Churchill Tax-Free Fund of Kentucky

                 380 Madison Avenue, Suite 2300
                       New York, NY 10017
                  800-USA-KTKY (800-872-5859) 
                          212-697-6666

Prospectus
Class A Shares
Class C Shares                                     April 30, 1997

     The Fund is a mutual fund whose objective is to seek to
provide as high a level of current income exempt from Kentucky
and Federal income taxes as is consistent with preservation of
capital by investing in municipal obligations which pay interest
exempt from Kentucky State and Federal income taxes. These
municipal obligations must, at the time of purchase, either be
rated within the four highest credit ratings (considered as
investment grade) assigned by Moody's Investors Service, Inc. or
Standard & Poor's Corporation, or, if unrated, be determined to
be of comparable quality by the Fund's Adviser, Banc One
Investment Advisors Corporation.

     This Prospectus concisely states information about the Fund
that you should know before investing. A Statement of Additional
Information about the Fund dated April 30, 1997, (the "Additional
Statement") has been filed with the Securities and Exchange
Commission and is available without charge upon written request
to Administrative Data Management Corp., the Fund's Shareholder
Servicing Agent, at the address given below, or by calling the
telephone number(s) given below. The Additional Statement
contains information about the Fund and its management not
included in the Prospectus. The Additional Statement is
incorporated by reference in its entirety in the Prospectus. Only
when you have read both the Prospectus and the Additional
Statement are all material facts about the Fund available to you.

     SHARES OF THE FUND ARE NOT DEPOSITS IN, OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY BANC ONE CORPORATION OR ITS BANK OR
NON-BANK AFFILIATES OR BY ANY OTHER BANK. SHARES OF THE FUND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY OR GOVERNMENT SPONSORED AGENCY OF THE FEDERAL GOVERNMENT
OR ANY STATE. 

AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS, INCLUDING
POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.

     FOR PURCHASE, REDEMPTION OR ACCOUNT INQUIRIES CONTACT 
            THE FUND'S SHAREHOLDER SERVICING AGENT: 
              ADMINISTRATIVE DATA MANAGEMENT CORP.
           581 MAIN STREET, WOODBRIDGE, NJ 07095-1198
           CALL 800-872-5860 TOLL FREE OR 908-855-5731

FOR GENERAL INQUIRIES & YIELD INFORMATION, CALL 800-872-5859 TOLL
FREE OR 212-697-6666

THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.





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CHURCHILL 
TAX-FREE FUND OF
KENTUCKY

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The Fund invests in tax-free municipal securities, primarily the
kinds of obligations issued by various communities and political
subdivisions within Kentucky. Most of these securities are used
to finance long-term municipal projects; examples are pictured
above. (See "Investment of the Fund's Assets.") The municipal
obligations which financed these particular projects were
included in the Fund's portfolio as of April 1, 1997, and
together represented 19.8% of the Fund's portfolio. Since the
portfolio is subject to change, the Fund may not necessarily own
these specific securities at the time of the delivery of this
Prospectus.




                           HIGHLIGHTS 

     Churchill Tax-Free Fund of Kentucky, founded by Aquila
Management Corporation in 1987 and one of the Aquilasm Group of
Funds, is an open-end mutual fund which invests in tax-free
municipal bonds, the kind of obligations issued by the
Commonwealth of Kentucky, its counties and various other local
authorities to finance such long-term public purpose projects as
schools, universities, housing, transportation, utilities,
hospitals and water and sewer facilities throughout Kentucky.
(See "Introduction.")

     Tax-Free Income - The municipal obligations in which the
Fund invests pay interest which is exempt from regular Federal
income taxes and Commonwealth of Kentucky income and ad valorem
taxes. Dividends paid by the Fund from this income are likewise
free of such taxes. It is, however, possible that in certain
circumstances a small portion of the dividends paid by the Fund
will be subject to income taxes. In addition, the Federal
alternative minimum tax may apply to some investors, but its
impact will be limited since not more than 20% of the Fund's net
assets can be invested in obligations paying interest which is
subject to this tax. The receipt of exempt-interest dividends
from the Fund may result in some portion of social security
payments or railroad retirement benefits being included in
taxable income. Capital gains distributions, if any, are taxable.
(See "Dividend and Tax Information.")

     Investment Grade - The Fund will acquire only those
municipal obligations which, at the time of purchase, are within
the four highest credit ratings assigned by Moody's Investors
Service, Inc. or Standard & Poor's Corporation, or are determined
by the Adviser to be of comparable quality. In general there are
nine separate credit ratings, ranging from the highest to the
lowest credit ratings for municipal obligations. Obligations
within the top four ratings are considered "investment grade,"
but those in the fourth rating may have speculative
characteristics as well. (See "Investment of the Fund's Assets.")

     Initial Investment - You may open your account with any
purchase of $1,000 or more or by opening an Automatic Investment
Program which makes purchases of $50 or more each month. See the
Application, which is in the back of the Prospectus. (See "How to
Invest in the Fund," which includes applicable sales charge
information.) 

     Additional Investments - You may make additional investments
at any time and in any amount, directly or, if in an amount of
$50 or more, through the convenience of having your investment
electronically transferred from your financial institution
account into the Fund by Automatic Investment or Telephone
Investment. (See "How to Invest in the Fund.")

     Alternative Purchase Plans - The Fund provides two
alternative ways for individuals to invest. (See "Alternative
Purchase Plans.") One way permits individual investors to pay
distribution and certain service charges principally at the time
they purchase shares; the other way permits investors to pay such
costs over a period of time, but without paying anything at time
of purchase, much as goods can be purchased on an installment
plan. For this purpose the Fund offers the following classes of
shares, which differ in their expense levels and sales charges:

     
     * Front-Payment Class Shares ("Class A Shares") are offered
     to anyone at net asset value plus a sales charge, paid at
     the time of purchase, at the maximum rate of 4.0% of the
     public offering price, with lower rates for larger
     purchases. (See "How to Purchase Class A Shares.") Class A
     Shares are subject to an asset retention service fee under
     the Fund's Distribution Plan at the rate of 0.15 of 1% of
     the average annual net assets represented by the Class A
     Shares. (See "Distribution Plan.")

     * Level-Payment Class Shares ("Class C Shares") are offered
     to anyone at net asset value with no sales charge payable at
     the time of purchase but with a level charge for service and
     distribution fees for six years after the date of purchase
     at the aggregate annual rate of 1% of the average annual net
     assets of the Class C Shares. (See "Distribution Plan" and "
     Shareholder Services Plan for Class C Shares. ") Six years
     after the date of purchase, Class C Shares are automatically
     converted to Class A Shares. If you redeem Class C Shares
     before you have held them for 12 months from the date of
     purchase you will pay a contingent deferred sales charge
     ("CDSC"); this charge is 1%, calculated on the net asset
     value of the Class C Shares at the time of purchase or at
     redemption, whichever is less. There is no CDSC after Class
     C Shares have been held beyond the applicable period. (See
     "Alternative Purchase Plans," "Computation of the Holding
     Periods for Class C Shares" and "How to Purchase Class C
     Shares.")

     The Fund also issues Institutional Class Shares ("Class Y
Shares") that are sold only to certain institutional investors.
Class Y Shares are not offered by this Prospectus.

     Class A Shares and Class C Shares are only offered for sale
in certain states. (See "How to Invest in the Fund.") If shares
of the Fund are sold outside those states the Fund can redeem
them. If your state of residence is not Kentucky, the dividends
from the Fund may be subject to income taxes of the state in
which you reside. Accordingly, you should consult your tax
adviser before acquiring shares of the Fund.

     Monthly Income - Dividends are declared daily and paid
monthly. At your choice, dividends are paid by check mailed to
you, directly deposited into your financial institution account
or automatically reinvested without sales charge in additional
shares of the Fund at the then-current net asset value. Specific
classes of shares will have different dividend amounts due to
their particular expense levels. (See "Dividend and Tax
Information.")

     Many Different Issues - You have the advantages of a
portfolio which consists of over 171 issues with different
maturities. (See "Investment of the Fund's Assets.")

     Local Portfolio Management - Banc One Investment Advisors
Corporation (the "Adviser") serves as the Fund's Investment
Adviser, providing experienced local professional management. The
Adviser is a wholly-owned subsidiary of BANC ONE CORPORATION
("Banc One"). As of April 1, 1997, the Adviser was responsible
for management of over $5.2 billion of investments in municipal
obligations, of which $2.3 billion were held in mutual funds and
$570 million were obligations of Kentucky issuers. The Adviser
services Kentucky clients at offices in Louisville and Lexington.

     The Fund is obligated to pay investment advisory fees at the
rate of 0.14 of 1% of average annual net assets to its Adviser
(and administration fees to its Administrator, for total fees at
the rate of up to 0.40 of 1% of average annual net assets). Both
of these fees are subject to increase were the Fund to
discontinue certain payments under the Distribution Plan, so that
together these fees would be payable at an aggregate annual rate
of up to 0.50 of 1%. Payments under the Distribution Plan began
on July 1, 1994. (See "Table of Expenses," "Distribution Plan"
and "Management Arrangements.") Some or all of these fees may be
waived by the Adviser and Administrator. (See "Table of Expenses"
and "Management Arrangements.")

     Redemptions - Liquidity - You may redeem any amount of your
account on any business day at the next determined net asset
value by telephone, FAX or mail request, with proceeds being sent
to a predesignated financial institution, if you have elected
Expedited Redemption. Proceeds will be wired or transferred
through the facilities of the Automated Clearing House, wherever
possible, upon request, if in an amount of $1,000 or more, or
will be mailed. For these and other redemption procedures see
"How to Redeem Your Investment." There are no penalties or
redemption fees for redemption of Class A Shares. However, there
is a contingent deferred sales charge with respect to certain
Class A Shares which have been purchased in amounts of $1 million
or more (see "Purchase of $1 Million or More"). If you redeem
Class C Shares before you have held them for 12 months from the
date of purchase you will pay a contingent deferred sales charge
("CDSC") at the rate of 1%. (See "Alternative Purchase Plans" --
"Class C Shares.")

     Certain Stabilizing Measures - The Fund will employ such
traditional measures as varying maturities, upgrading credit
standards for portfolio purchases, broadening diversification and
increasing its position in cash, in an attempt to protect against
declines in the value of its investments and other market risks.
(See "Certain Stabilizing Measures.")

     Exchanges - You may exchange Class A or Class C Shares of
the Fund into corresponding classes of shares of other
Aquila-sponsored tax-free municipal bond mutual funds or two
Aquila sponsored equity funds. You may also exchange them into
shares of the Aquila-sponsored money market funds. The exchange
prices will be the respective net asset values of the shares.
(See "Exchange Privilege.")

     Risks and Special Considerations - The share price,
determined on each business day, varies with the market prices of
the Fund's portfolio securities, which fluctuate with market
conditions including prevailing interest rates. Accordingly, the
proceeds of redemptions may be more or less than your original
cost. (See "Factors Which May Affect the Value of the Fund's
Investments and Their Yields.") The Fund's assets, being
primarily or entirely Kentucky issues, are subject to economic
and other conditions affecting Kentucky. (See "Risk Factors and
Special Considerations Regarding Investment in Kentucky
Obligations.") Moreover, the Fund is classified as a
"non-diversified" investment company, because it may choose to
invest in the obligations of a relatively limited number of
issuers. (See "Investment of the Fund's Assets.") The Fund may
also, to a limited degree, buy and sell futures contracts and
options on futures contracts, although since inception the Fund
has not done so and has no present intention to do so. There may
be risks associated with these practices. (See "Certain
Stabilizing Measures.")

     Statements and Reports - You will receive statements of your
account monthly as well as each time you add to your account or
take money out. Additionally, you will receive a Semi-Annual
Report and an audited Annual Report.








                      CHURCHILL TAX-FREE FUND OF KENTUCKY
                               TABLE OF EXPENSES

                                                              
                                                         Class A    Class C
Shareholder Transaction Expenses                         Shares     Shares

   Maximum Sales Charge Imposed on Purchases              4.00%      None
     (as a percentage of the offering price)
   Maximum Sales Charge Imposed on                        None       None
     Reinvested Dividends
   Deferred Sales Charge                                  None(1)    1.00%(2)
   Redemption Fees                                        None       None
   Exchange Fee                                           None       None

Annual Fund Operating Expenses (3)
  (as a percentage of average net assets)

     Investment Advisory Fee                              0.14%      0.14%
     12b-1 Fee                                            0.15%      0.75%
     All other expenses (4)                               0.45%      0.70%
       Administration Fee                            0.26%     0.26%
       Service Fee                                   None      0.25%
       Other Expenses (4)                            0.19%     0.19%
     Total Fund Operating Expenses (4)                    0.74%      1.59%

Example (5)
You would pay the following expenses on a $1,000 investment, assuming 
a 5% annual return and redemption at the end of each time period:



                              1 year    3 years   5years    10 years
                                                
Class A Shares                $47       $63       $80       $128

Class C Shares
  With complete redemption
    at end of period          $26       $50       $87       $145 (6)
  With no redemption          $16       $50       $87       $145 (6)



(1) Certain shares purchased in transactions of $1 million or more without
a sales charge may be subject to a contingent deferred sales charge of up 
to 1% upon redemption during the first four years after purchase.  See
"Purchase of $1 Million or More".



(2) A contingent deferred sales charge of 1% is imposed on the redemption
proceeds of the shares (or on the original price, whichever is lower) if
redeemed during the first 12 months after purchase.



(3) Estimated based upon expenses incurred by the Fund during its most 
recent fiscal year, restated to reflect current arrangements.  Class A 
Shares were outstanding during the entire period.  Class C Shares were
established on April 1, 1996.



(4) Does not reflect a 0.01% expense offset in custodian fees received 
for uninvested cash balances.  Reflecting this offset, other expenses, 
all other expenses, and total Fund operating expenses for Class A Shares 
were 0.18%, 0.44% and 0.73%, respectively; for Class C Shares, these 
expenses would have been 0.18%, 0.69% and 1.58%, respectively.



(5) The expense example is based upon the above shareholder transaction
expenses (in the case of Class A Shares, this includes a sales charge of
$40 for a $1,000 investment) and annual Fund operating expenses.  It is 
also based upon amounts at the beginning of each year which includes the
prior year's assumed results.  A year's results consist of an assumed 5%
annual return less total operating expenses; the expense ratio was applied
to an assumed average balance (the year's starting investment plus one-half
the year's results). Each figure represents the cumulative expenses so
determined for the period specified.



(6) Six years after the date of purchase, Class C Shares are automatically
converted to Class A Shares. 





THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR 
FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. 
THE SECURITIES AND EXCHANGE COMMISSION SPECIFIES THAT ALL MUTUAL FUNDS USE
THE 5% ANNUAL RATE OF RETURN FOR PURPOSES OF PREPARING THE ABOVE EXAMPLE. 
THE EXAMPLE ALSO REFLECTS THE MAXIMUM SALES CHARGE. (SEE "HOW TO INVEST IN
THE FUND").

The purpose of the above table is to assist the investor in understanding 
the various costs that an investor in the Fund will bear directly or
indirectly. The assumed 5% annual return should not be interpreted as a
prediction of an actual return, which may be higher or lower.








                      CHURCHILL TAX-FREE FUND OF KENTUCKY
                             FINANCIAL HIGHLIGHTS
                FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

     The following table of Financial Highlights as it relates to the five
years ended December 31, 1996 has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon is included in the Fund's
financial statements contained in its Annual Report, which are incorporated
by reference into the Additional Statement. The information provided in the
table should be read in conjunction with the financial statements and related
notes. The Fund's Annual Report contains additional information about the
Fund's performance and is available upon request without charge. On October
16, 1989, Aquila Management Corporation, originally the Fund's Sub-Adviser
and Administrator, became Administrator only. Effective September 11, 1995,
Banc One Investment Advisors Corporation became the Fund's Investment
Adviser, replacing PNC Bank, Kentucky, Inc. ("See Management Arrangements").

                                        Class A(3)               Class C(4)
                                   Year Ended December 31,
                           1996    1995      1994      1993      1996


                                                  
Net Asset Value,
Beginning of Period        $10.71   $9.97    $10.93    $10.49    $10.47
Income from Investment
Operations:
  Net investment
  income...............    0.55     0.60     0.60      0.62      0.37
  Net gain (loss) on
  securities (both
  realized and
  unrealized)..........    (0.12)   0.74     (0.96)    0.47      0.11
  Total from Investment
  Operations...........    0.43     1.34     (0.36)    1.09      0.48
Less Distributions:
  Dividends from
  net investment
  income...............    (0.59)   (0.60)   (0.60)    (0.62)    (0.40)
  Distributions from
  capital gains........       -       -        -       (0.03)      -
  Total Distributions..    (0.59)   (0.60)   (0.60)    (0.65)    (0.40)
Net Asset Value,
End of Period              $10.55   $10.71   $9.97     $10.93    $10.55
Total Return (not
(reflecting
sales load)............    4.71     13.75    (3.31)    10.50     4.72(1)
Ratios/Supplemental Data
  Net Assets, End of 
  Period (in thousands)    222,889  230,270  232,656   258,632   433
  Ratio of Expenses
  to Average Net
  Assets...............    0.74     0.79     0.72      0.59      1.55(2)
  Ratio of Net Investment
  Income to Average Net
  Assets...............    5.23     5.57     5.81      5.67      4.35(2)    
  Portfolio Turnover
  Rate.................    8.94     17.09    35.25     31.29     8.94    

Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary waiver
of fees, the Administrator's voluntary expense reimbursement and the expense
offset in custodian fees for uninvested cash balances would have been:

Net Investment
Income.................    0.55     0.60      0.60      0.60     0.37    
Ratio of Expenses
to Average Net
Assets.................    0.75     0.80     0.73      0.73      1.56(2)     
Ratio of Net Investment
Income to Average
Net Assets.............    5.22     5.74     5.80      5.52      4.34(2)     



1992       1991        1990          1989          1988          1987*
                                                  

$10.39     $10.00      $10.06        $9.53         $9.26         $9.60
  0.66       0.66        0.65         0.68          0.65          0.25
  0.19       0.41      (0.03)         0.53          0.26        (0.32)
  0.85       1.07        0.62         1.21          0.91        (0.07)
(0.66)     (0.66)      (0.68)       (0.68)        (0.64)        (0.27)
(0.09)     (0.02)         -            -             -             -
(0.75)     (0.68)      (0.68)       (0.68)        (0.64)        (0.27)
$10.49     $10.39      $10.00       $10.06         $9.53         $9.26
  8.48      10.97        6.64        13.09         10.49        (0.65)(1)
192,600   114,798      66,076       35,652        19,007         5,767
  0.42       0.27        0.10         0.08          0.10         1.08(2)
  6.21       6.53        6.60         6.94          6.87         5.39(2)
 50.33      16.69        7.67         3.63         10.51         62.83
  0.63       0.60        0.59         0.57          0.58          0.16
  0.68       0.84        0.76         1.09          1.21         3.82(2)
  5.95       5.96        5.94         5.92          5.79         2.66(2)


(1)Not annualized.



(2)Annualized.



(3) Designated as Class A Shares on April 1, 1996. 



(4) New Class of Shares established on April 1, 1996.



*For the period from May 21, 1987 (commencement of operations) to December
31, 1987.






                          INTRODUCTION

     The Fund's shares are designed to be a suitable investment
for investors who seek income exempt from Kentucky State and
regular Federal income taxes.

     You may invest in shares of the Fund as an alternative to
direct investments in Kentucky Obligations, as defined below,
which may include obligations of certain non-Kentucky issuers.
The Fund offers you the opportunity to keep assets fully invested
in a vehicle that provides a professionally managed portfolio of
Kentucky Obligations which may, but not necessarily will, be more
diversified, higher yielding or more stable and more liquid than
you might be able to obtain on an individual basis by direct
purchase of Kentucky Obligations. Through the convenience of a
single security consisting of shares of the Fund, you are also
relieved of the inconvenience associated with direct investments
of fixed denominations, including the selecting, purchasing,
handling, monitoring call provisions and safekeeping of Kentucky
Obligations.

     Kentucky Obligations are a type of municipal obligation.
Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain
funds for various public purposes. The two principal
classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less
while municipal bonds have extended maturities. Municipal notes
include: project notes, which sometimes carry a U.S. Government
guarantee; tax anticipation notes; revenue anticipation notes;
bond anticipation notes; construction loan notes; and floating
and variable rate demand notes. Municipal obligations include
municipal lease/purchase agreements which are similar to
installment purchase contracts for property or equipment. The
purposes for which municipal obligations such as bonds are issued
include the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing,
mass transportation, streets and water and sewer works. Other
public purposes for which municipal obligations may be issued
include the refunding of outstanding obligations, the obtaining
of funds for general operating expenses and the obtaining of
funds to lend to other public institutions and facilities.

                 INVESTMENT OF THE FUND'S ASSETS

     In seeking its objective of providing as high a level of
current income which is exempt from both Kentucky State and
regular Federal income taxes as is consistent with the
preservation of capital, the Fund will invest in Kentucky
Obligations (as defined below). There is no assurance that the
Fund will achieve its objective, which is a fundamental policy of
the Fund. (See "Investment Restrictions.")

     As used in the Prospectus and the Additional Statement, the
term "Kentucky Obligations" means obligations, including those of
certain non-Kentucky issuers, of any maturity which pay interest
which, in the opinion of bond counsel or other appropriate
counsel, is exempt from regular Federal income taxes and Kentucky
income taxes. Although exempt from regular Federal income tax,
interest paid on certain types of Kentucky Obligations, and
dividends which the Fund might pay from this interest, are
preference items as to the Federal alternative minimum tax; for
further information, see "Dividend and Tax Information." As a
fundamental policy, at least 80% of the Fund's net assets will be
invested in Kentucky Obligations the income paid upon which will
not be subject to the alternative minimum tax; accordingly, the
Fund can invest up to 20% of its net assets in obligations which
are subject to the Federal alternative minimum tax. The Fund may
refrain entirely from purchasing these types of Kentucky
Obligations. (See "Dividend and Tax Information.")

     The non-Kentucky bonds or other obligations the interest on
which is exempt under present law from regular Federal and
Kentucky income taxes are those issued by or under the authority
of Guam, the Northern Mariana Islands, Puerto Rico and the Virgin
Islands. The Fund will not purchase Kentucky Obligations of
non-Kentucky issuers unless Kentucky Obligations of Kentucky
issuers of the desired quality, maturity and interest rate are
not available. As a Kentucky-oriented fund, at least 65% of the
Fund's total assets will be invested in Kentucky Obligations of
Kentucky issuers. The Fund invests only in Kentucky Obligations
and, possibly, in Futures and options on Futures (see below) for
protective (hedging) purposes.

     In general, there are nine separate credit ratings, ranging
from the highest to the lowest quality standards for municipal
obligations. So that the Fund will have a portfolio of quality
oriented (investment grade) securities, the Kentucky Obligations
which the Fund will purchase must, at the time of purchase,
either (i) be rated within the four highest credit ratings
assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"); or (ii) if unrated, be
determined to be of comparable quality to municipal obligations
so rated by Banc One Investment Advisors Corporation (the
"Adviser"), subject to the direction and control of the Fund's
Board of Trustees. Municipal obligations rated in the fourth
highest credit rating are considered by such rating agencies to
be of medium quality and thus may present investment risks not
present in more highly rated obligations. Such bonds lack
outstanding investment characteristics and may in fact have
speculative characteristics as well; changes in economic
conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is
the case for higher grade bonds. If after purchase the rating of
any rated Kentucky Obligation is downgraded such that it could
not then be purchased by the Fund, or, in the case of an unrated
Kentucky Obligation, if the Adviser determines that the unrated
obligation is no longer of comparable quality to those rated
obligations which the Fund may purchase, it is the current policy
of the Fund to cause any such obligation to be sold as promptly
thereafter as the Adviser in its discretion determines to be
consistent with the Fund's objectives; such obligation remains in
the Fund's portfolio until it is sold. In addition, because a
downgrade often results in a reduction in the market price of a
downgraded obligation, sale of such an obligation may result in a
loss. See Appendix A to the Additional Statement for further
information as to these ratings. The Fund can purchase industrial
development bonds only if they meet the definition of Kentucky
Obligations, i.e., the interest on them is exempt from Kentucky
State and regular Federal income taxes.

     The Fund is classified as a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940
Act"). The Fund also intends to continue to qualify as a
"regulated investment company" under the Internal Revenue Code
(the "Code"). One of the tests for such qualification under the
Code is, in general, that at the end of each fiscal quarter of
the Fund, at least 50% of its assets must consist of (i) cash;
and (ii) securities which, as to any one issuer, do not exceed 5%
of the value of the Fund's assets. If the Fund had elected to
register under the 1940 Act as a "diversified" investment
company, it would have to meet the same test as to 75% of its
assets. The Fund may therefore not have as much diversification
among securities, and thus diversification of risk, as if it had
made this election under the 1940 Act. In general, the more the
Fund invests in the securities of specific issuers, the more the
Fund is exposed to risks associated with investments in those
issuers. The Fund's assets, being primarily or entirely Kentucky
issues, are accordingly subject to economic and other conditions
affecting Kentucky. (See "Risk Factors and Special Considerations
Regarding Investment in Kentucky Obligations.")

Certain Stabilizing Measures

     The Fund will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases,
broadening diversification and increasing its position in cash
and cash equivalents in attempting to protect against declines in
the value of its investments and other market risks. There can,
however, be no assurance that these will be successful. Although
the Fund has no current intention of using futures and options,
to the limited degree described below, these may be used to
attempt to hedge against changes in the market price of the
Fund's Kentucky Obligations caused by interest rate fluctuations.
Futures and options could also provide a hedge against increases
in the cost of securities the Fund intends to purchase.

     Although it does not currently do so, and since inception
has not done so, the Fund may buy and sell futures contracts
relating to indices on municipal bonds ("Municipal Bond Index
Futures") and to U.S. government securities ("U.S. Government
Securities Futures"); both kinds of futures contracts are
"Futures." The Fund may also write and purchase put and call
options on Futures. As a matter of fundamental policy the Fund
will not buy or sell a Future or an option on a Future if
thereafter more than 10% of its net assets would be in initial or
variation margin on such Futures and options on them, and in
premiums on such options. The Fund will not enter into Futures or
options for which the aggregate initial margins and premiums paid
for options exceed 5% of the fair market value of the Fund's
assets. (See the Additional Statement.) Under normal market
conditions, the Fund cannot purchase or sell Municipal Bond Index
Futures, U.S. Government Securities Futures, or options on
Futures if thereafter more than 20% of its total assets would
consist of cash, margin deposits on such Futures and margin
deposits and premiums on such options, except for temporary
defensive purposes, i.e., in anticipation of a decline or
possible decline in the value of Kentucky Obligations.

     The primary risks associated with the use of Futures and
options are: (i) imperfect correlation between the change in the
market value of the securities held in the Fund's portfolio and
the prices of Futures or options purchased or sold by the Fund;
(ii) incorrect forecasts by the Adviser concerning interest rates
which may result in the hedge being ineffective; and (iii)
possible lack of a liquid secondary market for a Future or
option; the resulting inability to close a Futures or options
position could adversely affect the Fund's hedging ability. For a
hedge to be completely effective, the price change of the hedging
instrument should equal the price change of the security being
hedged. The risk of imperfect correlation of these price changes
is increased as the composition of the Fund's portfolio is
divergent from the debt securities underlying the hedging
instrument. To date, the Adviser has had no experience in the use
of Futures or options on them.

     The liquidity of a secondary market in a Future may be
adversely affected by "daily price fluctuation limits"
established by commodity exchanges which restrict the amount of
change in the contract price allowed during a single trading day.
Thus, once a daily limit is reached, no further trades may be
entered into beyond the limit, thereby preventing the liquidation
of open positions. Prices have in the past reached the daily
limit on a number of consecutive trading days. For further
information about Futures and options, see the Additional
Statement.

     When and if the Fund determines to use Futures and options,
the Prospectus will be supplemented.

Floating and Variable Rate Demand Notes

     Floating and variable rate demand notes are tax-exempt
obligations which may have a stated maturity in excess of one
year, but permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding one year, in each
case upon not more than 30-days' notice. The issuer of such notes
normally has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal amount of the
note plus accrued interest upon a specified number of days'
notice to the noteholders. The interest rate on a floating rate
demand note is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is
adjusted automatically at specified intervals.

Participation Interests

     The Fund may purchase from financial institutions
participation interests in Kentucky Obligations (such as
industrial development bonds and municipal lease/purchase
agreements). A participation interest gives the Fund an undivided
interest in the underlying Kentucky Obligations in the proportion
that the Fund's participation interest bears to the total amount
of the underlying Kentucky Obligations. All such participation
interests must meet the Fund's credit requirements. (See
"Limitation to 10% as to Certain Investments.")

When-Issued and Delayed Delivery Purchases

     The Fund may buy Kentucky Obligations on a when-issued or
delayed delivery basis when it has the intention of acquiring
them. The Kentucky Obligations so purchased are subject to market
fluctuation and no interest accrues to the Fund until delivery
and payment take place; their value at the delivery date may be
less than the purchase price. The Fund cannot enter into
when-issued commitments exceeding in the aggregate 15% of the
market value of the Fund's total assets, less liabilities other
than the obligations created by when-issued commitments. If the
Fund chooses to dispose of the right to acquire a when-issued
obligation prior to its acquisition, it could, as with the
disposition of any other portfolio holding, incur a gain or loss
due to market fluctuation; any such gain would be a taxable
short-term gain. The Fund places an amount of assets equal in
value to the amount due on the settlement date for the
when-issued or delayed delivery securities being purchased in a
segregated account with the Custodian, which is marked to market
every business day. See the Additional Statement for further
information.

Limitation to 10% as to Certain Investments

     The Fund cannot purchase Kentucky Obligations that are not
readily marketable if thereafter more than 10% of its net assets
would consist of such investments. However, this 10% limit does
not include any Kentucky Obligations as to which the Fund can
exercise the right to demand payment in full within three days
and as to which there is a secondary market. Floating and
variable rate demand notes and participation interests (including
municipal lease/purchase obligations) are considered illiquid
unless determined by the Board of Trustees to be readily
marketable. (See the Additional Statement.)

Current Policy as to Certain Obligations

     The Fund will not invest more than 25% of its total assets
in (i) Kentucky Obligations the interest on which is paid from
revenues of similar type projects or (ii) industrial development
bonds, unless the Prospectus and/or the Additional Statement are
supplemented to reflect the change and to give additional
information.

Factors Which May Affect the Value of the Fund's 
Investments and Their Yields

     The value of the Kentucky Obligations in which the Fund
invests will fluctuate depending in large part on changes in
prevailing interest rates, and may be subject to other market
factors as well. If the prevailing interest rates go up after the
Fund buys Kentucky Obligations, the value of these obligations
will normally go down; if these rates go down, the value of these
obligations will normally go up. Changes in value and yield based
on changes in prevailing interest rates may have different
effects on short-term Kentucky Obligations than on long-term
obligations. Long-term obligations (which often have higher
yields) may fluctuate in value more than short-term ones. For
this reason, the Fund may, to achieve a defensive position,
shorten the average maturity of its portfolio.

Risk Factors and Special Considerations Regarding 
Investment in Kentucky Obligations

     The following is a discussion of the general factors that
might influence the ability of Kentucky issuers to repay
principal and interest when due on the Kentucky Obligations
contained in the portfolio of the Fund. Such information is
derived from sources that are generally available to investors
and is believed by the Fund to be accurate, but has not been
independently verified and may not be complete.

     The Commonwealth of Kentucky is a leader among the States in
the production of coal. Tobacco is the dominant agricultural
product, and Kentucky ranks second among states in the total cash
value of tobacco raised. There is a significant diversification
in the manufacturing mix including tobacco processing plants,
distilleries and durable goods production including automobiles,
heavy machinery, computer appliances and office equipment.
Toyota, a major Japanese automobile manufacturer, has constructed
a large facility in Georgetown, Kentucky. The horse breeding and
racing industry plays an important role both as a significant
industry as well as encouraging tourist business in the state.

     Economic problems include a continuing high unemployment
rate in the non-urbanized areas of the State. The Coal Severance
Tax is a significant revenue producer for the state and its
political subdivisions, and any substantial decrease in the
amount of coal or other minerals produced could result in revenue
shortfalls. Additionally, any federal legislation affecting
adversely the tobacco and/or cigarette industry would have a
negative impact on Kentucky's economy. Although revenue
obligations of the state or its political subdivisions may be
payable from a specific project, there can be no assurances that
further economic difficulties and the resulting impact on state
and local government finances will not adversely affect the
market value of the bonds issued by Kentucky municipalities or
political subdivisions or the ability of the respective entities
to pay debt service. Major legislative initiatives in the area of
education reform and medicaid expenses are having an impact on
the Commonwealth's financial profile.

     The Commonwealth of Kentucky relies upon sales and use tax,
individual income tax, property tax, corporate income tax,
insurance premium tax, alcohol beverage tax, corporate license
tax, cigarette tax, and horse racing tax for its revenue. The
cities, counties and other local governments are essentially
limited to property taxes, occupational license taxes, utility
taxes, transit and restaurant meals taxes and various license
fees for their revenue. Obligations of non-Kentucky issuers are
subject to the risks of general economic and other factors
affecting those issuers.

     Because of constitutional limitations, the Commonwealth of
Kentucky cannot enter into a financial obligation of more than
two years' duration, and no other municipal issuer within the
Commonwealth can enter into a financial obligation of more than
one year's duration. As a consequence, the payment and security
arrangements applicable to Kentucky revenue bonds differ
significantly from those generally applicable to municipal
revenue bonds in other States. See the Additional Statement.

                     INVESTMENT RESTRICTIONS

     The Fund has a number of policies about what it can and
cannot do. Certain of these policies, identified in the
Prospectus and Additional Statement as "fundamental policies,"
cannot be changed unless the holders of a "majority," as defined
in the 1940 Act, of the Fund's outstanding shares vote to change
them. (See the Additional Statement for a definition of such a
majority.) All other policies can be changed from time to time by
the Board of Trustees without shareholder approval. Some of the
more important of the Fund's fundamental policies, not otherwise
identified in the Prospectus, are set forth below; others are
listed in the Additional Statement.

1. The Fund invests only in certain limited securities.

     The Fund cannot buy any securities other than the Kentucky
Obligations meeting the standards stated under "Investment of the
Fund's Assets"; the Fund can also purchase and sell Futures and
options on them within the limits there discussed.

2. The Fund has industry investment requirements.

     The Fund cannot buy the obligations of issuers in any one
industry if more than 25% of its total assets would then be
invested in securities of issuers of that industry; the Fund will
consider that a non-governmental user of facilities financed by
industrial development bonds is an issuer in an industry.

3. The Fund cannot make loans.

     The Fund can buy those Kentucky Obligations which it is
permitted to buy (see "Investment of the Fund's Assets"); this is
investing, not making a loan. The Fund cannot lend its portfolio
securities.

4. The Fund can borrow only in limited amounts for special
purposes.

     The Fund can borrow from banks for temporary or emergency
purposes but only up to 10% of its total assets. It can mortgage
or pledge its assets only in connection with such borrowing and
only up to the lesser of the amounts borrowed or 5% of the value
of its total assets. However, this shall not prohibit margin
arrangements in connection with the purchase or sale of Municipal
Bond Index Futures, U.S. Government Securities Futures or options
on them, or the payment of premiums on those options. Interest on
borrowings would reduce the Fund's income. Except in connection
with borrowings, the Fund will not issue senior securities. The
Fund will not purchase any Kentucky Obligations, Futures or
options on Futures while it has any outstanding borrowings which
exceed 5% of the value of its total assets.

                    NET ASSET VALUE PER SHARE

     The Fund's net asset value and offering price per share of
each class are determined as of 4:00 p.m. New York time on each
day that the New York Stock Exchange is open (a "business day").
The net asset value per share is determined by dividing the value
of the net assets(i.e., the value of the assets less liabilities)
by the total number of shares outstanding. Determination of the
value of the Fund's assets is subject to the direction and
control of the Fund's Board of Trustees. In general it is based
on market value, except that Kentucky Obligations maturing in 60
days or less are generally valued at amortized cost; see the
Additional Statement for further information.

                   ALTERNATIVE PURCHASE PLANS

     In this Prospectus, the Fund provides individual investors
with the option of two alternative ways to purchase shares,
through two separate classes of shares. All classes represent
interests in the same portfolio of Kentucky Obligations. The
primary distinction among the classes of shares offered to
individuals lies in their sales charge structures and ongoing
expenses, as described below. You should choose the class that
best suits your own circumstances and needs.

     If you choose to purchase Class A Shares you will pay the
applicable sales charge at the time of your purchase. By
purchasing Class C Shares, you will pay a sales charge over a
period of six years after purchase but without paying anything at
time of purchase, much as goods can be purchased on an
installment plan. You are subject to a conditional deferred sales
charge, described below, but only if you redeem your Class C
Shares before they have been held 12 months from your purchase.
(See "Computation of Holding Periods for Class C Shares.")

     Class A Shares, "Front-Payment Class Shares," are offered
     to anyone at net asset value plus a sales charge, paid at
     the time of purchase, at the maximum rate of 4.0% of the
     public offering price, with lower rates for larger
     purchases. When you purchase Class A Shares, the amount of
     your investment is reduced by the applicable sales charge.
     Class A Shares are subject to an asset retention service
     fee under the Fund's Distribution Plan at the rate of 0.15
     of 1% of the average annual net assets represented by the
     Class A Shares. Certain Class A Shares purchased in
     transactions of $1 million or more are subject to a
     contingent deferred sales charge. (See "Purchase of $1
     Million or More.")


     Class C Shares, "Level-Payment Class Shares," are offered
     to anyone at net asset value with no sales charge payable
     at purchase but with a level charge for distribution fees
     and service fees for six years after the date of purchase
     at the aggregate annual rate of 1% of the average annual
     net assets of the Class C Shares. (See "Distribution Plan"
     and "Shareholder Services Plan for Class C Shares.") Six
     years after the date of purchase, Class C Shares,
     including Class C Shares acquired in exchange for other
     Class C Shares under the Exchange Privilege (see "Exchange
     Privilege"), are automatically converted to Class A
     Shares. If you redeem Class C Shares before you have held
     them for 12 months from the date of purchase you will pay
     a contingent deferred sales charge ("CDSC") at the rate of
     1%, calculated on the net asset value of the redeemed
     Class C Shares at the time of purchase or of redemption,
     whichever is less. The amount of any CDSC will be paid to
     the Distributor. The CDSC does not apply to shares
     acquired through the reinvestment of dividends on Class C
     Shares or to any Class C Shares held for more than 12
     months after purchase. For purposes of applying the CDSC
     and determining the time of conversion, the 12-month and
     six-year holding periods are considered modified by up to
     one month depending upon when during a month your purchase
     of such shares is made. (See "Computation of Holding
     Periods for Class C Shares" and "How to Purchase Class C
     Shares.")
     
     In determining whether a CDSC is payable on a redemption
of Class C Shares, it will be assumed that the redemption is
made first of any shares acquired as dividends or
distributions, second of any Class C Shares you have held for
more than 12 months from the date of purchase and finally of
those Class C Shares as to which the CDSC is payable which you
have held the longest. This will result in your paying the
lowest possible CDSC.

Computation of Holding Periods for Class C Shares

     For purposes of determining the holding period for Class C
Shares, all of your purchases made during a calendar month will
be deemed to have been made on the first business day of that
month at the average cost of all purchases made during that
month. The 12-month CDSC holding period will end on the first
business day of the 12th calendar month after the date your
purchase is deemed to have been made. Accordingly, the CDSC
holding period applicable to your Class C Shares may be up to
one month less than the full 12 months depending upon when your
actual purchase was made during a month. Running of the
12-month CDSC holding period will be suspended for one month
for each period of thirty days during which you have held
shares of a money market fund you have received in exchange for
Class C Shares under the Exchange Privilege. (See "Exchange
Privilege.") 

     Your Class C Shares will automatically convert to Class A
Shares six years after the date of purchase, together with a
pro-rata portion of all Class C Shares representing dividends
and other distributions paid in additional Class C Shares. The
Class C Shares so converted will no longer be subject to the
higher expenses borne by the Class C Shares. The conversion
will be effected at relative net asset values on the first
business day of the month following that in which the sixth
anniversary of your purchase of the Class C Shares occurred,
except as noted below. Accordingly, the holding period
applicable to your Class C Shares may be up to one month more
than the six years depending upon when your actual purchase was
made during a month. Because the per share value of Class A
Shares may be higher than that of Class C Shares at the time of
conversion, you may receive fewer Class A Shares than the
number of Class C Shares converted. If you have made one or
more exchanges of Class C Shares among the Aquila-sponsored
tax-free municipal bond funds or equity funds under the
Exchange Privilege, the six-year holding period is deemed to
have begun on the date you purchased your original Class C
Shares of the Fund or of another of the Aquila bond or equity
funds. The six-year holding period will be suspended by one
month for each period of thirty days during which you hold
shares of a money market fund you have received in exchange for
Class C Shares under the Exchange Privilege. (See "Exchange
Privilege.")

     The following chart summarizes the principal differences
between Class A Shares and Class C Shares.




