September 30, 1998
Dear Shareholder:

     Capital Gains Distribution:  While we finished our June 30th fiscal year with 
no capital gains distributions to be made from any fund, there is another rule which 
says we must distribute by calendar year end any capital gains we may have earned 
prior to October 31st. Our Tennessee and North Carolina series have not been around 
long enough to see a loss year in bonds, so virtually all bonds in those two state's 
portfolios are worth more than we paid for them. If we have to sell any bonds in 
those portfolios to cover cash flow, there will be a small distribution to be made by 
year end. Currently our estimate is that the Tennessee and North Carolina Income 
series may have from one to two cents of gain. We will have to wait until October 31st 
to know the exact amount. The Kentucky funds and the Intermediate Government Fund have 
been in existence for many years, and in past years when bonds were down we captured 
some tax loss carry-forward in those series, so we do not expect to have net gains 
there. If there are gains in any of these series, rest assured they are taken 
thoughtfully. Morningstar says both the Tennessee and North Carolina Income Series are 
in the top 1% of similar funds in the country. The Kentucky Income Series is in the 
Morningstar top 6%. We are managing as carefully as possible.

     Exchange Privileges: As we have expanded the number of series we offer, including 
some of Fountain Square's equity funds, we have offered exchange free privileges 
between funds. Nearly everyone selects this option when they fill out their 
application blank at the time they open their first account. Some shareholders have 
been with us so long (prior to 1987) that they opened their account before there were 
other funds to exchange for their existing series. A few others, for reasons we do not 
completely understand, have not elected this privilege at the time they filled out 
their initial application blank. From time to time people in this category call us 
to exchange, say, their Short-to-Medium Series for the Income Series, or, a bond series 
for a stock series, and are upset when we have to tell them they have never elected 
this privilege on their application form. When that happens we have to get something 
in writing from those shareholders before we can make the exchange. If you are one of 
these shareholders, we will be sending you a form to elect exchange privileges in the 
near future. Please do not overlook it. Make a choice and return it to us without delay.

     Escheat Laws and Proxies:  I'll bet you are wondering what the connection can be? 
Over a year ago a Kentucky state auditor appeared at our door to inspect us for accounts 
that should be turned over to the state under escheat laws for ultimate distribution 
under state rules. This applied to shareholders we had not heard from for seven years, 
(even if their mail had not been returned). You might be surprised to know that there 
are quite a few of you who reinvest dividends and never communicate with us in any way 
during the year, including not returning your proxy. It is worth the time to return 
your proxy once a year just so that we can show that you have communicated with us.

     There is another reason to return your proxy which is equally important. If we fail 
to get a quorum (over 50%) of shares outstanding by proxy, and if there are not enough 
shares represented at the annual meeting to push this count over the top, we would then 
have to have another meeting to complete the annual business of that series. This could 
be expensive, all of which expense would inure to the series in question, reducing its 
net tax-free dividend by that amount.

     We have always had a good percentage return of proxies in our smaller Tennessee and 
North Carolina series, but as the two Kentucky series become larger we are having a 
little difficulty getting the 50% (plus) return we need. If you are a Kentucky Tax-Free 
Series shareholder (either Income or Short-to-Medium series) we especially ask you to 
please take the five minutes or less required to vote and return your proxy. At this 
time I know of nothing unusual that shareholders will vote on this year so it should be 
easy to do. If you have not received your proxy by the time this letter reaches you, 
you will soon.

     Pay on Death Registration Procedures: In July Kentucky's new Pay on Death law 
became effective, permitting registration of securities in a way that permits the 
transfer of those securities to a beneficiary upon death of the owner, or joint owners 
of the securities. Tennessee has had this legislation in effect for several years. 

     Only individuals, single or joint owners, may avail themselves of this privilege. 
Corporate owners, for example, cannot register in this way. We will accept written 
statements from shareholders asking us to register their account P.O.D. (Pay on death) 
or T.O.D. (Transfer on death) to a beneficiary of their choice. If you own the shares 
jointly with another, the transfer or payment will not take place until the death of 
the second beneficiary. If no beneficiary survives at the death of the registered 
shareholder(s), the security belongs to the estate of the shareholder. A designation of 
P.O.D. beneficiary may be canceled or changed at any time by you (or by both owners, if 
registered jointly) without consent of the beneficiary.

     Stock and Bond Markets. What Now?  I think it is highly unlikely that the stock 
market will soon return to levels seen earlier this year. I am sure there will be ups and 
downs but, unlike 1987, when there were few clouds on the horizon, the threatened collapse 
of many world economies today stand in the way of a big rebound.

     For the same reason, we may now see the bond market continue to rise (interest rates 
fall) as the global economy continues to disinflate, and as the U.S. runs a budget 
surplus, thus reducing federal borrowing. Municipal bonds have not risen as fast as 
U. S. Treasuries and are trading at interest rate levels that are historically very high 
in relation to Treasury rate levels. At these levels municipal bonds are a bargain and, 
like all bargains, the conditions that produce them will only last a short while. If you 
are thinking about putting more money in municipals, now is probably the time to do it.






                                                            Yours truly,
                                                            Dupree Mutual Funds




                                                            Thomas P. Dupree, Sr.
                                                            President