.08% (b) 36.08% (c) 39.67% (d)

To Match a Double
Tax Free Yield of: A Fully Taxable Investment Would Have to Pay You:

2.00% 2.78% 2.90% 3.13% 3.31%
3.00% 4.17% 4.35% 4.69% 4.97%
4.00% 5.56% 5.80% 6.26% 6.63%
5.00% 6.95% 7.25% 7.82% 8.29%
6.00% 8.34% 8.70% 9.38% 9.94%
7.00% 9.73% 10.16% 10.95% 11.60%
- -----------

* Assumes an investor, filing jointly, with $300,000 in intangible assets.
See the following table.

(a) FEDERAL RATE OF 28% + (FLORIDA INTANGIBLES TAX EFFECT OF .12% x (1 - 28%))

(b) FEDERAL RATE OF 31% + (FLORIDA INTANGIBLES TAX EFFECT OF .12% x (1 - 31%))

(d) FEDERAL RATE OF 39.6% + (FLORIDA INTANGIBLES TAX EFFECT OF .12% x (1 -
39.6%))

THIS TABLE IS A HYPOTHETICAL ILLUSTRATION AND SHOULD NOT BE CONSIDERED AN
INDICATION OF FUND PERFORMANCE OF ANY OF THE USAA FAMILY OF FUNDS.

THESE RATES WERE SELECTED AS EXEMPLARY RATES THAT WOULD BE RELEVANT TO MOST
TAXPAYERS.

THE ABOVE TABLE ALSO INCLUDES THE EFFECT OF THE INTANGIBLES TAX. YOUR ACTUAL
RATE WILL VARY DEPENDING ON YOUR FILING STATUS AND THE TOTAL AMOUNT OF YOUR
INTANGIBLES SUBJECT TO THE FLORIDA TAX. SHAREHOLDERS OF EITHER FLORIDA FUND WILL
HAVE THE POTENTIAL BENEFIT OF OWNING SHARES IN A FUND THE VALUE OF WHICH IS
EXEMPT FROM THE FLORIDA INTANGIBLES TAX.

23
<PAGE>

THE FOLLOWING TABLE CALCULATES THE ESTIMATED INTANGIBLE TAX LIABILITY AS A
PERCENTAGE OF INTANGIBLE ASSETS.

Florida Intangible Tax Rate Effect

Intangible Assets Individual Joint
$100,000 0.08% 0.06%
$200,000 0.14% 0.08%
$300,000 0.16% 0.12%
$400,000 0.17% 0.14%
$500,000 0.18% 0.15%
$600,000 0.18% 0.16%
$700,000 0.18% 0.17%
$800,000 0.19% 0.17%
$900,000 0.19% 0.17%
$1,000,000 0.19% 0.18%
$2,000,000 0.19% 0.19%
$5,000,000 0.20% 0.20%

The table uses the methodology from the State of Florida's 1996 Intangible Tax
Return's "Tax Calculation Worksheet" to calculate the intangible tax liability
as a percentage of intangible assets.

APPENDIX D - DOLLAR-COST AVERAGING

Dollar-cost averaging is a systematic investing method which can be used by
investors as a disciplined technique for investing. A fixed amount of money is
invested in a security (such as a stock or mutual fund) on a regular basis over
a period of time, regardless of whether securities markets are moving up or
down.

This practice reduces average share costs to the investor who acquires
more shares in periods of lower securities prices and fewer shares in periods of
higher prices.

While dollar-cost averaging does not assure a profit or protect against
loss in declining markets, this investment strategy is an effective way to help
calm the effect of fluctuations in the financial markets. Systematic investing
involves continuous investment in securities regardless of fluctuating price
levels of such securities. Investors should consider their financial ability to
continue purchases through periods of low and high price levels.

As the following chart illustrates, dollar-cost averaging tends to keep
the overall cost of shares lower. This example is for illustration only, and
different trends would result in different average costs.

HOW DOLLAR-COST AVERAGING WORKS

$100 Invested Regularly for 5 Periods

Market Trend
-----------------------------------------------------------------

Down Up Mixed
-----------------------------------------------------------------
Share Shares Share Shares Share Shares
Investment Price Purchased Price Purchased Price Purchased
------------------- --------------------- ------------------
$100 10 10 6 16.67 10 10
100 9 11.1 7 14.29 9 11.1
100 8 12.5 7 14.29 8 12.5
100 8 12.5 9 11.1 9 11.1
100 6 16.67 10 10 10 10
---- -- ---- -- ---- --- ---
$500 ***41 62.77 ***39 66.35 ***46 54.7
*Avg. Cost: $7.97 *Avg. Cost: $7.54 *Avg. Cost: $9.14
----- ----- -----
**Avg. Price: $8.20 **Avg. Price:$7.80 **Avg Price: $9.20
----- ----- -----

* Average Cost is the total amount invested divided by number of shares
purchased.

** Average Price is the sum of the prices paid divided by number of purchases.
*** Cumulative total of share prices used to compute average prices.

22735-0897

<PAGE>

Part B

Statement of Additional Information for the

Texas Tax-Free Income and
Texas Tax-Free Money Market Funds

<PAGE>

[UAAA EAGLE LOGO]

USAA STATE STATEMENT OF
TAX-FREE ADDITIONAL INFORMATION
TRUST August 1, 1997

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

USAA STATE TAX-FREE TRUST
TEXAS FUNDS

USAA STATE TAX-FREE TRUST (the Trust) is a registered investment company
offering shares of four no-load mutual funds, two of which are described in this
Statement of Additional Information (SAI): the Texas Tax-Free Income Fund and
Texas Tax-Free Money Market Fund (collectively, the Funds or the Texas Funds).
Each Fund is classified as diversified and has a common investment objective of
providing Texas investors with a high level of current interest income that is
exempt from federal income taxes. The Texas Tax-Free Money Market Fund has a
further objective of preserving capital and maintaining liquidity.

You may obtain a free copy of a Prospectus for the Texas Funds dated August 1,
1997, by writing to USAA State Tax-Free Trust, 9800 Fredericksburg Rd., San
Antonio, TX 78288, or by calling toll free 1-800-531-8181. The Prospectus
provides the basic information you should know before investing in the Funds.
This SAI is not a Prospectus and contains information in addition to and more
detailed than that set forth in the Prospectus. It is intended to provide you
with additional information regarding the activities and operations of the Trust
and the Funds, and should be read in conjunction with the Prospectus.