                         Class A                  Class C

                                            
Initial Sales            Maximum of 4%            None
Charge                   of the Public
                         Offering Price



Contingent               None (except             Maximum CDSC
Deferred                 for certain              of 1% if shares
Sales Charge             purchases over           redeemed before
                         $1 Million)              12 months; 0% 
                                                  after 12 months


Distribution and         0.15 of 1%               Distribution fee
Service Fees                                      of 0.75 of 1% and
                                                  a service fee of
                                                  0.25 of 1% for a 
                                                  total of 1%, 
                                                  payable for six
                                                  years

Other Information        Initial Sales            Shares convert
                         Charge waived            to Class A Shares
                         or reduced in            after six years
                         some cases



Factors to Consider in Choosing Classes of Shares

     This discussion relates to the major differences between
Class A Shares and Class C Shares. It is recommended that any
investment in the Fund be considered long-term in nature.

     Over time, the cumulative total cost of the 1% annual
service and distribution fees on the Class C Shares will equal or
exceed the total cost of the initial 4% maximum initial sales
charge and 0.15 of 1% annual fee payable for Class A Shares. For
example, if equal amounts were paid at the same time for Class A
Shares (where the amount invested is reduced by the amount of the
sales charge) and for Class C Shares (which carry no sales charge
at the time of purchase) and the net asset value per share
remained constant over time, the total of such costs for Class C
Shares would equal the total of such costs for Class A Shares
after approximately four and two-thirds years. This example
assumes no redemptions and disregards the time value of money.
Purchasers of Class C Shares have all of their investment dollars
invested from the time of purchase, without having their
investment reduced at the outset by the initial sales charge
payable for Class A Shares. If you invest in Class A Shares you
will pay the entire sales charge at the time of purchase.
Accordingly, if you expect to redeem your shares within a
reasonably short time after purchase, you should consider the
total cost of such an investment in Class A Shares compared with
a similar investment in Class C Shares. The example under "Table
of Expenses" shows the effect of Fund expenses for both classes
if a hypothetical investment in each of the classes is held for
1, 3, 5 and 10 years. (See the Table of Expenses.)

     Dividends and other distributions paid by the Fund with
respect to shares of each class are calculated in the same manner
and at the same time. The dividends actually paid with respect to
Class C Shares will be lower than those paid on Class A because
Class C Shares bear higher distribution and service fees and will
have a higher expense ratio. In addition, the dividends of each
class can vary because each class will bear certain
class-specific charges. For example, each class will bear the
costs of printing and mailing annual reports to its own
shareholders.

                    HOW TO INVEST IN THE FUND

     The Fund's shares may be purchased through any investment
broker or dealer (a "selected dealer") which has a sales
agreement with Aquila Distributors, Inc. (the "Distributor") or
through the Distributor. There are two ways to make an initial
investment: (i) order the shares through your investment broker
or dealer, if it is a selected dealer; or (ii) mail the
Application with payment to Administrative Data Management Corp.
(the "Agent") at the address on the Application. If you purchase
Class A Shares, the applicable sales charge will apply in either
instance. Subsequent investments are also subject to the
applicable sales charges. You are urged to complete an
Application and send it to the Agent so that expedited
shareholder services can be established at the time of your
investment. Unless your initial investment is specified to be
made in Class C Shares, it will be made in Class A Shares.

     The minimum initial investment for Class A Shares and Class
C Shares is $1,000, except as otherwise stated in the Prospectus
or Additional Statement. You may also make an initial investment
of at least $50 by establishing an Automatic Investment Program.
To do this you must open an account for automatic investments of
at least $50 each month and make an initial investment of at
least $50. (See below and "Automatic Investment Program" in the
Application.) Such investment must be drawn in United States
dollars on a United States commercial or savings bank, a credit
union or a United States branch of a foreign commercial bank
(each of which is a "Financial Institution"). You may make
subsequent investments in the same class of shares in any amount
(unless you have an Automatic Withdrawal Plan). Your subsequent
investment may be made through a selected dealer or by forwarding
payment to the Agent, with the name(s) of account owner(s), the
account number, the name of the Fund and the class of shares to
be purchased. With subsequent investments, please send the
pre-printed stub attached to the Fund's confirmations.

     Subsequent investments of $50 or more in shares of the same
class as your initial investment can be made by electronic funds
transfer from your demand account at a Financial Institution. To
use electronic funds transfer for your purchases, your Financial
Institution must be a member of the Automated Clearing House and
the Agent must have received your completed Application
designating this feature, or, after your account has been opened,
a Ready Access Features form available from the Distributor or
the Agent. A pre-determined amount can be regularly transferred
for investment ("Automatic Investment"), or single investments
can be made upon receipt by the Agent of telephone instructions
from anyone ("Telephone Investment"). The maximum amount of each
Telephone Investment is $50,000. Upon 30 days' written notice to
shareholders, the Fund may modify or terminate these investment
methods at any time or charge a service fee, although no such fee
is currently contemplated.

     The offering price is the net asset value per share for
Class C Shares and the net asset value per share plus the
applicable sales charge for Class A Shares. The offering price
determined on any day applies to all purchase orders received by
the Agent from selected dealers that day, except that orders
received by it after 4:00 p.m. New York time will receive that
day's offering price only if such orders were received by
selected dealers from customers prior to such time and
transmitted to the Distributor prior to its close of business
that day (normally 5:00 p.m. New York time); if not so
transmitted, such orders will be filled at the next determined
offering price. Selected dealers are required to transmit orders
promptly. Investments by mail are made at the offering price next
determined after receipt of the purchase order by the Agent.
Purchase orders received on other than a business day will be
executed on the next succeeding business day. Purchases by
Automatic Investment and Telephone Investment will be executed on
the first business day occurring on or after the date an order is
considered received by the Agent at the price determined on that
day. In the case of Automatic Investment your order will be
executed on the date you specified for investment at the price
determined on that day. If that day is not a business day your
order will be executed at the price determined on the next
business day. In the case of Telephone Investment your order will
be filled at the next determined offering price. If your order is
placed after the time for determining the net asset value of the
Fund shares for any day it will be executed at the price
determined on the following business day. The sale of shares will
be suspended during any period when the determination of net
asset value is suspended and may be suspended by the Distributor
when the Distributor judges it in the Fund's best interest to do
so.

     At the date of the Prospectus, shares of the Fund are
available only in the following states: Kentucky, Alabama,
Florida, Hawaii, Illinois, Indiana, New Jersey, New York, 
Pennsylvania, Ohio, Tennessee and the District of Columbia.

     If you do not reside in one of these states you should not
purchase shares of the Fund. If shares are sold outside of these
states the Fund can redeem them. Such a redemption may result in
a loss to you and may have tax consequences. In addition, if your
state of residence is not Kentucky, the dividends from the Fund
may not be exempt from income tax of the state in which you
reside. Accordingly, you should consult your tax adviser before
acquiring shares of the Fund.

How to Purchase Class A Shares 
(Front-Payment Class Shares)

     The following table shows the amount of the sales charges to
a "single purchaser" (defined below) together with the dealer
discounts paid to dealers and the agency commissions paid to
brokers (collectively called the "commissions") for Class A
Shares:



                         Sales          Sales          Commis-
                         Charge         Charge         sions
                         as             as             as
                         Percentage     Approximate    Percentage
                         of Public      Percentage     of 
Amount of                Offering       of Amount      Offering
Purchase                 Price          Invested       Price

                                              
Less than $25,000......  4.00%          4.17%          3.50%
$25,000 but less
   than $50,000........  3.75%          3.90%          3.50%
$50,000 but less
   than $100,000.......  3.50%          3.63%          3.25%
$100,000 but less
   than $250,000.......  3.25%          3.36%          3.00%
$250,000 but less
   than $500,000.......  3.00%          3.09%          2.75%
$500,000 but less
   than $1,000,000.....  2.50%          2.56%          2.25%

For purchases of $1 million or more see "Purchase of $1 Million
or More," below.




     The table of sales charges is applicable to purchases of
Class A Shares by a "single purchaser," i.e.: (a) an individual;
(b) an individual together with his or her spouse and their
children under the age of 21 purchasing shares for his or their
own accounts; (c) a trustee or other fiduciary purchasing shares
for a single trust estate or a single fiduciary account; and (d)
a tax-exempt organization enumerated in Section 501(c)(3) or (13)
of the Code.

     Upon notice to all selected dealers, the Distributor may
reallow up to the full amount of the applicable sales charge as
shown in the above schedule during periods specified in such
notice. During periods when all or substantially all of the
entire sales charge is reallowed, such selected dealers may be
deemed to be underwriters as that term is defined in the
Securities Act of 1933.

Purchase of $1 Million or More

     Class A Shares issued under the following circumstances are
called "CDSC Class A Shares": (i) shares issued in a single
purchase of $1 million or more by a single purchaser; and (ii)
all shares issued in a single purchase to a single purchaser the
value of which, when added to the value of the CDSC Class A
Shares and Class A Shares on which a sales charge has been paid,
already owned at the time of such purchase, equals or exceeds $1
million. CDSC Class A Shares also include certain Class A Shares
issued under the program captioned "Special Dealer Arrangements,"
below. CDSC Class A Shares do not include (i) Class A Shares
purchased without sales charge pursuant to the terms described
under "General," below and (ii) Class A Shares purchased in
transactions of less than $1 million and when certain special
dealer arrangements are not in effect under "Certain Investment
Companies" set forth under "Reduced Sales Charges," below.

     When you purchase CDSC Class A Shares you will not pay a
sales charge at the time of purchase, and the Distributor will
pay to any dealer effecting such a purchase an amount equal to 1%
of the sales price of the shares purchased for purchases of $1
million but less than $2.5 million, 0.50 of 1% for purchases of
$2.5 million but less than $5 million, and 0.25 of 1% for
purchases of $5 million or more.

     If you redeem all or part of your CDSC Class A Shares during
the four years after your purchase of such shares, at the time of
redemption you will be required to pay to the Distributor a
special contingent deferred sales charge based on the lesser of
(i) the net asset value of your redeemed CDSC Class A Shares at
the time of purchase or (ii) the net asset value of your redeemed
CDSC Class A Shares at the time of redemption (the "Redemption
Value"). The special charge will be an amount equal to 1% of the
Redemption Value if the redemption occurs within the first two
years after purchase, and 0.50 of 1% of the Redemption Value if
the redemption occurs within the third or fourth year after
purchase. The special charge will apply to redemptions of CDSC
Class A Shares purchased without a sales charge pursuant to a
Letter of Intent, as described below under "Reduced Sales Charges
for Certain Purchasers of Class A Shares." The special charge
does not apply to shares acquired through the reinvestment of
dividends on CDSC Class A Shares or to any CDSC Class A Shares
held for more than four years after purchase. In determining
whether the special charge is applicable, it will be assumed that
the CDSC Class A Shares you have held the longest are the first
CDSC Class A Shares to be redeemed, unless you instruct the Agent
otherwise. It will also be assumed that if you have both CDSC
Class A Shares and non-CDSC Class A Shares the non-CDSC Class A
Shares will be redeemed first.

     For purposes of determining the holding period for CDSC
Class A Shares, all of your purchases made during a calendar
month will be deemed to have been made on the first business day
of that month at the average cost of all purchases made during
that month. The four-year holding period will end on the first
business day of the 48th calendar month after the date your
purchase is deemed to have been made. Accordingly, the CDSC
holding period applicable to your CDSC Class A Shares may be up
to one month less than the full 48 months depending upon when
your actual purchase was made during a month. Running of the
48-month CDSC holding period will be suspended for one month for
each period of thirty days during which you have held shares of a
money market fund you have received in exchange for CDSC Class A
Shares under the Exchange Privilege. (See "Exchange Privilege.") 

Reduced Sales Charges for Certain Purchases 
of Class A Shares

     Right of Accumulation: If you are a "single purchaser" you
may benefit from a reduction of the sales charge in accordance
with the above schedule for subsequent purchases of Class A
Shares if the cumulative value (at cost or current net asset
value, whichever is higher) of Class A Shares you have previously
purchased with a sales charge, together with Class A Shares of
your subsequent purchase with such a charge, amounts to $25,000
or more.

     Letters of Intent: The foregoing schedule of reduced sales
charges will also be available to "single purchasers" who enter
into a written Letter of Intent (included in the Application)
providing for the purchase, within a thirteen-month period, of
Class A Shares of the Fund through a single selected dealer or
through the Distributor. Class A Shares of the Fund which you
previously purchased during a 90-day period prior to the date of
receipt by the Distributor of your Letter of Intent and which you
still own may also be included in determining the applicable
reduction. For further details, including escrow provisions, see
the Letter of Intent provisions of the Application.

     General: Class A Shares may be purchased at the next
determined net asset value by the Fund's Trustees and officers,
by the directors, officers and certain employees, retired
employees and representatives of the Adviser and its parent and
affiliates, the Administrator and the Distributor, by selected
dealers and brokers and their officers and employees, by certain
persons connected with firms providing legal, advertising or
public relations assistance, by certain family members of, and
plans for the benefit of, the foregoing, and for the benefit of
trust or similar clients of banking institutions over which these
institutions have full investment authority if the Distributor
has entered into an agreement relating to such purchases. Except
for the last category, purchasers must give written assurance
that the purchase is for investment and that the Class A Shares
will not be resold except through redemption. There may be tax
consequences of these purchases. Such purchasers should consult
their own tax counsel. Class A Shares may also be issued at net
asset value in a merger, acquisition or exchange offer made
pursuant to a plan of reorganization to which the Fund is a
party.

     The Fund permits the sale of its Class A Shares at prices
that reflect the reduction or elimination of the sales charge to
investors who are members of certain qualified groups meeting the
following requirements. A qualified group (i) is a group or
association, or a category of purchasers who are represented by a
fiduciary, professional or other representative (other than a
registered broker-dealer), which (ii) satisfies uniform criteria
which enable the Distributor to realize economies of scale in its
costs of distributing shares; (iii) gives its endorsement or
authorization (if it is a group or association) to an investment
program to facilitate solicitation of its membership by a broker
or dealer; and (iv) complies with the conditions of purchase that
are set forth in any agreement entered into between the Fund and
the group, representative or broker or dealer. At the time of
purchase you must furnish the Distributor with information
sufficient to permit verification that the purchase qualifies for
a reduced sales charge, either directly or through a broker or
dealer.

     Certain Investment Companies: Class A Shares of the Fund may
be purchased at net asset value without sales charge (except as
set forth below under "Special Dealer Arrangements") to the
extent that the aggregate net asset value of such Class A Shares
does not exceed the proceeds from a redemption (a "Qualified
Redemption"), made within 120 days prior to such purchase, of
shares of another investment company on which a sales charge,
including a contingent deferred sales charge, has been paid.
Additional information is available from the Distributor.

     To qualify, the following special procedures must be
followed:

     1. A completed Application (included in the Prospectus) and
     payment for the shares to be purchased must be sent to the
     Distributor, Aquila Distributors, Inc., 380 Madison Avenue,
     Suite 2300, New York, NY 10017 and should not be sent to the
     Shareholder Servicing Agent of the Fund, Administrative Data
     Management Corp. (This instruction replaces the mailing
     address contained on the Application.)

     2. The Application must be accompanied by evidence
     satisfactory to the Distributor that the prospective
     shareholder has made a Qualified Redemption in an amount at
     least equal to the net asset value of the Class A Shares to
     be purchased. Satisfactory evidence includes a confirmation
     of the date and the amount of the redemption from the
     investment company, its transfer agent or the investor's
     broker or dealer, or a copy of the investor's account
     statement with the investment company reflecting the
     redemption transaction.

     3. You must complete and return to the Distributor a
     Transfer Request Form, which is available from the
     Distributor.
     
     The Fund reserves the right to alter or terminate this
privilege at any time without notice. The Prospectus will be
supplemented to reflect such alteration or termination.

     Special Dealer Arrangements: During certain periods
determined by the Distributor, the Distributor (not the Fund)
will pay to any dealer effecting a purchase of Class A Shares of
the Fund using the proceeds of a Qualified Redemption the lesser
of (i) 1% of such proceeds or (ii) the same amounts described
under "Purchase of $1 Million or More," above, on the same terms
and conditions. Class A Shares of the Fund issued in such a
transaction will be CDSC Class A Shares and if you thereafter
redeem all or part of such shares during the four-year period
from the date of purchase you will be subject to the special
contingent deferred sales charge described under "Purchase of $1
Million or More," above, on the same terms and conditions.
Whenever the Special Dealer Arrangements are in effect the
Prospectus will be supplemented.

How to Purchase Class C Shares (Level-Payment Class Shares)

     Level-Payment Class Shares (Class C Shares) are offered at
net asset value with no sales charge payable at purchase. A level
charge is imposed for service and distribution fees for the first
six years after the date of purchase at the aggregate annual rate
of 1% of the average annual net assets of the Fund represented by
the Class C Shares. If you redeem Class C Shares before you have
held them for 12 months from the date of purchase you will pay a
contingent deferred sales charge ("CDSC"). The CDSC is charged at
the rate of 1%, calculated on the net asset value of the redeemed
Class C Shares at the time of purchase or at redemption,
whichever is less. There is no CDSC after Class C Shares have
been held beyond the applicable period. The CDSC does not apply
to shares acquired through the reinvestment of dividends on Class
C Shares.

     The Distributor will pay to any dealer effecting a purchase
of Class C Shares an amount equal to 1% of the sales price of the
Class C Shares purchased. 

Additional Compensation for Dealers

     The Distributor, at its own expense, may also provide
additional compensation to dealers in connection with sales of
any class of shares of the Fund. Additional compensation may
include payment or partial payment for advertising of the Fund's
shares, payment of travel expenses, including lodging, incurred
in connection with attendance at sales seminars taken by
qualifying registered representatives to locations within or
outside of the United States, other prizes or financial
assistance to securities dealers in offering their own seminars
or conferences. In some instances, such compensation may be made
available only to certain dealers whose representatives have sold
or are expected to sell significant amounts of such shares.
Dealers may not use sales of the Fund's shares to qualify for the
incentives to the extent such may be prohibited by the laws of
any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. The cost to the
Distributor of such promotional activities and such payments to
participating dealers will not exceed the amount of the sales
charges in respect of sales of all classes of shares of the Fund
effected through such participating dealers, whether retained by
the Distributor or reallowed to participating dealers. No such
additional compensation to dealers in connection with sales of
shares of the Fund will affect the price you pay for shares or
the amount that the Fund will receive from such sales. Any of the
foregoing payments to be made by the Distributor may be made
instead by the Administrator out of its own funds, directly or
through the Distributor.

     Brokers and dealers may receive different levels of
compensation for selling different classes of shares.

Systematic Payroll Investments

     If your employer has established with the Fund a Systematic
Payroll Investment Plan ("Payroll Plan") you may arrange for
systematic investments into the Fund through a Payroll Plan.
Investments can be made in either Class A Shares or Class C
Shares. In order to participate in a Payroll Plan, you should
make arrangements with your own employer's payroll department,
and you must complete and sign any special application forms
which may be required by your employer. You must also complete
the Application included in the Prospectus. Once your application
is received and put into effect, under a Payroll Plan the
employer will make a deduction from payroll checks in an amount
you determine, and will remit the proceeds to the Fund. An
investment in the Fund will be made for you at the offering
price, which includes applicable sales charges determined as
described above, when the Fund receives the funds from your
employer. The Fund will send a confirmation of each transaction
to you. To change the amount of or to terminate your
participation in the Payroll Plan (which could take up to ten
days), you must notify your employer.

Confirmations and Share Certificates 

     All purchases of shares will be confirmed and credited to
you in an account maintained for you at the Agent in full and
fractional shares of the Fund (rounded to the nearest 1/1000th of
a share). 

     No share certificates will be issued for Class C Shares.
Share certificates for Class A Shares will be issued only if you
so request in writing to the Agent. All share certificates
previously issued by the Fund represent Class A Shares. No
certificates will be issued for fractional Class A shares or if
you have elected Automatic Investment or Telephone Investment for
Class A Shares (see "How to Invest in the Fund" above) or
Expedited Redemption (see "How to Redeem Your Investment" below).
If certificates for Class A Shares are issued at your request,
Expedited Redemption Methods described below will not be
available. In addition, you may incur delay and expense if you
lose the certificates. 

     The Fund and the Distributor reserve the right to reject any
order for the purchase of shares. In addition, the offering of
shares may be suspended at any time and resumed at any time
thereafter.

Distribution Plan

     The Fund has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule provides in
substance that an investment company may not engage directly or
indirectly in financing any activity which is primarily intended
to result in the sale of its shares except pursuant to a written
plan adopted under the Rule. The Plan has three parts.

     Under one part of the Plan, the Fund is authorized to make
payments with respect to Class A Shares ("Class A Permitted
Payments") to Qualified Recipients, which payments shall be made
through the Distributor or shareholder servicing agent as
disbursing agent, and may not exceed, for any fiscal year of the
Fund (as adjusted for any part or parts of a fiscal year during
which payments under the Plan are not accruable or for any fiscal
year which is not a full fiscal year), 0.15 of 1% of the average
annual net assets represented by the Class A Shares of the Fund.
Such payments shall be made only out of the Fund's assets
allocable to the Class A Shares. "Qualified Recipients" means
broker-dealers or others selected by the Distributor, including
but not limited to any principal underwriter of the Fund, with
which the Fund or the Distributor has entered into written
agreements and which have rendered assistance (whether direct,
administrative, or both) in the distribution and/or retention of
the Fund's Class A Shares or servicing of accounts of
shareholders owning Class A Shares.

     Under another part of the Plan, the Fund is authorized to
make payments with respect to Class C Shares ("Class C Permitted
Payments") to Qualified Recipients. Class C Permitted Payments
shall be made through the Distributor or shareholder servicing
agent as disbursing agent, and may not exceed, for any fiscal
year of the Fund (as adjusted for any part or parts of a fiscal
year during which payments under the Plan are not accruable or
for any fiscal year which is not a full fiscal year), 0.75 of 1%
of the average annual net assets represented by the Class C
Shares of the Fund. Such payments shall be made only out of the
Fund's assets allocable to the Class C Shares. "Qualified
Recipients" means broker-dealers or others selected by the
Distributor, including but not limited to any principal
underwriter of the Fund, with which the Distributor has entered
into written agreements and which have rendered assistance
(whether direct, administrative, or both) in the distribution
and/or retention of the Fund's Class C Shares or servicing of
accounts of shareholders owning Class C Shares. Payments with
respect to Class C Shares during the first year after purchase
are paid to the Distributor and thereafter to other Qualified
Recipients.

     Permitted Payments under the Plan commenced July 1, 1994.
Until April 1, 1996, all outstanding shares of the Fund were what
are currently designated Class A Shares. During the fiscal year
ended December 31, 1996, $338,443 was paid to Qualified
Recipients under the Plan as then in effect with respect to Class
A Shares, of which $4,724 was retained by the Distributor. During
the fiscal year ended December 31, 1996 payments of $1,000 were
made with respect to Class C Shares, all of which was retained by
the Distributor.

     Whenever the Fund makes Permitted Payments, the aggregate
annual rate of the advisory fee and administration fee otherwise
payable by the Fund will be reduced from 0.50 of 1% to 0.40 of 1%
of the Fund's average annual net assets. (See "Management
Arrangements.")

     Another part of the Plan is designed to protect against any
claim against or involving the Fund that some of the expenses
which might be considered to be sales-related which the Fund pays
or may pay come within the purview of the Rule. The Fund believes
that except for Permitted Payments it is not financing any such
activity and does not consider any payment enumerated in this
part of the Plan as so financing any such activity. However, it
might be claimed that some of the expenses the Fund pays come
within the purview of the Rule. If and to the extent that any
payment as specifically listed in the Plan (see the Additional
Statement) is considered to be primarily intended to result in or
as indirect financing of any activity which is primarily intended
to result in the sale of Fund shares, these payments are
authorized under the Plan. In addition, if the Administrator, out
of its own funds, makes payment for distribution expenses such
payments are authorized. See the Additional Statement. 

Shareholder Services Plan for Class C Shares

     Under a Shareholder Services Plan, the Fund is authorized to
make payments with respect to Class C Shares ("Service Fees") to
Qualified Recipients. Service Fees shall be paid through the
Distributor or shareholder servicing agent as disbursing agent,
and may not exceed, for any fiscal year of the Fund (as adjusted
for any part or parts of a fiscal year during which payments
under the Plan are not accruable or for any fiscal year which is
not a full fiscal year), 0.25 of 1% of the average annual net
assets represented by the Class C Shares of the Fund. Such
payments shall be made only out of the Fund's assets represented
by the Class C Shares. "Qualified Recipients" means
broker-dealers or others selected by the Distributor, including
but not limited to any principal underwriter of the Fund, with
which the Fund or the Distributor has entered into written
agreements and which have agreed to provide personal services to
holders of Class C Shares and/or maintenance of Class C
shareholder accounts. See the Additional Statement. Service Fees
with respect to Class C Shares will be paid to the Distributor.
During the fiscal year ended December 31, 1996 payments of $333
were made for Service Fees with respect to Class C Shares, all of
which was retained by the Distributor.

                  HOW TO REDEEM YOUR INVESTMENT

     You may redeem all or any part of your shares at the net
asset value next determined after acceptance of your redemption
request at the Agent (subject to any applicable contingent
deferred sales charge for redemptions of Class C Shares and CDSC
Class A Shares). For redemptions of Class C Shares and CDSC Class
A Shares, at the time of redemption a sufficient number of
additional shares will be redeemed to pay for any applicable
contingent deferred sales charge. Redemptions can be made by the
various methods described below. There is no minimum period for
any investment in the Fund, except for shares recently purchased
by check, Automatic Investment or Telephone Investment as
discussed below. Except for CDSC Class A Shares (see "Purchase of
$1 Million or More") there are no redemption fees or withdrawal
penalties for Class A Shares. Class C Shares are subject to a
contingent deferred sales charge if redeemed before they have
been held 12 months from the date of purchase. (See "Alternative
Purchase Plans.") A redemption may result in a transaction
taxable to you. If you own both Class A Shares and Class C Shares
and do not specify which you wish to redeem, it will be assumed
that you wish to redeem Class A Shares.

     For your convenience the Fund offers expedited redemption
for all classes of shares to provide you with a high level of
liquidity for your investment.

Expedited Redemption Methods
(Non-Certificate Shares)

     You have the flexibility of two expedited methods of
initiating redemptions. They are available as to shares of any
class not represented by certificates.

     
     1. By Telephone. The Agent will accept instructions by
     telephone from anyone to redeem shares and make payments 

          a) to a Financial Institution account you have
          predesignated or 

          b) by check in the amount of $50,000 or less, mailed to
          you, if your shares are registered in your name at the
          Fund and the check is sent to your address of record,
          provided that there has not been a change of your
          address of record during the 30 days preceding your
          redemption request. You can make only one request for
          telephone redemption by check in any 7-day period. 
     
     See "Redemption Payments" below for payment methods. Your
name, your account number and your address of record must be
supplied.

     To redeem an investment by this method, telephone:

             800-872-5860 toll free or 908-855-5731

     Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.

     2. By FAX or Mail. You may also request redemption payments
     to a predesignated Financial Institution account by a letter
     of instruction sent to: Administrative Data Management
     Corp., Attn: Aquilasm Group of Funds, by FAX at 908-855-5730
     or by mail at 581 Main Street, Woodbridge, NJ 07095-1198,
     indicating account name(s), account number, amount to be
     redeemed, and any payment directions, signed by the
     registered holder(s). Signature guarantees are not required.
     See "Redemption Payments" below for payment methods.
     
     If you wish to have redemption proceeds sent to a Financial
Institution Account, you should so elect on the Expedited
Redemption section of the Application or the Ready Access
Features form and provide the required information concerning
your Financial Institution account number. The Financial
Institution account must be in the exclusive name(s) of the
shareholder(s) as registered with the Fund. You may change the
designated Financial Institution account at any time by
completing and returning a Ready Access Features form. For
protection of your assets, this form requires signature
guarantees and possible additional documentation.

Regular Redemption Method 
(Certificate and Non-Certificate Shares)

     1. Certificate Shares. Certificates representing Class A
     Shares to be redeemed should be sent in blank (unsigned) to
     the Fund's Shareholder Servicing Agent: Administrative Data
     Management Corp., Attn: Aquilasm Group of Funds, 581 Main
     Street, Woodbridge, NJ 07095-1198, with payment
     instructions. A stock assignment form signed by the
     registered shareholder(s) exactly as the account is
     registered must also be sent to the Shareholder Servicing
     Agent.
     
     For your own protection, it is essential that certificates
be mailed separately from signed redemption documentation.
Because of possible mail problems, it is also recommended that
certificates be sent by registered mail, return receipt
requested.

     For a redemption request to be in "proper form," the
signature or signatures must be the same as in the registration
of the account. In a joint account, the signatures of both
shareholders are necessary. Signature guarantees may be required
if sufficient documentation is not on file with the Agent.
Additional documentation may be required where shares are held by
certain types of shareholders such as corporations, partnerships,
trustees or executors, or if redemption is requested by other
than the shareholder of record. If redemption proceeds of $50,000
or less are payable to the record holder and are to be sent to
the record address, no signature guarantee is required, except as
noted above. In all other cases, signatures must be guaranteed by
a member of a national securities exchange, a U.S. bank or trust
company, a state-chartered savings bank, a federally chartered
savings and loan association, a foreign bank having a U.S.
correspondent bank, a participant in the Securities Transfer
Association Medallion Program (STAMP), the Stock Exchanges
Medallion Program (SEMP) or the New York Stock Exchange, Inc.
Medallion Signature Program (MSP). A notary public is not an
acceptable signature guarantor.

     2. Non-Certificate Shares. If you own non-certificate shares
     registered on the books of the Fund, and you have not
     elected Expedited Redemption to a predesignated Financial
     Institution account, you must use the Regular Redemption
     Method. Under this redemption method you should send a
     letter of instruction to: Administrative Data Management
     Corp., Attn: Aquilasm Group of Funds, 581 Main Street,
     Woodbridge, NJ 07095-1198, containing:

               Account Name(s);

               Account Number;

               Dollar amount or number of shares to be redeemed
               or a statement that all shares held in the account
               are to be redeemed;

               Payment instructions (normally redemption proceeds
               will be mailed to your address as registered with
               the Fund);

               Signature(s) of the registered shareholder(s); and

               Signature guarantee(s), if required, as indicated
               above.

Redemption Payments

     Redemption payments will ordinarily be mailed to you at your
address of record. If you so request and the amount of your
redemption proceeds is $1,000 or more, the proceeds will,
wherever possible, be wired or transferred through the facilities
of the Automated Clearing House to the Financial Institution
account specified in the Expedited Redemption section of your
Application or Ready Access Features form. The Fund may impose a
charge, not exceeding $5.00 per wire redemption, after written
notice to shareholders who have elected this redemption
procedure. The Fund has no present intention of making this
charge. Upon 30 days' written notice to shareholders, the Fund
may modify or terminate the use of the Automated Clearing House
to make redemption payments at any time or charge a service fee,
although no such fee is presently contemplated. If any such
changes are made, the Prospectus will be supplemented to reflect
them. If you use a broker or dealer to arrange for a redemption,
it may charge you a fee for this service.

     The Fund will normally make payment for all shares redeemed
on the next business day (see "Net Asset Value Per Share")
following acceptance of the redemption request made in compliance
with one of the redemption methods specified above. Except as set
forth below, in no event will payment be made more than seven
days after acceptance of such a redemption request. However, the
right of redemption may be suspended or the date of payment
postponed (i) during periods when the New York Stock Exchange is
closed for other than weekends and holidays or when trading on
such Exchange is restricted as determined by the Securities and
Exchange Commission by rule or regulation; (ii) during periods in
which an emergency, as determined by the Securities and Exchange
Commission, exists which causes disposal of, or valuation of the
net asset value of, the portfolio securities to be unreasonable
or impracticable; or (iii) for such other periods as the
Securities and Exchange Commission may permit. Payment for
redemption of shares recently purchased by check (irrespective of
whether the check is a regular check or a certified, cashier's or
official bank check) or by Automatic Investment or Telephone
Investment may be delayed up to 15 days or until (i) the purchase
check or Automatic Investment or Telephone Investment has been
honored or (ii) the Agent has received assurances by telephone or
in writing from the Financial Institution on which the purchase
check was drawn, or from which the funds for Automatic Investment
or Telephone Investment were transferred, satisfactory to the
Agent and the Fund, that the purchase check or Automatic
Investment or Telephone Investment will be honored. Possible
delays in payment of redemption proceeds can be eliminated by
using wire payments or Federal Reserve drafts to pay for
purchases.

     If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by the distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in
conformity with applicable rules of the Securities and Exchange
Commission. See the Additional Statement for details.

     The Fund has the right to compel the redemption of shares
held in any account if the aggregate net asset value of such
shares is less than $500 as a result of shareholder redemptions
or failure to meet the minimum investment level under an
Automatic Purchase Program. If the Board elects to do this,
shareholders who are affected will receive prior written notice
and will be permitted 60 days to bring their accounts up to the
minimum before this redemption is processed.

Reinvestment Privilege

     You may reinvest without payment of any additional sales
charge all or part of any redemption proceeds within 120 days of
a redemption of shares in shares of the Fund of the same class as
the shares redeemed at the net asset value next determined after
the Agent receives your reinvestment order. In the case of Class
C Shares or CDSC Class A Shares on which a contingent deferred
sales charge was deducted at the time of redemption, the
Distributor will refund to you the amount of such sales charge,
which will be added to the amount of the reinvestment. The Class
C Shares or CDSC Class A Shares issued on reinvestment will be
deemed to have been outstanding from the date of your original
purchase of the redeemed shares, less the period from redemption
to reinvestment. The reinvestment privilege for any class may be
exercised only once a year, unless otherwise approved by the
Distributor. If you have realized a gain on the redemption of
your shares, the redemption transaction is taxable, and
reinvestment will not alter any capital gains tax payable. If
there has been a loss on the redemption, some or all of the loss
may be tax deductible, depending on the amount reinvested and the
length of time between the redemption and the reinvestment. You
should consult your own tax advisor on this matter.

                    AUTOMATIC WITHDRAWAL PLAN

     You may establish an Automatic Withdrawal Plan if you own or
purchase Class A Shares of the Fund having a net asset value of
at least $5,000. The Automatic Withdrawal Plan is not available
for Class C Shares.

     Under an Automatic Withdrawal Plan you will receive a
monthly or quarterly check in a stated amount, not less than $50.
If such a plan is established, all dividends and distributions
must be reinvested in your shareholder account. Redemption of
Class A Shares to make payments under the Automatic Withdrawal
Plan will give rise to a gain or loss for tax purposes. See the
Automatic Withdrawal Plan provisions of the Application included
in the Prospectus, the Additional Statement under "Automatic
Withdrawal Plan," and "Dividend and Tax Information" below.

     Purchases of additional Class A Shares concurrently with
withdrawals are undesirable because of sales charges when
purchases are made. Accordingly, you may not maintain an
Automatic Withdrawal Plan while simultaneously making regular
purchases. While an occasional lump sum investment may be made,
such investment should normally be an amount at least equal to
three times the annual withdrawal or $5,000, whichever is less.

                     MANAGEMENT ARRANGEMENTS

The Board of Trustees

     The business and affairs of the Fund are managed under the
direction and control of its Board of Trustees. The Additional
Statement lists the Fund's Trustees and officers and provides
further information about them.

The Advisory Agreement

     Banc One Investment Advisors Corporation (the "Adviser")
supervises the investment program of the Fund and the composition
of its portfolio.

     The services of the Adviser are rendered under an Investment
Advisory Agreement (the "Advisory Agreement") which provides,
subject to the control of the Board of Trustees, for investment,
supervisory and certain administrative services. The Advisory
Agreement states that the Adviser shall, at its expense, provide
to the Fund all office space and facilities, equipment and
clerical personnel necessary for the carrying out of the
Adviser's duties under the Advisory Agreement. The Adviser will,
at its expense, provide for pricing of the Fund's portfolio daily
using a pricing service or other source of pricing information
satisfactory to the Fund and, unless otherwise directed by the
Board of Trustees, provide for pricing of the Fund's portfolio at
least quarterly using another such source satisfactory to the
Fund.

     Under the Advisory Agreement, the Adviser pays all
compensation of those officers and employees of the Fund and of
those Trustees, if any, who are affiliated with the Adviser.
Under the Advisory Agreement, the Fund bears the cost of
preparing and setting in type its prospectuses, statements of
additional information, and reports to shareholders and the costs
of printing or otherwise producing and distributing those copies
of such prospectuses, statements of additional information and
reports as are sent to its shareholders. Under the Advisory
Agreement, all costs and expenses not expressly assumed by the
Adviser or by the Administrator under the Administration
Agreement or by the Fund's Distributor (principal underwriter)
are paid by the Fund. The Advisory Agreement lists examples of
such expenses borne by the Fund, the major categories of such
expenses being: legal and audit expenses, custodian and transfer
agent or shareholder servicing agent fees and expenses, stock
issuance and redemption costs, certain printing costs,
registration costs of the Fund and its shares under Federal and
State securities laws, interest, taxes and brokerage commissions,
and non-recurring expenses, including litigation.

     Under the Advisory Agreement, the Fund pays a fee payable
monthly and computed on the net asset value of the Fund as of the
close of business each business day at the annual rate of 0.17 of
1% of such net asset value provided, however, that for any day
that the Fund pays or accrues a fee under the Distribution Plan
of the Fund based upon the assets of the Fund (other than a fee
allocable by class to certain shares of the Fund), the management
fee shall be payable at the annual rate of 0.14 of 1% of such net
asset value. (Since the Administrator also receives a fee from
the Fund under the Administration Agreement, the total investment
advisory and administration fees which the Fund pays are at the
annual rate of 0.50 of 1% of such net assets, or, for any day
that the Fund pays or accrues a fee under the Distribution Plan
of the Fund based upon the assets of the Fund, at 0.40 of 1% of
such net asset value; see below.) Payments under the Distribution
Plan began on July 1, 1994 and the advisory and administration
fees are currently being accrued at the lower rate. Prior to
September 11, 1995, different advisory and administration
arrangements were in effect. See the Additional Statement for a
description of such arrangements. The Adviser and the
Administrator may, in order to attempt to achieve a competitive
yield on the shares of the Fund, each waive all or part of any
such fee.

     The Adviser agrees that the above fee shall be reduced, but
not below zero, by an amount equal to its pro-rata portion
(hereafter described) of the amount, if any, by which the total
expenses of the Fund in any fiscal year, exclusive of taxes,
interest and brokerage fees, shall exceed the lesser of (i) 2.5%
of the first $30 million of average annual net assets of the Fund
plus 2% of the next $70 million of such assets and 1.5% of such
assets in excess of $100 million, or (ii) 25% of the Fund's total
annual investment income. The pro-rata portion, as between the
Administrator and Adviser, is based on the aggregate of the fee
of the Adviser and the fee of the Administrator (exclusive of
amounts paid or to be paid out by the Administrator, if any, for
the applicable period pursuant to the Fund's Distribution Plan.)

     The Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Fund; see the
Additional Statement. Under these provisions, the Adviser is
authorized to consider sales of shares of the Fund or of any
other investment company or companies having the same investment
adviser, sub-adviser, administrator or principal underwriter as
the Fund.

     The Fund's Custodian is an affiliate of the Adviser. It is
expected that another banking subsidiary of the Adviser's parent,
Banc One Corporation, will provide a credit facility to the Fund.

The Administration Agreement

     Under an Administration Agreement (the "Administration
Agreement"), Aquila Management Corporation as Administrator, at
its own expense, provides office space, personnel, facilities and
equipment for the performance of its functions thereunder and as
is necessary in connection with the maintenance of the
headquarters of the Fund and pays all compensation of the Fund's
Trustees, officers and employees who are affiliated persons of
the Administrator.

     Under the Administration Agreement, subject to the control
of the Fund's Board of Trustees, the Administrator provides all
administrative services to the Fund other than those relating to
its investment portfolio. Such administrative services include
but are not limited to maintaining books and records of the Fund,
either keeping the accounting records of the Fund, including the
computation of the net asset value per share and the dividends
(however, the daily pricing of the Fund's portfolio is the
responsibility of the Adviser under the Advisory Agreement) or,
at its expense and responsibility, delegating these accounting
duties in whole or in part to a company satisfactory to the Fund,
and overseeing all relationships between the Fund and its
transfer agent, custodian, legal counsel, auditors and principal
underwriter, including the negotiation of agreements in relation
thereto, the supervision and coordination of the performance of
such agreements, and the overseeing of all administrative matters
which are necessary or desirable for effective operation of the
Fund and for the sale, servicing, or redemption of the Fund's
shares. See the Additional Statement for a further description of
functions listed in the Administration Agreement as part of such
duties.

     Under the Administration Agreement, the Fund pays a fee
payable monthly and computed on the net asset value of the Fund
at the end of each business day at the annual rate of 0.33 of 1%
of such net asset value, provided, however, that for any day that
the Fund pays or accrues a fee under the Distribution Plan of the
Fund based upon the assets of the Fund (other than a fee
allocable by class to certain shares of the Fund), the annual fee
will be payable at the annual rate of 0.26 of 1% of such net
asset value. Payments under the Distribution Plan began on July
1, 1994 and administration fees are currently being accrued at
the lower rate. See the Additional Statement for a description of
the Fund's former management fees. The Administrator has agreed
that the above fee shall be reduced, but not below zero, by an
amount equal to its pro-rata portion (defined as in the Advisory
Agreement) of the amount, if any, by which the total expenses of
the Fund in any fiscal year, exclusive of taxes, interest and
brokerage fees, shall exceed the lesser of (i) 2.5% of the first
$30 million of average annual net assets of the Fund plus 2% of
the next $70 million of such assets and 1.5% of such assets in
excess of $100 million, or (ii) 25% of the Fund's total annual
investment income.

