<PAGE>


                     The Tax-Exempt Fund of California/(R)/

                                   Prospectus

<TABLE>
<CAPTION>
         TABLE OF CONTENTS
------------------------------------------------------
<S>      <S>
  1       Risk/Return Summary
------------------------------------------------------
  4       Fees and Expenses of the Fund
------------------------------------------------------
  5       Investment Objectives, Strategies and Risks
------------------------------------------------------
  7       Management and Organization
------------------------------------------------------
  8       Shareholder Information
------------------------------------------------------
  9       Choosing a Share Class
------------------------------------------------------
11        Purchase and Exchange of Shares
------------------------------------------------------
12        Sales Charges
------------------------------------------------------
14        Sales Charge Reductions and Waivers
------------------------------------------------------
15        Plans of Distribution
------------------------------------------------------
16        How to Sell Shares
------------------------------------------------------
17        Distributions and Taxes
------------------------------------------------------
18        Financial Highlights
------------------------------------------------------
</TABLE>






                                 MARCH 15, 2001


 THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED
 OR DISAPPROVED OF THESE SECURITIES. FURTHER, IT HAS NOT DETERMINED THAT THIS
 PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS
 A CRIMINAL OFFENSE.

<PAGE>



<PAGE>

 RISK/RETURN SUMMARY

 The fund's primary objective is to provide you with a high level of current
 income exempt from regular federal and California income taxes.  Its secondary
 objective is to preserve your investment.  It invests primarily in municipal
 bonds, including lower quality bonds, issued by municipalities in the state of
 California, including counties, cities, towns, and various regional or special
 districts.

 The fund is designed for investors seeking income exempt from federal and state
 taxes, and capital preservation over the long term.  An investment in the fund
 is subject to risks, including the possibility that the fund's income and the
 value of its investments may fluctuate in response to economic, political or
 social events in the U.S. or abroad. Because the fund invests in securities
 issued by California municipalities, the fund is more susceptible to factors
 adversely affecting issuers of California securities than a comparable
 municipal bond mutual fund that does not concentrate in a single state. The
 values of debt securities owned by the fund may be affected by changing
 interest rates and credit risk assessments. Lower quality and longer maturity
 bonds may be subject to greater price fluctuations than higher quality and
 shorter maturity bonds.

 Your investment in the fund is not a bank deposit and is not insured or
 guaranteed by the Federal Deposit Insurance Corporation or any other government
 agency, entity or person.

 YOU MAY LOSE MONEY BY INVESTING IN THE FUND. THE LIKELIHOOD OF LOSS IS GREATER
 IF YOU INVEST FOR A SHORTER PERIOD OF TIME.


                                       1

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>

 HISTORICAL INVESTMENT RESULTS

 The following information provides some indication of the risks of investing in
 the fund by showing changes in the fund's investment results from year to year
 and by showing how the fund's average annual returns for various periods
 compare with those of a broad measure of market performance. Past results are
 not an indication of future results.


                 CALENDAR YEAR TOTAL RETURNS FOR CLASS A SHARES
   (Results do not include a sales charge; if one were included, results would
                                   be lower.)
 [bar chart]
 1991   10.10%
 1992    8.25%
 1993   12.87%
 1994   -5.08%
 1995   17.59%
 1996    4.27%
 1997    8.54%
 1998    6.13%
 1999   -1.97%
 2000   11.29%
 [end bar chart]


    The fund's highest/lowest quarterly results during this time period were:

<TABLE>
<CAPTION>
        <S>                 <C>     <C>
        HIGHEST             7.46%  (quarter ended March 31, 1995)
        LOWEST              -4.68%  (quarter ended March 31, 1994)
</TABLE>


                                       2

THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS



<PAGE>



 Unlike the bar chart on the previous page, the table below reflects the fund's
 results with the maximum initial or deferred sales charge imposed, as required
 by Securities and Exchange Commission rules. Class A share results reflect the
 maximum initial sales charge of 3.75%. Sales charges are reduced for purchases
 of $100,000 or more. Results would be higher if calculated without a sales
 charge. All fund results reflect the reinvestment of dividend and capital gain
 distributions.

 Since the fund's Class B shares began investment operations on March 15, 2000
 and Class C and F shares began investment operations on March 15, 2001,
 comparable results for those classes are not available for the 2000 calendar
 year.
<TABLE>
<CAPTION>
 AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDING DECEMBER 31, 2000:
 ------------------------------------------------------------------------------
                                    ONE YEAR  FIVE YEARS  TEN YEARS   LIFETIME
 <S>                                <C>       <C>         <C>        <C>
 Class A - began 10/28/86
 (with the maximum sales charge       7.09%     4.76%       6.59%      6.46%
 imposed)
 ------------------------------------------------------------------------------
 Lehman Brothers Municipal Bond      11.68%     5.84%       7.32%      7.37%
 Index/1/
 ------------------------------------------------------------------------------
 Lipper California Municipal Debt    12.95%     5.05%       6.79%      6.58%
 Average/2/
 ------------------------------------------------------------------------------
 Class A 30-day yield: 4.31%
 (For current yield information, please call American FundsLine at
  1-800-325-3590.)
 ------------------------------------------------------------------------------
</TABLE>

 1 The Lehman Brothers Municipal Bond Index represents the national long-term
  investment grade municipal bond market. This index is unmanaged and does not
  reflect sales charges, commissions or expenses.
 2 The Lipper California Municipal Debt Funds Average represents funds that
  limit their assets to those securities that provide income that is exempt from
  taxation in California. The results of the underlying funds in the average
  include the reinvestment of dividend and capital gains distributions and
  brokerage commissions paid by the funds for portfolio transactions, but do not
  reflect sales charges.


                                       3

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>

 FEES AND EXPENSES OF THE FUND

 SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)

<TABLE>
<CAPTION>
                                                      CLASS A   CLASS B   CLASS C    CLASS F
 --------------------------------------------------------------------------------------------
 <S>                                                  <C>       <C>       <C>       <C>
 Maximum sales charge imposed on purchases (as a       3.75%/1/  none      none       none
 percentage of offering price)
 --------------------------------------------------------------------------------------------
 Maximum sales charge imposed on reinvested            none      none      none       none
 dividends
 --------------------------------------------------------------------------------------------
 Maximum deferred sales charge                        none/2/    5.00%/3/  1.00%/4/   none
 --------------------------------------------------------------------------------------------
 Redemption or exchange fees                           none      none      none       none
 --------------------------------------------------------------------------------------------
</TABLE>
 1 Sales charges are reduced or eliminated for purchases of $100,000 or more.
 2 A contingent deferred sales charge of 1% applies on certain redemptions made
  within 12 months following purchases of $1 million or more made without a
  sales charge.
 3 Deferred sales charges are reduced after 12 months and eliminated after six
  years.
 4 Deferred sales charge is eliminated after 12 months.

 ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)

<TABLE>
<CAPTION>
                                                           CLASS A  CLASS B/1/  CLASS C/2/   CLASS F/2/
 -------------------------------------------------------------------------------------------------------
 <S>                                                       <C>      <C>         <C>         <C>
 Management Fees                                            0.39%     0.39%       0.39%        0.39%
 -------------------------------------------------------------------------------------------------------
 Distribution and/or Service (12b-1) Fees/3/                0.25%     1.00%       1.00%        0.25%
 -------------------------------------------------------------------------------------------------------
 Other Expenses                                             0.08%     0.05%       0.21%        0.21%
 -------------------------------------------------------------------------------------------------------
 Total Annual Fund Operating Expenses                       0.72%     1.44%       1.60%        0.85%
 -------------------------------------------------------------------------------------------------------
</TABLE>

 1 Annualized.
 2 Based on estimated amounts for the current fiscal year.
 3 Class A and F 12b-1 fees may not exceed 0.25% and 0.50%, respectively, of the
  class' average net assets annually.

 EXAMPLE

 The examples below are intended to help you compare the cost of investing in
 the fund with the cost of investing in other mutual funds. The examples assume
 that you invest $10,000 in the fund for the time periods indicated, that your
 investment has a 5% return each year and that the fund's operating expenses
 remain the same as shown above.  The "Class A" example reflects the maximum
 initial sales charge in the first year. The "Class B- and Class C-assuming
 redemption" examples reflect applicable contingent deferred sales charges
 through six years and one year, respectively (after which times they are
 eliminated). The examples do not include fees charged by financial
 intermediaries, typically applicable mainly to Class F shares. Both Class B
 examples reflect Class A expenses for years 9 and 10 since Class B shares
 automatically convert to Class A after eight years. Although your actual costs
 may be higher or lower, based on these assumptions, your cumulative expenses
 would be:

<TABLE>
<CAPTION>
                                             ONE YEAR         THREE YEARS         FIVE YEARS         TEN YEARS
 <S>                                      <C>              <C>                 <C>                <C>
 Class A                                       $446               $597               $761              $1,236
 ----------------------------------------------------------------------------------------------------------------------------------
 Class B - assuming redemption                 $647               $856               $987              $1,528
 -------------------------------------------------------------------------------------------------------------------
 Class B - assuming no redemption              $147               $456               $787              $1,528
 -------------------------------------------------------------------------------------------------------------------
 Class C - assuming redemption                 $263               $505               $871              $1,900
 -------------------------------------------------------------------------------------------------------------------
 Class C - assuming no redemption              $163               $505               $871              $1,900
 -------------------------------------------------------------------------------------------------------------------
 Class F - excludes intermediary fees/*/       $ 87               $271               $471              $1,049
 -------------------------------------------------------------------------------------------------------------------
 *Fees charged by financial intermediaries are independent of fund expenses and will increase the overall cost of
  your investment.  Intermediary fees typically range from 0.50% to 3.00% of assets annually depending on services
  offered.
</TABLE>



                                       4

THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS



<PAGE>

 INVESTMENT OBJECTIVES, STRATEGIES AND RISKS

 The fund's primary investment objective is to provide you with a high level of
 current income exempt from regular federal and California income taxes.  Its
 secondary objective is preservation of capital.  The fund seeks to achieve
 these objectives by investing primarily in municipal bonds, including lower
 quality bonds, issued by municipalities in the state of California.  Municipal
 bonds are debt obligations generally issued to obtain funds for various public
 purposes, including the construction of public facilities.

 Because the fund invests in securities of issuers within the state of
 California, the fund is more susceptible to factors adversely affecting issuers
 of California securities than a comparable municipal bond mutual fund which
 does not concentrate in a single state.  For example, in the past, California
 voters have passed amendments to the state's constitution and other measures
 that limit the taxing and spending authority of California governmental
 entities and future voter initiatives may adversely affect California municipal
 bonds.  More detailed information about the risks of investing in California is
 contained in the statement of additional information.

 Under normal market conditions, the fund will invest at least 80% of its assets
 in, or derive at least 80% of its income from, securities that are exempt from
 both federal and California income taxes. The fund may invest up to 20% of its
 assets in securities that may subject you to federal alternative minimum taxes.
 The fund will invest primarily in debt securities rated Baa or BBB or better by
 Moody's Investors Service, Inc. or Standard & Poor's Corporation (or unrated
 but determined to be of equivalent quality) and may invest up to 20% of its
 assets in debt securities rated Ba and BB or below.

 The values of most debt securities held by the fund may be affected by changing
 interest rates and individual securities by changes in their effective
 maturities and credit ratings. For example, the values of bonds in the fund's
 portfolio generally will decline when interest rates rise and vice versa. Debt
 securities are also subject to credit risk, which is the possibility that the
 credit strength of an issuer will weaken and/or an issuer of a debt security
 will fail to make timely payments of principal or interest and the security
 will go into default. The values of lower quality and longer maturity bonds
 will be subject to greater price fluctuations than higher quality and shorter
 maturity bonds. The fund's investment adviser attempts to reduce these risks
 through diversification of the portfolio and ongoing credit analysis of each
 issuer as well as by monitoring economic and legislative developments.

 The fund may also hold cash or money market instruments or taxable debt
 securities. The size of the fund's cash position will vary and will depend on
 various factors, including market conditions and purchases and redemptions of
 fund shares. A larger cash position could detract from the achievement of the
 fund's objectives, but it also would reduce the fund's exposure in the event of
 a market


                                       5

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>

 downturn and provide liquidity to make additional investments or to meet
 redemptions.

 The fund relies on the professional judgment of its investment adviser, Capital
 Research and Management Company, to make decisions about the fund's portfolio
 investments. The basic investment philosophy of the investment adviser is to
 seek undervalued securities that represent good long-term investment
 opportunities. Securities may be sold when the investment adviser believes they
 no longer represent good long-term value.

 ADDITIONAL INVESTMENT RESULTS

 Unlike the investment results table shown on an earlier page, the table below
 reflects the fund's results calculated without a sales charge.


<TABLE>
<CAPTION>
 AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2000:
                             ONE YEAR    FIVE YEARS    TEN YEARS     LIFETIME
 <S>                        <C>         <C>           <C>          <C>
 Class A - began 10/28/86
 (with no sales charge        11.29%       5.56%         7.00%        6.75%
 imposed)
 ------------------------------------------------------------------------------
 Lehman Brothers Municipal    11.68%       5.84%         7.32%        7.37%
 Bond Index/1/
 ------------------------------------------------------------------------------
 Lipper California            12.95%       5.05%         6.79%        6.58%
 Municipal Debt Average/2/
 ------------------------------------------------------------------------------
 Class A distribution rate/3/: 4.73%
 (For current distribution rate information, please American FundsLine at
  1-800-325-3590.)
 ------------------------------------------------------------------------------
</TABLE>


 1 The Lehman Brothers Municipal Bond Index represents the national long-term
  investment grade municipal bond market. This index is unmanaged and does not
  reflect sales charges, commissions or expenses.
 2 The Lipper California Municipal Debt Funds Average represents funds that
  limit their assets to those securities that provide income that is exempt from
  taxation in California. The results of the underlying funds in the average
  include the reinvestment of dividend and capital gains distributions and
  brokerage commissions paid by the funds for portfolio transactions, but do not
  reflect sales charges.
 3 The distribution rate represents actual distributions paid by the fund. It
  was calculated at net asset value by annualizing dividends paid by the fund
  over one month and dividing that number by the fund's average net asset value
  for the month.


                                       6

THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS



<PAGE>

 MANAGEMENT AND ORGANIZATION

 INVESTMENT ADVISER

 Capital Research and Management Company, an experienced investment management
 organization founded in 1931, serves as investment adviser to the fund and
 other funds, including those in The American Funds Group. Capital Research and
 Management Company, a wholly owned subsidiary of The Capital Group Companies,
 Inc., is headquartered at 333 South Hope Street, Los Angeles, CA 90071. Capital
 Research and Management Company manages the investment portfolio and business
 affairs of the fund. The total management fee paid by the fund, as a percentage
 of average net assets, for the previous fiscal year appears earlier under "Fees
 and Expenses of the Fund."

 MULTIPLE PORTFOLIO COUNSELOR SYSTEM

 Capital Research and Management Company uses a system of multiple portfolio
 counselors in managing mutual fund assets. Under this approach the portfolio of
 a fund is divided into segments managed by individual counselors. Counselors
 decide how their respective segments will be invested, within the limits
 provided by a fund's objective(s) and policies and by Capital Research and
 Management Company's investment committee. In addition, Capital Research and
 Management Company's research professionals may make investment decisions with
 respect to a portion of a fund's portfolio. The primary individual portfolio
 counselors for The Tax-Exempt Fund of California are:


<TABLE>
<CAPTION>
 PORTFOLIO COUNSELOR/
 FUND TITLE (IF          COUNSELOR    PRIMARY TITLE WITH INVESTMENT ADVISER
 APPLICABLE)               SINCE      (OR AFFILIATE) AND INVESTMENT EXPERIENCE
 ------------------------------------------------------------------------------
 <S>                    <C>          <C>
 NEIL L. LANGBERG          1986       Vice President, Investment Management
 Senior Vice President                Group, Capital Research and Management
                                      Company
                                      Investment professional with Capital
                                      Research and Management Company or
                                      affiliate since 1978
 ------------------------------------------------------------------------------
 DAVID A. HOAG             1993       Vice President and Director, Capital
 Vice President                       Research Company
                                      Investment professional since 1988 and
                                      with Capital Research and Management
                                      Company or affiliate since 1991
 ------------------------------------------------------------------------------
 EDWARD B. NAHMIAS         1998       Vice President, Capital Research Company
                                      Investment professional since 1990 and
                                      with Capital Research and Management
                                      Company or affiliate since 1996
 ------------------------------------------------------------------------------
</TABLE>



                                       7

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>

 SHAREHOLDER INFORMATION

 SHAREHOLDER SERVICES

 American Funds Service Company, the fund's transfer agent, offers you a wide
 range of services you can use to alter your investment program should your
 needs and circumstances change. These services may be terminated or modified at
 any time upon 60 days written notice. For your convenience, American Funds
 Service Company has four service centers across the country.

                  AMERICAN FUNDS SERVICE COMPANY SERVICE AREAS
                    Call toll-Free from anywhere in the U.S.
                               (8 a.m. to 8 p.m. ET):
                                   800/421-0180

                             [map of the United States]

<TABLE>
<CAPTION>
<S>                <C>                 <C>                    <C>
Western            Western Central     Eastern Central        Eastern
Service Center     Service Center      Service Center         Service Center
American Funds     American Funds      American Funds         American Funds
Service Company    Service Company     Service Company        Service Company
P.O. Box 2205      P.O. Box 659522     P.O. Box 6007          P.O. Box 2280
Brea, California   San Antonio, Texas  Indianapolis, Indiana  Norfolk, Virginia
92822-2205         78265-9522          46206-6007             23501-2280
Fax: 714/671-7080  Fax: 210/474-4050   Fax: 317/735-6620      Fax: 757/670-4773
</TABLE>



 A MORE DETAILED DESCRIPTION OF POLICIES AND SERVICES IS INCLUDED IN THE FUND'S
 STATEMENT OF ADDITIONAL INFORMATION AND THE OWNER'S GUIDE SENT TO NEW AMERICAN
 FUNDS SHAREHOLDERS TITLED "WELCOME TO THE FAMILY." Both are available by
 writing or calling American Funds Service Company.


                                       8

THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS



<PAGE>

 CHOOSING A SHARE CLASS

 The fund offers four different classes of shares.  Each share class represents
 investments in the same portfolio of securities, but each class has its own
 sales charge and expense structure, allowing you to choose the class that best
 meets your situation. WHEN YOU PURCHASE SHARES OF THE FUND, YOU MUST CHOOSE A
 SHARE CLASS.  IF NONE IS CHOSEN, YOUR INVESTMENT WILL BE MADE IN CLASS A
 SHARES.

 Shares of the fund may be purchased through various investment programs or
 accounts, including many types of retirement plans.  HOWEVER, TAX-EXEMPT FUNDS
 SHOULD NOT SERVE AS RETIREMENT PLAN INVESTMENTS. The services or share classes
 available to you may vary depending upon how you wish to purchase shares of the
 fund.

 Factors you should consider in choosing a class of shares include:

 . How long you expect to own the shares

 . How much you intend to invest

 . Total expenses associated with owning shares of each class

 . Whether you qualify for any reduction or waiver of sales charges (for
  example, Class A shares may be a less expensive option over time if you
  qualify for a sales charge reduction or waiver)

 . Class B and C shares generally are not available to certain retirement plans,
  including employer-sponsored retirement plans such as 401(k) plans,
  employer-sponsored 403(b) plans, and money purchase pension and profit sharing
  plans

 . Class F shares are generally only available to fee-based programs of
  investment firms and registered investment advisers that have special
  agreements with the fund's distributor

 EACH INVESTOR'S FINANCIAL CONSIDERATIONS ARE DIFFERENT.  YOU SHOULD SPEAK WITH
 YOUR FINANCIAL ADVISER TO HELP YOU DECIDE WHICH SHARE CLASS IS BEST FOR YOU.


                                       9

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>

 SUMMARY OF THE PRIMARY DIFFERENCES AMONG SHARE CLASSES

<TABLE>
<CAPTION>
  CLASS A SHARES
 ------------------------------------------------------------------------------
 <S>                         <S>
  Initial sales charge        up to 3.75% (reduced or eliminated for purchases
                              of $100,000 or more)
  Contingent deferred sales   none (except on certain redemptions on purchases
  charge                      of $1 million or more bought without an initial
                              sales charge)
  12b-1 fees                  up to 0.25% annually
  Dividends                   higher than other classes due to lower annual
                              expenses
  Purchase maximum            none
  Conversion                  none
  CLASS B SHARES
 ------------------------------------------------------------------------------
  Initial sales charge        none
  Contingent deferred sales   starts at 5.00% and declines each year until it
  charge                      reaches 0% after six years
  12b-1 fees                  1.00% annually
  Dividends                   lower than Class A and F shares due to higher
                              distribution fees and other expenses
  Purchase maximum            $100,000
  Conversion                  automatic conversion to Class A shares after
                              eight years, reducing future annual expenses
  CLASS C SHARES
 ------------------------------------------------------------------------------
  Initial sales charge        none
  Contingent deferred sales   1.00% if shares are sold within one year after
  charge                      being purchased
  12b-1 fees                  1.00% annually
  Dividends                   lower than Class A and F shares due to higher
                              distribution fees and other expenses
  Purchase maximum            $500,000
  Conversion                  automatic conversion to Class F shares after ten
                              years, reducing future annual expenses
  CLASS F SHARES
 ------------------------------------------------------------------------------
  Initial sales charge        none
  Contingent deferred sales   none
  charge
  12b-1 fees                  currently 0.25% annually (may not exceed 0.50%
                              annually)
  Dividends                   higher than Class B and C shares due to lower
                              distribution fees, but typically lower than Class
                              A shares due to higher other expenses
  Purchase maximum            none
  Conversion                  none
 ------------------------------------------------------------------------------
</TABLE>



                                       10

THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS



<PAGE>

 PURCHASE AND EXCHANGE OF SHARES

 PURCHASE OF CLASS A, B AND C SHARES

 Generally, you may open an account and purchase Class A, B and C shares by
 contacting any investment dealer (who may impose transaction charges in
 addition to those described in this prospectus) authorized to sell the fund's
 shares. You may purchase additional shares in various ways, including through
 your investment dealer and by mail, telephone, the Internet and bank wire.

 PURCHASE OF CLASS F SHARES

 Generally, you may only open an account and purchase Class F shares through
 fee-based programs of investment firms and registered investment advisers with
 special agreements with the fund's distributor. These firms and advisers
 typically charge ongoing fees for services they provide.

 EXCHANGE

 Generally, you may exchange your shares into shares of the same class of other
 funds in The American Funds Group without a sales charge. For purposes of
 computing the contingent deferred sales charge on Class B and C shares, the
 length of time you have owned your shares will be measured from the date of
 original purchase and will not be affected by any exchange.

 Exchanges of shares from the money market funds initially purchased without a
 sales charge generally will be subject to the appropriate sales charge.
 Exchanges have the same tax consequences as ordinary sales and purchases. See
 "Transactions by Telephone..." for information regarding electronic exchanges.

 THE FUND AND AMERICAN FUNDS DISTRIBUTORS, THE FUND'S DISTRIBUTOR, RESERVE THE
 RIGHT TO REJECT ANY PURCHASE ORDER FOR ANY REASON, INCLUDING PURCHASES WHICH
 ARE PART OF EXCHANGE ACTIVITY THAT COULD INVOLVE ACTUAL OR POTENTIAL HARM TO
 THE FUND.


<TABLE>
<CAPTION>
 PURCHASE MINIMUMS FOR ALL CLASSES OF SHARES
 <S>                                              <C>
 To establish an account                           $  1,000
 To add to an account                              $     50
 -----------------------------------------------------------
 PURCHASE MAXIMUM FOR CLASS B SHARES               $100,000
 -----------------------------------------------------------
 PURCHASE MAXIMUM FOR CLASS C SHARES               $500,000
 -----------------------------------------------------------
</TABLE>



                                       11

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>

 SHARE PRICE

 The fund calculates its share price, also called net asset value, as of
 approximately 4:00 p.m. New York time, which is the normal close of trading on
 the New York Stock Exchange, every day the Exchange is open. In calculating net
 asset value, market prices are used when available. The fund has adopted
 procedures to make "fair value" determinations when reliable market prices for
 particular securities are not available.

 Your shares will be purchased at the net asset value (plus any applicable sales
 charge in the case of Class A shares), or sold at the net asset value next
 determined after American Funds Service Company receives and accepts your
 request. A contingent deferred sales charge may apply at the time you sell
 certain Class A, B and C shares.

 SALES CHARGES

 CLASS A

 The initial sales charge you pay when you buy Class A shares differs depending
 upon the amount you invest and may be reduced or eliminated for larger
 purchases as indicated below.


<TABLE>
<CAPTION>
                             SALES CHARGE AS A PERCENTAGE OF
                             ----------------------------------
                                                                    DEALER
                                                    NET           COMMISSION
                                OFFERING          AMOUNT           AS % OF
 INVESTMENT                       PRICE          INVESTED       OFFERING PRICE
 ------------------------------------------------------------------------------
 <S>                         <C>              <C>              <C>
 Less than $100,000               3.75%            3.90%            3.00%
 ------------------------------------------------------------------------------
 $100,000 but less than           3.50%            3.63%            2.75%
 $250,000
 ------------------------------------------------------------------------------
 $250,000 but less than           2.50%            2.56%            2.00%
 $500,000
 ------------------------------------------------------------------------------
 $500,000 but less than           2.00%            2.04%            1.60%
 $750,000
 ------------------------------------------------------------------------------
 $750,000 but less than $1        1.50%            1.52%            1.20%
 million
 ------------------------------------------------------------------------------
 $1 million or more and
 certain other investments        none             none             none
 described below
 ------------------------------------------------------------------------------
</TABLE>


 CLASS A PURCHASES NOT SUBJECT TO SALES CHARGE

 INVESTMENTS OF $1 MILLION OR MORE MAY BE SUBJECT TO A 1% CONTINGENT DEFERRED
 SALES CHARGE IF SHARES ARE SOLD WITHIN ONE YEAR OF PURCHASE.
  Employer-sponsored defined contribution-type plans investing $1 million or
 more, or with 100 or more eligible employees, and Individual Retirement Account
 rollovers involving retirement plan assets invested in the American Funds, may
 invest with no sales charge and are not subject to a contingent deferred sales
 charge.  Also exempt are investments made through retirement plans, endowments
 or foundations with $50 million or more in assets, and investments made through
 accounts that purchased fund shares before March 15, 2001 and are part of
 certain qualified fee-based programs. The distributor may pay dealers up to 1%


                                       12

THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS



<PAGE>

 on investments made in Class A shares with no initial sales charge. The fund
 may reimburse the distributor for these payments through its Plan of
 Distribution (see below).

