March 31, 2010 Shareholder Letter

Dear Shareholder:

Municipal Market Update:

Municipal bonds turned in a solid performance during the first quarter as the supply of tax-exempt bonds continued to tighten and money continued to flow out of low-yielding cash and cash-equivalents into the bond market in search of higher yields. Strong demand, coupled with a tight supply of tax-exempt bonds, resulted in higher prices and lower yields. Treasury and municipal bond yields increased (i.e., prices decreased) somewhat towards the end of the quarter as investor concerns over the federal budget deficit mounted.

On the credit front, almost three years into the financial crisis, the credit quality of all eight of our municipal bond portfolios remains very strong. We continue to keep a close watch on state and local economies as they work through their budget problems. Similarly, we continue to carefully scrutinize bonds we own and any bonds that we are considering adding to our portfolios in order to protect our shareholders in this difficult environment.

Notwithstanding some alarming headlines predicting a “municipal meltdown”, the market has not experienced a significant rise in the default rate of securities issued by cities, states, and local governments. The few defaults that have made the news recently have been confined almost exclusively to securities backed by real estate developments (a/k/a “dirt bonds”) and other debts not secured by the pledge of governments (i.e., private activity bonds). We don’t own any of these riskier types of securities in our municipal bond portfolios. Sometimes being an old-fashioned conservative municipal bond fund manager has its advantages!

The Bigger Picture and the Fed’s Exit Strategy:

Most economists expect economic growth to continue on a moderate path. Economists at the Federal Reserve are forecasting economic growth of between 3.0 to 3.5 percent in 2010 and 3.5 to 4.5 percent in 2011. High levels of unemployment and persistent weakness in real estate continue to hamper the economic recovery. Businesses and consumers are still busy cleaning up their balance sheets by reducing debt through a process called deleveraging. A sobering report recently issued by McKinsey & Company points out that, historically, deleveraging episodes on average last six to seven years. So, if history is any guide, the deleveraging process will continue for a few more years and will be a significant drag on economic growth going forward.

On a more positive note, there is still no evidence of a pickup in inflation or inflation expectations. The Fed’s preferred price index, which excludes food and energy costs, rose 1.3 percent in February from a year earlier. This is below the long-term range of 1.7 percent to 2.0 percent that the Fed typically finds acceptable. This is good news for the bond market.

William McChesney Martin, Jr. served from 1951 to 1970 as the Chairman of the Federal Reserve Board. He is probably remembered most for his famous line that the job of the Federal Reserve is “to take away the punch bowl just as the party gets going.” Is the Fed getting ready to take away the punch bowl?

Federal Reserve officials affirmed their pledge to keep the fed funds rate near zero for an “extended period” after its most recent meeting on March 16. The pertinent language of the Fed’s policy statement was as follows: “Economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” It appears unlikely that the Fed will raise short-term interest rates in the near future. Ben Bernanke is a scholar of the Great Depression and knows firsthand the risks associated with tightening monetary policy too soon with a still fragile economy.

Notwithstanding this, the Fed has taken other steps to ensure that when the time is right it will have the tools to respond. The Fed is discontinuing its purchases of mortgage-backed and agency debt securities and winding down other special liquidity facilities it created during the financial crisis. In mid-February, the Fed raised the discount rate by 25 basis points to 0.75% which is the first step towards restoring the normal 1% spread between the discount rate and fed funds rate. The Fed has also been authorized by Congress to pay interest on banks’ holdings of reserve and excess balances at Federal Reserve Banks. By paying interest on reserves, the Fed will be in a better position to exert upward pressure on the fed funds rate when it deems it necessary to do so. The Fed also plans to use reverse repurchase agreements as a means of absorbing excess bank reserves. The Fed’s exit strategy has been plotted--we’ll have to wait and see how and when it is rolled out.

New & Improved Website:

I am pleased to report that we have completed an overhaul of our website. The website address remains the same and can be found at www.dupree-funds.com. We think you will find the new website to be user friendly and an improvement over the old one. Complete up-to-date information for all nine of our funds is posted on our website as well as an account application and other frequently used forms. I hope you will take our new website for a test drive.

Sincerely,

Allen E. Grimes, III

Executive Vice President

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