Information about the Adviser,
the Administrator and the Distributor

     Banc One Investment Advisors Corporation (the "Adviser") is
a wholly-owned subsidiary of BANC ONE CORPORATION ("Banc One").
Banc One currently has affiliate banking organizations in
Kentucky, Arizona, Colorado, Illinois, Indiana, Ohio, Oklahoma,
Texas, Utah, West Virginia and Wisconsin. On a consolidated
basis, Banc One had assets of over $101.8 billion as of December
31, 1996. As of April 1, 1997, the Adviser was responsible for
management of over $5.2 billion of investments in municipal
obligations, of which $2.3 billion were held in mutual funds and
of which $570 million were obligations of Kentucky issuers. The
Adviser services Kentucky clients at offices in Louisville and
Lexington. As it has been in the past, since the beginning of the
Fund's operations in 1987, the Fund's investments will continue
to be managed so that it will have a portfolio of
quality-oriented (investment grade) securities.

     The Fund's portfolio is managed locally in Kentucky by Mr.
Thomas S. Albright, Vice President and Senior Portfolio Manager,
at the Adviser's Louisville office. He has served in this
capacity since September, 1995, when the Adviser became adviser
to the Fund. From 1981 to 1995 he was employed by Liberty
National Bank, the Adviser's local predecessor, where he was
responsible for management of its investment portfolio. He also
served as President of Liberty Investment Services, Inc., that
bank's full service brokerage subsidiary. Mr. Albright is a
member of the Adviser's Fixed Income Fund Sub-Committee. Mr.
Albright attended the University of Louisville.

     See the Additional Statement as to the legality, under the
Glass-Steagall Act, of the Adviser's acting as the Fund's
investment adviser. In general, under that Act, the Adviser will
not, among other things, be involved in the promotion or
distribution of shares of the Fund.

     The Fund's Administrator is founder and administrator to the
Aquilasm Group of Funds, which consists of tax-free municipal
bond funds, money market funds and two equity funds. As of
December 31, 1996, these funds had aggregate assets of
approximately $2.7 billion, of which approximately $1.9 billion
consisted of assets of the tax-free municipal bond funds. The
Administrator, which was founded in 1984, is controlled by Mr.
Lacy B. Herrmann (directly, through a trust and through share
ownership by his wife). See the Additional Statement for
information on Mr. Herrmann.

     The Distributor currently handles the distribution of the
shares of fourteen funds (five money market funds, seven tax-free
municipal bond funds and two equity funds), including the Fund.
Under the Distribution Agreement, the Distributor is responsible
for the payment of certain printing and distribution costs
relating to prospectuses and reports as well as the costs of
supplemental sales literature, advertising and other promotional
activities.

     At the date of this Prospectus, there is a proposed
transaction whereby all of the shares of the Distributor, which
are currently owned by Mr. Herrmann, will be owned by certain
directors and/or officers of the Administrator and/or the
Distributor including Mr. Herrmann. 

     During the fiscal year ended December 31, 1996, the Fund
paid or accrued $316,432 and $587,239 to the Adviser and
Administrator respectively.

                  DIVIDEND AND TAX INFORMATION

Dividends and Distributions

     The Fund will declare all of its net income, as defined
below, as dividends on every day, including weekends and
holidays, on those shares outstanding for which payment was
received by the close of business on the preceding business day.
Net income for dividend purposes includes all interest income
accrued by the Fund since the previous dividend declaration,
including accretion of any original issue discount, less expenses
paid or accrued. As such net income will vary, the Fund's
dividends will also vary. Dividends and other distributions paid
by the Fund with respect to each class of its shares are
calculated at the same time and in the same manner. The per share
dividends of Class C Shares will be lower than the per share
dividends on the Class A Shares as a result of the higher service
and distribution fees applicable to those shares. In addition,
the dividends of each class can vary because each class will bear
certain class-specific charges. Dividends and other distributions
paid by the Fund with respect to each class of its shares are
calculated at the same time and in the same manner.

     It is the Fund's present policy to pay dividends so that
they will be received or credited by approximately the first day
of each month. Shareholders may elect to have dividends deposited
without charge by electronic funds transfers into an account at a
Financial Institution which is a member of the Automated Clearing
House by completing a Ready Access Features form.

     Redeemed shares continue to earn dividends through and
including the earlier of (i) the day before the day on which the
redemption proceeds are mailed, wired or transferred by the
facilities of the Automated Clearing House by the Agent or paid
by the Agent to a selected dealer; or (ii) the third day on which
the New York Stock Exchange is open after the day on which the
net asset value of the redeemed shares has been determined (see
"How To Redeem Your Investment").

     Net investment income includes amounts of income from the
Kentucky Obligations in the Fund's portfolio which are allocated
as "exempt-interest dividends." "Exempt-interest dividends" are
exempt from regular Federal income tax. The allocation of
"exempt-interest dividends" will be made by the use of one
designated percentage applied uniformly to all income dividends
declared during the Fund's tax year. Such designation will
normally be made in the first month after the end of each of the
Fund's fiscal years as to income dividends paid in the prior
year. It is possible that in certain circumstances, a small
portion of the dividends paid by the Fund will be subject to
income taxes. During the Fund's fiscal year ended December 31,
1996, 93.6% of the Fund's dividends were "exempt-interest
dividends." For the calendar year 1996, 6.4% of the total
dividends paid were taxable. The percentage of income designated
as tax-exempt for any particular dividend may be different from
the percentage of the Fund's income that was tax-exempt during
the period covered by the dividend.

     Distributions ("short-term gains distributions") from net
realized short-term gains, if any, and distributions ("long-term
gains distributions"), if any, from the excess of net long-term
capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be
paid out after that date; the Fund may also pay supplemental
distributions after the end of its fiscal year. If net capital
losses are realized in any year, they are charged against capital
and not against net investment income which is distributed
regardless of gains or losses. The Fund may be required to impose
backup withholding at a rate of 31% upon payment of redemptions
to shareholders, and from short- and long-term gains
distributions (if any) and any other distributions that do not
qualify as "exempt-interest dividends," if shareholders do not
comply with provisions of the law relating to the furnishing of
taxpayer identification numbers and reporting of dividends.

     Unless you request otherwise by letter addressed to the
Agent or by filing an appropriate Application prior to a given
ex-dividend date, dividends and distributions will be
automatically reinvested in full and fractional shares of the
Fund at net asset value on the record date for the dividend or
distribution or other date fixed by the Board of Trustees. An
election to receive cash will continue in effect until written
notification of a change is received by the Agent. All
shareholders, whether their dividends are received in cash or are
being reinvested, will receive a monthly account summary
indicating the current status of their investment. There is no
fixed dividend rate. Corporate shareholders of the Fund are not
entitled to any deduction for dividends received from the Fund.

Tax Information

     The Fund qualified during its last fiscal year as a
"regulated investment company" under the Code, and intends to
continue to so qualify. If it does so qualify, it will not be
liable for Federal income taxes on amounts paid by it as
dividends and distributions. However, the Code contains a number
of complex tests relating to such qualification and it is
possible although not likely that the Fund might not meet one or
more of these tests in any particular year. If it does not so
qualify, it would be treated for tax purposes as an ordinary
corporation, would receive no tax deduction for payments made to
shareholders and would be unable to pay dividends or
distributions which would qualify as "exempt-interest dividends"
or "capital gains dividends," as discussed below.

     The Fund intends to qualify during each fiscal year under
the Code to pay "exempt-interest dividends" to its shareholders.
Exempt-interest dividends which are derived from net income
earned by the Fund on Kentucky Obligations will be excludable
from gross income of the shareholders for regular Federal income
tax purposes. Capital gains dividends are not included in
exempt-interest dividends. Although "exempt-interest dividends"
are not taxed, each taxpayer must report the total amount of
tax-exempt interest (including exempt-interest dividends from the
Fund) received or acquired during the year.

     The Omnibus Budget Reconciliation Act of 1993 requires that
either gains realized by the Fund on the sale of municipal
obligations acquired after April 30, 1993 at a price which is
less than face or redemption value be included as ordinary income
to the extent such gains do not exceed such discount or that the
discount be amortized and included ratably in taxable income.
There is an exception to the foregoing treatment if the amount of
the discount is less than 0.25% of face or redemption value
multiplied by the number of years from acquisition to maturity.
The Fund will report such ordinary income in the years of sale or
redemption rather than amortize the discount and report it
ratably. To the extent the resultant ordinary taxable income is
distributed to shareholders, it will be taxable to them as
ordinary income.

     Capital gains dividends (net long-term gains over net
short-term losses which the Fund distributes and so designates)
are reportable by shareholders as long-term capital gains. This
is the case whether the shareholder takes the distribution in
cash or elects to have the distribution reinvested in Fund shares
and regardless of the length of time the shareholder has held his
or her shares. Capital gains are taxed at the same rates as
ordinary income, except that for individuals, trusts and estates
the maximum tax rate on capital gains distributions is 28% even
if the applicable rate on ordinary income for such taxpayers is
higher than 28%.

     Short-term gains, when distributed, are taxed to
shareholders as ordinary income. Capital losses of the Fund are
not distributed but carried forward by the Fund to offset gains
in later years and thereby lessen the later-year capital gains
dividends and amounts taxed to shareholders.

     The Fund's gains or losses on sales of Kentucky Obligations
will be long-term or short-term depending upon the length of time
the Fund has held such obligations. Capital gains and losses of
the Fund will also include gains and losses on Futures and
options, if any, including gains and losses actually realized on
sales and exchanges and gains and losses deemed to be realized.
Those deemed to be realized are on Futures and options held by
the Fund at year-end, which are "marked to the market," that is,
deemed sold for fair market value. Net gains or losses realized
and deemed realized on Futures and options will be reportable by
the Fund as long-term to the extent of 60% of the gains or losses
and short-term to the extent of 40% regardless of the actual
holding period of such investments.

     Information as to the tax status of the Fund's dividends and
distributions will be mailed to shareholders annually.

     Under the Code, interest on loans incurred by shareholders
to enable them to purchase or carry shares of the Fund may not be
deducted for regular Federal tax purposes. In addition, under
rules used by the Internal Revenue Service for determining when
borrowed funds are deemed used for the purpose of purchasing or
carrying particular assets, the purchase of shares of the Fund
may be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the
purchase of shares. The receipt of exempt-interest dividends from
the Fund by an individual shareholder may result in some portion
of any social security payments or railroad retirement benefits
received by the shareholder or the shareholder's spouse being
included in taxable income.

     Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds
or private activity bonds should consult their own tax advisers
before purchasing shares.

     While interest from all Kentucky Obligations is tax-exempt
for purposes of computing the shareholder's regular tax, interest
from so-called private activity bonds issued after August 7,
1986, constitutes a tax preference for both individuals and
corporations and thus will enter into a computation of the
alternative minimum tax. Whether or not that computation will
result in a tax will depend on the entire content of the
taxpayer's return. The Fund will not invest in the types of
Kentucky Obligations which would give rise to interest that would
be subject to alternative minimum taxation if more than 20% of
its net assets would be so invested, and may refrain from
investing in that type of bond completely. The 20% limit is a
fundamental policy of the Fund. 

     Corporate shareholders must add to or subtract from
alternative minimum taxable income, as calculated before taking
into consideration this adjustment, 75% of the difference between
what is called adjusted current earnings (essentially current
earnings and profits) and alternative minimum taxable income, as
previously calculated. Since tax-exempt bond interest is included
in earnings and profits and therefore in adjusted current
earnings, this adjustment will tend to make it more likely that
corporate shareholders will be subject to the alternative minimum
tax.

Tax Effects of Redemptions

     Normally, when you redeem shares of the Fund you will
recognize capital gain or loss measured by the difference between
the proceeds received in the redemption and the amount you paid
for the shares. If you are required to pay a conditional deferred
sales charge at the time of redemption, the amount of that charge
will reduce the amount of your gain or increase the amount of
your loss as the case may be. Your gain or loss will be long-term
if you held the redeemed shares for over a year, and short-term,
if for a year or less. However, if shares held for six months or
less are redeemed and you have a loss, two special rules apply:
the loss is reduced by the amount of exempt-interest dividends,
if any, which you received on the redeemed shares, and any loss
over and above the amount of such exempt-interest dividends is
treated as a long-term loss to the extent you have received
capital gains dividends on the redeemed shares.

Tax Effect of Conversion

     Class C Shares will automatically convert to Class A Shares
approximately six years after purchase. No gain or loss will be
recognized by the Fund or its shareholders upon such conversions;
each shareholder's adjusted tax basis in the Class A Shares
received upon conversion will equal the shareholder's adjusted
tax basis in the Class C Shares held immediately before the
conversion; and each shareholder's holding period for the Class A
Shares received upon conversion will include the period for which
the shareholder held as capital assets the converted Class C
Shares immediately before conversion.

Kentucky Tax Information

     Since the Fund may, except as indicated below, purchase only
Kentucky Obligations (which, as defined, means obligations,
including those of non-Kentucky issuers, of any maturity which
pay interest which, in the opinion of counsel, is exempt from
regular Federal income taxes and Kentucky income taxes) all of
the exempt-interest dividends paid by the Fund will be excludable
from the shareholder's gross income for Kentucky income tax
purposes. The Fund may also pay "short-term gains distributions"
and "long-term gains distributions," each as discussed under
"Dividends and Distributions" above. Under Kentucky income tax
law, short-term gains distributions are not exempt from Kentucky
income tax. Kentucky taxes long-term gains distributions at its
ordinary individual and corporate rates. The only investment
which the Fund may make other than in Kentucky Obligations is in
Futures and options on them. Any gains on Futures and options
(including gains imputed under the Code) paid as part or all of a
short-term gains distribution or a long-term gains distribution
will be taxed as indicated above. Under the laws of Kentucky
relating to ad valorem taxation of property, the shareholders
rather than the Fund are considered the owners of the Fund's
assets. Each shareholder will be deemed to be the owner of a
pro-rata portion of the Fund. According to the Kentucky Revenue
Cabinet, to the extent that such portion consists of Kentucky
Obligations, it will be exempt from property taxes, but it will
be subject to property taxes on intangibles to the extent it
consists of cash on hand, cash in out-of-state banks, Futures,
options and other nonexempt assets.

                       EXCHANGE PRIVILEGE

     There is an exchange privilege as set forth below among this
Fund and certain tax-free municipal bond funds and two equity
funds (the "Bond or Equity Funds") and certain money market funds
(the "Money-Market Funds"), all of which are sponsored by Aquila
Management Corporation and Aquila Distributors, Inc., and have
the same Administrator and Distributor as the Fund. All exchanges
are subject to certain conditions described below. As of the date
of the Prospectus, the Aquila-sponsored Bond or Equity Funds are
this Fund, Aquila Rocky Mountain Equity Fund, Aquila Cascadia
Equity Fund, Hawaiian Tax-Free Trust, Tax-Free Trust of Arizona,
Tax-Free Trust of Oregon, Tax-Free Fund of Colorado, Tax-Free
Fund For Utah and Narragansett Insured Tax-Free Income Fund; the
Aquila Money-Market Funds are Capital Cash Management Trust,
Pacific Capital Cash Assets Trust (Original Shares), Pacific
Capital Tax-Free Cash Assets Trust (Original Shares), Pacific
Capital U.S. Treasuries Cash Assets Trust (Original Shares) and
Churchill Cash Reserves Trust.

     Class A Shares of the Fund can be exchanged only into Class
A Shares of any Bond or Equity Fund or into shares of the
Money-Market Funds. Class C Shares can be exchanged only into
Class C Shares of any Bond or Equity Fund or into shares of the
Money-Market Funds.

Class A Shares Exchange Privilege

     Under the Class A Shares exchange privilege, once any
applicable sales charge has been paid on Class A Shares of any
Bond or Equity Fund, those shares (and any shares acquired as a
result of reinvestment of dividends and/or distributions) may be
exchanged any number of times between Money-Market Funds and Bond
or Equity Funds without the payment of any additional sales
charge. 

     CDSC Class A Shares of the Fund (see "Purchase of $1 Million
or More" and "Special Dealer Arrangements") can be exchanged for
CDSC Class A Shares of a Bond or Equity Fund or into a
Money-Market Fund. The CDSC Class A Shares will not be subject to
a contingent deferred sales charge at the time of exchange, but
the contingent deferred sales charge will be payable upon a
redemption which occurs before the expiration of the applicable
holding period of any CDSC Class A Shares or any shares of a
Money-Market Fund received on exchange for CDSC Class A Shares.
(The contingent deferred sales charge does not apply to any
shares acquired as a result of reinvestment of dividends and/or
distributions.) For purposes of computing the time period for the
applicable contingent deferred sales charge, the length of time
of ownership of CDSC Class A Shares will be determined by the
time of original purchase and not by the time of the exchange.
Any period of 30 days or more during which any Money-Market
shares received on an exchange of CDSC Class A Shares are held is
not counted in computing the period of ownership of CDSC Class A
Shares. (See "Alternative Purchase Plans.")

Class C Shares Exchange Privilege

     Under the Class C Shares exchange privilege, Class C Shares
(and any Class C Shares acquired as a result of reinvestment of
dividends and/or distributions) may be exchanged any number of
times between Money-Market Funds and for Class C Shares of Bond
or Equity Funds. Class C Shares will not be subject to a
contingent deferred sales charge at the time of exchange, but the
contingent deferred sales charge will be payable upon redemption
which occurs before the expiration of the applicable holding
period of any Class C Shares or any shares of a Money-Market Fund
received on exchange for Class C Shares. (The contingent deferred
sales charge does not apply to any shares acquired as a result of
reinvestment of dividends and/or distributions.) For purposes of
computing the time period for the applicable contingent deferred
sales charge or for the conversion of Class C Shares into Class A
Shares, the length of time of ownership of Class C Shares will be
determined by time of original purchase and not by the time of
the exchange. Any period of 30 days or more during which any
Money-Market shares received on an exchange of Class C Shares are
held is not counted in computing the period of ownership of Class
C Shares. (See "Alternative Purchase Plans.")

Eligible Shares

     The "Class A Eligible Shares" of any Bond or Equity Fund are
those Class A Shares which were (a) acquired by direct purchase
with payment of any applicable sales charge, or which were
received in exchange for shares of another Bond or Equity Fund on
which any applicable sales charge was paid; (b) acquired by
exchange for shares of a Money-Market Fund with payment of the
applicable sales charge; (c) acquired in one or more exchanges
between shares of a Money-Market Fund and a Bond or Equity Fund
so long as the shares of the Bond or Equity Fund were originally
purchased as set forth in (a) or (b); (d) acquired on conversion
of Class C Shares or (e) acquired as a result of reinvestment of
dividends and/or distributions on otherwise Class A Eligible
Shares.

     The "CDSC Class A Eligible Shares" of any Bond or Equity
Fund are those CDSC Class A Shares which were (a) acquired by
direct purchase in the amount of $1 million or more without a
sales charge or in certain purchases when Special Dealer
Arrangements are in effect or which were received in exchange for
CDSC Class A Shares of another Bond or Equity Fund acquired under
the same conditions; (b) acquired by exchange for shares of a
Money-Market Fund under the same conditions; (c) acquired in one
or more exchanges between shares of a Money-Market Fund and a
Bond or Equity Fund so long as the shares of the Bond or Equity
Fund were originally purchased as set forth in (a) or (b); or (d)
acquired as a result of reinvestment of dividends and/or
distributions on otherwise CDSC Class A Eligible Shares.

     The "Class C Eligible Shares" of any Bond or Equity Fund are
those shares which were (a) acquired by direct purchase including
by exchange from a Money-Market Fund, or which were received in
exchange for shares of Class C Shares of another Bond or Equity
Fund; or (b) acquired as a result of reinvestment of dividends
and/or distributions on otherwise Class C Eligible Shares.

     If you own Class A or Class C Eligible Shares of any Bond or
Equity Fund, you may exchange them for shares of any Money Market
Fund or the Class A or Class C Shares, respectively, of any other
Bond or Equity Fund without payment of any sales charge or CDSC.
The shares received will continue to be Class A or Class C
Eligible Shares.

     If you own shares of a Money-Market Fund which you have
acquired by exchange for Class A Eligible Shares of any Bond or
Equity Fund, you may exchange these shares, and any shares
acquired as a result of reinvestment of dividends and/or
distributions on these shares, for Class A Shares of any Bond or
Equity Fund without payment of any sales charge.

     If you own shares of a Money-Market Fund which you have
acquired by exchange for CDSC Class A Eligible Shares of any Bond
or Equity Fund, you may exchange these shares, and any shares
acquired as a result of reinvestment of dividends and/or
distributions on these shares, for CDSC Class A Shares of any
Bond or Equity Fund but you will be required to pay the
applicable contingent deferred sales charge, if any, if you
redeem such shares before you have held CDSC Class A Shares for
four years. You will also be required to pay the applicable
contingent deferred sales charge, if any, if you redeem such
shares of a Money-Market Fund before you have held CDSC Class A
Shares for four years. The running of the four-year period is
suspended during the period you hold shares of a Money-Market
Fund received in exchange for CDSC Class A Shares.

     If you own shares of a Money-Market Fund which you have
acquired by exchange for Class C Eligible Shares of any Bond or
Equity Fund, you may exchange these shares, and any shares
acquired as a result of reinvestment of dividends and/or
distributions on these shares, for Class C Shares of any Bond or
Equity Fund, but you will be required to pay the applicable
contingent deferred sales charge, if any, if you redeem such
Class C Shares before you have held Class C Shares for 12 months.
You will also be required to pay the applicable contingent
deferred sales charge, if any, if you redeem such shares of a
Money-Market Fund before you have held Class C Shares for 12
months. The running of the 12-month CDSC period and the six-year
conversion period for Class C Shares is suspended during the
period you hold shares of a Money-Market Fund received in
exchange for Class C Shares. (See "Alternative Purchase Plans.")

     Shares of a Money-Market Fund may be exchanged for shares of
another Money-Market Fund or for Class A Shares or Class C Shares
of a Bond or Equity Fund; however, if the shares of a
Money-Market Fund were not acquired by exchange of Eligible
Shares of a Bond or Equity Fund or of shares of a Money-Market
Fund acquired in such an exchange, they may be exchanged for
Class A Shares of a Bond or Equity Fund only upon payment of the
applicable sales charge.

     This Fund, as well as the Money-Market Funds and other Bond
or Equity Funds, reserves the right to reject any exchange into
its shares, if shares of the fund into which exchange is desired
are not available for sale in your state of residence. The Fund
may also modify or terminate this exchange privilege at any time.
In the case of termination, the Prospectus will be appropriately
supplemented. No such modification or termination shall take
effect on less than 60 days' written notice to shareholders.

     All exercises of the exchange privilege are subject to the
conditions that (i) the shares being acquired are available for
sale in your state of residence; (ii) the aggregate net asset
value of the shares surrendered for exchange are at least equal
to the minimum investment requirements of the investment company
whose shares are being acquired and (iii) the ownership of the
accounts from which and to which the exchange is made are
identical.

     The Agent will accept telephone exchange instructions from
anyone. To make a telephone exchange telephone: 

             800-872-5860 toll free or 908-855-5731

     Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.

     Exchanges will be effected at the relative exchange prices
of the shares being exchanged next determined after receipt by
the Agent of your exchange request. The exchange prices will be
the respective net asset values of the shares, unless a sales
charge is to be deducted in connection with an exchange of
shares, in which case the exchange price of shares of a Bond or
Equity Fund will be their public offering price. Prices for
exchanges are determined in the same manner as for purchases of
the Fund's shares. See "How to Invest in the Fund."

     An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the
realization of a capital gain or loss, depending on the cost or
other tax basis of the shares exchanged and the holding period
(see "Tax Effects of Redemptions" and the Additional Statement);
no representation is made as to the deductibility of any such
loss should such occur.

     Dividends paid by the Money-Market Funds are taxable, except
to the extent that a portion or all of the dividends paid by
Pacific Capital Tax-Free Cash Assets Trust (a tax-free
Money-Market Fund) are exempt from regular Federal income tax,
and to the extent that a portion or all of the dividends paid by
Pacific Capital U.S. Treasuries Cash Assets Trust (which invests
in U.S. Treasury obligations) are exempt from state income taxes.
Dividends paid by Aquila Rocky Mountain Equity Fund and Aquila
Cascadia Equity Fund are taxable. If your state of residence is
not the same as that of the issuers of obligations in which a
tax-free municipal bond fund or a tax-free money-market fund
invests, the dividends from that fund may be subject to income
tax of the state in which you reside. Accordingly, you should
consult your tax adviser before acquiring shares of such a bond
fund or a tax-free money-market fund under the exchange privilege
arrangement.

     If you are considering an exchange into one of the funds
listed above, you should send for and carefully read its
Prospectus.

                       GENERAL INFORMATION

Performance

     Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance including current yield, taxable equivalent yield,
various expressions of total return, current distribution rate
and taxable equivalent distribution rate.

     Average annual total return figures, as prescribed by the
Securities and Exchange Commission, represent the average annual
percentage change in value of a hypothetical $1,000 purchase, at
the maximum public offering price (offering price includes any
applicable sales charge) for 1-, 5- and 10-year periods and for a
period since the inception of the Fund, to the extent applicable,
through the end of such periods, assuming reinvestment (without
sales charge) of all distributions. The Fund may also furnish
total return quotations for other periods or based on investments
at various applicable sales charge levels or at net asset value.
For such purposes total return equals the total of all income and
capital gains paid to shareholders, assuming reinvestment of all
distributions, plus (or minus) the change in the value of the
original investment, expressed as a percentage of the purchase
price. See the Additional Statement.

     Current yield reflects the income per share earned by each
of the Fund's portfolio investments; it is calculated by (i)
dividing the Fund's net investment income per share during a
recent 30-day period by (ii) the maximum public offering price on
the last day of that period and by (iii) annualizing the result.
Taxable equivalent yield shows the yield from a taxable
investment that would be required to produce an after-tax yield
equivalent to that of the Fund, which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of
the Fund's yield (calculated as indicated) by one minus a stated
income tax rate and by adding the product to the taxable portion
(if any) of the Fund's yield. See the Additional Statement.

     Current yield and taxable equivalent yield, which are
calculated according to a formula prescribed by the Securities
and Exchange Commission (see the Additional Statement), are not
indicative of the dividends or distributions which were or will
be paid to the Fund's shareholders. Dividends or distributions
paid to shareholders are reflected in the current distribution
rate or taxable equivalent distribution rate which may be quoted
to shareholders. The current distribution rate is computed by (i)
dividing the total amount of dividends per share paid by the Fund
during a recent 30-day period by (ii) the current maximum
offering price and by (iii) annualizing the result. A taxable
equivalent distribution rate shows the taxable distribution rate
that would be required to produce an after-tax distribution rate
equivalent to the Fund's distribution rate (calculated as
indicated above). The current distribution rate differs from the
current yield computation because it could include distributions
to shareholders from sources, if any, other than dividends and
interest, such as short-term capital gains or return of capital.
If distribution rates are quoted in advertising, they will be
accompanied by calculations of current yield in accordance with
the formula of the Securities and Exchange Commission.

     In each case performance figures are based upon past
performance, reflect as appropriate all recurring charges against
the Fund's income net of fee waivers and reimbursement of
expenses, if any, and will assume the payment of the maximum
sales charge, if any, on the purchase of shares, but not on
reinvestment of income dividends. The investment results of the
Fund, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what the
Fund's yield, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future
period. The annual report of the Fund contains additional
performance information that will be made available upon request
and without charge.

Description of the Fund and Its Shares

     Churchill Tax-Free Trust (the "Trust"), a non-diversified
open-end investment company was formed on March 30, 1987, as a
Massachusetts business trust. Its name was changed from
"Churchill Tax-Free Fund of Kentucky" to "Churchill Tax-Free
Trust" in June, 1988. The Fund is the original and only active
portfolio (series) of the Trust. The Fund is an open-end,
non-diversified management investment company. (See "Investment
of the Fund's Assets" for further information about the Fund's
status as "non-diversified.") The Declaration of Trust permits
the Trustees to issue an unlimited number of full and fractional
shares and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the
proportionate beneficial interests in the Fund. Each share
represents an equal proportionate interest in the Fund with each
other share of its class; shares of the respective classes
represent proportionate interests in the Fund in accordance with
their respective net asset values. Upon liquidation of the Fund,
shareholders are entitled to share pro-rata in the net assets of
the Fund available for distribution to shareholders, in
accordance with the respective net asset values of the shares of
each of the Fund's classes at that time. All shares are presently
divided into three classes; however, if they deem it advisable
and in the best interests of shareholders, the Board of Trustees
of the Fund may create additional classes of shares, which may
differ from each other as provided in rules and regulations of
the Securities and Exchange Commission or by exemptive order. The
Board of Trustees may, at its own discretion, create additional
series of shares, each of which may have separate assets and
liabilities (in which case any such series will have a
designation including the word "Series"). See the Additional
Statement for further information about possible additional
series. Shares are fully paid and non-assessable, except as set
forth under the caption "General Information" in the Additional
Statement; the holders of shares have no pre-emptive or
conversion rights.

     In addition to Class A and Class C Shares, which are offered
by this Prospectus, the Fund also has Institutional Class Shares
("Class Y Shares"), which are offered only to institutions acting
for investors in a fiduciary, advisory, agency, custodial or
similar capacity and are not offered directly to retail
customers. Class Y Shares are offered by means of a separate
prospectus, which can be obtained by calling the Fund at
800-872-5859.

     The primary distinction among the Fund's three classes of
shares lies in their different sales charge structures and
ongoing expenses, which are likely to be reflected in differing
yields and other measures of investment performance. All three
classes represent interests in the same portfolio of Kentucky
Obligations and have the same rights, except that each class
bears the separate expenses, if any, of its participation in the
Distribution Plan and Shareholder Services Plan and has exclusive
voting rights with respect to such participation.

Voting Rights

     At any meeting of shareholders, shareholders are entitled to
one vote for each dollar of net asset value (determined as of the
record date for the meeting) per share held (and proportionate
fractional votes for fractional dollar amounts). Shareholders
will vote on the election of Trustees and on other matters
submitted to the vote of shareholders. Shares vote by classes on
any matter specifically affecting one or more classes, such as an
amendment of an applicable part of the Distribution Plan. No
amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding
shares of the Fund, except that the Fund's Board of Trustees may
change the name of the Fund. The Fund may be terminated (i) upon
the sale of its assets to another issuer, or (ii) upon
liquidation and distribution of the assets of the Fund, in either
case if such action is approved by the vote of the holders of a
majority of the outstanding shares of the Fund. If not so
terminated, the Fund will continue indefinitely.




              APPLICATION FOR CHURCHILL TAX-FREE FUND OF KENTUCKY
                      FOR CLASS A OR CLASS C SHARES ONLY
                PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
                      ADM, ATTN: AQUILA SM GROUP OF FUNDS
                  581 MAIN STREET, WOODBRIDGE, NJ 07095-1198
                                1-800-872-5860

STEP 1
A. ACCOUNT REGISTRATION

___Individual Use line 1
___Joint Account*   Use lines 1&2
___For a Minor Use line 3
___For Trust, Corporation, Partnership or other Entity Use line 4
*  Joint Accounts will be Joint Tenants with rights of survivorship unless 
   otherwise specified.
** Uniformed Gifts/Transfers to Minors Act.

Please type or print name exactly as account is to be registered
1.________________________________________________________________
  First Name   Middle Initial   Last Name   Social Security Number 
2.________________________________________________________________
  First Name   Middle Initial   Last Name   Social Security Number 
3.________________________________________________________________
  Custodians First Name      Middle Initial          Last Name 
Custodian for ____________________________________________________
                   Minors First Name   Middle Initial   Last Name  
Under the ___________UGTMA** _____________________________________
         Name of State       Minors Social Security Number 
4. ____________________________________________________
   ____________________________________________________
(Name of Corporation or Partnership. If a Trust, include the name(s) of 
Trustees in which account will be registered and the name and date of the 
Trust Instrument. Account for a Pension or Profit Sharing Plan or Trust may 
be registered in the name of the Plan or Trust itself.)
___________________________________________________________________
        Tax I.D. Number    Authorized Individual          Title 

B. MAILING ADDRESS AND TELEPHONE NUMBER


____________________________________________________
  Street or PO Box                           City 
_______________________________(______)______________
  State           Zip          Daytime Phone Number

Occupation:________________________Employer:________________________

Employers Address:__________________________________________________
                   Street Address:               City  State  Zip 
Citizen or resident of: ___  U.S. ___ Other  Check here ___ if you are a 
non-U.S. Citizen or resident and not subject to back-up withholding (See 
certification in Step 4, Section B, below.)

C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)

_______________________   _____________________________
Dealer Name                           Branch Number
_______________________   _____________________________
Street Address                   Rep. Number/Name
_______________________   (_______)_____________________
  City    State    Zip     Area Code        Telephone


STEP 2 PURCHASES OF SHARES
A. INITIAL INVESTMENT

Indicate method of payment (For either method, make check payment to:
CHURCHILL TAX-FREE FUND OF KENTUCKY)

Indicate class of shares:
__  Class A Shares (Front-Payment Class)
__  Class C Shares (Level-Payment Class)

IF NO SHARE CLASS IS MARKED, INVESTMENT WILL AUTOMATICALLY BE MADE IN CLASS A
SHARES.

   __ Initial Investment $_________ (Minimum $1,000)
   __ Automatic Investment $________ (Minimum $50)
For Automatic Investments of at least $50 per month, you must complete Step
3, Section A, Step 4, Sections A & B and ATTACH A PRE-PRINTED DEPOSIT SLIP OR
VOIDED CHECK.

B. DISTRIBUTIONS

All income dividends and capital gains distributions are automatically 
reinvested in additional shares at Net Asset Value unless otherwise 
indicated below.

Dividends are to be:___ Reinvested  ___Paid in cash*
Capital Gains Distributions are to be: ___ Reinvested ___ Paid in cash*
    * For cash dividends, please choose one of the following options:
___ Deposit directly into my/our Financial Institution account. 
    ATTACHED IS A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK showing the
    Financial Institution account where I/we would like you to deposit the
    dividend. (A Financial Institution is a commercial bank, savings bank or
    credit union.)
___ Mail check to my/our address listed in Step 1.



STEP 3
SPECIAL FEATURES
A. AUTOMATIC INVESTMENT PROGRAM
(Check appropriate box)
___ Yes ___ No

    This option provides you with a convenient way to have amounts 
automatically drawn on your Financial Institution account and invested in 
your Churchill Tax-Free Fund of Kentucky Account. To establish this program,
please complete Step 4, Sections A & B of this Application.
I/We wish to make regular monthly investments of $ _________________
(minimum $50) on the ___ 1st day  or ___ 16th day of the month (or 
on the first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)

B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No


    This option provides you with a convenient way to add to your account
(minimum $50 and maximum $50,000) at any time you wish by simply calling 
the Fund toll-free at 1-800-872-5860. To establish this program, please 
complete Step 4, Sections A & B of this Application.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)

C. LETTER OF INTENT

APPLICABLE TO CLASS A SHARES ONLY.
See Terms of Letter of Intent and Escrow at the end of this application
___ Yes ___ No

I/We intend to invest in Class A Shares of the Fund during the 13-month
period from the date of my/our first purchase pursuant to this Letter (which
purchase cannot be more than 90 days prior to the date of this Letter), an
aggregate amount (excluding any reinvestment of dividends or distributions)
of at least $25,000 which, together with my/our present holdings of Fund
shares
(at public offering price on date of this Letter), will equal or exceed the
minimum amount checked below:
___  $25,000   ___  $50,000    ___ $100,000   ___ $250,000
___  $500,000  ___  $1,000,000 ___ $2,500,000 ___ $5,000,000 

D. AUTOMATIC WITHDRAWAL PLAN

(Minimum investment $5,000)
APPLICABLE TO CLASS A SHARES ONLY.
Application must be received in good order at least 2 weeks prior to 1st
actual liquidation date.
(Check appropriate box)
___ Yes ___ No

    Please establish an Automatic Withdrawal Plan for this account, subject
to the terms of the Automatic Withdrawal Plan Provisions set forth below. To 
realize the amount stated below, Administrative Data Management Corp. 
(the Agent) is authorized to redeem sufficient shares from this account at
the then current Net Asset Value, in accordance with the terms below:
Dollar Amount of each withdrawal $ ______________beginning________________ .
                                   Minimum: $50             Month/Year
Payments to be made: ___ Monthly or ___ Quarterly
    Checks should be made payable as indicated below. If check is payable to
a Financial Institution for your account, indicate Financial Institution
name, address and your account number.
_______________________________     ______________________________________
First Name Middle Initial Last Name   Financial Institution Name
_______________________________     ______________________________________
  Street                             Financial Institution Street Address
_______________________________     ______________________________________
 City   State Zip                   City   State Zip    
                
                                     ____________________________________
                                     Financial Institution Account Number

E. TELEPHONE EXCHANGE
 (Check appropriate box)
___ Yes ___ No
This option allows you to effect exchanges among accounts in your name
within the Aquila SM Group of Funds by telephone.

    The Agent is authorized to accept and act upon my/our or any other
persons telephone instructions to execute the exchange of shares of one
Aquila-
sponsored fund for shares of another Aquila-sponsored fund with identical
shareholder registration in the manner described in the Prospectus. Except
for gross negligence in acting upon such telephone instructions to execute an
exchange, and subject to the conditions set forth herein, I/we understand and
agree to hold harmless the Agent, each of the Aquila Funds, and their
respective officers, directors, trustees, employees, agents and affiliates
against any liability, damage, expense, claim or loss, including reasonable
costs and attorneys fees, resulting from acceptance of, or acting or failure
to act upon, this Authorization.

F. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No
The proceeds will be deposited to your Financial Institution account listed.

    Cash proceeds in any amount from the redemption of shares will be mailed
or wired, whenever possible, upon request, if in an amount of $1,000 or more
to my/our account at a Financial Institution. The Financial Institution
account
must be in the same name(s) as this Fund account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________   ____________________________________
  Account Registration            Financial Institution Account Number
_______________________________   ____________________________________
  Financial Institution Name      Financial Institution Transit/Routing
Number
_______________________________   ____________________________________
  Street                            City   State Zip      



STEP 4 Section A
DEPOSITORS AUTHORIZATION TO HONOR DEBITS

IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT
YOU MUST ALSO COMPLETE STEP 4, SECTIONS A & B.
I/We authorize the Financial Institution listed below to charge to my/our
account any drafts or debits drawn on my/our account initiated by the Agent,
Administrative Data Management Corp., and to pay such sums in accordance
therewith, provided my/our account has sufficient funds to cover such drafts
or debits. I/We further agree that your treatment of such orders will be the
same as if I/we personally signed or initiated the drafts or debits. I/We
understand that this authority will remain in effect until you receive my/our
written instructions to cancel this service. I/We also agree that if any such
drafts or debits are dishonored, for any reason, you shall have no
liabilities.

Financial Institution Account Number _______________________________________

Name and Address where my/our account is maintained

Name of Financial Institution______________________________________________

Street Address_____________________________________________________________

City___________________________________________State _________ Zip ________
Name(s) and Signature(s) of Depositor(s) as they appear where account is 
registered

______________________________________________
        (Please Print)
X_____________________________________________  __________________
        (Signature)                                    (Date)

______________________________________________
        (Please Print)
X_____________________________________________  __________________
        (Signature)                                    (Date)

                        INDEMNIFICATION AGREEMENT

To: Financial Institution Named Above
So that you may comply with your depositor's request, Aquila Distributors, 
Inc. (the "Distributor") agrees:

1 Electronic Funds Transfer debit and credit items transmitted 
  pursuant to the above authorization shall be subject to the 
  provisions of the Operating Rules of the National Automated 
  Clearing House Association.

2 To indemnify and hold you harmless from any loss you may suffer in 
  connection with the execution and issuance of any electronic 
  debit in the normal course of business initiated by  the Agent 
  (except any loss due to your payment of any amount drawn against
  insufficient or uncollected funds), provided that you promptly 
  notify us in writing of any claim against you with respect to 
  the same, and further provided that you will not settle or
  pay or agree to settle or pay any such claim without the written 
  permission of the Distributor.

3 To indemnify you for any loss including your reasonable costs and expenses 
  in the event that you dishonor, with or without cause, any such electronic 
  debit.

STEP 4 Section B
SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED

- - The undersigned warrants that he/she has full authority and is of 
  legal age to purchase shares of the Fund and has received and 
  read a current Prospectus of the Fund and agrees to its terms.

- - I/We authorize the Fund and its agents to act upon these 
  instructions for the features that have been checked.

- - I/We acknowledge that in connection with an Automatic Investment or 
  Telephone Investment, if my/our account at the Financial Institution has 
  insufficient funds, the Fund and its agents may cancel the purchase 
  transaction and are authorized to liquidate other shares or fractions
  thereof held in my/our Fund account to make up any deficiency resulting
  from any decline in the net asset value of shares so purchased and any
  dividends paid on those shares. I/We authorize the Fund and its agents to
  correct any transfer error by a debit or credit to my/our Financial
  Institution account and/or Fund account and to charge the account for any
  related charges. I/We acknowledge that shares purchased either through
  Automatic Investment or Telephone Investment are subject to applicable
  sales charges.