 CLASS B AND C

 Class B and C shares are sold without any initial sales charge.  American Funds
 Distributors pays 4% of the amount invested to dealers who sell Class B shares
 and 1% to dealers who sell Class C shares.

 For Class C shares, a contingent deferred sales charge of 1% applies if shares
 are sold within one year of purchase.  For Class B shares, a contingent
 deferred sales charge may be applied to shares you sell within six years of
 purchase, as shown in the table below.

<TABLE>
<CAPTION>
 <S>                                   <C>  <C>  <C>  <C>  <C>  <C>
 CLASS B SHARES SOLD WITHIN YEAR       1    2    3    4    5     6
 --------------------------------------------------------------------
 CONTINGENT DEFERRED SALES CHARGE      5%   4%   4%   3%   2%    1%
</TABLE>


 Shares acquired through reinvestment of dividends or capital gain distributions
 are not subject to a contingent deferred sales charge.  In addition, the
 contingent deferred sales charge may be waived in certain circumstances.  See
 "Contingent Deferred Sales Charge Waivers for Class B and C Shares" below.  The
 contingent deferred sales charge is based on the original purchase cost or the
 current market value of the shares being sold, whichever is less.  For purposes
 of determining the contingent deferred sales charge, if you sell only some of
 your shares, shares that are not subject to any contingent deferred sales
 charge will be sold first and then shares that you have owned the longest.

 See "Plans of Distribution" below for ongoing compensation paid to your dealer
 or financial adviser for all share classes.

 CONVERSION OF CLASS B AND C SHARES

 Class B shares automatically convert to Class A shares in the month of the
 eight-year anniversary of the purchase date.  Class C shares automatically
 convert to Class F shares in the month of the ten-year anniversary of the
 purchase date.  The Internal Revenue Service currently takes the position that
 these automatic conversions are not taxable. Should their position change,
 shareholders would still have the option of converting but may face certain tax
 consequences.


                                       13

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>

 SALES CHARGE REDUCTIONS AND WAIVERS

 You must let your investment dealer or American Funds Service Company know if
 you qualify for a reduction in your Class A sales charge or waiver of your
 Class B or C contingent deferred sales charge.

 REDUCING YOUR CLASS A SALES CHARGE

 You and your "immediate family" (your spouse and your children under the age of
 21) may combine investments to reduce your Class A sales charge.

 AGGREGATING ACCOUNTS

 To receive a reduced Class A sales charge, investments made by you and your
 immediate family (see above) may be aggregated if made for your own account(s)
 and/or, for instance:

 . trust accounts established by the above individuals. However, if the
  person(s) who established the trust is deceased, the trust account may be
  aggregated with accounts of the person who is the primary beneficiary of the
  trust.

 . solely controlled business accounts.

 . single-participant retirement plans.

 CONCURRENT PURCHASES

 You may combine simultaneous purchases of any class of shares of two or more
 American Funds, as well as individual holdings in various American Legacy
 variable annuities or variable life insurance policies, to qualify for a
 reduced Class A sales charge.  Direct purchases of money market funds are
 excluded.

 RIGHTS OF ACCUMULATION

 You may take into account the current value (or if greater, the amount you
 invested less any withdrawals) of your existing holdings in any class of shares
 of the American Funds, as well as individual holdings in various American
 Legacy variable annuities or variable life insurance policies, to determine
 your Class A sales charge. Direct purchases of money market funds are excluded.

 STATEMENT OF INTENTION

 You can reduce the sales charge you pay on your Class A share purchases by
 establishing a Statement of Intention. A Statement of Intention allows you to
 combine all non-money market fund purchases of all share classes, as well as
 individual American Legacy variable annuity and life insurance policies you
 intend to make over a 13-month period, to determine the applicable sales
 charge. At your request, purchases made during the previous 90 days may be
 included; however, capital appreciation and reinvested dividends and capital
 gains do not apply toward these combined purchases. A portion of your account
 may be held in escrow to cover additional Class A sales charges which may be
 due if your total investments over the 13-month period do not qualify for the
 applicable sales charge reduction.


                                       14

THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS



<PAGE>

 CONTINGENT DEFERRED SALES CHARGE WAIVERS FOR CLASS B AND C SHARES

 The contingent deferred sales charge on Class B and C shares may be waived in
 the following cases:

 . when receiving payments through systematic withdrawal plans (up to 12% of the
  value of each fund account);

 . when receiving required minimum distributions from retirement accounts upon
  reaching age 70 1/2; or

 . for redemptions due to death or post-purchase disability of the shareholder.

 PLANS OF DISTRIBUTION

 The fund has Plans of Distribution or "12b-1 Plans" under which it may finance
 activities primarily intended to sell shares, provided the categories of
 expenses are approved in advance by the fund's board of trustees. The plans
 provide for annual expenses of up to 0.25% for Class A shares, 1.00% for Class
 B and C shares, and up to 0.50% for Class F shares. For all share classes, up
 to 0.25% of these expenses may be used to pay service fees to qualified dealers
 for providing certain shareholder services.  The remaining expense for each
 share class may be used for distribution expenses.

 The 12b-1 fees paid by the fund, as a percentage of average net assets, for the
 previous fiscal year are indicated earlier under "Fees and Expenses of the
 Fund." Since these fees are paid out of the fund's assets or income on an
 ongoing basis, over time they will increase the cost and reduce the return of
 an investment. The higher fees for Class B and C shares may cost you more over
 time than paying the initial sales charge for Class A shares.

 OTHER COMPENSATION TO DEALERS

 American Funds Distributors may pay, or sponsor informational meetings for,
 dealers as described in the statement of additional information.


                                       15

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>

 HOW TO SELL SHARES

 Once a sufficient period of time has passed to reasonably assure that checks or
 drafts (including certified or cashiers' checks) for shares purchased have
 cleared (normally 15 calendar days), you may sell (redeem) those shares in any
 of the following ways:

 THROUGH YOUR DEALER OR FINANCIAL ADVISER (CERTAIN CHARGES MAY APPLY)

 . Shares held for you in your dealer's name must be sold through the dealer.

 . Class F shares must be sold through your dealer or financial adviser.

 WRITING TO AMERICAN FUNDS SERVICE COMPANY

 . Requests must be signed by the registered shareholder(s).

 . A signature guarantee is required if the redemption is:

     -- Over $50,000;

     -- Made payable to someone other than the registered shareholder(s); or

     -- Sent to an address other than the address of record, or an address of
      record which has been changed within the last 10 days.

 . American Funds Service Company reserves the right to require signature
  guarantee(s) on any redemptions.

 . Additional documentation may be required for sales of shares held in
  corporate, partnership or fiduciary accounts.

 TELEPHONING OR FAXING AMERICAN FUNDS SERVICE COMPANY, OR BY USING AMERICAN
 FUNDSLINE/(R)/ OR AMERICAN FUNDSLINE ONLINE/(R)/:

 . Redemptions by telephone, fax, or computer (including American FundsLine and
  American FundsLine OnLine) are limited to $50,000 per shareholder each day.

 . Checks must be made payable to the registered shareholder.

 . Checks must be mailed to an address of record that has been used with the
  account for at least 10 days.

 TRANSACTIONS BY TELEPHONE, FAX, AMERICAN FUNDSLINE OR FUNDSLINE ONLINE

 Generally, you are automatically eligible to use these services for redemptions
 and exchanges unless you notify us in writing that you do not want any or all
 of these services. You may reinstate these services at any time.

 Unless you decide not to have telephone, fax, or computer services on your
 account(s), you agree to hold the fund, American Funds Service Company, any of
 its affiliates or mutual funds managed by such affiliates, and each of their
 respective directors, trustees, officers, employees and agents harmless from
 any losses, expenses, costs or liabilities (including attorney fees) which may
 be incurred in connection with the exercise of these privileges, provided
 American Funds Service Company employs reasonable procedures to confirm that
 the instructions received from any person with appropriate account information
 are genuine. If reasonable procedures are not employed, it and/or the fund may
 be liable for losses due to unauthorized or fraudulent instructions.


                                       16

THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS



<PAGE>

 DISTRIBUTIONS AND TAXES

 DIVIDENDS AND DISTRIBUTIONS

 The fund declares dividends from net investment income daily and distributes
 the accrued dividends, which may fluctuate, to shareholders each month.
  Dividends begin accruing one day after payment for shares is received by the
 fund or American Funds Service Company. Capital gains, if any, are usually
 distributed in November or December. When a dividend or capital gain is
 distributed, the net asset value per share is reduced by the amount of the
 payment.

 You may elect to reinvest dividends and/or capital gain distributions to
 purchase additional shares of this fund or any other American Fund, or you may
 elect to receive them in cash. Most shareholders do not elect to take capital
 gain distributions in cash because these distributions reduce principal value.

 TAX CONSEQUENCES

 Interest on municipal bonds is generally not included in gross income for
 federal income tax purposes. Interest on a state's municipal bonds is generally
 not included in state gross income for taxpayers of such state. The fund is
 permitted to pass through to its shareholders federally tax-exempt income
 subject to certain requirements.  However, the fund may invest in obligations
 which pay interest that is subject to state and local taxes when distributed by
 the fund.

 TAXES ON DISTRIBUTIONS

 Distributions you receive from the fund may be subject to income tax and may
 also be subject to state or local taxes to the extent they include income from
 debt securities that are not exempt from tax - unless you are exempt from
 taxation.

 For federal tax purposes, any taxable dividends and distributions of short-term
 capital gains are treated as ordinary income. The fund's distributions of net
 long-term capital gains are taxable to you as long-term capital gains. Any
 taxable distributions you receive from the fund will normally be taxable to you
 when made, regardless of whether you reinvest distributions or receive them in
 cash.

 It is anticipated that federal exempt-interest dividends paid by the fund and
 derived from interest on bonds exempt from California income tax will also be
 exempt from California corporate and personal income tax (although not from
 California franchise tax).  To the extent the fund's dividends are derived from
 interest on debt obligations other than California municipal securities, such
 dividends will be subject to such state's state income tax even though the
 dividends may be exempt from federal income tax.

 TAXES ON TRANSACTIONS

 Your redemptions, including exchanges, may result in a capital gain or loss for
 federal tax purposes. A capital gain or loss on your investment is the
 difference between the cost of your shares, including any sales charges, and
 the price you receive when you sell them.

 Please see your tax adviser for further information.


                                       17

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>

FINANCIAL HIGHLIGHTS/1/

The financial highlights table is intended to help you understand the fund's
results for the past five years and is currently only shown for Class A and B
shares.  A similar table will be shown for Class C and F shares beginning with
the fund's 2001 fiscal year end. Certain information reflects financial results
for a single fund share. The total returns in the table represent the rate that
an investor would have earned or lost on an investment in the fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by Deloitte & Touche LLP, whose report, along with the fund's financial
statements, is included in the statement of additional information, which is
available upon request.

<TABLE>
<CAPTION>
                                      Net gains/(losses) on
             Net asset                     securities                    Dividends
               value,        Net         (both realized      Total from  (from net   Distributions                   Net asset
Year ended  beginning of  investment           and           investment  investment  (from capital      Total      value, end of
August 31       year        income         unrealized)       operations   income)       gains)      distributions      year
----------------------------------------------------------------------------------------------------------------------------------
<S>         <C>           <C>         <C>                    <C>         <C>         <C>            <C>            <C>
 CLASS A:
   2000        $15.72       $.74/2/           $.31/2/          $1.05       $(.74)       $(.03)         $(.77)         $16.00
   1999         16.60        .74              (.65)              .09        (.74)        (.23)          (.97)          15.72
   1998         16.22        .79               .47              1.26        (.80)        (.08)          (.88)          16.60
   1997         15.78        .83               .53              1.36        (.83)        (.09)          (.92)          16.22
   1996         15.74        .84               .04               .88        (.84)        -              (.84)          15.78
 CLASS B:
   2000         15.38        .24/2/            .67/2/            .91        (.29)        -              (.29)          16.00
<CAPTION>

                                          Ratio of     Ratio of
                           Net assets,   expenses to   income to
Year ended                 end of year   average net  average net     Portfolio
August 31   Total return  (in millions)    assets       assets      turnover rate
----------------------------------------------------------------------------------
<S>         <C>           <C>            <C>          <C>          <C>
 CLASS A:
   2000        6.99%          $394           .72%        4.78%         41.68%/4/
   1999         .47            379           .70         4.55          22.68
   1998        7.98            358           .71         4.83          27.78
   1997        8.80            289           .72         5.15          15.68
   1996        5.65            253           .73         5.25          27.60
 CLASS B:
   2000        5.99              1          1.44/3/      3.81/3/       41.68/4/
</TABLE>


1 The years 1996 through 2000 represent, for Class A shares, fiscal years ended
 August 31.  The period ended 2000 represents, for Class B shares, the 169-day
 period ended August 31, 2000.  Class B shares were not offered before March 15,
 2000.  Total return for Class B is based on activity during the period and thus
 is not representative of a full year.  Total returns exclude all sales charges,
 including contingent deferred sales charges.

2 Based on average shares outstanding.

3 Annualized.

4 Represents portfolio turnover rate (equivalent for all share classes) for the
 year ended August 31, 2000.




                                       18

THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS



<PAGE>

 ---------------------------------------------------------
 NOTES


                                       19

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>

 ---------------------------------------------------------
 NOTES


                                       20

THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS



<PAGE>

 ---------------------------------------------------------
 NOTES


                                       21

                                  THE TAX-EXEMPT FUND OF CALIFORNIA / PROSPECTUS

<PAGE>


<TABLE>
<CAPTION>
 <S>                           <C>
 FOR SHAREHOLDER SERVICES                  American Funds Service Company
                                                             800/421-0180
 FOR RETIREMENT PLAN SERVICES    Call your employer or plan administrator
 FOR DEALER SERVICES                          American Funds Distributors
                                                     800/421-9900 Ext. 11
 FOR 24-HOUR INFORMATION                            American FundsLine(R)
                                                             800/325-3590
                                             American FundsLine OnLine(R)
                                             http://www.americanfunds.com

</TABLE>

            Telephone conversations may be recorded or monitored for
          verification, recordkeeping and quality assurance purposes.

                            *     *     *     *     *

 MULTIPLE TRANSLATIONS  This prospectus may be translated into other languages.
 If there is any inconsistency or ambiguity as to the meaning of any word or
 phrase in a translation, the English text will prevail.

 ANNUAL/SEMI-ANNUAL REPORT TO SHAREHOLDERS  Contains additional information
 about the fund including financial statements, investment results, portfolio
 holdings, a statement from portfolio management discussing market conditions
 and the fund's investment strategies, and the independent accountants' report
 (in the annual report).

 STATEMENT OF ADDITIONAL INFORMATION (SAI) AND CODES OF ETHICS The SAI contains
 more detailed information on all aspects of the fund, including the fund's
 financial statements and is incorporated by reference into this prospectus.
 The Codes of Ethics describe the personal investing policies adopted by the
 fund and the fund's investment adviser and its affiliated companies.

 The Codes of Ethics and current SAI have been filed with the Securities and
 Exchange Commission ("SEC"). These and other related materials about the fund
 are available for review or to be copied at the SEC's Public Reference Room in
 Washington, D.C. (202/942-8090) or on the EDGAR database on the SEC's Internet
 Web site at http://www.sec.gov, or, after payment of a duplicating fee, via
 e-mail request to publicinfo@sec.gov or by writing the SEC's Public Reference
 Section, Washington, D.C. 20549-0102.

 HOUSEHOLD MAILINGS  Each year you are automatically sent an updated
 prospectus, annual and semi-annual report for the fund. You may also
 occasionally receive proxy statements for the fund. In order to reduce the
 volume of mail you receive, when possible, only one copy of these documents
 will be sent to shareholders that are part of the same family and share the
 same residential address.

 If you would like to receive individual copies of these documents, or a free
 copy of the SAI or Codes of Ethics, please call American Funds Service Company
 at 800/421-0180 or write to the Secretary of the fund at 333 South Hope
 Street, Los Angeles, California 90071.
 Investment Company File No. 811-4694
                                                       Printed on recycled paper
                                                               TEFCA-010-0301/MC


<PAGE>


                    THE AMERICAN FUNDS TAX-EXEMPT SERIES II
                        THE TAX-EXEMPT FUND OF CALIFORNIA

                                     Part B
                      Statement of Additional Information

                                 March 15, 2001


This document is not a prospectus but should be read in conjunction with the
current prospectus of The Tax-Exempt Fund of California (the "fund" or "TEFCA")
dated March 15, 2001. The prospectus may be obtained from your investment dealer
or financial planner or by writing to the fund at the following address:

                     The American Funds Tax-Exempt Series II
                         The Tax-Exempt Fund of California
                              Attention: Secretary
                              333 South Hope Street
                          Los Angeles, California 90071
                                 (213) 486-9200

                               TABLE OF CONTENTS


<TABLE>
<CAPTION>
Item                                                                  Page No.
----                                                                  --------
<S>                                                                   <C>
Certain Investment Limitations and Guidelines . . . . . . . . . . .        2
Description of Certain Securities and Investment Techniques . . . .        2
Fundamental Policies and Investment Restrictions. . . . . . . . . .       14
Fund Organization and Voting Rights . . . . . . . . . . . . . . . .       15
Fund Trustees and Other Officers. . . . . . . . . . . . . . . . . .       17
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . .       20
Taxes and Distributions . . . . . . . . . . . . . . . . . . . . . .       24
Purchase of Shares. . . . . . . . . . . . . . . . . . . . . . . . .       28
Sales Charges . . . . . . . . . . . . . . . . . . . . . . . . . . .       30
Sales Charge Reductions and Waivers . . . . . . . . . . . . . . . .       33
Individual Retirement Account (IRA) Rollovers . . . . . . . . . . .       36
Price of Shares . . . . . . . . . . . . . . . . . . . . . . . . . .       37
Selling Shares. . . . . . . . . . . . . . . . . . . . . . . . . . .       38
Shareholder Account Services and Privileges . . . . . . . . . . . .       39
Execution of Portfolio Transactions . . . . . . . . . . . . . . . .       42
General Information . . . . . . . . . . . . . . . . . . . . . . . .       42
Class A Share Investment Results and Related Statistics . . . . . .       44
Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .       46
Financial Statements
</TABLE>




                   The Tax-Exempt Fund of California - Page 1

<PAGE>


                 CERTAIN INVESTMENT LIMITATIONS AND GUIDELINES

The following limitations and guidelines are considered at the time of purchase,
under normal market conditions, and are based on a percentage of the fund's net
assets unless otherwise noted. This summary is not intended to reflect all of
the fund's investment limitations.

 .    The fund will invest at least 80% of its assets in, or derive at least 80%
     of its income from, securities that are exempt from both federal and
     California income taxes.The fund may invest up to 20% of its assets in
     securities subject to alternative minimum taxes.
 .    The fund will invest at least 65% of its assets in debt securities rated
     BBB by Standard & Poor's Corporation (S&P) or Baa by Moody's Investors
     Services, Inc. (Moody's) or better or unrated but determined to be of
     equivalent quality.
 .    The fund may invest up to 20% of its assets in straight debt securities
     rated BB by S&P and Ba by Moody's or below or unrated but determined to be
     of equivalent quality.
 .    The fund will invest substantially in securities with maturities in excess
     of three years.

The fund may experience difficulty liquidating certain portfolio securities
during significant market declines or periods of heavy redemptions.


          DESCRIPTION OF CERTAIN SECURITIES AND INVESTMENT TECHNIQUES

The descriptions below are intended to supplement the material in the prospectus
under "Investment Objectives, Strategies and Risks."


DEBT SECURITIES - Bonds and other debt securities are used by issuers to borrow
money. Issuers pay investors interest and generally must repay the amount
borrowed at maturity. Some debt securities, such as zero coupon bonds, do not
pay current interest, but are purchased at a discount from their face values.
The prices of debt securities fluctuate depending on such factors as interest
rates, credit quality, and maturity. In general, their prices decline when
interest rates rise and vice versa.


Lower rated bonds, rated Ba or below by S&P and BB or below by Moody's or
unrated but considered to be of equivalent quality, are described by the rating
agencies as speculative and involve greater risk of default or price changes due
to changes in the issuer's creditworthiness than higher rated bonds, or they may
already be in default. The market prices of these securities may fluctuate more
than higher quality securities and may decline significantly in periods of
general economic difficulty. It may be more difficult to dispose of, or to
determine the value of, lower rated bonds.


Certain risk factors relating to lower rated bonds are discussed below.


     SENSITIVITY TO INTEREST RATE AND ECONOMIC CHANGES - Lower rated bonds, like
     other bonds, may be sensitive to adverse economic changes and political and
     corporate developments and may be sensitive to interest rate changes.
     During an economic downturn or substantial period of rising interest rates,
     highly leveraged issuers may experience increased financial stress that
     would adversely affect their ability to service their principal and
     interest payment obligations, to meet projected business goals, and to
     obtain additional financing. In addition, periods of economic uncertainty
     and changes can be expected to result in increased volatility of market
     prices and yields of lower rated bonds.


                   The Tax-Exempt Fund of California - Page 2

<PAGE>


     PAYMENT EXPECTATIONS - Lower rated bonds, like other bonds, may contain
     redemption or call provisions. If an issuer exercises these provisions in a
     declining interest rate market, the fund would have to replace the security
     with a lower yielding security, resulting in a decreased return for
     investors. If the issuer of a bond defaults on its obligations to pay
     interest or principal or enters into bankruptcy proceedings, the fund may
     incur losses or expenses in seeking recovery of amounts owed to it.

     LIQUIDITY AND VALUATION - There may be little trading in the secondary
     market for particular bonds, which may affect adversely the fund's ability
     to value accurately or dispose of such bonds. Adverse publicity and
     investor perceptions, whether or not based on fundamental analysis, may
     decrease the value and liquidity of lower rated bonds.

MUNICIPAL BONDS - Municipal bonds are debt obligations generally issued to
obtain funds for various public purposes, including the construction of public
facilities. Opinions relating to the validity of municipal bonds, their
exclusion from gross income for federal income tax purposes and, where
applicable, state and local income tax are rendered by bond counsel to the
issuing authorities at the time of issuance.


The two principal classifications of municipal bonds are general obligation
bonds and limited obligation or revenue bonds. General obligation bonds are
secured by the issuer's pledge of its full faith and credit including, if
available, its taxing power for the payment of principal and interest. Issuers
of general obligation bonds include states, counties, cities, towns and various
regional or special districts. The proceeds of these obligations are used to
fund a wide range of public facilities such as the construction or improvement
of schools, highways and roads, water and sewer systems and facilities for a
variety of other public purposes. Lease revenue bonds or certificates of
participation in leases are payable from annual lease rental payments from a
state or locality. Annual rental payments are payable to the extent such rental
payments are appropriated annually.


Typically, the only security for a limited obligation or revenue bond is the net
revenue derived from a particular facility or class of facilities financed
thereby or, in some cases, from the proceeds of a special tax or other special
revenues. Revenue bonds have been issued to fund a wide variety of
revenue-producing public capital projects including: electric, gas, water and
sewer systems; highways, bridges and tunnels; port and airport facilities;
colleges and universities; hospitals; and convention, recreational and housing
facilities. Although the security behind these bonds varies widely, many provide
additional security in the form of a debt service reserve fund which may also be
used to make principal and interest payments on the issuer's obligations. In
addition, some revenue obligations (as well as general obligations) are insured
by a bond insurance company or backed by a letter of credit issued by a banking
institution.


Revenue bonds also include, for example, pollution control, health care and
housing bonds, which, although nominally issued by municipal authorities, are
generally not secured by the taxing power of the municipality but by the
revenues of the authority derived from payments by the private entity which owns
or operates the facility financed with the proceeds of the bonds. Obligations of
housing finance authorities have a wide range of security features including
reserve funds and insured or subsidized mortgages, as well as the net revenues
from housing or other public projects. Most of these bonds do not generally
constitute the pledge of the credit of the issuer of such bonds. The credit
quality of such revenue bonds is usually directly related to the credit standing
of the user of the facility being financed or of an institution which provides a
guarantee, letter of credit, or other credit enhancement for the bond issue.


                   The Tax-Exempt Fund of California - Page 3

<PAGE>


MUNICIPAL LEASE OBLIGATIONS - The fund may invest, without limitation, in
municipal lease revenue obligations that are determined to be liquid by the
Investment Adviser. In determining whether these securities are liquid, the
Investment Adviser will consider, among other things, the credit quality and
support, including strengths and weaknesses of the issuers and lessees, the
terms of the lease, the frequency and volume of trading and the number of
dealers trading the securities.


ZERO COUPON BONDS - Municipalities may issue zero coupon securities which are
debt obligations that do not entitle the holder to any periodic payments of
interest prior to maturity or a specified date when the securities begin paying
current interest. They are issued and traded at a discount from their face
amount or par value, which discount varies depending on the time remaining until
cash payments begin, prevailing interest rates, liquidity of the security, and
the perceived credit quality of the issuer.


PRE-REFUNDED BONDS - From time to time, a municipality may refund a bond that it
has already issued prior to the original bond's call date by issuing a second
bond, the proceeds of which are used to purchase securities. The securities are
placed in an escrow account pursuant to an agreement between the municipality
and an independent escrow agent. The principal and interest payments on the
securities are then used to pay off the original bondholders. For the purposes
of diversification, pre-refunded bonds will be treated as governmental issues.


CASH AND CASH EQUIVALENTS - These securities include, but are not limited to:
(i) tax-exempt commercial paper (e.g., short-term notes obligations issued by
municipalities that mature, or may be redeemed in 270 days or less), (ii)
municipal notes (e.g., bond anticipation notes, revenue anticipation notes, and
tax anticipation notes issued by municipalities that mature, or may be redeemed
in one year or less), (iii) municipal obligations backed by letters of credit
issued by banks or other financial institutions or government agencies that
mature, or may be redeemed in one year or less, (iv) tax-exempt variable rate
debt issued by municipal conduits for corporate obligors, and (v) securities of
the U.S. Government, its agencies or instrumentalities that mature, or may be
redeemed in one year or less.


RISK FACTORS RELATING TO CALIFORNIA DEBT OBLIGATIONS - The following describes
certain risks relating to debt obligations of California issuers.  This
information constitutes only a brief summary, does not purport to be a complete
description, and is based on information drawn from official statements relating
to securities offerings of the State of California (the "State") and various
local agencies in California, available as of the date of this Prospectus.
 While the Investment Adviser has not independently verified such information,
it has no reason to believe that such information is not correct in all material
respects.  In addition to this current information, future California
constitutional amendments, legislative measures, executive orders,
administrative regulations, court decisions and voter initiatives could have an
adverse effect on the debt obligations of California issuers.  The initiative
process is used quite often in California, resulting in numerous initiative
items on the ballot for most state and local elections, any of which could
affect the ability of public entities to pay their obligations.