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

TABLE OF CONTENTS

PAGE
2 Valuation of Securities
2 Additional Information Regarding Redemption of Shares
3 Investment Plans
4 Investment Policies
5 Investment Restrictions
6 Special Risk Considerations
10 Portfolio Transactions
11 Further Description of Shares
12 Certain Federal Income Tax Considerations
13 Trustees and Officers of the Trust
16 The Trust's Manager
17 General Information
17 Calculation of Performance Data
19 Appendix A - Tax-Exempt Securities and Their Ratings
22 Appendix B - Comparison of Portfolio Performance
24 Appendix C - Taxable Equivalent Yield Table
25 Appendix D - Dollar-Cost Averaging

<PAGE>

VALUATION OF SECURITIES

The investments of the TEXAS TAX-FREE INCOME FUND are valued each business
day by a pricing service (the Service) approved by the Board of Trustees. The
Service uses the mean between quoted bid and asked prices or the last sale price
to price securities when, in the Service's judgment, these prices are readily
available and are representative of the securities' market values. For many
securities, such prices are not readily available. The Service generally prices
these securities based on methods which include consideration of yields or
prices of tax-exempt securities of comparable quality, coupon, maturity and
type, indications as to values from dealers in securities, and general market
conditions. Securities purchased with maturities of 60 days or less are stated
at amortized cost which approximates market value. Repurchase agreements are
valued at cost. Securities which cannot be valued by the Service, and all other
assets, are valued in good faith at fair value using methods determined by the
Manager under the general supervision of the Board of Trustees.

The value of the TEXAS TAX-FREE MONEY MARKET FUND'S securities is stated
at amortized cost which approximates market value. This involves valuing a
security at its cost and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates. While this method provides certainty in valuation, it may result in
periods during which the value of an instrument, as determined by amortized
cost, is higher or lower than the price the Fund would receive upon the sale of
the instrument.

The valuation of the Texas Tax-Free Money Market Fund's portfolio
instruments based upon their amortized cost is subject to the Fund's adherence
to certain procedures and conditions. Consistent with regulatory requirements,
the Manager will only purchase securities with remaining maturities of 397 days
or less and will maintain a dollar-weighted average portfolio maturity of no
more than 90 days. The Manager will invest only in securities that have been
determined to present minimal credit risk and that satisfy the quality and
diversification requirements of applicable rules and regulations of the
Securities and Exchange Commission (SEC).

The Board of Trustees has established procedures designed to stabilize the
Texas Tax-Free Money Market Fund's price per share, as computed for the purpose
of sales and redemptions, at $1.00. There can be no assurance, however, that the
Fund will at all times be able to maintain a constant $1.00 NAV per share. Such
procedures include review of the Fund's holdings at such intervals as is deemed
appropriate to determine whether the Fund's NAV calculated by using available
market quotations deviates from $1.00 per share and, if so, whether such
deviation may result in material dilution or is otherwise unfair to existing
shareholders. In the event that it is determined that such a deviation exists,
the Board of Trustees will take such corrective action as it regards necessary
and appropriate. Such action may include selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends, or establishing a NAV per share by using
available market quotations.

ADDITIONAL INFORMATION REGARDING REDEMPTION OF SHARES

2
<PAGE>

REDEMPTION BY CHECK

Shareholders in the Texas Tax-Free Money Market Fund may request that checks be
issued for their account. Checks must be written in the amount of at least $250.

The Transfer Agent will return to the shareholder checks paid during the
month by separate mail. The checkwriting privilege will be subject to the
customary rules and regulations of State Street Bank and Trust Company (State
Street Bank or the Custodian) governing checking accounts. There is no charge to
the shareholder for the use of the checks or for subsequent reorders of checks.

The Trust, the Transfer Agent and State Street Bank each reserve the right
to change or suspend the checkwriting privilege upon 30 days' written notice to
participating shareholders.

INVESTMENT PLANS

AUTOMATIC PURCHASE OF SHARES

INVESTRONIC(R) - The regular purchase of additional shares through electronic
funds transfer from a checking or savings account. You may invest as little as
$50 per month.

BUY/SELL SERVICE - The intermittent purchase or redemption of shares through
electronic funds transfer to or from a checking or savings account.

3
<PAGE>

SYSTEMATIC WITHDRAWAL PLAN

Such a plan may be initiated by depositing shares worth at least $5,000
with the Transfer Agent and by completing the Systematic Withdrawal Plan
application, which may be requested from the Manager. The shareholder may
terminate participation in the plan at any time. There is no charge to the
shareholder for withdrawals under the Systematic Withdrawal Plan. The Trust will
not bear any expenses in administering the plan beyond the regular transfer
agent and custodian costs of issuing and redeeming shares. The Manager will bear
any additional expenses of administering the plan.

INVESTMENT POLICIES

CALCULATION OF PORTFOLIO WEIGHTED AVERAGE MATURITIES

With respect to obligations held by the Texas Tax-Free Income Fund, if it
is probable that the issuer of an instrument will take advantage of a
maturity-shortening device, such as a call, refunding, or redemption provision,
the date on which the instrument will probably be called, refunded, or redeemed
may be considered to be its maturity date. Also, the maturities of securities
subject to sinking fund arrangements are determined on a weighted average life
basis, which is the average time for principal to be repaid. The weighted
average life of these securities is likely to be substantially shorter than
their stated final maturity. In addition, for purposes of the Fund's investment
policies, an instrument will be treated as having a maturity earlier than its
stated maturity date if the instrument has technical features such as puts or
demand features which, in the judgment of the Manager, will result in the
instrument being valued in the market as though it has the earlier maturity.

The Texas Tax-Free Money Market Fund will determine the maturity of an
obligation in its portfolio in accordance with Rule 2a-7 under the Investment
Company Act of 1940, as amended (1940 Act).

REPURCHASE AGREEMENTS

4
<PAGE>

OTHER POLICIES

Each Fund may lend its securities and engage in short sells against the box. The
Texas Tax-Free Income Fund may also invest in options, financial futures
contracts and options on financial futures contracts. However, the Funds do not
intend to engage in any of these practices during the coming year without first
supplying further information in the Prospectus.

