November 3, 1998
Dear Shareholder:

     Enclosed is this year's new Prospectus, which is almost exactly the 
same as last year. Nothing of any significance has changed. Securities and 
Exchange regulations require that we send one to each account, an expense 
we cannot avoid.

     No-load Funds, Brokers and "Advice": If you are reading the financial 
trade publications you have probably noticed an increasing number of articles 
about investors who are seeking advice in the process of investing. The story 
goes that no-load funds will not capture a larger share of the market in the 
future because investors are now more willing to pay a load on mutual funds 
to get the "advice" of a broker. Really? 

     I would not for a minute take issue with the fact that many folks would 
like to have informed, fair and honest advice if they can find it. But there 
are all kinds of advice! If you want good advice, advice delivered without a 
conflict of interest, you need to research carefully who you choose for an 
advisor and, as a best choice, agree to a "fee only" arrangement for the 
service. Any "advice" you pay for through the purchase of a security or financial 
product with a built in sales charge comes with a built in conflict of interest. 

     Now let me hasten to say, I know securities brokers and insurance agents 
who can be completely trusted, even though they sell products with a sales charge. 
But that is because I have known them well for years. Even under those circumstances, 
it makes sense to arrange a "fee only" agreement with a securities broker if 
possible. Under a "fee only" arrangement, both you and the broker can relax in the 
knowledge that he or she is being employed to represent only you, and nobody else. 
Then, if the broker can find a suitable bond fund that has no sales charge of 
any sort, he is free to suggest that for your portfolio without the fear of working 
"sans compensation".

     There is certain advice a good broker can give you and there is advice that 
he can't. For example, he can give you information on a wide variety of choices, 
and advice about the level of risk involved with each choice. He can tell you what 
prudent people have done in past markets and suggest what is prudent today. But 
he cannot give advice about the future direction of stock or bond markets without, 
over a period of time,  being wrong about as many times as he is right. Jason 
Zweig, the mutual fund editor at Forbes wrote a scathing article back in 1994 about 
the poor quality of advice given in the 1980's by brokers who were pushing high-load 
financial products. This advice was tainted by both conflict of interest and inability 
to predict future market swings.

     Can you get advice from us? Yes; almost seventy percent of our employees are 
fully registered brokers who have passed the same Series 7 examination that other 
brokers take. That is a little unusual for no-load funds. We are not required to 
have registered brokers. All of our "Series 7" folks are qualified to give you 
advice on the general subject of securities, not just on bond funds. And finally, 
best of all, none of them are paid a commission to sell you anything. They are all 
on salary. The fact is, if you are a shareholder, you can get well trained advice 
from us without conflicts of interest affecting our judgment. 

     This is a puzzling stock and bond market:  In February this letter included a 
paragraph assessing my hits and misses on market predictions in the previous year. 
Of course, I really don't know what will happen next in either the stock or bond 
markets, but it is still fun to guess. In that letter I said I thought the stock 
market looked high to me with the Dow at 7,900. By July, as the market reached 9,300 
I looked pretty dumb. In August, only one month later, at 7,500 I was a genius. 
Today, (Nov. 4th) at almost 8,800, I'm stupid again. Well, frankly, at this time, 
and at this level, I think the market is the one who is being stupid.

     The market assumption seems to be that the Federal Reserve's recent interest 
rate cuts are eventually going to return the world economy to a state of prosperity. 
In spite of the threat of lower corporate earnings reports for the next several 
months, investors seem to believe it is O.K. to continue buying 26x earnings multiples 
on Dow stocks.

     Meanwhile, the thirty year Treasury bond moves up when the stock market moves 
down, and vice versa. Municipal bonds have moved with less volatility, and short 
bonds have generally remained strong in the face of the Federal Reserve's lowering 
of short rates. Obviously, my guess is that stocks are not a buy at this level and 
bonds are. On any of our tax-free income series, at today's prices, a person in the 
top federal income tax bracket makes over 8.25% in taxable equivalent income alone. 
Assume a modest bond market rise, say three or four percent, and suddenly you have 
as much as a 12% total return. Want to bet you will do better with the Dow? I don't. 

     So my neck is out a mile? Yes, and a year from now we will see whether I eat 
cake or crow. Feathers are hard to swallow, but I've done it several times now and it 
didn't kill me.

     Expect a small Capital Gains Distribution in the North Carolina and Tennessee 
Income Series: As of the October 31st cut-off date for computing capital gains 
distributions, the North Carolina Tax-Free Income Series had accrued a capital gains 
distribution of a little more than one half cent a share, .0063 to be exact. We will 
accrue this to your account within the next few days which gets the distribution out 
of the price of the shares. If you have elected to receive this dividend in cash 
(few have), it will be distributed on December 31st with your other dividend. The 
Tennessee Tax-Free Income Series has accrued 1.2 cents a share which will be treated 
in the same manner.







                                                            Yours truly,
                                                            Dupree Mutual Funds




                                                            Thomas P. Dupree, Sr.
                                                            President