Introduction:

     As a result of damage caused by Hurricane Katrina to the Gulf Coast, financial operations of the state of Mississippi and some of its cities, counties and other public entities have been significantly disrupted. Consequently, Moody’s Investors Service (“Moody’s”) has placed bond credits issued by nine (9) municipalities on the coast of Mississippi on Watchlist for possible downgrade. Similarly, Standard & Poor’s Rating Services (“S&P”) has also placed approximately $3.1 billion of debt issued by the state of Mississippi and a number of its localities on CreditWatch for possible downgrade. Neither Moody’s nor S&P have currently placed any bond credits issued by Alabama municipalities or counties on credit watch for possible downgrade.

Alabama Tax-Free Income Series:

     Although Alabama did sustain damage from Katrina, the damage was much less severe than that in Louisiana and Mississippi. The majority of the damage in Alabama appears to be centered in the city of Mobile and the surrounding area. Moody’s has determined that the impact from the storm was not sufficient to justify putting the state’s Aa2 general obligation or other debt ratings on Watchlist. The state’s rating was upgraded from Aa3 in August 2005 in recognition of the strong legal provisions that have allowed Alabama to maintain financial reserves even during economic downturns.

     Based on this information and a review of our portfolio holdings, we do not anticipate any negative credit implications for the municipal bonds held in this Series.

Mississippi Tax-Free Income Series:

     Overview: The coastal areas of Mississippi suffered a tremendous amount of physical damage. Accordingly, Moody’s has placed the state of Mississippi’s Aa3 general obligation bond rating on Watchlist for possible downgrade along with the A1 rating on Mississippi Development Bank bonds issued for Department of Transportation projects in Tunica County. S&P has also placed the outstanding debt of a number of public housing issues in Mississippi on CreditWatch with negative implications. These actions reflect the economic strain the state faces in the aftermath of Katrina. The loss of casinos and related tourism in the Biloxi-Gulfport area is a significant economic dislocation and will result in substantial state tax revenue losses during the current fiscal year as well as reduced individual and corporate income tax receipts. To some extent these losses will be offset by federal aid and private donations as well as economic activity associated with rebuilding.

     Our Portfolio of Bonds: As of September 2, 2005 approximately 75.53% of the municipal bonds held in the Mississippi Tax-Free Income Series were insured. A number of the insured municipal bonds held in the Series’ portfolio were issued by cities, counties or localities that were adversely affected by Hurricane Katrina. In the event that a default occurs, the insurance company that provided credit enhancement to the respective bond issue would be obligated to make the interest and principal payments. All four of the major bond insurers have exposure to public finance credits located in FEMA-designated disaster areas in Alabama, Louisiana and Mississippi. However, as a percent of their overall book of business the exposure is relatively small, estimated at less than 1-2% of their net par insured.

     As of September 2, 2005 approximately 6.41% of the municipal bonds held in this Series were escrowed to call date or maturity with U.S. Government securities.

     Approximately 18.06% of the municipal bonds held in this Series were not insured or escrowed to call date or maturity. The portfolio holds four (4) un-insured State of Mississippi general obligation credit issues with a combined net par value of $435,000.00 which represents approximately 10.33% of the total par value of the Series’ portfolio ($4,210,000.00). These general obligation bonds are backed by a combination of revenues from sales, franchise, ad-valorem property and other miscellaneous taxes as well as bus licensing fees. While none of these issues have been currently downgraded by the rating services, they have been put on credit watch. We do not expect these G.O. credits to default. The Series also holds other municipal bonds that are not insured or escrowed to call date or maturity which comprise approximately 7.73% of the portfolio. However, these bonds are all issued by municipalities or counties located in the northern portion of the state that do not appear to have been adversely affected by Hurricane Katrina.

Conclusion

     At this time, both Moody’s and S&P have concluded that Alabama state finances will not be significantly disrupted over the long term.

     Moody’s has opined that the state of Mississippi appears to have sufficient liquidity to meet its current obligations to bondholders. Moody’s estimates that the Mississippi State Treasurer currently has access to about $1.2 billion of funds that could be applied to debt service. The current year’s debt service payments are expected to total $364 million.

     We will continue to aggressively monitor the municipal bonds that we hold in both the Alabama and the Mississippi Tax-Free Income Series and will provide our shareholders with additional updates. If you have questions, please don’t hesitate to contact one of our investment representatives at (800) 866-0614.

Sincerely,     Thomas P. Dupree, President