INVESTMENT RESTRICTIONS

Under the restrictions, neither Fund will:

(1) With respect to 75% of its total assets, purchase the securities of any
issuer (except Government Securities, as such term is defined in the 1940
Act) if, as a result, the Fund would own more than 10% of the outstanding
voting securities of such issuer or the Fund would have more than 5% of
the value of its total assets invested in the securities of such issuer;
for purposes of this limitation, identification of the "issuer" will be
based on a determination of the source of assets and revenues committed to
meeting interest and principal payments of each security; for purposes of
this limitation the State of Texas or other jurisdictions and each of its
separate political subdivisions, agencies, authorities and
instrumentalities shall be treated as a separate issuer;

(3) Purchase any securities which would cause 25% or more of the value of that
Fund's total assets at the time of such purchase to be invested in
securities the interest upon which is derived from revenues or projects
with similar characteristics, such as toll road revenue bonds, housing
revenue bonds, electric power project revenue bonds, or in industrial
revenue bonds which are based, directly or indirectly, on the credit of
private entities of any one industry; provided that the foregoing
limitation does not apply with respect to investments in U.S. Treasury
Bills, other obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities, and, in the case of the Texas Tax-Free
Money Market Fund, certificates of deposit and banker's acceptances of
domestic banks;

(4) Issue senior securities, except as permitted under the 1940 Act;

(8) Purchase or sell commodities or commodities contracts except that the
Texas Tax-Free Income Fund may invest in financial futures contracts,
options thereon and similar instruments.

ADDITIONAL RESTRICTIONS

Neither Fund will:

(1) Pledge, mortgage or hypothecate its assets to any extent greater than
33 1/3% of the value of its total assets;

(3) The Texas Tax-Free Income Fund may not invest more than 15% of the value
of its net assets and the Texas Tax-Free Money Market Fund may not invest
more than 10% of the value of its net assets in illiquid securities
(including repurchase agreements maturing in more than seven days);

5
<PAGE>

(5) Purchase securities of other investment companies except to the extent
permitted by applicable law;

(6) Purchase or sell puts, calls, straddles or spreads or any combination
thereof, except to the extent permitted by applicable law; or

(7) Purchase interests in oil, gas, or other mineral exploration or
development programs, except that it may purchase securities of issuers
whose principal business activities fall within such areas.

SPECIAL RISK CONSIDERATIONS

The following only highlights some of the more significant financial trends and
budget information affecting the State of Texas, and is based on information
drawn from official statements and prospectuses relating to various securities
offerings by the State of Texas, its agencies and instrumentalities, as
available on the date of this SAI. The Trust has not independently verified this
information. The historical data and trends discussed in this section are not
intended to be exhaustive or to predict future events or trends. There can be no
assurance that past trends will continue or that there will be an absence of
material adverse changes subsequent to the date of this SAI.

Because the Texas Funds concentrate their investments in a specific state,
there are risks associated with investment in the Funds which would not exist if
the Funds' investments were more widely diversified. These risks include the
possible enactment of new legislation in the State which could affect State
and/or municipal obligations, economic factors which could affect these
obligations, and varying levels of supply and demand for state and municipal
obligations.

STATE DEBT. Except as specifically authorized, the Texas Constitution
generally prohibits the creation of debt by or on behalf of the State, with two
exceptions: (1) debt created to supply deficiencies in revenues which do not
total more than $200,000 at any time, and (2) debt to repel invasion, suppress
insurrection, defend the State in war, or pay existing debt. In addition, the
Texas Constitution prohibits the Legislature from lending the credit of the
State to any person, including municipalities, or pledging the credit of the
State in any manner for the payment of the liabilities of any individual,
association of individuals, corporation or municipality. The limitations of the
Constitution do not prohibit the issuance of revenue bonds, however, since Texas
courts (like the courts of most states) have held that certain obligations do
not create a "debt" within the meaning of the Constitution. The State of Texas
and various State agencies have issued revenue bonds payable from the revenues
produced by various facilities or from lease payments appropriated by the
Legislature. Furthermore, obligations which are payable from funds expected to
be available during the current budget period do not constitute "debt" within
the meaning of the Constitution. Certain short term obligations, like the Tax
and Revenue Anticipation Notes issued by the Treasurer of the State of Texas,
which mature within the biennial budget period in which they are issued
(discussed below in more detail), are not deemed to be "debt" within the meaning
of the Texas Constitution.

Voters in the State have from time to time by constitutional amendment
authorized the issuance of general obligation indebtedness for which the full
faith, credit and taxing power of the State are pledged. In some cases, the
authorized indebtedness may not be issued without the approval of the
Legislature, but in other cases, the constitutional amendments are
self-operating and the debt may be issued without specific legislative action.
Various State agencies have the authority to issue general obligation bonds.
Texas voters have also adopted a constitutional amendment which authorizes the
Water Development Board to incur unlimited contractual obligations to the United
States for the acquisition and development of water storage facilities in
reservoirs constructed by the United States. These contractual obligations are
declared by the Constitution to constitute general obligations of the State.
Texas voters have also authorized the governing bodies of certain public
colleges and universities to issue bonds payable from certain appropriations
required by the Constitution, without limitation as to principal amount, except
that the debt service on such bonds may not exceed 50% of the amount
appropriated each year.

Credit ratings on State debt are dependent upon several economic and
political factors, including the ability to continue to fund a substantial
portion of the debt service on general obligation debt from general fund revenue
in the annual State budget and the ability to maintain the amount of authorized
debt within the range of affordability.

OUTSTANDING DEBT SUMMARY. Texas had a total of approximately $11.4 billion
in State bonds outstanding on August 31, 1996, up from $10.4 billion on August
31, 1995. This figure includes commercial paper and variable rate notes;
however, it does not include short-term debt issued for cash management purposes
(described below). Approximately $4.99 billion of Texas' total state debt
outstanding on August 31,

<PAGE>

1996, carries the general obligation pledge of the State. These bonds carry a
constitutional pledge of the full faith and credit of the State to pay off the
bonds if pledged revenues are insufficient. The remaining debt, non- general
obligation debt, is dependent only on the revenue stream of a particular program
or an appropriation from the Legislature. General obligation and non-general
obligation bonds that depend on general revenue for debt service are classified
as "not self-supporting" for purposes of this disclosure. "Not self-supporting"
bonds outstanding totaled approximately $3 billion of total State bonds
outstanding as of the end of August 1996. Debt service on "self-supporting"
bonds (both general obligation and non-general obligation bonds) is paid from
sources outside the State's general revenue fund or outside State government
entirely. Self-supporting bonds, therefore, do not put direct pressure on State
finances.