Certain debt obligations held by the fund may be obligations of issuers which
rely in whole or in substantial part on California state revenues for the
continuance of their operations and the payment of their obligations.  Certain
state property and other state tax revenues and moneys from the State's general
fund are appropriated by the state legislature each fiscal year for distribution
to counties, cities and their various taxing entities, such as school districts,
to assist such local entities in providing essential governmental functions,
including those required by


                   The Tax-Exempt Fund of California - Page 4

<PAGE>


state law.  During the severe recession California experienced from 1991 to
1993, the state legislature eliminated significant components of its aid to
local governments.  The State has since increased aid to local governments and
reduced certain mandates for local services.  Whether legislation will be
enacted in the future to either increase or reduce the redistribution of state
revenues to local governments, or to make them less dependent on state budget
decisions, cannot be predicted.  To the extent local entities do not receive
money from the State to pay for their operations and services, their ability to
pay debt service on obligations held by the fund may be impaired.


Certain of the debt obligations may be obligations of issuers who rely in whole
or in part on ad valorem real or personal property taxes as a source of revenue
or may be leases subject to annual appropriation by the lessor.  Article XIIIA
of the California Constitution limits the taxing powers of California public
agencies.  Article XIIIA provides that the maximum ad valorem tax on real
property cannot exceed one percent of the full cash value of the property, and
effectively prohibits the levying of any other ad valorem property tax, even
with voter approval.  Full cash value is defined as the County Assessor's
valuation of real property as shown on the 1975-76 tax bill under "full cash
value" or, thereafter, the appraisal value of real property when purchased,
newly constructed, or when a change in ownership has occurred after the 1975
assessment.  The full cash value is subject to annual adjustment to reflect
inflation at a rate not to exceed two percent or a reduction in the consumer
price index or comparable local data, or declining property value caused by
damage, destruction or other factors.  Article XIIIB of the California
Constitution limits the amount of appropriations of state and of local
governments from "proceeds of taxes" to the amount of appropriations of the
entity for the prior year, adjusted for changes in the cost of living,
population and certain other adjustments.  Both Article XIIIA and Article XIIIB
were adopted by the people of the State of California pursuant to the State's
initiative constitutional amendment process.


Certain debt obligations held by the fund may be obligations payable solely from
lease payments on real property leased to the state, cities, counties or their
various public entities, especially since the adoption of Article XIIIA
described above because such leases are structured so as not to create a
statutory "debt" of the leasing entity.  However, to insure that a debt is not
technically created, California law requires that the lessor is not required to
make lease payments during any period that it is denied use and occupancy of the
property lease in proportion to such loss.  Moreover, the lessor does not agree
to pay lease payments beyond the current fiscal year; it only agrees to include
lease payments in its annual budget for each fiscal year.  In case of a default
under the lease, the only remedy available against the lessor is that of
reletting the property; no acceleration of lease payments is permitted.  Each of
these factors presents a risk that the lease financing obligations held by the
fund would not be paid in a timely manner.


Proposition 62 was approved by the voters in 1986 and fully activated in 1995 by
a state Supreme Court ruling.  Proposition 62 took away general law cities' and
counties' authority to impose other general purpose taxes without voter
approval.


On November 5, 1996, Proposition 218 was accepted by a majority of California
voters.  Proposition 218 constrains local governments' ability to impose
"property-related" fees, assessments and taxes.  This measure applies to all
cities, counties, special districts, redevelopment agencies and school districts
in California.  This amendment basically extended to charter cities the same
voter approval requirements imposed under Proposition 62 on general law cities
and counties.


                   The Tax-Exempt Fund of California - Page 5

<PAGE>


Certain debt obligations held by the fund may be obligations which are payable
solely from the revenues of health care institutions.  Certain provisions under
California law may adversely affect these revenues and, consequently, payment on
those debt obligations.


The federally sponsored Medicaid program for health care services to eligible
welfare beneficiaries in California is known as the Medi-Cal program.  In the
past, the Medi-Cal program has provided a cost-based system of reimbursement for
inpatient care furnished to Medi-Cal beneficiaries by any eligible hospital.
 The State now selectively contracts by county with California hospitals to
provide reimbursement for non-emergency inpatient services to Medi-Cal
beneficiaries, generally on a flat per diem payment basis regardless of cost.
 California law also permits private health plans and insurers to contract
selectively with hospitals for services to beneficiaries on negotiated terms,
generally at rates lower than standard charges.  It is expected that hospitals
that do not contract with health plans and insurers will experience some
decrease in patient census.


Debt obligations payable solely from revenues of health care institutions may
also be insured by the State pursuant to an insurance program operated by the
Office of Statewide Health Planning and Development (the "Office").  Most such
debt obligations are secured by a mortgage of real property in favor of the
Office and the holders.  If a default occurs on such insured debt obligations,
the Office may either continue to make debt service payments on the obligations
or foreclose on the mortgage and request the State Treasurer to issue debentures
payable from a reserve fund established under the insurance program (the Health
Facility Construction Loan Insurance Fund or "HFCLIF") or from unappropriated
State funds.  In the event of a default, any debenture payable from the HFCLIF
would become payable on a par with general obligations bonds issued by the
State.


Certain debt obligations held by the fund may be obligations which are secured
in whole or in part by a mortgage or deed of trust on real property.  California
has five principal statutory provisions which limit the remedies of a creditor
secured by a mortgage or deed of trust.  Two limit the creditor's right to
obtain a deficiency judgment, one limitation being based on the method of
foreclosure and the other on the type of debt secured.  Under the former, a
deficiency judgment is barred when the foreclosure is accomplished by means of
nonjudicial trustee's sale.  Under the latter, a deficiency judgment is barred
when the foreclosed mortgage or deed of trust secures certain purchase money
obligations.  Another California statute, commonly known as the "one form of
action" rule, requires creditors secured by real property to exhaust their real
property security by foreclosure before bringing a personal action against the
debtor.  The fourth statutory provision limits any deficiency judgment obtained
by a creditor secured by real property following a judicial sale of such
property to the excess of the outstanding debt over the fair value of the
property at the time of the sale, thus preventing the creditor from obtaining a
large deficiency judgment against the debtor as the result of low bids at a
judicial sale.  The fifth statutory provision gives the debtor the right to
redeem the real property from any judicial foreclosure sale as to which a
deficiency judgment may be ordered against the debtor.


Upon the default of a mortgage or deed of trust with respect to California real
property, the creditor's nonjudicial foreclosure rights under the power of sale
contained in the mortgage or deed of trust are subject to the constraints
imposed by California law upon transfers of title to real property by private
power of sale.  During the three-month period beginning with the filing of a
formal notice of default, the debtor is entitled to reinstate the mortgage by
making any overdue payments.  Under standard loan servicing procedures, the
filing of the formal notice of default does not occur unless at least three full
monthly payments have become due and remain unpaid.


                   The Tax-Exempt Fund of California - Page 6

<PAGE>


The power of sale is exercised by posting and publishing a notice of sale for at
least 20 days after expiration of the three-month reinstatement period.
 Therefore, the effective minimum period for foreclosing on a mortgage could be
in excess of seven months after the initial default.  Such time delays in
collections could disrupt the flow of revenues available to an issuer for the
payment of debt service on the outstanding obligations if such defaults occur
with respect to a substantial number of mortgages or deeds of trust securing an
issuer's obligations.


In addition, a court could find that there is sufficient involvement of the
issuer in the nonjudicial sale of property securing a mortgage for such private
sale to constitute "state action," and could hold that the private right-of-sale
proceedings violate the due process requirements of the federal or state
constitutions, consequently preventing an issuer from using the nonjudicial
foreclosure remedy described above.


Certain debt obligations held by the fund may be obligations which finance the
acquisition of single-family home mortgages for low and moderate income
mortgagors.  These obligations may be payable solely from revenues derived from
the home mortgages, and are subject to California's statutory limitations
described above applicable to obligations secured by real property. Under
California anti-deficiency legislation, there is no personal recourse against a
mortgagor of a single family residence purchased with the loan secured by the
mortgage, regardless of whether the creditor chooses judicial or nonjudicial
foreclosure.


Under California law, mortgage loans secured by single-family owner-occupied
dwellings may be prepaid at any time.  Prepayment charges on such mortgage loans
may be imposed only with respect to voluntary prepayments made during the first
five years during the term of the mortgage loan, and cannot in any event exceed
six months' advance interest on the amount prepaid in excess of 20% of the
original principal amount of the mortgage loan.  This limitation could affect
the flow of revenues available to an issuer for debt service on the outstanding
debt obligations which financed such home mortgages.


The California economy and general financial condition affect the ability of the
State and local governments to raise and redistribute revenues to assist issuers
of municipal securities to make timely payments on their obligations.
 California is the most populous state in the nation with a total population
estimated at 34 million.  California has a diverse economy, with major
employment in the agriculture, manufacturing, high technology, services, trade,
entertainment and construction sectors.  After experiencing strong growth
throughout much of the 1980s, from 1990-1993 the State suffered through a severe
recession, the worst since the 1930's, heavily influenced by large cutbacks in
defense/aerospace industries, military base closures and a major drop in real
estate construction.  California's economy has been performing strongly since
the start of 1994.


Certain of the State's significant industries, such as high technology, are
sensitive to economic disruptions in their export markets and the State's rate
of economic growth, therefore, could be adversely affected by any such
disruption.  A significant downturn in U.S. stock market prices could adversely
affect California's economy by reducing household spending and business
investment, particularly in the important high technology sector.  Moreover, a
large and increasing share of the State's General Fund revenue in the form of
income and capital gains taxes is directly related to, and would be adversely
affected by a significant downturn in the performance of, the stock markets.


                   The Tax-Exempt Fund of California - Page 7

<PAGE>


In addition, it is impossible to predict the time, magnitude or location of a
major earthquake or its effect on the California economy.  In January 1994, a
major earthquake struck the Los Angeles area, causing significant damage in a
four county area.  The possibility exists that another such earthquake could
create a major dislocation of the California economy and significantly affect
state and local government budgets.


It is not possible to predict the future impact of the voter initiatives, State
constitutional amendments, legislation or economic considerations described
above, or of such initiatives, amendments or legislation that may be enacted in
the future, on the long-term ability of the State of California or California
municipal issuers to pay interest or repay principal on their obligations.
There is no assurance that any California issuer will make full or timely
payments of principal or interest or remain solvent.  For example, in December
1994, Orange County, California, together with its pooled investment funds,
which included investment funds from other local governments, filed for
bankruptcy.  Los Angeles County, the nation's largest county, in the recent past
has also experienced financial difficulty and its financial condition will
continue to be affected by the large number of County residents who are
dependent on government services and by a structural deficit in its health
department.  Nonetheless, California's improved economy has caused Los Angeles
County, and other local governments, to come under increased pressure from
public employee unions for improved compensation and retirement benefits.


Recent Developments Regarding Natural Gas And Electricity - During the past year
California has experienced difficulties with the prices and supplies of natural
gas and electricity in much of the State.  With respect to natural gas,
shortages and interruptions of the supply of natural gas to California, coupled
with high national natural gas prices, have resulted in substantial price
increases to business and residential users. Continuing high prices and
shortages of natural gas supplies could adversely affect the State's economy,
and particularly generation of electricity, much of which is fueled by natural
gas.


Because of capacity constraints in electric generation and transmission,
California electric utilities have been forced to purchase wholesale power at
high prices beginning in mid-2000.  Under current deregulation rules for the
electric industry enacted in 1996, two of the State's large investor-owned
utility ("IOU") companies are not allowed to charge customers the full cost of
service, while rates in a third IOU's service area were cut back after rising
sharply to cover wholesale power costs.  The two largest IOUs have experienced
reportedly serious financial difficulties, including concerns about possible
bankruptcy.


In the face of those difficulties and serious shortages of electricity, the
Governor proclaimed a state of emergency to exist in California and directed the
State Department of Water Resources ("DWR") to enter into contracts and
arrangements for the purchase and sale of electric power, using advances from
the State's General Fund, as necessary to assist in mitigating the effects of
the emergency.  During the period January 17-February 14, 2001 DWR expenditures
for such purposes aggregated $1.2 billion.


The Governor also signed legislation that authorizes the State to issue up to
$10 billion in revenue bonds to purchase electricity.  The bonds, which would be
repaid over time by ratepayers, would cover the difference between retail end
use customer payments for electricity furnished by the DWR and the DWR's cost of
purchasing that electricity.  The State anticipates that customer payments and
bond proceeds will fully reimburse the General Fund for its advances made to
implement the DWR's power purchases.  Pending implementation of these repayment
mechanisms, the State reports that it has sufficient available resources to
continue to


                   The Tax-Exempt Fund of California - Page 8

<PAGE>


support the DWR's electricity purchases for many months. Neither the faith and
credit nor the taxing power of the State will be pledged to pay the revenue
bonds.


The State Legislature is considering various bills dealing with energy matters,
including bills that would authorize one or more State agencies to build,
purchase or obtain by eminent domain electricity generation or transmission
facilities or natural gas transmission facilities, with the power to issue
revenue bonds for these purposes, and a proposal for the State to purchase the
utilities' transmission lines.  While the Governor, the State Legislature, the
State Public Utilities Commission and the Federal Energy Regulatory Commission
all are considering further actions to deal with shortcomings in the State's
deregulated energy market, it is not possible to predict at this time what the
long-term impact of these developments will be on California's economy or their
effect on State revenues.


State Budget - Following a severe recession beginning in 1990, the State's
financial condition improved markedly during the fiscal years starting in
1995-96, due to a combination of better than expected revenues, slowdown in
growth of social welfare programs, and continued spending restraint based on
actions taken in earlier years.  The State's cash position also improved, and no
external deficit borrowing occurred over the end of the last five fiscal years.


The combination of resurging exports, a strong stock market, and a
rapidly-growing economy in 1999 and early 2000 resulted in unprecedented growth
in General Fund revenues during fiscal year 1999-2000.  The latest estimates
from the Department of Finance indicate revenues of about $71.9 billion, an
increase of over 20 percent over final 1998-99 revenues and $8.9 billion higher
than projected for the 1999 Budget Act.  The latest estimates indicate
expenditures of $66.5 billion in 1999-2000, a $2.8 billion increase over the
1999 Budget Act, but the result still left a record balance in the Special Fund
for Economic Uncertainties ("SFEU") at June 30, 2000 of over $8.7 billion.


Fiscal Year 2000-01 Budget - On June 30, 2000, the Governor signed the 2000
Budget Act.  The spending plan assumed General Fund revenues and transfers of
$73.9 billion, a 3.8 percent increase over 1999-00 estimates.  The 2000 Budget
Act appropriated $78.8 billion from the General Fund, a 17.3 percent increase
over 1999-00, and reflected the use of $5.5 billion from the SFEU available from
surpluses in the prior year.  In order not to place undue pressure on future
budget years, about $7.0 billion of the increased spending in 2000-01 was for
one-time expenditures and investments.


At the time the 2000 Budget Act was signed, the State Department of Finance
estimated the June 30, 2001 SFEU balance to be $1.781 billion.  In addition, the
Governor held back $500 million as a set-aside for litigation costs.  If this
amount is not fully expended during fiscal year 2000-01, the balance will
increase the SFEU.  Because of the State's strong cash position, the
Administration announced that it would not undertake a revenue anticipation note
borrowing in 2000-01.  The 2000 Budget Act also included Special Fund
expenditures of $15.6 billion and Bond Fund expenditures of $5.0 billion.
Special Fund revenues are estimated at $16.5 billion.


The Governor announced on October 25, 2000 that, pursuant to provisions in the
law enacted in 1991 when the State sales tax rate was last raised, the State
sales tax rate would be reduced by 0.25 percent for a period of at least one
calendar year, effective January 1, 2001.  This reduction will result in
approximately $553 million less General Fund revenue in the last half of fiscal
year 2000-01 and approximately $600 million less in the first half of fiscal
year 2001-02.  If the General


                   The Tax-Exempt Fund of California - Page 9

<PAGE>


Fund reserve falls below 4 percent of General Fund revenue in the future, the
sales tax rate could be raised by 0.25%.


Fiscal Year 2001-02 Budget - The 2001-02 Governor's proposed budget, released on
January 10, 2001, provides updated 2000-01 revenue and expenditure estimates.
 General Fund revenues in 2000-01 are estimated to be $76.9 billion, $3.0
billion above the 2000 Budget Act estimates.  Expenditures in 2000-01 are
estimated to be $79.7 billion, about $900 million above the Budget Act
estimates.  The Department of Finance estimates the June 30, 2001 SFEU balance,
the budget reserve, will be approximately $5.85 billion, a substantial increase
over the Budget Act estimate of $1.78 billion.  However, current surpluses in
the General Fund are being used to respond to the energy situation.


The 2001-02 proposed budget estimates 2001-02 General Fund revenues and
transfers to be about $79.4 billion, or 3.3 percent higher than the revised
2000-01 estimate.  The estimate assumes a slowing economy, still showing
moderate growth short of a recession.  The estimate also accounts for a $553
million drop in sales tax revenues as a result of the 0.25 percent sales tax
reduction which took effect on January 1, 2001, and will remain in effect at
least until December 31, 2001.  The Governor proposes $82.9 billion in
expenditures, a 3.9 percent increase over the revised 2000-01 estimate.  The
Governor proposes budget reserves in 2001-02 of $2.4 billion.  Of this amount,
$500 million is intended for unplanned litigation costs. The final expenditure
program for 2001-02 will be determined by June 2001 by the Legislature and the
Governor.

THE FOREGOING DISCUSSION OF THE 2000-01 AND 2001-02 FISCAL YEAR BUDGETS
IS BASED IN LARGE PART ON STATEMENTS MADE IN A RECENT "PRELIMINARY OFFICIAL
STATEMENT" DISTRIBUTED BY THE STATE OF CALIFORNIA.  IN THAT DOCUMENT, THE STATE
INDICATED THAT ITS DISCUSSION OF THE FISCAL YEAR BUDGET IS BASED ON ESTIMATES
AND PROJECTIONS OF REVENUES AND EXPENDITURES FOR THE CURRENT FISCAL YEAR AND
MUST NOT BE CONSTRUED AS STATEMENTS OF FACT.  THE STATE NOTED FURTHER THAT THE
ESTIMATES AND PROJECTIONS ARE BASED UPON VARIOUS ASSUMPTIONS WHICH MAY BE
AFFECTED BY NUMEROUS FACTORS, INCLUDING FUTURE ECONOMIC CONDITIONS IN THE STATE
AND THE NATION, AND THAT THERE CAN BE NO ASSURANCE THAT THE ESTIMATES WILL BE
ACHIEVED.


State Indebtedness - As of February 1, 2001, the State had over $22.5 billion
aggregate amount of its general obligation bonds outstanding and unused general
obligation bond authorizations in an aggregate amount of approximately $12.6
billion. The State also builds and acquires capital facilities through the use
of lease purchase borrowing.  As of February 1, 2001, the State had
approximately $6.7 billion of outstanding Lease-Purchase Debt.
)

In addition to the general obligation bonds, State agencies and authorities had
approximately $28.6 billion aggregate principal amount of revenue bonds and
notes outstanding as of February 1, 2001.  Revenue bonds represent both
obligations payable from State revenue-producing enterprises and projects, which
are not payable from the General Fund, and conduit obligations payable only from
revenues paid by private users of facilities financed by such revenue bonds.
 Such enterprises and projects include transportation projects, various public
works and exposition projects, educational facilities (including the California
State University and University of California systems), housing, health
facilities and pollution control facilities.


Litigation - The State is a party to numerous legal proceedings, many of which
normally occur in governmental operations.  In addition, the State is involved
in certain other legal proceedings


                  The Tax-Exempt Fund of California - Page 10

<PAGE>


that, if decided against the State, might require the State to make significant
future expenditures or impair future revenue sources. A number of lawsuits have
been filed concerning various aspects of the current energy situation.  These
include disputes over rates set by the CPUC; responsibility for electricity and
natural gas purchases made by the investor-owned utilities and California
Independent System Operator (which continues to purchase some electricity); and
antitrust and fraud claims against various parties.


Ratings - Because of the State's continuing recession-related budget problems,
the State's General Obligation bonds were downgraded in July 1994 to A1 from Aa
by Moody's, to A from A+ by Standard & Poor's, and to A from AA by Fitch. The
State's improved economy and budget, however, have resulted in several upgrades
in its general obligation bond ratings. As of October 6, 2000, the State's
general obligation bonds were rated Aa2 by Moody's. AA by Standard & Poor's, and
AA by Fitch. It is not presently possible to determine whether, or the extent to
which, Moody's, S&P or Fitch will change such ratings in the future. It should
be noted that the creditworthiness of obligations issued by local California
issuers may be unrelated to the creditworthiness of obligations issued by the
State, and there is no obligation on the part of the State to make payment on
such local obligations in the event of default.


U.S. VIRGIN ISLANDS AND PUERTO RICO OBLIGATIONS - The fund may invest in
obligations of the Commonwealth of Puerto Rico and its agencies and authorities
and the U.S. Virgin Islands to the extent such obligations are exempt from
federal and state income taxes. Adverse political and economic conditions and
developments, affecting Puerto Rico and the U.S. Virgin Islands, may in turn
affect negatively the value of the fund's holdings in such obligations.


SECURITIES SUBJECT TO ALTERNATIVE MINIMUM TAX - The fund may invest in
tax-exempt securities believed to pay interest constituting an item of tax
preference subject to alternative minimum tax; therefore, while the fund's
distributions from tax-exempt securities are not subject to regular federal
income tax, a portion or all may be included in determining a shareholder's
federal alternative minimum tax.


FORWARD COMMITMENTS - The fund may enter into commitments to purchase or sell
securities at a future date. When the fund agrees to purchase such securities,
it assumes the risk of any decline in value of the security beginning on the
date of the agreement. When the fund agrees to sell such securities, it does not
participate in further gains or losses with respect to the securities beginning
on the date of the agreement. If the other party to such a transaction fails to
deliver or pay for the securities, the fund could miss a favorable price or
yield opportunity, or could experience a loss.


The fund will not use these transactions for the purpose of leveraging and will
segregate liquid assets which will be marked to market daily in an amount
sufficient to meet its payment obligations in these transactions. Although these
transactions will not be entered into for leveraging purposes, to the extent the
fund's aggregate commitments under these transactions exceed its segregated
assets, the fund temporarily could be in a leveraged position (because it may
have an amount greater than its net assets subject to market risk). Should
market values of the fund's portfolio securities decline while the fund is in a
leveraged position, greater depreciation of its net assets would likely occur
than were it not in such a position. The fund will not borrow money to settle
these transactions and therefore, will liquidate other portfolio securities in
advance of settlement if necessary to generate additional cash to meet its
obligations thereunder.


                  The Tax-Exempt Fund of California - Page 11

<PAGE>


VARIABLE AND FLOATING RATE OBLIGATIONS - The interest rates payable on certain
securities in which the fund may invest may not be fixed but may fluctuate based
upon changes in market rates. Variable and floating rate obligations bear coupon
rates that are adjusted at designated intervals, based on the then current
market rates of interest. Variable and floating rate obligations permit the fund
to "lock in" the current interest rate for only the period until the next
scheduled rate adjustment, but the rate adjustment feature tends to limit the
extent to which the market value of the obligation will fluctuate.


TEMPORARY INVESTMENTS - The fund may invest in short-term municipal obligations
of up to one year in maturity during periods of temporary defensive strategy
resulting from abnormal market conditions, or when such investments are
considered advisable for liquidity. Generally, the income from all such
securities is exempt from federal income tax. Further, a portion of the fund's
assets, which will normally be less than 20%, may be held in cash or invested in
high-quality taxable short-term securities of up to one year in maturity. Such
investments may include: (1) obligations of the U.S. Treasury; (2) obligations
of agencies and instrumentalities of the U.S. Government; (3) money market
instruments, such as certificates of deposit issued by domestic banks, corporate
commercial paper, and bankers' acceptances; and (4) repurchase agreements.


ADJUSTMENT OF MATURITIES - The Investment Adviser seeks to anticipate movements
in interest rates and adjusts the maturity distribution of the portfolio
accordingly. Keeping in mind the fund's objective, the Investment Adviser will
increase the fund's exposure to this price volatility only when it appears
likely to increase current income without undue risk to capital.


ISSUE CLASSIFICATION - Securities with the same general quality rating and
maturity characteristics, but which vary according to the purpose for which they
were issued, often tend to trade at different yields. Correspondingly,
securities issued for similar purposes and with the same general maturity
characteristics, but which vary according to the creditworthiness of their
respective issuers, tend to trade at different yields. These yield differentials
tend to fluctuate in response to political and economic developments, as well as
temporary imbalances in normal supply/demand relationships. The Investment
Adviser monitors these fluctuations closely, and will attempt to adjust
portfolio concentrations in various issue classifications according to the value
disparities brought about by these yield relationship fluctuations.


The Investment Adviser believes that, in general, the market for municipal bonds
is less liquid than that for taxable fixed-income securities. Accordingly, the
ability of the fund to make purchases and sales of securities in the foregoing
manner may, at any particular time and with respect to any particular
securities, be limited (or non-existent).


CONCENTRATION OF INVESTMENTS - The fund will invest more than 25% of its assets
in municipal obligations of issuers located in the same state. This may make the
fund more susceptible to similar economic, political, or regulatory occurrences
such as changes in healthcare regulations, environmental considerations related
to construction, construction cost increases and labor problems, failure of
healthcare facilities to maintain adequate occupancy levels, and inflation. As
the similarity in issuers increases, the potential for fluctuations in the
fund's share price may increase. The fund may invest more than 25% of its assets
in industrial development bonds.


PRIVATE PLACEMENTS - Generally, municipal securities acquired in private
placements are subject to contractual restrictions on resale. Accordingly, all
private placements will be considered illiquid unless they have been
specifically determined to be liquid, taking into account factors such as


                  The Tax-Exempt Fund of California - Page 12

<PAGE>


the frequency and volume of trading and the commitment of dealers to make
markets under procedures adopted by the fund's board of directors.


RESTRICTED SECURITIES AND LIQUIDITY - The fund may purchase securities subject
to restrictions on resale. Securities not actively traded will be considered
illiquid unless they have been specifically determined to be liquid under
procedures which have been adopted by the fund's board of trustees, taking into
account factors such as the frequency and volume of trading, the commitment of
dealers to make markets and the availability of qualified investors, all of
which can change from time to time. The fund may incur certain additional costs
in disposing of illiquid securities.


REPURCHASE AGREEMENTS - The fund may enter into repurchase agreements, under
which the fund buys a security and obtains a simultaneous commitment from the
seller to repurchase the security at a specified time and price. Repurchase
agreements permit the fund to maintain liquidity and earn income over periods of
time as short as overnight. The seller must maintain with the fund's custodian
collateral equal to at least 100% of the repurchase price, including accrued
interest, as monitored daily by the Investment Adviser. The fund will only enter
into repurchase agreements involving securities in which it could otherwise
invest and with selected banks and securities dealers whose financial condition
is monitored by the Investment Adviser. If the seller under the repurchase
agreement defaults, the fund may incur a loss if the value of the collateral
securing the repurchase agreement has declined and may incur disposition costs
in connection with liquidating the collateral. If bankruptcy proceedings are
commenced with respect to the seller, realization of the collateral by the fund
may be delayed or limited.