- - The Fund, the Agent and the Distributor and their Trustees, directors, 
  employees and agents will not be liable for acting upon instructions
  believed to be genuine, and will not be responsible for any losses
  resulting from unauthorized telephone transactions if the Agent follows
  reasonable procedures designed to verify the identity of the caller. The
  Agent will request some or all of the following information: account name
  and number; name(s) and social security number registered to the account
  and personal identification; the Agent may also record calls. Shareholders
  should verify the accuracy of confirmation statements immediately upon
  receipt. Under penalties of perjury, the undersigned whose Social Security
  (Tax I.D.) Number is shown above certifies (i) that Number is my correct
  taxpayer identification number and (ii) currently I am not under IRS
  notification that I am subject to backup withholding (line out (ii) if
  under notification). If no such Number is shown, the undersigned further
  certifies, under penalties of perjury, that either (a) no such Number has
  been issued, and a Number has been or will soon be applied for; if a Number
  is not provided to you within sixty days, the undersigned understands that
  all payments (including liquidations) are subject to 31% withholding under
  federal tax law, until a Number is provided and the undersigned may be
  subject to a $50 I.R.S. penalty; or (b) that the undersigned is not a
  citizen or resident of the U.S.; and either does not expect to be in the
  U.S. for 183 days during each calendar year and does not conduct a
  business in the U.S. which would receive any gain from the Fund, or is
  exempt under an income tax treaty.

NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW. FOR A TRUST, ALL 
TRUSTEES MUST SIGN.*
__________________________     ____________________________     _________
Individual (or Custodian)      Joint Registrant, if any            Date
__________________________     ____________________________     _________
Corporate Officer, Partner,    Title                               Date
Trustee, etc.    

* For Trust, Corporations or Associations, this form must be accompanied by 
proof of authority to sign, such as a certified copy of the corporate 
resolution or a certificate of incumbency under the trust instrument.


SPECIAL INFORMATION

- - Certain features (Automatic Investment, Telephone Investment, 
  Expedited Redemption and Direct Deposit of Dividends) are effective 15 days
  after this form is received in good order by the Fund's Agent.

- - You may cancel any feature at any time, effective 3 days after the Agent 
  receives written notice from you.

- - Either the Fund or the Agent may cancel any  feature, without prior 
  notice, if in its judgment your use of any  feature involves unusual 
  effort or difficulty in the administration of your account.

- - The Fund reserves the right to alter, amend or terminate any or all  
  features or to charge a service fee upon 30 days written notice to 
  shareholders except if additional notice is specifically required by the 
  terms of the Prospectus.

BANKING INFORMATION

- - If your Financial Institution account changes, you must complete a Ready 
  Access features form which may be obtained from Aquila Distributors at 
  1-800-872-5859 and send it to the Agent together with a "voided" check or 
  pre-printed deposit slip from the new account. The new Financial
  Institution change is effective in 15 days after this form is received 
  in good order by the Fund's Agent.

TERMS OF LETTER OF INTENT AND ESCROW

      By checking Box 3c and signing the Application, the investor 
is entitled to make each purchase at the public offering price 
applicable to a single transaction of the dollar amount checked 
above, and agrees to be bound by the terms and conditions applicable to
Letters of Intent appearing below.

      The investor is making no commitment to purchase shares, but if the 
investor's purchases within thirteen months from the date of the investor's 
first purchase do not aggregate $25,000, or, if such purchases added to the 
investor's present holdings do not aggregate the minimum amount specified 
above, the investor will pay the increased amount of sales charge prescribed 
in the terms of escrow below.

      The commission to the dealer or broker, if any, named herein shall be 
at the rate applicable to the minimum amount of the investor's specified 
intended purchases checked above. If the investor's actual purchases do not 
reach this minimum amount, the commissions previously paid to the 
dealer will be adjusted to the rate applicable to the investor's total
purchases. If the investor's purchases exceed the dollar amount of the
investor's intended purchases and pass the next commission break-point, 
the investor shall receive the lower sales charge, provided that the 
dealer returns to the Distributor the excess of commissions previously
allowed or paid to him over that which would be applicable to the 
amount of the investor's total purchases.

      The investor's dealer or broker shall refer to this Letter of 
Intent in placing any future purchase orders for the investor 
while this Letter is in effect.

      The escrow shall operate as follows:

1. Out of the initial purchase (or subsequent purchases if necessary), 3% of
   the dollar amount specified in the Letter of Intent (computed to the
   nearest full share) shall be held in escrow in shares of the Fund by the
   Agent. All dividends and any capital distributions on the escrowed shares
   will be credited to the investor's account.
  
2. If the total minimum investment specified under the Letter is completed
   within a thirteen-month period, the escrowed shares will be promptly 
   released to the investor. However, shares disposed of prior to completion
   of the purchase requirement under the Letter will be deducted from the
   amount required to complete the investment commitment.

3. If the total purchases pursuant to the Letter are less than the amount
   specified in the Letter as the intended aggregate purchases, the investor
   must remit to the Distributor an amount equal to the difference between
   the dollar amount of sales charges actually paid and the amount of 
   sales charges which would have been paid if the total amount 
   purchased had been made at a single time. If such difference in sales
   charges is not paid within twenty days after receipt of a request 
   from the Distributor or the dealer, the Distributor will, within sixty
   days after the expiration of the Letter, redeem the number of escrowed
   shares necessary to realize such difference in sales charges. Full 
   shares and any cash proceeds for a fractional share remaining after 
   such redemption will be released to the investor. The escrow of shares
   will not be released until any additional sales charge due has been 
   paid as stated in this section.
   
4. By checking Box 3c and signing the Application, the investor irrevocably
   constitutes and appoints the Agent or the Distributor as his attorney to
   surrender for redemption any or all escrowed shares on the books of the
   Fund.

AUTOMATIC WITHDRAWAL PLAN PROVISIONS
By requesting an Automatic Withdrawal Plan, the applicant agrees 
to the terms and conditions applicable to such plans, as stated below.

1. The Agent will administer the Automatic Withdrawal Plan (the "Plan") 
   as agent for the person (the "Planholder") who executed the Plan
   authorization.

2. Certificates will not be issued for shares of the Fund purchased for and
   held under the Plan, but the Agent will credit all such shares to the 
   Planholder on the records of the Fund. Any share certificates now held by
   the Planholder may be surrendered unendorsed to the Agent with the
   application so that the shares represented by the certificate may be held
   under the Plan.

3. Dividends and distributions will be reinvested in shares of the Fund at
   Net Asset Value without a sales charge.

4. Redemptions of shares in connection with disbursement payments will be
   made at the Net Asset Value per share in effect at the close of business
   on the last business day of the month or quarter.

5. The amount and the interval of disbursement payments and the address to
   which checks are to be mailed may be changed, at any time, by the 
   Planholder on written notification to the Agent. The Planholder should
   allow at least two weeks time in mailing such notification before the
   requested change can be put in effect.

6. The Planholder may, at any time, instruct the Agent by written notice (in
   proper form in accordance with the requirements of the then current 
   Prospectus of the Fund) to redeem all, or any part of, the shares held
   under the Plan. In such case the Agent will redeem the number of shares
   requested at the Net Asset Value per share in effect in accordance with
   the Fund's usual redemption procedures and will mail a check for the
   proceeds of such redemption to the Planholder.

7. The Plan may, at any time, be terminated by the Planholder on written
   notice to the Agent, or by the Agent upon receiving directions to that 
   effect from the Fund. The Agent will also terminate the Plan upon receipt
   of evidence satisfactory to it of the death or legal incapacity of the
   Planholder. Upon termination of the Plan by the Agent or the Fund, shares
   remaining unredeemed will be held in an uncertificated account in the name
   of the Planholder, and the account will continue as a dividend-
   reinvestment, uncertificated account unless and until proper instructions
   are received from the Planholder, his executor or guardian, or as
   otherwise appropriate.

8. The Agent shall incur no liability to the Planholder for any action taken
   or omitted by the Agent in good faith.

9. In the event that the Agent shall cease to act as transfer agent for the
   Fund, the Planholder will be deemed to have appointed any successor
   transfer agent to act as his agent in administering the Plan.

10.Purchases of additional shares concurrently with withdrawals are
   undesirable because of sales charges when purchases are made. 
   Accordingly, a Planholder may not maintain this Plan while simultaneously
   making regular purchases. While an occasional lump sum investment may be
   made, such investment should normally be an amount equivalent to three
   times the annual withdrawal or $5,000, whichever is less.





INVESTMENT ADVISER
Banc One Investment Advisors Corporation
416 West Jefferson Street
Louisville, Kentucky 40202

ADMINISTRATOR
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017

BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher     Douglas Dean
Diana P. Herrmann         Ann R. Leven
Theodore T. Mason         Anne J. Mills
William J. Nightingale    James R. Ramsey

OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Teresa M. Priest, Vice President
L. Michele Robbins, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary

DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017

TRANSFER AND SHAREHOLDER SERVICING AGENT
Administrative Data Management Corp.
581 Main Street
Woodbridge, New Jersey 07095-1198

CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154

COUNSEL
Hollyer Brady Smith Troxell 
  Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176

TABLE OF CONTENTS
Highlights.......................................
Table of Expenses................................    
Financial Highlights.............................        
Introduction.....................................        
Investment Of The Fund's Assets..................        
Investment Restrictions.........................       
Net Asset Value Per Share....................... 
Alternative Purchase Plans......................       
How To Invest In The Fund.......................        
How To Redeem Your Investment...................       
Automatic Withdrawal Plan.......................       
Management Arrangements.........................       
Dividend And Tax Information....................       
Exchange Privilege..............................       
General Information.............................       
Application and Letter of Intent


AQUILA
[LOGO]
CHURCHILL
TAX-FREE FUND
OF
KENTUCKY

A tax-free
income investment

[LOGO]

PROSPECTUS

One Of The
Aquilasm Group Of Funds




               Churchill Tax-Free Fund of Kentucky

                 380 Madison Avenue, Suite 2300
                       New York, NY 10017
                  800-USA-KTKY (800-872-5859) 
                          212-697-6666

Prospectus
Institutional Class Shares
Class Y Shares                                     April 30, 1997

     The Fund is a mutual fund whose objective is to seek to
provide as high a level of current income exempt from Kentucky
and Federal income taxes as is consistent with preservation of
capital by investing in municipal obligations which pay interest
exempt from Kentucky State and Federal income taxes. These
municipal obligations must, at the time of purchase, either be
rated within the four highest credit ratings (considered as
investment grade) assigned by Moody's Investors Service, Inc. or
Standard & Poor's Corporation, or, if unrated, be determined to
be of comparable quality by the Fund's Adviser, Banc One
Investment Advisors Corporation.

     There are three classes of shares of the Fund: Institutional
Class Shares ("Class Y Shares") are offered only to institutions
acting for investors in a fiduciary, advisory, agency, custodial
or similar capacity, and are not offered directly to retail
customers. Class Y Shares are offered at net asset value with no
sales charge, no redemption fee, no contingent deferred sales
charge and no distribution fee. (See "How to Purchase Class Y
Shares.") The other classes, Front-Payment Class Shares ("Class A
Shares") and Level-Payment Class Shares ("Class C Shares") are
not offered by this Prospectus. See "General Information -
Description of the Fund and Its Shares."

     This Prospectus concisely states information about the Fund
that you should know before investing. A Statement of Additional
Information about the Fund dated April 30, 1997, (the "Additional
Statement") has been filed with the Securities and Exchange
Commission and is available without charge upon written request
to Administrative Data Management Corp., the Fund's Shareholder
Servicing Agent, at the address given below, or by calling the
telephone number(s) given below. The Additional Statement
contains information about the Fund and its management not
included in the Prospectus. The Additional Statement is
incorporated by reference in its entirety in the Prospectus. Only
when you have read both the Prospectus and the Additional
Statement are all material facts about the Fund available to you.

     SHARES OF THE FUND ARE NOT DEPOSITS IN, OBLIGATIONS OF OR
GUARANTEED OR ENDORSED BY BANC ONE CORPORATION OR ITS BANK OR
NON-BANK AFFILIATES OR BY ANY OTHER BANK. SHARES OF THE FUND ARE
NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENTAL
AGENCY OR GOVERNMENT SPONSORED AGENCY OF THE FEDERAL GOVERNMENT
OR ANY STATE. 

     AN INVESTMENT IN THE FUND INVOLVES INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED.

      FOR PURCHASE, REDEMPTION OR ACCOUNT INQUIRIES CONTACT
            THE FUND'S SHAREHOLDER SERVICING AGENT: 
              ADMINISTRATIVE DATA MANAGEMENT CORP.

           581 MAIN STREET, WOODBRIDGE, NJ 07095-1198
           CALL 800-872-5860 TOLL FREE OR 908-855-5731

           FOR GENERAL INQUIRIES & YIELD INFORMATION, 
           CALL 800-872-5859 TOLL FREE OR 212-697-6666

THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.




                           HIGHLIGHTS 

     Churchill Tax-Free Fund of Kentucky, founded by Aquila
Management Corporation in 1987 and one of the Aquilasm Group of
Funds, is an open-end mutual fund which invests in tax-free
municipal bonds, the kind of obligations issued by the
Commonwealth of Kentucky, its counties and various other local
authorities to finance such long-term public purpose projects as
schools, universities, housing, transportation, utilities,
hospitals and water and sewer facilities throughout Kentucky.
(See "Introduction.")

     Tax-Free Income - The municipal obligations in which the
Fund invests pay interest which is exempt from regular Federal
income taxes and Commonwealth of Kentucky income and ad valorem
taxes. Dividends paid by the Fund from this income are likewise
free of such taxes. It is, however, possible that in certain
circumstances a small portion of the dividends paid by the Fund
will be subject to income taxes. The Federal alternative minimum
tax may apply to some investors, but its impact will be limited
since not more than 20% of the Fund's net assets can be invested
in obligations paying interest which is subject to this tax. The
receipt of exempt-interest dividends from the Fund may result in
some portion of social security payments or railroad retirement
benefits being included in taxable income. Capital gains
distributions, if any, are taxable. (See "Dividend and Tax
Information.")

     Investment Grade - The Fund will acquire only those
municipal obligations which, at the time of purchase, are within
the four highest credit ratings assigned by Moody's Investors
Service, Inc. or Standard & Poor's Corporation, or are determined
by the Adviser to be of comparable quality. In general there are
nine separate credit ratings, ranging from the highest to the
lowest credit ratings for municipal obligations. Obligations
within the top four ratings are considered "investment grade,"
but those in the fourth rating may have speculative
characteristics as well. (See "Investment of the Fund's Assets.")

     Initial Investment - You may open your account with any
purchase of $1,000 or more or by opening an Automatic Investment
Program which makes purchases of $50 or more each month. See the
Application, which is in the back of the Prospectus. (See "How to
Invest in the Fund.")

     Additional Investments - You may make additional investments
at any time and in any amount, directly, or if in an amount of
$50 or more, through the convenience of having your investment
electronically transferred from your financial institution
account into the Fund by Automatic Investment or Telephone
Investment. (See "How to Invest in the Fund.")

     Alternative Purchase Plans - The Fund provides alternative
ways to invest. (See "Description of the Fund and its Shares.")
For this purpose the Fund offers classes of shares, which differ
in their expense levels and sales charges:

          Institutional Class Shares ("Class Y Shares") are
          offered by this Prospectus. Class Y Shares are offered
          only to institutions acting for investors in a
          fiduciary, advisory, agency, custodial or similar
          capacity, and are not offered directly to retail
          customers. Class Y Shares are offered at net asset
          value with no sales charge, no redemption fee, no
          contingent deferred sales charge and no distribution
          fee. (See "How to Purchase Class Y Shares.")

     The other classes, Front-Payment Class Shares ("Class A
Shares") and Level-Payment Class Shares ("Class C Shares"), are
not offered by this Prospectus. See "General Information -
Description of the Fund and Its Shares."

     At the date of the Prospectus, Class Y Shares are registered
for sale only in Kentucky. (See "How to Invest in the Fund.") If
Class Y Shares of the Fund are sold outside of Kentucky, except
to certain institutional investors, the Fund can redeem them. If
your state of residence is not Kentucky, dividends from the Fund
may be subject to income taxes of the state in which you reside.
Accordingly, you should consult your tax adviser before acquiring
shares of the Fund.

     Monthly Income - Dividends are declared daily and paid
monthly. At your choice, dividends are paid by check mailed to
you, directly deposited into your financial institution account
or automatically reinvested without sales charge in additional
shares of the Fund at the then-current net asset value. Specific
classes of shares will have different dividend amounts due to
their particular expense levels. (See "Dividend and Tax
Information.")

     Many Different Issues - You have the advantages of a
portfolio which consists of over 171 issues with different
maturities. (See "Investment of the Fund's Assets.")

     Local Portfolio Management - Banc One Investment Advisors
Corporation (the "Adviser") serves as the Fund's Investment
Adviser, providing experienced local professional management. The
Adviser is a wholly-owned subsidiary of BANC ONE CORPORATION
("Banc One"). As of April 1, 1997, the Adviser was responsible
for management of over $5.2 billion of investments in municipal
obligations, of which $2.3 billion were held in mutual funds and
of which $570 million were obligations of Kentucky issuers. The
Adviser services Kentucky clients at offices in Louisville and
Lexington.

     The Fund is obligated to pay investment advisory fees at the
rate of 0.14 of 1% of average annual net assets to its Adviser
(and administration fees to its Administrator, for total fees at
the rate of up to 0.40 of 1% of average annual net
assets).Payments under the Distribution Plan began on July 1,
1994. (See "Table of Expenses," "Distribution Plan" and
"Management Arrangements.") Some or all of these fees may be
waived by the Adviser and Administrator. (See "Table of Expenses"
and "Management Arrangements.")

     Redemptions - Liquidity - You may redeem any amount of your
Class Y Shares account on any business day at the next determined
net asset value by telephone, FAX or mail request, with proceeds
being sent to a predesignated financial institution, if you have
elected Expedited Redemption. Proceeds will be wired or
transferred through the facilities of the Automated Clearing
House, wherever possible, upon request, if in an amount of $1,000
or more, or will be mailed. For these and other redemption
procedures see "How to Redeem Your Investment." There are no
redemption fees for redemption of Class Y shares.

     Certain Stabilizing Measures - The Fund will employ such
traditional measures as varying maturities, upgrading credit
standards for portfolio purchases, broadening diversification and
increasing its position in cash, in an attempt to protect against
declines in the value of its investments and other market risks.
(See "Certain Stabilizing Measures.")

     Exchanges - You may exchange Class Y Shares of the Fund into
Class Y Shares of other Aquila-sponsored tax-free municipal bond
mutual funds or two equity funds. You may also exchange them into
shares of the Aquila-sponsored money market funds. The exchange
prices will be the respective net asset values of the shares.
(See "Exchange Privilege.")

     Risks and Special Considerations - The share price,
determined on each business day, varies with the market prices of
the Fund's portfolio securities, which fluctuate with market
conditions including prevailing interest rates. Accordingly, the
proceeds of redemptions may be more or less than your original
cost. (See "Factors Which May Affect the Value of the Fund's
Investments and Their Yields.") The Fund's assets, being
primarily or entirely Kentucky issues, are subject to economic
and other conditions affecting Kentucky. (See "Risk Factors and
Special Considerations Regarding Investment in Kentucky
Obligations.") Moreover, the Fund is classified as a
"non-diversified" investment company, because it may choose to
invest in the obligations of a relatively limited number of
issuers. (See "Investment of the Fund's Assets.") The Fund may
also, to a limited degree, buy and sell futures contracts and
options on futures contracts, although since inception the Fund
has not done so and has no present intention to do so. There may
be risks associated with these practices. (See "Certain
Stabilizing Measures.")

     Statements and Reports - You will receive statements of your
account monthly as well as each time you add to your account or
take money out. Additionally, you will receive a Semi-Annual
Report and an audited Annual Report.








                      CHURCHILL TAX-FREE FUND OF KENTUCKY
                               TABLE OF EXPENSES

                                                          Class Y
Shareholder Transaction Expenses                          Shares
                                                       
   Maximum Sales Charge Imposed on Purchases              None 
     (as a percentage of the offering price)
   Maximum Sales Charge Imposed on Reinvested Dividends   None
   Deferred Sales Charge                                  None
   Redemption Fees                                        None
   Exchange Fee                                           None

Annual Fund Operating Expenses (1)
  (as a percentage of average net assets)

   Investment Advisory Fee                                0.14%
   All other expenses (2)                                 0.45%
     Administration Fee                              0.26%     
     Other Expenses (2)                              0.19%     
   Total Fund Operating Expenses (2)                      0.59%     

Example (3)
You would pay the following expenses on a $1,000 investment, assuming
a 5% annual return and redemption at the end of each time period:

       1 Year       3 Years       5 Years       10 Years 
         $6           $19           $33            $74



(1) Estimated based upon expenses incurred by the Fund during its most 
recent fiscal year, restated to reflect current arrangements. Class A 
Shares were outstanding during the entire period. Class Y Shares were
established April 1, 1996. 



(2) Does not reflect a 0.01% expense offset in custodian fees received 
for uninvested cash balances.  Reflecting this offset, other expenses, 
all other expenses, and total Fund operating expenses for Class Y Shares
would have been 0.18%, 0.44% and 0.58%, respectively.



(3) The expense example is based upon the above annual Fund operating
expenses.  It is also based upon amounts at the beginning of each year 
which includes the prior year's assumed results.  A year's results consist 
of an assumed 5% annual return less total annual operating expenses; the
expense ratio was applied to an assumed average balance (the year's 
starting investment plus one-half the year's results).  Each figure
represents the cumulative expenses so determined for the period specified.




THE EXAMPLE ABOVE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR 
FUTURE EXPENSES; ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
THE SECURITIES AND EXCHANGE COMMISSION SPECIFIES THAT ALL MUTUAL FUNDS USE
THE 5% ANNUAL RATE OF RETURN FOR PURPOSES OF PREPARING THE ABOVE EXAMPLE.

The purpose of the above table is to assist the investor in understanding 
the various costs that an investor in the Fund will bear directly or
indirectly.  The assumed 5% annual return should not be interpreted as a
prediction of an actual return, which may be higher or lower.







                      CHURCHILL TAX-FREE FUND OF KENTUCKY
                             FINANCIAL HIGHLIGHTS
                FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

     The following table of Financial Highlights as it relates to the five
years ended December 31, 1996 has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon is included in the Fund's
financial statements contained in its Annual Report, which are incorporated
by reference into the Additional Statement. The information provided in the
table should be read in conjunction with the financial statements and related
notes. The Fund's Annual Report contains additional information about the
Fund's performance and is available upon request without charge. On October
16, 1989, Aquila Management Corporation, originally the Fund's Sub-Adviser
and Administrator, became Administrator only. Effective September 11, 1995,
Banc One Investment Advisors Corporation became the Fund's Investment
Adviser, replacing PNC Bank, Kentucky, Inc. ("See Management Arrangements").

                                        Class A(3)               Class Y(4)
                                   Year Ended December 31,
                           1996    1995      1994      1993      1996


                                                  
Net Asset Value,
Beginning of Period        $10.71   $9.97    $10.93    $10.49    $10.47
Income from Investment
Operations:
  Net investment
  income...............    0.55     0.60     0.60      0.62      0.43
  Net gain (loss) on
  securities (both
  realized and
  unrealized)..........    (0.12)   0.74     (0.96)    0.47      0.11
  Total from Investment
  Operations...........    0.43     1.34     (0.36)    1.09      0.54
Less Distributions:
  Dividends from
  net investment
  income...............    (0.59)   (0.60)   (0.60)    (0.62)    (0.46)
  Distributions from
  capital gains........       -       -        -       (0.03)      -
  Total Distributions..    (0.59)   (0.60)   (0.60)    (0.65)    (0.46)
Net Asset Value,
End of Period              $10.55   $10.71   $9.97     $10.93    $10.55
Total Return (not
(reflecting
sales load)............    4.71     13.75    (3.31)    10.50     5.24(1)
Ratios/Supplemental Data
  Net Assets, End of 
  Period (in thousands)    222,889  230,270  232,656   258,632   5,823
  Ratio of Expenses
  to Average Net
  Assets...............    0.74     0.79     0.72      0.59      0.56(2)
  Ratio of Net Investment
  Income to Average Net
  Assets...............    5.23     5.57     5.81      5.67      5.42(2)    
  Portfolio Turnover
  Rate.................    8.94     17.09    35.25     31.29     8.94    

Net investment income per share and the ratios of income and expenses to
average net assets without the Adviser's and Administrator's voluntary waiver
of fees, the Administrator's voluntary expense reimbursement and the expense
offset in custodian fees for uninvested cash balances would have been:

Net Investment
Income.................    0.55     0.60      0.60      0.60     0.43    
Ratio of Expenses
to Average Net
Assets.................    0.75     0.80     0.73      0.73      0.58(2)     
Ratio of Net Investment
Income to Average
Net Assets.............    5.22     5.74     5.80      5.52      5.41(2)     



1992       1991        1990          1989          1988          1987*
                                                  

$10.39     $10.00      $10.06        $9.53         $9.26         $9.60
  0.66       0.66        0.65         0.68          0.65          0.25
  0.19       0.41      (0.03)         0.53          0.26        (0.32)
  0.85       1.07        0.62         1.21          0.91        (0.07)
(0.66)     (0.66)      (0.68)       (0.68)        (0.64)        (0.27)
(0.09)     (0.02)         -            -             -             -
(0.75)     (0.68)      (0.68)       (0.68)        (0.64)        (0.27)
$10.49     $10.39      $10.00       $10.06         $9.53         $9.26
  8.48      10.97        6.64        13.09         10.49        (0.65)(1)
192,600   114,798      66,076       35,652        19,007         5,767
  0.42       0.27        0.10         0.08          0.10         1.08(2)
  6.21       6.53        6.60         6.94          6.87         5.39(2)
 50.33      16.69        7.67         3.63         10.51         62.83
  0.63       0.60        0.59         0.57          0.58          0.16
  0.68       0.84        0.76         1.09          1.21         3.82(2)
  5.95       5.96        5.94         5.92          5.79         2.66(2)


(1)Not annualized.



(2)Annualized.



(3) Designated as Class A Shares on April 1, 1996. 



(4) New Class of Shares established on April 1, 1996.



*For the period from May 21, 1987 (commencement of operations) to December
31, 1987.







                          INTRODUCTION

     The Fund's shares are designed to be a suitable investment
for investors who seek income exempt from Kentucky State and
regular Federal income taxes.

     You may invest in shares of the Fund as an alternative to
direct investments in Kentucky Obligations, as defined below,
which may include obligations of certain non-Kentucky issuers.
The Fund offers you the opportunity to keep assets fully invested
in a vehicle that provides a professionally managed portfolio of
Kentucky Obligations which may, but not necessarily will, be more
diversified, higher yielding or more stable and more liquid than
you might be able to obtain on an individual basis by direct
purchase of Kentucky Obligations. Through the convenience of a
single security consisting of shares of the Fund, you are also
relieved of the inconvenience associated with direct investments
of fixed denominations, including the selecting, purchasing,
handling, monitoring call provisions and safekeeping of Kentucky
Obligations.

     Kentucky Obligations are a type of municipal obligation.
Municipal obligations are issued by or on behalf of states,
territories and possessions of the United States and their
political subdivisions, agencies and instrumentalities to obtain
funds for various public purposes. The two principal
classifications of municipal obligations are "notes" and "bonds."
Municipal notes are generally used to provide for short-term
capital needs and generally have maturities of one year or less
while municipal bonds have extended maturities. Municipal notes
include: project notes, which sometimes carry a U.S. Government
guarantee; tax anticipation notes; revenue anticipation notes;
bond anticipation notes; construction loan notes; and floating
and variable rate demand notes. Municipal obligations include
municipal lease/purchase agreements which are similar to
installment purchase contracts for property or equipment. The
purposes for which municipal obligations such as bonds are issued
include the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing,
mass transportation, streets and water and sewer works. Other
public purposes for which municipal obligations may be issued
include the refunding of outstanding obligations, the obtaining
of funds for general operating expenses and the obtaining of
funds to lend to other public institutions and facilities.

                 INVESTMENT OF THE FUND'S ASSETS

     In seeking its objective of providing as high a level of
current income which is exempt from both Kentucky State and
regular Federal income taxes as is consistent with the
preservation of capital, the Fund will invest in Kentucky
Obligations (as defined below). There is no assurance that the
Fund will achieve its objective, which is a fundamental policy of
the Fund. (See "Investment Restrictions.")

     As used in the Prospectus and the Additional Statement, the
term "Kentucky Obligations" means obligations, including those of
certain non-Kentucky issuers, of any maturity which pay interest
which, in the opinion of bond counsel or other appropriate
counsel, is exempt from regular Federal income taxes and Kentucky
income taxes. Although exempt from regular Federal income tax,
interest paid on certain types of Kentucky Obligations, and
dividends which the Fund might pay from this interest, are
preference items as to the Federal alternative minimum tax; for
further information, see "Dividend and Tax Information." As a
fundamental policy, at least 80% of the Fund's net assets will be
invested in Kentucky Obligations the income paid upon which will
not be subject to the alternative minimum tax; accordingly, the
Fund can invest up to 20% of its net assets in obligations which
are subject to the Federal alternative minimum tax. The Fund may
refrain entirely from purchasing these types of Kentucky
Obligations. (See "Dividend and Tax Information.")

     The non-Kentucky bonds or other obligations the interest on
which is exempt under present law from regular Federal and
Kentucky income taxes are those issued by or under the authority
of Guam, the Northern Mariana Islands, Puerto Rico and the Virgin
Islands. The Fund will not purchase Kentucky Obligations of
non-Kentucky issuers unless Kentucky Obligations of Kentucky
issuers of the desired quality, maturity and interest rate are
not available. As a Kentucky-oriented fund, at least 65% of the
Fund's total assets will be invested in Kentucky Obligations of
Kentucky issuers. The Fund invests only in Kentucky Obligations
and, possibly, in Futures and options on Futures (see below) for
protective (hedging) purposes.

     In general, there are nine separate credit ratings, ranging
from the highest to the lowest quality standards for municipal
obligations. So that the Fund will have a portfolio of quality
oriented (investment grade) securities, the Kentucky Obligations
which the Fund will purchase must, at the time of purchase,
either (i) be rated within the four highest credit ratings
assigned by Moody's Investors Service, Inc. ("Moody's") or
Standard & Poor's Corporation ("S&P"); or (ii) if unrated, be
determined to be of comparable quality to municipal obligations
so rated by Banc One Investment Advisors Corporation (the
"Adviser"), subject to the direction and control of the Fund's
Board of Trustees. Municipal obligations rated in the fourth
highest credit rating are considered by such rating agencies to
be of medium quality and thus may present investment risks not
present in more highly rated obligations. Such bonds lack
outstanding investment characteristics and may in fact have
speculative characteristics as well; changes in economic
conditions or other circumstances are more likely to lead to a
weakened capacity to make principal and interest payments than is
the case for higher grade bonds. If after purchase the rating of
any rated Kentucky Obligation is downgraded such that it could
not then be purchased by the Fund, or, in the case of an unrated
Kentucky Obligation, if the Adviser determines that the unrated
obligation is no longer of comparable quality to those rated
obligations which the Fund may purchase, it is the current policy
of the Fund to cause any such obligation to be sold as promptly
thereafter as the Adviser in its discretion determines to be
consistent with the Fund's objectives; such obligation remains in
the Fund's portfolio until it is sold. In addition, because a
downgrade often results in a reduction in the market price of a
downgraded obligation, sale of such an obligation may result in a
loss. See Appendix A to the Additional Statement for further
information as to these ratings. The Fund can purchase industrial
development bonds only if they meet the definition of Kentucky
Obligations, i.e., the interest on them is exempt from Kentucky
State and regular Federal income taxes.

     The Fund is classified as a "non-diversified" investment
company under the Investment Company Act of 1940 (the "1940
Act"). The Fund also intends to continue to qualify as a
"regulated investment company" under the Internal Revenue Code
(the "Code"). One of the tests for such qualification under the
Code is, in general, that at the end of each fiscal quarter of
the Fund, at least 50% of its assets must consist of (i) cash;
and (ii) securities which, as to any one issuer, do not exceed 5%
of the value of the Fund's assets. If the Fund had elected to
register under the 1940 Act as a "diversified" investment
company, it would have to meet the same test as to 75% of its
assets. The Fund may therefore not have as much diversification
among securities, and thus diversification of risk, as if it had
made this election under the 1940 Act. In general, the more the
Fund invests in the securities of specific issuers, the more the
Fund is exposed to risks associated with investments in those
issuers. The Fund's assets, being primarily or entirely Kentucky
issues, are accordingly subject to economic and other conditions
affecting Kentucky. (See "Risk Factors and Special Considerations
Regarding Investment in Kentucky Obligations.")

Certain Stabilizing Measures

     The Fund will employ such traditional measures as varying
maturities, upgrading credit standards for portfolio purchases,
broadening diversification and increasing its position in cash
and cash equivalents in attempting to protect against declines in
the value of its investments and other market risks. There can,
however, be no assurance that these will be successful. Although
the Fund has no current intention of using futures and options,
to the limited degree described below, these may be used to
attempt to hedge against changes in the market price of the
Fund's Kentucky Obligations caused by interest rate fluctuations.
Futures and options could also provide a hedge against increases
in the cost of securities the Fund intends to purchase.

     Although it does not currently do so, and since inception
has not done so, the Fund may buy and sell futures contracts
relating to indices on municipal bonds ("Municipal Bond Index
Futures") and to U.S. government securities ("U.S. Government
Securities Futures"); both kinds of futures contracts are
"Futures." The Fund may also write and purchase put and call
options on Futures. As a matter of fundamental policy the Fund
will not buy or sell a Future or an option on a Future if
thereafter more than 10% of its net assets would be in initial or
variation margin on such Futures and options on them, and in
premiums on such options. The Fund will not enter into Futures or
options for which the aggregate initial margins and premiums paid
for options exceed 5% of the fair market value of the Fund's
assets. (See the Additional Statement.) Under normal market
conditions, the Fund cannot purchase or sell Municipal Bond Index
Futures, U.S. Government Securities Futures, or options on
Futures if thereafter more than 20% of its total assets would
consist of cash, margin deposits on such Futures and margin
deposits and premiums on such options, except for temporary
defensive purposes, i.e., in anticipation of a decline or
possible decline in the value of Kentucky Obligations.

     The primary risks associated with the use of Futures and
options are: (i) imperfect correlation between the change in the
market value of the securities held in the Fund's portfolio and
the prices of Futures or options purchased or sold by the Fund;
(ii) incorrect forecasts by the Adviser concerning interest rates
which may result in the hedge being ineffective; and (iii)
possible lack of a liquid secondary market for a Future or
option; the resulting inability to close a Futures or options
position could adversely affect the Fund's hedging ability. For a
hedge to be completely effective, the price change of the hedging
instrument should equal the price change of the security being
hedged. The risk of imperfect correlation of these price changes
is increased as the composition of the Fund's portfolio is
divergent from the debt securities underlying the hedging
instrument. To date, the Adviser has had no experience in the use
of Futures or options on them.

     The liquidity of a secondary market in a Future may be
adversely affected by "daily price fluctuation limits"
established by commodity exchanges which restrict the amount of
change in the contract price allowed during a single trading day.
Thus, once a daily limit is reached, no further trades may be
entered into beyond the limit, thereby preventing the liquidation
of open positions. Prices have in the past reached the daily
limit on a number of consecutive trading days. For further
information about Futures and options, see the Additional
Statement.

     When and if the Fund determines to use Futures and options,
the Prospectus will be supplemented.

Floating and Variable Rate Demand Notes

     Floating and variable rate demand notes are tax-exempt
obligations which may have a stated maturity in excess of one
year, but permit the holder to demand payment of principal at any
time, or at specified intervals not exceeding one year, in each
case upon not more than 30-days' notice. The issuer of such notes
normally has a corresponding right, after a given period, to
prepay in its discretion the outstanding principal amount of the
note plus accrued interest upon a specified number of days'
notice to the noteholders. The interest rate on a floating rate
demand note is based on a known lending rate, such as a bank's
prime rate, and is adjusted automatically each time such rate is
adjusted. The interest rate on a variable rate demand note is
adjusted automatically at specified intervals.

Participation Interests

     The Fund may purchase from financial institutions
participation interests in Kentucky Obligations (such as
industrial development bonds and municipal lease/purchase
agreements). A participation interest gives the Fund an undivided
interest in the underlying Kentucky Obligations in the proportion
that the Fund's participation interest bears to the total amount
of the underlying Kentucky Obligations. All such participation
interests must meet the Fund's credit requirements. (See
"Limitation to 10% as to Certain Investments.")

When-Issued and Delayed Delivery Purchases

     The Fund may buy Kentucky Obligations on a when-issued or
delayed delivery basis when it has the intention of acquiring
them. The Kentucky Obligations so purchased are subject to market
fluctuation and no interest accrues to the Fund until delivery
and payment take place; their value at the delivery date may be
less than the purchase price. The Fund cannot enter into
when-issued commitments exceeding in the aggregate 15% of the
market value of the Fund's total assets, less liabilities other
than the obligations created by when-issued commitments. If the
Fund chooses to dispose of the right to acquire a when-issued
obligation prior to its acquisition, it could, as with the
disposition of any other portfolio holding, incur a gain or loss
due to market fluctuation; any such gain would be a taxable
short-term gain. The Fund places an amount of assets equal in
value to the amount due on the settlement date for the
when-issued or delayed delivery securities being purchased in a
segregated account with the Custodian, which is marked to market
every business day. See the Additional Statement for further
information.

Limitation to 10% as to Certain Investments

     The Fund cannot purchase Kentucky Obligations that are not
readily marketable if thereafter more than 10% of its net assets
would consist of such investments. However, this 10% limit does
not include any Kentucky Obligations as to which the Fund can
exercise the right to demand payment in full within three days
and as to which there is a secondary market. Floating and
variable rate demand notes and participation interests (including
municipal lease/purchase obligations) are considered illiquid
unless determined by the Board of Trustees to be readily
marketable. (See the Additional Statement.)

Current Policy as to Certain Obligations

     The Fund will not invest more than 25% of its total assets
in (i) Kentucky Obligations the interest on which is paid from
revenues of similar type projects or (ii) industrial development
bonds, unless the Prospectus and/or the Additional Statement are
supplemented to reflect the change and to give additional
information.

Factors Which May Affect the Value of the Fund's 
Investments and Their Yields

     The value of the Kentucky Obligations in which the Fund
invests will fluctuate depending in large part on changes in
prevailing interest rates, and may be subject to other market
factors as well. If the prevailing interest rates go up after the
Fund buys Kentucky Obligations, the value of these obligations
will normally go down; if these rates go down, the value of these
obligations will normally go up. Changes in value and yield based
on changes in prevailing interest rates may have different
effects on short-term Kentucky Obligations than on long-term
obligations. Long-term obligations (which often have higher
yields) may fluctuate in value more than short-term ones. For
this reason, the Fund may, to achieve a defensive position,
shorten the average maturity of its portfolio.

Risk Factors and Special Considerations Regarding 
Investment in Kentucky Obligations

     The following is a discussion of the general factors that
might influence the ability of Kentucky issuers to repay
principal and interest when due on the Kentucky Obligations
contained in the portfolio of the Fund. Such information is
derived from sources that are generally available to investors
and is believed by the Fund to be accurate, but has not been
independently verified and may not be complete.

     The Commonwealth of Kentucky ranks first among the States in
the production of coal. Tobacco is the dominant agricultural
product, and Kentucky ranks second among states in the total cash
value of tobacco raised. There is a significant diversification
in the manufacturing mix including tobacco processing plants,
distilleries and durable goods production including automobiles,
heavy machinery, computer appliances and office equipment.
Toyota, a major Japanese automobile manufacturer, has constructed
a large facility in Georgetown, Kentucky. The horse breeding and
racing industry plays an important role both as a significant
industry as well as encouraging tourist business in the state.

     Economic problems include a continuing high unemployment
rate in the non-urbanized areas of the State. The Coal Severance
Tax is a significant revenue producer for the state and its
political subdivisions, and any substantial decrease in the
amount of coal or other minerals produced could result in revenue
shortfalls. Additionally, any federal legislation affecting
adversely the tobacco and/or cigarette industry would have a
negative impact on Kentucky's economy. Although revenue
obligations of the state or its political subdivisions may be
payable from a specific project, there can be no assurances that
further economic difficulties and the resulting impact on state
and local government finances will not adversely affect the
market value of the bonds issued by Kentucky municipalities or
political subdivisions or the ability of the respective entities
to pay debt service. Major legislative initiatives in the area of
education reform and medicaid expenses are having an impact on
the Commonwealth's financial profile.

     The Commonwealth of Kentucky relies upon sales and use tax,
individual income tax, property tax, corporate income tax,
insurance premium tax, alcohol beverage tax, corporate license
tax, cigarette tax, and horse racing tax for its revenue. The
cities, counties and other local governments are essentially
limited to property taxes, occupational license taxes, utility
taxes, transit and restaurant meals taxes and various license
fees for their revenue. Obligations of non-Kentucky issuers are
subject to the risks of general economic and other factors
affecting those issuers.

     Because of constitutional limitations, the Commonwealth of
Kentucky cannot enter into a financial obligation of more than
two years' duration, and no other municipal issuer within the
Commonwealth can enter into a financial obligation of more than
one year's duration. As a consequence, the payment and security
arrangements applicable to Kentucky revenue bonds differ
significantly from those generally applicable to municipal
revenue bonds in other States. See the Additional Statement.

                     INVESTMENT RESTRICTIONS

     The Fund has a number of policies about what it can and
cannot do. Certain of these policies, identified in the
Prospectus and Additional Statement as "fundamental policies,"
cannot be changed unless the holders of a "majority," as defined
in the 1940 Act, of the Fund's outstanding shares vote to change
them. (See the Additional Statement for a definition of such a
majority.) All other policies can be changed from time to time by
the Board of Trustees without shareholder approval. Some of the
more important of the Fund's fundamental policies, not otherwise
identified in the Prospectus, are set forth below; others are
listed in the Additional Statement.