During fiscal 1996, State agencies and institutions of higher education
issued $2.6 billion in bonds, including $1.3 billion in new money bonds (not
including commercial paper) and $1.3 billion in refunding bonds. New money bond
issues raise additional funds and add to the State's outstanding debt, while
refunding bonds, generally, replace bonds issued previously. Texas State
agencies and institutions of higher education plan to issue approximately $1.5
billion in bonds and commercial paper during fiscal year 1997. Of this amount,
$293 million is anticipated to be not self-supporting. Approximately $1.2
billion will be issued to finance projects or programs and approximately $207
million will be issued to refund existing debt.

As of August 31, 1996, Texas had approximately $5.9 billion in authorized
but unissued bonds. Approximately $3.7 billion or 58% of these authorized but
unissued bonds would be State general obligation debt. About $1.4 billion or 17%
of the total authorized but unissued bonds would require the payment of debt
service from general revenue. The remainder are designed to be self-supporting
through program revenues.

GENERAL OBLIGATION DEBT. Much of the outstanding bond indebtedness of the
State is designed to be self-supporting, even though the full faith and credit
of the State is pledged for its payment. Revenues from land and housing programs
are expected to be sufficient to pay principal and interest on all outstanding
Veterans Land Board bonds. The majority of the bonded indebtedness of the Texas
Water Development Board is self-supporting to the extent that all funds provided
from payments on obligations of political subdivisions for water projects are
applied to such bonded indebtedness in an effort to avoid resorting to
appropriated funds; such revenues have been sufficient to pay the principal and
interest on such bonds since fiscal year 1980. The remaining portion of the
Water Development Board's debt is for the Economically Distressed Areas Program.
These bonds do not depend totally on the State's general revenue for debt
service; however, approximately 90% of the bonds issued may be used for grants.
Revenues from student loans are pledged to pay the principal and interest on the
outstanding bonds of the Texas Higher Education Coordinating Board. Revenues
from park entrance fees and other income have been sufficient to pay principal
and interest on the outstanding bonds of the Texas Parks and Wildlife
Department.

The general obligation bonds that have been issued by the Texas Public
Finance Authority and the Texas National Research Laboratory Commission are not
self-supporting. All debt service on these bonds is paid from the State's
general revenue fund. The higher education constitutional bonds are not
explicitly a general obligation or full faith and credit bond, but the revenue
pledge has the same effect. Debt service is paid from an annual constitutional
appropriation to qualified institutions of higher education from the first
monies coming into the state treasury that are not otherwise dedicated by the
Constitution.

STATE REVENUE BONDS. The Texas Public Finance Authority (the "TPFA"), and
the National Guard Armory Board (the "Armory Board") have authority to issue
state-backed lease revenue bonds. Such obligations do not constitute "debt"
within the meaning of the Constitution, even though they are payable from rental
payments appropriated and made by the State under leases covering the facilities
financed with the proceeds of the obligations.

The Armory Board is authorized to issue bonds, payable solely from rents
received with respect to buildings constructed by it and leased to the National
Guard without limitation as to amount. Effective January 1, 1992, the TPFA
issues bonds on behalf of the Armory Board.

The Texas National Research Laboratory Commission (the "Laboratory
Commission") was formerly authorized to issue up to $500 million in
lease-revenue bonds to pay for activities related to a superconducting super
space collider research facility. On June 1, 1995, all of the outstanding
Laboratory Commission lease revenue bonds issued to provide funding for the
super collider project were defeased or redeemed. As of September 1, 1995, the
Texas Legislature rescinded the Laboratory Commission's remaining revenue bond
authority.

The TPFA is authorized to issue both lease-revenue bonds to finance the
construction, acquisition or renovation of state office buildings and equipment
revenue bonds to finance the acquisition of equipment. For the lease-revenue
bonds, the authorized amount of debt is equal to 1.5 times the estimated cost of
projects that have been approved by the Legislature.

In addition to the foregoing revenue obligations issued by state entities,
additional state programs may be financed with revenue bonds or similar
obligations payable from revenues generated by the specific

<PAGE>

authorized programs, and not from the general revenues of the State or its
taxing power. Among the state entities authorized to issue such revenue bonds
are the Texas Water Development Board, the Texas Water Resources Finance
Authority, the Texas Agricultural Finance Authority, the State Comptroller on
behalf of the Texas School Facilities Finance Program, the Texas Department of
Housing and Community Affairs, the Texas Department of Commerce, the Texas
Turnpike Authority, the Texas Public Finance Authority, the Texas Low-Level
Radioactive Waste Disposal Authority and Texas colleges and universities.

SHORT TERM BORROWING. By statute, the Texas Comptroller of Public Accounts
is authorized, to make interfund transfers of surplus cash, excluding
constitutionally dedicated revenues, between funds in the Treasury in order to
avoid temporary cash deficiencies in the General Revenue Fund. This procedure
effectively allows the Comptroller of Public Accounts to borrow against cash
balances held in special funds to finance deficiencies in the General Revenue
Fund caused by timing differences between cash receipts and cash expenditures.
During fiscal 1996 approximately $2.4 billion in Tax and Revenue Anticipation
Notes were issued by the Comptroller. The Comptroller is authorized to issue Tax
and Revenue Anticipation Notes ("Notes") on behalf of the State under
legislation which became effective in October 1986. Under the terms of the
legislation, Notes may be issued solely to coordinate the State's cash flow
within a fiscal year and must mature and be paid in full during the biennium in
which the Notes are issued. Interfund borrowing was not used in fiscal years
1995 and 1996 due to the consolidation of numerous funds into the General
Revenue Fund on August 31, 1993. The total amount of Notes issued and interfund
borrowing may not exceed 25% of the taxes and revenues to be credited to the
State's General Revenue Fund for the fiscal year as forecasted by the
Comptroller.

SOURCES OF REVENUE. As a result of the State's expansion in Medicaid
spending and other Health and Human Services programs requiring federal matching
revenues, federal receipts were the State's leading source of income in fiscal
1996. Sales tax, which had been the main source of revenue for the previous
twelve years prior to fiscal 1993, was second. Licenses, fees, fines and
penalties were the third largest revenue source to the State in fiscal 1995.
Motor fuels taxes and motor vehicle sales/rental taxes were the State's fourth
and fifth largest revenue sources. The remainder of the State's revenues are
derived primarily from interest and investment income, lottery proceeds,
cigarette and tobacco, franchise, oil and gas severance and other taxes. The
State has no personal or corporate income tax, although the State does impose a
corporate franchise tax based on the amount of a corporation's capital and
"earned surplus," which includes corporate net income and officers' and
directors' compensation.