There is no current intent to engage in this investment practice over the next
12 months.


                        *     *     *     *     *     *

PORTFOLIO TURNOVER - Portfolio changes will be made without regard to the length
of time particular investments may have been held. Short-term trading profits
are not the fund's objective and changes in its investments are generally
accomplished gradually, though short-term transactions may occasionally be made.
High portfolio turnover (100% or more) involves correspondingly greater
transaction costs in the form of dealer spreads or brokerage commissions, and
may result in the realization of net capital gains, which are taxable when
distributed to shareholders.


Fixed-income securities are generally traded on a net basis and usually neither
brokerage commissions nor transfer taxes are involved, although the price
usually includes a profit to the dealer.


The fund's portfolio turnover rate would equal 100% if each security in the
fund's portfolio was replaced once per year. See "Financial Highlights" in the
prospectus for the fund's annual portfolio turnover for each of the last five
fiscal periods.


                  The Tax-Exempt Fund of California - Page 13

<PAGE>


                FUNDAMENTAL POLICIES AND INVESTMENT RESTRICTIONS

FUNDAMENTAL POLICIES - The fund has adopted the following fundamental policies
and investment restrictions which may not be changed without approval by holders
of a majority of its outstanding shares. Such majority is defined in the
Investment Company Act of 1940 ("1940 Act") as the vote of the lesser of (i) 67%
or more of the outstanding voting securities present at a meeting, if the
holders of more than 50% of the outstanding voting securities are present in
person or by proxy, or (ii) more than 50% of the outstanding voting securities.
All percentage limitations are considered at the time securities are purchased
and are based on the fund's net assets unless otherwise indicated. None of the
following investment restrictions involving a maximum percentage of assets will
be considered violated unless the excess occurs immediately after, and is caused
by, an acquisition by the fund.


These restrictions provide that the fund may not:

 1.  Invest more than 5% of the value of its total assets in the securities of
any one issuer provided that this limitation shall apply only to 75% of the
value of the fund's total assets and, provided further, that the limitation
shall not apply to obligations issued or guaranteed by the U.S. Government or
its agencies or instrumentalities;

 2.  Buy or sell real estate in the ordinary course of its business; however,
the fund may invest in securities secured by real estate or interests therein;

 3.  Make loans to others, except for the purchase of debt securities or
entering into repurchase agreements;

 4.  Sell securities short, except to the extent that the fund contemporaneously
owns or has the right to acquire at no additional cost securities identical to
those sold short;

 5.  Purchase securities on margin, except such short-term credits as may be
necessary for the clearance of purchases or sales;

 6.  Borrow money, except from banks for temporary or emergency purposes, not in
excess of 5% of the value of the fund's total assets, excluding the amount
borrowed. This borrowing provision is intended to facilitate the orderly sale of
portfolio securities to accommodate unusually heavy redemption requests, if they
should occur; it is not intended for investment purposes;

7.   Underwrite any issue of securities, except to the extent that the purchase
of municipal bonds directly from the issuer in accordance with the fund's
investment objective, policies and restrictions, and later resale may be deemed
to be an underwriting;

8.   Invest in companies for the purpose of exercising control or management;

9.   Buy or sell commodities or commodity contracts or oil, gas or other mineral
exploration or development programs;

10.  Write, purchase or sell puts, calls, straddles, spreads or any combination
thereof;


                  The Tax-Exempt Fund of California - Page 14

<PAGE>


11.  Invest more than 25% of its assets in securities of any industry, although
for purposes of this limitation, the issuers of municipal securities and U. S.
Government obligations are not considered to be part of any industry.

For the purpose of the fund's investment restrictions, the identification of the
issuer of municipal bonds which are not general obligation bonds is made by the
Investment Adviser on the basis of the characteristics of the obligation as
described, the most significant of which is the ultimate source of funds for the
payment of principal of and interest on such bonds.

For purposes of Investment Restriction #9, the term "oil, gas or other mineral
exploration or development programs" includes oil, gas or other mineral
exploration or development leases.

NON-FUNDAMENTAL POLICIES - The following non-fundamental policy(ies) may be
changed without shareholder approval:


     The fund may not:

     (a)  invest 25% or more of its assets in securities the interest on which
     is paid from revenues of similar type projects (such as hospitals and
     health facilities; turnpikes and toll roads; ports and airports; or
     colleges and universities). The fund may, however, invest more than an
     aggregate of 25% of its total assets in industrial development bonds.

     (b)  invest more than 15% of its value of its net assets in illiquid
     securities.

     (c)  invest in securities of other investment companies, except as
     permitted by the Investment Company Act of 1940, as amended.

                      FUND ORGANIZATION AND VOTING RIGHTS

The fund, an open-end, diversified management investment company, was organized
as a Massachusetts business trust on May 30, 1986.


All fund operations are supervised by the fund's Board of Trustees which meets
periodically and performs duties required by applicable state and federal laws.
Members of the board who are not employed by Capital Research and Management
Company or its affiliates are paid certain fees for services rendered to the
fund as described in "Trustees and Trustee Compensation" below. They may elect
to defer all or a portion of these fees through a deferred compensation plan in
effect for the fund.


The fund has four classes of shares - Class A, B, C and F. The shares of each
class represent an interest in the same investment portfolio.  Each class has
equal rights as to voting, redemption, dividends and liquidation, except that
each class bears different distribution expenses and may bear different transfer
agent fees and other expenses properly attributable to the particular class as
approved by the Board of Trustees and set forth in the fund's rule 18f-3 Plan.
Class A, B, C and F shareholders have exclusive voting rights with respect to
the respective class' rule 12b-1 Plans adopted in connection with the
distribution of shares and on other matters in which the interests of one class
are different from interests in another class.  Shares of all classes of the
fund vote together on matters that affect all classes in substantially the same
manner. Each class votes as a class on matters that affect that class alone.


                  The Tax-Exempt Fund of California - Page 15

<PAGE>


The fund does not hold annual meetings of shareholders. However, significant
matters which require shareholder approval, such as certain elections of board
members or a change in a fundamental investment policy, will be presented to
shareholders at a meeting called for such purpose. Shareholders have one vote
per share owned. At the request of the holders of at least 10% of the shares,
the fund will hold a meeting at which any member of the board could be removed
by a majority vote.


                  The Tax-Exempt Fund of California - Page 16

<PAGE>



                           FUND TRUSTEES AND OFFICERS

                       Trustees and Trustee Compensation


<TABLE>
<CAPTION>
                                                                                             AGGREGATE
                                                                                            COMPENSATION
                                                                                       (INCLUDING VOLUNTARILY
                                                                                              DEFERRED
                                                                                          COMPENSATION/1/)
                                                                                           FROM THE FUND
                                POSITION                                                 DURING FISCAL YEAR
                                  WITH           PRINCIPAL OCCUPATION(S) DURING                ENDED
   NAME, ADDRESS AND AGE       REGISTRANT                 PAST 5 YEARS                    AUGUST 31, 2000
---------------------------------------------------------------------------------------------------------------
<S>                           <C>           <C>                                        <C>
 Richard G. Capen, Jr.         Trustee       Corporate Director and author; former            $2,114/3/
 6077 San Elijo, Box 2494                    United States Ambassador to Spain;
 Rancho Santa Fe, CA 92067                   former Vice Chairman of the Board,
 Age: 66                                     Knight-Ridder, Inc., former Chairman
                                             and Publisher, The Miami Herald
                                                            ----------------
---------------------------------------------------------------------------------------------------------------
 H. Frederick Christie         Trustee       Private Investor.  Former President and          $2,058/3/
 P.O. Box 144                                Chief Executive Officer, The Mission
 Palos Verdes Estates, CA                    Group (non-utility holding company,
 90274                                       subsidiary of Southern California
 Age: 67                                     Edison Company
---------------------------------------------------------------------------------------------------------------
 +Don R. Conlan                Trustee       President (retired), The Capital Group            none/4/
 1630 Milan Avenue                           Companies, Inc.
 South Pasadena, CA 91030
 Age: 65
---------------------------------------------------------------------------------------------------------------
 Diane C. Creel                Trustee       CEO and President, The Earth Technology          $1,900/3/
 100 W. Broadway                             Corporation (international consulting
 Suite 5000                                  engineering)
 Long Beach, CA 90802
 Age: 52
---------------------------------------------------------------------------------------------------------------
 Martin Fenton                 Trustee       Managing Director, Senior Resource               $2,500/3/
 4660 La Jolla Village                       Group LLC (development and management
 Drive                                       of senior living communities)
 Suite 725
 San Diego, CA 92122
 Age: 65
---------------------------------------------------------------------------------------------------------------
 Leonard R. Fuller             Trustee       President, Fuller Consulting (financial          $2,131/3/
 4337 Marina City Drive                      management consulting firm)
 Suite 841 ETN
 Marina del Rey, CA 90292
 Age: 54
---------------------------------------------------------------------------------------------------------------
 +*Abner D. Goldstine          President,    Senior Vice President and Trustee,                none/4/
 Age: 71                       PEO and       Capital Research and Management Company
                               Trustee
---------------------------------------------------------------------------------------------------------------
 +**Paul G. Haaga, Jr.         Chairman      Executive Vice President and Director,            none/4/
    Age: 52                    of            Capital Research and Management Company
                               the Board
---------------------------------------------------------------------------------------------------------------
 Richard G. Newman             Trustee       Chairman and CEO, AECOM Technology               $2,531/3/
 3250 Wilshire Boulevard                     Corporation (architectural engineering)
 Los Angeles, CA 90010-1599
 Age: 66
---------------------------------------------------------------------------------------------------------------
 Frank M .Sanchez              Trustee       President, The Sanchez Family                    $2,550/3/
 5234 Via San Delarro, #1                    Corporation dba McDonald's Restaurants
 Los Angeles, CA 90022                       (McDonald's licensee)
 Age: 57
---------------------------------------------------------------------------------------------------------------
<CAPTION>
                                   TOTAL COMPENSATION
                                 (INCLUDING VOLUNTARILY
                                        DEFERRED
                                  COMPENSATION/1/) FROM      TOTAL NUMBER
                                  ALL FUNDS MANAGED BY         OF FUND
                                  CAPITAL RESEARCH AND          BOARDS
                                   MANAGEMENT COMPANY          ON WHICH
                              OR ITS AFFILIATES/2/ FOR THE     TRUSTEE
   NAME, ADDRESS AND AGE       YEAR ENDED AUGUST 31, 2000     SERVES/2/
--------------------------------------------------------------------------
<S>                           <C>                           <C>
 Richard G. Capen, Jr.                 $88,153/3/                 14
 6077 San Elijo, Box 2494
 Rancho Santa Fe, CA 92067
 Age: 66
--------------------------------------------------------------------------
 H. Frederick Christie                 $214,453/3/                19
 P.O. Box 144
 Palos Verdes Estates, CA
 90274
 Age: 67
--------------------------------------------------------------------------
 +Don R. Conlan                          none/4/                   7
 1630 Milan Avenue
 South Pasadena, CA 91030
 Age: 65
--------------------------------------------------------------------------
 Diane C. Creel                        $42,320/3/                 12
 100 W. Broadway
 Suite 5000
 Long Beach, CA 90802
 Age: 52
--------------------------------------------------------------------------
 Martin Fenton                         $128,153/3/                16
 4660 La Jolla Village
 Drive
 Suite 725
 San Diego, CA 92122
 Age: 65
--------------------------------------------------------------------------
 Leonard R. Fuller                     $87,953/3/                 13
 4337 Marina City Drive
 Suite 841 ETN
 Marina del Rey, CA 90292
 Age: 54
--------------------------------------------------------------------------
 +*Abner D. Goldstine                    none/4/                  12
 Age: 71
--------------------------------------------------------------------------
 +**Paul G. Haaga, Jr.                   none/4/                  15
    Age: 52
--------------------------------------------------------------------------
 Richard G. Newman                     $105,320/3/                13
 3250 Wilshire Boulevard
 Los Angeles, CA 90010-1599
 Age: 66
--------------------------------------------------------------------------
 Frank M .Sanchez                      $43,953/3/                 12
 5234 Via San Delarro, #1
 Los Angeles, CA 90022
 Age: 57
--------------------------------------------------------------------------
</TABLE>




                  The Tax-Exempt Fund of California - Page 17


<PAGE>


[This page is deliberately left blank for this filing.]

                  The Tax-Exempt Fund of California - Page 18


<PAGE>

+ "Interested persons" within the meaning of the 1940 Act on the basis of their
  affiliation with the fund's Investment Adviser, Capital Research and
  Management Company, or the parent company of the Investment Adviser, The
  Capital Group Companies, Inc.


* Address is 11100 Santa Monica Boulevard, Los Angeles, CA 90025
** Address is 333 South Hope Street, Los Angeles, CA 90071

1  Amounts may be deferred by eligible Trustees under a non-qualified deferred
  compensation plan adopted by the fund in 1993. Deferred amounts accumulate at
  an earnings rate determined by the total return of one or more funds in The
  American Funds Group as designated by the Trustees.

2 Capital Research and Management Company manages The American Funds Group
  consisting of 29 funds: AMCAP Fund, Inc., American Balanced Fund, Inc.,
  American High-Income Municipal Bond Fund, Inc., American High-Income Trust,
  American Mutual Fund, Inc., The Bond Fund of America, Inc., The Cash
  Management Trust of America, Capital Income Builder, Inc., Capital World
  Growth and Income Fund, Inc., Capital World Bond Fund, Inc., EuroPacific
  Growth Fund, Fundamental Investors, Inc., The Growth Fund of America, Inc.,
  The Income Fund of America, Inc., Intermediate Bond Fund of America, The
  Investment Company of America, Limited Term Tax-Exempt Bond Fund of America,
  The New Economy Fund, New Perspective Fund, Inc., New World Fund, Inc.,
  SMALLCAP World Fund, Inc., The Tax-Exempt Bond Fund of America, Inc., The
  Tax-Exempt Fund of California, The Tax-Exempt Fund of Maryland, The Tax-Exempt
  Fund of Virginia, The Tax-Exempt Money Fund of America, The U. S. Treasury
  Money Fund of America, U.S. Government Securities Fund and Washington Mutual
  Investors Fund, Inc. Capital Research and Management Company also manages
  American Variable Insurance Series and Anchor Pathway Fund, which serve as the
  underlying investment vehicle for certain variable insurance contracts; and
  Endowments, whose shareholders are limited to (i) any entity exempt from
  taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as
  amended ("501(c)(3) organization");      (ii) any trust, the present or future
  beneficiary of which is a 501(c)(3) organization, and (iii) any other entity
  formed for the primary purpose of benefiting a 501(c)(3) organization. An
  affiliate of Capital Research and Management Company, Capital International,
  Inc., manages Emerging Markets Growth Fund, Inc.

3 Don R. Conlan, Paul G. Haaga, Jr., and Abner D. Goldstine are affiliated with
  the Investment Adviser and, accordingly, receive no compensation from the
  fund.

4 Since the deferred compensation plan's adoption, the total amount of deferred
  compensation accrued by the fund (plus earnings thereon) through the 2000
  fiscal year for participating Trustees is as follows: Richard G. Capen, Jr.
  ($4,315), H. Frederick Christie ($5,017), Diane C. Creel ($3,159), Martin
  Fenton ($16,381), Leonard R. Fuller ($4,734), Richard G. Newman ($33,284) and
  Frank M. Sanchez ($1,358). Amounts deferred and accumulated earnings thereon
  are not funded and are general unsecured liabilities of the fund until paid to
  the Trustees.


                  The Tax-Exempt Fund of California - Page 19


<PAGE>



                                 OTHER OFFICERS


<TABLE>
<CAPTION>
                               POSITION(S)     PRINCIPAL OCCUPATION(S) DURING
   NAME AND ADDRESS     AGE  WITH REGISTRANT            PAST 5 YEARS
-------------------------------------------------------------------------------
<S>                     <C>  <C>              <C>
Neil L. Langberg        47   Senior Vice      Vice President, Investment
11100 Santa Monica           President        Management Group, Capital
Blvd.                                         Research and Management Company
Los Angeles, CA 90025
-------------------------------------------------------------------------------
Michael J. Downer       46   Vice President   Senior Vice President - Fund
333 South Hope Street                         Business Management Group,
Los Angeles, CA 90071                         Capital Research and Management
                                              Company
-------------------------------------------------------------------------------
David A. Hoag           35   Vice President   Vice President and Director,
11100 Santa Monica                            Capital Research Company*
Blvd.
Los Angeles, CA 90025
-------------------------------------------------------------------------------
Julie F. Williams       52   Secretary        Vice President - Fund Business
333 South Hope Street                         Management Group, Capital
Los Angeles, CA 90071                         Research and Management Company
-------------------------------------------------------------------------------
Anthony W. Hynes, Jr.   38   Treasurer        Vice President - Fund Business
135 South State                               Management Group, Capital
College Blvd.                                 Research and Management Company
Brea, CA 92821
-------------------------------------------------------------------------------
Kimberly S. Verdick     36   Assistant        Assistant Vice President - Fund
333 South Hope Street        Secretary        Business Management Group,
Los Angeles, CA 90071                         Capital Research and Management
                                              Company
-------------------------------------------------------------------------------
</TABLE>


* Company affiliated with Capital Research and Management Company.

All of the officers listed are officers and/or directors/trustees of one or more
of the other funds for which Capital Research and Management Company serves as
Investment Adviser.


No compensation is paid by the fund to any officer or Trustee who is a director,
officer or employee of the Investment Adviser or affiliated companies. The fund
pays annual fees of $1,500 to Trustees who are not affiliated with the
Investment Adviser, plus $210 for each Board of Trustees meeting attended. In
addition, various Trustees participate with directors and trustees of certain
other funds in The American Funds Group in joint meetings of Contracts
Committees, Audit Committees and Nominating Committees; total fees for
attendance at these meetings, which are prorated among the participants in
proportion to the number of funds represented, are $2,510 for each meeting of
the Contracts Committee and $1,000 for each meeting of the Audit and Nominating
Committees. No pension or retirement benefits are accrued as part of fund
expenses. The Trustees may elect, on a voluntary basis, to defer all or a
portion of their fees through a deferred compensation plan in effect for the
fund. The fund also reimburses certain expenses of the Trustees who are not
affiliated with the Investment Adviser. As of February 15, 2001 the officers and
Trustees of the fund and their families, as a group, owned beneficially or of
record less than 1% of the outstanding shares of the fund.


                                   MANAGEMENT

INVESTMENT ADVISER - The Investment Adviser, Capital Research and Management
Company, founded in 1931, maintains research facilities in the U.S. and abroad
(Los Angeles, San Francisco, New York, Washington, D.C., London, Geneva, Hong
Kong, Singapore and Tokyo), with a staff of professionals, many of whom have a
number of years of investment experience.


                  The Tax-Exempt Fund of California - Page 20

<PAGE>


The Investment Adviser is located at 333 South Hope Street, Los Angeles, CA
90071, and at 135 South State College Boulevard, Brea, CA 92821. The Investment
Adviser's research professionals travel several million miles a year, making
more than 5,000 research visits in more than 50 countries around the world. The
Investment Adviser believes that it is able to attract and retain quality
personnel. The Investment Adviser is a wholly owned subsidiary of The Capital
Group Companies, Inc.


The Investment Adviser is responsible for managing more than $300 billion of
stocks, bonds and money market instruments and serves over 11 million
shareholder accounts of all types throughout the world. These investors include
privately owned businesses and large corporations as well as schools, colleges,
foundations and other non-profit and tax-exempt organizations.


INVESTMENT ADVISORY AND SERVICE AGREEMENT - The Investment Advisory and Service
Agreement (the "Agreement") between the fund and the Investment Adviser will
continue in effect until May 31, 2001, unless sooner terminated, and may be
renewed from year to year thereafter, provided that any such renewal has been
specifically approved at least annually by (i) the Board of Trustees, or by the
vote of a majority (as defined in the 1940 Act) of the outstanding voting
securities of the fund, and (ii) the vote of a majority of Trustees who are not
parties to the Agreement or interested persons (as defined in the 1940 Act) of
any such party, cast in person at a meeting called for the purpose of voting on
such approval. The Agreement provides that the Investment Adviser has no
liability to the fund for its acts or omissions in the performance of its
obligations to the fund not involving willful misconduct, bad faith, gross
negligence or reckless disregard of its obligations under the Agreement. The
Agreement also provides that either party has the right to terminate it, without
penalty, upon 60 days' written notice to the other party, and that the Agreement
automatically terminates in the event of its assignment (as defined in the 1940
Act).


The Investment Adviser, in addition to providing investment advisory services,
furnishes the services and pays the compensation and travel expenses of persons
to perform the executive, administrative, clerical and bookkeeping functions of
the fund, and provides suitable office space, necessary small office equipment
and utilities, general purpose accounting forms, supplies, and postage used at
the offices of the fund. The fund pays all expenses not assumed by the
Investment Adviser, including, but not limited to, custodian, stock transfer and
dividend disbursing fees and expenses; shareholder recordkeeping and
administrative services; costs of the designing, printing and mailing of
reports, prospectuses, proxy statements, and notices to its shareholders; taxes;
expenses of the issuance and redemption of shares of the fund (including stock
certificates, registration and qualification fees and expenses); expenses
pursuant to the fund's Plans of Distribution (described below); legal and
auditing expenses; compensation, fees, and expenses paid to directors
unaffiliated with the Investment Adviser; association dues; costs of stationery
and forms prepared exclusively for the fund; and costs of assembling and storing
shareholder account data.


The management fee is based upon the net assets of the fund and monthly gross
investment income. Gross investment income is determined in accordance with
generally accepted accounting principles and does not include gains or losses
from sales of capital assets.


The Investment Adviser receives a fee at an annual rate of 0.30% on the first
$60 million of average net assets, plus 0.21% on net assets over $60 million,
plus 3% of gross investment income.  Assuming net assets of $390 million and
gross investment income levels of 4%, 5%,


                  The Tax-Exempt Fund of California - Page 21

<PAGE>


6%, 7% and 8% management fees would be 0.34%, 0.37%, 0.40%, 0.43% and 0.46%,
respectively.


The Investment Adviser has agreed that in the event the expenses of Class A
shares of the fund (with the exclusion of interest, taxes, brokerage costs,
extraordinary expenses such as litigation and acquisitions or other expenses
excludable under applicable state securities laws or regulations) for any fiscal
year ending on a date on which the Agreement is in effect, exceed the expense
limitations, if any, applicable to the fund pursuant to state securities laws or
any regulations thereunder, it will reduce its fee by the extent of such excess
and, if required pursuant to any such laws or any regulations thereunder, will
reimburse the fund in the amount of such excess. To the extent the fund's
management fee must be waived due to Class A share expense ratios exceeding the
above limit, management fees will be reduced similarly for all classes of shares
of the fund or other Class A fees will be waived in lieu of management fees. For
the fiscal years ended 2000, 1999, and 1998, the Investment Adviser received
advisory fees of $1,442,000, $1,459,000, and $1,262,000, respectively.


ADMINISTRATIVE SERVICES AGREEMENT - The Administrative Services Agreement (the
"Administrative Agreement") between the fund and the Investment Adviser,
relating to the fund's Class C and F shares, will continue in effect until May
31, 2002, unless sooner terminated, and may be renewed from year to year
thereafter, provided that any such renewal has been specifically approved at
least annually by the vote of a majority of Trustees who are not parties to the
Administrative Agreement or interested persons (as defined in the 1940 Act) of
any such party, cast in person at a meeting called for the purpose of voting on
such approval.  The Administrative Agreement provides that the fund may
terminate the agreement at any time by vote of a majority of Trustees who are
not interested persons of the fund.  The Investment Adviser has the right to
terminate the Administrative Agreement upon 60 days' written notice to the fund.
 The Administrative Agreement automatically terminates in the event of its
assignment (as defined in the 1940 Act).


Under the Administrative Agreement, the Investment Adviser provides certain
transfer agent and administrative services for shareholders of the fund's Class
C and F shares.  The Investment Adviser contracts with third parties, including
American Funds Service Company, the fund's Transfer Agent, to provide these
services.  Services include, but are not limited to, shareholder account
maintenance, transaction processing, tax information reporting, and shareholder
and fund communications. In addition, the Investment Adviser monitors,
coordinates and oversees the activities performed by third parties.


As compensation for its services, the Investment Adviser receives transfer agent
fees for transfer agent services provided to the fund's Class C and F shares.
 Transfer agent fees are paid monthly according to a fee schedule contained in a
Shareholder Services Agreement between the fund and American Funds Service
Company.  The fund's Class C and F shares pay only those transfer agent fees
that are attributed to accounts and activities generated by their respective
share class.  The Investment Adviser also receives an administrative services
fee for administrative services provided to the fund's Class C and F shares.
 Administrative services fees are paid monthly, accrued daily and calculated at
the annual rate of 0.15% of the average net assets of the fund's Class C and F
shares.


PRINCIPAL UNDERWRITER AND PLANS OF DISTRIBUTION - American Funds Distributors,
Inc. (the "Principal Underwriter") is the principal underwriter of the fund's
shares. The Principal Underwriter is located at 333 South Hope Street, Los
Angeles, CA 90071, 135 South State


                  The Tax-Exempt Fund of California - Page 22

<PAGE>


College Boulevard, Brea, CA 92821, 3500 Wiseman Boulevard, San Antonio, TX
78251, 8332 Woodfield Crossing Boulevard, Indianapolis, IN 46240, and 5300 Robin
Hood Road, Norfolk, VA 23513.


The fund has adopted Plans of Distribution (the "Plans"), pursuant to rule 12b-1
under the 1940 Act. The Principal Underwriter receives amounts payable pursuant
to the Plans (see below). In addition, the Principal Underwriter receives
revenues from sales of the fund's shares. For Class A shares, the Principal
Underwriter receives commission revenue consisting of that portion of the Class
A sales charge remaining after the allowances by the Principal Underwriter to
investment dealers. For Class B shares, the Principal Underwriter sells the
rights to Class B 12b-1 fees paid by the fund for distribution expenses to a
third party and receives the revenue remaining after compensating investment
dealers for sales of Class B shares. The fund also pays the Principal
Underwriter for advancing the immediate service fees paid to qualified dealers
of Class B shares. For Class C shares, the Principal Underwriter receives any
contingent deferred sales charges that apply to Class C shares during the first
year after purchase. The fund pays the Principal Underwriter for advancing the
immediate service fees and commissions paid to qualified dealers of Class C
shares. For Class F shares, the fund pays the Principal Underwriter for
advancing the immediate service fees paid to qualified dealers and advisers of
Class F shares.