1. The Fund invests only in certain limited securities.

     The Fund cannot buy any securities other than the Kentucky
Obligations meeting the standards stated under "Investment of the
Fund's Assets"; the Fund can also purchase and sell Futures and
options on them within the limits there discussed.

2. The Fund has industry investment requirements.

     The Fund cannot buy the obligations of issuers in any one
industry if more than 25% of its total assets would then be
invested in securities of issuers of that industry; the Fund will
consider that a non-governmental user of facilities financed by
industrial development bonds is an issuer in an industry.

3. The Fund cannot make loans.

     The Fund can buy those Kentucky Obligations which it is
permitted to buy (see "Investment of the Fund's Assets"); this is
investing, not making a loan. The Fund cannot lend its portfolio
securities.

4. The Fund can borrow only in limited amounts for special
purposes.

     The Fund can borrow from banks for temporary or emergency
purposes but only up to 10% of its total assets. It can mortgage
or pledge its assets only in connection with such borrowing and
only up to the lesser of the amounts borrowed or 5% of the value
of its total assets. However, this shall not prohibit margin
arrangements in connection with the purchase or sale of Municipal
Bond Index Futures, U.S. Government Securities Futures or options
on them, or the payment of premiums on those options. Interest on
borrowings would reduce the Fund's income. Except in connection
with borrowings, the Fund will not issue senior securities. The
Fund will not purchase any Kentucky Obligations, Futures or
options on Futures while it has any outstanding borrowings which
exceed 5% of the value of its total assets.

                    NET ASSET VALUE PER SHARE

     The Fund's net asset value and offering price per share of
each class are determined as of 4:00 p.m. New York time on each
day that the New York Stock Exchange is open (a "business day").
The net asset value per share is determined by dividing the value
of the net assets(i.e., the value of the assets less liabilities)
by the total number of shares outstanding. Determination of the
value of the Fund's assets is subject to the direction and
control of the Fund's Board of Trustees. In general it is based
on market value, except that Kentucky Obligations maturing in 60
days or less are generally valued at amortized cost; see the
Additional Statement for further information.

                    HOW TO INVEST IN THE FUND

     Institutional Class Shares (Class Y Shares) are offered only
to institutional investors for investments held in a fiduciary,
advisory, agency, custodial or similar capacity, or through them
to their clients, and are not offered directly to retail
customers. Class Y Shares are offered at net asset value with no
sales charge, no redemption fee, no contingent deferred sales
charge and no distribution fee. 

How to Purchase Class Y Shares

     Class Y Shares of the Fund may be purchased through any
investment broker or dealer (a "selected dealer") which has a
sales agreement with Aquila Distributors, Inc. (the
"Distributor") or through the Distributor. There are two ways to
make an initial investment: (i) order the shares through your
investment broker or dealer, if it is a selected dealer; or (ii)
mail the Application with payment to Administrative Data
Management Corp. (the "Agent") at the address on the Application.
There is no sales charge on initial or subsequent investments.
You are urged to complete an Application and send it to the Agent
so that expedited shareholder services can be established at the
time of your investment.

     The minimum initial investment for Class Y Shares is $1,000,
except as otherwise stated in the Prospectus or Additional
Statement. You may also make an initial investment of at least
$50 by establishing an Automatic Investment Program. To do this
you must open an account for automatic investments of at least
$50 each month and make an initial investment of at least $50.
(See below and "Automatic Investment Program" in the
Application.) Such investment must be drawn in United States
dollars on a United States commercial or savings bank, credit
union or a United States branch of a foreign commercial bank
(each of which is a "Financial Institution"). You may make
subsequent investments in Class Y Shares in any amount (unless
you have an Automatic Withdrawal Plan). Your subsequent
investment may be made through a selected dealer or by forwarding
payment to the Agent, with the name(s) of account owner(s), the
account number and the name of the Fund. With subsequent
investments, please send the pre-printed stub attached to the
Fund's confirmations.

     Subsequent investments of $50 or more in Class Y Shares can
be made by electronic funds transfer from your demand account at
a Financial Institution. To use electronic funds transfer for
your purchases, your Financial Institution must be a member of
the Automated Clearing House and the Agent must have received
your completed Application designating this feature, or, after
your account has been opened, a Ready Access Features form
available from the Distributor or the Agent. A pre-determined
amount can be regularly transferred for investment ("Automatic
Investment"), or single investments can be made upon receipt by
the Agent of telephone instructions from anyone ("Telephone
Investment"). The maximum amount of each Telephone Investment is
$50,000. Upon 30 days' written notice to shareholders, the Fund
may modify or terminate these investment methods at any time or
charge a service fee, although no such fee is currently
contemplated.

     The offering price for Class Y Shares is the net asset value
per share. The offering price determined on any day applies to
all purchase orders received by the Agent from selected dealers
that day, except that orders received by it after 4:00 p.m. New
York time will receive that day's offering price only if such
orders were received by selected dealers from customers prior to
such time and transmitted to the Distributor prior to its close
of business that day (normally 5:00 p.m. New York time); if not
so transmitted, such orders will be filled at the next determined
offering price. Selected dealers are required to transmit orders
promptly. Investments by mail are made at the offering price next
determined after receipt of the purchase order by the Agent.
Purchase orders received on other than a business day will be
executed on the next succeeding business day. Purchases by
Automatic Investment and Telephone Investment will be executed on
the first business day occurring on or after the date an order is
considered received by the Agent at the price determined on that
day. In the case of Automatic Investment your order will be
executed on the date you specified for investment at the price
determined on that day. If that day is not a business day your
order will be executed at the price determined on the next
business day. In the case of Telephone Investment your order will
be filled at the next determined offering price. If your order is
placed after the time for determining the net asset value of the
Fund shares for any day it will be executed at the price
determined on the following business day. The sale of shares will
be suspended during any period when the determination of net
asset value is suspended and may be suspended by the Distributor
when the Distributor judges it in the Fund's best interest to do
so.

     At the date of the Prospectus, Class Y Shares of the Fund
are registered for sale only in the following states: Kentucky,
Alabama, Florida, Hawaii, Illinois, Indiana, New Jersey and New
York.

     If you do not reside in these states and are not an
institutional investor, you should not purchase Class Y Shares of
the Fund. If shares are sold outside of Kentucky, except to
certain institutional investors, the Fund can redeem them. Such a
redemption may result in a loss to you and may have tax
consequences. In addition, if your state of residence is not
Kentucky, the dividends from the Fund may be subject to income
taxes of the state in which you reside. Accordingly, you should
consult your tax adviser before acquiring shares of the Fund.

Possible Compensation for Dealers

     The Distributor, at its own expense, may also provide
additional compensation to dealers in connection with sales of
any class of shares of the Fund. Additional compensation may
include payment or partial payment for advertising of the Fund's
shares, payment of travel expenses, including lodging, incurred
in connection with attendance at sales seminars taken by
qualifying registered representatives to locations within or
outside of the United States, other prizes or financial
assistance to securities dealers in offering their own seminars
or conferences. In some instances, such compensation may be made
available only to certain dealers whose representatives have sold
or are expected to sell significant amounts of such shares.
Dealers may not use sales of the Fund's shares to qualify for the
incentives to the extent such may be prohibited by the laws of
any state or any self-regulatory agency, such as the National
Association of Securities Dealers, Inc. The cost to the
Distributor of such promotional activities and such payments to
participating dealers will not exceed the amount of the sales
charges in respect of sales of all classes of shares of the Fund
effected through such participating dealers, whether retained by
the Distributor or reallowed to participating dealers. No such
additional compensation to dealers in connection with sales of
shares of the Fund will affect the price you pay for shares or
the amount that the Fund will receive from such sales. Any of the
foregoing payments to be made by the Distributor may be made
instead by the Administrator out of its own funds, directly or
through the Distributor.

     Brokers and dealers may receive different levels of
compensation for selling different classes of shares.

Confirmations and Share Certificates

     All purchases of shares will be confirmed and credited to
you in an account maintained for you at the Agent in full and
fractional shares of the Fund (rounded to the nearest 1/1000th of
a share). No share certificates will be issued for Class Y
Shares.

     The Fund and the Distributor reserve the right to reject any
order for the purchase of shares. In addition, the offering of
shares may be suspended at any time and resumed at any time
thereafter.

Distribution Plan

     The Fund has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 (the "Rule") under the 1940 Act. The Rule provides in
substance that an investment company may not engage directly or
indirectly in financing any activity which is primarily intended
to result in the sale of its shares except pursuant to a written
plan adopted under the Rule. No payments under the Plan from
assets represented by Class Y Shares are authorized.

     The Plan contains provisions designed to protect against any
claim against or involving the Fund that some of the expenses
which might be considered to be sales-related which the Fund pays
or may pay come within the purview of the Rule. The Fund believes
that except for payments made with respect to Class A Shares and
Class C Shares it is not financing any such activity and does not
consider any payment enumerated in such provisions as so
financing any such activity. If and to the extent that any
payment as specifically listed in the Plan (see the Additional
Statement) is considered to be primarily intended to result in or
as indirect financing of any activity which is primarily intended
to result in the sale of Fund shares, these payments are
authorized under the Plan. In addition, if the Administrator, out
of its own funds, makes payment for distribution expenses such
payments are authorized. See the Additional Statement.

                  HOW TO REDEEM YOUR INVESTMENT

     You may redeem all or any part of your Class Y Shares at the
net asset value next determined after acceptance of your
redemption request at the Agent. Redemptions can be made by the
various methods described below. There is no minimum period for
any investment in the Fund, except for shares recently purchased
by check, Automatic Investment or Telephone Investment as
discussed below. There are no redemption fees or penalties on
redemption of Class Y Shares. A redemption may result in a
transaction taxable to you.

     For your convenience the Fund offers expedited redemption
for Class Y Shares to provide you with a high level of liquidity
for your investment.

Expedited Redemption Methods

     You have the flexibility of two expedited methods of
initiating redemptions.

     1. By Telephone. The Agent will accept instructions by
telephone from anyone to redeem shares and make payments

          a) to a Financial Institution account you have
          predesignated or 

          b) by check in the amount of $50,000 or less, mailed to
          you, if your shares are registered in your name at the
          Fund and the check is sent to your address of record,
          provided that there has not been a change of your
          address of record during the 30 days preceding your
          redemption request. You can make only one request for
          telephone redemption by check in any 7-day period. 

     See "Redemption Payments" below for payment methods. Your
name, your account number and your address of record must be
supplied.

     To redeem an investment by this method, telephone:

             800-872-5860 toll free or 908-855-5731

     Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.

     2. By FAX or Mail. You may also request redemption payments
to a predesignated Financial Institution account by a letter of
instruction sent to: Administrative Data Management Corp., Attn:
Aquilasm Group of Funds, by FAX at 908-855-5730 or by mail at 581
Main Street, Woodbridge, NJ 07095-1198, indicating account
name(s), account number, amount to be redeemed, and any payment
directions, signed by the registered holder(s). Signature
guarantees are not required. See "Redemption Payments" below for
payment methods.

     If you wish to have redemption proceeds sent to a Financial
Institution Account, you should so elect on the Expedited
Redemption section of the Application or the Ready Access
Features form and provide the required information concerning
your Financial Institution account number. The Financial
Institution account must be in the exclusive name(s) of the
shareholder(s) as registered with the Fund. You may change the
designated Financial Institution account at any time by
completing and returning a Ready Access Features form. For
protection of your assets, this form requires signature
guarantees and possible additional documentation.

Regular Redemption Method

     If you own Class Y Shares registered on the books of the
Fund, and you have not elected Expedited Redemption to a
predesignated Financial Institution account, you must use the
Regular Redemption Method. Under this redemption method you
should send a letter of instruction to: Administrative Data
Management Corp., Attn: Aquilasm Group of Funds, 581 Main Street,
Woodbridge, NJ 07095-1198, containing:

          Account Name(s);

          Account Number;

          Dollar amount or number of shares to be redeemed or a
          statement that all shares held in the account are to be
          redeemed;

          Payment instructions (normally redemption proceeds will
          be mailed to your address as registered with the Fund);

          Signature(s) of the registered shareholder(s); and

          Signature guarantee(s), if required, as indicated
          below.

     For a redemption request to be in "proper form," the
signature or signatures must be the same as in the registration
of the account. In a joint account, the signatures of both
shareholders are necessary. Signature guarantees may be required
if sufficient documentation is not on file with the Agent.
Additional documentation may be required where shares are held by
certain types of shareholders such as corporations, partnerships,
trustees or executors, or if redemption is requested by other
than the shareholder of record. If redemption proceeds of $50,000
or less are payable to the record holder and are to be sent to
the record address, no signature guarantee is required, except as
noted above. In all other cases, signatures must be guaranteed by
a member of a national securities exchange, a U.S. bank or trust
company, a state-chartered savings bank, a federally chartered
savings and loan association, a foreign bank having a U.S.
correspondent bank, a participant in the Securities Transfer
Association Medallion Program (STAMP), the Stock Exchanges
Medallion Program (SEMP) or the New York Stock Exchange, Inc.
Medallion Signature Program (MSP). A notary public is not an
acceptable signature guarantor.

Redemption Payments

     Redemption payments will ordinarily be mailed to you at your
address of record. If you so request and the amount of your
redemption proceeds is $1,000 or more, the proceeds will,
wherever possible, be wired or transferred through the facilities
of the Automated Clearing House to the Financial Institution
account specified in the Expedited Redemption section of your
Application or Ready Access Features form. The Fund may impose a
charge, not exceeding $5.00 per wire redemption, after written
notice to shareholders who have elected this redemption
procedure. The Fund has no present intention of making this
charge. Upon 30 days' written notice to shareholders, the Fund
may modify or terminate the use of the Automated Clearing House
to make redemption payments at any time or charge a service fee,
although no such fee is presently contemplated. If any such
changes are made, the Prospectus will be supplemented to reflect
them. If you use a broker or dealer to arrange for a redemption,
it may charge you a fee for this service.

     The Fund will normally make payment for all shares redeemed
on the next business day (see "Net Asset Value Per Share")
following acceptance of the redemption request made in compliance
with one of the redemption methods specified above. Except as set
forth below, in no event will payment be made more than seven
days after acceptance of such a redemption request. However, the
right of redemption may be suspended or the date of payment
postponed (i) during periods when the New York Stock Exchange is
closed for other than weekends and holidays or when trading on
such Exchange is restricted as determined by the Securities and
Exchange Commission by rule or regulation; (ii) during periods in
which an emergency, as determined by the Securities and Exchange
Commission, exists which causes disposal of, or valuation of the
net asset value of, the portfolio securities to be unreasonable
or impracticable; or (iii) for such other periods as the
Securities and Exchange Commission may permit. Payment for
redemption of shares recently purchased by check (irrespective of
whether the check is a regular check or a certified, cashier's or
official bank check) or by Automatic Investment or Telephone
Investment may be delayed up to 15 days or until (i) the purchase
check or Automatic Investment or Telephone Investment has been
honored or (ii) the Agent has received assurances by telephone or
in writing from the Financial Institution on which the purchase
check was drawn, or from which the funds for Automatic Investment
or Telephone Investment were transferred, satisfactory to the
Agent and the Fund, that the purchase check or Automatic
Investment or Telephone Investment will be honored. Possible
delays in payment of redemption proceeds can be eliminated by
using wire payments or Federal Reserve drafts to pay for
purchases.

     If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the
redemption price in whole or in part by the distribution in kind
of securities from the portfolio of the Fund, in lieu of cash, in
conformity with applicable rules of the Securities and Exchange
Commission. See the Additional Statement for details.

     The Fund has the right to compel the redemption of shares
held in any account if the aggregate net asset value of such
shares is less than $500 as a result of shareholder redemptions
or failure to meet the minimum investment level under an
Automatic Purchase Program. If the Board elects to do this,
shareholders who are affected will receive prior written notice
and will be permitted 60 days to bring their accounts up to the
minimum before this redemption is processed.

                    AUTOMATIC WITHDRAWAL PLAN

     You may establish an Automatic Withdrawal Plan if you own or
purchase Class Y Shares of the Fund having a net asset value of
at least $5,000. Under an Automatic Withdrawal Plan you will
receive a monthly or quarterly check in a stated amount, not less
than $50. If such a plan is established, all dividends and
distributions must be reinvested in your shareholder account.
Redemption of shares to make payments under the Automatic
Withdrawal Plan will give rise to a gain or loss for tax
purposes. See the Automatic Withdrawal Plan provisions of the
Application included in the Prospectus, the Additional Statement
under "Automatic Withdrawal Plan," and "Dividend and Tax
Information" below. 

                     MANAGEMENT ARRANGEMENTS

The Board of Trustees

     The business and affairs of the Fund are managed under the
direction and control of its Board of Trustees. The Additional
Statement lists the Fund's Trustees and officers and provides
further information about them.

The Advisory Agreement

     Banc One Investment Advisors Corporation (the "Adviser")
supervises the investment program of the Fund and the composition
of its portfolio.

     The services of the Adviser are rendered under an Investment
Advisory Agreement (the "Advisory Agreement") which provides,
subject to the control of the Board of Trustees, for investment,
supervisory and certain administrative services. The Advisory
Agreement states that the Adviser shall, at its expense, provide
to the Fund all office space and facilities, equipment and
clerical personnel necessary for the carrying out of the
Adviser's duties under the Advisory Agreement. The Adviser will,
at its expense, provide for pricing of the Fund's portfolio daily
using a pricing service or other source of pricing information
satisfactory to the Fund and, unless otherwise directed by the
Board of Trustees, provide for pricing of the Fund's portfolio at
least quarterly using another such source satisfactory to the
Fund.

     Under the Advisory Agreement, the Adviser pays all
compensation of those officers and employees of the Fund and of
those Trustees, if any, who are affiliated with the Adviser.
Under the Advisory Agreement, the Fund bears the cost of
preparing and setting in type its prospectuses, statements of
additional information, and reports to shareholders and the costs
of printing or otherwise producing and distributing those copies
of such prospectuses, statements of additional information and
reports as are sent to its shareholders. Under the Advisory
Agreement, all costs and expenses not expressly assumed by the
Adviser or by the Administrator under the Administration
Agreement or by the Fund's Distributor (principal underwriter)
are paid by the Fund. The Advisory Agreement lists examples of
such expenses borne by the Fund, the major categories of such
expenses being: legal and audit expenses, custodian and transfer
agent or shareholder servicing agent fees and expenses, stock
issuance and redemption costs, certain printing costs,
registration costs of the Fund and its shares under Federal and
State securities laws, interest, taxes and brokerage commissions,
and non-recurring expenses, including litigation.

     Under the Advisory Agreement, the Fund pays a fee payable
monthly and computed on the net asset value of the Fund as of the
close of business each business day at the annual rate of 0.17 of
1% of such net asset value, provided, however, that for any day
that the Fund pays or accrues a fee under the Distribution Plan
of the Fund based upon the assets of the Fund (other than a fee
allocable by class to certain shares of the Fund), the advisory
fee shall be payable at the annual rate of 0.14 of 1% of such net
asset value. (Since the Administrator also receives a fee from
the Fund under the Administration Agreement, the total investment
advisory and administration fees which the Fund pays are at the
annual rate of 0.50 of 1% of such net assets, or, for any day
that the Fund pays or accrues a fee under the Distribution Plan
of the Fund based upon the assets of the Fund, at 0.40 of 1% of
such net asset value; see below.) Payments under the Distribution
Plan began on July 1, 1994 and the advisory and administration
fees are currently being accrued at the lower rate. Prior to
September 11, 1995, different advisory and administration
arrangements were in effect. See the Additional Statement for a
description of such arrangements. The Adviser and the
Administrator may, in order to attempt to achieve a competitive
yield on the shares of the Fund, each waive all or part of any
such fee.

     The Adviser agrees that the above fee shall be reduced, but
not below zero, by an amount equal to its pro-rata portion
(hereafter described) of the amount, if any, by which the total
expenses of the Fund in any fiscal year, exclusive of taxes,
interest and brokerage fees, shall exceed the lesser of (i) 2.5%
of the first $30 million of average annual net assets of the Fund
plus 2% of the next $70 million of such assets and 1.5% of such
assets in excess of $100 million, or (ii) 25% of the Fund's total
annual investment income. The pro-rata portion, as between the
Administrator and Adviser, is based on the aggregate of the fee
of the Adviser and the fee of the Administrator (exclusive of
amounts paid or to be paid out by the Administrator, if any, for
the applicable period pursuant to the Fund's Distribution Plan.)

     The Advisory Agreement contains provisions as to the
allocation of the portfolio transactions of the Fund; see the
Additional Statement. Under these provisions, the Adviser is
authorized to consider sales of shares of the Fund or of any
other investment company or companies having the same investment
adviser, sub-adviser, administrator or principal underwriter as
the Fund.

     The Fund's Custodian is an affiliate of the Adviser. It is
expected that another banking subsidiary of the Adviser's parent,
Banc One Corporation, will provide a credit facility to the Fund.

The Administration Agreement

     Under an Administration Agreement (the "Administration
Agreement"), Aquila Management Corporation as Administrator, at
its own expense, provides office space, personnel, facilities and
equipment for the performance of its functions thereunder and as
is necessary in connection with the maintenance of the
headquarters of the Fund and pays all compensation of the Fund's
Trustees, officers and employees who are affiliated persons of
the Administrator.

     Under the Administration Agreement, subject to the control
of the Fund's Board of Trustees, the Administrator provides all
administrative services to the Fund other than those relating to
its investment portfolio. Such administrative services include
but are not limited to maintaining books and records of the Fund,
either keeping the accounting records of the Fund, including the
computation of the net asset value per share and the dividends
(however, the daily pricing of the Fund's portfolio is the
responsibility of the Adviser under the Advisory Agreement) or,
at its expense and responsibility, delegating these accounting
duties in whole or in part to a company satisfactory to the Fund,
and overseeing all relationships between the Fund and its
transfer agent, custodian, legal counsel, auditors and principal
underwriter, including the negotiation of agreements in relation
thereto, the supervision and coordination of the performance of
such agreements, and the overseeing of all administrative matters
which are necessary or desirable for effective operation of the
Fund and for the sale, servicing, or redemption of the Fund's
shares. See the Additional Statement for a further description of
functions listed in the Administration Agreement as part of such
duties.

     Under the Administration Agreement, the Fund pays a fee
payable monthly and computed on the net asset value of the Fund
at the end of each business day at the annual rate of 0.33 of 1%
of such net asset value, provided, however, that for any day that
the Fund pays or accrues a fee under the Distribution Plan of the
Fund based upon the assets of the Fund (other than a fee
allocable by class to certain shares of the Fund), the annual fee
will be payable at the annual rate of 0.26 of 1% of such net
asset value. Payments under the Distribution Plan began on July
1, 1994 and administration fees are currently being accrued at
the lower rate. See the Additional Statement for a description of
the fund's former management fees. The Administrator has agreed
that the above fee shall be reduced, but not below zero, by an
amount equal to its pro-rata portion (defined as in the Advisory
Agreement) of the amount, if any, by which the total expenses of
the Fund in any fiscal year, exclusive of taxes, interest and
brokerage fees, shall exceed the lesser of (i) 2.5% of the first
$30 million of average annual net assets of the Fund plus 2% of
the next $70 million of such assets and 1.5% of such assets in
excess of $100 million, or (ii) 25% of the Fund's total annual
investment income.

Information about the Adviser,
the Administrator and the Distributor

     Banc One Investment Advisors Corporation (the "Adviser") is
a wholly-owned subsidiary of BANC ONE CORPORATION ("Banc One").
Banc One currently has affiliate banking organizations in
Kentucky, Arizona, Colorado, Illinois, Indiana, Ohio, Oklahoma,
Texas, Utah, West Virginia and Wisconsin. On a consolidated
basis, Banc One had assets of over $101.8 billion as of December
31, 1996. As of April 1, 1997, the Adviser was responsible for
management of over $5.2 billion of investments in municipal
obligations, of which $2.3 billion were held in mutual funds and
of which $570 million were obligations of Kentucky issuers. The
Adviser services Kentucky clients at offices in Louisville and
Lexington. As it has been in the past, since the beginning of the
Fund's operations in 1987, the Fund's investments will continue
to be managed so that it will have a portfolio of
quality-oriented (investment grade) securities.

     The Fund's portfolio is managed locally in Kentucky by Mr.
Thomas S. Albright, Vice President and Senior Portfolio Manager,
at the Adviser's Louisville office. He has served in this
capacity since September, 1995, when the Adviser became adviser
to the Fund. From 1981 to 1995 he was employed by Liberty
National Bank, the Adviser's local predecessor, where he was
responsible for management of its investment portfolio. He also
served as President of Liberty Investment Services, Inc., that
bank's full service brokerage subsidiary. Mr. Albright is a
member of the Adviser's Fixed Income Fund Sub-Committee. Mr.
Albright attended the University of Louisville.

     See the Additional Statement as to the legality, under the
Glass-Steagall Act, of the Adviser's acting as the Fund's
investment adviser. In general, under that Act, the Adviser will
not, among other things, be involved in the promotion or
distribution of shares of the Fund.

     The Fund's Administrator is founder and administrator to the
Aquilasm Group of Funds, which consists of tax-free municipal
bond funds, money market funds and two equity funds. As of
December 31, 1996, these funds had aggregate assets of
approximately $2.7 billion, of which approximately $1.9 billion
consisted of assets of tax-free municipal bond funds. The
Administrator, which was founded in 1984, is controlled by Mr.
Lacy B. Herrmann (directly, through a trust and through share
ownership by his wife). See the Additional Statement for
information on Mr. Herrmann.

     The Distributor currently handles the distribution of the
shares of fourteen funds (seven tax-free municipal bond funds,
five money market funds and two equity funds), including the
Fund. Under the Distribution Agreement, the Distributor is
responsible for the payment of certain printing and distribution
costs relating to prospectuses and reports as well as the costs
of supplemental sales literature, advertising and other
promotional activities.

     At the date of this Prospectus, there is a proposed
transaction whereby all of the shares of the Distributor, which
are currently owned by Mr. Herrmann, will be owned by certain
directors and/or officers of the Administrator and/or the
Distributor including Mr. Herrmann.

     During the fiscal year ended December 31, 1996, the Fund
paid or accrued $316,432 and $587,239 to the Adviser and
Administrator respectively.

                  DIVIDEND AND TAX INFORMATION

Dividends and Distributions

     The Fund will declare all of its net income, as defined
below, as dividends on every day, including weekends and
holidays, on those shares outstanding for which payment was
received by the close of business on the preceding business day.
Net income for dividend purposes includes all interest income
accrued by the Fund since the previous dividend declaration,
including accretion of any original issue discount, less expenses
paid or accrued. As such net income will vary, the Fund's
dividends will also vary.In addition, the dividends of each class
can vary because each class will bear certain class-specific
charges. Dividends and other distributions paid by the Fund with
respect to each class of its shares are calculated at the same
time and in the same manner.

     It is the Fund's present policy to pay dividends so that
they will be received or credited by approximately the first day
of each month. Shareholders may elect to have dividends deposited
without charge by electronic funds transfers into an account at a
Financial Institution which is a member of the Automated Clearing
House by completing a Ready Access Features form.

     Redeemed shares continue to earn dividends through and
including the earlier of (i) the day before the day on which the
redemption proceeds are mailed, wired or transferred by the
facilities of the Automated Clearing House by the Agent or paid
by the Agent to a selected dealer; or (ii) the third day on which
the New York Stock Exchange is open after the day on which the
net asset value of the redeemed shares has been determined. (See
"How To Redeem Your Investment.")

     Net investment income includes amounts of income from the
Kentucky Obligations in the Fund's portfolio which are allocated
as "exempt-interest dividends." "Exempt-interest dividends"are
exempt from regular Federal income tax. The allocation of
"exempt-interest dividends" will be made by the use of one
designated percentage applied uniformly to all income dividends
declared during the Fund's tax year. Such designation will
normally be made in the first month after the end of each of the
Fund's fiscal years as to income dividends paid in the prior
year. It is possible that in certain circumstances, a small
portion of the dividends paid by the Fund will be subject to
income taxes. During the Fund's fiscal year ended December 31,
1996, 93.6% of the Fund's dividends were "exempt-interest
dividends." For the calendar year 1996, 6.4% of the total
dividends paid were taxable.The percentage of income designated
as tax-exempt for any particular dividend may be different from
the percentage of the Fund's income that was tax-exempt during
the period covered by the dividend.

     Distributions ("short-term gains distributions") from net
realized short-term gains, if any, and distributions ("long-term
gains distributions"), if any, from the excess of net long-term
capital gains over net short-term capital losses realized through
October 31st of each year and not previously paid out will be
paid out after that date; the Fund may also pay supplemental
distributions after the end of its fiscal year. If net capital
losses are realized in any year, they are charged against capital
and not against net investment income which is distributed
regardless of gains or losses. The Fund may be required to impose
backup withholding at a rate of 31% upon payment of redemptions
to shareholders, and from short- and long-term gains
distributions (if any) and any other distributions that do not
qualify as "exempt-interest dividends," if shareholders do not
comply with provisions of the law relating to the furnishing of
taxpayer identification numbers and reporting of dividends.

     Unless you request otherwise by letter addressed to the
Agent or by filing an appropriate Application prior to a given
ex-dividend date, dividends and distributions will be
automatically reinvested in full and fractional shares of the
Fund at net asset value on the record date for the dividend or
distribution or other date fixed by the Board of Trustees. An
election to receive cash will continue in effect until written
notification of a change is received by the Agent. All
shareholders, whether their dividends are received in cash or are
being reinvested, will receive a monthly account summary
indicating the current status of their investment. There is no
fixed dividend rate. Corporate shareholders of the Fund are not
entitled to any deduction for dividends received from the Fund.

Tax Information

     The Fund qualified during its last fiscal year as a
"regulated investment company" under the Code, and intends to
continue to so qualify. If it does so qualify, it will not be
liable for Federal income taxes on amounts paid by it as
dividends and distributions. However, the Code contains a number
of complex tests relating to such qualification and it is
possible although not likely that the Fund might not meet one or
more of these tests in any particular year. If it does not so
qualify, it would be treated for tax purposes as an ordinary
corporation, would receive no tax deduction for payments made to
shareholders and would be unable to pay dividends or
distributions which would qualify as "exempt-interest dividends"
or "capital gains dividends," as discussed below.

     The Fund intends to qualify during each fiscal year under
the Code to pay "exempt-interest dividends" to its shareholders.
Exempt-interest dividends which are derived from net income
earned by the Fund on Kentucky Obligations will be excludable
from gross income of the shareholders for regular Federal income
tax purposes. Capital gains dividends are not included in
exempt-interest dividends. Although "exempt-interest dividends"
are not taxed, each taxpayer must report the total amount of
tax-exempt interest (including exempt-interest dividends from the
Fund) received or acquired during the year.

     The Omnibus Budget Reconciliation Act of 1993 requires that
either gains realized by the Fund on the sale of municipal
obligations acquired after April 30, 1993 at a price which is
less than face or redemption value be included as ordinary income
to the extent such gains do not exceed such discount or that the
discount be amortized and included ratably in taxable income.
There is an exception to the foregoing treatment if the amount of
the discount is less than 0.25% of face or redemption value
multiplied by the number of years from acquisition to maturity.
The Fund will report such ordinary income in the years of sale or
redemption rather than amortize the discount and report it
ratably. To the extent the resultant ordinary taxable income is
distributed to shareholders, it will be taxable to them as
ordinary income.

     Capital gains dividends (net long-term gains over net
short-term losses which the Fund distributes and so designates)
are reportable by shareholders as long-term capital gains. This
is the case whether the shareholder takes the distribution in
cash or elects to have the distribution reinvested in Fund shares
and regardless of the length of time the shareholder has held his
or her shares. Capital gains are taxed at the same rates as
ordinary income, except that for individuals, trusts and estates
the maximum tax rate on capital gains distributions is 28% even
if the applicable rate on ordinary income for such taxpayers is
higher than 28%.

     Short-term gains, when distributed, are taxed to
shareholders as ordinary income. Capital losses of the Fund are
not distributed but carried forward by the Fund to offset gains
in later years and thereby lessen the later-year capital gains
dividends and amounts taxed to shareholders.

     The Fund's gains or losses on sales of Kentucky Obligations
will be long-term or short-term depending upon the length of time
the Fund has held such obligations. Capital gains and losses of
the Fund will also include gains and losses on Futures and
options, if any, including gains and losses actually realized on
sales and exchanges and gains and losses deemed to be realized.
Those deemed to be realized are on Futures and options held by
the Fund at year-end, which are "marked to the market," that is,
deemed sold for fair market value. Net gains or losses realized
and deemed realized on Futures and options will be reportable by
the Fund as long-term to the extent of 60% of the gains or losses
and short-term to the extent of 40% regardless of the actual
holding period of such investments.

     Information as to the tax status of the Fund's dividends and
distributions will be mailed to shareholders annually.

     Under the Code, interest on loans incurred by shareholders
to enable them to purchase or carry shares of the Fund may not be
deducted for regular Federal tax purposes. In addition, under
rules used by the Internal Revenue Service for determining when
borrowed funds are deemed used for the purpose of purchasing or
carrying particular assets, the purchase of shares of the Fund
may be considered to have been made with borrowed funds even
though the borrowed funds are not directly traceable to the
purchase of shares. The receipt of exempt-interest dividends from
the Fund by an individual shareholder may result in some portion
of any social security payments or railroad retirement benefits
received by the shareholder or the shareholder's spouse being
included in taxable income.

     Persons who are "substantial users" (or persons related
thereto) of facilities financed by industrial development bonds
or private activity bonds should consult their own tax advisers
before purchasing shares.

     While interest from all Kentucky Obligations is tax-exempt
for purposes of computing the shareholder's regular tax, interest
from so-called private activity bonds issued after August 7,
1986, constitutes a tax preference for both individuals and
corporations and thus will enter into a computation of the
alternative minimum tax. Whether or not that computation will
result in a tax will depend on the entire content of the
taxpayer's return. The Fund will not invest in the types of
Kentucky Obligations which would give rise to interest that would
be subject to alternative minimum taxation if more than 20% of
its net assets would be so invested, and may refrain from
investing in that type of bond completely. The 20% limit is a
fundamental policy of the Fund. 

     Corporate shareholders must add to or subtract from
alternative minimum taxable income, as calculated before taking
into consideration this adjustment, 75% of the difference between
what is called adjusted current earnings (essentially current
earnings and profits) and alternative minimum taxable income, as
previously calculated. Since tax-exempt bond interest is included
in earnings and profits and therefore in adjusted current
earnings, this adjustment will tend to make it more likely that
corporate shareholders will be subject to the alternative minimum
tax.

Tax Effects of Redemptions

     Normally, when you redeem shares of the Fund you will
recognize capital gain or loss measured by the difference between
the proceeds received in the redemption and the amount you paid
for the shares. The gain or loss will be long-term if you held
the redeemed shares for over a year, and short-term, if for a
year or less. However, if shares held for six months or less are
redeemed and you have a loss, two special rules apply: the loss
is reduced by the amount of exempt-interest dividends, if any,
which you received on the redeemed shares, and any loss over and
above the amount of such exempt-interest dividends is treated as
a long-term loss to the extent you have received capital gains
dividends on the redeemed shares.

Kentucky Tax Information

     Since the Fund may, except as indicated below, purchase only
Kentucky Obligations (which, as defined, means obligations,
including those of non-Kentucky issuers, of any maturity which
pay interest which, in the opinion of counsel, is exempt from
regular Federal income taxes and Kentucky income taxes) all of
the exempt-interest dividends paid by the Fund will be excludable
from the shareholder's gross income for Kentucky income tax
purposes. The Fund may also pay "short-term gains distributions"
and "long-term gains distributions," each as discussed under
"Dividends and Distributions" above. Under Kentucky income tax
law, short-term gains distributions are not exempt from Kentucky
income tax. Kentucky taxes long-term gains distributions at its
ordinary individual and corporate rates. The only investment
which the Fund may make other than in Kentucky Obligations is in
Futures and options on them. Any gains on Futures and options
(including gains imputed under the Code) paid as part or all of a
short-term gains distribution or a long-term gains distribution
will be taxed as indicated above. Under the laws of Kentucky
relating to ad valorem taxation of property, the shareholders
rather than the Fund are considered the owners of the Fund's
assets. Each shareholder will be deemed to be the owner of a
pro-rata portion of the Fund. According to the Kentucky Revenue
Cabinet, to the extent that such portion consists of Kentucky
Obligations, it will be exempt from property taxes, but it will
be subject to property taxes on intangibles to the extent it
consists of cash on hand, cash in out-of-state banks, Futures,
options and other nonexempt assets.

                       EXCHANGE PRIVILEGE

     There is an exchange privilege as set forth below among this
Fund and certain tax-free municipal bond funds and two equity
funds (the "Bond or Equity Funds") and certain money market funds
(the "Money-Market Funds"), all of which are sponsored by Aquila
Management Corporation and Aquila Distributors, Inc., and have
the same Administrator and Distributor as the Fund. All exchanges
are subject to certain conditions described below. As of the date
of the Prospectus, the Aquila Bond or Equity Funds are this Fund,
Aquila Rocky Mountain Equity Fund, Aquila Cascadia Equity Fund,
Hawaiian Tax-Free Trust, Tax-Free Trust of Arizona, Tax-Free
Trust of Oregon, Tax-Free Fund of Colorado, Tax-Free Fund For
Utah and Narragansett Insured Tax-Free Income Fund; the Aquila
Money-Market Funds are Capital Cash Management Trust, Pacific
Capital Cash Assets Trust (Original Shares), Pacific Capital
Tax-Free Cash Assets Trust (Original Shares), Pacific Capital
U.S. Treasuries Cash Assets Trust (Original Shares) and Churchill
Cash Reserves Trust.

     Class Y Shares of the Fund may be exchanged only for Class Y
Shares of the Bond or Equity Funds or for shares of a
Money-Market Fund.

     Under the Class Y exchange privilege, once Class Y Shares of
any Bond or Equity Fund have been purchased, those shares (and
any Class Y Shares acquired as a result of reinvestment of
dividends and/or distributions) may be exchanged any number of
times between Money-Market Funds and Class Y Shares of the Bond
or Equity Funds without the payment of any sales charge.

     The "Class Y Eligible Shares" of any Bond or Equity Fund are
those shares which were (a) acquired by direct purchase including
by exchange by an institutional investor from a Money-Market
Fund, or which were received in exchange for Class Y Shares of
another Bond or Equity Fund; or (b) acquired as a result of
reinvestment of dividends and/or distributions on otherwise Class
Y Eligible Shares. Shares of a Money-Market Fund not acquired in
exchange for Class Y Eligible Shares of a Bond or Equity Fund can
be exchanged for Class Y Shares of a Bond or Equity Fund only by
persons eligible to make an initial purchase of Class Y Shares.

     This Fund, as well as the Money-Market Funds and other Bond
or Equity Funds, reserves the right to reject any exchange into
its shares, if shares of the fund into which exchange is desired
are not available for sale in your state of residence. The Fund
may also modify or terminate this exchange privilege at any time.
In the case of termination, the Prospectus will be appropriately
supplemented. No such modification or termination shall take
effect on less than 60 days' written notice to shareholders.

     All exercises of the exchange privilege are subject to the
conditions that (i) the shares being acquired are available for
sale in your state of residence; (ii) the aggregate net asset
value of the shares surrendered for exchange are at least equal
to the minimum investment requirements of the investment company
whose shares are being acquired and (iii) the ownership of the
accounts from which and to which the exchange is made are
identical.

     The Agent will accept telephone exchange instructions from
anyone. To make a telephone exchange telephone: 

             800-872-5860 toll free or 908-855-5731

     Note: The Fund, the Agent, and the Distributor will not be
responsible for any losses resulting from unauthorized telephone
transactions if the Agent follows reasonable procedures designed
to verify the identity of the caller. The Agent will request some
or all of the following information: account name(s) and number,
name of the caller, the social security number registered to the
account and personal identification. The Agent may also record
calls. You should verify the accuracy of confirmation statements
immediately upon receipt.

     Exchanges of Class Y Shares will be effected at the relative
net asset values of the Class Y Shares being exchanged next
determined after receipt by the Agent of your exchange request.
Prices for exchanges are determined in the same manner as for
purchases of the Fund's shares. See "How to Invest in the Fund."

     An exchange is treated for Federal tax purposes as a
redemption and purchase of shares and may result in the
realization of a capital gain or loss, depending on the cost or
other tax basis of the shares exchanged and the holding period
(see "Tax Effects of Redemptions" and the Additional Statement);
no representation is made as to the deductibility of any such
loss should such occur.

     Dividends paid by the Money-Market Funds are taxable, except
to the extent that a portion or all of the dividends paid by
Pacific Capital Tax-Free Cash Assets Trust (a tax-free
money-market Fund) are exempt from regular Federal income tax,
and to the extent that a portion or all of the dividends paid by
Pacific Capital U.S. Treasuries Cash Assets Trust (which invests
in U.S. Treasury obligations) are exempt from state income taxes.
Dividends paid by Aquila Rocky Mountain Equity Fund and Aquila
Cascadia Equity Fund are taxable. If your state of residence is
not the same as that of the issuers of obligations in which a
tax-free municipal bond fund or a tax-free money-market fund
invests, the dividends from that fund may be subject to income
tax of the state in which you reside. Accordingly, you should
consult your tax adviser before acquiring shares of such a bond
fund or a tax-free money-market fund under the exchange privilege
arrangement.