There can be no assurance that the State will not face budget gaps,
decreases in revenues or deficits in future years resulting from a disparity
between tax or other revenues projected and the spending required to maintain
State programs and debt service at current levels. Furthermore, the State is a
party to numerous lawsuits in which an adverse decision could require
extraordinary and unbudgeted expenditures. Notwithstanding the foregoing, the
State of Texas finished fiscal year 1996 with a $2.3 billion positive cash
balance in the General Revenue Fund. This was the ninth consecutive year that
Texas has ended a fiscal year with a positive balance in the General Revenue
Fund.

LIMITATIONS ON TAXING POWER. The Constitution prohibits the State of Texas
from levying ad valorem taxes on property for general revenue purposes. The
Constitution also limits the rate of growth of appropriations from tax revenues
not dedicated by the Constitution during any biennium to the estimated rate of
growth for the State's economy. The Legislature may avoid the constitutional
limitations if it finds, by a majority vote of both houses, that an emergency
exists. The Constitution authorizes the Legislature to provide by law for the
implementation of this restriction, and the Legislature, pursuant to such
authorization, has defined the estimated rate of growth in the State's economy
to mean the estimated increase in personal income.

APPROPRIATIONS AND BUDGETING. The Constitution requires an appropriation
for any funds to be drawn out of the Treasury. Certain appropriations are made
by the Constitution and do not require further legislative action, although the
Legislature frequently makes a parallel appropriation. All other appropriations
must be made through a bill passed by the Legislature and approved by the
Governor or passed by the Legislature over the Governor's veto. Legislative
appropriations are limited by the Constitution to a period of two years. Article
III, Section 49a of the Texas Constitution, the so-called "pay-as-you-go"
provision, provides that an appropriation from any fund other than the General
Revenue Fund is not valid if it exceeds the amount of cash and estimated
revenues of the fund from which such appropriation is to be paid. No
appropriations that are passed by the Legislature may be sent to the Governor
for consideration until the Comptroller of Public Accounts has certified that
the amounts appropriated are within the amounts estimated to be available in the
affected funds.

The Governor is authorized by statute to make findings of any facts
specified by the Legislature in any appropriations bill as a contingency to the
expenditure of funds. Accordingly, the Governor has some minimal discretion to
prevent the expenditure of funds, exercisable in situations in which an
appropriation made by the Legislature is conditioned upon the occurrence of a
given event or the existence of a given fact.

8
<PAGE>

The Legislature has provided a means of dealing with fiscal emergencies
under which the Governor is empowered to authorize expenditures from a general
appropriation made by the Legislature specifically for emergencies. The
Legislature is not obligated to appropriate any amount for such purpose, but
customarily does so. The Governor may not authorize the expenditure of the
emergency funds unless a certification is made to the Comptroller of Public
Accounts that an emergency and imperative public necessity requiring the use of
such funds exists and the Comptroller of Public Accounts determines that no
other funds are available for such purpose.

The Legislature, in the second called session held during the Summer of
1987, enacted a budget execution law which gave the Governor, subject to the
review of the Legislative Budget Board, the ability to make changes in
legislative appropriations during periods when the Legislature is not in
session. The statute was amended in 1991, giving both the Governor and the
Legislative Budget Board the authority to make proposals that require a state
agency be prohibited from spending an appropriation, or that an agency be
obligated to expend an appropriation, or which affect the manner in which part
or all of an appropriation made by the Legislature to an agency may be
distributed or redistributed. In addition, the Governor or the Legislative
Budget Board, upon making a determination that an emergency exists, may propose
that an appropriation made to a state agency be transferred to another agency,
that an appropriation be retained by the agency but used for a different purpose
or that the time when an appropriation is made available to a state agency be
changed. Funds which are dedicated by the Constitution may be withheld upon the
Governor's or the Legislative Budget Board's proposal, but may not be
transferred to other state agencies, except to an agency which is entitled to
receive appropriations from those funds under the terms of the Constitution.
Federal funds appropriated by the Texas Legislature may be transferred only as
permitted by federal law. The Governor's or the Legislative Budget Board's use
of the budget execution law is subject to publication and, in certain instances,
public hearing requirements. In addition, before the Governor's proposal may be
executed, it must be ratified by action of the Legislative Budget Board, or if
proposed by the Board, the proposal must be ratified by the Governor.

Except under the circumstances set forth above, appropriations or
adjustments of appropriations may currently be authorized only by the
Legislature.

PUBLIC SCHOOL FINANCE. In 1984, a group of property-poor school districts
and the Mexican-American Legal Defense and Education Fund filed EDGEWOOD V.
BYNUM (later Kirby) against the school finance system, challenging the State's
school finance system as unconstitutional. In April 1987 State District Judge
Harley Clark ruled in favor of the 67 property-poor districts finding the
State's public school funding system unconstitutional. Two subsequent school
finance plans were drafted by the Texas Legislature in June 1990 and April 1991,
but each was declared unconstitutional. In late May 1993, Texas legislators
passed Senate Bill 7, which directed the State's 98 wealthiest school districts
to choose from among five alternatives for sharing their overall property wealth
with other, poorer districts. Judge McCown ordered that the plan be implemented
during the 1993-94 school year and, on December 10, 1993, upheld the
constitutionality of SB 7. On May 25, 1994, representatives from the
property-rich and property-poor districts appealed the case to the Texas Supreme
Court.

The Texas Supreme Court issued its opinion on January 30, 1995. The court
upheld all provisions of SB 7 and overturned the lower court's mandate to
provide additional funding for school facilities in property-poor districts. The
court ruled that convincing evidence of an inability to provide facilities had
not been presented, but that the absence of a separate funding source for
facilities could cause the court to declare the entire finance system
unconstitutional. The court also cautioned of the appearance of a
constitutionally-prohibited State ad valorem tax if all districts were forced to
tax at the capped value to maintain standards.

RETIREMENT SYSTEMS. The State of Texas operates three defined-benefit
retirement systems: the Teacher Retirement System of Texas ("TRST"), the
Employee's Retirement System of Texas ("ERST") and the Judicial Retirement
System of Texas ("JRST"). In addition, state employees, except those compensated
on a fee basis, are covered under the federal Social Security system. Political
subdivisions of the State may voluntarily provide for coverage of their
employees under the State's agreement with the federal Social Security
Administration.

