August 30, 1999
Dear Shareholder:

     Value Systems and Bonds vs. Stocks: As far as I can tell, everybody occasionally 
wakes up at night and gets their mind going on some subject that keeps them awake for 
hours. I had one of these spells last month while on vacation in Venice, Italy. Earlier 
in the day my wife and I had looked at a beautiful gold bracelet at Bulgari, a fancy 
international jewelry store. The bracelet was quite expensive, but exquisitely done, and 
not totally out of reach of our pocketbook. Nevertheless, Clara quietly returned the 
bracelet when she heard the price, (a special discount just for you, Madam) and later 
told me she would never pay that for the bracelet. So this put me to thinking. What is 
the thought process associated with how each of us places a value on things?

     In my "midnight madness" I concluded that there are two opposite poles in the 
determination of price. If we are pricing a basic necessity; food, water, shelter, then 
we will agree to pay whatever is required to get our minimum needs fulfilled. This price 
will be based almost totally on supply and demand. Lets call this a "basic necessity 
price" (BNP) and it can include basic services as well as goods.

     The opposite to BNP is the price of goods or services based upon an "idea", or a 
"feeling". Clara's bracelet would be in this category. Its value is determined by an idea 
that gold and semi-precious stones have a value well beyond any practical use they may 
have, (which is virtually nil). In the particular case of that bracelet, we include the 
idea that Bulgari brings added value with its excellent reputation, an idea generated by 
effective advertising. Finally, there is the idea that the bracelet is beautiful, 
something upon which we might find wide agreement, but an idea difficult to rationalize. 
Why is it beautiful? What is beauty?

     Of course, many things fall between these poles. Food served at an expensive 
restaurant is priced to reflect the idea that food there is "better" and the service 
there has a luxury value of its own. Some gold is sold to the electronics industry at 
considerably less per ounce than the gold in the bracelet Clara admired. 

     So there are things we price as commodities or basic necessities and there are 
things we price on the basis of a fad, or feeling or idea, and perhaps most things are 
priced a little bit by both considerations. But how does this relate to stocks and bonds?

     Well, I would suggest to you that bonds are priced more like a basic necessity. 
They are a promise to pay money in two streams; (1) the regular payment of interest 
over the years and (2) the prompt payment of principal at maturity. A well secured 
bond is a simple money contract, and its price is determined by the supply of and demand 
for money at the time of its sale. In a sense, money is a basic commodity. Yes, there 
is an idea or feeling component in the pricing of money which varies as folks try to 
outguess the Federal Reserve Board, but bond pricing is mostly tied to the supply and 
demand of money.

     Stocks, on the other hand, have a value derived mostly (but not entirely) from 
an idea. Perhaps the basic idea in today's market is "somebody will surely buy this 
stock from me in the future for more than I have paid". Cynics call this the "greater 
fool" theory. But whether cynical or not, one has to accept the fact that the idea 
works as long as enough people believe it. That is the basis upon which most of today's 
day traders operate, and, indeed,  in the last few years it has been profitable for some.

     In the early 1950's when I took Ben Graham's course in securities analysis we 
learned a lot about how to recalculate "real" earnings of a company, and then apply a 
historical multiple to these earnings to value the company's stock. While this 
"price/earnings ratio" was not the only judgment factor used, it was certainly the 
primary one. This method of analysis includes value estimates or "ideas", but at least 
it makes an effort to analyze a stock against income, or cash flow, somewhat like a 
bond. This is called "value analysis" and is much talked about today largely because 
it has been abandoned. Warren Buffett made his fortune using Graham's value analysis. 
One of my favorite Buffett quotes is; "For some reason, people take their cues from 
price action rather than from values. What doesn't work is when you start doing things 
you don't understand, or because they worked last week for somebody else. The dumbest 
reason in the world to buy a stock is because it's going up". Yet that is the primary 
reason why day-traders buy a stock. "It's going up. Somebody will pay more for it 
before the day ends." Yes, of course, there is some element of supply and demand in 
stock pricing, but the predominant idea today is hype.

     There is little risk in predicting that one day stock pricing will return to 
traditional value judgments. The risk is found in predicting when. If that were to 
happen in 1999 we would see stock indices way below current levels...and then we would 
see a whole passel of folks who would remember there really was a reason for owning bonds.

     Telephonic Redemptions: When you telephone to redeem shares, our employees are 
required to ask a series of questions designed to protect the money in your account. 
The employee will ask your account number. That allows us to quickly pull up your 
account to verify that funds are available. Then with your account on the screen 
before us, we ask you a series of additional questions which will help us to determine 
beyond any further doubt that you are indeed the person who owns the account. If you 
fail to answer any of these questions correctly we must then refuse the redemption 
until you give us your instructions in writing. 

     Neither will we allow you to change your address at the time you telephone to 
redeem. Why? Because the primary way someone would steal your money by telephonic 
redemption would be to feign your identity on the telephone, and have the funds wired 
or mailed to an address other than yours. 

     We are finicky about that, not because we want to make your life difficult, but 
because we want to make theft difficult. So far, we haven't lost a penny. So if we 
seem to ask a lot of questions, please be patient with us. It's all for your protection.



                                                              Yours truly,
                                                              DUPREE MUTUAL FUNDS




                                                              Thomas P. Dupree, President
                                                              President