Commissions retained by the Principal Underwriter on sales of Class A shares
during the 2000 fiscal year amounted to $124,000 after an allowance of $474,000
to dealers. During the fiscal years ended 1999 and 1998, the Principal
Underwriter retained $205,000 and $183,000, respectively, on sales of Class A
shares after an allowance of $794,000 and $713,000 to dealers, respectively.
Revenue retained and service fees received by the Principal Underwriter on sales
of Class B shares during the 2000 fiscal year amounted to $6,000 after
compensation of $38,000 to dealers.


As required by rule 12b-1 and the 1940 Act, the Plans (together with the
Principal Underwriting Agreement) have been approved by the full Board of
Trustees and separately by a majority of the trustees who are not "interested
persons" of the fund and who have no direct or indirect financial interest in
the operation of the Plans or the Principal Underwriting Agreement. Potential
benefits of the Plans to the fund include shareholder services, savings to the
fund in transfer agency costs, savings to the fund in advisory fees and other
expenses, benefits to the investment process from growth or stability of assets
and maintenance of a financially healthy management organization. The selection
and nomination of trustees who are not "interested persons" of the fund are
committed to the discretion of the trustees who are not "interested persons"
during the existence of the Plans. The Plans may not be amended to increase
materially the amount spent for distribution without shareholder approval. Plan
expenses are reviewed quarterly and the Plans must be renewed annually by the
Board of Trustees.


Under the Plans, the fund may annually expend (i) for Class A shares, up to
0.25% of its net assets attributable to Class A shares, (ii) for Class B shares,
1.00% of its net assets attributable to Class B shares, (iii) for Class C
shares, 1.00% of its net assets attributable to Class C shares, and (iv) for
Class F shares, up to 0.50% of its net assets attributable to Class F shares, to
finance any activity which is primarily intended to result in the sale of fund
shares, provided the fund's Board of Trustees has approved the category of
expenses for which payment is being made.


For Class A shares, (i) up to 0.25% is reimbursed to the Principal Underwriter
for paying service-related expenses, including service fees paid to qualified
dealers, and (ii) up to the amount allowable under the fund's Class A 12b-1
limit is reimbursed to the Principal Underwriter for


                  The Tax-Exempt Fund of California - Page 23

<PAGE>


paying distribution-related expenses, including dealer commissions and
wholesaler compensation paid on sales of shares of $1 million or more purchased
without a sales charge (including purchases by employer-sponsored defined
contribution-type retirement plans investing $1 million or more or with 100 or
more eligible employees, and retirement plans, endowments and foundations with
$50 million or more in assets) ("no load purchases"). Commissions on no load
purchases of Class A shares in excess of the Class A Plan limitation not
reimbursed to the Principal Underwriter during the most recent fiscal quarter
are recoverable for five quarters, provided that such commissions do not exceed
the annual expense limit.  After five quarters these commissions are not
recoverable.


For Class B shares, (i) 0.25% is paid to the Principal Underwriter for paying
service-related expenses, including service fees paid to qualified dealers, and
(ii) 0.75% is paid to the Principal Underwriter for distribution-related
expenses, including the financing of commissions paid to qualified dealers.


For Class C shares, (i) 0.25% is paid to the Principal Underwriter for paying
service-related expenses, including service fees paid to qualified dealers, and
(ii) 0.75% is paid to the Principal Underwriter for paying distribution-related
expenses, including commissions paid to qualfied dealers.


For Class F shares, 0.25% is paid to the Principal Underwriter for paying
service-related expenses, including service fees paid to qualified dealers or
advisers.  Currently, no compensation is paid under the fund's Class F Plan for
distribution-related expenses.


During the 2000 fiscal year, the fund paid or accrued $924,000 for compensation
to dealers or the Principal Underwriter under the Plan for Class A shares and
$2,000 under the Plan for Class B shares. As of August 31, 2000, accrued and
unpaid distribution expenses for Class A and Class B shares were $155,000 and
$1,000, respectively .


OTHER COMPENSATION TO DEALERS - The Principal Underwriter, at its expense (from
a designated percentage of its income), currently provides additional
compensation to dealers. Currently these payments are limited to the top 100
dealers who have sold shares of the fund or other funds in The American Funds
Group. These payments will be based principally on a pro rata share of a
qualifying dealer's sales. The Principal Underwriter will, on an annual basis,
determine the advisability of continuing these payments.


                            TAXES AND DISTRIBUTIONS

FUND TAXATION - The fund intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code ("Code") so that it
will not be liable for federal tax on income and capital gains distributed to
shareholders. In order to qualify as a regulated investment company, and avoid
being subject to federal income or excise taxes at the fund level, the fund
intends to distribute substantially all of its net investment income and net
realized capital gains within each calendar year as well as on a fiscal year
basis, and intends to comply with other tax rules applicable to regulated
investment companies.


To avoid federal excise taxes, the Code requires the fund to distribute by
December 31 of each year, at a minimum, the following amounts:  98% of its
taxable ordinary income earned during the calendar year; 98% of its capital gain
net income earned during the twelve month period ending October 31; and 100% of
any undistributed amounts from the prior year.


                  The Tax-Exempt Fund of California - Page 24

<PAGE>


Interest on the municipal securities purchased by the fund is believed to be
free from regular federal income tax. However, the Code imposes limitations on
the use and investment of the proceeds of state and local governmental bonds and
of other funds of the issuers of such bonds.  These limitations must be
satisfied on a continuing basis to maintain the exclusion from gross income of
interest on such bonds. Bond counsel qualify their opinions as to the federal
tax status of new issues of bonds by making such opinions contingent on the
issuer's future compliance with these limitations. Any failure on the part of an
issuer to comply could cause the interest on its bonds to become taxable to
investors retroactive to the date the bonds were issued.


As long as a fund continues to qualify as a regulated investment company under
the federal Internal Revenue Code, it will incur no California income or
franchise tax liability on income and capital gains distributed to shareholders.
California personal income tax law provides that exempt-interest dividends paid
by a regulated investment company, or series thereof, from interest on
obligations that are exempt from California personal income tax are excludable
from gross income. For a fund to qualify to pay exempt-interest dividends under
California law, at least 50% of the value of its assets must consist of such
obligations at the close of each quarter of its fiscal year. For purposes of
California personal income taxation, distributions to individual shareholders
derived from interest on other types of obligations and short-term capital gains
will be taxed as dividends, and long-term capital gain distributions will be
taxed as long-term capital gains. California has an alternative minimum tax
similar to the federal AMT. However, the California AMT does not include
interest from private activity municipal obligations as an item of tax
preference. Interest on indebtedness incurred or continued by a shareholder in
connection with the purchase of shares of a fund will not be deductible for
California personal income tax purposes. Corporate taxpayers should note that
dividends will not be exempt from California corporate income or franchise tax.


DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS

     DIVIDENDS - By meeting certain requirements of the Code, the fund qualifies
     to pay exempt-interest dividends to shareholders. These dividends
     ("exempt-interest dividends") are derived from interest income exempt from
     regular federal income tax, and are not subject to regular federal income
     tax when they are distributed to fund shareholders. In addition, to the
     extent that exempt-interest dividends are derived from interest on
     obligations of a state or its political subdivisions, or from interest on
     qualifying U.S. territorial obligations (including qualifying obligations
     of Puerto Rico, the U.S. Virgin Islands or Guam), they also may be exempt
     from that state's personal income taxes.

     CAPITAL GAIN DISTRIBUTIONS - The fund may derive capital gains and losses
     in connection with sales or other dispositions of its portfolio securities.
     Distributions from net short-term capital gains will be taxable to
     shareholders as ordinary income. Distributions from net long-term capital
     gains will be taxable to shareholders as long-term capital gain, regardless
     of how long a particular shareholder has held shares in the fund.

     A portion of the gain on municipal bonds purchased at market discount after
     April 30, 1993 is taxable to shareholders as ordinary income, not as
     capital gains.


SHAREHOLDER TAXATION - Individual shareholders are required to report to the
federal government all exempt-interest dividends and all other tax-exempt
interest received.


                  The Tax-Exempt Fund of California - Page 25

<PAGE>


Distributions by the fund result in a reduction in the net asset value of the
fund's shares. Should a distribution reduce the net asset value below a
shareholder's cost basis, such distribution nevertheless will be taxable to the
shareholder to the extent it consists of ordinary income or capital gain as
described above, even though, from an investment standpoint, it may constitute a
partial return of investment capital.  For this reason, investors should
consider the tax implications of buying shares just prior to a distribution. The
price of shares purchased at that time includes the amount of the forthcoming
distribution. Those purchasing just prior to a distribution will then receive a
partial return of investment capital upon the distribution, which may be taxable
to them, in whole or in part.


Redemptions and exchanges of fund shares are taxable transactions for federal
and state income tax purposes. If a shareholder redeems fund shares, or
exchanges shares for shares of a different fund, the IRS will require the
shareholder to report any gain or loss on the redemption or exchange. Generally,
the gain or loss realized will be capital gain or loss and will be long-term or
short-term, generally depending on how long the shareholder held the shares.


Any loss incurred on the redemption or exchange of shares held for six months or
less will be disallowed to the extent of any exempt-interest dividends
distributed to a shareholder with respect to fund shares and any remaining loss
will be treated as a long-term capital loss to the extent of any long-term
capital gains distributed to the shareholder by the fund on those shares.


All or a portion of any loss a shareholder realizes upon the redemption of fund
shares will be disallowed to the extent that shareholder buys other shares in
the fund (through reinvestment of dividends or otherwise) within 30 days before
or after the share redemption. Any loss disallowed under these rules will be
added to the shareholder's tax basis in the new shares purchased.


If a shareholder redeems shares in the fund, and then reinvests the sales
proceeds in the fund or in another fund within 90 days of buying the original
shares, the sales charge that would otherwise apply to the shareholder's
reinvestment may be reduced or eliminated. The IRS will require the shareholder
to report any gain or loss on the redemption of the original shares in the fund.
In doing so, all or a portion of the sales charge paid by the shareholder for
the original shares in the fund will be excluded from the shareholder's tax
basis in the shares sold (for the purpose of determining gain or loss upon the
sale of such shares). The portion of the sales charge excluded will equal the
amount that the sales charge is reduced on the reinvestment. Any portion of the
sales charge excluded from a shareholder's tax basis in the shares sold will be
added to the tax basis of the shares acquired from the reinvestment.


Interest on certain private activity bonds, while exempt from regular federal
income tax, is a preference item for taxpayers when determining their
alternative minimum tax under the Code and under the income tax provisions of
several states. Private activity bond interest could subject a shareholder to or
increase liability under federal and state alternative minimum taxes, depending
on a shareholder's individual or corporate tax position. Persons who are defined
in the Code as substantial users (or persons related to such users) of
facilities financed by private activity bonds should consult with their tax
advisors before buying fund shares.


The fund is not intended to constitute a balanced investment program and is not
designed for investors seeking capital appreciation or maximum tax-exempt income
without fluctuation of principal. Shares of the fund generally would not be
suitable for tax-exempt institutions or tax-deferred retirement plans (e.g.,
plans qualified under Section 401 of the Code, and individual retirement
accounts).  Such retirement plans would not gain any benefit from the tax-exempt


                  The Tax-Exempt Fund of California - Page 26

<PAGE>


nature of the fund's dividends because such dividends would be ultimately
taxable to beneficiaries when distributed to them.


The fund will be required to report to the IRS all distributions of investment
company taxable income and capital gains as well as gross proceeds from the
redemption or exchange of fund shares, except in the case of certain exempt
shareholders. Under the backup withholding provisions of Section 3406 of the
Code, distributions of investment company taxable income and capital gains and
proceeds from the redemption or exchange of a regulated investment company may
be subject to withholding of federal income tax at the rate of 31% in the case
of non-exempt U.S. shareholders who fail to furnish the investment company with
their taxpayer identification numbers and with required certifications regarding
their status under the federal income tax law. Withholding may also be required
if the fund is notified by the IRS or a broker that the taxpayer identification
number furnished by the shareholder is incorrect or that the shareholder has
previously failed to report interest or dividend income. If the withholding
provisions are applicable, any such distributions and proceeds, whether taken in
cash or reinvested in additional shares, will be reduced by the amounts required
to be withheld.


The foregoing discussion of U.S. federal income tax law relates solely to the
application of that law to U.S. persons, i.e., U.S. citizens and residents and
U.S. corporations, partnerships, trusts and estates. Each shareholder who is not
a U.S. person should consider the U.S. and foreign tax consequences of ownership
of shares of the fund, including the possibility that such a shareholder may be
subject to a U.S. withholding tax at a rate of 30% (or a lower rate under an
applicable income tax treaty) on taxable dividends, excluding long-term capital
gain distributions, received by him or her.


Shareholders should consult their tax advisers about the application of federal,
state and local tax law in light of their particular situation.


                  The Tax-Exempt Fund of California - Page 27

<PAGE>


                               PURCHASE OF SHARES


<TABLE>
<CAPTION>
        METHOD            INITIAL INVESTMENT        ADDITIONAL INVESTMENTS
-------------------------------------------------------------------------------
<S>                     <C>                     <C>
                        See "Purchase           $50 minimum (except where a
                        Minimums" for initial   lower minimum is noted under
                        investment minimums.    "Purchase Minimums").
-------------------------------------------------------------------------------
By contacting           Visit any investment    Mail directly to your
your investment dealer  dealer who is           investment dealer's address
                        registered in the       printed on your account
                        state where the         statement.
                        purchase is made and
                        who has a sales
                        agreement with
                        American Funds
                        Distributors.
-------------------------------------------------------------------------------
By mail                 Make your check         Fill out the account additions
                        payable to the fund     form at the bottom of a recent
                        and mail to the         account statement, make your
                        address indicated on    check payable to the fund,
                        the account             write your account number on
                        application. Please     your check, and mail the check
                        indicate an investment  and form in the envelope
                        dealer on the account   provided with your account
                        application.            statement.
-------------------------------------------------------------------------------
By telephone            Please contact your     Complete the "Investments by
                        investment dealer to    Phone" section on the account
                        open account, then      application or American
                        follow the procedures   FundsLink Authorization Form.
                        for additional          Once you establish the
                        investments.            privilege, you, your financial
                                                advisor or any person with your
                                                account information can call
                                                American FundsLine(R) and make
                                                investments by telephone
                                                (subject to conditions noted in
                                                "Shareholder Account Services
                                                and Privileges - Telephone and
                                                Computer Purchases, Redemptions
                                                and Exchanges" below).
-------------------------------------------------------------------------------
By computer             Please contact your     Complete the American FundsLink
                        investment dealer to    Authorization Form. Once you
                        open account, then      established the privilege, you,
                        follow the procedures   your financial advisor or any
                        for additional          person with your account
                        investments.            information may access American
                                                FundsLine OnLine(R) on the
                                                Internet and make investments
                                                by computer (subject to
                                                conditions noted in
                                                "Shareholder Account Services
                                                and Privileges - Telephone and
                                                Computer Purchases, Redemptions
                                                and Exchanges" below).
-------------------------------------------------------------------------------
By wire                 Call 800/421-0180 to    Your bank should wire your
                        obtain your account     additional investments in the
                        number(s), if           same manner as described under
                        necessary. Please       "Initial Investment."
                        indicate an investment
                        dealer on the account.
                        Instruct your bank to
                        wire funds to:

                        Wells Fargo Bank
                        155 Fifth Street,
                        Sixth Floor
                        San Francisco, CA
                        94106
                        (ABA#121000248)

                        For credit to the
                        account of:
                        American Funds Service
                        Company a/c#
                        4600-076178
                        (fund name)
                        (your fund acct. no.)
-------------------------------------------------------------------------------
</TABLE>


The funds and the Principal Underwriter reserve the right to reject any purchase
order.  Generally, Class F shares may only be purchased through fee-based
programs of investment firms and registered investment advisers who have special
agreements with the fund's distributor.  Class B and C shares are generally not
available to certain employer-sponsored retirement plans, such as 401(k) plans,
employer-sponsored 403(b) plans, and money purchase


                  The Tax-Exempt Fund of California - Page 28

<PAGE>


pension and profit sharing plans.  In addition, the state tax-exempt funds are
only offered in certain states and tax-exempt funds in general should not serve
as retirement plan investments.


PURCHASE MINIMUMS - The minimum initial investment for all funds in The American
Funds Group, except the money market funds and the state tax-exempt funds, is
$250.  The minimum initial investment for the money market funds (The Cash
Management Trust of America, The Tax-Exempt Money Fund of America, and The U.S.
Treasury Money Fund of America) and the state tax-exempt funds (The Tax-Exempt
Fund of California, The Tax-Exempt Fund of Maryland, and The Tax-Exempt Fund of
Virginia) is $1,000. Purchase minimums are reduced to $50 for purchases through
"Automatic Investment Plans" (except for the money market funds) or to $25 for
purchases by retirement plans through payroll deductions and may be reduced or
waived for shareholders of other funds in The American Funds Group. The minimum
is $50 for additional investments (except for retirement plan payroll deductions
as noted above).


PURCHASE MAXIMUM FOR CLASS B SHARES - The maximum purchase order for Class B
shares for all American Funds is $100,000. For investments above $100,000, Class
A shares are generally a less expensive option over time due to sales charge
reductions or waivers.


PURCHASE MAXIMUM FOR CLASS C SHARES - The maximum purchase order for Class C
shares for all American Funds is $500,000.


FUND NUMBERS - Here are the fund numbers for use with our automated phone line,
American FundsLine/(R)/ (see description below):

<TABLE>
<CAPTION>
                                                  FUND      FUND      FUND       FUND
                                                 NUMBER    NUMBER    NUMBER     NUMBER
FUND                                            CLASS A   CLASS B   CLASS C    CLASS F
----------------------------------------------------------------------------------------
<S>                                             <C>       <C>       <C>       <C>
STOCK AND STOCK/BOND FUNDS
AMCAP Fund/(R)/ . . . . . . . . . . . . . . .      02       202       302        402
American Balanced Fund/(R)/ . . . . . . . . .      11       211       311        411
American Mutual Fund/(R)/ . . . . . . . . . .      03       203       303        403
Capital Income Builder/(R)/ . . . . . . . . .      12       212       312        412
Capital World Growth and Income Fund/SM/  . .      33       233       333        433
EuroPacific Growth Fund/(R)/  . . . . . . . .      16       216       316        416
Fundamental Investors/SM/ . . . . . . . . . .      10       210       310        410
The Growth Fund of America/(R)/ . . . . . . .      05       205       305        405
The Income Fund of America/(R)/ . . . . . . .      06       206       306        406
The Investment Company of America/(R)/  . . .      04       204       304        404
The New Economy Fund/(R)/ . . . . . . . . . .      14       214       314        414
New Perspective Fund/(R)/ . . . . . . . . . .      07       207       307        407
New World Fund/SM/  . . . . . . . . . . . . .      36       236       336        436
SMALLCAP World Fund/(R)/  . . . . . . . . . .      35       235       335        435
Washington Mutual Investors Fund/SM/  . . . .      01       201       301        401
BOND FUNDS
American High-Income Municipal Bond Fund/(R)/      40       240       340        440
American High-Income Trust/SM/  . . . . . . .      21       221       321        421
The Bond Fund of America/SM/  . . . . . . . .      08       208       308        408
Capital World Bond Fund/(R)/  . . . . . . . .      31       231       331        431
Intermediate Bond Fund of America/SM/ . . . .      23       223       323        423
Limited Term Tax-Exempt Bond Fund of
America/SM/ . . . . . . . . . . . . . . . . .      43       243       343        443
The Tax-Exempt Bond Fund of America/(R)/  . .      19       219       319        419
The Tax-Exempt Fund of California/(R)/* . . .      20       220       320        420
The Tax-Exempt Fund of Maryland/(R)/* . . . .      24       224       324        424
The Tax-Exempt Fund of Virginia/(R)/* . . . .      25       225       325        425
U.S. Government Securities Fund/SM/ . . . . .      22       222       322        422
MONEY MARKET FUNDS
The Cash Management Trust of America/(R)/ . .      09       209       309        409
The Tax-Exempt Money Fund of America/SM/  . .      39       N/A       N/A        N/A
The U.S. Treasury Money Fund of America/SM/ .      49       N/A       N/A        N/A
___________
*Available only in certain states.
</TABLE>



                  The Tax-Exempt Fund of California - Page 29

<PAGE>


                                 SALES CHARGES

CLASS A SALES CHARGES - The sales charges you pay when purchasing Class A shares
of stock, stock/bond, and bond funds of The American Funds Group are set forth
below. The money market funds of The American Funds Group are offered at net
asset value. (See "Fund Numbers" for a listing of the funds.)

<TABLE>
<CAPTION>
                                                                                       DEALER
                                                               SALES CHARGE AS       CONCESSION
                                                              PERCENTAGE OF THE:    AS PERCENTAGE
                                                              ------------------       OF THE
AMOUNT OF PURCHASE
AT THE OFFERING PRICE                                        NET AMOUNT  OFFERING     OFFERING
                                                             -INVESTED-   PRICE         PRICE
------------------------------------------------------------- --------    -----         -----
<S>                                                          <C>         <C>       <C>
STOCK AND STOCK/BOND FUNDS
Less than $25,000  . . . . . . . . . . . . . . . . . . . .     6.10%      5.75%         5.00%
$25,000 but less than $50,000  . . . . . . . . . . . . . .     5.26       5.00          4.25
$50,000 but less than $100,000. .                              4.71       4.50          3.75
BOND FUNDS
Less than $100,000 . . . . . . . .                             3.90       3.75          3.00
STOCK, STOCK/BOND, AND BOND FUNDS
$100,000 but less than $250,000 .                              3.63       3.50          2.75
$250,000 but less than $500,000 .                              2.56       2.50          2.00
$500,000 but less than $750,000 .                              2.04       2.00          1.60
$750,000 but less than $1 million                              1.52       1.50          1.20
$1 million or more . . . . . . . . . .        none     none    (see below)
-----------------------------------------------------------------------------
</TABLE>


CLASS A PURCHASES NOT SUBJECT TO SALES CHARGES - Investments of $1 million or
more are sold with no initial sales charge.  HOWEVER, A 1% CONTINGENT DEFERRED
SALES CHARGE (CDSC) MAY BE


                  The Tax-Exempt Fund of California - Page 30

<PAGE>


IMPOSED IF REDEMPTIONS ARE MADE WITHIN ONE YEAR OF PURCHASE. Employer-sponsored
defined contribution-type plans investing $1 million or more, or with 100 or
more eligible employees, and Individual Retirement Account rollovers from
retirement plans with assets invested in the American Funds (see "Individual
Retirement Account (IRA) Rollovers" below) may invest with no sales charge and
are not subject to a CDSC.  403(b) plans may be treated as employer-sponsored
plans for sales charge purposes if: (i) the American Funds are principal
investment options; (ii) the employer facilitates the enrollment process by, for
example, allowing for onsite group enrollment meetings held during working
hours; and (iii) there is only one dealer firm assigned to the plans.  403(b)
plans meeting these criteria may invest with no sales charge and are not subject
to a CDSC if investing $1 million or more or having 100 or more eligible
employees.


Investments made through accounts that purchased Class A shares of the fund
before March 15, 2001 and are part of certain qualified fee-based programs, and
retirement plans, endowments or foundations with $50 million or more in assets,
may also be made with no sales charge and are not subject to a CDSC.  A dealer
concession of up to 1% may be paid by the fund under its Class A Plan of
Distribution on investments made with no initial sales charge.


In addition, Class A shares of the stock, stock/bond and bond funds may be sold
at net asset value to:


(1)  current or retired directors, trustees, officers and advisory board members
of, and certain lawyers who provide services to, the funds managed by Capital
Research and Management Company, current or retired employees of Washington
Management Corporation, current or retired employees and partners of The Capital
Group Companies, Inc. and its affiliated companies, certain family members and
employees of the above persons, and trusts or plans primarily for such persons;

(2)  current registered representatives, retired registered representatives with
respect to accounts established while active, or full-time employees (and their
spouses, parents, and children) of dealers who have sales agreements with the
Principal Underwriter (or who clear transactions through such dealers) and plans
for such persons or the dealers;

(3)  companies exchanging securities with the fund through a merger, acquisition
or exchange offer;

(4)  insurance company separate accounts;

(5)  accounts managed by subsidiaries of The Capital Group Companies, Inc.;

(6)  The Capital Group Companies, Inc., its affiliated companies and Washington
Management Corporation; and

(7)	wholesalers and full-time employees directly supporting wholesalers
involved in the distribution of insurance company separate accounts whose
underlying investments are managed by any affiliate of The Capital Group
Companies, Inc.


Shares are offered at net asset value to these persons and organizations due to
anticipated economies in sales effort and expense.


                  The Tax-Exempt Fund of California - Page 31

<PAGE>


CONTINGENT DEFERRED SALES CHARGE ON CLASS A AND C SHARES -  Except as described
above, a CDSC of 1% applies to redemptions of Class A shares of the American
Funds, other than the money market funds, made within 12 months following the
purchase of Class A shares of $1 million or more made without an initial sales
charge.  A CDSC of 1% also applies to redemptions of Class C shares of the
American Funds made within 12 months following the purchase of the Class C
shares. The charge is 1% of the lesser of the value of the shares redeemed
(exclusive of reinvested dividends and capital gain distributions) or the total
cost of such shares.  Shares held the longest are assumed to be redeemed first
for purposes of calculating this CDSC. The CDSC may be waived in certain
circumstances.  See "CDSC Waivers for Class A and C Shares" below.


CLASS B SALES CHARGES - Class B shares are sold without any initial sales
charge.  However, a CDSC may be applied to shares you sell within six years of
purchase, as shown in the table below:



<TABLE>
<CAPTION>
 CONTINGENT DEFERRED SALES CHARGE ON
       SHARES SOLD WITHIN YEAR               AS A % OF SHARES BEING SOLD
 ------------------------------------------------------------------------------
 <S>                                  <C>
                  1                                     5.00%
                  2                                     4.00%
                  3                                     4.00%
                  4                                     3.00%
                  5                                     2.00%
                  6                                     1.00%
</TABLE>



There is no CDSC on appreciation in share value above the initial purchase price
or on shares acquired through reinvestment of dividends or capital gain
distributions.  In addition, the CDSC may be waived in certain circumstances.
 See "CDSC Waivers for Class B shares" below.  The CDSC is based on the original
purchase cost or the current market value of the shares being sold, whichever is
less.  In processing redemptions of Class B shares, shares that are not subject
to any CDSC will be redeemed first followed by shares that you have owned the
longest during the six-year period.


CLASS F SALES CHARGE - Class F shares are sold with no initial or contingent
deferred sales charge.


DEALER COMMISSIONS AND COMPENSATION - For Class A shares, commissions (up to 1%)
are paid to dealers who initiate and are responsible for purchases of $1 million
or more, for purchases by any employer-sponsored defined contribution-type plan
investing $1 million or more or with 100 or more eligible employees, IRA
rollover accounts (as described in "Individual Retirement Account (IRA)
Rollovers" below), and for purchases made at net asset value by certain
retirement plans, endowments and foundations with assets of $50 million or more.
 Commissions on investments in Class A shares are paid at the following rates:
1.00% on amounts of $1 million to $4 million, 0.50% on amounts over $4 million
to $10 million, and 0.25% on amounts over $10 million. Commissions are based on
cumulative investments and are not annually reset.


For Class B shares, compensation equal to 4.00% of the amount invested is paid
by the Principal Underwriter to dealers who sell Class B shares.


                  The Tax-Exempt Fund of California - Page 32

<PAGE>


For Class C shares, compensation equal to 1.00% of the amount invested is paid
by the Principal Underwriter to dealers who sell Class C shares.


CONVERSION OF CLASS B AND C SHARES - Class B shares automatically convert to
Class A shares in the month of the eight-year anniversary of the purchase date.
 Class C shares automatically convert to Class F shares in the month of the
ten-year anniversary of the purchase date. The conversion of shares is subject
to the Internal Revenue Service's continued position that the conversions are
not subject to federal income tax.  In the event the Internal Revenue Service no
longer takes this position, the automatic conversion feature may be suspended,
in which event no further conversions of Class B or C shares would occur while
such suspension remained in effect.  In that event, at your option, Class B
shares could be exchanged for Class A shares and Class C shares for Class F
shares on the basis of the relative net asset values of the two classes, without
the imposition of a sales charge or fee; however, such an exchange could
constitute a taxable event for you. Absent such an exchange, Class B and C
shares would continue to be subject to higher expenses for longer than eight
years and ten years, respectively.


                      SALES CHARGE REDUCTIONS AND WAIVERS

REDUCING YOUR CLASS A SALES CHARGE - You and your "immediate family" (your
spouse and your children under age 21) may combine investments to reduce your
costs. You must let your investment dealer or American Funds Service Company
(the "Transfer Agent") know if you qualify for a reduction in your sales charge
using one or any combination of the methods described below.


     STATEMENT OF INTENTION - You may enter into a non-binding commitment to
     purchase shares of a fund(s) over a 13-month period and receive the same
     sales charge as if all shares had been purchased at once. This includes
     purchases made during the previous 90 days, but does not include future
     appreciation of your investment or reinvested distributions. The reduced
     sales charges and offering prices set forth in the Prospectus apply to
     purchases of $25,000 or more for equity funds and $100,000 or more for bond
     funds made within a 13-month period subject to the following statement of
     intention (the "Statement"). The Statement is not a binding obligation to
     purchase the indicated amount.

     When a shareholder elects to use a Statement in order to qualify for a
     reduced sales charge, shares equal to 5% of the dollar amount specified
     in the Statement will be held in escrow in the shareholder's account
     out of the initial purchase (or subsequent purchases, if necessary)
     by the Transfer Agent. All dividends and any capital gain distributions
     on shares held in escrow will be credited to the shareholder's account
     in shares (or paid in cash, if requested). If the intended investment
     is not completed within the specified 13-month period, the purchaser
     will remit to the Principal Underwriter the difference between the
     sales charge actually paid and the sales charge which would have been
     paid if the total of such purchases had been made at a single time.
     The dealer assigned to the account at the end of the period will
     receive an appropriate commission adjustment. If the difference is not
     paid by the close of the Statement period, the appropriate number of
     shares held in escrow will be redeemed to pay such difference. If the
     proceeds from this redemption are inadequate, the purchaser will be
     liable to the Principal Underwriter for the balance still outstanding.

     The Statement may be revised upward at any time during the 13-month period,
     and such a revision will be treated as a new Statement, except that the
     13-month period during which the purchase must be made will remain
     unchanged. Accordingly, upon your


                  The Tax-Exempt Fund of California - Page 33

<PAGE>


     request, the sales charge paid on investments made 90 days prior to the
     Statement revision will be adjusted to reflect the revised Statement.

     Existing holdings eligible for rights of accumulation (see below),
     including Class A shares held in a fee-based arrangement, other classes of
     shares of the American Funds, and any individual investments in American
     Legacy variable annuities and variable life insurance policies (American
     Legacy, American Legacy II and American Legacy III variable annuities,
     American Legacy Life, American Legacy Variable Life, and American Legacy
     Estate Builder) may be credited toward satisfying the Statement.

     During the Statement period reinvested dividends and capital gain
     distributions, investments in money market funds, and investments made
     under a right of reinstatement will not be credited toward satisfying the
     Statement. The Statement will be considered completed if the shareholder
     dies within the 13-month Statement period. Commissions will not be adjusted
     or paid on the difference between the Statement amount and the amount
     actually invested before the shareholder's death.

     When the trustees of certain retirement plans purchase shares by payroll
     deduction, the sales charge for the investments made during the 13-month
     period will be handled as follows: the regular monthly payroll deduction
     investment will be multiplied by 13 and then multiplied by 1.5. The current
     value of existing American Funds investments (other than money market fund
     investments) and any rollovers or transfers reasonably anticipated to be
     invested in non-money market American Funds during the 13-month period, and
     any individual investments in American Legacy variable annuities and
     variable life insurance policies are added to the figure determined above.
     The sum is the Statement amount and applicable breakpoint level. On the
     first investment and all other investments made pursuant to the Statement,
     a sales charge will be assessed according to the sales charge breakpoint
     thus determined. There will be no retroactive adjustments in sales charges
     on investments made during the 13-month period.

     Shareholders purchasing shares at a reduced sales charge under a Statement
     indicate their acceptance of these terms with their first purchase.

     AGGREGATION - Sales charge discounts are available for certain aggregated
     investments. Qualifying investments include those made by you and your
     immediate family (your spouse and your children under the age of 21), if
     all parties are purchasing shares for their own accounts and/or:

     .    individual-type employee benefit plan(s), such as an IRA, 403(b) plan
          (see exception below), or single-participant Keogh-type plan;

     .    business accounts solely controlled by you or your immediate family
          (for example, you own the entire business);

     .    trust accounts established by you or your immediate family.  However,
          if the person(s) who established the trust is deceased, the trust
          account may be aggregated with accounts of the person who is the
          primary beneficiary of the trust; or

     .    endowments or foundations established and controlled by you or your
          immediate family.


                  The Tax-Exempt Fund of California - Page 34

<PAGE>


     Individual purchases by a trustee(s) or other fiduciary(ies) may also be
     aggregated if the investments are:

     .    for a single trust estate or fiduciary account, excluding
          individual-type employee benefit plans described above;

     .
          made for two or more employee benefit plans of a single employer or of
          affiliated employers as defined in the 1940 Act, again excluding
          individual-type employee benefit plans described above;

     .    for a diversified common trust fund or other diversified pooled
          account not specifically formed for the purpose of accumulating fund
          shares;

     .    for non-profit, charitable or educational organizations (or any
          employer-sponsored retirement plan for such an endowment or
          foundation) or any endowments or foundations established and
          controlled by the organization; or

     .    for participant accounts of a 403(b) plan that is treated as an
          employer-sponsored plan (see "Class A Purchases Not Subject to Sales
          Charges" above), or made for two or more 403(b) plans that are treated
          as employer-sponsored plans of a single employer or affiliated
          employers as defined in the 1940 Act.

     Purchases made for nominee or street name accounts (securities held in the
     name of an investment dealer or another nominee such as a bank trust
     department instead of the customer) may not be aggregated with those made
     for other accounts and may not be aggregated with other nominee or street
     name accounts unless otherwise qualified as described above.

     CONCURRENT PURCHASES - You may combine purchases of all classes of shares
     of two or more funds in The American Funds Group, as well as individual
     holdings in American Legacy variable annuities and variable life insurance
     policies.  Shares of money market funds purchased through an exchange,
     reinvestment or cross-reinvestment from a fund having a sales charge also
     qualify. However, direct purchases of the money market funds are excluded.

     RIGHTS OF ACCUMULATION - You may take into account the current value (or if
     greater, the amount you invested less any withdrawals) of your existing
     holdings in all share classes of The American Funds Group, as well as your
     holdings in Endowments (shares of which may be owned only by tax-exempt
     organizations), to determine your sales charge on investments in accounts
     eligible to be aggregated, or when making a gift to an individual or
     charity. When determining your sales charge, you may also take into account
     the value of your individual holdings, as of the end of the week prior to
     your investment, in various American Legacy variable annuities and variable
     life insurance policies. Direct purchases of the money market funds are
     excluded.

CDSC WAIVERS FOR CLASS A AND C SHARES -  Any CDSC on Class A and C shares may be
waived in the following cases:


(1)  Exchanges (except if shares acquired by exchange are then redeemed within
12 months of the initial purchase).


                  The Tax-Exempt Fund of California - Page 35

<PAGE>


(2)  Distributions from 403(b) plans or IRAs due to death, post-purchase
disability or attainment of age 59-1/2.

(3)  Tax-free returns of excess contributions to IRAs.

(4)  Redemptions through systematic withdrawal plans (see "Automatic
Withdrawals" below), not exceeding 12% each year of the lesser of the original
purchase cost or the current market value of the shares being sold that would
otherwise be subject to a CDSC.

CDSC WAIVERS FOR CLASS B SHARES - Any CDSC on Class B shares may be waived in
the following cases:


(1)  Redemptions through systematic withdrawal plans ("SWPs") (see "Automatic
Withdrawals" below) not exceeding 12% each year of the lesser of the original
purchase cost or the current market value of the shares being sold that would
otherwise be subject to a CDSC. Shares not subject to a CDSC (such as shares
representing reinvestment of distributions) will be redeemed first and will
count toward the 12% limitation.  If there are insufficient shares not subject
to a CDSC, shares subject to the lowest CDSC will be redeemed next until the 12%
limit is reached.

The 12% fee from CDSC limit is calculated on a pro rata basis at the time the
first payment is made and is recalculated thereafter on a pro rata basis at the
time of each SWP payment.  Shareholders who establish a SWP should be aware that
the amount of that payment not subject to a CDSC may vary over time depending on
fluctuations in net asset value of their account.  This privilege may be revised
or terminated at any time.


(2)  Required minimum distributions taken from retirement accounts upon the
attainment of age 70-1/2.

(3)  Distributions due to death or post-purchase disability of a shareholder. In
the case of joint tenant accounts, if one joint tenant dies, the surviving joint
tenant(s), at the time they notify the Transfer Agent of the decedent's death
and remove his/her name from the account, may redeem shares from the account
without incurring a CDSC. Redemptions subsequent to the notification to the
Transfer Agent of the death of one of the joint owners will be subject to a
CDSC.

                 INDIVIDUAL RETIREMENT ACCOUNT (IRA) ROLLOVERS

Assets from a retirement plan (plan assets) may be invested in any class of
shares of the American Funds (except as described below) through an IRA
rollover plan. All such rollover investments will be subject to the terms
and conditions for Class A, B, C and F shares contained in the fund's
current prospectus and statement of additional information. An IRA rollover
involving plan assets that offered an investment option managed by any
affiliate of The Capital Group Companies, Inc., including any of the
American Funds, may be invested in Class A shares at net asset value and
will not be subject to a contingent deferred sales charge.  Dealers who
initiate and are responsible for such investments will be compensated
pursuant to the schedule applicable to Class A share investments of
$1 million or more (see "Dealers Commissions and Compensation" above).



                  The Tax-Exempt Fund of California - Page 36

<PAGE>


                                PRICE OF SHARES

Shares are purchased at the offering price next determined after the purchase
order is received and accepted by the fund or the Transfer Agent; this offering
price is effective for orders received prior to the time of determination of the
net asset value and, in the case of orders placed with dealers, accepted by the
Principal Underwriter, the Transfer Agent or either of their designees. In the
case of orders sent directly to the fund or the Transfer Agent, an investment
dealer MUST be indicated. The dealer is responsible for promptly transmitting
purchase orders to the Principal Underwriter.


Orders received by the investment dealer, the Transfer Agent, or the fund after
the time of the determination of the net asset value will be entered at the next
calculated offering price. Prices which appear in the newspaper do not always
indicate prices at which you will be purchasing and redeeming shares of the
fund, since such prices generally reflect the previous day's closing price
whereas purchases and redemptions are made at the next calculated price. The
price you pay for shares, the offering price, is based on the net asset value
per share which is calculated once daily as of approximately 4:00 p.m. New York
time, which is the normal close of trading on the New York Stock Exchange each
day the Exchange is open. If, for example, the Exchange closes at 1:00 p.m., the
fund's share price would still be determined as of 4:00 p.m. New York time. The
New York Stock Exchange is currently closed on weekends and on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas
Day.


All portfolio securities of funds managed by Capital Research and Management
Company (other than money market funds) are valued, and the net asset value per
share is determined as follows:


1.    Equity securities, including depositary receipts, are valued at the last
reported sale price on the exchange or market on which such securities are
traded, as of the close of business on the day the securities are being valued
or, lacking any sales, at the last available bid price. In cases where equity
securities are traded on more than one exchange, the securities are valued on
the exchange or market determined by the Investment Adviser to be the broadest
and most representative market, which may be either a securities exchange or the
over-the-counter market. Fixed-income securities are valued at prices obtained
from a pricing service, when such prices are available; however, in
circumstances where the Investment Adviser deems it appropriate to do so, such
securities will be valued at the mean quoted bid and asked prices or at prices
for securities of comparable maturity, quality and type.

Short-term securities maturing within 60 days are valued at amortized cost which
approximates market value.


Assets or liabilities initially expressed in terms of non-U.S. currencies are
translated prior to the next determination of the net asset value of the fund's
shares into U.S. dollars at the prevailing market rates.


Securities and assets for which representative market quotations are not readily
available are valued at fair value as determined in good faith under policies
approved by the fund's Board. The fair value of all other assets is added to the
value of securities to arrive at the total assets;


2.   Liabilities, including accruals of taxes and other expense items, are
deducted from total assets; and


                  The Tax-Exempt Fund of California - Page 37

<PAGE>


3.   Net assets so obtained are then divided by the total number of shares
outstanding, and the result, rounded to the nearer cent, is the net asset value
per share.

Any purchase order may be rejected by the Principal Underwriter or by the fund.
The Principal Underwriter will not knowingly sell shares of the fund directly or
indirectly to any person or entity, where, after the sale, such person or entity
would own beneficially directly or indirectly more than 4.5% of the outstanding
shares of the fund without the consent of a majority of the fund's Board of
Trustees.


                                 SELLING SHARES

Shares are sold at the net asset value next determined after your request is
received in good order by the Transfer Agent. Sales of certain Class A, B and C
shares may be subject to a CDSC.  Generally, Class F shares may only be sold
through fee-based programs of investment firms and registered investment
advisers with special agreements with the fund's distributor.


You may sell (redeem) other classes of shares in your account in any of the
following ways:


     THROUGH YOUR DEALER (certain charges may apply)

     -     Shares held for you in your dealer's street name must be sold through
           the dealer.

     WRITING TO AMERICAN FUNDS SERVICE COMPANY

     -     Requests must be signed by the registered shareholder(s).

     -     A signature guarantee is required if the redemption is:

          -  Over $50,000;

          -  Made payable to someone other than the registered shareholder(s);
          or

          -  Sent to an address other than the address of record, or an address
            of record which has been changed within the last 10 days.

          Your signature may be guaranteed by a domestic stock exchange or the
          National Association of Securities Dealers, Inc., bank, savings
          association or credit union that is an eligible guarantor institution.
          The Transfer Agent reserves the right to require a signature guarantee
          on any redemptions.


     -    Additional documentation may be required for sales of shares held in
          corporate, partnership or fiduciary accounts.

     -   You must include any shares you wish to sell that are in certificate
         form.

     TELEPHONING OR FAXING AMERICAN FUNDS SERVICE COMPANY, OR BY USING AMERICAN
     FUNDSLINE/(R)/ OR AMERICAN FUNDSLINE ONLINE/(R)/

     -    Redemptions by telephone or fax (including American FundsLine/(R)/ and
          American FundsLine OnLine/(R)/) are limited to $50,000 per shareholder
          each day.


                  The Tax-Exempt Fund of California - Page 38

<PAGE>


     -     Checks must be made payable to the registered shareholder(s).

     -    Checks must be mailed to an address of record that has been used with
          the account for at least 10 days.

     MONEY MARKET FUNDS

     -  You may have redemptions of $1,000 or more wired to your bank by
          writing American Funds Service Company.

     -   You may establish check writing privileges (use the money market funds
          application).

          -  If you request check writing privileges, you will be provided with
            checks that you may use to draw against your account. These checks
            may be made payable to anyone you designate and must be signed by
            the authorized number of registered shareholders exactly as
            indicated on your checking account signature card.

          -  Check writing is not available for Class B, C or F shares of The
            Cash Management Trust.

If you sell Class A, B or C shares and request a specific dollar amount to be
sold, we will sell sufficient shares so that the sale proceeds, after deducting
any applicable CDSC, equals the dollar amount requested.


Redemption proceeds will not be mailed until sufficient time has passed to
provide reasonable assurance that checks or drafts (including certified or
cashier's checks) for shares purchased have cleared (which may take up to 15
calendar days from the purchase date). Except for delays relating to clearance
of checks for share purchases or in extraordinary circumstances (and as
permissible under the 1940 Act), sale proceeds will be paid on or before the
seventh day following receipt and acceptance of an order. Interest will not
accrue or be paid on amounts that represent uncashed distribution or redemption
checks.


You may reinvest proceeds from a redemption or a dividend or capital gain
distribution of Class A, B, C or F shares without a sales charge in the Class A
shares of any fund in The American Funds Group within 90 days after the date of
the redemption or distribution (any CDSC on Class A or C shares will be credited
to your account). In addition, proceeds from a redemption or a dividend or
capital gain distribution of Class C shares may be reinvested in Class C shares.
Redemption proceeds of shares representing direct purchases in the money market
funds that are reinvested in non-money market funds will be subject to a sales
charge. Proceeds will be reinvested at the next calculated net asset value after
your request is received and accepted by the Transfer Agent.


                  SHAREHOLDER ACCOUNT SERVICES AND PRIVILEGES

The following services and privileges are generally available to all
shareholders.  However, certain services and privileges may not be available if
your account is held with an investment dealer.


                  The Tax-Exempt Fund of California - Page 39

<PAGE>


AUTOMATIC INVESTMENT PLAN - An automatic investment plan enables you to make
monthly or quarterly investments in The American Funds through automatic debits
from your bank account. To set up a plan you must fill out an account
application and specify the amount you would like to invest ($50 minimum) and
the date on which you would like your investments to occur. The plan will begin
within 30 days after your account application is received. Your bank account
will be debited on the day or a few days before your investment is made,
depending on the bank's capabilities. The Transfer Agent will then invest your
money into the fund you specified on or around the date you specified.  For
example, if the date you specified falls on a weekend or holiday, your money
will be invested on the next business day.  If your bank account cannot be
debited due to insufficient funds, a stop-payment or the closing of the account,
the plan may be terminated and the related investment reversed. You may change
the amount of the investment or discontinue the plan at any time by writing to
the Transfer Agent.


AUTOMATIC REINVESTMENT - Dividends and capital gain distributions are reinvested
in additional shares of the same class and fund at net asset value unless you
indicate otherwise on the account application. You also may elect to have
dividends and/or capital gain distributions paid in cash by informing the fund,
the Transfer Agent or your investment dealer.


If you have elected to receive dividends and/or capital gain distributions in
cash, and the postal or other delivery service is unable to deliver checks to
your address of record, or you do not respond to mailings from American Funds
Service Company with regard to uncashed distribution checks, your distribution
option will automatically be converted to having all dividends and other
distributions reinvested in additional shares.


CROSS-REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS - You may cross-reinvest
dividends and capital gains ("distributions") of the same share class into any
other fund in The American Funds Group at net asset value, subject to the
following conditions:


(a)  The aggregate value of your account(s) in the fund(s) paying distributions
equals or exceeds $5,000 (this is waived if the value of the account in the fund
receiving the distributions equals or exceeds that fund's minimum initial
investment requirement),

(b)  If the value of the account of the fund receiving distributions is below
the minimum initial investment requirement, distributions must be automatically
reinvested,

(c)  If you discontinue the cross-reinvestment of distributions, the value of
the account of the fund receiving distributions must equal or exceed the minimum
initial investment requirement. If you do not meet this requirement within 90
days of notification, the fund has the right to automatically redeem the
account.

EXCHANGE PRIVILEGE - You may only exchange shares into other funds in The
American Funds Group within the same class. However, exchanges from Class A
shares of The Cash Management Trust of America may be made to Class B or C
shares of any other American Fund for dollar cost averaging purposes. Exchange
purchases are subject to the minimum investment requirements of the fund
purchased and no sales charge generally applies. However, exchanges of shares
from the money market funds are subject to applicable sales charges on the fund
being purchased, unless the money market fund shares were acquired by an
exchange from a fund having a sales charge, or by reinvestment or
cross-reinvestment of dividends or capital gain distributions.


                  The Tax-Exempt Fund of California - Page 40

<PAGE>


Exchanges of Class F shares generally may only be done through fee-based
programs of investment firms and registered investment advisers with special
agreements with the fund's distributor. You may exchange shares of other classes
by writing to the Transfer Agent (see "Selling Shares"), by contacting your
investment dealer, by using American FundsLine and American FundsLine OnLine
(see "American FundsLine and American FundsLine OnLine" below), or by
telephoning 800/421-0180 toll-free, faxing (see "American Funds Service Company
Service Areas" -- "Principal Underwriter and Transfer Agent" in the prospectus
for the appropriate fax numbers) or telegraphing the Transfer Agent. (See
"Telephone and Computer Purchases, Redemptions and Exchanges" below.) Shares
held in corporate-type retirement plans for which Capital Bank and Trust Company
serves as trustee may not be exchanged by telephone, computer, fax or telegraph.
Exchange redemptions and purchases are processed simultaneously at the share
prices next determined after the exchange order is received. (See "Purchase of
Shares"--"Price of Shares.") THESE TRANSACTIONS HAVE THE SAME TAX CONSEQUENCES
AS ORDINARY SALES AND PURCHASES.


AUTOMATIC EXCHANGES - You may automatically exchange shares of the same class in
amounts of $50 or more among any of the funds in The American Funds Group on any
day (or preceding business day if the day falls on a non-business day) of each
month you designate.


AUTOMATIC WITHDRAWALS - Withdrawal payments are not to be considered as
dividends, yield or income. Automatic investments may not be made into a
shareholder account from which there are automatic withdrawals. Withdrawals of
amounts exceeding reinvested dividends and distributions and increases in share
value would reduce the aggregate value of the shareholder's account. The
Transfer Agent arranges for the redemption by the fund of sufficient shares,
deposited by the shareholder with the Transfer Agent, to provide the withdrawal
payment specified.


ACCOUNT STATEMENTS - Your account is opened in accordance with your registration
instructions. Transactions in the account, such as additional investments will
be reflected on regular confirmation statements from the Transfer Agent.
Dividend and capital gain reinvestments, purchases through automatic investment
plans and certain retirement plans, as well as automatic exchanges and
withdrawals will be confirmed at least quarterly.


AMERICAN FUNDSLINE AND AMERICAN FUNDSLINE ONLINE - You may check your share
balance, the price of your shares, or your most recent account transaction,
redeem shares (up to $50,000 per shareholder each day) from non-retirement plan
accounts, or exchange shares around the clock with American FundsLine and
American FundsLine OnLine. To use these services, call 800/325-3590 from a
TouchTone(TM) telephone or access the American Funds Web site on the Internet at
www.americanfunds.com. Redemptions and exchanges through American FundsLine and
American FundsLine OnLine are subject to the conditions noted above and in
"Telephone and Computer Purchases, Redemptions and Exchanges" below. You will
need your fund number (see the list of funds in The American Funds Group under
"Purchase of Shares - Purchase Minimums" and "Purchase of Shares - Fund
Numbers"), personal identification number (generally the last four digits of
your Social Security number or other tax identification number associated with
your account) and account number.


TELEPHONE AND COMPUTER PURCHASES, REDEMPTIONS AND EXCHANGES - By using the
telephone (including American FundsLine) or computer (including American
FundsLine OnLine), fax or telegraph purchase, redemption and/or exchange
options, you agree to hold the fund, the Transfer Agent, any of its affiliates
or mutual funds managed by such affiliates, and each of their


                  The Tax-Exempt Fund of California - Page 41

<PAGE>


respective directors, trustees, officers, employees and agents harmless from any
losses, expenses, costs or liability (including attorney fees) which may be
incurred in connection with the exercise of these privileges. Generally, all
shareholders are automatically eligible to use these options. However, you may
elect to opt out of these options by writing the Transfer Agent (you may also
reinstate them at any time by writing the Transfer Agent). If the Transfer Agent
does not employ reasonable procedures to confirm that the instructions received
from any person with appropriate account information are genuine, it and/or the
fund may be liable for losses due to unauthorized or fraudulent instructions. In
the event that shareholders are unable to reach the fund by telephone because of
technical difficulties, market conditions, or a natural disaster, redemption and
exchange requests may be made in writing only.


REDEMPTION OF SHARES - The fund's Declaration of Trust permits the fund to
direct the Transfer Agent to redeem the shares of any shareholder for their then
current net asset value per share if at such time the shareholder of record owns
shares having an aggregate net asset value of less than the minimum initial
investment amount required of new shareholders as set forth in the fund's
current registration statement under the 1940 Act, and subject to such further
terms and conditions as the Board of Trustees of the fund may from time to time
adopt.


SHARE CERTIFICATES - Shares are credited to your account and certificates are
not issued unless you request them by writing to the Transfer Agent.


                      EXECUTION OF PORTFOLIO TRANSACTIONS

The Investment Adviser places orders for the fund's portfolio securities
transactions. The Investment Adviser strives to obtain the best available prices
in its portfolio transactions taking into account the costs and quality of
executions. When, in the opinion of the Investment Adviser, two or more brokers
(either directly or through their correspondent clearing agents) are in a
position to obtain the best price and execution, preference may be given to
brokers who have sold shares of the fund or who have provided investment
research, statistical, or other related services to the Investment Adviser. The
fund does not consider that it has an obligation to obtain the lowest available
commission rate to the exclusion of price, service and qualitative
considerations.


There are occasions on which portfolio transactions for the fund may be executed
as part of concurrent authorizations to purchase or sell the same security for
other funds served by the Investment Adviser, or for trusts or other accounts
served by affiliated companies of the Investment Adviser. Although such
concurrent authorizations potentially could be either advantageous or
disadvantageous to the fund, they are effected only when the Investment Adviser
believes that to do so is in the interest of the fund. When such concurrent
authorizations occur, the objective is to allocate the executions in an
equitable manner. The fund will not pay a mark-up for research in principal
transactions.


Brokerage commissions paid on portfolio transactions, including dealer
concessions on underwritings, for the fiscal years ended August 31, 2000, 1999
and 1998, amounted to $182,000, $318,000 and $358,000, respectively,
respectively.


                  The Tax-Exempt Fund of California - Page 42

<PAGE>


                              GENERAL INFORMATION

CUSTODIAN OF ASSETS - Securities and cash owned by the fund, including proceeds
from the sale of shares of the fund and of securities in the fund's portfolio,
are held by The Chase Manhattan Bank, One Chase Manhattan Plaza, New York, NY
10081, as Custodian. If the fund holds non-U.S. securities, the Custodian may
hold these securities pursuant to sub-custodial arrangements in non-U.S. banks
or non-U.S. branches of U.S. banks.


TRANSFER AGENT - American Funds Service Company, a wholly owned subsidiary of
the Investment Adviser, maintains the records of each shareholder's account,
processes purchases and redemptions of the fund's shares, acts as dividend and
capital gain distribution disbursing agent, and performs other related
shareholder service functions. American Funds Service Company was paid a fee of
$97,000 for Class A shares and $47 for Class B shares for the 2000 fiscal year.


INDEPENDENT ACCOUNTANTS - Deloitte & Touche LLP, Two California Plaza, 350 South
Grand Avenue, Suite 200, Los Angeles, CA 90071, serves as the fund's independent
accountants providing audit services, preparation of tax returns and review of
certain documents to be filed with the Securities and Exchange Commission. The
financial statements included in this Statement of Additional Information from
the Annual Report have been so included in reliance on the report of Deloitte &
Touche LLP, independent accountants, given on the authority of said firm as
experts in accounting and auditing. The selection of the fund's independent
accountants is reviewed and determined annually by the Board of Trustees.


PROSPECTUSES, REPORTS TO SHAREHOLDERS AND PROXY STATEMENTS - The fund's fiscal
year ends on August 31. Shareholders are provided updated prospectuses annually
and at least semiannually with reports showing the investment portfolio,
financial statements and other information. The fund's annual financial
statements are audited by the fund's independent accountants, Deloitte & Touche
LLP. In addition, shareholders may also receive proxy statements for the fund.
In an effort to reduce the volume of mail shareholders receive from the fund
when a household owns more than one account, the Transfer Agent has taken steps
to eliminate duplicate mailings of prospectuses, shareholder reports and proxy
statements. To receive additional copies of a prospectus, report or proxy
statement, shareholders should contact the Transfer Agent.


SHAREHOLDER AND TRUSTEE RESPONSIBILITY - Under the laws of certain states,
including Massachusetts where the fund was organized and California where the
fund's principal office is located, shareholders of a Massachusetts business
trust may, under certain circumstances, be held personally liable as partners
for the obligations of the fund. However, the risk of a shareholder incurring
any financial loss on account of shareholder liability is limited to
circumstances in which a fund itself would be unable to meet its obligations.
The Declaration of Trust contains an express disclaimer of shareholder liability
for acts, omissions, obligations or affairs of the fund and provides that notice
of the disclaimer may be given in each agreement, obligation, or instrument
which is entered into or executed by the fund or Trustees. The Declaration of
Trust provides for indemnification out of fund property of any shareholder held
personally liable for the obligations of the fund and also provides for the fund
to reimburse such shareholder for all legal and other expenses reasonably
incurred in connection with any such claim or liability.


                  The Tax-Exempt Fund of California - Page 43

<PAGE>


Under the Declaration of Trust, the Trustees, officers, employees or agents of
the fund are not liable for actions or failure to act; however, they are not
protected from liability by reason of their willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
their office.


PERSONAL INVESTING POLICY - The fund, Capital Research and Management Company
and its affiliated companies, including the fund's principal underwriter, have
adopted codes of ethics which allow for personal investments, including
securities in which the fund may invest from time to time. This policy includes:
a ban on acquisitions of securities pursuant to an initial public offering;
restrictions on acquisitions of private placement securities; pre-clearance and
reporting requirements; review of duplicate confirmation statements; annual
recertification of compliance with codes of ethics; blackout periods on personal
investing for certain investment personnel; ban on short-term trading profits
for investment personnel; limitations on service as a director of publicly
traded companies; and disclosure of personal securities transactions.


OTHER INFORMATION - The financial statements including the investment portfolio
and the report of Independent Accountants contained in the Annual Report are
included in this Statement of Additional Information. The following information
is not included in the Annual Report:


             DETERMINATION OF NET ASSET VALUE, REDEMPTION PRICE AND
     MAXIMUM OFFERING PRICE PER SHARE FOR CLASS A SHARES -- AUGUST 31, 2000

<TABLE>
<CAPTION>
<S>                                                               <C>
Net asset value and redemption price per share
  (Net assets divided by shares outstanding) . . . . . . . . .      $16.00
Maximum offering price per share
  (100/96.25 of net asset value per share,
  which takes into account the fund's current maximum
  sales charge). . . . . . . . . . . . . . . . . . . . . . . .      $16.62
</TABLE>


            CLASS A SHARE INVESTMENT RESULTS AND RELATED STATISTICS

The fund's yield was 4.50% based on a 30-day (or one month) period ended August
31, 2000, 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[( a-b/cd + 1)/6/ -1]

     Where:  a  = dividends and interest earned during the period.

             b  = expenses accrued for the period (net of reimbursements).

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

             d  = the maximum offering price per share on the last day of the
                  period.

The fund's one-year total return and five- and ten-year average annual total
returns at the maximum offering price for the periods ended August 31, 2000 were
2.99%, 5.13% and 6.83%,


                  The Tax-Exempt Fund of California - Page 44

<PAGE>


respectively.  The fund's one-year total return and five- and ten-year average
annual total returns at net asset value for the periods ended August 31, 2000
were 6.99%, 5.93% and 7.24%, respectively.


The average total return ("T") is computed by equating the value at the end of
the period ("ERV") with a hypothetical initial investment of $1,000 ("P") over a
period of years ("n") according to the following formula as required by the
Securities and Exchange Commission: P(1+T)/n/ = ERV.


In calculating average annual total return at the maximum offering price, the
fund assumes: (1) deduction of the maximum sales load of 3.75% from the $1,000
initial investment; (2) reinvestment of dividends and distributions at net asset
value on the reinvestment date determined by the Board; and (3) a complete
redemption at the end of any period illustrated. In addition, the fund will
provide lifetime average total return figures. From time to time, the fund may
calculate investment results for Class B, C and F shares.


The fund may also, at times, calculate total return based on net asset value per
share (rather than the offering price), in which case the figure would not
reflect the effect of any sales charges which would have been paid if shares
were purchased during the period reflected in the computation. Consequently,
total return calculated in this manner will be higher. These total returns may
be calculated over periods in addition to those described above. Total return
for the unmanaged indices will be calculated assuming reinvestment of dividends
and interest, but will not reflect any deductions for advisory fees, brokerage
costs or administrative expenses.


The fund may include information on its investment results and/or comparisons of
its investment results to various unmanaged indices (such as the Dow Jones
Average of 30 Industrial Stocks and the Standard and Poor's 500 Composite Stock
Index) or results of other mutual funds or investment or savings vehicles in
advertisements or in reports furnished to present or prospective shareholders.
The fund may also, from time to time, combine its results with those of other
funds in The American Funds Group for purposes of illustrating investment
strategies involving multiple funds.


The fund may refer to results and surveys compiled by organizations such as CDA/
Wiesenberger, Ibbotson Associates, Lipper Analytical Services, Morningstar,
Inc., and by the U.S. Department of Commerce. Additionally, the fund may refer
to results published in various newspapers and periodicals, including Barron's,
Forbes, Fortune, Institutional Investor, Kiplinger's Personal Finance Magazine,
Money, U.S. News and World Report and The Wall Street Journal.


The fund may illustrate the benefits of tax-deferral by comparing taxable
investments to investments made through tax-deferred retirement plans.


The fund may compare its investment results with the Consumer Price Index, which
is a measure of the average change in prices over time in a fixed market basket
of goods and services (e.g. food, clothing, and fuels, transportation, and other
goods and services that people buy for day-to-day living).


The fund may also calculate a tax equivalent yield based on a 30-day (or one
month) period ended no later than the date of the most recent balance sheet
included in the registration statement, computed by dividing that portion of the
yield (as computed by the formula stated above) which is tax-exempt by one minus
a stated income tax rate and adding the product to that


                  The Tax-Exempt Fund of California - Page 45

<PAGE>


portion, if any, of the yield that is not tax-exempt. The fund's tax-equivalent
yield based on the maximum combined effective federal/state tax rate of 45.2%
for the 30-day (or one month) period ended August 31, 2000 was 8.21%.


                  The Tax-Exempt Fund of California - Page 46

<PAGE>




                                    APPENDIX
                          Description of Bond Ratings

BOND RATINGS - The ratings of Moody's Investors Service, Inc. (Moody's) and
Standard & Poor's Corporation (S&P) represent their opinions as to the quality
of the municipal bonds which they undertake to rate.  It should be emphasized,
however, that ratings are general and are not absolute standards of quality.
 Consequently, municipal bonds with the same maturity, coupon and rating may
have different yields, while municipal bonds of the same maturity and coupon
with different ratings may have the same yield.


Moody's rates the long-term debt securities issued by various entities from
-------
"Aaa" to "C."  Moody's applies the numerical modifiers 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate bond rating
system.  The modifier 1 indicates that the security ranks in the higher end of
its generic rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.  Ratings are described as follows:


"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 edge.'
 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."


"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 risks appear somewhat larger than the Aaa
securities."


"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."


"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."


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


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


                  The Tax-Exempt Fund of California - Page 47

<PAGE>


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


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


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


S & P rates the long-term securities debt of various entities in categories
-----
ranging from "AAA" to "D" according to quality.  The ratings from "AA" to "CCC"
may be modified by the addition of a plus (+) or minus (-) sign to show relative
standing within the major rating categories.  Ratings are described as follows:


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


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


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


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


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


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


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


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


"The rating 'C1' is reserved for income bonds on which no interest is being
paid."


                  The Tax-Exempt Fund of California - Page 48

<PAGE>


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


                  The Tax-Exempt Fund of California - Page 49

<TABLE>
The Tax-Exempt Fund of California
Investment Portfolio, August 31, 2000

<S>                                                                             <C>         <C>
                                                                                  Principal       Market
                                                                                     Amount        Value
                                                                                       (000)        (000)
                                                                                   --------     --------

Tax-Exempt Securities Maturing in More Than
One Year - 91.44%
G.O. Bonds, 5.375% 2014                                                                1,200        1,259
G.O. Ref. Bonds:
 0% 2007                                                                               3,500        2,624
 5.25% 2009                                                                            3,000        3,223
 5.25% 2013                                                                            2,250        2,376
 5.25% 2017                                                                            1,000        1,014
 FGIC Insured, 4.75%  2016                                                             2,900        2,788

Educational Facs. Auth., Rev. Bonds:
 California Institute of Technology, Series                                            5,000        4,314
1998, 4.50% 2027
 University of San Francisco, Series 1996, MBIA                                        1,190        1,318
Insured, 5.70% 2011
 Stanford University, Series N, 5.20% 2027                                             3,000        2,922

Health Facs. Fncg. Auth., Hospital Rev. Bonds:
 Catholic Healthcare West, 1998 Series A:
  5.00% 2006                                                                           1,500        1,451
  5.00% 2007                                                                           1,000          957
  5.25% 2008                                                                           1,750        1,684
 Downey Community Hospital, Series 1993:
  5.20% 2003                                                                           1,000        1,006
  5.625% 2008                                                                          3,000        3,029
  5.75% 2015                                                                           4,900        4,709
 Little Co. of Mary Health Services, Series 1998,
AMBAC Insured:
  5.00% 2010                                                                           2,170        2,269
  5.00% 2013                                                                           1,125        1,146
 Pacific Presbyterian Medical Center, 1985 Series B,                                   3,570        3,708
INDLC Insured, 6.75% 2015 (Preref. 2002)
Housing Fin. Agcy.:
 Single Family Mortgage Bonds:
  1995 Issue B-2 AMT, AMBAC Insured, 5.70% 2007                                        2,060        2,071
  1997 Series B-3 AMT, MBIA Insured, 5.10% 2012                                          810          802
 Single Family Mortgage Rev. Bonds:
  1997 Series C-1, Class 111, MBIA Insured, 5.05% 2011                                 1,585        1,586
  1998 Series C-4, Class I, 4.90% 2004                                                 2,265        2,321

Pollution Control Fncg. Auth.:
 Pollution Control Rev. Bonds:
  Pacific Gas and Electric Co., 1992 Series B                                          2,800        2,954
AMT, 6.35% 2009
  San Diego Gas and Electric Co., 1996 Series A,                                       5,000        5,461
 5.90% 2014
 Resource Recovery Rev. Bonds, Waste Management Inc.                                   1,500        1,530
Guarantee Bond, Series A AMT, 7.15% 2011
 Solid Waste Disposal Rev. Bonds:
  (CanFibre of Riverside Project), Series 1997A                                        1,000          915
AMT, 9.00% 2019
  (USA Waste Services, Inc. Project), Series 1998A                                     2,000        1,843
AMT, 5.10% 2018 (Put 2008)
Public Works Board:
 Lease Rev. Bonds, Dept. of Corrections, Various

State Prisons:
  Imperial County, 1991 Series A, AMBAC Insured, 6.50% 2017                            1,000        1,148
  Lassen County (Susanville), 1993 Series D, FSA Insured,                              2,000        2,082
5.25% 2015
 Lease Rev. Ref. Bonds:
  Dept. of Corrections, 1998 Series C (State                                           2,000        2,126
Prison-Monterey County), 5.25% 2007
  1998 Series A (Library and Courts Annex Building                                     1,500        1,628
Complex), 5.50% 2010
  Various State Prisons, Series 1993A, AMBAC                                           1,000        1,058
Insured, 5.25% 2013

Rural Home Mortgage Fin. Auth., Single Family Mortgage
Rev. Bonds(Mortgage-Backed Securities Program):
  1995 Series B AMT, 7.75% 2026                                                        1,405        1,496
  1996 Series A AMT, 7.75% 2027                                                          830          900

Statewide Communities Dev. Auth.:
 Apartment Dev. Rev. Ref. Bonds (Irvine Apartment
Communities, LP):
  Series 1998A-1 AMT, 5.05% 2025 (Put 2008)                                            5,300        5,236
  Series 1998A-3, 5.10% 2025 (Put 2010)                                                5,000        4,947
  Series 1998A-4, 5.25% 2025 (Put 2013)                                                3,000        2,935
 Hospital Rev. Cert. of  Part., Cedars-Sinai Medical                                   5,900        6,539
Center, Series 1992, 6.50% 2012
 Citrus Valley Health Partners, Inc., Cert. of Part.,                                  1,000        1,072
 MBIA Insured, 5.50% 2011
The Internext Group, Cert. of Part.:
  5.375% 2017                                                                          5,000        4,615
  5.375% 2030                                                                          2,000        1,748
Veterans G.O. Bonds, Series BG, 4.95% 2010                                             1,000        1,035
Dept. of Water Resources, Central Valley Project, Water                                2,000        1,911
System Rev. Bonds,  Series O, 5.00% 2022
Alameda Corridor Transportation Auth., Tax-Exempt Senior                               3,500        3,503
Lien Rev. Bonds, Series 1999A, MBIA Insured, 5.125% 2018
Alta Loma School District, San Bernardino County, G.O.                                 2,500          796
Bonds, Series A 1999 Election, FGIC Insured,  0% 2021
Anaheim Public Fncg. Auth., Lease Rev. Bonds (Anaheim
Public Improvement Project),
 Senior Lease Rev. Bonds, FSA Insured:
  1997 Series A, 6.00% 2024                                                            1,500        1,647
  1997 Series C, Capital Appreciation Bonds, 0% 2018                                   3,900        1,488
  1997 Series C, 0% 2022                                                               5,500        1,641
City of Antioch, Public Fncg. Auth., 1998 Reassessment                                 1,360        1,409

Rev. Bonds, Subordinated Series B, AMBAC Insured, 5.70% 2010
Association of Bay Area Governments:
Fin. Auth. for Nonprofit Corps., Cert. of Part.:
  Episcopal Homes Foundation, Series 1997A, 5.25% 2007                                 2,275        2,154
  Stanford University Hospital, Series 1993:
   5.75% 2005                                                                          1,240        1,338
   5.50% 2013 (Preref. 2005)                                                           1,500        1,599
 Fin. Auth., Taxable Rev. Ref. Cert. of Part. (American                                3,000        2,680
Baptist Homes of the West Facs. Project), Series 1997B,
6.20% 2027
 Ref. Rev. Cert. of Part.:
  American Baptist Homes Foundation, Series 1998A,                                     5,985        5,430
6.10% 2017
  Episcopal Homes Foundation, Series 1998, 5.00% 2009                                  4,600        4,546
Berkeley Unified School District, Alameda County,                                      1,540        1,519
1992 G.O. Bonds, Series G, FGIC Insured, 5.00% 2018
Redev. Agcy. of the City of Burbank (Golden State
Redev. Project),
 Tax Allocation Bonds, 1993 Series A:
  6.00% 2013                                                                           1,500        1,571
  6.00% 2023                                                                           1,000        1,025
  6.25% 2024                                                                           1,475        1,533
Cabrillo Community College Dist., Santa Cruz County,                                   1,500          654
Election of 1998 G.O. Bonds, Series B, FGIC Insured, 0% 2016
Capistrano Unified School Dist.:
 Cert. of Part., Series 1997, 5.20% 2018                                                 990          985
 Community Fac. Dist. Special Tax, 5.75% 2029                                          1,750        1,639
Central Valley Fncg. Auth., Cogeneration Project
Rev. Ref. Bonds
 (Carson Ice-Gen Project):
  Series 1993:
   6.00% 2009                                                                          1,000        1,039
   6.10% 2013 (Preref. 2003)                                                           1,000        1,072
   6.20% 2020 (Preref. 2003)                                                           1,500        1,612
  Series 1998, MBIA Insured, 5.00% 2018                                                2,000        1,969
Central Valley School Districts Fncg. Auth. (School Dist.                              1,000        1,148
G.O. Bond Ref. Program), 1998 Rev. Bonds, Series A,
MBIA Insured, 6.25% 2011
City of Chino Hills, Community Fac.:
 Dist. No. 9 (Rincon Village Area), Special Tax Bonds,                                   995        1,032
Series 1998, 6.45% 2023
 Dist. No. 10 (Fairfield Ranch), Special Tax Bonds,                                    2,000        2,074
 6.95% 2030
City of Commerce, Community Dev. Commission, Redev. Project                            1,000        1,029
No. 1, Subordinate Lien Tax Allocation Ref. Bonds, Series
1997 B, 5.50% 2008
City of Corona, Community Facs. Dist. No. 86-2 (Woodlake),                             2,000        1,955
1999 Special Tax Ref. Bonds, AMBAC Insured, 5.125% 2019
County of El Dorado, Community Facs. Dist. No. 1992-1 (El                                995          998
Dorado Hills Dev.), Series 1999 Special Tax Bonds,
 6.125% 2016
City of Folsom, Community Facs. Dist. No. 10, Special Tax
Bonds, Series 1999:
 6.20% 2011                                                                            1,475        1,540
 7.00% 2024                                                                            1,000        1,062
City of Fontana, Community Facs. Dist. No. 12 (Sierra                                  1,105        1,150
Lakes), Special Tax Bonds, Series 1999, 6.50% 2015
Foothill/Eastern Transportation Corridor Agcy., Toll                                   1,000        1,125
Road Rev. Bonds, Series 1995A, 6.00% 2016 (Preref. 2010)
Foothill-De Anza Community College Dist., Santa Clara
County, Election of 1999 G.O. Bonds, Series A, MBIA Insured:
 0% 2017                                                                               3,000        1,225
 0% 2019                                                                               5,555        1,992
Golden West Schools Fncg. Auth., 1999 Rev. Bonds (School                               2,750        1,052
Dist. G.O. Bonds Ref. Program), Series A, MBIA
Insured, 0% 2018
Imperial Irrigation Dist., 1998 Electric System Ref.                                   2,000        1,968
Rev. Bonds, MBIA Insured, 5.00% 2018
City of Irvine:
 Assessment Dist. No. 94-13 (Oak Creek), Limited Obligation
  Improvement Bonds:
   Group One, 5.50% 2022                                                               1,000          927
   Group Two, 5.875% 2017                                                              1,000        1,003
 Assessment Dist. No. 95-12, Limited Obligation Improvement                            1,400        1,305
Bonds, Group Three, 5.50% 2021
City of Long Beach:
 Fncg. Auth. Rev. Bonds, Series 1992, AMBAC Insured,                                     750          832
6.00% 2017
 Harbor Rev. Bonds, Series 1993 AMT, 5.125% 2018                                       1,000          967
City of Los Angeles:
 Community Redev. Agcy., Central Business Dist. Redev.                                 2,000        2,012
Project, Tax Allocation Ref. Bonds, Series I, 5.00% 2001
 Harbor Dept. Rev. Bonds:
  Issue 1988, 7.60% 2018                                                               1,750        2,200
  Issue 1995, Series B AMT, 6.625% 2025                                                1,000        1,053
  Issue 1996 AMT, 5.50% 2007                                                           3,675        3,911
 Multi-family Housing Rev. Bonds (GNMA Collateralized -                                2,005        2,024
Ridgecroft Apartments Project), Series 1997E
AMT, 6.125% 2027
 State Building Auth., Lease Rev. Bonds (Dept. of General                              1,000        1,036
Services Lease), Series 1999A, 5.40% 2015
County of Los Angeles, Capital Asset Leasing Corp.,
Cert. of Part.
 (Marina del Rey), 1993 Series A:
  6.25% 2003                                                                           1,675        1,722
  6.50% 2008                                                                           6,000        6,366
Los Angeles Unified School Dist., G.O. Bonds, Series                                   2,500        2,387
1998B, FGIC Insured, 5.00% 2023
The Metropolitan Water Dist. of Southern California, Water                             4,270        4,042
Rev. Bonds, Series 1997A, 5.00% 2026
Northern California Power Agcy., Geothermal
Project Number 3
 Special Rev. Bonds, 1993 Ref. Series A:
  5.60% 2006                                                                             860          906
  5.60% 2006 (Escrowed to Maturity)                                                    1,000        1,077
  5.65% 2007 (Escrowed to Maturity)                                                    1,025        1,113
Oak Park Unified School Dist., Ventura County, G.O. Bonds,                             2,300        1,058
Series 2000 Election of 1977, FSA Insured, 0% 2015
Port of Oakland, Rev. Bonds, 2000 Series K AMT, FGIC                                   2,000        2,102
Insured, 5.25% 2007
Community Facs. Dist. No. 99-1 of the County of Orange                                 1,000        1,054
(Ladera Ranch), Series A of 1999, Special Tax
Bonds, 6.70% 2029
County of Orange:
 Aliso Viejo Special Tax Bonds of Community Facs.                                      1,000        1,081
Dist. No. 88-1, Series A of 1992, 7.35% 2018 (Preref. 2002)
 Limited Obligation Improvement Bonds, Irvine Coast                                      900          896
Assessment Dist. No. 88-1, 1998 Series A, 5.25% 2009
 Local Transportation Auth., First Senior Fixed-Rate                                   1,500        1,684
Bonds, MBIA Insured, 6.00% 2009
 Recovery Cert. of Part., 1996 Series A, MBIA                                          1,500        1,678
Insured, 6.00% 2008
South Orange County Public Fncg. Auth., Special Tax Rev.                               1,600        1,717
Bonds, 1999 Series A, FSA Insured, 5.375% 2011
Orange County Water Dist., Rev. Cert. of Part.,                                        2,960        2,931
Series 1999A, 5.25% 2022
City of Oxnard, Assessment Dist. No. 97-1-R (Pacific
 Commerce Center), Limited Obligation Ref. Bonds:
  5.60% 2005                                                                           2,805        2,870
  5.70% 2006                                                                           1,165        1,200
Placer Union High School Dist., Placer County, Election of                             3,525          989
1999 G.O. Bonds, FGIC Insured, Series A, 0% 2023
Pleasanton Joint Powers Fncg. Auth., Reassessment Rev.
 Bonds, 1993 Series A:
  5.70% 2001                                                                           3,665        3,711
  6.15% 2012                                                                           1,740        1,821
City of Poway:
 Community Facs. Dist. No. 88-1 (Parkway Business Centre),
Special Tax Ref. Bonds, Series 1998:
  5.30% 2005                                                                           1,225        1,236
  6.25% 2007                                                                           2,050        2,190
  6.50% 2008                                                                           2,000        2,176
  6.50% 2009                                                                           1,320        1,443
  6.50% 2010                                                                           1,715        1,879
 Poway Unified School Dist., Community Facs. Dist. No. 1,                              1,000        1,050
Series 1998 Special Tax Bonds, MBIA Insured, 5.00% 2010
 Reassessment Dist. No. 97-1 (4-S Ranch), Limited Obligation
  Improvement Bonds:
   5.90% 2007                                                                          1,435        1,483
   5.90% 2008                                                                          1,000        1,033
City of Riverside, Electric Ref./Rev. Bonds, Series 1998,                              1,500        1,480
AMBAC Insured, 5.00% 2018
Riverside County:
 Asset Leasing Corp., Leasehold Rev. Bonds, MBIA                                       1,000          263
Insured, 0% 2024
 Public Fncg. Auth., Cert. of Part., Air Force Village                                   950          952
West, Inc., 5.40% 2009
City of Roseville:
 Highland Reserve North Community Facs. Dist. No. 1,                                   1,000        1,045
Special Tax Bonds, Series 1999, 6.00% 2011
 North Roseville Community Facs. Dist. No. 1, Special                                  1,980        1,945
Tax Bonds, Series 1998, 5.20% 2007
 Woodcreek West Community Facs. Dist. No. 1, Special
Tax Bonds, Series 1999:
  6.50% 2015                                                                           1,000        1,049
  6.70% 2025                                                                           1,750        1,833
Sacramento Cogeneration Auth., Cogeneration
Project Rev. Bonds
 (Procter & Gamble Project), 1995 Series:
 7.00% 2005                                                                            1,700        1,861
 6.375% 2010                                                                           1,600        1,717
 6.375% 2010 (Preref. 2005)                                                            1,085        1,209
 6.50% 2014 (Preref. 2005)                                                             1,000        1,120
 6.50% 2021 (Preref. 2005)                                                             4,000        4,480
Sacramento Municipal Utility Dist., Electric Rev.                                      2,500        2,696
 Bonds, 1997 Series K,  AMBAC Insured, 5.70% 2017
Sacramento Power Auth., Cogeneration Project Rev.                                      1,500        1,551
Bonds, 1995 Series, 6.00% 2003
Sacramento County Airport System Rev. Ref. Bonds,                                      3,000        2,840
Series 1998A, FGIC Insured, 5.00% 2026
County of Sacramento:
 Laguna Creek Ranch/Elliott Ranch
Community Facs. Dist. No. 1,
  Improvement Area No. 2 Special Tax
Ref. Bonds (Elliott Ranch):
   6.00% 2012                                                                            880          921
   6.10% 2013                                                                            665          696
   6.30% 2021                                                                            500          512
 Ref. Cert. of Part. (1994 Public Facs.
Project - Coroner/Crime Lab
  and Data Center), Series 1997, AMBAC Insured, 4.75% 2017                             2,500        2,394
 Single Family Mortgage Rev. Bonds (GNMA Mortgage-Backed                               1,500        2,129
Securities Program), Issue A of 1987 AMT, 9.00%
2019 (Escrowed to Maturity)
 2000 Tax and Rev. Anticipation Notes, 5.25% 2001                                      2,000        2,021
County of San Bernardino, Housing Auth.:
 Multifamily Housing Rev. Bonds (Fannie Mae Program -                                    965          990
Villa Serena Project), Series 1985, 4.95% 2007
 Multifamily Housing Rev. Ref. Bonds (Equity                                           1,000          957
Residential/Redlands Lawn & Tennis Apartments), Issue
1999A, 5.20% 2029 (Put 2009)
County of San Diego:
 Cert. of Part., Sharp Healthcare Obligated Group,                                     2,000        1,955
MBIA Insured, 5.00% 2018
San Diego Unified School Dist., 1999 G.O. Bonds (Election                              3,000        1,233
of 1998, Series A), Capital Appreciation Bonds, FGIC
Insured, 0% 2017
City and County of San Francisco:
 International Airport:
  Second Series Issue 22 Rev. Bonds, AMBAC                                             6,000        5,682
Insured,  5.00% 2019
  Second Series Issue 23B Rev. Bonds, FGIC                                             4,250        4,043
Insured,  5.00% 2024
 Port Commission Rev. Ref. Bonds, Series 1994, 5.90% 2009                              1,500        1,598
 Redev. Agcy., Residential Fac. Rev. Bonds (Coventry                                   5,000        5,087
Park Project), Series 1996A AMT, 8.50% 2026
County of San Joaquin, Cert. of Part. (1993 General                                    1,000        1,088
Hospital Project), 6.625% 2020 (Preref. 2003)
San Joaquin Hills Transportation Corridor Agcy.:
 Senior Lien Toll Road Rev. Bonds (Orange County),
(Escrowed to Maturity)
  0% 2011                                                                              1,500          923
  0% 2014                                                                              4,000        2,045
  0% 2019                                                                              4,150        1,539
  0% 2023                                                                             14,900        4,335
 Toll Road Ref. Rev. Capital Appreciation Bonds,                                       3,765        1,298
MBIA Insured, Series 1997A, 0% 2020
City of San Jose,
 Redev. Agcy., Multifamily Housing Rev.
Bonds (GNMA Collateralized -
  The Miraido Village), Series 1997A AMT:
   5.30% 2012                                                                            920          914
   5.65% 2022                                                                          1,490        1,466
San Juan Unified School District, FGIC Insured, 0% 2021                                1,435          454
San Marcos Public Facs. Auth.:
 1989 Public Fac. Rev. Bonds, (Community Fac. Dist.                                    4,015        1,441
No. 88-1),  0% 2019 (Escrowed to Maturity)
 Ref. Rev. Bonds, Series 1998:
  5.50% 2010                                                                           4,295        4,365
  5.80% 2027                                                                           1,000          946
San Mateo County Transportation Authority, Limited Tax                                 2,500        2,639
Bonds, MBIA Insured, 1997 Series A, 5.50% 2017
Santa Ana Fncg. Auth., Police Administration and Holding                               1,000        1,135
Fac. Lease Rev. Bonds, MBIA Insured,
Series 1994A, 6.25% 2019
Santa Clara County Fncg. Auth., Lease Rev. Bonds                                       2,200        2,773
(VMC Fac. Replacement Project), AMBAC Insured, 1994
Series A, 7.75% 2009
Santa Monica-Malibu Unified School Dist., G.O. Bonds,                                  2,000          564
Series 1999 Election of 1998, FGIC Insured, 0% 2023
Shafter Joint Powers Fin. Auth., Lease Rev.
Bonds, 1997 Series A
 (Community Correctional Fac. Acquisition Project):
  5.50% 2006                                                                           1,535        1,590
  5.95% 2011                                                                           1,700        1,820
Southern California Home Fncg. Auth., Single Family                                      800          815
Mortgage Rev. Bonds (GNMA and FNMA Mortgage-Backed
Securities Program), 1992 Series A AMT, 6.75% 2022
South Tahoe Joint Powers Fncg. Auth.:
 Ref. Rev. Bonds (South Tahoe Redev. Project Area                                      3,250        3,312
No. 1), 1995 Series B, 6.25% 2020
 Subordinate Bond Anticipation Notes (South Tahoe Redev.
Project Area No. 1):
  Series 1999A, 7.30% 2007                                                             4,500        4,532
  Series 1999B, 7.30% 2007                                                             1,000        1,007
City of Stockton, Mello-Roos Rev. Bonds, Community Facs.
 Dist. No. 90-2B (Brookside Estates), Series 1997A:
  5.50% 2005                                                                           1,560        1,602
  5.75% 2008                                                                           1,840        1,916
  5.95% 2010                                                                           1,000        1,047
  6.20% 2015                                                                           1,750        1,800
Community Facs. Dist. No. 88-12 of the City of Temecula                                  745          740
(Ynez Corridor), Special Tax Ref. Bonds, 1998
Series A, 5.25% 2008
Tustin Unified School Dist., Community Fac. Dist. No. 97-1,                            3,000        3,030
Series 2000 Special Tax Bonds, 6.375% 2035
Virgin Islands Public Fin. Auth., Rev. and Ref. Bonds
 (Matching Fund Loan Notes):
  Series 1998 A:
   5.20% 2010                                                                          1,000          978
   5.30% 2011                                                                          2,000        1,955
  Series 1998 C, 5.50% 2008                                                            1,000        1,019
  Series 1998 D:
   5.50% 2003                                                                          1,895        1,897
   6.00% 2004                                                                          1,000        1,017
   6.00% 2006                                                                          2,220        2,269
Washington Township Health Care Dist., Rev.
Bonds, Series 1999:
 5.00% 2010                                                                            1,210        1,224
 5.00% 2013                                                                            1,100        1,081
 5.00% 2018                                                                            2,750        2,584
City of West Sacramento, Limited Obligation Ref.                                         500          503
Improvement Bonds, Reassessment Dist. of 1998, 5.20% 2008
West Sacramento Fncg. Auth., Special Tax Rev.
Bonds, Series F:
 5.85% 2013                                                                            1,725        1,681
 6.10% 2029                                                                            1,500        1,427
                                                                                              ----------
                                                                                                  361,150
                                                                                              ----------