TRST and ERST are maintained on an actuarial basis. As of August 31, 1996,
the unfunded actuarial liability of TRST was approximately $1,813 million and
the overfunded actuarial liability of ERST was approximately $886 million. The
period required to amortize the unfunded actuarial liability, given then-current
contribution rates, benefits and investment assumptions, was estimated to be
11.3 years in the case of TRST. The TRST fair value of investments, as of August
31, 1996, was $49.6 billion. The ERST fair value of pooled investments as of
August 31, 1996, was $13.2 billion. Until recently, JRST was maintained on a
pay- as-you-go basis. However, legislation enacted in June 1985, divided JRST
into two plans by changing the name of the existing plan and establishing a
second, separate plan. The new plan, known as Judicial Retirement System of
Texas Plan Two, is to be maintained on an actuarially sound basis and covers
individuals who became judicial officers after August 31, 1985. The unfunded
actuarial liability of JRST Plan

9
<PAGE>

Two as of August 31, 1996, was $943 thousand. The old plan, now known as the
Judicial Retirement System of Texas Plan One, will continue to be maintained on
a pay-as-you-go basis and will cover judicial officers who are active on August
31, 1985, or had retired on or before that date.

Contributions to the retirement systems are made by both the State and
covered employees. The Texas Constitution mandates a state contribution rate of
not less than 6% or more than 10% of payroll for the ERST and TRST; member
contributions may not be less than 6% of payroll. The Legislature, however, may
appropriate additional funds as are actuarially determined to be needed to fund
benefits authorized by law.

For the 1996-97 biennium, the Texas Legislature set the State's
contribution rates to the retirement systems at the following rates: ERST and
TRST at 6% of payroll, and JRST Plan Two at 16.54% of payroll. Member
contribution rates are 6% for ERST and JRST Plan Two and 6.4% for TRST.

As part of the 1985 changes in the State's retirement systems, the
Legislature prohibited the implementation of changes in the ERST and TRST
systems that would cause the period required to amortize the unfunded actuarial
liability of either plan to exceed thirty-one years. Prior to the adoption of
these measures, the State had no official limit on the amortization period for
unfunded actuarial liability, although the management of both ERST and TRST had
adopted an informal policy of limiting the period to thirty years.

The State's retirement systems were created and are operated pursuant to
statutes enacted by the Legislature. The Legislature has the authority to modify
these statutes and, accordingly, contribution rates, benefits, benefit levels
and such other aspects of each system as it deems appropriate, including the
provisions limiting changes that increase the amortization period for unfunded
actuarial liability of any plan. The State's retirement systems are not subject
to the funding and vesting requirements of the Employee Retirement Income
Security Act of 1974, as amended, although Congress has from time to time
considered legislation that would regulate pension funds of public bodies.

PORTFOLIO TRANSACTIONS

On occasions when the Manager deems the purchase or sale of a security to
be in the best interest of the Trust, as well as the Manager's other clients,
the Manager, to the extent permitted by applicable laws and regulations, may
aggregate such securities to be sold or purchased for the Trust with those to be
sold or purchased for other customers in order to obtain best execution and
lower brokerage commissions, if any. In such event, allocation of the securities
so purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Manager in the manner it considers to be most equitable and
consistent with its fiduciary obligations to all such customers, including the
Trust. In some instances, this procedure may impact the price and size of the
position obtainable for the Trust.

10
<PAGE>

PORTFOLIO TURNOVER RATE

The portfolio turnover rate is computed by dividing the dollar amount of
securities purchased or sold (whichever is smaller) by the average value of
securities owned during the year.

The rate of portfolio turnover will not be a limiting factor when the
Manager deems changes in the Texas Tax-Free Income Fund's portfolio appropriate
in view of its investment objective. For example, securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another security of comparable quality may
be purchased at approximately the same time in order to take advantage of what
the Fund believes to be a temporary disparity in the normal yield relationship
between the two securities. These yield disparities may occur for reasons not
directly related to the investment quality of particular issues or the general
movement of interest rates, such as changes in the overall demand for or supply
of various types of tax-exempt securities.

For the last two fiscal years the Texas Tax-Free Income Fund's portfolio
turnover rates were as follows:

1996 . . . . . 71.14% 1997. . . . . 86.17%

Portfolio turnover rates have been calculated excluding short-term
variable rate securities, which are those with put date intervals of less than
one year.

FURTHER DESCRIPTION OF SHARES

11
<PAGE>

CERTAIN FEDERAL INCOME TAX CONSIDERATIONS

TAXATION OF THE FUNDS

TAXATION OF THE SHAREHOLDERS

12
<PAGE>

A shareholder of the Texas Tax-Free Income Fund should be aware that a
redemption of shares (including any exchange into another USAA Fund) is a
taxable event and, accordingly, a capital gain or loss may be recognized. If a
shareholder receives an exempt-interest dividend with respect to any share and
such share has been held for six months or less, any loss on the redemption or
exchange will be disallowed to the extent of such exempt-interest dividend.
Similarly, if a shareholder of the Fund receives a distribution taxable as
long-term capital gain with respect to shares of the Fund and redeems or
exchanges shares before he has held them for more than six months, any loss on
the redemption or exchange (not otherwise disallowed as attributable to an
exempt-interest dividend) will be treated as long-term capital loss.

TRUSTEES AND OFFICERS OF THE TRUST

Robert G. Davis 1, 2
Trustee and Chairman of the Board of Trustees
Age: 50

Michael J.C. Roth 1, 2
Trustee, President and Vice Chairman of the Board of Trustees
Age: 55

13
<PAGE>

John W. Saunders, Jr. 1, 2, 4
Trustee and Vice President
Age: 62

Barbara B. Dreeben 3, 4, 5
200 Patterson #1008
San Antonio, TX 78209
Trustee
Age: 52

Howard L. Freeman, Jr. 2, 3, 4, 5
2710 Hopeton
San Antonio, TX 78230
Trustee
Age: 62

Robert L. Mason, Ph.D. 3, 4, 5
12823 Queens Forest
San Antonio, TX 78230
Trustee
Age: 51

Manager, Statistical Analysis Section, Southwest Research Institute
(8/75-present). Dr. Mason serves as a Trustee of USAA Investment Trust and as a
Director of USAA Mutual Fund, Inc. and USAA Tax Exempt Fund, Inc.