     If you are considering an exchange into one of the funds
listed above, you should send for and carefully read its
Prospectus.

                       GENERAL INFORMATION

Performance

     Advertisements, sales literature and communications to
shareholders may contain various measures of the Fund's
performance including current yield, taxable equivalent yield,
various expressions of total return, current distribution rate
and taxable equivalent distribution rate.

     Average annual total return figures, as prescribed by the
Securities and Exchange Commission, represent the average annual
percentage change in value of a hypothetical $1,000 purchase,
invested at the maximum public offering price (offering price
includes any applicable sales charge) for 1-, 5- and 10-year
periods and for a period since the inception of the Fund, to the
extent applicable, through the end of such periods, assuming
reinvestment (without sales charge) of all distributions. The
Fund may also furnish total return quotations for other periods
or based on investments at various applicable sales charge levels
or at net asset value. For such purposes total return equals the
total of all income and capital gains paid to shareholders,
assuming reinvestment of all distributions, plus (or minus) the
change in the value of the original investment, expressed as a
percentage of the purchase price. See the Additional Statement.

     Current yield reflects the income per share earned by each
of the Fund's portfolio investments; it is calculated by (i)
dividing the Fund's net investment income per share during a
recent 30-day period by (ii) the maximum public offering price on
the last day of that period and by (iii) annualizing the result.
Taxable equivalent yield shows the yield from a taxable
investment that would be required to produce an after-tax yield
equivalent to that of the Fund, which invests in tax-exempt
obligations. It is computed by dividing the tax-exempt portion of
the Fund's yield (calculated as indicated) by one minus a stated
income tax rate and by adding the product to the taxable portion
(if any) of the Fund's yield. See the Additional Statement.

     Current yield and taxable equivalent yield, which are
calculated according to a formula prescribed by the Securities
and Exchange Commission (see the Additional Statement), are not
indicative of the dividends or distributions which were or will
be paid to the Fund's shareholders. Dividends or distributions
paid to shareholders are reflected in the current distribution
rate or taxable equivalent distribution rate which may be quoted
to shareholders. The current distribution rate is computed by (i)
dividing the total amount of dividends per share paid by the Fund
during a recent 30-day period by (ii) the current maximum
offering price and by (iii) annualizing the result. A taxable
equivalent distribution rate shows the taxable distribution rate
that would be required to produce an after-tax distribution rate
equivalent to the Fund's distribution rate (calculated as
indicated above). The current distribution rate differs from the
current yield computation because it could include distributions
to shareholders from sources, if any, other than dividends and
interest, such as short-term capital gains or return of capital.
If distribution rates are quoted in advertising, they will be
accompanied by calculations of current yield in accordance with
the formula of the Securities and Exchange Commission.

     In each case performance figures are based upon past
performance, reflect as appropriate all recurring charges against
the Fund's income net of fee waivers and reimbursement of
expenses, if any, and will assume the payment of the maximum
sales charge, if any, on the purchase of shares, but not on
reinvestment of income dividends. The investment results of the
Fund, like all other investment companies, will fluctuate over
time; thus, performance figures should not be considered to
represent what an investment may earn in the future or what the
Fund's yield, tax equivalent yield, distribution rate, taxable
equivalent distribution rate or total return may be in any future
period. The annual report of the Fund contains additional
performance information that will be made available upon request
and without charge.

Description of the Fund and Its Shares

     Churchill Tax-Free Trust (the "Trust"), a non-diversified
open-end investment company was formed on March 30, 1987, as a
Massachusetts business trust. Its name was changed from
"Churchill Tax-Free Fund of Kentucky" to "Churchill Tax-Free
Trust" in June, 1988. The Fund is the original and only active
portfolio (series) of the Trust. The Fund is an open-end,
non-diversified management investment company. (See "Investment
of the Fund's Assets" for further information about the Fund's
status as "non-diversified.") The Declaration of Trust permits
the Trustees to issue an unlimited number of full and fractional
shares and to divide or combine the shares into a greater or
lesser number of shares without thereby changing the
proportionate beneficial interests in the Fund. Each share
represents an equal proportionate interest in the Fund with each
other share of its class; shares of the respective classes
represent proportionate interests in the Fund in accordance with
their respective net asset values. Upon liquidation of the Fund,
shareholders are entitled to share pro-rata in the net assets of
the Fund available for distribution to shareholders, in
accordance with the respective net asset values of the shares of
each of the Fund's classes at that time. All shares are presently
divided into three classes; however, if they deem it advisable
and in the best interests of shareholders, the Board of Trustees
of the Fund may create additional classes of shares, which may
differ from each other as provided in rules and regulations of
the Securities and Exchange Commission or by exemptive order. The
Board of Trustees may, at its own discretion, create additional
series of shares, each of which may have separate assets and
liabilities (in which case any such series will have a
designation including the word "Series"). See the Additional
Statement for further information about possible additional
series. Shares are fully paid and non-assessable, except as set
forth under the caption "General Information" in the Additional
Statement; the holders of shares have no pre-emptive or
conversion rights.

     The other two classes of shares of the Fund are
Front-Payment Class Shares ("Class A Shares") and Level-Payment
Class Shares ("Class C Shares"), which are fully described in a
separate prospectus that can be obtained by calling the Fund at
800-872-5859.

     The primary distinction among the Fund's three classes of
shares lies in their different sales charge structures and
ongoing expenses, which are likely to be reflected in differing
yields and other measures of investment performance. All three
classes represent interests in the same portfolio of Kentucky
Obligations and have the same rights, except that each class
bears the separate expenses, if any, of its participation in the
Distribution Plan and Shareholder Services Plan and has exclusive
voting rights with respect to such participation. There are no
Distribution fees with respect to Class Y Shares.

     The Fund's Distribution Plan has three parts. In addition to
the defensive provisions described above, Parts I and II of the
Plan authorize payments, to certain "Qualified Recipients," out
of the Fund assets allocable to the Class A Shares and Class C
Shares, respectively. See the Additional Statement. The Fund has
also adopted a Shareholder Services Plan under which the Fund is
authorized to make certain payments out of the Fund assets
allocable to the Class C Shares. See the Additional Statement.

Voting Rights

     At any meeting of shareholders, shareholders are entitled to
one vote for each dollar of net asset value (determined as of the
record date for the meeting) per share held (and proportionate
fractional votes for fractional dollar amounts). Shareholders
will vote on the election of Trustees and on other matters
submitted to the vote of shareholders. Shares vote by classes on
any matter specifically affecting one or more classes, such as an
amendment of an applicable part of the Distribution Plan. No
amendment may be made to the Declaration of Trust without the
affirmative vote of the holders of a majority of the outstanding
shares of the Fund, except that the Fund's Board of Trustees may
change the name of the Fund. The Fund may be terminated (i) upon
the sale of its assets to another issuer, or (ii) upon
liquidation and distribution of the assets of the Fund, in either
case if such action is approved by the vote of the holders of a
majority of the outstanding shares of the Fund. If not so
terminated, the Fund will continue indefinitely.





              APPLICATION FOR CHURCHILL TAX-FREE FUND OF KENTUCKY
                            FOR CLASS Y SHARES ONLY
                PLEASE COMPLETE STEPS 1 THROUGH 4 AND MAIL TO:
                      ADM, ATTN: AQUILA SM GROUP OF FUNDS
                  581 MAIN STREET, WOODBRIDGE, NJ 07095-1198
                             Tel.# 1-800-872-5860

STEP 1
A. ACCOUNT REGISTRATION

___Individual Use line 1
___Joint Account*   Use lines 1&2
___For a Minor Use line 3
___For Trust, Corporation, Partnership or other Entity Use line 4
*  Joint Accounts will be Joint Tenants with rights of survivorship
   unless otherwise specified.
** Uniformed Gifts/Transfers to Minors Act.

Please type or print name exactly as account is to be registered
1.________________________________________________________________
  First Name   Middle Initial   Last Name   Social Security Number 
2.________________________________________________________________
  First Name   Middle Initial   Last Name   Social Security Number 
3.________________________________________________________________
  Custodian's First Name      Middle Initial          Last Name 
Custodian for ____________________________________________________
                   Minor's First Name   Middle Initial   Last Name  
Under the ___________UGTMA** _____________________________________
         Name of State       Minors Social Security Number 
4. ____________________________________________________
   ____________________________________________________
(Name of Corporation or Partnership. If a Trust, include the name(s) 
of Trustees in which account will be registered and the name and date 
of the Trust Instrument. Account for a Pension or Profit Sharing Plan 
or Trust may be registered in the name of the Plan or Trust itself.)
___________________________________________________________________
        Tax I.D. Number    Authorized Individual          Title 


B. MAILING ADDRESS AND TELEPHONE NUMBER

____________________________________________________
  Street or PO Box                           City 
_______________________________(______)______________
  State           Zip          Daytime Phone Number

Occupation:________________________Employer:________________________

Employer's Address:__________________________________________________
                   Street Address:               City  State  Zip 
Citizen or resident of: ___  U.S. ___ Other  Check here ___ if you 
are a non-U.S. Citizen or resident and not subject to back-up 
withholding (See certification in Step 4, Section B, below.)

C. INVESTMENT DEALER OR BROKER:
(Important - to be completed by Dealer or Broker)

_______________________   _____________________________
Dealer Name                           Branch Number
_______________________   _____________________________
Street Address                   Rep. Number/Name
_______________________   (_______)_____________________
  City    State    Zip     Area Code        Telephone


STEP 2 
PURCHASES OF SHARES

A. INITIAL INVESTMENT

Indicate Method of Payment (For either method, make check 
payable to: CHURCHILL TAX-FREE FUND OF KENTUCKY)

___Initial Investment  $ ______________ (Minimum investment $1,000)
                         
___Automatic Investment $______________ (Minimum $50)

For Automatic Investment of at least $50 per month, you must complete
Step 3, Section A, Step 4, Sections A & B and ATTACH A PRE-PRINTED 
DEPOSIT SLIP OR VOIDED CHECK.

B. DISTRIBUTIONS

All income dividends and capital gains distributions are automatically 
reinvested in additional shares at Net Asset Value unless otherwise 
indicated below.

Dividends are to be:___ Reinvested  ___Paid in cash*
Capital Gains Distributions are to be: ___ Reinvested ___ Paid in cash*
    * For cash dividends, please choose one of the following options:

___ Deposit directly into my/our Financial Institution account. 
    ATTACHED IS A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK 
    showing the Financial Institution account where I/we would like you
    to deposit the dividend. (A Financial Institution is a commercial 
    bank, savings bank or credit union.)

___ Mail check to my/our address listed in Step 1.


STEP 3
SPECIAL FEATURES

A. AUTOMATIC INVESTMENT PROGRAM
(Check appropriate box)
___ Yes ___ No

    This option provides you with a convenient way to have amounts 
automatically drawn on your Financial Institution account and invested
in your Churchill Tax-Free Fund of Kentucky Account. To establish this
program, please complete Step 4, Sections A & B of this Application.

I/We wish to make regular monthly investments of $ _________________ 
(minimum $50) on the ___ 1st day  or ___ 16th day of the month (or on 
the first business day after that date).
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)

B. TELEPHONE INVESTMENT
(Check appropriate box)
___ Yes ___ No

    This option provides you with a convenient way to add to your account 
(minimum $50 and maximum $50,000) at any time you wish by simply calling 
the Fund toll-free at 1-800-872-5860. To establish this program, please 
complete Step 4, Sections A & B of this Application.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK)

C. AUTOMATIC WITHDRAWAL PLAN
(Minimum investment $5,000)

Application must be received in good order at least 2 weeks 
prior to 1st actual liquidation date.
(Check appropriate box)
___ Yes ___ No

    Please establish an Automatic Withdrawal Plan for this account,
subject to the terms of the Automatic Withdrawal Plan Provisions set
forth below. To realize the amount stated below, Administrative 
Data Management Corp. (the Agent) is authorized to redeem sufficient
shares from this account at the then current Net Asset Value, in 
accordance with the terms below:

Dollar Amount of each withdrawal $ ______________beginning________________ .
                                   Minimum: $50             Month/Year
Payments to be made: ___ Monthly or ___ Quarterly

    Checks should be made payable as indicated below. If check is 
payable to a Financial Institution for your account, indicate 
Financial Institution name, address and your account number.
_______________________________     ______________________________________
First Name Middle Initial Last Name   Financial Institution Name
_______________________________     ______________________________________
  Street                             Financial Institution Street Address
_______________________________     ______________________________________
 City   State Zip                   City   State Zip    
                
                                     ____________________________________
                                     Financial Institution Account Number

D. TELEPHONE EXCHANGE
 (Check appropriate box)
___ Yes ___ No

This option allows you to effect exchanges among accounts in your 
name within the Aquila SM Group of Funds by telephone.

    The Agent is authorized to accept and act upon my/our or any other 
persons telephone instructions to execute the exchange of shares of one 
Aquila-sponsored fund for shares of another Aquila-sponsored fund with 
identical shareholder registration in the manner described in the 
Prospectus. Except for gross negligence in acting upon such telephone
instructions to execute an exchange, and subject to the conditions set 
forth herein, I/we understand and agree to hold harmless the Agent, each
of the Aquila Funds, and their respective officers, directors, trustees,
employees, agents and affiliates against any liability, damage, expense,
claim or loss, including reasonable costs and attorneys fees, resulting
from acceptance of, or acting or failure to act upon, this Authorization.

E. EXPEDITED REDEMPTION
(Check appropriate box)
___ Yes ___ No

The proceeds will be deposited to your Financial Institution 
account listed.

    Cash proceeds in any amount from the redemption of shares will 
be mailed or wired, whenever possible, upon request, if in an amount 
of $1,000 or more to my/our account at a Financial Institution. The 
Financial Institution account must be in the same name(s) as this 
Fund account is registered.
(YOU MUST ATTACH A PRE-PRINTED DEPOSIT SLIP OR VOIDED CHECK).
_______________________________   ____________________________________
  Account Registration            Financial Institution Account Number
_______________________________   ____________________________________
  Financial Institution Name      Financial Institution Transit/Routing
                                                                Number
_______________________________   ____________________________________
  Street                            City   State Zip      


STEP 4 
Section A

DEPOSITORS AUTHORIZATION TO HONOR DEBITS

IF YOU SELECTED AUTOMATIC INVESTMENT OR TELEPHONE INVESTMENT
YOU MUST ALSO COMPLETE STEP 4, SECTIONS A & B.

I/We authorize the Financial Institution listed below to charge to 
my/our account any drafts or debits drawn on my/our account initiated 
by the Agent, Administrative Data Management Corp., and to pay such 
sums in accordance therewith, provided my/our account has sufficient 
funds to cover such drafts or debits. I/We further agree that your 
treatment of such orders will be the same as if I/we personally signed 
or initiated the drafts or debits.

I/We understand that this authority will remain in effect until you 
receive my/our written instructions to cancel this service. I/We also 
agree that if any such drafts or debits are dishonored, for any 
reason, you shall have no liabilities.

Financial Institution Account Number _______________________________________

Name and Address where my/our account is maintained

Name of Financial Institution______________________________________________

Street Address_____________________________________________________________

City___________________________________________State _________ Zip ________
Name(s) and Signature(s) of Depositor(s) as they appear where account is 
registered

______________________________________________
        (Please Print)
X_____________________________________________  __________________
        (Signature)                                    (Date)

______________________________________________
        (Please Print)
X_____________________________________________  __________________
        (Signature)                                    (Date)

                        INDEMNIFICATION AGREEMENT

To: Financial Institution Named Above

So that you may comply with your depositor's request, Aquila 
Distributors, Inc. (the "Distributor") agrees:

1 Electronic Funds Transfer debit and credit items transmitted pursuant
  to the above authorization shall be subject to the provisions of the 
  Operating Rules of the National Automated Clearing House Association.

2 To indemnify and hold you harmless from any loss you may suffer in 
  connection with the execution and issuance of any electronic debit 
  in the normal course of business initiated by  the Agent (except 
  any loss due to your payment of any amount drawn against insufficient 
  or uncollected funds), provided that you promptly notify us in 
  writing of any claim against you with respect to the same, and further
  provided that you will not settle or pay or agree to settle or pay any 
  such claim without the written permission of the Distributor.

3 To indemnify you for any loss including your reasonable costs and 
  expenses in the event that you dishonor, with or without cause, 
  any such electronic debit.

STEP 4 
Section B

SHAREHOLDER AUTHORIZATION/SIGNATURE(S) REQUIRED

- - The undersigned warrants that he/she has full authority and is of 
  legal age to purchase shares of the Fund and has received and 
  read a current Prospectus of the Fund and agrees to its terms.

- - I/We authorize the Fund and its agents to act upon these 
  instructions for the features that have been checked.

- - I/We acknowledge that in connection with an Automatic Investment or 
  Telephone Investment, if my/our account at the Financial Institution
  has insufficient funds, the Fund and its agents may cancel the 
  purchase transaction and are authorized to liquidate other shares or
  fractions thereof held in my/our Fund account to make up any deficiency
  resulting from any decline in the net asset value of shares so 
  purchased and any dividends paid on those shares. I/We authorize the 
  Fund and its agents to correct any transfer error by a debit or credit
  to my/our Financial Institution account and/or Fund account and to 
  charge the account for any related charges. I/We acknowledge that 
  shares purchased either through Automatic Investment or Telephone 
  Investment are subject to applicable sales charges.

- - The Fund, the Agent and the Distributor and their Trustees, directors, 
  employees and agents will not be liable for acting upon instructions
  believed to be genuine, and will not be responsible for any losses
  resulting from unauthorized telephone transactions if the Agent follows
  reasonable procedures designed to verify the identity of the caller. 
  The Agent will request some or all of the following information: account
  name and number; name(s) and social security number registered to the 
  account and personal identification; the Agent may also record calls.
  Shareholders should verify the accuracy of confirmation statements
  immediately upon receipt. Under penalties of perjury, the undersigned
  whose Social Security (Tax I.D.) Number is shown above certifies 
  (i) that Number is my correct taxpayer identification number and 
  (ii) currently I am not under IRS notification that I am subject to 
  backup withholding (line out (ii) if under notification). If no such 
  Number is shown, the undersigned further certifies, under penalties
  of perjury, that either (a) no such Number has been issued, and a 
  Number has been or will soon be applied for; if a Number is not 
  provided to you within sixty days, the undersigned understands that 
  all payments (including liquidations) are subject to 31% withholding 
  under federal tax law, until a Number is provided and the undersigned 
  may be subject to a $50 I.R.S. penalty; or (b) that the undersigned 
  is not a citizen or resident of the U.S.; and either does not expect 
  to be in the U.S. for 183 days during each calendar year and does 
  not conduct a business in the U.S. which would receive any gain from 
  the Fund, or is exempt under an income tax treaty.

NOTE: ALL REGISTERED OWNERS OF THE ACCOUNT MUST SIGN BELOW. 
FOR A TRUST, ALL TRUSTEES MUST SIGN.*
__________________________     ____________________________     _________
Individual (or Custodian)      Joint Registrant, if any            Date
__________________________     ____________________________     _________
Corporate Officer, Partner,    Title                               Date
Trustee, etc.    

* For Trust, Corporations or Associations, this form must be accompanied 
by proof of authority to sign, such as a certified copy of the corporate 
resolution or a certificate of incumbency under the trust instrument.

SPECIAL INFORMATION

- - Certain features (Automatic Investment, Telephone Investment, 
  Expedited Redemption and Direct Deposit of Dividends) are effective 
  15 days after this form is received in good order by the Fund's Agent.

- - You may cancel any feature at any time, effective 3 days after the 
  Agent receives written notice from you.

- - Either the Fund or the Agent may cancel any  feature, without prior 
  notice, if in its judgment your use of any  feature involves unusual 
  effort or difficulty in the administration of your account.

- - The Fund reserves the right to alter, amend or terminate any or all  
  features or to charge a service fee upon 30 days written notice to 
  shareholders except if additional notice is specifically required by 
  the terms of the Prospectus.

BANKING INFORMATION

- - If your Financial Institution account changes, you must complete a 
  Ready Access features form which may be obtained from Aquila 
  Distributors at 1-800-872-5859 and send it to the Agent together 
  with a "voided" check or pre-printed deposit slip from the new 
  account. The new Financial Institution change is effective in 15 
  days after this form is received in good order by the Fund's Agent.

AUTOMATIC WITHDRAWAL PLAN PROVISIONS

By requesting an Automatic Withdrawal Plan, the applicant agrees to 
the terms and conditions applicable to such plans, as stated below.

1. The Agent will administer the Automatic Withdrawal Plan 
   (the "Plan") as agent for the person (the "Planholder") who 
   executed the Plan authorization.

2. Certificates will not be issued for shares of the Fund purchased 
   for and held under the Plan, but the Agent  will credit all such 
   shares to the Planholder on the records of the Fund. Any share
   certificates now held by the Planholder may be surrendered 
   unendorsed to the Agent with the application so that the shares
   represented by the certificate may be held under the Plan.

3. Dividends and distributions will be reinvested in shares of the 
   Fund at Net Asset Value without a sales charge.

4. Redemptions of shares in connection with disbursement payments 
   will be made at the Net Asset Value per share in effect at the 
   close of business on the last business day of the month or quarter.

5. The amount and the interval of disbursement payments and the address
   to which checks are to be mailed may be changed, at any time, by the
   Planholder on written notification to the Agent. The Planholder 
   should allow at least two weeks time in mailing such notification 
   before the requested change can be put in effect.

6. The Planholder may, at any time, instruct the Agent by written notice
   (in proper form in accordance with the requirements of the then current 
   Prospectus of the Fund) to redeem all, or any part of, the shares held
   under the Plan. In such case the Agent will redeem the number of shares
   requested at the Net Asset Value per share in effect in accordance with
   the Fund's usual redemption procedures and will mail a check for the
   proceeds of such redemption to the Planholder.

7. The Plan may, at any time, be terminated by the Planholder on written
   notice to the Agent, or by the Agent upon receiving directions to that 
   effect from the Fund. The Agent will also terminate the Plan upon 
   receipt of evidence satisfactory to it of the death or legal 
   incapacity of the Planholder. Upon termination of the Plan by the 
   Agent or the Fund, shares remaining unredeemed will be held in an
   uncertificated account in the name of the Planholder, and the account
   will continue as a dividend-reinvestment, uncertificated account 
   unless and until proper instructions are received from the Planholder,
   his executor or guardian, or as otherwise appropriate.

8. The Agent shall incur no liability to the Planholder for any action 
   taken or omitted by the Agent in good faith.

9. In the event that the Agent shall cease to act as transfer agent for 
   the Fund, the Planholder will be deemed to have appointed any successor
   transfer agent to act as his agent in administering the Plan.

10.Purchases of additional shares concurrently with withdrawals are
   undesirable because of sales charges when purchases are made. 
   Accordingly, a Planholder may not maintain this Plan while 
   simultaneously making regular purchases. While an occasional lump sum
   investment may be made, such investment should normally be an amount
   equivalent to three times the annual withdrawal or $5,000, whichever 
   is less.





INVESTMENT ADVISER
Banc One Investment Advisors Corporation
416 West Jefferson Street
Louisville, Kentucky 40202

ADMINISTRATOR
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017

BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher     Douglas Dean
Diana P. Herrmann         Ann R. Leven
Theodore T. Mason         Anne J. Mills
William J. Nightingale    James R. Ramsey

OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Teresa M. Priest, Vice President
L. Michele Robbins, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary

DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017

TRANSFER AND SHAREHOLDER SERVICING AGENT
Administrative Data Management Corp.
581 Main Street
Woodbridge, New Jersey 07095-1198

CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154

COUNSEL
Hollyer Brady Smith Troxell 
  Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176

TABLE OF CONTENTS
Highlights.......................................
Table of Expenses................................
Financial Highlights.............................
Introduction.....................................
Investment Of The Fund's Assets..................
Investment Restrictions.........................
Net Asset Value Per Share.......................
How To Invest In The Fund.......................
How To Redeem Your Investment...................
Automatic Withdrawal Plan.......................
Management Arrangements.........................
Dividend And Tax Information....................
Exchange Privilege..............................
General Information.............................
Application 

AQUILA
[LOGO]
CHURCHILL
TAX-FREE FUND
OF
KENTUCKY

A tax-free
income investment

[LOGO]

PROSPECTUS

One Of The
Aquilasm Group Of Funds




               Churchill Tax-Free Fund of Kentucky

                  380 Madison Avenue Suite 2300
                    New York, New York 10017
                   800-USA-KTKY (800-872-5859)
                          212-697-6666

Statement of Additional Information                April 30, 1997

     This Statement of Additional Information (the "Additional
Statement") is not a Prospectus. There are two Prospectuses for
the Fund dated April 30, 1997: one Prospectus describes Front
Payment Class Shares "Class A Shares" and Level Payment Class
Shares "Class C Shares" of the Fund and the other describes
Institutional Class Shares ("Class Y Shares") of the Fund.
References in the Additional Statement to "the Prospectus" refer
to either of these Prospectuses. The Additional Statement should
be read in conjunction with the Prospectus for the class of
shares in which you are considering investing. Either or both
Prospectuses may be obtained from the Fund's Shareholder
Servicing Agent, Administrative Data Management Corp., by writing
to: 581 Main Street, Woodbridge, New Jersey 07095-1198 or by
calling at the following numbers:

             800-872-5860 toll free or 908-855-5731

or from Aquila Distributors, Inc., the Fund's Distributor, by
writing to it at 380 Madison Avenue, Suite 2300, New York, New
York 10017; or by calling: 

             800-872-5859 toll free or 212-697-6666

     The Annual Report of the Fund for the fiscal year ended
December 31, 1996 (audited) will be delivered with the Additional
Statement.


                        TABLE OF CONTENTS

Investment of the Fund's Assets  . . . . . . . . . . . . . . . .2
Municipal Bonds  . . . . . . . . . . . . . . . . . . . . . . . .7
Performance  . . . . . . . . . . . . . . . . . . . . . . . . . .9
Investment Restrictions. . . . . . . . . . . . . . . . . . . . 12
Distribution Plan. . . . . . . . . . . . . . . . . . . . . . . 13
Shareholder Services Plan. . . . . . . . . . . . . . . . . . . 19
Limitation of Redemptions in Kind. . . . . . . . . . . . . . . 21
Trustees and Officers. . . . . . . . . . . . . . . . . . . . . 21
Additional Information as to Management Arrangements . . . . . 27
Computation of Net Asset Value . . . . . . . . . . . . . . . . 31
Automatic Withdrawal Plan. . . . . . . . . . . . . . . . . . . 33
Additional Tax Information . . . . . . . . . . . . . . . . . . 33
Conversion of Class C Shares . . . . . . . . . . . . . . . . . 34
General Information. . . . . . . . . . . . . . . . . . . . . . 34
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . 37





                 INVESTMENT OF THE FUND'S ASSETS

     The investment objective and policies of the Fund are
described in the Prospectus, which refers to the matters
described below. See the Prospectus for the definition of
"Kentucky Obligations."

Ratings

     The ratings assigned by Moody's Investors Service, Inc.
("Moody's") or Standard & Poor's Corporation ("S&P") represent
their respective opinions of the quality of the municipal bonds
and notes which they undertake to rate. It should be emphasized,
however, that ratings are general and not absolute standards of
quality. Consequently, obligations with the same maturity, stated
interest rate and rating may have different yields, while
obligations of the same maturity and stated interest rate with
different ratings may have the same yield. See Appendix A to this
Additional Statement for further information about the ratings of
Moody's and S&P as to the various rated Kentucky Obligations
which the Fund may purchase.

     The table below gives information as to the percentage of
Fund net assets invested, as of December 31, 1996, in Kentucky
Obligations in the various rating categories: 

     
     Highest rating (1). . . . . . . . . . . . . . . . . . .40.6%
     Second highest rating (2) . . . . . . . . . . . . . . .18.2%
     Third highest rating (3). . . . . . . . . . . . . . . .38.0%
     Fourth highest rating (4) . . . . . . . . . . . . . . . 2.6%
     Not rated (5) . . . . . . . . . . . . . . . . . . . . . 0.6%
                                                             100%


(1) Aaa of Moody's or AAA of S&P (or other highest rating).
(2) Aa of Moody's or AA of S&P (or other second highest rating).
(3) A of Moody's or A of S&P (or other third highest rating).
(4) Baa of Moody's or BBB of S&P (or other fourth highest
rating).
(5) Bonds not rated by Moody's or S&P are assigned a rating by
the Adviser. Such rating must be the equivalent of one of the
above ratings.

When-Issued and Delayed Delivery Obligations

     The Fund may buy Kentucky Obligations on a when-issued or
delayed delivery basis. The purchase price and the interest rate
payable on the Kentucky Obligations are fixed on the transaction
date. At the time the Fund makes the commitment to purchase
Kentucky Obligations on a when-issued or delayed delivery basis,
it will record the transaction and thereafter reflect the value
each day of such Kentucky Obligations in determining its net
asset value. The Fund will make commitments for such when-issued
transactions only when it has the intention of actually acquiring
the Kentucky Obligations. The Fund places an amount of assets
equal in value to the amount due on the settlement date for the
when-issued or delayed delivery securities being purchased in a
segregated account with the Custodian, which is marked to market
every business day. On delivery dates for such transactions, the
Fund will meet its commitments by selling the Kentucky
Obligations held in the separate account and/or from cash flow.

Determination of the Marketability of Certain Securities

     In determining marketability of floating and variable rate
demand notes and participation interests (including municipal
lease/purchase obligations) the Board of Trustees will consider
the following factors, not all of which may be applicable to any
particular issue: the quality, maturity and coupon rate of the
issue, ratings received from the nationally recognized
statistical rating organizations and any changes or prospective
changes in such ratings, the likelihood that the issuer will
continue to appropriate the required payments for the issue,
recent purchases and sales of the same or similar issues, the
general market for municipal securities of the same or similar
quality, the Adviser's opinion as to marketability of the issue
and other factors that may be applicable to any particular issue.

Futures Contracts and Options

     Although the Fund does not presently do so, it is permitted
to buy and sell Futures contracts relating to municipal bond
indices ("Municipal Bond Index Futures") and to U.S. Government
securities ("U.S. Government Securities Futures," together
referred to as "Futures"), and exchange traded options based on
Futures as a possible means to protect the asset value of the
Fund during periods of changing interest rates, although in fact
the Fund may never do so. The following discussion is intended to
explain briefly the workings of Futures and options on them which
would be applicable if the Fund were to use them.

     Unlike when the Fund purchases or sells a Kentucky
Obligation, no price is paid or received by the Fund upon the
purchase or sale of a Future. Initially, however, when such
transactions are entered into, the Fund will be required to
deposit with the Futures commission merchant ("broker") an amount
of cash or Kentucky Obligations equal to a varying specified
percentage of the contract amount. This amount is known as
initial margin. Subsequent payments, called variation margin, to
and from the broker, will be made on a daily basis as the price
of the underlying index or security fluctuates making the Future
more or less valuable, a process known as marking to market.
Insolvency of the broker may make it more difficult to recover
initial or variation margin. Changes in variation margin are
recorded by the Fund as unrealized gains or losses. Margin
deposits do not involve borrowing by the Fund and may not be used
to support any other transactions. At any time prior to
expiration of the Future, the Fund may elect to close the
position by taking an opposite position which will operate to
terminate the Fund's position in the Future. A final
determination of variation margin is then made. Additional cash
is required to be paid by or released to the Fund and it realizes
a gain or a loss. Although Futures by their terms call for the
actual delivery or acceptance of cash, in most cases the
contractual obligation is fulfilled without having to make or
take delivery. All transactions in the Futures markets are
subject to commissions payable by the Fund and are made, offset
or fulfilled through a clearing house associated with the
exchange on which the contracts are traded. Although the Fund
intends to buy and sell Futures only on an exchange where there
appears to be an active secondary market, there is no assurance
that a liquid secondary market will exist for any particular
Future at any particular time. In such event, or in the event of
an equipment failure at a clearing house, it may not be possible
to close a Futures position.

     Municipal Bond Index Futures currently are based on a
long-term municipal bond index developed by the Chicago Board of
Trade ("CBT") and The Bond Buyer (the "Municipal Bond Index").
Financial Futures contracts based on the Municipal Bond Index
began trading on June 11, 1985. The Municipal Bond Index is
comprised of 40 tax-exempt municipal revenue and general
obligation bonds. Each bond included in the Municipal Bond Index
must be rated A or higher by Moody's or S&P and must have a
remaining maturity of 19 years or more. Twice a month new issues
satisfying the eligibility requirements are added to, and an
equal number of old issues are deleted from, the Municipal Bond
Index. The value of the Municipal Bond Index is computed daily
according to a formula based on the price of each bond in the
Municipal Bond Index, as evaluated by six dealer-to-dealer
brokers.

     The Municipal Bond Index Futures contract is traded only on
the CBT. Like other contract markets, the CBT assures performance
under Futures contracts through a clearing corporation, a
nonprofit organization managed by the exchange membership which
is also responsible for handling daily accounting of deposits or
withdrawals of margin.

     There are at present U.S. Government financial futures
contracts based on long-term Treasury bonds, Treasury notes, GNMA
Certificates and three-month Treasury bills. U.S. Government
Securities Futures have traded longer than Municipal Bond Index
Futures, and the depth and liquidity available in the trading
markets for them are in general greater.

     Call Options on Futures Contracts. The Fund may also
purchase and sell exchange related call and put options on
Futures. The purchase of a call option on a Future is analogous
to the purchase of a call option on an individual security.
Depending on the pricing of the option compared to either the
Future upon which it is based, or upon the price of the
underlying debt securities, it may or may not be less risky than
ownership of the Futures contract or underlying debt securities.
Like the purchase of a Futures contract, the Fund may purchase a
call option on a Future to hedge against a market advance when
the Fund is not fully invested.

     The writing of a call option on a Future constitutes a
partial hedge against declining prices of the securities which
are deliverable upon exercise of the Future. If the price at
expiration of the Future is below the exercise price, the Fund
will retain the full amount of the option premium which provides
a partial hedge against any decline that may have occurred in the
Fund's portfolio holdings.

     Put Options on Futures Contracts. The purchase of put
options on a Future is analogous to the purchase of protective
put options on portfolio securities. The Fund may purchase a put
option on a Future to hedge the Fund's portfolio against the risk
of rising interest rates.

     The writing of a put option on a Future constitutes a
partial hedge against increasing prices of the securities which
are deliverable upon exercise of the Future. If the Future price
at expiration is higher than the exercise price, the Fund will
retain the full amount of the option premium which provides a
partial hedge against any increase in the price of securities
which the Fund intends to purchase.

     The writer of an option on a Future is required to deposit
initial and variation margin pursuant to requirements similar to
those applicable to Futures. Premiums received from the writing
of an option will be included in initial margin. The writing of
an option on a Future involves risks similar to those relating to
Futures.

Risk Factors in Futures Transactions and Options

     One risk in employing Futures or options on them to attempt
to protect against the price volatility of the Fund's Kentucky
Obligations is that the Adviser could be incorrect in its
expectations as to the extent of various interest rate movements
or the time span within which the movements take place. For
example, if the Fund sold a Future in anticipation of an increase
in interest rates, and then interest rates went down instead, the
Fund would lose money on the sale.

     Another risk as to Futures or options on them arises because
of the imperfect correlation between movement in the price of the
Future and movements in the prices of the Kentucky Obligations
which are the subject of the hedge. The risk of imperfect
correlation increases as the composition of the Fund's portfolio
diverges from the municipal bonds included in the applicable
index or from the security underlying the U.S. Government
Securities Futures. The price of the Future or option may move
more than or less than the price of the Kentucky Obligations
being hedged. If the price of the Future or option moves less
than the price of the Kentucky Obligations which are the subject
of the hedge, the hedge will not be fully effective but, if the
price of the Kentucky Obligations being hedged has moved in an
unfavorable direction, the Fund would be in a better position
than if it had not hedged at all. If the price of the Kentucky
Obligations being hedged has moved in a favorable direction, this
advantage will be partially offset by the Future or option. If
the price of the Future or option has moved more than the price
of the Kentucky Obligations, the Fund will experience either a
loss or gain on the Future or option which will not be completely
offset by movements in the price of the Kentucky Obligations
which are the subject of the hedge. To compensate for the
imperfect correlation of movements in the price of the Kentucky
Obligations being hedged and movements in the price of the
Futures or options, the Fund may buy or sell Futures or options
in a greater dollar amount than the dollar amount of the Kentucky
Obligations being hedged if the historical volatility of the
prices of the Kentucky Obligations being hedged is less than the
historical volatility of the debt securities underlying the
hedge. It is also possible that, where the Fund has sold Futures
or options to hedge its portfolio against decline in the market,
the market may advance and the value of the Kentucky Obligations
held in the Fund's portfolio may decline. If this occurred the
Fund would lose money on the Future or option and also experience
a decline in value of its portfolio securities.

     Where Futures or options are purchased to hedge against a
possible increase in the price of Kentucky Obligations before the
Fund is able to invest in them in an orderly fashion, it is
possible that the market may decline instead; if the Fund then
concludes not to invest in them at that time because of concern
as to possible further market decline or for other reasons, the
Fund will realize a loss on the Futures or options that is not
offset by a reduction in the price of the Kentucky Obligations
which it had anticipated purchasing.

     The particular municipal bonds comprising the index
underlying Municipal Bond Index Futures will vary from the bonds
held by the Fund. The correlation of the hedge with such bonds
may be affected by disparities in the average maturity, ratings,
geographical mix or structure of the Fund's investments as
compared to those comprising the Index, and general economic or
political factors. In addition, the correlation between movements
in the value of the Municipal Bond Index may be subject to change
over time, as additions to and deletions from the Municipal Bond
Index alter its structure. The correlation between U.S.
Government Securities Futures and the municipal bonds held by the
Fund may be adversely affected by similar factors and the risk of
imperfect correlation between movements in the prices of such
Futures and the prices of Municipal Bonds held by the Fund may be
greater.

     Trading in Municipal Bond Index Futures may be less liquid
than that in other Futures. The trading of Futures and options is
also subject to certain market risks, such as inadequate trading
activity or limits on upward or downward price movements which
could at times make it difficult or impossible to liquidate
existing positions.

Regulatory Aspects of Futures and Options

     The Fund will, due to requirements under the Investment
Company Act of 1940 (the "1940 Act"), deposit in a segregated
account with its custodian bank Kentucky Obligations maturing in
one year or less or cash, in an amount equal to the fluctuating
market value of long Futures or options it has purchased, less
any margin deposited on long positions.

     The Fund must operate within certain restrictions as to its
long and short positions in Futures under a rule (the "CFTC
Rule") adopted by the Commodity Futures Trading Commission
("CFTC") under the Commodity Exchange Act (the "CEA") to be
eligible for the exclusion provided by the CFTC Rule as a
"commodity pool operator" (as defined under the CEA), and must
represent to the CFTC that the Fund will operate within such
restrictions. Under these restrictions the Fund will not, as to
any positions, whether long, short or a combination thereof,
enter into Futures or options for which the aggregate initial
margins and premiums paid for options exceed 5% of the fair
market value of its assets. Under the restrictions, the Fund also
must, as to its short positions, use Futures and options solely
for bona-fide hedging purposes within the meaning and intent of
the applicable provisions under the CEA. As to the Fund's long
positions which are used as part of its portfolio strategy and
are incidental to its activities in the underlying cash market,
the "underlying commodity value" (see below) of its Futures must
not exceed the sum of (i) cash set aside in an identifiable
manner, or short-term U.S. debt obligations or other U.S.
dollar-denominated high quality short-term money market
instruments so set aside, plus any funds deposited as margin;
(ii) cash proceeds from existing investments due in 30 days and
(iii) accrued profits held at the futures commission merchant.
(There is described above the segregated account which the Fund
must maintain with its custodian bank as to its Futures and
options activities due to requirements other than those of the
CFTC Rule; the Fund will, as to long positions, be required to
abide by the more restrictive of this other requirement or the
above requirements of the CFTC Rule.) The "underlying commodity
value" of a Future or option is computed by multiplying the size
of the Future by the daily settlement price of the Future or
option.

     The "sale" of a Future means the acquisition by the Fund of
an obligation to deliver an amount of cash equal to a specified
dollar amount times the difference between the value of the index
or government security at the close of the last trading day of
the Future and the price at which the Future is originally struck
(which the Fund anticipates will be lower because of a subsequent
rise in interest rates and a corresponding decline in the index
value). This is referred to as having a "short" Futures position.
The "purchase" of a Future means the acquisition by the Fund of
an obligation to take delivery of such an amount of cash. In this
case, the Fund anticipates that the closing value will be higher
than the price at which the Future is originally struck. This is
referred to as having a "long" Futures position. No physical
delivery of the bonds making up the index or the U.S. government
securities, as the case may be, is made as to either a long or a
short Futures position.

Portfolio Turnover

     A portfolio turnover rate is, in general, the percentage
computed by taking the lesser of purchases or sales of portfolio
securities for a year and dividing it by the monthly average
value of such securities during the year, excluding certain
short-term securities. Since the turnover rate of the Fund will
be affected by a number of factors, the Fund is unable to predict
what rate the Fund will have in any particular period or periods,
although such rate is not expected to exceed 100%. However, the
rate could be substantially higher or lower in any particular
period.

                         MUNICIPAL BONDS

     The two principal classifications of municipal bonds are
"general obligation" bonds and "revenue" bonds. General
obligation bonds are secured by the issuer's pledge of its full
faith, credit and unlimited taxing power for the payment of
principal and interest. Revenue or special tax bonds are payable
only from the revenues derived from a particular facility or
class of facilities or projects or, in a few cases, from the
proceeds of a special excise or other tax, but are not supported
by the issuer's power to levy unlimited general taxes. There are,
of course, variations in the security of municipal bonds, both
within a particular classification and between classifications,
depending on numerous factors. The yields of municipal bonds
depend on, among other things, general financial conditions,
general conditions of the municipal bond market, the size of a
particular offering, the maturity of the obligation and rating of
the issue.

     Since the Fund may invest in industrial development bonds or
private activity bonds, the Fund may not be an appropriate
investment for entities which are "substantial users" of
facilities financed by those bonds or for investors who are
"related persons" of such users. Generally, an individual will
not be a "related person" under the Internal Revenue Code unless
such investor or his or her immediate family (spouse, brothers,
sisters and lineal descendants) own directly or indirectly in the
aggregate more than 50 percent of the equity of a corporation or
is a partner of a partnership which is a "substantial user" of a
facility financed from the proceeds of those bonds. A
"substantial user" of such facilities is defined generally as a
"non-exempt person who regularly uses a part of [a] facility"
financed from the proceeds of industrial development or private
activity bonds.

     Because of constitutional limitations, the Commonwealth of
Kentucky cannot enter into a financial obligation of more than
two years' duration, and no other municipal issuer within the
Commonwealth can enter into a financial obligation of more than
one year's duration. As a consequence, the payment and security
arrangements applicable to Kentucky revenue bonds differ
significantly from those generally applicable to municipal
revenue bonds in other States. For example, most local school
construction is financed from the proceeds of bonds nominally
issued by a larger city or county government, which holds legal
title to the school, subject to a year-to-year renewable
leaseback arrangement with the local school district. Similar
arrangements are used to finance many city and county
construction projects but in these cases, the bonds are nominally
issued in the name of a public corporation, which holds title to
the project and leases the project back to the city or county on
a year-to-year renewable basis. In both situations, the rent that
the nominal issuer receives from the actual user of the property
financed by the bonds is the only source of any security for the
payment of the bonds, so that a failure by the user to renew the
lease in any year will put the bonds into default. However, there
is no reported instance in which a Kentucky school bond has gone
into default. In determining marketability of any such issue, the
Board of Trustees will consider the following factors, not all of
which may be applicable to any particular issue: the quality,
maturity and coupon rate of the issue, ratings received from the
nationally recognized statistical rating organizations and any
changes or prospective changes in such ratings, the likelihood
that the issuer will continue to appropriate the required
payments for the issue, recent purchases and sales of the same or
similar issues, the general market for municipal securities of
the same or similar quality, the Adviser's opinion as to
marketability of the issue and other factors that may be
applicable to any particular issue.

     As indicated in the Prospectus, there are certain Kentucky
Obligations the interest on which is subject to the Federal
alternative minimum tax on individuals. While the Fund may
purchase these obligations, it may, on the other hand, refrain
from purchasing particular Kentucky Obligations due to this tax
consequence. Also, as indicated in the Prospectus, the Fund will
not purchase obligations of Kentucky issuers the interest on
which is subject to regular Federal income tax. The foregoing may
reduce the number of issuers of obligations which are available
to the Fund.

                           PERFORMANCE

     As noted in the Prospectus, the Fund may from time to time
quote various performance figures to illustrate its past
performance.

     Performance quotations by investment companies are subject
to rules of the Securities and Exchange Commission ("SEC"). These
rules require the use of standardized performance quotations or,
alternatively, that every non-standardized performance quotation
furnished by the Fund be accompanied by certain standardized
performance information computed as required by the SEC. Current
yield and average annual compounded total return quotations used
by the Fund are based on these standardized methods and are
computed separately for each of the Fund's three classes of
shares. Prior to April 1, 1996, the Fund had outstanding only one
class of shares which are currently designated "Class A Shares."
On that date the Fund began to offer shares of two other classes,
Class C Shares and Class Y Shares. During most of the historical
periods listed below, there were no Class C Shares or Class Y
Shares outstanding and the information below relates solely to
Class A Shares unless otherwise indicated. Each of these and
other methods that may be used by the Fund are described in the
following material.

Total Return

     Average annual total return is determined by finding the
average annual compounded rates of return over 1- and 5-year
periods and a period since the inception of the operations of the
Fund (on May 21, 1987) that would equate an initial hypothetical
$1,000 investment to the value such an investment in shares of
each of the Fund's three classes would have if it were completely
redeemed at the end of each such period.

     In the case of Class A Shares, the calculation assumes the
maximum sales charge is deducted from the hypothetical initial
$1,000 purchase. In the case of Class C Shares, the calculation
assumes the applicable Conditional Deferred Sales Charge ("CDSC")
imposed on a redemption of Class C Shares held for the period is
deducted. In the case of Class Y Shares, the calculation assumes
that no sales charge is deducted and no CDSC is imposed. For all
three classes, it is assumed that on each reinvestment date
during each such period any capital gains are reinvested at net
asset value, and all income dividends are reinvested at net asset
value, without sales charge (because the Fund does not impose any
sales charge on reinvestment of dividends for any class). The
computation further assumes that the entire hypothetical account
was completely redeemed at the end of each such period.

     Investors should note that the maximum sales charge (4%)
reflected in the following quotations for Class A Shares is a one
time charge, paid at the time of initial investment. The greatest
impact of this charge is during the early stages of an investment
in the Fund. Actual performance will be affected less by this one
time charge the longer an investment remains in the Fund.

Average Annual Compounded Rates of Return:




          Class A Shares      Class C Shares      Class Y Shares
                                              
One Year       (0.01)%             N/A(1)              N/A(1)

Five Years     5.69%               N/A                 N/A

Since 
inception on 
May 21, 1987   7.11%               3.69%(2)            5.24%(2)


(1) During these periods no Class C Shares or Class Y Shares were
outstanding.



(2) Period from April 1, 1996 (inception of class) through
December 31, 1996.
 




     These figures were calculated according to the following SEC
formula:

                                    n
                              P(1+T)  = ERV

where

     P    =    a hypothetical initial payment of $1,000

     T    =    average annual total return

     n    =    number of years

     ERV  =    ending redeemable value of a hypothetical $1,000
               payment made at the beginning of the 1- and 5-year
               periods or the period since inception, at the end
               of each such period.

     As discussed in the Prospectus, the Fund may quote total
rates of return in addition to its average annual total return 
for each of its three classes. Such quotations are computed in
the same manner as the Fund's average annual compounded rate,
except that such quotations will be based on the Fund's actual
return for a specified period as opposed to its average return
over the periods described above.
  
Total Return




          Class A Shares      Class C Shares      Class Y Shares
                                              
One Year       (0.01)%             N/A(1)              N/A(1)

Five Years     31.87%              N/A                 N/A

Ten Years      N/A                 N/A                 N/A

Since 
inception on 
May 21, 1987   93.62%              3.69%(2)            5.24%(2)


(1) During these periods no Class C Shares or Class Y Shares were
outstanding.



(2) Period from April 1, 1996 (inception of class) through
December 31, 1996.




     In general, actual total rate of return will be lower than
the average annual rate of return because the average annual rate
of return reflects the effect of compounding. See discussion of
the impact of the sales charge on quotations of rates of return,
above.

Yield

     Current yield reflects the income per share earned by the
Fund's portfolio investments. Current yield is determined by
dividing the net investment income per share earned for each of
the Fund's three classes during a 30-day base period by the
maximum offering price per share on the last day of the period
and annualizing the result. Expenses accrued for the period
include any fees charged to all shareholders of each class during
the base period net of fee waivers and reimbursements of
expenses, if any.

     The Fund may also quote a taxable equivalent yield for each
of its three classes of shares which shows the taxable yield that
would be required to produce an after-tax yield equivalent to
that of a fund which invests in tax-exempt obligations. Such
yield is computed by dividing that portion of the yield of the
Fund (computed as indicated above) which is tax-exempt by one
minus the highest applicable combined federal and Kentucky income
tax rate (and adding the result to that portion of the yield of
the Fund that is not tax-exempt, if any).

     The Kentucky and the combined Kentucky and federal income
tax rates upon which the Fund's tax equivalent yield quotations
are based are 6.0% and 44.34% respectively. The latter rate
reflects currently-enacted Federal income tax law. From time to
time, as any changes to such rates become effective, tax
equivalent yield quotations advertised by the Fund will be
updated to reflect such changes. Any tax rate increases will tend
to make a tax-free investment, such as the Fund, relatively more
attractive than taxable investments. Therefore, the details of
specific tax increases may be used in Fund sales material.

Yield for the 30-day period ended December 31, 1996 (the date of
the Fund's most recent audited financial statements:




          Class A Shares      Class C Shares      Class Y Shares
                                              
Yield          4.58%               3.27%               4.89%

Taxable
Equivalent
Yield          8.00%               5.71%               8.54%




     These figures were obtained using the Securities and
Exchange Commission formula:

                                            6
                        Yield = 2 [(a-b + 1)  -1]
                                   ----
                                    cd
where:

     a = interest earned during the period

     b = expenses accrued for the period (net of waivers and  
         reimbursements)

     c = the average daily number of shares outstanding during 
         the period that were entitled to receive dividends

     d = the maximum offering price per share on the last day of 
         the period


Current Distribution Rate

     Current yield and tax equivalent yield, which are calculated
according to a formula prescribed by the SEC, are not indicative
of the amounts which were or will be paid to the Fund's
shareholders. Amounts paid to shareholders are reflected in the
quoted current distribution rate or taxable equivalent
distribution rate. The current distribution rate is computed by
(i) dividing the total amount of dividends per share paid by the
Fund during a recent 30-day period by (ii) the current maximum
offering price and by (iii) annualizing the result. A taxable
equivalent distribution rate shows the taxable distribution rate
that would be required to produce an after-tax distribution rate
equivalent to the Fund's current distribution rate (calculated as
indicated above). The current distribution rate can differ from
the current yield computation because it could include
distributions to shareholders from additional sources (i.e.,
sources other than dividends and interest), such as short-term
capital gains.

Other Performance Quotations

     With respect to those categories of investors who are
permitted to purchase Class A Shares of the Fund at net asset
value, the Fund may quote a "Current Distribution for Net Asset
Value Investments." This rate is computed by (i) dividing the
total amount of dividends per share paid by the Fund during a
recent 30-day period by (ii) the current net asset value of the
Fund and by (iii) annualizing the result. Figures for yield,
total return and other measures of performance for Net Asset
Value Investments may also be quoted. These will be derived as
described above with the substitution of net asset value for
public offering price.

     Regardless of the method used, past performance is not
necessarily indicative of future results, but is an indication of
the return to shareholders only for the limited historical period
used. If distribution rates are quoted in advertising, they will
be accompanied by calculations of current yield in accordance
with the formula of the Securities and Exchange Commission.

     The Fund may include in advertisements and sales literature,
information, examples and statistics that illustrate the effect
of taxable versus tax-free compounding income at a fixed rate of
return to demonstrate the growth of an investment over a stated
period of time resulting from the payment of dividends and
capital gains distributions in additional shares. The examples
used will be for illustrative purposes only and are not
representations by the Fund of past or future yield or return.

     From time to time, in reports and promotional literature,
the Fund may compare its performance to, or cite the historical
performance of, U.S. Treasury bills, notes and bonds, or indices
of broad groups of unmanaged securities considered to be
representative of, or similar to, that Fund's portfolio holdings,
such as:

     Lipper Analytical Services, Inc. ("Lipper") is a
widely-recognized independent service that monitors and ranks the
performance of regulated investment companies. The Lipper
performance analysis includes the reinvestment of capital gain
distributions and income dividends but does not take sales
charges into consideration. The method of calculating total
return data on indices utilizes actual dividends on ex-dividend
dates accumulated for the quarter and reinvested at quarter end.

     Morningstar Mutual Funds ("Morningstar"), a semi-monthly
publication of Morningstar, Inc. Morningstar proprietary ratings
reflect historical risk-adjusted performance and are subject to
change every month. Funds with at least three years of
performance history are assigned ratings from one star (lowest)
to five stars (highest). Morningstar ratings are calculated from
the funds' three-, five-, and ten-year average annual returns
(when available) and a risk factor that reflects fund performance
relative to three-month Treasury bill monthly returns. Fund's
returns are adjusted for fees and sales loads. Ten percent of the
funds in an investment category receive five stars, 22.5% receive
four stars, 35% receive three stars, 22.5% receive two stars, and
the bottom 10% receive one star.

     Salomon Brothers Inc., "Market Performance," a monthly
publication which tracks principal return, total return and yield
on the Salomon Brothers Broad Investment-Grade Bond Index and the
components of the Index.

     Merrill Lynch, Pierce, Fenner & Smith, Inc., "Taxable Bond
Indices," a monthly corporate government index publication which
lists principal, coupon and total return on over 100 different
taxable bond indices which Merrill Lynch tracks. They also list
the par weighted characteristics of each Index.

     Lehman Brothers, Inc., "The Bond Market Report," a monthly
publication which tracks principal, coupon and total return on
the Lehman Govt./Corp. Index and Lehman Aggregate Bond Index, as
well as all the components of these Indices.

     The Consumer Price Index, prepared by the U.S. Bureau of
Labor Statistics, is a commonly used measure of inflation. The
Index shows changes in the cost of selected consumer goods and
does not represent a return on an investment vehicle.

     From time to time, in reports and promotional literature,
performance rankings and ratings reported periodically in
national financial publications such as MONEY, FORBES, BUSINESS
WEEK, BARRON'S, FINANCIAL TIMES and FORTUNE may also be used. In
addition, quotations from articles and performance ratings and
ratings appearing in daily newspaper publications such as THE
WALL STREET JOURNAL, THE NEW YORK TIMES and NEW YORK DAILY NEWS
may be cited.

                     INVESTMENT RESTRICTIONS

     The Fund has a number of policies concerning what it can and
cannot do. Those that are called fundamental policies cannot be
changed unless the holders of a "majority" (as defined in the
1940 Act) of the Fund's outstanding shares vote to change them.
Under that Act, the vote of the holders of a "majority" of the
Fund's outstanding shares means the vote of the holders of the
lesser of (a) 67% or more of the Fund's shares present at a
meeting or represented by proxy if the holders of more than 50%
of its shares are so present or represented; or (b) more than 50%
of the Fund's outstanding shares. Those fundamental policies not
set forth in the Prospectus are set forth below:

1. The Fund invests only in certain limited securities.

     The Fund cannot buy any securities other than Kentucky
Obligations (discussed under "Investment of the Fund's Assets" in
the Prospectus), Municipal Bond Index Futures, U.S. Government
Securities Futures and options on Futures; therefore the Fund
cannot buy any voting securities, any commodities or commodity
contracts other than Municipal Bond Index Futures and U.S.
Government Securities Futures, any mineral related programs or
leases, any shares of other investment companies or any warrants,
puts, calls or combinations thereof other than on Futures.

     The Fund cannot buy real estate or any non-liquid interests
in real estate investment trusts; however, it can buy any
securities which it can otherwise buy even though the issuer
invests in real estate or has interests in real estate.


2. The Fund does not buy for control.

     The Fund cannot invest for the purpose of exercising control
or management of other companies.

3. The Fund does not sell securities it does not own or borrow
   from brokers to buy securities.

     Thus, it cannot sell short or buy on margin; however, the
Fund can make margin deposits in connection with the purchase or
sale of Municipal Bond Index Futures, U.S. Government Securities
Futures and options on them, and can pay premiums on these
options.

4. The Fund is not an underwriter.

     The Fund cannot engage in the underwriting of securities,
that is, the selling of securities for others. Also, it cannot
invest in restricted securities. Restricted securities are
securities which cannot freely be sold for legal reasons.

                        DISTRIBUTION PLAN

     The Fund's Distribution Plan has three parts, relating
respectively to distribution payments with respect to Class A
Shares (Part I), to distribution payments relating to Class C
Shares (Part II) and to certain defensive provisions (Part III).

Provisions Relating to Class A Shares (Part I)

     At the date of the Additional Statement, most of the
outstanding shares of the Fund would be considered Qualified
Holdings of various broker-dealers unaffiliated with the Adviser
or the Distributor. The Distributor will consider shares which
are not Qualified Holdings of such unrelated broker-dealers to be
Qualified Holdings of the Distributor and will authorize
Permitted Payments to the Distributor with respect to such shares
whenever Permitted Payments are being made under the Plan.

     Part I of the Plan applies only to the Front Payment Class
Shares ("Class A Shares") of the Fund (regardless of whether such
class is so designated or is redesignated by some other name).

     As used in Part I of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements in connection
with Part I ("Class A Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Front Payment Class
Shares or servicing of shareholder accounts with respect to such
shares. "Qualified Holdings" shall mean, as to any Qualified
Recipient, all Front Payment Class Shares beneficially owned by
such Qualified Recipient, or beneficially owned by its brokerage
customers, other customers, other contacts, investment advisory
clients, or other clients, if the Qualified Recipient was, in the
sole judgment of the Distributor, instrumental in the purchase
and/or retention of such shares and/or in providing
administrative assistance or other services in relation thereto.

     Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Class A Permitted
Payments") to Qualified Recipients, which Class A Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Fund (as adjusted for any part
or parts of a fiscal year during which payments under the Plan
are not accruable or for any fiscal year which is not a full
fiscal year), 0.15 of 1% of the average annual net assets of the
Fund represented by the Front Payment Class Shares. Such payments
shall be made only out of the Fund's assets allocable to the
Front Payment Class Shares. The Distributor shall have sole
authority (i) as to the selection of any Qualified Recipient or
Recipients; (ii) not to select any Qualified Recipient; and (iii)
the amount of Class A Permitted Payments, if any, to each
Qualified Recipient provided that the total Class A Permitted
Payments to all Qualified Recipients do not exceed the amount set
forth above. The Distributor is authorized, but not directed, to
take into account, in addition to any other factors deemed
relevant by it, the following: (a) the amount of the Qualified
Holdings of the Qualified Recipient; (b) the extent to which the
Qualified Recipient has, at its expense, taken steps in the
shareholder servicing area with respect to holders of Front
Payment Class Shares, including without limitation, any or all of
the following activities: answering customer inquiries regarding
account status and history, and the manner in which purchases and
redemptions of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options,
account designations and addresses; providing necessary personnel
and facilities to establish and maintain shareholder accounts and
records; assisting in processing purchase and redemption
transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or
redeem shares; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in
shareholder designated accounts; furnishing (either alone or
together with other reports sent to a shareholder by such person)
monthly and year-end statements and confirmations of purchases
and redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving,
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a Qualified
Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.

     While Part I is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class A Permitted
Payments made under Section 9 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which
the amounts were expended; and (ii) all fees of the Fund to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the
Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Fund an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.

     Part I originally went into effect when it was approved (i)
by a vote of the Trustees, including the Independent Trustees,
with votes cast in person at a meeting called for the purpose of
voting on Part I of the Plan; and (ii) by a vote of holders of at
least a "majority" (as so defined) of the outstanding voting
securities of the Front Payment Class Shares class (or of any
predecessor class or category of shares, whether or not
designated as a class) and a vote of holders of at least a
"majority" (as so defined) of the outstanding voting securities
of the Level Payment Class Shares and/or of any other class whose
shares are convertible into Front Payment Class Shares. Part I
has continued, and will, unless terminated as hereinafter
provided, continue in effect, until the June 30 next succeeding
such effectiveness, and from year to year thereafter only so long
as such continuance is specifically approved at least annually by
the Fund's Trustees and its Independent Trustees with votes cast
in person at a meeting called for the purpose of voting on such
continuance. Part I may be terminated at any time by the vote of
a majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund to which Part I
applies. Part I may not be amended to increase materially the
amount of payments to be made without shareholder approval of the
class or classes of shares affected by Part I as set forth in
(ii) above, and all amendments must be approved in the manner set
forth in (i) above.

     In the case of a Qualified Recipient which is a principal
underwriter of the Fund, the Class A Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since
each such agreement must be approved in accordance with, and
contain the provisions required by, the Rule. In the case of
Qualified Recipients which are not principal underwriters of the
Fund, the Class A Plan Agreements with them shall be (i) their
agreements with the Distributor with respect to payments under
the Fund's Distribution Plan in effect prior to April 1, 1996 or
(ii) Class A Plan Agreements entered into thereafter.

Provisions relating to Class C Shares (Part II)

     Part II of the Plan applies only to the Level Payment Shares
Class ("Class C Shares") of the Fund (regardless of whether such
class is so designated or is redesignated by some other name).

     As used in Part II of the Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to any
principal underwriter of the Fund, with which the Fund or the
Distributor has entered into written agreements in connection
with Part II ("Class C Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the
distribution and/or retention of the Fund's Level Payment Class
Shares or servicing of shareholder accounts with respect to such
shares. "Qualified Holdings" shall mean, as to any Qualified
Recipient, all Level Payment Class Shares beneficially owned by
such Qualified Recipient, or beneficially owned by its brokerage
customers, other customers, other contacts, investment advisory
clients, or other clients, if the Qualified Recipient was, in the
sole judgment of the Distributor, instrumental in the purchase
and/or retention of such shares and/or in providing
administrative assistance or other services in relation thereto.

     Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Class C Permitted
Payments") to Qualified Recipients, which Class C Permitted
Payments may be made directly, or through the Distributor or
shareholder servicing agent as disbursing agent, which may not
exceed, for any fiscal year of the Fund (as adjusted for any part
or parts of a fiscal year during which payments under the Plan
are not accruable or for any fiscal year which is not a full
fiscal year), 0.75 of 1% of the average annual net assets of the
Fund represented by the Level Payment Class Shares. Such payments
shall be made only out of the Fund's assets allocable to the
Level Payment Class Shares. The Distributor shall have sole
authority (i) as to the selection of any Qualified Recipient or
Recipients; (ii) not to select any Qualified Recipient; and (iii)
the amount of Class C Permitted Payments, if any, to each
Qualified Recipient provided that the total Class C Permitted
Payments to all Qualified Recipients do not exceed the amount set
forth above. The Distributor is authorized, but not directed, to
take into account, in addition to any other factors deemed
relevant by it, the following: (a) the amount of the Qualified
Holdings of the Qualified Recipient; (b) the extent to which the
Qualified Recipient has, at its expense, taken steps in the
shareholder servicing area with respect to holders of Level
Payment Class Shares, including without limitation, any or all of
the following activities: answering customer inquiries regarding
account status and history, and the manner in which purchases and
redemptions of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options,
account designations and addresses; providing necessary personnel
and facilities to establish and maintain shareholder accounts and
records; assisting in processing purchase and redemption
transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or
redeem shares; verifying and guaranteeing shareholder signatures
in connection with redemption orders and transfers and changes in
shareholder designated accounts; furnishing (either alone or
together with other reports sent to a shareholder by such person)
monthly and year-end statements and confirmations of purchases
and redemptions; transmitting, on behalf of the Fund, proxy
statements, annual reports, updating prospectuses and other
communications from the Fund to its shareholders; receiving,
tabulating and transmitting to the Fund proxies executed by
shareholders with respect to meetings of shareholders of the
Fund; and providing such other related services as the
Distributor or a shareholder may request from time to time; and
(c) the possibility that the Qualified Holdings of the Qualified
Recipient would be redeemed in the absence of its selection or
continuance as a Qualified Recipient. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a Qualified
Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years.

     While Part II is in effect, the Fund's Distributor shall
report at least quarterly to the Fund's Trustees in writing for
their review on the following matters: (i) all Class C Permitted
Payments made under Section 15 of the Plan, the identity of the
Qualified Recipient of each payment, and the purposes for which
the amounts were expended; and (ii) all fees of the Fund to the
Distributor, sub-adviser or Administrator paid or accrued during
such quarter. In addition, if any such Qualified Recipient is an
affiliated person, as that term is defined in the Act, of the
Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Fund an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.

     Part II originally went into effect when it was approved (i)
by a vote of the Trustees, including the Independent Trustees,
with votes cast in person at a meeting called for the purpose of
voting on Part II of the Plan; and (ii) by a vote of holders of
at least a "majority" (as so defined) of the outstanding voting
securities of the Level Payment Class Shares. Part II has
continued, and will, unless terminated as hereinafter provided,
continue in effect, until the April 30 next succeeding such
effectiveness, and from year to year thereafter only so long as
such continuance is specifically approved at least annually by
the Fund's Trustees and its Independent Trustees with votes cast
in person at a meeting called for the purpose of voting on such
continuance. Part II may be terminated at any time by the vote of
a majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund to which Part II
applies. Part II may not be amended to increase materially the
amount of payments to be made without shareholder approval of the
class or classes of shares affected by Part II as set forth in
(ii) above, and all amendments must be approved in the manner set
forth in (i) above.

     In the case of a Qualified Recipient which is a principal
underwriter of the Fund, the Class C Plan Agreement shall be the
agreement contemplated by Section 15(b) of the 1940 Act since
each such agreement must be approved in accordance with, and
contain the provisions required by, the Rule. In the case of
Qualified Recipients which are not principal underwriters of the
Fund, the Class C Plan Agreements with them shall be (i) their
agreements with the Distributor with respect to payments under
the Fund's Distribution Plan in effect prior to April 1, 1996 or
(ii) Class C Plan Agreements entered into thereafter.

     For the fiscal year ended December 31, 1996, the Fund paid
distribution fees of $338,443 with respect to its Class A Shares,
of which the Distributor retained $4,724, $1,000 with respect to
the Fund's Class C Shares, all of which was retained by the
Distributor. During the fiscal year ended December 31, 1995,
$358,097 was paid to Qualified Recipients under the Plan as then
in effect, of which $3,716 was retained by the Distributor.
During the fiscal year ended December 31, 1994, $180,9971 was
paid under the Plan to Qualified Recipients, of which, $51,057
was paid to the Distributor.

Defensive Provisions (Part III)

     Another part of the Plan (Part III) states that if and to
the extent that any of the payments listed below are considered
to be "primarily intended to result in the sale of" shares issued
by the Fund within the meaning of Rule 12b-1, such payments are
authorized under the Plan: (i) the costs of the preparation of
all reports and notices to shareholders and the costs of printing
and mailing such reports and notices to existing shareholders,
irrespective of whether such reports or notices contain or are
accompanied by material intended to result in the sale of shares
of the Fund or other funds or other investments; (ii) the costs
of the preparation and setting in type of all prospectuses and
statements of additional information and the costs of printing
and mailing all prospectuses and statements of additional
information to existing shareholders; (iii) the costs of
preparation, printing and mailing of any proxy statements and
proxies, irrespective of whether any such proxy statement
includes any item relating to, or directed toward, the sale of
the Fund's shares; (iv) all legal and accounting fees relating to
the preparation of any such reports, prospectuses, statements of
additional information, proxies and proxy statements; (v) all
fees and expenses relating to the registration or qualification
of the Fund and/or its shares under the securities or "Blue-Sky"
laws of any jurisdiction; (vi) all fees under the Securities Act
of 1933 and the 1940 Act, including fees in connection with any
application for exemption relating to or directed toward the sale
of the Fund's shares; (vii) all fees and assessments of the
Investment Company Institute or any successor organization,
irrespective of whether some of its activities are designed to
provide sales assistance; (viii) all costs of the preparation and
mailing of confirmations of shares sold or redeemed or share
certificates, and reports of share balances; and (ix) all costs
of responding to telephone or mail inquiries of investors or
prospective investors.

     The Plan states that while it is in effect, the selection
and nomination of those Trustees of the Fund who are not
"interested persons" of the Fund shall be committed to the
discretion of such disinterested Trustees but that nothing in the
Plan shall prevent the involvement of others in such selection
and nomination if the final decision on any such selection and
nomination is approved by a majority of such disinterested
Trustees.

     The Plan states that while it is in effect, the Fund's
Administrator and Distributor shall report at least quarterly to
the Fund's Board of Trustees in writing for their review on the
following matters: (i) all Permitted Payments made under this
Plan, the identity of the Qualified Recipient of each Payment,
and the purposes for which the amounts were expended; (ii) all
costs of each item of cost specified in the Plan (making
estimates of such costs where necessary or desirable) during the
preceding calendar or fiscal quarter; and (iii) all fees of the
Fund to the distributor, sub-adviser or administrator paid or
accrued during such quarter. In addition if any such Qualified
Recipient is an affiliate, as that term is defined in the Act, of
the Fund, the Adviser, the Administrator or the Distributor, such
person shall agree to furnish to the Distributor for transmission
to the Board of Trustees of the Fund an accounting, in form and
detail satisfactory to the Board of Trustees, to enable the Board
of Trustees to make the determinations of the fairness of the
compensation paid to such affiliated person, not less often than
annually.

     The Plan defines as the Fund's Independent Trustees those
Trustees who are not "interested persons" of the Fund as defined
in the 1940 Act and who have no direct or indirect financial
interest in the operation of the Plan or in any agreements
related to the Plan. The Plan, unless terminated as hereinafter
provided, continues in effect from year to year only so long as
such continuance is specifically approved at least annually by
the Fund's Board of Trustees and its Independent Trustees with
votes cast in person at a meeting called for the purpose of
voting on such continuance. In voting on the implementation or
continuance of the Plan, those Trustees who vote to approve such
implementation or continuance must conclude that there is a
reasonable likelihood that the Plan will benefit the Fund and its
shareholders. The Plan may be terminated at any time by vote of a
majority of the Independent Trustees or by the vote of the
holders of a "majority" (as defined in the 1940 Act) of the
outstanding voting securities of the Fund. The Plan may not be
amended to increase materially the amount of payments to be made
without shareholder approval and all amendments must be approved
in the manner set forth above as to continuance of the Plan.

     The Plan and each Part of it shall also be subject to all
applicable terms and conditions of Rule 18f-3 under the 1940 Act
as now in force or hereafter amended. Specifically, but without
limitation, the provisions of Part III shall be deemed to be
severable, within the meaning of and to the extent required by
Rule 18f-3, with respect to each outstanding class of shares of
the Fund.

                    SHAREHOLDER SERVICES PLAN

     The Fund has adopted a Shareholder Services Plan (the
"Services Plan") to provide for the payment with respect to Class
C Shares of the Fund of "Service Fees" within the meaning of
Article III, Section 26(b)(9) of the Rules of Fair Practice of
the National Association of Securities Dealers, Inc. The Services
Plan applies only to the Class C Shares of the Fund (regardless
of whether such class is so designated or is redesignated by some
other name).

     As used in the Services Plan, "Qualified Recipients" shall
mean broker-dealers or others selected by Aquila Distributors,
Inc. (the "Distributor"), including but not limited to the
Distributor and any other principal underwriter of the Fund, who
have, pursuant to written agreements with the Fund or the
Distributor, agreed to provide personal services to shareholders
of Level Payment Class Shares and/or maintenance of Level Payment
Class Shares shareholder accounts. "Qualified Holdings" shall
mean, as to any Qualified Recipient, all Level Payment Class
Shares beneficially owned by such Qualified Recipient's
customers, clients or other contacts. "Administrator" shall mean
Aquila Management Corporation or any successor serving as
sub-adviser or administrator of the Fund.

     Subject to the direction and control of the Fund's Board of
Trustees, the Fund may make payments ("Service Fees") to
Qualified Recipients, which Service Fees (i) may be paid directly
or through the Distributor or shareholder servicing agent as
disbursing agent and (ii) may not exceed, for any fiscal year of
the Fund (as adjusted for any part or parts of a fiscal year
during which payments under the Services Plan are not accruable
or for any fiscal year which is not a full fiscal year), 0.25 of
1% of the average annual net assets of the Fund represented by
the Level Payment Class Shares. Such payments shall be made only
out of the Fund's assets allocable to the Level Payment Class
Shares. The Distributor shall have sole authority with respect to
the selection of any Qualified Recipient or Recipients and the
amount of Service Fees, if any, paid to each Qualified Recipient,
provided that the total Service Fees paid to all Qualified
Recipients may not exceed the amount set forth above and
provided, further, that no Qualified Recipient may receive more
than 0.25 of 1% of the average annual net asset value of shares
sold by such Recipient. The Distributor is authorized, but not
directed, to take into account, in addition to any other factors
deemed relevant by it, the following: (a) the amount of the
Qualified Holdings of the Qualified Recipient and (b) the extent
to which the Qualified Recipient has, at its expense, taken steps
in the shareholder servicing area with respect to holders of
Level Payment Class Shares, including without limitation, any or
all of the following activities: answering customer inquiries
regarding account status and history, and the manner in which
purchases and redemptions of shares of the Fund may be effected;
assisting shareholders in designating and changing dividend
options, account designations and addresses; providing necessary
personnel and facilities to establish and maintain shareholder
accounts and records; assisting in processing purchase and
redemption transactions; arranging for the wiring of funds;
transmitting and receiving funds in connection with customer
orders to purchase or redeem shares; verifying and guaranteeing
shareholder signatures in connection with redemption orders and
transfers and changes in shareholder designated accounts; and
providing such other related services as the Distributor or a
shareholder may request from time to time. Notwithstanding the
foregoing two sentences, a majority of the Independent Trustees
(as defined below) may remove any person as a Qualified
Recipient. Amounts within the above limits accrued to a Qualified
Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all
Qualified Recipients, the difference will not be carried over to
subsequent years. During the year 1996, the Fund paid $333 under
the Shareholder Services Plan all of which was retained by the
Distributor.

     While the Services Plan is in effect, the Fund's Distributor
shall report at least quarterly to the Fund's Trustees in writing
for their review on the following matters: (i) all Service Fees
paid under the Services Plan, the identity of the Qualified
Recipient of each payment, and the purposes for which the amounts
were expended; and (ii) all fees of the Fund to the Distributor
paid or accrued during such quarter. In addition, if any
Qualified Recipient is an "affiliated person," as that term is
defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), of the Fund, the Adviser, the Administrator or the
Distributor, such person shall agree to furnish to the
Distributor for transmission to the Board of Trustees of the Fund
an accounting, in form and detail satisfactory to the Board of
Trustees, to enable the Board of Trustees to make the
determinations of the fairness of the compensation paid to such
affiliated person, not less often than annually.

     The Services Plan has been approved by a vote of the
Trustees, including those Trustees who, at the time of such vote,
were not "interested persons" (as defined in the 1940 Act) of the
Fund and had no direct or indirect financial interest in the
operation of the Services Plan or in any agreements related to
the Services Plan (the "Independent Trustees"), with votes cast
in person at a meeting called for the purpose of voting on the
Services Plan. It will continue in effect for a period of more
than one year from its original effective date only so long as
such continuance is specifically approved at least annually as
set forth in the preceding sentence. It may be amended in like
manner and may be terminated at any time by vote of the
Independent Trustees.

     The Services Plan shall also be subject to all applicable
terms and conditions of Rule 18f-3 under the Act as now in force
or hereafter amended.

     While the Services Plan is in effect, the selection and
nomination of those Trustees of the Fund who are not "interested
persons" of the Fund, as that term is defined in the 1940 Act,
shall be committed to the discretion of such disinterested
Trustees. Nothing herein shall prevent the involvement of others
in such selection and nomination if the final decision on any
such selection and nomination is approved by a majority of such
disinterested Trustees.

                LIMITATION OF REDEMPTIONS IN KIND

     The Fund has elected to be governed by Rule 18f-1 under the
1940 Act, pursuant to which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1 percent
of the net asset value of the Fund during any 90-day period for
any one shareholder. Should redemptions by any shareholder exceed
such limitation, the Fund will have the option of redeeming the
excess in cash or in kind. If shares are redeemed in kind, the
redeeming shareholder might incur brokerage costs in converting
the assets into cash. The method of valuing securities used to
make redemptions in kind will be the same as the method of
valuing portfolio securities described under "Net Asset Value Per
Share" in the Prospectus, and such valuation will be made as of
the same time the redemption price is determined.

                      TRUSTEES AND OFFICERS

     The Trustees and officers of the Fund, their affiliations,
if any, with the Administrator or the Distributor and their
principal occupations during at least the past five years are set
forth below. Mr. Herrmann is an "interested person" of the Fund,
as that term is defined in the 1940 Act, as an officer of the
Fund and a Director, officer and shareholder of the Distributor.
Ms. Herrmann is an interested person as a member of his immediate
family. Ms. Leven is an interested person as a beneficiary of a
trust that owns shares of the parent company of the Adviser. They
are so designated by an asterisk.

     As of April 10, 1997, all of the Trustees and officers as a
group owned less than 1% of its outstanding shares.

Lacy B. Herrmann*, President and Chairman of the Board of
Trustees, 380 Madison Avenue, New York, New York 10017

Founder, President and Chairman of the Board of Aquila Management
Corporation since 1984, the sponsoring organization and
Administrator and/or Adviser or Sub-Adviser to the following
open-end investment companies, and Founder, Chairman of the Board
of Trustees, and President of each: Hawaiian Tax-Free Trust since
1984; Tax-Free Trust of Arizona since 1986; Tax-Free Trust of
Oregon since 1986; Tax-Free Fund of Colorado since 1987; Tax-Free
Fund For Utah since 1992; and Narragansett Insured Tax-Free
Income Fund since 1992; each of which is a tax-free municipal
bond fund, and two equity funds, Aquila Rocky Mountain Equity
Fund since 1993 and Aquila Cascadia Equity Fund, since 1996,
which, together with this Fund are called the Aquila Bond and
Equity Funds; and Pacific Capital Cash Assets Trust since 1984;
Churchill Cash Reserves Trust since 1985; Pacific Capital U.S.
Treasuries Cash Assets Trust since 1988; Pacific Capital Tax-Free
Cash Assets Trust since 1988; each of which is a money market
fund, and together with Capital Cash Management Trust ("CCMT")
are called the Aquila Money-Market Funds; Vice President,
Director, Secretary and formerly Treasurer of Aquila
Distributors, Inc. since 1981, distributor of the above funds;
President and Chairman of the Board of Trustees of CCMT, a money
market fund since 1981, and an Officer and Trustee/Director of
its predecessors since 1974; Chairman of the Board of Trustees
and President of Prime Cash Fund (which is inactive), since 1982
and of Short Term Asset Reserves 1984-1996; President and a
Director of STCM Management Company, Inc., sponsor and
sub-adviser to CCMT; Chairman, President, and a Director since
1984, of InCap Management Corporation, formerly sub-adviser and
administrator of Prime Cash Fund and Short Term Asset Reserves,
and Founder and Chairman of several other money market funds;
Director or Trustee of OCC Cash Reserves, Inc., Oppenheimer Quest
Global Value Fund, Inc., Oppenheimer Quest Value Fund, Inc., and
Trustee of Quest For Value Accumulation Trust, The Saratoga
Advantage Trust, and of the Rochester Group of Funds, each of
which is an open-end investment company; Trustee of Brown
University, 1990-1996 and currently Trustee Emeritus; actively
involved for many years in leadership roles with university,
school and charitable organizations.

Thomas A. Christopher, Trustee, 459 West Green Street, Danville,
Kentucky 40422 

Shareholder of Robinson, Hughes & Christopher, C.P.A.s, P.S.C.,
since 1977; President of A Good Place for Fun, Inc., a sports
facility, since 1987; active member of the American Institute of
Certified Public Accountants; Board of Directors of the Kentucky
Society of CPAs 1991 to 1994; Trustee of Churchill Cash Reserves
Trust since 1985; presently active in leadership roles with
various civic, community and church organizations.

Douglas Dean, Trustee, 106 West Vine Street, Suite 600,
Lexington, Kentucky 40507 

Founder and President of Dean, Dorton & Ford P.S.C., a public
accounting firm, since 1979; previously Staff Accountant, Tax
Supervisor and Tax Manager with Coopers & Lybrand, a public
accounting firm; Trustee of Trent Equity Fund, an equity mutual
fund, 1992-1994; Trustee of Churchill Cash Reserves Trust since
1995; Active as an officer and board member of various charitable
and community organizations.

Diana P. Herrmann*, Trustee and Vice President, 380 Madison
Avenue, New York, New York 10017

Senior Vice President and Secretary and formerly Vice President
of the Administrator since 1986 and Director since 1984; Trustee
of Tax-Free Trust of Arizona and Tax-Free Trust of Oregon since
1994, of Churchill Cash Reserves Trust since 1995 and of Aquila
Cascadia Equity Fund since 1996; Vice President of InCap
Management Corporation since 1986 and Director since 1983; Senior
Vice President or Vice President and formerly Assistant Vice
President of the Money Funds since 1986; Vice-President of Prime
Cash Fund (which is inactive), since 1986, of Cascades Cash Fund
1989-1994, and of Short Term Asset Management Fund, 1986-1988;
Assistant Vice President of Oxford Cash Management Fund,
1986-1988; Assistant Vice President and formerly Loan Officer of
European American Bank, 1981-1986; daughter of the Fund's
President; Trustee of the Leopold Schepp Foundation (academic
scholarships) since 1995; actively involved in mutual fund and
trade associations and in college and other volunteer
organizations.

Ann R. Leven*, Trustee, 785 Park Avenue, Apartment 20A, New York,
NY 10021

Treasurer of the National Gallery of Art, Washington, D.C., since
1994, Deputy Treasurer, 1990-1994; Treasurer of the Smithsonian
Institution, Washington, D.C., 1984-1990; President of ARL
Associates, strategic consultants, since 1983; Vice
President/Senior Corporate Planning Officer of The Chase
Manhattan Bank, N.A., 1979-1983; Treasurer of The Metropolitan
Museum of Art, 1972-1979; Trustee of Short Term Asset Reserves,
1984-1993, of Tax-Free Trust of Oregon since 1986, of Cascades
Cash Fund, 1989-1994, of Churchill Cash Reserves Trust since
1995, and of Aquila Cascadia Equity Fund since 1996; Trustee of
Oxford Cash Management Fund, 1987-1988; Director of the Delaware
Group of mutual funds since 1989; Adjunct Professor at Columbia
University Graduate School of Business Administration since 1975;
Trustee of the American Red Cross Endowment Fund, 1985-1990;
Member of the Visiting Committee of Harvard Business School,
1979-1985; Member of the Board of Overseers of The Amos Tuck
School, Dartmouth College, 1978-1984; Staff Director of the
Presidential Task Force on the Arts and Humanities, 1981;
Director of Alliance Capital Reserves Fund, a money market fund,
1978-1979.

Theodore T. Mason, Trustee, 26 Circle Drive, Hastings-on-Hudson,
New York 10706 

Managing Director of EastWind Power Partners, Ltd. since 1994;
Director of Cogeneration Development of Willamette Industries,
Inc., a forest products company, 1991-1993; Vice President of
Corporate Development of Penntech Papers, Inc., 1978-1991; Vice
President of Capital Projects for the same company, 1977-1978;
Vice Chairman of the Board of Trustees of CCMT since 1981;
Trustee and Vice President, 1976-1981, and formerly Director of
its predecessor; Director of STCM Management Company, Inc.; Vice
Chairman of the Board of Trustees and Trustee of Prime Cash Fund
(which is inactive) since 1982; Trustee of Short Term Asset
Reserves, 1984-1986 and 1989-1996, of Hawaiian Tax-Free Trust and
Pacific Capital Cash Assets Trust since 1984, of Churchill Cash
Reserves Trust since 1985 and of Pacific Capital Tax-Free Cash
Assets Trust and Pacific Capital U.S. Treasuries Cash Assets
Trust since 1988; Vice President and Trustee of Oxford Cash
Management Fund, 1983-1989; Vice President of Trinity Liquid
Assets Trust, 1983-1985; President and Director of Ted Mason
Venture Associates, Inc., a venture capital consulting firm,
1972-1980; Advisor to the Commander, U.S. Maritime Defense Zone
Atlantic, 1984-1988; National Vice President, Surface/Subsurface,
Naval Reserve Association, 1985-1987; National Vice President,
Budget and Finance, for the same Association, 1983-1985;
Commanding Officer of four Naval Reserve Units, 1974-1985;
Captain, USNR, 1978-1988.

Anne J. Mills, Trustee, 167 Glengarry Place, Castle Pines
Village, Castle Rock, Colorado 80104

Vice President for Business Affairs of Ottawa University since
1992; Director of Customer Fulfillment, U.S. Marketing and
Services Group, IBM Corporation, 1990-1991; Director of Business
Requirements of that Group, 1988-1990; Director of Phase
Management of that Group, 1985-1988; Budget Review Officer of the
American Baptist Churches/USA since 1994; Director of the
American Baptist Foundation since 1985; Trustee of Brown
University; Trustee of Churchill Cash Reserves Trust since 1985,
of Tax-Free Trust of Arizona since 1986, of Tax-Free Fund of
Colorado and Capital Cash Management Trust since 1987 and of
Tax-Free Fund For Utah since 1994. 

William J. Nightingale, Trustee, 1266 East Main Street, Stamford
Connecticut 06902 

Chairman and founder (1975) and Senior Advisor since 1995 of
Nightingale & Associates, Inc., a general management consulting
firm focusing on interim management, divestitures, turnaround of
troubled companies, corporate restructuring and financial
advisory services; President, Chief Executive Officer and
Director of Bali Company, Inc., a manufacturer of women's
apparel, which became a subsidiary of Hanes Corporation,
1970-1975; prior to that, Vice President and Chief Financial
Officer of Hanes Corporation after being Vice President-Corporate
Development and Planning of that company, 1968-1970; formerly
Senior Associate of Booz, Allen & Hamilton, management
consultants, after having been Marketing Manager with General
Mills, Inc.; Trustee of Narragansett Insured Tax-Free Income Fund
since 1992 and of Churchill Cash Reserves Trust since 1993;
Director of Yale International, Inc. (various industrial
manufacturing companies); Glasstech Inc. (glass bending equipment
and engineering) and Ring's End, Inc. (retail lumber and building
supply chain).

James R. Ramsey, Trustee, 109 Wetherby Building, Western Kentucky
University, Bowling Green, Kentucky 42101 

Vice President for Finance and Administration, and Professor of
Economics, Western Kentucky University; Trustee of Churchill Cash
Reserves Trust since 1995; Chief State Economist and Executive
Director of the Office for Financial Management and Economic
Analysis of the Commonwealth of Kentucky, 1981-1992; Adjunct
Professor of the University of Kentucky; Assistant Dean and
Director of Public Administration of Loyola University in New
Orleans, Louisiana, 1978-1981; Assistant Professor of Public
Finance and Administration of Loyola University, 1977-1981;
Assistant Professor of Economics, Middle Tennessee State
University, 1975-1977; published numerous articles, monographs
and working papers on economics and fiscal management.

Jerry G. McGrew, Senior Vice President, P.O. Box 662, Radcliff,
Kentucky 40159 

Vice President, 1987-1994; Vice President of Tax-Free Fund For
Utah since 1992; Vice President of Churchill Cash Reserves Trust
since 1995; Registered Principal since 1993; Vice President of
Aquila Distributors, Inc. since 1993; Registered Representative
of J.J.B. Hilliard, W.L. Lyons Inc., 1983-1987; Account Manager
with IBM Corporation, 1967-1981; Gubernatorial appointee,
Kentucky Financial Institutions Board, since 1993; Chairman,
Total Quality Management for Small Business, 1990-1994; President
of Elizabethtown/Hardin County, Kentucky, Chamber of Commerce,
1989-1991; President of Elizabethtown Country Club, 1983-1985.

William C. Wallace, Vice President, 380 Madison Avenue, New York,
New York 10017 

Vice President of Capital Cash Management Trust and Pacific
Capital Cash Assets Trust since 1984; Senior Vice President of
Hawaiian Tax-Free Trust since 1985 and Vice President, 1984-1985;
Senior Vice President of Tax-Free Trust of Arizona since 1989 and
Vice President, 1986-1988; Vice President of Tax-Free Trust of
Oregon since 1986, of Tax-Free Fund of Colorado since 1987, of
Pacific Capital Tax-Free Cash Assets Trust and Pacific Capital
U.S. Treasuries Cash Assets Trust since 1988 and of Narragansett
Insured Tax-Free Income Fund since 1992; Secretary and Director
of STCM Management Company, Inc. since 1974; President of the
Distributor since 1995 and formerly Vice President of the
Distributor, 1986-1992; Member of the Panel of Arbitrators,
American Arbitration Association, since 1978; Assistant Vice
President, American Stock Exchange, Market Development Division,
and Director of Marketing, American Gold Coin Exchange, a
subsidiary of the American Stock Exchange, 1976-1984.

Teresa M. Priest, Vice President, 402 North Mantle Avenue,
Elizabethtown, KY 42701

Corporate Safety Director/Human Resource Manager of Ramsey &
Associates, Inc. 1995-1996; Senior Sales Representative of
Bluegrass Cellular, Inc. 1993-1995; Account Executive at Lite
105.5 WASE, 1992; Sales Assistant of J.J.B. Hilliard, W.L. Lyons,
Inc. 1990-1991.

L. Michele Robbins, Vice President, 4277 Bardstown Road,
Elizabethtown, Kentucky 42701

Assistant Vice President, 1995-1996; Registered Representative of
Aquila Distributors, Inc. since 1995; Investment Broker,
1990-1994; Sales Assistant, 1984-1990, J.J.B. Hilliard, W.L.
Lyons, Inc.; active in Elizabethtown Emmaus Community, United Way
of Hardin County, Elizabethtown Junior Women's Club, Big
Brothers/Big Sisters, and Fund for the Arts.

Rose F. Marotta, Chief Financial Officer, 380 Madison Avenue, New
York, New York 10017 

Chief Financial Officer of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1991 and Treasurer, 1981-1991;
formerly Treasurer of the predecessor of CCMT; Treasurer and
Director of STCM Management Company, Inc., since 1974; Treasurer
of Trinity Liquid Assets Trust, 1982-1986 and of Oxford Cash
Management Fund, 1982-1988; Treasurer of InCap Management
Corporation since 1982, of the Administrator since 1984 and of
the Distributor since 1985.

Richard F. West, Treasurer, 380 Madison Avenue, New York, New
York 10017 

Treasurer of the Aquila Money-Market Funds and the Aquila Bond
and Equity Funds and of Aquila Distributors, Inc. since 1992;
Associate Director of Furman Selz Incorporated, 1991-1992; Vice
President of Scudder, Stevens & Clark, Inc. and Treasurer of
Scudder Institutional Funds, 1989-1991; Vice President of Lazard
Freres Institutional Funds Group, Treasurer of Lazard Freres
Group of Investment Companies and HT Insight Funds, Inc.,
1986-1988; Vice President of Lehman Management Co., Inc. and
Assistant Treasurer of Lehman Money Market Funds, 1981-1985;
Controller of Seligman Group of Investment Companies, 1960-1980.

Edward M. W. Hines, Secretary, 551 Fifth Avenue, New York, New
York 10176 

Partner of Hollyer Brady Smith Troxell Barrett Rockett Hines &
Mone LLP, attorneys, since 1989 and counsel, 1987-1989; Secretary
of the Aquila Money-Market Funds and the Aquila Bond and Equity
Funds since 1982; Secretary of Trinity Liquid Assets Trust,
1982-1985 and Trustee of that Trust, 1985-1986; Secretary of
Oxford Cash Management Fund, 1982-1988.

John M. Herndon, Assistant Secretary, 380 Madison Avenue, New
York, New York 10017 

Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995 and Vice President of the
Aquila Money-Market Funds since 1990; Vice President of the
Administrator since 1990; Investment Services Consultant and Bank
Services Executive of Wright Investors' Service, a registered
investment adviser, 1983-1989; Member of the American Finance
Association, the Western Finance Association and the Society of
Quantitative Analysts.

Patricia A. Craven, Assistant Secretary & Compliance Officer, 380
Madison Avenue, New York, New York 10017 

Assistant Secretary of the Aquila Money-Market Funds and the
Aquila Bond and Equity Funds since 1995; Counsel to the
Administrator and the Distributor since 1995; formerly a Legal
Associate for Oppenheimer Management Corporation, 1993-1995.

Compensation of Trustees

     The Fund does not pay fees to Trustees affiliated with the
Administrator or to any of the Fund's officers. During the fiscal
year ended December 31, 1996, the Fund paid $59,858 in fees and
reimbursement of expenses to its other Trustees. The Fund is one
of the 14 funds in the Aquilasm Group of Funds, which consist of
tax-free municipal bond funds, money market funds and two equity
funds. The following table lists the compensation of all Trustees
who received compensation from the Fund and the compensation they
received during the Fund's fiscal year from other funds in the
Aquilasm Group of Funds. None of such Trustees has any pension or
retirement benefits from the Fund or any of the other funds in
the Aquila group.




                                  Compensation        Number of
                                  from all            boards on
             Compensation         funds in the        which the
               from the           Aquilasm            Trustee
Name           Fund               Group               serves
                                              
Thomas A.
Christopher    $6,650              $11,851             2

Douglas 
Dean           $7,984              $12,784             2

Ann R. 
Leven          $5,933              $18,400             3

Theodore T.
Mason          $6,703              $47,551             8

Anne J.
Mills          $5,300              $28,164             6

William J.
Nightingale    $6,478              $13,942             3

James R.
Ramsey         $6,050              $10,795             2



      ADDITIONAL INFORMATION AS TO MANAGEMENT ARRANGEMENTS

Additional Information as to the Advisory Agreement

     The Investment Advisory Agreement (the "Advisory Agreement")
between the Fund and the Adviser contains the provisions
described below, in addition to those described in the
Prospectus. The Advisory Agreement became effective on September
11, 1995. Prior to that date, PNC Bank, Kentucky, Inc. acted as
the Fund's investment adviser under a former advisory agreement
that terminated on that date.

     The Advisory Agreement may be terminated by the Adviser at
any time without penalty upon giving the Fund sixty days' written
notice, and may be terminated by the Fund at any time without
penalty upon giving the Adviser sixty days' written notice,
provided that such termination by the Fund shall be directed or
approved by the vote of a majority of all its Trustees in office
at the time or by the vote of the holders of a majority (as
defined in the 1940 Act) of its voting securities at the time
outstanding and entitled to vote; it automatically terminates in
the event of its assignment (as so defined).

     The Advisory Agreement provides that in the absence of
willful misfeasance, bad faith, gross negligence or reckless
disregard of its obligations thereunder, the Adviser is not
liable for any loss sustained by the adoption of any investment
policy or the purchase, sale or retention of any security and
permits the Adviser to act as investment adviser for any other
person, firm or corporation. The Fund agrees to indemnify the
Adviser to the full extent permitted under the Fund's Declaration
of Trust.

     The Advisory Agreement states that it is agreed that the
Adviser shall have no responsibility or liability for the
accuracy or completeness of the Fund's Registration Statement
under the Securities Act of 1933 and the 1940 Act, except for the
information supplied by the Adviser for inclusion therein.

     The Advisory Agreement contains the following provisions as
to the Fund's portfolio transactions. In connection with its
duties to arrange for the purchase and sale of the Fund's
portfolio securities, the Adviser shall select such
broker-dealers ("dealers") as shall, in the Adviser's judgment,
implement the policy of the Fund to achieve "best execution,"
i.e., prompt, efficient and reliable execution of orders at the
most favorable net price. The Adviser shall cause the Fund to
deal directly with the selling or purchasing principal or market
maker without incurring brokerage commissions unless the Adviser
determines that better price or execution may be obtained by
paying such commissions; the Fund expects that most transactions
will be principal transactions at net prices and that the Fund
will incur little or no brokerage costs. The Fund understands
that purchases from underwriters include a commission or
concession paid by the issuer to the underwriter and that
principal transactions placed through dealers include a spread
between the bid and asked price. In allocating transactions to
dealers, the Adviser is authorized to consider, in determining
whether a particular dealer will provide best execution, the
dealer's reliability, integrity, financial condition and risk in
positioning the securities involved, as well as the difficulty of
the transaction in question, and thus need not pay the lowest
spread or commission available if the Adviser determines in good
faith that the amount of commission is reasonable in relation to
the value of the brokerage and research services provided by the
dealer, viewed either in terms of the particular transaction or
the Adviser's overall responsibilities as to the accounts as to
which it exercises investment discretion. If, on the foregoing
basis, the transaction in question could be allocated to two or
more dealers, the Adviser is authorized, in making such
allocation, to consider (i) whether a dealer has provided
research services, as further discussed below; and (ii) whether a
dealer has sold shares of the Fund or any other investment
company or companies having the Adviser as its investment adviser
or having the same sub-adviser, Administrator or principal
underwriter as the Fund. Such research may be in written form or
through direct contact with individuals and may include
quotations on portfolio securities and information on particular
issuers and industries, as well as on market, economic or
institutional activities. The Fund recognizes that no dollar
value can be placed on such research services or on execution
services, that such research services may or may not be useful to
the Fund and/or other accounts of the Adviser and that research
received by such other accounts may or may not be useful to the
Fund.

     The expense limitation referred to in the Prospectus, if in
effect, is implemented monthly so that at no time is there any
unpaid liability under the limitation, subject to readjustment
during the year.

     During the fiscal year ended December 31, 1995, all of the
Fund's transactions were principal transactions and no brokerage
commissions were paid.

     During the fiscal year ended December 31, 1996 the Fund paid
or accrued $316,432 to the Adviser. From January 1, 1995, through
September 10, 1995, the Fund paid or accrued $336,044 in advisory
fees to its former adviser under a former advisory agreement.
From September 11, 1995 through December 31, 1995 the Fund paid
or accrued $102,734 in advisory fees to the Adviser. For the year
ended December 31, 1994, the fees accrued to the former
investment adviser under the advisory agreement in effect until
September 11, 1995 were $551,174.

Glass-Steagall Act

     In 1971 the United States Supreme Court held in Investment
Company Institute v. Camp that the federal statute commonly
referred to as the Glass-Steagall Act prohibits a national bank
from operating a fund for the collective investment of managing
agency accounts. Subsequently, the Board of Governors of the
Federal Reserve System (the "Board") issued a regulation and
interpretation to the effect that the Glass-Steagall Act and such
decision: (a) forbid a bank holding company registered under the
Federal Bank Holding Company Act of 1956 (the "Holding Company
Act") or any non-bank affiliate thereof from sponsoring,
organizing, or controlling a registered, open-end investment
company continuously engaged in the issuance of its Shares, but
(b) do not prohibit such a holding company or affiliate from
acting as investment adviser, transfer agent, and custodian to
such an investment company. In 1981, the United States Supreme
Court held in Board of Governors of the Federal Reserve System v.
Investment Company Institute that the Board did not exceed its
authority under the Holding Company Act when it adopted its
regulation and interpretation authorizing bank holding companies
and their non-bank affiliates to act as investment advisers to
registered closed-end investment companies. In the Board of
Governors case, the Supreme Court also stated that if a national
bank complied with the restrictions imposed by the Board in its
regulation and interpretation authorizing bank holding companies
and their non-bank affiliates to act as investment advisers to
investment companies, a national bank performing investment
advisory services for an investment company would not violate the
Glass-Steagall Act. In addition, state securities laws on this
issue may differ from the interpretations of federal law
expressed herein and banks and financial institutions may be
required to register as dealers pursuant to state law.

     The Adviser has represented to the Fund that it possesses
the legal authority to perform the investment advisory services
contemplated by the agreement and described in the Prospectus and
the Additional Statement without violation of applicable statutes
and regulations. Future changes in either federal or state
statutes and regulations relating to the permissible activities
of banks or bank holding companies and the subsidiaries or
affiliates of those entities, as well as further judicial or
administrative decisions or interpretations of present and future
statutes and regulations, could prevent or restrict the Adviser
from continuing to perform such services for the Fund. Depending
upon the nature of any changes in the services which could be
provided by the Adviser, the Board of Trustees of the Fund would
review the Fund's relationship with the Adviser and consider
taking all action necessary in the circumstances. 

     Should future legislative, judicial, or administrative
action prohibit or restrict the proposed activities of BANC ONE
CORPORATION subsidiary banks or their correspondent banks in
connection with customer purchases of shares of the Fund, these
banks might be required to alter materially or discontinue the
services offered by them to customers. It is not anticipated,
however, that any change in the Fund's method of operations would
affect its net asset value per share or result in financial
losses to any customer.

Additional Information as to the Administration Agreement

     The Administration Agreement (the "Administration
Agreement") between Aquila Management Corporation, as
Administrator, and the Fund contains the provisions described
below in addition to those described in the Prospectus. The
Administration Agreement went into effect on September 11, 1995,
replacing a former administration agreement with similar terms
except for the provision of fund accounting services and fee
arrangements. See the Prospectus.

     Subject to the control of the Fund's Board of Trustees, the
Administrator also provides all administrative services to the
Fund other than those relating to its investment portfolio; as
part of such duties, the Administrator (i) provides office space,
personnel, facilities, and equipment for the performance of the
following functions and for the maintenance of the Fund's
headquarters; (ii) oversees all relationships between the Fund
and its transfer agent, custodian, legal counsel, auditors and
principal underwriter, including the negotiation of agreements in
relation thereto, the supervision and coordination of the
performance of such agreements, and the overseeing of all
administrative matters which are necessary or desirable for
effective operation of the Fund and for the sale, servicing, or
redemption of the Fund's shares; (iii) provides to the Adviser
and to the Fund statistical and other factual information and
advice regarding economic factors and trends, but does not
generally furnish advice or make recommendations regarding the
purchase or sale of securities; (iv) under the New Administration
Agreement the Administrator either keeps the accounting records
of the Fund, including the computation of net asset value per
share and the dividends (provided that pricing of the Fund's
portfolio shall be the responsibility of the Adviser under the
Advisory Agreement) or, at its expense and responsibility,
delegates such duties in whole or in part to a company
satisfactory to the Fund, and under the Former Administration
Agreement and the New Administration Agreement, the Administrator
maintains the Fund's other books and records and prepares (or
assists counsel and auditors in the preparation of) all required
proxy statements, reports to the Fund's shareholders and
Trustees, reports to and other filings with the Securities and
Exchange Commission and any other governmental agencies, and tax
returns, and oversees the insurance relationships of the Fund;
(v) prepares, on the Fund's behalf and at its expense, such
applications and reports as may be necessary to register or
maintain its registration or that of its shares under the
securities or "Blue-Sky" laws of all such jurisdictions as may be
required from time to time; and (vi) responds to any inquiries or
other communications from shareholders and broker-dealers, or if
any such inquiry or communication is more properly to be
responded to by the Fund's shareholder servicing and transfer
agent or distributor, oversees such shareholder servicing and
transfer agent's or distributor's response thereto. Since the
Fund pays its own legal and audit expenses, to the extent that
the Fund's counsel and accountants prepare or assist in the
preparation of prospectuses, proxy statements and reports to
shareholders, the costs of such preparation or assistance are
paid by the Fund.

     The expense limitation referred to in the Prospectus, if in
effect, is implemented monthly so that at no time is there any
unpaid liability under the limitation, subject to readjustment
during the year.

     The Administration Agreement may be terminated at any time
without penalty by the Administrator upon sixty days' written
notice to the Fund and the Adviser; it may be terminated by the
Fund at any time without penalty upon giving the Administrator
sixty days' written notice, provided that such termination by the
Fund shall be directed or approved by a vote of a majority of the
Trustees in office at the time, including a majority of the
Trustees who are not interested persons of the Fund. In either
case the notice provision may be waived.

     The Administration Agreement provides that the Administrator
shall not be liable for any error in judgement or for any loss
suffered by the Fund in connection with the matters to which the
Administration Agreement relates, except a loss resulting from
willful misfeasance, bad faith or gross negligence of the
Administrator in the performance of its duties, or from reckless
disregard by it of its obligations and duties under the
Administration Agreement. The Fund agrees to indemnify the
Administrator to the full extent permitted by the Declaration of
Trust.

     During the fiscal year ended December 31, 1996 the Fund paid
or accrued $587,239 to the Administrator. During the year ended
December 31, 1995, fees of $515,895 were paid or accrued to the
Administrator under a former administration agreement in effect
until September 10, 1995 and under the Administration Agreement
in effect thereafter. For the year ended December 31, 1994 the
fees accrued to the Administrator under a former administration
agreement in effect until September 11, 1995, were $551,174.

                 COMPUTATION OF NET ASSET VALUE

     The net asset value of the Fund's shares is determined as of
4:00 p.m., New York time, on each day that the New York Stock
Exchange is open by dividing the value of the Fund's net assets
by the total number of its shares then outstanding. Securities
having a remaining maturity of less than sixty days when
purchased and securities originally purchased with maturities in
excess of sixty days but which currently have maturities of sixty
days or less are valued at cost adjusted for amortization of
premiums and accretion of discounts. All other portfolio
securities are valued at the mean between bid and asked
quotations which, for Kentucky Obligations, may be obtained from
a reputable pricing service or from one or more broker-dealers
dealing in Kentucky Obligations, either of which may, in turn,
obtain quotations from broker-dealers or banks which deal in
specific issues. However, since Kentucky Obligations are
ordinarily purchased and sold on a "yield" basis by banks or
dealers which act for their own account and do not ordinarily
make continuous offerings, quotations obtained from such sources
may be subject to greater fluctuations than is warranted by
prevailing market conditions. Accordingly, some or all of the
Kentucky Obligations in the Fund's portfolio may be priced, with
the approval of the Fund's Board of Trustees, by differential
comparisons to the market in other municipal bonds under methods
which include consideration of the current market value of
tax-free debt instruments having varying characteristics of
quality, yield and maturity. Any securities or assets for which
market quotations are not readily available are valued at their
fair value as determined in good faith under procedures
established by and under the general supervision and
responsibility of the Fund's Board of Trustees. In the case of
Kentucky Obligations, such procedures may include "matrix"
comparisons to the prices for other tax-free debt instruments on
the basis of the comparability of their quality, yield, maturity
and other special factors, if any, involved. With the approval of
the Fund's Board of Trustees, the Adviser may at its own expense
and without reimbursement from the Fund employ a pricing service,
bank or broker-dealer experienced in such matters to perform any
of the above described functions.

     As indicated above, the net asset value per share of the
Fund's shares will be determined on each day that the New York
Stock Exchange is open. That Exchange annually announces the days
on which it will not be open. The most recent announcement
indicates that it will not be open on the following days: New
Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, that Exchange may close on days not included in that
announcement.

Reasons for Differences in Public Offering Price

     As described herein and in the Prospectus, there are a
number of instances in which the Fund's shares are sold or issued
on a basis other than the maximum public offering price, that is,
the net asset value plus the highest sales charge. Some of these
relate to lower or eliminated sales charges for larger purchases,
whether made at one time or over a period of time as under a
Letter of Intent or right of accumulation. (See the table of
sales charges in the Prospectus.) The reasons for these quantity
discounts are, in general, that (i) they are traditional and have
long been permitted in the industry and are therefore necessary
to meet competition as to sales of shares of other funds having
such discounts; and (ii) they are designed to avoid an unduly
large dollar amount of sales charge on substantial purchases in
view of reduced selling expenses. Quantity discounts are made
available to certain related persons ("single purchasers") for
reasons of family unity and to provide a benefit to tax-exempt
plans and organizations.

     The reasons for the other instances in which there are
reduced or eliminated sales charges are as follows. Exchanges at
net asset value are permitted because a sales charge has already
been paid on the shares exchanged. Sales without sales charge are
permitted to Trustees, officers and certain others due to reduced
or eliminated selling expenses and/or since such sales may
encourage incentive, responsibility and interest and an
identification with the aims and policies of the Fund. Limited
reinvestments of redemptions at no sales charge are permitted to
attempt to protect against mistaken or incompletely informed
redemption decisions. Shares may be issued at no sales charge in
plans of reorganization due to reduced or eliminated sales
expenses and since, in some cases, such issuance is exempted in
the 1940 Act from the otherwise applicable restrictions as to
what sales charge must be imposed. In no case in which there is a
reduced or eliminated sales charge are the interests of existing
shareholders adversely affected since, in each case, the Fund
receives the net asset value per share of all shares sold or
issued.

                    AUTOMATIC WITHDRAWAL PLAN

     Any shareholder who owns or purchases Class A or Class Y
Shares of the Fund having a net asset value of at least $5,000
may establish an Automatic Withdrawal Plan under which he or she
will receive a monthly or quarterly check in a stated amount, not
less than $50. Stock certificates will not be issued for shares
held under an Automatic Withdrawal Plan. All dividends and
distributions must be reinvested. Shares will be redeemed on the
last business day of the month or quarter as may be necessary to
meet withdrawal payments.

     Redemption of shares for withdrawal purposes may reduce or
even liquidate the account. Monthly or quarterly payments paid to
shareholders may not be considered as a yield or income on
investment.

                   ADDITIONAL TAX INFORMATION

     If you incur a sales commission on purchase of shares of one
mutual fund (the original fund) and then sell such shares or
exchange them for shares of a different mutual fund without
having held them at least 91 days, you must reduce the tax basis
for the shares sold or exchanged to the extent that the standard
sales commission charged for acquiring shares in the exchange or
later acquiring shares of the original fund or another fund is
reduced because of the shareholder's having owned the original
fund shares. The effect of the rule is to increase your gain or
reduce your loss on the original fund shares. The amount of the
basis reduction on the original fund shares, however, is added on
the investor's basis for the fund shares acquired in the exchange
or later acquired. The provision applies to commissions charged
after October 3, 1989.

                  CONVERSION OF CLASS C SHARES

     Level Payment Class Shares ("Class C Shares") of the Fund,
which you hold will automatically convert to Front Payment Class
Shares ("Class A Shares") of the Fund based on the relative net
asset values per share of the two classes as of the close of
business on the first business day of the month in which the
sixth anniversary of the your initial purchase of such Class C
Shares occurs. For these purposes, the date of your initial
purchase shall mean (1) the first business day of the month in
which such Class C Shares were issued to you, or (2) for Class C
Shares of the Fund you have obtained through an exchange or
series of exchanges under the Exchange Privilege (see "Exchange
Privilege" in the Prospectus), the first business day of the
month in which you made the original purchase of Class C Shares
so exchanged. For conversion purposes, Class C Shares purchased
through reinvestment of dividends or other distributions paid in
respect of Class C Shares will be held in a separate sub-account.
Each time any Class C Shares in your regular account (other than
those in the sub-account) convert to Class A Shares, a pro-rata
portion of the Class C Shares in the sub-account will also
convert to Class A Shares. The portion will be determined by the
ratio that your Class C Shares then converting to Class A Shares
bears to the total of your Class C Shares not acquired through
reinvestment of dividends and distributions.

     The availability of the conversion feature is subject to the
continuing applicability of a ruling of the Internal Revenue
Service ("IRS"), or an opinion of counsel, that: (1) the
dividends and other distributions paid on Class A Shares and
Class C Shares will not result in "preferential dividends" under
the Code; and (2) the conversion of shares does not constitute a
taxable event. If the conversion feature ceased to be available,
the Class C Shares of the Fund would not be converted and would
continue to be subject to the higher ongoing expenses of the
Class C Shares beyond six years from the date of purchase. The
Fund has no reason to believe that these conditions for the
availability of the conversion feature will not continue to be
met.

     If the Fund implements any amendments to its Distribution
Plan that would increase materially the costs that may be borne
under such Distribution Plan by Class A Shares shareholders,
Class C Shares will stop converting into Class A Shares unless a
majority of Class C Shares shareholders, voting separately as a
class, approve the proposal.

                       GENERAL INFORMATION

Possible Additional Series

     If additional Series (as discussed in the Prospectus) were
created by the Board of Trustees, shares of each such Series
would be entitled to vote as a Series only to the extent
permitted by the 1940 Act (see below) or as permitted by the
Board of Trustees. Income and operating expenses would be
allocated among two or more series in a manner acceptable to the
Board of Trustees.

     Under Rule 18f-2 under the 1940 Act, as to any investment
company which has two or more Series outstanding, on any matter
required to be submitted to shareholder vote, such matter is not
deemed to have been effectively acted upon unless approved by the
holders of a "majority" (as defined in that Rule) of the voting
securities of each Series affected by the matter. Such separate
voting requirements do not apply to the election of trustees or
the ratification of the selection of accountants. The Rule
contains special provisions for cases in which an advisory
contract is approved by one or more, but not all, Series. A
change in investment policy may go into effect as to one or more
Series whose holders so approve the change, even though the
required vote is not obtained as to the holders of other affected
Series.

Ownership of Securities

     Of the Class A Shares of the Fund outstanding on March 31,
1997, BHC Securities Inc., 2005 Market Street, Philadelphia, PA
held of record 1,616,354 shares (7.6% of the class). On the basis
of information received from those holders, the Fund's management
believes that all of such shares are held for the benefit of
clients.

     Of the Class C Shares of the Fund outstanding on March 31,
1997, BHC Securities Inc., 2005 Market Street, Philadelphia, PA
held of record (two accounts) 15,007 shares and 9553 shares
(23.8% and 15.1%, respectively of the class) and J.C. Bradford &
Co C/F held 9,628 shares (15.2% of the class). On the basis of
information received from those holders, the Fund's management
believes that all of such shares are held for the benefit of
clients. In addition, John K. Codey held 7,117 shares (11.4% of
the class); Mary Lois Koonce held 6,620 shares (10.5% of the
class) and Bruce Hays held 3,344 shares (5.3% of the class).

     Of the Class Y Shares of the Fund outstanding on March 31,
1997, National City Bank of Kentucky, TTEE held 79,633 shares
(11.6% of the class. On the basis of information received from
the holder, the Fund's management believes that all of such
shares are held for the benefit of clients.

     The Fund's management is not aware of any other person
owning of record or beneficially 5% or more of the shares of any
class of Fund's outstanding shares as of that date.

Indemnification of Shareholders and Trustees

     Under Massachusetts law, shareholders of a trust such as the
Fund may, under certain circumstances, be held personally liable
as partners for the obligations of the Fund. For shareholder
protection, however, an express disclaimer of shareholder
liability for acts or obligations of the Fund is contained in the
Declaration of Trust which requires that notice of such
disclaimer be given in each agreement, obligation, or instrument
entered into or executed by the Fund or the Trustees. The
Declaration of Trust provides for indemnification out of the
Fund's property of any shareholder held personally liable for the
obligations of the Fund. The Declaration of Trust also provides
that the Fund shall, upon request, assume the defense of any
claim made against any shareholder for any act or obligation of
the Fund and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder
liability is limited to the relatively remote circumstances in
which the Fund itself would be unable to meet its obligations. In
the event the Fund had two or more Series, and if any such Series
were to be unable to meet the obligations attributable to it
(which, as is the case with the Fund, is relatively remote), the
other Series would be subject to such obligations, with
corresponding increase in the risk of the shareholder liability
mentioned in the prior sentence.

     The Declaration of Trust further indemnifies the Trustees of
the Fund out of the property of the Fund and provides that they
will not be liable for errors of judgment or mistakes of fact or
law; but nothing in the Declaration of Trust protects a Trustee
against any liability to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his or her office.

Custodian and Auditors

     The Fund's Custodian, Bank One Trust Company is responsible
for holding the Fund's assets. The Custodian is an affiliate of
the Adviser.

     The Fund's auditors, KPMG Peat Marwick LLP, perform an
annual audit of the Fund's financial statements.

Underwriting Commissions

     During the year ended December 31, 1996, the aggregate
dollar amount of sales charges on sales of shares in the Fund was
$455,583 and the amount retained by the Distributor was $21,310.

Financial Statements

     The financial statements for the Fund for the fiscal year
ended December 31, 1996, which are contained in the Annual Report
for that fiscal year, are hereby incorporated by reference into
the Additional Statement. Those financial statements have been
audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon is incorporated herein by reference.




                           APPENDIX A

              DESCRIPTION OF MUNICIPAL BOND RATINGS

Municipal Bond Ratings

     Standard & Poor's.  A Standard & Poor's municipal obligation
rating is a current assessment of the creditworthiness of an
obligor with respect to a specific obligation. This assessment
may take into consideration obligors such as guarantors, insurers
or lessees.

     The debt rating is not a recommendation to purchase, sell or
hold a security, inasmuch as it does not comment as to market
price or suitability for a particular investor.

     The ratings are based on current information furnished by
the issuer or obtained by Standard & Poor's from other sources it
considers reliable. Standard & Poor's does not perform an audit
in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed,
suspended or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.

     The ratings are based, in varying degrees, on the following
considerations:

     I.   Likelihood of default - capacity and willingness of the
          obligor as to the timely payment of interest and
          repayment of principal in accordance with the terms of
          the obligation;

     II.  Nature of and provisions of the obligation;

     III. Protection afforded by, and relative position of, the
          obligation in the event of bankruptcy, reorganization
          or other arrangement under the laws of bankruptcy and
          other laws affecting creditors rights.

     AAA  Debt rated "AAA" has the highest rating assigned by
          Standard & Poor's. Capacity to pay interest and repay
          principal is extremely strong.

     AA   Debt rated "AA" has a very strong capacity to pay
          interest and repay principal and differs from the
          highest rated issues only in small degree.

     A    Debt rated "A" has a strong capacity to pay interest
          and repay principal although it is somewhat more
          susceptible to the adverse effects of changes in
          circumstances and economic conditions than debt in
          higher rated categories.

     BBB  Debt rated "BBB" is regarded as having an adequate
          capacity to pay interest and repay principal. Whereas
          it normally exhibits adequate protection parameters,
          adverse economic conditions or changing circumstances
          are more likely to lead to a weakened capacity to pay
          interest and repay principal for debt in this category
          than in higher rated categories.

     Plus (+) or Minus (:): The ratings from "AA" to "B" may be
modified by the addition of a plus or minus sign to show relative
standing within the major rating categories.

     Provisional Ratings: The letter "p" indicates that the
rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the debt
being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while
addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of, or the risk of
default upon failure of, such completion. The investor should
exercise his own judgment with respect to such likelihood and
risk.

     Standard & Poor's ratings for municipal note issues are
designated SP in order to help investors distinguish more clearly
the credit quality of notes as compared to bonds. Notes bearing
the designation SP-1 are deemed very strong or to have strong
capacity to pay principal and interest. Those issues determined
to possess overwhelming safety characteristics will be given a
plus (+) designation. Notes bearing the designation SP-2 are
deemed to have a satisfactory capacity to pay principal and
interest.

     Moody's Investors Service.  A brief description of the
applicable Moody's Investors Service rating symbols and their
meanings follows:

     Aaa  Bonds which are rated Aaa are judged to be of the best
          quality. They carry the smallest degree of investment
          risk and are generally referred to as "gilt edge".
          Interest payments are protected by a large or by an
          exceptionally stable margin and principal is secure.
          While the various protective elements are likely to
          change, such changes as can be visualized are most
          unlikely to impair the fundamentally strong position of
          such issues.

     Aa   Bonds which are rated Aa are judged to be of high
          quality by all standards. Together with the Aaa group
          they comprise what are generally known as high grade
          bonds. They are rated lower than the best bonds because
          margins of protection may not be as large as in Aaa
          securities or fluctuation of protective elements may be
          of greater amplitude or there may be other elements
          present which make the long-term risks appear somewhat
          larger than in Aaa securities.

     A    Bonds which are rated A possess many favorable
          investment attributes and are to be considered as upper
          medium grade obligations. Factors giving security to
          principal and interest are considered adequate, but
          elements may be present which suggest a susceptibility
          to impairment some time in the future.

     Baa  Bonds which are rated Baa are considered as medium
          grade obligations; i.e., they are neither highly
          protected nor poorly secured. Interest payments and
          principal security appear adequate for the present but
          certain protective elements may be lacking or may be
          characteristically unreliable over any great length of
          time. Such bonds lack outstanding investment
          characteristics and in fact have speculative
          characteristics as well.

     Bonds in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are
designated by the symbols Aa1, A1, Baa1, Ba1 and B1.

     Moody's Short Term Loan Ratings - There are four rating
categories for short-term obligations, all of which define an
investment grade situation. These are designated Moody's
Investment Grade as MIG 1 through MIG 4. In the case of variable
rate demand obligations (VRDOs), two ratings are assigned; one
representing an evaluation of the degree of risk associated with
scheduled principal and interest payments, and the other
representing an evaluation of the degree of risk associated with
the demand feature. The short-term rating assigned to the demand
feature of VRDOs is designated as VMIG. When no rating is applied
to the long or short-term aspect of a VRDO, it will be designated
NR. Issues or the features associated with MIG or VMIG ratings
are identified by date of issue, date of maturity or maturities
or rating expiration date and description to distinguish each
rating from other ratings. Each rating designation is unique with
no implication as to any other similar issue of the same obligor.
MIG ratings terminate at the retirement of the obligation while
VMIG rating expiration will be a function of each issuer's
specific structural or credit features.

     MIG1/VMIG1     This designation denotes best quality. There
                    is present strong protection by established
                    cash flows, superior liquidity support or
                    demonstrated broad-based access to the market
                    for refinancing.

     MIG2/VMIG2     This designation denotes high quality.
                    Margins of protection are ample although not
                    so large as in the preceding group.

     MIG3/VMIG3     This designation denotes favorable quality.
                    All security elements are accounted for but
                    there is lacking the undeniable strength of
                    the preceding grades. Liquidity and cash flow
                    protection may be narrow and market access
                    for refinancing is likely to be less well
                    established.

     MIG4/VMIG4     This designation denotes adequate quality.
                    Protection commonly regarded as required of
                    an investment security is present and
                    although not distinctly or predominantly
                    speculative, there is specific risk. 




INVESTMENT ADVISER
Banc One Investment Advisors Corporation
416 West Jefferson Street
Louisville, Kentucky 40202
  
ADMINISTRATOR
Aquila Management Corporation
380 Madison Avenue, Suite 2300
New York, New York 10017

BOARD OF TRUSTEES
Lacy B. Herrmann, Chairman
Thomas A. Christopher
Douglas Dean
Diana P. Herrmann
Ann R. Leven
Theodore T. Mason
Anne J. Mills
William J. Nightingale
James R. Ramsey

OFFICERS
Lacy B. Herrmann, President
Jerry G. McGrew, Senior Vice President
Teresa M. Priest, Vice President
L. Michele Robbins, Vice President
Rose F. Marotta, Chief Financial Officer
Richard F. West, Treasurer
Edward M.W. Hines, Secretary

DISTRIBUTOR
Aquila Distributors, Inc.
380 Madison Avenue, Suite 2300
New York, New York 10017

TRANSFER AND SHAREHOLDER SERVICING AGENT
Administrative Data Management Corp.
581 Main Street
Woodbridge, New Jersey 07095-1198

CUSTODIAN
Bank One Trust Company, N.A.
100 East Broad Street
Columbus, Ohio 43271

INDEPENDENT AUDITORS
KPMG Peat Marwick LLP
345 Park Avenue
New York, New York 10154

COUNSEL
Hollyer Brady Smith Troxell 
  Barrett Rockett Hines & Mone LLP
551 Fifth Avenue
New York, New York 10176

AQUILA
[LOGO]
CHURCHILL
TAX-FREE FUND
OF
KENTUCKY

A TAX-FREE
INCOME INVESTMENT

[LOGO]

STATEMENT OF
ADDITIONAL
INFORMATION

One Of The
Aquilasm Group Of Funds