December 31, 1998
Dear Shareholder:

     A Time for Cheers and Bronx Cheers: A year ago I wrote in this letter that 
you could expect "flat-tax" proposals to be talked about in 1998. That has 
happened. But I also said that I thought it would be hard for these proposals to 
get very far along the road to passage. Indeed, the subject seems to have dropped 
somewhat from the political scene for now, and I expect it will eventually disappear 
entirely unless Steve Forbes again mounts a Presidential campaign based on this 
proposal. So that prognostication was mostly accurate.

     I next said that "Asian Flu" would depress the economy in 1998 a lot more 
than the ½ of 1% reduction to the GNP being predicted at the time. It appears GNP 
growth may be down a full 1%, twice what was being predicted, but I can't claim much 
credit. While I didn't use a figure, I really expected a faster slowing than that, 
say, 1 ½% to 2%.

     In conjunction with that expected slowdown I obviously assumed that the stock 
market would be down as well. Well, that was certainly wrong. At this point in late 
December it looks like the Dow will close the year up about 1400 points. Bronx Cheers!

     Finally I suggested that later in the year the Federal Reserve Board might 
actually lower interest rates. That was a 100% winner. Going with that prediction 
was the assumption the bond market might get a lot stronger. The Treasury market is, 
indeed, much stronger. The thirty year Treasury bonds yielded 5.87% at that time and 
that has dropped below 5.00% several times this year. What was unexpected is that 
municipal bonds are only slightly stronger than they were at that date, and are 
currently selling at tax-free yields almost as high a fully taxable Treasury bonds. 
That is almost unheard of, and suggests municipals are an amazing bargain at these 
levels.

     The wise thing would be to leave stock market predictions alone since every 
conservative has been wrong on that subject for several years. But, I'll get reckless 
and take one more shot. The latest BusinessWeek  has a chart in its "Business Outlook" 
section showing earnings per share for the S&P 500 as follows:

               PERCENT CHANGE - REPORTED EARNINGS PER SHARE FOR S&P 500

         1995            1996            1997            1998            1999

         +11%            +14%            +2.5%           -1.0%           .00% 


        (figures rounded to nearest half percent. 1998 and 1999 are forecasts)

     In spite of the dramatic slowing of increases in 1997 and the actual decline of 
earnings in 1998 the S&P index has climbed from 975.04 on January 2, 1998 to an 
incredible 1228.54 on the date this is written. That is nearly a 26% gain coming in 
the face of declining economic fundamentals. There are reasons for this, of course, 
but none of them are rational. For example, there is a strong belief that the investor 
no longer analyzes stock purchases as in days "of old" and that traditional earnings 
multiples can be ignored because (with occasional small corrections) we now live in 
a new world in which the stock market will always go up!

     As long as enough investors believe that, it will be a self fulfilling prophecy. 
Indeed, it has been a self fulfilling prophecy for several years. But it gives the 
cynics a chance to quote the "Greater Fool Theory", namely "I'll buy this at its 
current high price because, later, a greater fool will buy it from me at a higher price". 

     A Year of Blessings: Lest I sound like the Grinch, let me quickly say our strong 
stock market of past years has been a wonderful tonic for the American economy. So I 
hope it continues in spite of its irrationality.

     Meanwhile, good things are happening to us.

     MUTUAL FUNDS Magazine has rated the Dupree fund family at five stars, their top 
rating. This is a family rating, averaging all funds in the family. The rating was 
published just this month and puts us in the same class with Legg Mason, Strong, Stein 
Roe, Janus and Vanguard. Impressive company to be with! MUTUAL FUNDS has become the most
respected and widely read publication dealing exclusively with the mutual fund industry.

     Our two North Carolina Funds have now been in business for three years and have 
been rated by Morningstar Rating Services. The North Carolina Tax-Free Short-to-Medium 
Series was rated five star, their highest performance rating. The North Carolina Tax-Free 
Income Series was rated four star, their next highest rating, but in addition, was in 
the top one percent of all single state long term funds with which it is compared as to 
total return (713 funds). It was the top performing North Carolina tax-free bond fund 
for the one and three year period ending November 30, 1998, according to Morningstar Inc.

     The Tennessee Tax-Free Short-to-Medium Series was rated five star, again their 
highest performance rating, ranking in the top ten percent of funds with which it is 
compared.  The Tennessee Tax-Free Income Series was rated four star but was also in the 
top one percent of all single state long term funds with which it is compared using a 
total return comparison. It was also the top performing Tennessee tax-free bond fund 
for the one and three year period ending November 30, 1998, according to Morningstar, Inc.

     The Kentucky Tax-Free Income Series was rated five star and the Kentucky Short-to-
Medium Series was rated four star. For many years the Short-to-Medium Series was five 
star so it has an average rating of 4.5 stars for the 99 months it has been rated.

     Please excuse our bragging when we say this is incredible recognition to have 
from such top rating agencies. And none of us have a Harvard MBA!







                                                            Happy New Year,
                                                            Dupree Mutual Funds




                                                            Thomas P. Dupree, Sr.
                                                            President