Richard A. Zucker 3, 4, 5
407 Arch Bluff
San Antonio, TX 78216
Trustee
Age: 54

Vice President, Beldon Roofing and Remodeling (1985-present). Mr. Zucker serves
as a Trustee of USAA Investment Trust and as a Director of USAA Mutual Fund,
Inc. and USAA Tax Exempt Fund, Inc.

Michael D. Wagner 1
Secretary
Age: 49

Alex M. Ciccone 1
Assistant Secretary
Age: 47

14
<PAGE>

Sherron A. Kirk 1
Treasurer
Age: 52

Dean R. Pantzar 1
Assistant Treasurer
Age: 38

- ----------
1 Indicates those Trustees and officers who are employees of the Manager or
affiliated companies and are considered "interested persons" under the 1940
Act.
2 Member of Executive Committee
3 Member of Audit Committee
4 Member of Pricing and Investment Committee
5 Member of Corporate Governance Committee

The following table sets forth information describing the compensation of
the current Trustees of the Trust for their services as Trustees for the fiscal
year ended March 31, 1997.

Name Aggregate Total Compensation
of Compensation from the USAA
Trustee from the Trust Family of Funds (b)
- -------- ----------------- -------------------
George E. Brown* $ 5,370 $ 25,600
Robert G. Davis None (a) None (a)
Barbara B. Dreeben 7,605 36,600
Howard L. Freeman, Jr. 7,605 36,600
Robert L. Mason* 2,235 11,000
Michael J.C. Roth None (a) None (a)
John W. Saunders, Jr. None (a) None (a)
Richard A. Zucker 7,605 36,600
- ----------------
* Effective January 1, 1997, Robert L. Mason replaced George E. Brown as a
Trustee on the Board of Trustees. Mr. Brown retired on December 31, 1996.

15
<PAGE>

All of the above Trustees are also Trustees/Directors of the other funds
for which IMCO serves as investment adviser. No compensation is paid by any fund
to any Trustee/Director who is a director, officer, or employee of IMCO or its
affiliates. No pension or retirement benefits are accrued as part of fund
expenses. The Trust reimburses certain expenses of the Trustees who are not
affiliated with the investment adviser. As of July 11, 1997, the officers and
Trustees of the Trust and their families as a group owned beneficially or of
record less than 1% of the outstanding shares of the Trust.

As of July 11, 1997, USAA and its affiliates owned 194,890 shares (3.7%)
of the Texas Tax-Free Money Market Fund and no shares of the Texas Tax-Free
Income Fund.

The following table identifies all persons, who as of July 11, 1997, held
of record or owned beneficially 5% or more of either Fund's shares.

Name and address
Title of Class of beneficial owner Percent of class
- --------------------- ---------------------- ----------------

Texas Tax-Free Money Miriam F. Schweers 7%
Market Fund Carl A. Schweers
1240 E. Sunshine Dr.
San Antonio, TX 78228-2944

THE TRUST'S MANAGER

In addition to managing the Trust's assets, the Manager advises and
manages the investments for USAA and its affiliated companies as well as those
of USAA Investment Trust, USAA Mutual Fund, Inc., USAA Tax Exempt Fund, Inc. and
USAA Life Investment Trust. As of the date of this SAI, total assets under
management by the Manager were approximately $35 billion, of which approximately
$20 billion were in mutual fund portfolios.

ADVISORY AGREEMENT

From time to time the Manager may, without prior notice to shareholders,
waive all or any portion of fees or agree to reimburse expenses incurred by a
Fund. Any such waiver or reimbursement may be terminated by the Manager at any
time without prior notice to shareholders. The Manager has voluntarily agreed to
limit each Fund's annual expenses to .50% of its ANA until August 1, 1998, and
will reimburse the Funds for all expenses in excess of the limitations.

16
<PAGE>

For the last three fiscal years, management fees were as follows:

1995* 1996 1997
----- ---- ----
Texas Tax-Free Income Fund $13,843 $35,729 $47,582
Texas Tax-Free Money Market Fund $11,156 $22,664 $25,483
- --------------
* For the eight-month period ended March 31, 1995.

Because the Funds' expenses exceeded the Manager's voluntary expense
limitation, the Manager did not receive any management fees for the last three
fiscal years. In addition, for 1995, 1996, and 1997, the Manager did not receive
reimbursement for other operating expenses to which it would have been entitled
in the amounts of $38,724, $47,505, and $32,878, respectively, from the Texas
Tax-Free Income Fund and $36,396, $46,368, and $39,351, respectively, from th
Texas Tax-Free Money Market Fund.

UNDERWRITER

TRANSFER AGENT

GENERAL INFORMATION

CUSTODIAN

COUNSEL

Goodwin, Procter & Hoar LLP, Exchange Place, Boston, MA 02109, will review
certain legal matters for the Trust in connection with the shares offered by the
Prospectus.

INDEPENDENT AUDITORS

FINANCIAL STATEMENTS

CALCULATION OF PERFORMANCE DATA

TOTAL RETURN

The Texas Tax-Free Income Fund may advertise performance in terms of average
annual total return for 1-, 5-, and 10-year periods, or for such lesser period
as the Fund has been in existence. Average annual total return is computed by
finding the average annual compounded rates of return over the periods that
would equate the initial amount invested to the ending redeemable value,
according to the following formula:

17
<PAGE>

P(1 + T)N = ERV

The date of commencement of operations for the Texas Tax-Free Income Fund
was August 1, 1994. The Fund's average total returns for the following periods
ended March 31, 1997 were:

1 year . . . . . 7.06% Since inception . . . . . 8.32%

YIELD

The Texas Tax-Free Income Fund may advertise performance in terms of a 30-day
yield quotation. The 30- day yield quotation is computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:

YIELD = 2 left [ left ({a-b} over cd + 1 right)^6 - 1 right]

For purposes of the yield calculation, interest income is computed based
on the yield to maturity of each debt obligation in the Fund's portfolio and all
recurring charges are recognized.

The Fund's 30-day yield for the period ended March 31, 1997 was 5.56%.

YIELD - TEXAS TAX-FREE MONEY MARKET FUND

When the Texas Tax-Free Money Market Fund quotes a current annualized yield, it
is based on a specified recent seven-calendar-day period. It is computed by (1)
determining the net change, exclusive of capital changes, in the value of a
hypothetical preexisting account having a balance of one share at the beginning
of the period, (2) dividing the net change in account value by the value of the
account at the beginning of the base period to obtain the base return, then (3)
multiplying the base period return by 52.14 (365/7). The resulting yield figure
is carried to the nearest hundredth of one percent.

