December 31, 1997
Dear Shareholder:

     As the new year starts we want to thank each of you for your past
business. This has been an interesting year in the securities market and 
1998 is shaping up to be even more interesting. Here are some possibilities:

     You will hear rumors of a flat-tax, but be not afraid: Representatives 
Archer and Armey are proposing two completely different tax laws that would 
do away with the current income tax as we know it. Archer's proposal is for 
a national sales tax, not unlike the European VAT tax, and Armey proposes a 
flat tax, with exemptions, which can be filed on a post card; a tax which 
will only affect wages and will exempt all investment income. Steve Forbes 
supports something similar to the Armey proposal.

     On the surface it might seem that there is some significant support for 
one of these alternatives. Archer and Armey have the support of a group of 
Texas businessmen, Forbes is trying to gather support nationwide and the Wall 
Street Journal seems to have an editorial policy that supports these ideas 
in general, though perhaps not in particular. In days to come it will be 
apparent that the public has been gradually brain washed into relating "flat-tax" 
with "motherhood and apple pie".      

     But when you look below the surface, I think it is hard to find any real 
possibility of passage of one of these proposals. There are countless special 
interests that have a stake in the present tax system with all of its complexities. 
Indeed, it is complex primarily because it has been constructed, piece by piece 
from the political pressures of these special interests. The biggest of these 
special interests would be reflected in the tension between those who earn wages 
and those who have investment income, notably in this latter category, people 
like Steve Forbes. Politically this will be termed the tension between workers 
and owners, or between the "poor" and the "rich".  President Clinton owes his 
election to the promotion of this kind of class competition as does Minority 
Leader Gephart. They will thrive on this debate. Even Speaker Gingrich has been 
quoted in recent weeks as having said there will be little of importance actually 
changed in the present tax system for several years. And I would add, "if ever".

     But meanwhile, as these things are bruited about, there will be articles by 
learned investment advisors warning you to buy only short maturity municipal bonds. 
I think they will be wrong again as, indeed, they were two years ago.

     Financial Markets threatened by "Asian Flu":  What will the stock market do 
in 1998?  We should preface any remarks by repeating that old aphorism, " there 
are economists who don't know, and there are economist who don't know they don't 
know". Having warned you that we could easily be wrong, I will boldly guess that 
the financial collapse of the Pacific Rim economies seen in 1997 will have far 
more effect on the U.S. economy in 1998 (and later) than is currently being 
predicted by some economists. A common belief is that our sales to Asia represent 
only a small part of our very large economy, and that we will absorb these losses 
with no more than a ½ of 1% drop in our GNP. My guess is that these estimates do 
not take into account the results of price drops in goods and services coming from 
Asia, or from other sources using Asian components. This is going to put pressure 
on the profits of firms that compete with these cheaper goods and services and that, 
in turn, may put pressure on our stock markets. The term for this result is 
"disinflation". Economists today have little experience with disinflation and its 
economic fallout, particularly world wide disinflation. It would be a wild guess to 
say the stock market will decline precipitously in 1998, but it is not wild to view 
that as a greater possibility now than it has been in the past.

     And the bond market? If our scenario is correct there would be little inflationary 
pressure, hence little need for the Federal Reserve to raise interest rates. Later in 
1998, if the economy begins to cool, the Fed might even be inclined to consider lowering 
rates. My hunch would be to put new investment money in bonds for now, but I don't 
think I would be inclined to sell stocks in my portfolio if that sale generates a 
large capital gain. 

     Tennessee Tax-Free Income Fund - Capital Gains Distribution: While we work hard 
to avoid ever having to pay capital gains distribution on all of the funds we manage, 
it is not always possible to avoid a gain without throwing away an opportunity that 
outweighs the negative impact of the tax incurred. As a result we had some trades 
this fall in the Tennessee Tax-Free Income Series that resulted in a one cent 
(actually .011) capital gains distribution. We accrued this to shareholders on 
November 19th, the earliest date possible, in order for those buying new shares to 
avoid purchasing a penny of capital gain. The actual payment of this accrued dividend 
comes with the December 31st distribution. Our auditors advise us that this 
dividend is taxed at the new federal 20% capital gains rate.

     Fountain Square Equity Funds: We have been very pleased with your response to 
the five Fountain Square equity funds we are now offering. We think it is worth 
repeating that it is now possible for you to buy these funds through us without 
added fees of any kind and to do so on a 100% no-load basis. You cannot do this 
elsewhere. 

     Of the three Dupree series which have been in business long enough (three years) 
to be rated by Morningstar, two are five star and one is four star. Five star is 
Morningstar's highest risk adjusted rating and encompasses only ten percent of the 
funds in any given category of funds. Of the five Fountain Square series we offer, four 
are rated by Morningstar. Three of the four which are rated are three star, and one 
is five star. Their Quality Growth Fund is the series with the five star rating. We 
have had a look at their operation and we are impressed with their competence and 
professionalism.

     For you, the shareholder, this means that you can now get a well balanced 
portfolio, allocated as you see fit, all without any load or 12b-1 fees and get 
this all at a single source with us. To do this with your broker will usually 
trigger "wrap" fees, even with Schwab there will be transaction fees, and with 
a Trust company or independent investment advisor there are account fees. You 
can make unlimited transfers between funds without charge.

     Is that a better mousetrap, or what? 


                                                            Yours truly,
                                                            Dupree Mutual Funds




                                                            Thomas P. Dupree, Sr.
                                                            President