Tax-Exempt Securities Maturing in One Year or Less - 6.84%
City of Azusa, Multifamily Housing Rev. Ref. Bonds                                     2,300        2,300
(Pacific Glen Apartments Project), Series
1994, 3.60% 2015 (1)
CA G.O. Bonds, 3.80% 2000                                                              3,000        3,000
City of Irvine Assessment Dist. No. 97-17, Limited                                     2,380        2,380
Obligation Improvement Bonds, Adjustable Rate
Series, 3.60% 2023 (1)
Irvine Ranch Water Dist., Consolidated Series 1993, G.O.                               1,100        1,100
of Improvement Dist. No. 140, 240, 105, 250, 3.60% 2033 (1)
County of Los Angeles, Tax and Rev. Anticipation                                       5,000        5,037
Notes, 2000-2001 Series A , 5.00% 2001
Los Angeles Multifamily Rev. Bonds, 3.60% 2009 (1)                                     2,300        2,300
Los Angeles Unified School Dist., Belmont Learning                                     2,400        2,400
Complex, Series 1997 A, 3.70% 2017 (1)
County of Orange, Apartment Dev. Rev. Bonds,  3.70% 2009 (1)                           1,300        1,300
Pollution Control Fncg. Auth., Burney Forest                                           1,600        1,600
Products Projects, Series 1998 A, 3.40% 2020 (1)
City of San Bernardino, SCH Health Care System Rev.                                    1,000        1,044
Bonds (Sisters of Charity for the Incarnate Word Houston,
Texas), Series 1991A, 7.00% 2021 (Preref. 2001)
School Cash Reserve Program Auth., 2000 Pool Bonds,                                    2,500        2,521
Series A,  5.25% 2001
County of Ventura, 2000 Tax and Rev. Anticipation                                      2,000        2,015
Notes, 5.00% 2001
                                                                                              ----------
                                                                                                   26,997
                                                                                              ----------
TOTAL TAX-EXEMPT SECURITIES (cost: $376,717,000)                                                  388,147
Excess of cash and receivables over payables                                                        6,789
                                                                                              ----------
NET ASSETS                                                                                       $394,936
                                                                                              ----------
(1) Coupon rate changes periodically.

See Notes to Financial Statements

Key to Abbreviations
Agcy. = Agency
Auth. = Authority
Cert. of Part. = Certificates of Participation
Dept. = Department
Dev. = Development
Dist. = District
Econ. = Economic
Fac. = Facility
Facs. = Facilities
Fin. = Finance
Fncg. = Financing
G.O. = General Obligation
Preref. = Prerefunded
Redev. = Redevelopment
Ref. = Refunding
Rev. = Revenue

</TABLE>







<TABLE>

The Tax-Exempt Fund of California
FINANCIAL STATEMENTS
<S>                                                       <C>           <C>
STATEMENT OF ASSETS AND LIABILITIES
at August 31, 2000                                             (dollars in thousands)
Assets:
Investment securities at market
 (cost: $376,717)                                                             $388,147
Cash                                                                                 1
Receivables for --
 Sales of investments                                            $1,460
 Sales of fund's shares                                           1,074
 Accrued interest                                                 5,437
 Other                                                                4          7,975
                                                                               396,123
Liabilities:
Payables for --
 Repurchases of fund's shares                                       110
 Dividends on fund's shares                                         700
 Management services                                                126
 Other expenses                                                     251          1,187
Net Assets at August 31, 2000 --
 Unlimited shares authorized                                                  $394,936

Class A shares:
 Net assets                                                                   $393,990
 Shares outstanding                                                         24,618,778
 Net asset value per share                                                      $16.00
Class B shares:
 Net assets                                                                       $946
 Shares outstanding                                                             59,113
 Net asset value per share                                                      $16.00


See Notes to Financial Statements

STATEMENT OF OPERATIONS
for the year ended August 31, 2000                              (dollars in thousands)
Investment Income:
 Income:
  Interest on tax-exempt securities                                            $20,371

 Expenses:
  Management services fee                                        $1,442
  Distribution expenses - Class A                                   924
  Distribution expenses - Class B                                     2
  Transfer agent fee - Class A                                       97
  Transfer agent fee - Class B                                       -
  Reports to shareholders                                            50
  Registration statement and prospectus                              22
  Postage, stationery and supplies                                   46
  Trustees' fees                                                     18
  Auditing and legal fees                                            57
  Custodian fee                                                       7
  Taxes other than federal income tax                                 7          2,672
  Net investment income                                                         17,699

Realized Gain and Unrealized
 Appreciation on Investments:
 Net realized gain                                                               1,655
 Net increase in unrealized appreciation on
  investments                                                                    6,031
  Net realized gain and unrealized
   appreciation on investments                                                   7,686

Net Increase in Net Assets Resulting from
 Operations                                                                    $25,385


STATEMENT OF CHANGES IN NET ASSETS                              (dollars in thousands)

                                                                      Year ended
                                                                       August 31,
                                                                   2000           1999
Operations:
 Net investment income                                          $17,699        $17,382
 Net realized gain on investments                                 1,655          1,312
 Net unrealized appreciation
  on investments                                                  6,031        (17,280)
  Net increase in net assets
   resulting from operations                                     25,385          1,414

Dividends and Distributions Paid to
 Shareholders:
 Dividends from net investment income:
  Class A                                                       (17,704)       (17,400)
  Class B                                                            (7)           -
 Distributions from net realized gain
  on investments:
  Class A                                                          (725)        (5,084)
  Class B                                                           -              -
  Total dividends and distributions                             (18,436)       (22,484)

Capital Share Transactions:
 Proceeds from shares sold                                       99,470        114,227
 Proceeds from shares issued in reinvestment
  of net investment income dividends and
  distributions of net realized gain on
  investments                                                    10,248         13,877
 Cost of shares repurchased                                    (100,734)       (85,585)
  Net increase in net assets
   resulting from capital share transactions                      8,984         42,519
Total Increase in Net Assets                                     15,933         21,449

Net Assets:
 Beginning of year                                              379,003        357,554
 End of year (including
  undistributed net investment
  income: $38 and $38 respectively)                            $394,936       $379,003



See Notes to Financial Statements

</TABLE>









THE TAX-EXEMPT FUND OF CALIFORNIA
NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION - The American Funds Tax-Exempt Series II (the "trust") is
registered under the Investment Company Act of 1940 as an open-end, diversified
management investment company and has initially issued one series of shares,
The Tax-Exempt Fund of California (the "fund").  The fund seeks a high level of
current income exempt from regular federal and California income taxes, with
the additional objective of preservation of capital.  The fund offers Class A
and Class B shares.  Class A shares are sold with an initial sales charge of up
to 3.75%.  Class B shares are sold without an initial sales charge but are
subject to a contingent deferred sales charge paid upon redemption. This charge
declines from 5% to zero over a period of six years. Class B shares have higher
distribution expenses and transfer agent fees than Class A shares. Class B
shares are automatically converted to Class A shares eight years after the date
of purchase. Holders of both classes of shares have equal pro rata rights to
assets and identical voting, dividend, liquidation and other rights, except
that each class bears different distribution and transfer agent expenses, and
each class shall have exclusive rights to vote on matters affecting only their
class.

SIGNIFICANT ACCOUNTING POLICIES - The financial statements have been prepared
in conformity with generally accepted accounting principles which require
management to make estimates and assumptions that affect the reported amounts
and disclosures in the financial statements.  Actual results could differ from
those estimates. The following is a summary of the significant accounting
policies consistently followed by the fund in the preparation of its financial
statements:

SECURITY VALUATION - Tax-exempt securities are valued at prices obtained from a
pricing service, when such prices are available; however, in circumstances
where the investment adviser deems it appropriate to do so, such securities
will be valued at the mean quoted bid and asked prices or at prices for
securities of comparable maturity, quality and type. Short-term securities
maturing within 60 days are valued at amortized cost, which approximates market
value.

Securities and assets for which representative market quotations are not
readily available are valued at fair value as determined in good faith by a
committee appointed by the Board of Trustees. The ability of the issuers of the
fixed-income securities held by the fund to meet their obligations may be
affected by economic developments in a specific industry, state or region.

SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - Security transactions are
accounted for as of the trade date. Realized gains and losses from securities
transactions are determined based on specific identified cost. In the event
securities are purchased on a delayed delivery or "when-issued" basis, the fund
will instruct the custodian to segregate liquid assets sufficient to meet its
payment obligations in these transactions. Interest income is recognized on an
accrual basis. Premiums and original issue discounts on securities are
amortized daily over the expected life of the security. Amortization of market
discounts on securities is recognized upon disposition.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS - Dividends to shareholders are
declared daily after the determination of the fund's net investment income and
are paid to shareholders monthly.

ALLOCATIONS - Income, expenses (other than class-specific expenses) and
realized and unrealized gains and losses are allocated daily between the share
classes based on their relative net asset values. Distribution expenses,
transfer agent fees and any other class-specific expenses are accrued daily and
charged to the applicable share class.


2. FEDERAL INCOME TAXATION

The fund complies with the requirements of the Internal Revenue Code applicable
to regulated investment companies and intends to distribute all of its net
taxable income and net capital gains for the fiscal year.  As a regulated
investment company, the fund is not subject to income taxes if such
distributions are made.  Required distributions are determined on a tax basis
and may differ from net investment income and net realized gains for financial
reporting purposes.  In addition, the fiscal year in which amounts are
distributed may differ from the year in which the net investment income and net
realized gains are recorded by the fund.

As of August 31, 2000, net unrealized appreciation on investments for book and
federal income tax purposes aggregated $11,430,000; $14,916,000 related to
appreciated securities and $3,486,000 related to depreciated securities. There
was no difference between book and tax realized gains on securities
transactions for the year ended August 31, 2000. During the year ended August
31, 2000 the fund realized, on a tax basis, a net capital gain of $1,362,000 on
securities transactions.  The cost of portfolio securities for book and federal
income tax purposes was $376,717,000 at August 31, 2000.


3. FEES AND TRANSACTIONS WITH RELATED PARTIES

INVESTMENT ADVISORY FEE - The fee of $1,442,000 for management services was
incurred pursuant to an agreement with Capital Research and Management Company
(CRMC), with which certain officers and Trustees of the fund are affiliated.
The Investment Advisory and Service Agreement provides for monthly fees accrued
daily, based on an annual rate of 0.30% of the first $60 million of average net
assets; 0.21% of such assets in excess of $60 million; and 3.00% of the fund's
monthly gross investment income.

DISTRIBUTION EXPENSES - Pursuant to a Plan of Distribution for Class A shares,
the fund may expend up to 0.25% of Class A daily net assets annually for any
activities primarily intended to result in sales of fund shares, provided the
categories of expenses for which reimbursement is made are approved in advance
by the fund's Board of Trustees. Fund expenses under the Plan include payments
to dealers to compensate them for their selling and servicing efforts. Pursuant
to a Plan of Distribution for Class B shares, the fund may expend 1.00% of
Class B daily net assets annually to compensate dealers for their selling and
servicing efforts. Some or all of the unpaid amounts may be paid by the fund in
the future.  During the year ended August 31, 2000, distribution expenses under
the Plan of Distribution for Class A were limited to $924,000 on Class A
shares.  Had no limitation been in effect, the fund would have paid $939,000 in
distribution expenses for Class A shares under the Plan. During the year ended
August 31, 2000, distribution expenses under the Plan of Distribution for Class
B were $2,000. As of August 31, 2000, accrued and unpaid distribution expenses
for Class A and Class B shares were $155,000 and $1,000, respectively.
American Funds Distributors, Inc. (AFD), the principal underwriter of the
fund's shares, received $124,000 (after allowances to dealers) during the year
ended August 31, 2000, as its portion of the sales charges paid by purchasers
of the fund's Class A shares. Such sales charges are not an expense of the fund
and, hence, are not reflected in the accompanying statement of operations.

TRANSFER AGENT FEE - A fee of $97,000 was incurred during the year ended August
31, 2000 pursuant to an agreement with American Funds Service Company (AFS),
the transfer agent for the fund.

DEFERRED TRUSTEES' FEES - Trustees who are unaffiliated with CRMC may elect to
defer part or all of the fees earned for services as members of the Board.
Amounts deferred are not funded and are general unsecured liabilities of the
fund. As of August 31, 2000, aggregate deferred amounts and earnings thereon
since the deferred compensation plan's adoption (1993), net of any payments to
Trustees, were $68,000.

AFFILIATED TRUSTEES' AND OFFICERS - CRMC is owned by The Capital Group
Companies, Inc. AFS and AFD are both wholly owned subsidiaries of CRMC.
Officers of the fund and certain Trustees are or may be considered to be
affiliated with CRMC, AFS and AFD. No such persons received any remuneration
directly from the fund.


4. INVESTMENT TRANSACTIONS AND OTHER DISCLOSURES

The fund made purchases and sales of investment securities, excluding
short-term securities, of $144,550,000 and $147,188,000, respectively, during
the year ended August 31, 2000.

Pursuant to the custodian agreement, the fund receives credits against its
custodian fee for imputed interest on certain balances with the custodian bank.
During the year ended August 31, 2000, the custodian fee of $7,000 was paid by
these credits rather than in cash.

The fund reclassified $217,000 from undistributed net realized gains to
additional paid-in capital for the year ended August 31, 2000 as a result of
permanent differences between book and tax.

As of August 31, 2000, net assets consisted of the following:
<TABLE>
                                                  (dollars in thousands)
<S>                                                 <C>
Capital paid in on shares of beneficial interest         381,843
Undistributed net investment income                           38
Accumulated net realized gain                              1,625
Net unrealized appreciation                               11,430
                                                       ----------
Net Assets                                             $ 394,936
                                                       ----------
</TABLE>


Capital share transactions in the fund were as follows:
<TABLE>
Capital share transactions table:
<S>                                         <C>             <C>             <C>             <C>
                                                      Year  ended                      Year ended
                                                     August 31, 2000                 August 31, 1999
                                               Amount (000)          Shares    Amount (000)          Shares
Class A Shares:
  Sold                                           $   98,529       6,365,894      $  114,227       6,994,060
  Reinvestment of dividends                          10,243         661,691          13,877         850,311
        and distributions
  Repurchased                                      (100,710)     (6,520,421)        (85,585)     (5,278,098)
   Net increase in Class A                            8,062         507,164          42,519       2,566,273
Class B Shares: *
  Sold                                                  941          60,296               -               -
  Reinvestment of dividends                               5             327               -               -
        and distributions
  Repurchased                                           (24)         (1,510)              -               -
   Net increase in Class B                              922          59,113               -               -
Total net increase in fund                       $    8,984         566,277      $   42,519       2,566,273


* Class B shares not offered
before March 15, 2000.

</TABLE>


<TABLE>

PER-SHARE DATA AND RATIOS (1)

<S>                                   <C>           <C>              <C>              <C>
                                                                                                     Net
                                         Net asset                                         gains/(losses)
                                             value,             Net                         on securities
                                          beginning       investment                       (both realized
Year ended                                  of year           income                      and unrealized)
Class A:
2000                                          $15.72            $.74              (2)                $.31          (2)
1999                                           16.60              .74                                (.65)
1998                                           16.22              .79                                  .47
1997                                           15.78              .83                                  .53
1996                                           15.74              .84                                  .04
Class B:
2000                                           15.38              .24             (2)                  .67         (2)






                                                           Dividends
                                        Total from        (from net     Distributions                       Net asset
                                         investment       investment    (from capital               Total   value, end
Year ended                               operations          income)           gains)       distributions      of year
Class A:
2000                                           $1.05           $(.74)           $(.03)              $(.77)       $16.00
1999                                           0.09             (.74)            (.23)               (.97)        15.72
1998                                           1.26             (.80)            (.08)               (.88)        16.60
1997                                           1.36             (.83)            (.09)               (.92)        16.22
1996                                           0.88             (.84)               -                (.84)        15.78
Class B:
2000                                           0.91             (.29)               -                (.29)        16.00



                                                                            Ratio of                         Ratio of
                                                         Net assets,         expenses                       net income
                                             Total       end of year       to average                       to average
Year ended                                   return    (in millions)       net assets                       net assets
Class A:
2000                                           6.99%            $394              .72%                            4.78%
1999                                            0.47              379              .70                             4.55
1998                                            7.98              358              .71                             4.83
1997                                            8.80              289              .72                             5.15
1996                                            5.65              253              .73                             5.25
Class B:
2000                                            5.99                1             1.44                (3)          3.81


                                                           Portfolio
                                                            turnover
Year ended                                                      rate
Class A:
2000                                                           41.68%             (4)
1999                                                            22.68
1998                                                            27.78
1997                                                            15.68
1996                                                            27.60
Class B:
2000                                            (3)             41.68             (4)



</TABLE>

(1) The years 1996 through 2000 represent, for Class A shares, fiscal years
ended August 31. The period ended 2000 represents, for Class B shares, the
169-day period ended August 31, 2000. Class B shares were not offered before
March 15, 2000.  Total returns for such periods are based on activity during
the period and thus are not representative of a full year.  Total returns
exclude all sales charges, including contingent deferred sales charges.

(2) Based on average shares outstanding.

(3) Annualized.

(4) Represents portfolio turnover rate (equivalent for all share classes) for
the year ended August 31, 2000.









INDEPENDENT AUDITORS' REPORT

TO THE BOARD OF TRUSTEES OF THE AMERICAN FUNDS
TAX-EXEMPT SERIES II AND SHAREHOLDERS OF
THE TAX-EXEMPT FUND OF CALIFORNIA:

We have audited the accompanying statement of assets and liabilities of The
American Funds Tax-Exempt Series II-- The Tax-Exempt Fund of California (the
"Fund" ), including the investment portfolio, as of August 31, 2000, and the
related statement of operations for the year then ended, the statement of
changes in net assets for each of the two years in the period then ended, and
the per-share data and ratios for each of the five years in the period then
ended for Class A shares and the period March 15, 2000 through August 31, 2000
for Class B shares. These financial statements and per-share data and ratios
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and per-share data and ratios
based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements and per-share data and ratios are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of August 31, 2000 by
correspondence with the custodian and brokers; where replies were not received,
we performed other procedures. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the financial statements and per-share data and ratios referred
to above present fairly, in all material respects, the financial position of
The American Funds Tax-Exempt Series II -- The Tax-Exempt Fund of California as
of August 31, 2000, the results of its operations for the year then ended, the
changes in its net assets for each of the two years in the period then ended,
and the per-share data and ratios for each of the five years in the period then
ended for Class A shares and the period March 15, 2000 through August 31, 2000
for Class B shares, in conformity with accounting principles generally accepted
in the United States of America.

Deloitte & Touche, LLP
Los Angeles, California
October 2, 2000



August 31, 2000

TAX INFORMATION (UNAUDITED)
We are required to advise you within 60 days of the fund's fiscal year-end
regarding the federal tax status of certain distributions received by
shareholders during such fiscal year.

During the fiscal year ended August 31, 2000, the fund paid a long-term capital
gain distribution of $725,000.

Shareholders may exclude from federal taxable income any exempt-interest
dividends paid from net investment income.  All of the dividends paid from net
investment income for Class A and Class B qualify as exempt-interest dividends.
Any distributions paid from realized net short-term or long-term capital gains
are not exempt from federal taxation.

SINCE THE AMOUNTS ABOVE ARE REPORTED FOR THE FUND'S FISCAL YEAR AND NOT THE
CALENDAR YEAR, SHAREHOLDERS SHOULD REFER TO THEIR FORM 1099-DIV OR OTHER TAX
INFORMATION WHICH WILL BE MAILED IN JANUARY 2001 TO DETERMINE THE CALENDAR YEAR
AMOUNTS TO BE INCLUDED ON THEIR 2000 TAX RETURNS.  SHAREHOLDERS SHOULD CONSULT
THEIR TAX ADVISERS.