Current and effective yields fluctuate daily and will vary with factors
such as interest rates and the quality, length of maturities, and type of
investments in the portfolio.

Yield for 7-day Period ended 3/31/97 was 3.13%
Effective Yield for 7-day Period ended 3/31/97 was 3.18%

TAX EQUIVALENT YIELD

A tax-exempt mutual fund may provide more "take-home" income than a fully
taxable mutual fund after paying taxes. Calculating a "tax equivalent yield"
means converting a tax-exempt yield to a pretax equivalent so that a meaningful
comparison can be made between a tax-exempt municipal fund and a fully taxable
fund. The Texas Tax-Free Money Market Fund may advertise performance in terms of
a tax equivalent yield based on the 7-day yield or effective yield and the Texas
Tax-Free Income Fund may advertise performance in terms of a 30-day tax
equivalent yield.

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To calculate a tax equivalent yield, the Texas investor must know his
federal marginal income tax rate. The tax equivalent yield is then computed by
dividing the tax-exempt yield of a fund by the complement of the federal
marginal tax rate. The complement, for example, of a federal marginal tax rate
of 36.0% is 64.0%, that is (1.00-0.36= 0.64).

Tax Equivalent Yield = Tax Exempt
Yield / (1- Federal Marginal Tax Rate)

Based on federal marginal tax rate of 36.0%, the tax equivalent yields for
the Texas Tax-Free Income and Texas Tax-Free Money Market Funds for the period
ended March 31, 1997 were 8.69% and 4.89%, respectively.

APPENDIX A - TAX-EXEMPT SECURITIES AND THEIR RATINGS

TAX-EXEMPT SECURITIES

RATINGS

EXCERPTS FROM MOODY'S BOND (TAX-EXEMPT SECURITIES) RATINGS:

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

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NOTE: THOSE BONDS IN THE AA, A, AND BAA GROUPS WHICH MOODY'S BELIEVES POSSESS
THE STRONGEST INVESTMENT ATTRIBUTES ARE DESIGNATED BY THE SYMBOLS AA1, A1, AND
BAA1.

EXCERPTS OF MOODY'S RATINGS OF SHORT-TERM LOANS (STATE AND TAX-EXEMPT NOTES):

Moody's ratings for state and tax-exempt notes and other short-term obligations
are designated Moody's Investment Grade (MIG). Symbols used will be as follows:

MIG-1 This designation denotes best quality. There is present strong
protection by established cash flows, superior liquidity support or
demonstrated broadbased access to the market for refinancing.

MIG-2 This designation denotes high quality. Margins of protection are
ample although not so large as in the preceding group.

EXCERPTS OF MOODY'S RATING OF COMMERCIAL PAPER:

Prime-1 Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory
obligations. Prime-1 repayment capacity will normally be evidenced
by the following characteristics:

EXCERPTS FROM S&P'S BOND RATINGS:

AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.

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

PLUS (+) OR MINUS (-): THE RATINGS FROM AA TO BBB MAY BE MODIFIED BY THE
ADDITION OF A PLUS OR MINUS SIGN TO SHOW RELATIVE STANDING WITHIN THE MAJOR
RATING CATEGORIES.

EXCERPTS OF S&P'S RATINGS OF TAX-EXEMPT NOTES:

SP-1 Strong capacity to pay principal and interest. Issues determined to
possess very strong characteristics are given a plus (+) designation.

SP-2 Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of
the notes.

EXCERPTS OF S&P'S RATING OF COMMERCIAL PAPER:

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.

EXCERPTS OF FITCH'S RATINGS OF BONDS:

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

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

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

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

EXCERPTS OF FITCH'S RATINGS TO COMMERCIAL PAPER, CERTIFICATES OF DEPOSIT AND
TAX-EXEMPT NOTES:

F-1+ Exceptionally strong credit quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.

F-1 Very strong credit quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.

F-2 Good credit quality. Issues assigned this rating have a satisfactory
degree of assurance for timely payment, but the margin of safety is not
as great as for issues assigned F-1+ and F-1 ratings.

EXCERPTS FROM DUFF & PHELPS LONG-TERM RATING SCALE:

AAA Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.

AA High credit quality. Protection factors are strong. Risk is modest but
may vary slightly from time to time because of economic conditions.

A Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress.

BBB Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic
cycles.

EXCERPTS FROM DUFF & PHELPS COMMERCIAL PAPER RATING SCALE:

D-1 Very high certainty of timely payment. Liquidity factors are excellent
and supported by good fundamental protection factors. Risk factors are
minor.

D-1- High certainty of timely payment. Liquidity factors are strong and
supported by good fundamental protection factors. Risk factors are
very small.

THOMPSON BANKWATCH, INC.

TBW-1 The highest category; indicates a very high likelihood that principal
and interest will be paid on a timely basis.

TBW-2 The second highest category; while the degree of safety regarding
timely repayment of principal and interest is strong, the relative
degree of safety is not as high as for issues rated TBW-1.

TBW-3 The lowest investment grade category; indicates that while the
obligation is more susceptible to adverse developments (both internal
and external) than those with higher ratings, the capacity to service
principal and interest in a timely fashion is considered adequate.

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IBCA INC.

A1 Obligations supported by the highest capacity for timely repayment. Where
issues possess a particularly strong credit feature, a rating of A1+ is
assigned.

A2 Obligations supported by a satisfactory capacity for timely repayment
although such capacity may be susceptible to adverse changes in business,
economic or financial conditions.

A3 Obligations supported by an adequate capacity for timely repayment. Such
capacity is more susceptible to adverse changes in business, economic or
financial conditions than for obligations in higher categories.

B Obligations for which the capacity for timely repayment is susceptible to
adverse changes in business, economic or financial conditions.

C Obligations for which there is a high risk of default or which are
currently in default.

APPENDIX B - COMPARISON OF PORTFOLIO PERFORMANCE

Fund performance also may be compared to the performance of broad groups
of mutual funds with similar investment goals or unmanaged indexes of comparable
securities. Evaluations of Fund performance made by independent sources may also
be used in advertisements concerning the Fund, including reprints of, or
selections from, editorials or articles about the Fund. The Fund or its
performance may also be compared to products and services not constituting
securities subject to registration under the Securities Act of 1933 such as, but
not limited to, certificates of deposit and money market accounts. Sources for
performance information and articles about the Fund may include the following: