Churchill Tax-Free Fund of Kentucky
                         380 Madison Avenue, Suite 2300
                               New York,* NY 10017
                                  800-437-1020
                                  212-697-6666
                                   Prospectus


                                                                 April 24, 2004
Class A Shares
Class C Shares


     Churchill Tax-Free Fund of Kentucky is a mutual fund that seeks to provide
you as high a level of current income exempt from Kentucky state and regular
Federal income taxes as is consistent with preservation of capital. The Fund
invests in municipal obligations that pay interest exempt from Kentucky state
and regular Federal income taxes and are of investment grade quality.

For purchase, redemption or account inquiries contact the Fund's Shareholder
Servicing Agent:


           PFPC Inc.* 760 Moore Road * King of Prussia, PA 19406-1212
                             800-437-1000 toll free


                    For general inquiries & yield information
                     800-437-1020 toll free or 212-697-6666

The Securities and Exchange Commission has not approved or disapproved the
Fund's securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.

<page>


 TABLE OF CONTENTS


 The Fund's Objective, Investment Strategies
 and Main Risks...................................2
 Risk/Return Bar Chart and Performance Table .....3
 Fees and Expenses of the Fund....................5
 Investment of the Fund's Assets..................6
 Fund Management..................................9
 Net Asset Value per Share.......................10
 Purchases ......................................10
 Redeeming Your Investment.......................12
 Alternative Purchase Plans......................15
 Dividends and Distributions.....................21
 Tax Information.................................22
 Financial Highlights............................24


<page>



The Fund's Objective, Investment Strategies and Main Risks

"What is the Fund's objective?"

     The Fund's objective is to provide you as high a level of current income
exempt from Kentucky state and regular Federal income taxes as is consistent
with preservation of capital.

"What is the Fund's investment strategy?"

     The Fund invests in tax-free municipal obligations which pay interest
exempt from Kentucky state and regular Federal income taxes. We call these
"Kentucky Obligations." In general, all or almost all of these obligations are
issued by the State of Kentucky, its counties and various other local
authorities. At least 80% of the Fund's assets will always consist of such
obligations of these issuers. These obligations can be of any maturity, but the
Fund's average portfolio maturity has traditionally been between 15 and 18
years.

     At the time of purchase, the Fund's Kentucky Obligations must be of
investment grade quality. This means that they must either

     *    be rated within the four highest credit ratings assigned by nationally
          recognized statistical rating organizations or,


     *    if unrated, be determined to be of comparable quality by the Fund's
          Manager, Aquila Investment Management LLC.


     The Manager selects obligations for the Fund's portfolio to best achieve
the Fund's objective. The Manager evaluates specific obligations for purchase by
considering various characteristics including quality, maturity and coupon rate.

     The interest paid on certain types of Kentucky Obligations may be subject
to the Federal alternative minimum tax ("AMT"). As a fundamental policy of the
Fund at least 80% of the Fund's assets must be invested in Kentucky Obligations
whose interest is exempt from Kentucky state and regular Federal income taxes
and is also not subject to AMT.

"What are the main risks of investing in the Fund?"

     Among the risks of investing in shares of the Fund and its portfolio of
securities are the following:

     Loss of money is a risk of investing in the Fund.

     The Fund's assets, being primarily or entirely Kentucky issues, are subject
to economic and other conditions affecting Kentucky. Adverse local events, such
as a downturn in the Kentucky economy, could affect the value of the Fund's
portfolio.

     There are two types of risk associated with any fixed- income debt
securities such as Kentucky Obligations: interest rate risk and credit risk.


     *    Interest rate risk relates to fluctuations in market value arising
          from changes in interest rates. If interest rates rise, the value of
          debt securities, including Kentucky Obligations, will normally
          decline. If the value of Kentucky Obligations held by the Fund
          declines, the net asset value of your shares in the Fund will also
          decline. All fixed-rate debt securities, even the most highly rated
          Kentucky Obligations, are subject to interest rate risk. Kentucky
          Obligations with longer maturities generally have a more pronounced
          reaction to interest rate changes than shorter-term securities.


     *    Credit risk relates to the ability of the particular issuers of the
          Kentucky Obligations the Fund owns to make periodic interest payments
          as scheduled and ultimately repay principal at maturity.

     An investment in the Fund is not a deposit in any bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.

     The Fund is classified as a "non-diversified" investment company under the
Investment Company Act of 1940 (the "1940 Act"). Thus, compared with
"diversified" funds, it may invest a greater percentage of its assets in
obligations of a particular issuer and may therefore not have as much
diversification among securities, and thus diversification of risk. 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.

<page>


                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                   RISK/RETURN BAR CHART AND PERFORMANCE TABLE

     The bar chart shown below provides an indication of the risks of investing
in Churchill Tax-Free Fund of Kentucky by showing changes in performance of the
Fund's Class A Shares from year to year over a ten-year period. The table on the
following page shows the risk of investing in the Fund by showing how the Fund's
average annual returns for the designated periods compare with a broad measure
of market performance. The table also shows the effect of taxes on the Fund's
returns by presenting after-tax returns for Class A Shares. These returns are
calculated using the highest individual Federal income and capital gains tax
rates in effect at the time of each distribution and redemption, but do not
reflect state and local taxes. A "return after taxes on distributions and
redemptions" may sometimes be higher than the other two return figures; this
happens when there is a capital loss on redemption, giving rise to a tax benefit
to the shareholder. Actual after-tax returns will depend on your specific
situation and may differ from those shown. The after-tax returns shown will be
irrelevant to investors owning shares through tax-deferred accounts, such as
IRAs or 401(k) plans. The total returns reflect reinvestment of dividends and
distributions. How the Fund has performed in the past (before and after taxes)
is not necessarily an indication of how the Fund will perform in the future.

 [Bar Chart]
Annual Total Returns
1994-2003

14%          13.75
              XXXX
12%           XXXX
              XXXX
10%           XXXX
              XXXX                          8.45        8.15
8%            XXXX        8.08              XXXX        XXXX
              XXXX        XXXX              XXXX        XXXX
6%            XXXX`       XXXX              XXXX        XXXX
              XXXX        XXXX  5.13        XXXX        XXXX
4%            XXXX  4.17  XXXX  XXXX        XXXX  4.02  XXXX  4.50
              XXXX  XXXX  XXXX  XXXX        XXXX  XXXX  XXXX  XXXX
2%            XXXX  XXXX  XXXX  XXXX        XXXX  XXXX  XXXX  XXXX
              XXXX  XXXX  XXXX  XXXX        XXXX  XXXX  XXXX  XXXX
0%      XXXX  XXXX  XXXX  XXXX  XXXX  XXXX  XXXX  XXXX  XXXX  XXXX
        XXXX                          XXXX
-2%     XXXX                         -1.51
        XXXX
-4%    -3.31

       1994   1995  1996  1997  1998  1999  2000  2001  2002  2003
                              Years

During the 10-year period shown in the bar chart, the highest return for a
quarter was 5.75% (quarter ended March 31, 1995) and the lowest return for a
quarter was -3.97% (quarter ended March 31, 1994).

Note: The Fund's Class A Shares are sold subject to a maximum 4% sales load
which is not reflected in the bar chart. If the sales load were reflected,
returns would be less than those shown above.


                          Average Annual Total Return

For the Period Ended
December 31, 2003           1 Year   5 Years     10 Years
Churchill Tax-Free Fund of Kentucky
Class A Shares(1)
    Return before taxes      0.36%    3.81%        4.60%
    Return after taxes on    0.36%    3.79%        4.55%
    Return after taxes on
     distributions and
     redemptions             1.64%    3.90%        4.60%

Lehman Brothers Quality Intermediate
  Municipal Bond Index(2)    4.64%    5.61%        5.60%


 For the Period Ended                             Since
    December 31, 2003        1 Year   5 Years  Inception(3)

Churchill Tax-Free Fund of Kentucky
Class C Shares
    Return before taxes      2.62%(4)  3.77%        4.51%

Lehman Brothers Quality Intermediate
  Municipal Bond Index(2)    4.64%     5.61%        5.92%

(1) The average annual total returns shown for Class A shares reflect the
maximum 4% sales load.

(2) The Lehman Brothers Quality Intermediate Municipal Bond Index is nationally
oriented and consists of an unmanaged mix of investment-grade intermediate-term
municipal securities of issuers throughout the United States. Because of the
relatively short duration (approximately 6 years) of the Trust's portfolio,
management believes the Intermediate Index to be appropriate, although the
average maturity of the Trust's portfolio is somewhat longer than that of the
index and the Trust's portfolio may accordingly experience somewhat greater
volatility.

(3) Since April 1, 1996 for Class C Shares.

(4) The average annual total return for Class C Shares for one year assumes
redemption at the end of the year and payment of 1% CDSC.

<page>



                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                          FEES AND EXPENSES OF THE FUND

This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.



                                         Class A         Class C
                                         Shares          Shares

Shareholder Fees
(fees paid directly from your investment)

Maximum Sales Charge (Load)
Imposed on Purchases.....
(as a percentage of offering price)      4.00%            None

Maximum Deferred Sales Charge (Load)..   None(1)         1.00%(2)
(as a percentage of the lesser of
redemption value or purchase price)

Maximum Sales Charge (Load)
Imposed on Reinvested Dividends or
Distributions
 (as a percentage of offering price)..... None            None
Redemption Fees.......................... None            None
Exchange Fees............................ None            None

Annual Fund Operating Expenses (expenses that are
  deducted from the Fund's assets)

Management Fees ..........................0.40%          0.40%
Distribution (12b-1) Fee..................0.15%          0.75%
All Other Expenses:
 Service Fee.....................None               0.25%
 Other Expenses (3)..............0.17%              0.17%
 Total All Other Expenses (3).............0.17%          0.42%
Total Annual Fund
 Operating Expenses (3)...................0.72%          1.57%

(1) If you buy Class A Shares in transactions of $1 million or more there is no
sales charge but you will be subject to a contingent deferred sales charge of up
to 1% if your shares are redeemed during the first two years after purchase.

(2) A contingent deferred sales charge of 1% is imposed on the redemption
proceeds of the shares if your shares are redeemed during the first 12 months
after purchase.

(3) Does not reflect an offset in Fund expenses received in the year ended
December 31, 2003 for uninvested cash balances. Reflecting this offset for that
year, total annual Fund operating expenses were 0.71% for Class A Shares and
1.56% for Class C Shares.


Example

This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year, you
reinvest all dividends and distributions, and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:

                          1 year    3 years        5 years        10 years

Class A Shares............$471      $621             $785          $1,259
Class C Shares............$260      $496             $855          $1,428(4)

You would pay the following expenses if you did not redeem your Class C Shares:

Class C Shares............$160      $496             $855          $1,428(4)

(4) Six years after the date of purchase, Class C Shares are automatically
converted to Class A Shares. Over time long-term Class C Shareholders could pay
the economic equivalent of an amount that is more than the maximum front-end
sales charge allowed under applicable regulations because of the 12b-1 fee and
service fee.

<page>

                         Investment of the Fund's Assets

"Is the Fund right for me?"

     The shares of the Fund are designed to be a suitable investment for
individuals, corporations, institutions and fiduciaries who seek income exempt
from Kentucky state and regular Federal income taxes.

Kentucky Obligations

     The Fund invests in Kentucky Obligations, which are a type of municipal
obligation. They pay interest which bond counsel or other appropriate counsel
deems to be exempt from regular Federal and Commonwealth of Kentucky income
taxes. They include obligations of Kentucky issuers and certain non-Kentucky
issuers, of any maturity.

     The obligations of non-Kentucky issuers that the Fund can purchase as
Kentucky Obligations are those issued by or under the authority of Guam, the
Northern Mariana Islands, Puerto Rico and the Virgin Islands. Interest paid on
these obligations is currently exempt from regular Federal and Kentucky income
taxes. The Fund purchases the obligations of these issuers only when obligations
of Kentucky issuers with the appropriate characteristics of quality, maturity
and coupon rate are unavailable.

Municipal Obligations

     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 public purposes.

     There are two principal classifications of municipal obligations: "notes"
and "bonds." Notes generally have maturities of one year or less, while bonds
are paid back over longer periods.

     The various public purposes for which municipal obligations are issued
include:

     *    obtaining funds for general operating expenses,

     *    refunding outstanding obligations,

     *    obtaining funds for loans to other public institutions and facilities,
          and

     *    funding the construction of highways, bridges, schools, hospitals,
          housing, mass transportation, streets and water and sewer works.

Municipal obligations include:

     *    tax, revenue or bond anticipation notes,

     *    construction loan notes,

     *    project notes, which sometimes carry a U.S. government guarantee,

     *    municipal lease/purchase agreements, which are similar to installment
          purchase contracts for property or equipment, and

     *    floating and variable rate demand notes.

<page>

Churchill Tax-Free Fund of Kentucky

[PICTURE]
Jefferson Co. Hospital Revenue
[PICTURE]
Jefferson Co. Pollution Control
[PICTURE]
Hardin County Water District
[PICTURE]
Higher Education
[PICTURE]
Kentucky Turnpike Authority
[PICTURE]
Kenton Co. Airport Board
[PICTURE]
Scott County School District
[PICTURE]
Warren County Judicial Center
[PICTURE]
University of Kentucky Library
[PICTURE]


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 in general to finance construction
of long-term municipal projects; examples are pictured above. The municipal
obligations that financed these particular projects were included in the Fund's
portfolio as of January 15, 2004, and together represented 16.09% 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.


<page>

"Explain further how interest rate risk and credit risk may affect the value of
the Fund's investments and their yields."

     Change in prevailing interest rates is the most common factor that affects
the value of the obligations in the Fund's portfolio. Any such change may have
different effects on short-term and long-term Kentucky Obligations. Long-term
obligations (which usually have higher yields) may fluctuate in value more than
short-term ones. Thus, the Fund may shorten the average maturity of its
portfolio when it believes that prevailing interest rates may rise. While this
strategy may promote one part of the Fund's objective, preservation of capital,
it may also result in a lower level of income.

     An additional aspect of credit risk that is related to but distinct from
the direct risk of nonpayment by an issuer is that market perceptions may
develop, based on the determinations of a rating agency or otherwise, of
deterioration in an issuer's credit, and these may tend to depress the market
value of the issuer's outstanding debt obligations. Other market conditions may
ameliorate this effect; for example, in a period of rising demand for, and/or
diminishing supply of, Kentucky Obligations, the market value of a Kentucky
Obligation may remain relatively firm even in the face of a lowered credit
rating for an issuer. Nevertheless, deterioration in creditworthiness tends as a
general matter to be reflected over time in lower market values.

"What are the main risk factors and special considerations specifically relating
to 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 that the Fund owns. The Fund has derived this information
from sources that are generally available to investors and believes it to be
accurate, but it has not been independently verified and it may not be complete.


     The Commonwealth of Kentucky continues to rank among the top coal producers
in the country. Tobacco is the dominant agricultural product. Kentucky ranks
second among the states in the total cash value of tobacco raised. There is
significant diversification in the manufacturing sector of the Commonwealth's
economy. A few examples include the production of automobiles and trucks, heavy
machinery and other durable goods, appliances and computer equipment. There
continues to be growth in auto parts/components producers that supply the Toyota
Motors facility in Georgetown, Kentucky. Strong demand has led to major
expansions of the Ford Truck plant at Louisville. Tobacco processing plants and
distilleries produce items for export throughout the world. Thoroughbred horse
breeding and racing are important to the economy, as is tourism.

     In 2002, Kentucky faced two major difficulties. For political reasons, the
Legislature and the Governor were unable to agree on a budget, and for most of
the year, there was no budget. The state operated under a spending plan proposed
by the Governor. In addition, the nation-wide economic downturn that began in
2001 failed to abate, causing revenues to shrink. The ability of the government
of the Commonwealth was, moreover, constrained by having largely used reserves
to make up shortfalls in earlier periods. Rating agencies downgraded the
Commonwealth's debt in late 2002, although it remains at a general AA level.


     In April, 2004 the Legislature adjourned without passing a budget for the
fiscal year beginning July 1, 2004. While funding under the current budget is
adequate until that time, curtailment in education and social service spending
may be required thereafter. The Governor has indicated that he will not call a
special session of the legislature to deal with the budget. The Governor's
powers to operate without a budget are likely to be challenged in the courts and
the outcome cannot be predicted. Further curtailment of services may become
necessary.


     Economic concerns include a relatively high unemployment rate in the
non-urbanized areas of the Commonwealth. 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. Any federal legislation that adversely affects the
tobacco and/or cigarette industry would have a negative impact on Kentucky's
economy. The effects of the recent settlement between the tobacco companies and
individual states, including Kentucky, which were just beginning to be felt,
have been put in jeopardy by recent litigation against one of the tobacco
companies that may impair its ability to fund its share of the settlement. Loss
of part of that anticipated revenue stream would put further pressure on the
state's budget.

     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, because resources for other matters will be
reduced or tax levels will be increased, or a combination of both may occur.

     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.

     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.

                                 Fund Management

"How is the Fund managed?"


     Aquila Investment Management LLC, 380 Madison Avenue, Suite 2300, New York,
NY 10017, the Manager, is the Fund's investment adviser under an Advisory and
Administration Agreement. The Manager provides for investment supervision,
including supervising continuously the investment program of the Fund and the
composition of its portfolio, determining what securities will be purchased or
sold by the Fund and arranging for the purchase and the sale of securities held
in the portfolio of the Fund; and, at the Manager's expense, providing for
pricing of the Fund's portfolio daily. The Manager is also responsible for
administrative services, including providing for the maintenance of the
headquarters of the Fund, overseeing relationships between the Fund and the
service providers to the Fund, including the fund accounting service,
maintaining the Fund's books and records and providing other administrative
services.


         The Manager provides the Fund with local advisory services.

     Under the Advisory and Administration Agreement, the Fund pays the Manager
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 0.50 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,
the annual management fee is payable at the annual rate of 0.40 of 1% of such
net asset value.

Information about the Manager


     The Fund's Manager is a wholly-owned subsidiary of Aquila Management
Corporation ("AMC"), founder of each fund in the Aquilasm Group of Funds, which
consists of tax-free municipal bond funds, money-market funds and an equity
fund. As of March 31, 2004, these funds had aggregate assets of approximately
$3.9 billion, of which approximately $2.5 billion consisted of assets of the
tax-free municipal bond funds. AMC's address is the same as that of the Manager.
AMC, which was founded in 1984, is controlled by Mr. Lacy B. Herrmann, directly,
through two trusts and through share ownership by his wife.


     The Fund's portfolio is managed locally in Kentucky at the Manager's
Louisville office by Mr. Thomas S. Albright, Senior Vice President and Portfolio
Manager. Mr. Albright has served as the Fund's portfolio manager since September
1995, when Banc One Investment Advisors Corporation, subsequently sub-adviser,
became adviser to the Fund. From 1981 to 1995 he was employed by Liberty
National Bank 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 attended the
University of Louisville.

                            Net Asset Value per Share

     The net asset value of the shares of each of the Fund's classes of shares
is determined as of 4:00 p.m., New York time, on each day that the New York
Stock Exchange is open (a "business day"), by dividing the value of the Fund's
net assets (which means the value of the assets less liabilities) allocable to
each class by the total number of shares of such class outstanding at that time.
In general, net asset value of the Fund's shares is based on portfolio market
value, except that Kentucky Obligations maturing in 60 days or less are
generally valued at amortized cost. The price at which a purchase or redemption
of shares is effected is based on the net asset value next calculated after your
purchase or redemption order is received in proper form. The New York Stock
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, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, the Exchange may close on days not included in that announcement.

                                    Purchases

"Are there alternative purchase plans?"

     The Fund provides individuals with alternative ways to purchase shares
through two separate classes of shares (Class A and Class C). Although the
classes have different sales charge structures and ongoing expenses, they both
represent interests in the same portfolio of Kentucky Obligations. You should
choose the class that best suits your own circumstances and needs.


"In which states can I buy shares of the Fund?"


     You can purchase shares of the Fund if you live in Kentucky or in one of
the other states listed below. You should not purchase shares of the Fund if you
do not reside in one of the following states.

     Also, if you do not reside in Kentucky, dividends from the Fund may be
subject to state income taxes of the state in which you do reside. Therefore,
you should consult your tax adviser before buying shares of the Fund.

     On the date of this Prospectus, Class A Shares and Class C Shares are
available only in:


               Kentucky *Alabama * Georgia * Hawaii * Illinois *
              Indiana * Missouri * New Jersey * New York * Ohio *
                            Pennsylvania * Tennessee


         In addition, Class A Shares are available in Texas.

     The Fund and the Distributor may reject any order for the purchase of
shares.


"How much money do I need to invest?"

Option I

         *Initially, $1,000.

         *Subsequently any amount (for investments in shares of the same class).

Option II

          *    $50 or more if an Automatic Investment Program is established.

          *    Subsequently, any amount you specify of $50 or more.

          *    You are not permitted to maintain both an Automatic Investment
               Program and an Automatic Withdrawal Plan simultaneously.

"How do I purchase shares?"

You may purchase the Fund's shares:


          *    through an investment broker or dealer, or a bank or other
               financial intermediary, that has a sales agreement with the
               Distributor, Aquila Distributors, Inc., in which case that
               institution will take action on your behalf, and you will not
               personally perform the steps indicated below; or


          *    directly through the Distributor, by mailing payment to the
               Fund's Agent, PFPC Inc.

     Your investment must be drawn in United States dollars on a United States
commercial bank, savings bank or credit union or a United States branch of a
foreign commercial bank (each of which is a "Financial Institution").

     The price you will pay is net asset value plus a sales charge for Class A
Shares and net asset value for Class C Shares. (See "What price will I pay for
the Fund's shares?")

                               Opening an Account

          *    Make out a check for the investment amount payable to Churchill
               Tax-Free Fund of Kentucky.

          *    Complete a New Account Application, which is available with the
               Prospectus or upon request, indicating the features you wish to
               authorize.

          *    Send your check and completed New Account Application to your
               dealer or to the Fund's Agent, PFPC Inc.

                              Adding to an Account

<TABLE>
<CAPTION>
<S>                                                       <C>

By Wire                                                   By Check

* Telephone the Agent (toll-free) at 800-437-1000         * Make out a check for the investment amount
(individual shareholders) or 877-953-6932                 payable to Tax-Free Fund of Colorado.
(broker/dealers) to advise us that you would like to
purchase shares of the Fund by wire transfer.             * Fill out the pre-printed stub attached to the
                                                          Fund's confirmations or supply the name(s) of
* Instruct your bank to transfer funds by wire to the     account owner(s), the account number, and the
following account:                                        name of the Fund.


Bank Name:PNC Bank, Philadelphia, PA                      * Send your check and account information to your
ABA Number: 031-0000-53                                   dealer or to the Fund's Agent, PFPC Inc.
Account Name: Aquilasm Group of Funds
Account No.: 85-0242-8425 Further Credit:
Churchill Tax-Free Fund of Kentucky,
Name of Shareholder and Account Number


</TABLE>

Unless you indicate otherwise, your investment will be made in Class A Shares.


"Can I transfer funds electronically?"

     You can have funds transferred electronically, in amounts of $50 or more,
from your Financial Institution if it is a member of the Automated Clearing
House. You may make investments through two electronic transfer features,
"Automatic Investment" and "Telephone Investment."

*    Automatic Investment: You can authorize a pre-determined amount to be
     regularly transferred from your account.

*    Telephone Investment: You can make single investments of up to $50,000 by
     telephone instructions to the Agent.

     Before you can transfer funds electronically, the Fund's Agent must have
your completed New Account Application authorizing these features. Or, if you
initially decide not to choose these conveniences and then later wish to do so,
you must complete a Ready Access Features Form which is available from the
Distributor or Agent, or if your account is set up so that your broker or dealer
makes these sorts of changes, request your broker or dealer to make them. The
Fund may modify or terminate these investment methods or charge a service fee,
upon 30 days' written notice to shareholders.

                            Redeeming Your Investment

     You may redeem some or all of your shares by a request to the Agent. Shares
will be redeemed at the next net asset value determined after your request has
been received in proper form.

     There is no minimum period for investment in the Fund, except for shares
recently purchased by check or by Automatic or Telephone Investment as discussed
below.

     If you own both Class A Shares and Class C Shares and do not specify which
class you wish to redeem, we will redeem your Class A Shares.

     Certain shares are subject to a contingent deferred sales charge, or CDSC.
These are:

*    Class C Shares held for less than 12 months (from the date of purchase);
     and

*    CDSC Class A Shares.

     Upon redemption, enough additional shares will be redeemed to pay for any
applicable CDSC.

         A redemption may result in a tax liability for you.

"How can I redeem my investment?"


By mail, send instructions to:


PFPC Inc.
Attn: Aquilasm Group of Funds
760 Moore Road
King of Prussia, PA 19406-1212


By telephone, call:

800-437-1000
toll free

By FAX, send
instructions to:


610-312-5463


For liquidity and convenience, the Fund offers expedited redemption.

Expedited Redemption Methods
(Non-Certificate Shares Only)

     You may request expedited redemption for any shares not issued in
certificate form in two ways:

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

          a) to a Financial Institution account you have previously specified;
          or


          b) by check in the amount of $50,000 or less, mailed to the name and
          address on the account from which you are redeeming, provided that
          neither the name nor the address has changed during the prior 30 days.
          You may only redeem by check via telephone request once in any
          seven-day period.


                              Telephoning the Agent

         Whenever you telephone the Agent, please be prepared to supply:

         account name(s) and number

         name of the caller

         the social security number registered to the account

         personal identification.


     Note: Check the accuracy of your confirmation statements immediately upon
receipt. The Fund, the Agent, and the Distributor are not responsible for losses
resulting from unauthorized telephone transactions if the Agent follows
reasonable procedures designed to verify a caller's identity. The Agent may
record calls.


     2. By FAX or Mail. You may request redemption payments to a predesignated
Financial Institution account by a letter of instruction sent to the Agent, PFPC
Inc., by FAX at 610-312-5463 or by mail to 760 Moore Road, King of Prussia, PA
19406-1212. The letter, signed by the registered shareholder(s) (no signature
guarantee is required), must indicate:


         account name(s)

         account number

         amount to be redeemed

         any payment directions

     To have redemption proceeds sent directly to a Financial Institution
account, you must complete the Expedited Redemption section of the New Account
Application or a Ready Access Features Form. You will be required to provide (1)
details about your Financial Institution account, (2) signature guarantees and
(3) possible additional documentation.

     The name(s) of the shareholder(s) on the Financial Institution account must
be identical to the name(s) on the Fund's records of your account.

     You may change your designated Financial Institution account at any time by
completing and returning a revised Ready Access Features Form.

Regular Redemption Method
(Certificate and Non-Certificate Shares)

     Certificate Shares. Mail to the Fund's Agent: (1) blank (unsigned)
certificates for Class A Shares to be redeemed, (2) redemption instructions, and
(3) a stock assignment form.

     To be in "proper form," items (2) and (3) above must be signed by the
registered shareholder(s) exactly as the account is registered. For a joint
account, both shareholder signatures are necessary.

     For your protection, mail certificates separately from signed redemption
instructions. We recommend that certificates be sent by registered mail, return
receipt requested.

     We may require additional documentation for certain types of shareholders,
such as corporations, partnerships, trustees or executors, or if redemption is
requested by someone other than the shareholder of record.

     Signature Guarantees. If sufficient documentation is on file, we do not
require a signature guarantee for redemptions of certificate or non-certificate
shares up to $50,000, payable to the record holder, and sent to the address of
record. In all other cases, signatures must be guaranteed.

         Your signature may be guaranteed by any:

               member of a national securities exchange

               U.S. bank or trust company

               state-chartered savings bank

               federally chartered savings and loan association

               foreign bank having a U.S. correspondent bank; or

               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.

     Non-Certificate Shares. You must use the Regular Redemption Method if you
have not chosen Expedited Redemption to a predesignated Financial Institution
account. To redeem by this method, send a letter of instruction to the Fund's
Agent, which includes:

               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 (we normally mail redemption proceeds to
               your address as registered with the Fund)

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

               signature guarantee(s), if required, as indicated above after
               "Certificate Shares."

"When will I receive the proceeds of my redemption?"

     Redemption proceeds are normally sent on the next business day following
receipt of your redemption request in proper form. Except as described below,
payments will normally be sent to your address of record within seven days.

Redemption                 Method of Payment                  Charges

Under $1,000.              Check.                             None.

$1,000 or more.            Check, or wired or                 None.
                           transferred through the
                           Automated Clearing House
                           to your Financial
                           Institution account, if
                           you so requested on your
                           New Account Application
                           or Ready Access Features
                           Form.

Through a                  Check or wire, to your             None.
broker/dealer.             broker/dealer.                     However your
                                                              broker/dealer
                                                              may charge a
                                                              fee.

     Although the Fund does not currently intend to, it can charge up to $5.00
per wire redemption, after written notice to shareholders who have elected this
redemption procedure. 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.

     The Fund may delay payment for redemption of shares recently purchased by
check (including certified, cashier's or official bank check), Automatic
Investment or Telephone Investment for up to 15 days after purchase; however,
payment for redemption will not be delayed after (i) the check or transfer of
funds has been honored, or (ii) the Agent receives satisfactory assurance that
your Financial Institution will honor the check or transfer of funds. You can
eliminate possible delays by paying for purchased shares with wired funds or
Federal Reserve drafts.

     The Fund has the right to postpone payment or suspend redemption rights
during certain periods. These periods may occur (i) when the New York Stock
Exchange is closed for other than weekends and holidays, (ii) when the
Securities and Exchange Commission (the "SEC") restricts trading on the New York
Stock Exchange, (iii) when the SEC determines that an emergency exists which
causes disposal of, or determination of the value of, portfolio securities to be
unreasonable or impracticable, and (iv) during such other periods as the SEC may
permit.

     The Fund can redeem your shares if their value totals less than $500 as a
result of redemptions or failure to meet and maintain the minimum investment
level under an Automatic Investment program. Before such a redemption is made,
we will send you a notice giving you 60 days to make additional investments to
bring your account up to the minimum.

     Redemption proceeds may be paid in whole or in part by distribution of the
Fund's portfolio securities ("redemption in kind") in conformity with SEC rules.
This method will only be used if the Board of Trustees determines that payments
partially or wholly in cash would be detrimental to the best interests of the
remaining shareholders.

"Are there any reinvestment privileges?"

     If you reinvest proceeds of redemption within 120 days of the redemption
you will not have to pay any additional sales charge on the reinvestment and the
Distributor will refund to you any CDSC deducted at the time of redemption by
adding it to the amount of your reinvestment. You must reinvest in the same
class as the shares redeemed. You may exercise this privilege only once a year,
unless otherwise approved by the Distributor.

     Reinvestment will not alter the tax consequences of your original
redemption.

"Is there an Automatic Withdrawal Plan?"

     An Automatic Withdrawal Plan, which is only available for Class A Shares,
allows you to receive a monthly or quarterly check in a stated amount, not less
than $50.

                           Alternative Purchase Plans

"How do the different arrangements for Class A Shares and Class C Shares affect
the cost of buying, holding and redeeming shares, and what else should I know
about the two classes?"

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

                    Class A Shares                Class C Shares
                    "Front-Payment Class"     "Level-Payment Class"

Initial           Class A Shares are           None. Class C
Sales             offered at net asset         Shares are offered
Charge            value plus a maximum         at net asset value
                  sales charge of 4%,          with no sales
                  paid at the time of          charge payable at
                  purchase. Thus,              the time of
                  your investment is           purchase.
                  reduced by the
                  applicable sales
                  charge.

Contingent        None (except for             A maximum CDSC of
Deferred          certain purchases of         1% is imposed upon
Sales             $1 million or more)          the redemption of
Charge                                         Class C Shares held
("CDSC")                                       for less than 12
                                               months. No CDSC
                                               applies to Class C
                                               Shares acquired
                                               through the
                                               reinvestment of
                                               dividends or
                                               distributions.

Distribution      A distribution               There is a level
and Service       fee of 0.15                  charge for
Fees              of 1% is imposed on          distribution and
                  the average annual           service fees for six
                  net assets                   years after the
                  represented by the           date of purchase
                  Class A Shares.              at the
                                               aggregate annual
                                               rate of 1% of the
                                               average net assets
                                               represented by the
                                               Class C Shares.

Other             The initial sales            Class C Shares
Information       charge is waived or          together with a
                  reduced in some              pro- rata portion
                  cases. Larger                of all Class C
                  purchases qualify            Shares acquired
                  for lower sales              through
                  charges.                     reinvestment of
                                               dividends and other
                                               distributions paid
                                               in additional Class
                                               C Shares,
                                               automatically
                                               convert to Class A
                                               Shares after six
                                               years.

Systematic Payroll Investments

     You can make systematic investments in either Class A Shares or Class C
Shares each pay period if your employer has established a Systematic Payroll
Investment Plan with the Fund. To participate in the payroll plan, you must make
your own arrangements with your employer's payroll department, which may include
completing special forms. Additionally, the Fund requires that you complete the
New Account Application. Once your New Account Application is received by the
Fund and a new account is opened, under the payroll plan your employer will
deduct a preauthorized amount from each payroll check. This amount will then be
sent directly to the Fund for purchase of shares at the then current offering
price, which includes any applicable sales charge. You will receive a
confirmation from the Fund for each transaction. Should you wish to change the
dollar amount or end future systematic payroll investments, you must notify your
employer directly. Changes may take up to ten days.

"What price will I pay for the Fund's shares?"

Class A Shares Offering             Class C Shares Offering
Price                               Price

Net asset value per share           Net asset value per share
plus the applicable sales
charge

     You will receive that day's offering price on purchase orders, including
Telephone Investments and investments by mail, received in proper form prior to
4:00 p.m. New York time. Otherwise, orders will be filled at the next determined
offering price. Dealers are required to submit orders promptly. Purchase orders
received on a non-business day, including those for Automatic Investment, will
be executed on the next succeeding business day. The sale of shares will be
suspended (1) during any period when net asset value determination is suspended
or (2) when the Distributor judges it is in the Fund's best interest to do so.

"What are the sales charges for purchases of Class A Shares?"


The following table shows the amount of sales charge incurred for each new
purchase by a "single purchaser" of Class A Shares. A "single purchaser" is:


     *    an individual;

     *    an individual, together with his or her spouse and/or any children
          under 21 years of age purchasing shares for their account;

     *    a trustee or other fiduciary purchasing shares for a single trust
          estate or fiduciary account; or

     *    a tax-exempt organization as detailed in Section 501(c)(3) or (13) of
          the Internal Revenue Code.


     You may be entitled to substantial reductions in sales charges based on
Class A Shares you or other members of your family already own. Be sure you tell
your broker or dealer about all those holdings so any reduction in sales charges
on your purchase can be correctly computed.



     A "single purchaser" will pay a sales charge based on the value at the time
of purchase of his or her aggregate holdings of Class A Shares of the Fund and
Class A Shares of any of the other funds in the Aquilasm Group of Funds in
accordance with the following table:

          I                II                        III
Amount of Purchase         Sales Charge as           Sales Charge as
And Value of All           Percentage of             Approximate
Class A Shares Held        Public                    Percentage of
By a Single Purchaser      Offering Price            Amount Invested

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

For purchases of $1 million or more see "Sales Charges for Purchases of $1
Million or More."

For example:

If you pay $10,000 (Column I), your sales charge would be 4.00% or $400 (Column
II). ($10,000 x .04 = $400)

The value of your account, after deducting the sales charge from your payment,
would increase by $9,600. (This would be the initial value of your account if
you opened it with the $10,000 purchase.) ($10,000 - $400 = $9,600)

The sales charge as a percentage of the increase in the value of your account
would be 4.17% (Column III). ($400 / $9,600 = .0416666 or 4.17%)

Sales Charges for Purchases of $1 Million or More

     You will not pay a sales charge at the time of purchase when you purchase
"CDSC Class A Shares." CDSC Class A Shares are:

          (i) Class A Shares issued in a single purchase of $1 million or more
          by a single purchaser;


          (ii) Class A Shares issued when the value of the purchase, together
          with the value of shares of the Fund or any other Fund in the Aquilasm
          Group of Funds that are owned by the purchaser and are either CDSC
          Class A Shares or Class A Shares on which a sales charge was paid,
          exceeds $1 million; and


          (iii) Class A Shares purchased with the proceeds of redemption of
          shares of another investment company.

Redemption of CDSC Class A Shares

     If you redeem all or part of your CDSC Class A Shares during the two years
after you purchase them, you must pay a special contingent deferred sales charge
upon redemption.


     The CDSC is based on the value of your holdings of CDSC Class A Shares at
the time of redemption, according to the following table:


                                                     During First Two Years
                                                         After Purchase
Value of Holdings
  Over $1 million and up to $2.5 million                    1%

  Over $2.5 million and up to $5 million
                                                           0.50%

  Over $5 million                                          0.25%


     However, it is not the Fund's intention ever to charge the shareholder
(impose a CDSC) more than the commission amount that was paid to the
broker/dealer in connection with the purchase transaction.

     This special charge also applies to CDSC Class A Shares purchased without a
sales charge pursuant to a Letter of Intent.

     The CDSC will be waived for:

     *    Redemption following the death of the shareholder or beneficial owner.


     *    Redemptions by the Fund when an account falls below the minimum
          required account size.


     *    Redemption by an investor who purchased $1 million or more without an
          initial sales charge if the securities dealer of record waived its
          commission in connection with the purchase, with notice to the
          investor at the time of purchase.

Reduced Sales Charges for Certain Purchases of Class A Shares

         Right of Accumulation

     "Single purchasers" may qualify for a reduced sales charge in accordance
with the above schedule when making subsequent purchases of Class A Shares.

         Letters of Intent


     A "single purchaser" may also qualify for reduced sales charges, in
accordance with the above schedule, after a written Letter of Intent (included
in the New Account Application) is received by the Distributor.


         General

     Class A Shares may be purchased without a sales charge by certain classes
of purchasers.

         Certain Investment Companies

     If you redeem shares of an investment company (not a member of the Aquilasm
Group of Funds) on which you have paid a sales charge, you can invest the
proceeds within 120 days of the redemption in Class A Shares of the Fund without
paying a sales charge. You can get additional information from the Distributor.

"What are the sales, service and distribution charges for Class C Shares?"

     *    No sales charge at time of purchase.

     *    Fees for service and distribution at a combined annual rate of 1% of
          average annual net assets of the Fund represented by Class C Shares.

     *    After six years, Class C Shares automatically convert to Class A
          Shares, which bear lower service and distribution fees.


     The Fund will not accept purchase orders for Class C Shares in an amount of
$500,000 or more on behalf of an individual investor (not including dealer
"street name" or omnibus accounts). This is because it will generally be more
advantageous for an individual investor to purchase amounts greater than
$500,000 of the Fund's Class A Shares instead.


         Redemption of Class C Shares

     *    1% charge if redeemed within the first 12 months after purchase. This
          contingent deferred sales charge, or CDSC, is calculated based on the
          lesser of the net asset value at the time of purchase or at the time
          of redemption.

     *    No CDSC applies if Class C Shares are held for 12 months after
          purchase.

     *    Shares acquired by reinvestment of dividends or distributions are not
          subject to any CDSC.


     *    The CDSC will be waived for redemption following the death of the
          shareholder or beneficial owner and for redemption by the Fund when an
          account falls below the minimum required size.


         Broker/Dealer Compensation - Class C Shares

     The Distributor will pay 1% of the sales price to any broker/dealer
executing a Class C Share purchase.


         Exchange Privilege

     Generally, you can exchange shares of this Fund into the tax-free municipal
bond funds and the equity fund (together with the Fund, the "Bond or Equity
Funds") and certain money-market funds (the "Money-Market Funds") in the
Aquilasm Group of Funds for shares of the same class of any other Bond or Equity
Fund, or for shares of any Money-Market Fund, without the payment of a sales
charge or any other fee, and there is no limit on the number of exchanges you
can make from fund to fund.


"What about confirmations?"

     A statement will be mailed to you confirming each purchase of shares in the
Fund. Additionally, your account at the Agent will be credited in full and
fractional shares (rounded to the nearest 1/1000th of a share).

"Is there a Distribution Plan or a Services Plan?"

     The Fund has adopted a Distribution Plan (the "Plan") under the Investment
Company Act of 1940's Rule 12b-1 in order to:

     (i) permit the Fund to finance activities primarily intended to result in
the sale of its shares;

     (ii) permit the Manager to make payment for distribution expenses out of
its own funds; and

     (iii) protect the Fund against any claim that some of the expenses which it
pays or may pay might be considered to be sales-related and therefore come
within the purview of the Rule.

     Pursuant to the Plan, the Fund makes payments with respect to both Class A
Shares and Class C Shares under agreements to certain broker/dealers and other
qualified recipients.

     For any fiscal year, these payments may not exceed 0.15 of 1% for Class A
Shares, and 0.75 of 1% for Class C Shares, of the average annual net assets
represented by each such class. Because these distribution fees are paid out of
assets on an ongoing basis, over time these fees will increase the cost of your
investment; they may cost you more than paying other types of sales charges.

     Whenever the Fund makes Class A payments, the annual rate of the advisory
and administration fee otherwise payable by the Fund is reduced from 0.50 of 1%
to 0.40 of 1% of the Fund's average annual net assets.

Shareholder Services Plan for Class C Shares

     The Fund's Shareholder Services Plan authorizes it to pay a service fee
under agreements to certain qualified recipients who have agreed to provide
personal services to Class C shareholders and/or maintain their accounts. For
any fiscal year, such fees may not exceed 0.25 of 1% of the average annual net
assets represented by Class C Shares. Payment is made only out of the Fund's
assets represented by Class C Shares.

     Service fees with respect to Class C Shares will be paid to the Distributor
during the first year after purchase and thereafter to other qualified
recipients.

"Transfer on Death"("TOD") Registration (Both Classes)

     The Fund generally permits "transfer on death" ("TOD") registration of
shares, so that on the death of the shareholder the shares are transferred to a
designated beneficiary or beneficiaries. Ask the Agent or your broker/dealer for
the Transfer on Death Registration Request Form. With it you will receive a copy
of the TOD Rules of the Aquilasm Group of Funds, which specify how the
registration becomes effective and operates. By opening a TOD Account, you agree
to be bound by the TOD Rules.

                           Dividends and Distributions

"How are dividends and distributions determined?"

     The Fund pays dividends and other distributions with respect to each class
of shares. The Fund calculates its dividends and other distributions with
respect to each class at the same time and in the same manner. Net income for
dividend purposes includes all interest income accrued by the Fund since the
previous dividend declaration less expenses paid or accrued. Net income also
includes any original issue discount, which occurs if the Fund purchases an
obligation for less than its face amount. The discount from the face amount is
treated as additional income earned over the life of the obligation. Because the
Fund's income varies, so will the Fund's dividends. There is no fixed dividend
rate. It is expected that most of the Fund's dividends will be comprised of
interest income. The dividends and distributions of each class can vary due to
certain class-specific charges. The Fund will declare all of its net income 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.

     Redeemed shares continue to earn dividends through and including the
earlier of:

               1. the day prior to the day when redemption proceeds are mailed,
               wired or transferred by the Automated Clearing House or the Agent
               or paid by the Agent to a selected dealer; or

               2. the third day the New York Stock Exchange is open after the
               day the net asset value of the redeemed shares was determined.

     The Fund's present policy is to pay dividends so they will be received or
credited by approximately the first day of each month.

 "How are dividends and distributions paid?"

     Dividends and distributions will automatically be reinvested in full and
fractional shares of the Fund of the same class at net asset value as of the
payment date for the dividend or distribution unless you elect otherwise.

     You may choose to have all or any part of your dividends or distributions
paid in cash. You can elect to have the cash portion of your dividends or
distributions deposited, without charge, by electronic funds transfers into your
account at a financial institution, if it is a member of the Automated Clearing
House.

     You can make any of these elections on the New Account Application, by a
Ready Access Features Form or by a letter to the Agent. Your election to receive
some or all of your dividends and distributions in cash will be effective as of
the next payment of dividends after it has been received in proper form by the
Agent. It will continue in effect until the Agent receives written notification
of a change.

     Whether your dividends and distributions are received in cash or
reinvested, you will receive a monthly statement indicating the current status
of your investment account with the Fund.


     If you do not comply with laws requiring you to furnish taxpayer
identification numbers and report dividends, the Fund may be required to impose
backup withholding at a rate of 28% upon payment of redemptions to shareholders
and on capital gains distributions (if any) and any other distributions that do
not qualify as "exempt-interest dividends."


     The Fund reserves the right to change the dividend and distribution payment
option on your account to "reinvest" if mail sent to the address on your account
is returned by the post office as "undeliverable" and you have elected to have
your account dividends and/or distributions paid in cash. In such event, the
Fund would then purchase additional shares of the Fund with any dividend or
distribution payments that are "undeliverable." In order to change the option
back to "cash," you would need to send the Agent written instructions as
described above.

                                Tax Information

     Net investment income includes income from Kentucky Obligations in the
portfolio that the Fund allocates as "exempt-interest dividends." Such dividends
are exempt from regular Federal income tax. The Fund will allocate
exempt-interest dividends by applying one designated percentage to all income
dividends it declares during its tax year. It will normally make this
designation in the first month following its fiscal year end for dividends paid
in the prior year.

     It is possible that, under certain circumstances, a portion of the
distributions paid by the Fund will be subject to income taxes.

     During the Fund's most recent fiscal year, the Fund's dividends consisted
of the following:

Fiscal Year
12/31/03

               Exempt Interest         Capital                  Ordinary
               Dividends               Gains Dividends          Dividend Income
Class A        99.70%                  0.00%                    0.30%
Shares

Class C        99.63%                  0.00%                    0.37%
Shares

     Net capital gains of the Fund, if any, 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.
Capital gains and any other taxable dividends declared in October, November or
December and paid to you in January (whether received in cash or reinvested in
shares) are taxable for Federal income tax purposes as if received in December.
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 intends to qualify during each fiscal year under the Internal
Revenue Code to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends 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 subject
to regular Federal income tax, each taxpayer must report the total amount of
tax-exempt interest (including exempt-interest dividends from the Fund) received
or acquired during the year. Exempt-interest dividends are taken into account in
determining the taxable portion of any Social Security or Railroad Retirement
benefit you or your spouse receives.

     The Fund will treat as ordinary income in the year received certain gains
on Kentucky Obligations it acquired after April 30, 1993 and sells for less than
face or redemption value. Those gains will be taxable to you as ordinary income,
if distributed.

     Capital gains dividends (net long-term gains over net short-term losses)
which the Fund distributes and so designates are reportable by shareholders as
taxable gains from the sale or exchange of a capital asset held for more than a
year. This is the case whether the shareholder reinvests the distribution in
shares of the Fund or receives it in cash, regardless of the length of time the
investment is held.

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

     The Fund's gains or losses on sales of Kentucky Obligations will be deemed
long-or short-term depending upon the length of time the Fund holds these
obligations.

     You will receive information on the tax status of the Fund's dividends and
distributions annually.

Special Tax Matters

     Under the Internal Revenue 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.

     If you, or someone related to you, is a "substantial user" of facilities
financed by industrial development or private activity bonds, you should consult
your own tax adviser before purchasing shares of the Fund.

     Interest from all Kentucky Obligations is tax-exempt for purposes of
computing the shareholder's regular tax. However, 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 ("AMT"). Whether or not that computation will result
in a tax will depend on the entire content of your return. The Fund will not
invest more than 20% of its assets in the types of Kentucky Obligations that pay
interest subject to AMT. An adjustment required by the Internal Revenue Code
will tend to make it more likely that corporate shareholders will be subject to
AMT. They should consult their tax advisers.

"What should I know about Kentucky taxes?"

     All of the exempt-interest dividends from Kentucky Obligations 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. 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,
futures, options and other nonexempt assets.

     Shareholders of the Fund should consult their tax advisers about other
state and local tax consequences of their investment in the Fund.

<page>




                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                              FINANCIAL HIGHLIGHTS


The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned or
lost on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Fund's financial statements, is included in the annual report, is
incorporated by reference into the SAI and is available upon request.

<TABLE>
<CAPTION>
                                                                     CLASS A
                                                  ----------------------------------------------

                                                             YEAR ENDED DECEMBER 31,
                                                  ----------------------------------------------
                                                   2003      2002      2001      2000      1999
                                                  ------    ------    ------    ------    ------
<S><C><C>                                          <C>      <C>       <C>       <C>       <C>
Net asset value, beginning of period ..........   $10.66    $10.31    $10.40    $10.09    $10.81
                                                  ------    ------    ------    ------    ------

Income (loss) from investment operations:
   Net investment income + ....................    0.44      0.47      0.50      0.52      0.52
   Net gain (loss) on securities (both
      realized and unrealized) ................    0.03      0.35     (0.09)     0.31     (0.68)
                                                  ------    ------    ------    ------    ------
   Total from investment operations ...........    0.47      0.82      0.41      0.83     (0.16)
                                                  ------    ------    ------    ------    ------

Less distributions:
   Dividends from net investment income .......   (0.44)    (0.47)    (0.50)    (0.52)    (0.53)
   Distributions from capital gains ...........     --        --        --        --      (0.03)
                                                  ------    ------    ------    ------    ------
   Total distributions ........................   (0.44)    (0.47)    (0.50)    (0.52)    (0.56)
                                                  ------    ------    ------    ------    ------
Net asset value, end of period ................   $10.69    $10.66    $10.31    $10.40    $10.09
                                                  ======    ======    ======    ======    ======
Total return (not reflecting sales charge) ....    4.50%     8.15%     4.02%     8.45%    (1.51)%

Ratios/supplemental data
   Net assets, end of period (in thousands) ...  $229,176  $226,014  $201,604  $196,890  $205,842
   Ratio of expenses to average net assets ....    0.72%     0.72%     0.72%     0.74%     0.72%
   Ratio of net investment income to average
      net assets ..............................    4.14%     4.50%     4.82%     5.10%     4.95%
   Portfolio turnover rate ....................   17.92%    18.27%    21.44%     6.61%     6.35%

The expense ratios after giving effect to the expense offset
for uninvested cash balances were:
   Ratio of expenses to average net assets ....    0.71%     0.71%     0.70%     0.73%     0.71%
</TABLE>

----------
+    Per share amounts have been  calculated  using the monthly  average  shares
     method.

Note: On July 1, 2000, Aquila Management Corporation was appointed as the Fund's
      Investment adviser, assuming investment management responsibilities,
      replacing Banc One Investment Advisers Corporation the Fund's Investment
      Sub-Adviser.

<TABLE>
<CAPTION>
                                                              CLASS C
                                               --------------------------------------
                                                       YEAR ENDED DECEMBER 31,
                                               --------------------------------------
                                                2003    2002    2001    2000    1999
                                               ------  ------  ------  ------  ------
<S><C><C>                                      <C>     <C>     <C>     <C>     <C>
Net asset value, beginning of period .......   $10.66  $10.31  $10.39  $10.08  $10.81
                                               ------  ------  ------  ------  ------

Income (loss) from investment operations:
   Net investment income + .................    0.35    0.38    0.41    0.43    0.43
   Net gain (loss) on securities (both
      realized and unrealized) .............    0.03    0.35   (0.08)   0.31   (0.69)
                                               ------  ------  ------  ------  ------
   Total from investment operations ........    0.38    0.73    0.33    0.74   (0.26)
                                               ------  ------  ------  ------  ------

Less distributions (note 10):
   Dividends from net investment income ....   (0.35)  (0.38)  (0.41)  (0.43)  (0.44)
   Distributions from capital gains ........     --      --      --      --    (0.03)
                                               ------  ------  ------  ------  ------
   Total distributions .....................   (0.35)  (0.38)  (0.41)  (0.43)  (0.47)
                                               ------  ------  ------  ------  ------
Net asset value, end of period .............   $10.69  $10.66  $10.31  $10.39  $10.08
                                               ======  ======  ======  ======  ======

Total return (not reflecting sales charge)..    3.62%   7.23%   3.24%   7.54%  (2.45)%

Ratios/supplemental data
   Net assets, end of period
      (in thousands) .......................   $7,197  $4,804  $3,355  $1,861  $1,932
   Ratio of expenses to average
      net assets ...........................    1.57%   1.56%   1.56%   1.59%   1.56%
   Ratio of net investment income
      to average net assets ................    3.26%   3.62%   3.92%   4.24%   4.09%
   Portfolio turnover rate .................   17.92%  18.27%  21.44%   6.61%   6.35%

The expense ratios after giving effect to the expense
offset for uninvested cash
balances were:

   Ratio of expenses to average
      net assets ...........................    1.56%   1.55%   1.55%   1.58%   1.55%
</TABLE>

----------
+    Per share amounts have been  calculated  using the monthly  average  shares
     method.

Note: On July 1, 2000, Aquila Management Corporation was appointed as the Fund's
      Investment adviser, assuming investment management responsibilities,
      replacing Banc One Investment Advisers Corporation the Fund's Investment
      Sub-Adviser.

 <page>

 FOUNDER
 Aquila Management Corporation


 MANAGER
 Aquila Investment Management LLC
 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
 Theodore T. Mason
 Anne J. Mills
 William J. Nightingale
 James R. Ramsey


 OFFICERS
 Diana P. Herrmann, Vice Chair and President
 Thomas S. Albright, Senior Vice President and Portfolio Manager
 Jerry G. McGrew, Senior Vice President
 Jason T. McGrew, Vice President
 Joseph P. DiMaggio, Chief Financial Officer and 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
 PFPC Inc.
 760 Moore Road
 King of Prussia, Pennsylvania 19406-1212


 CUSTODIAN
 Bank One Trust Company, N.A.
 1111 Polaris Parkway
 Columbus, Ohio 43240

 INDEPENDENT AUDITORS
 KPMG LLP
 757 Third Avenue
 New York, New York 10017

 COUNSEL
 Hollyer Brady Smith & Hines LLP
 551 Fifth Avenue
 New York, New York 10176

 <page>


     This Prospectus concisely states information about the Fund that you should
know before investing. A Statement of Additional Information about the Fund (the
"SAI") has been filed with the Securities and Exchange Commission. The SAI
contains information about the Fund and its management not included in this
Prospectus. The SAI is incorporated by reference in its entirety in this
Prospectus and is therefore legally a part of this Prospectus. Only when you
have read both this Prospectus and the SAI are all material facts about the Fund
available to you.

     You can get additional information about the Fund's investments in the
Fund's annual and semi-annual reports to shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. You can get the SAI and the Fund's annual and semi-annual reports
without charge, upon request by calling 800-437-1020 (toll free).

     In addition, you can review and copy information about the Fund (including
the SAI) at the Public Reference Room of the SEC in Washington, D.C. Information
on the operation of the Public Reference Room is available by calling
1-202-942-8090. Reports and other information about the Fund are also available
on the EDGAR Database at the SEC's Internet site at http://www.sec.gov. Copies
of this information can be obtained, for a duplicating fee, by E-mail request to
publicinfo@sec.gov or by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102.

 This Prospectus should be read and retained for future reference

 The file number under which the Fund is registered
 with the SEC under the
 Investment Company Act of 1940 is 811-5086.

 <page>

                       Churchill Tax-Free Fund of Kentucky

                                   One of The
                             Aquilasm Group Of Funds

                                   A tax-free
                                income investment

                                   PROSPECTUS



                     To make shareholder account inquiries,
                 call the Fund's Shareholder Servicing Agent at:
                             800-437-1000 toll free
                               or you can write to
                                    PFPC Inc.
                                 760 Moore Road
                         King of Prussia, PA 19406-1212


                     Ticker Symbol        CUSIP #

Class A Shares         CHTFX              171562101
Class C Shares         CHKCX              171562309





<PAGE>

                       Churchill Tax-Free Fund of Kentucky
                         380 Madison Avenue, Suite 2300
                               New York, NY 10017
                                  800-437-1020
                                  212-697-6666

                                   Prospectus


                                                                April 24, 2004
Class Y Shares
Class I Shares





     Churchill Tax-Free Fund of Kentucky is a mutual fund that seeks to provide
you as high a level of current income exempt from Kentucky state and regular
Federal income taxes as is consistent with preservation of capital. The Fund
invests in municipal obligations that pay interest exempt from Kentucky state
and regular Federal income taxes and are of investment grade quality.

For purchase, redemption or account inquiries contact the Fund's Shareholder
Servicing Agent:


           PFPC Inc. * 760 Moore Road * King of Prussia, PA 19406-1212
                             800-437-1000 toll free


                    For general inquiries & yield information
                     800-437-1020 toll free or 212-697-6666

The Securities and Exchange Commission has not approved or disapproved the
Fund's securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.

<page>


TABLE OF CONTENTS


The Fund's Objective, Investment Strategies
and Main Risks...................................2
Risk/Return Bar Chart and Performance Table .....4
Fees and Expenses of the Fund....................6
Investment of the Fund's Assets..................7
Fund Management..................................9
Net Asset Value per Share.......................10
Purchases ......................................10
Redeeming Your Investment.......................12
Alternative Purchase Plans......................15
Dividends and Distributions.....................17
Tax Information.................................18
Financial Highlights............................21


<page>

The Fund's Objective, Investment Strategies and Main Risks

"What is the Fund's objective?"

     The Fund's objective is to provide you as high a level of current income
exempt from Kentucky state and regular Federal income taxes as is consistent
with preservation of capital.

"What is the Fund's investment strategy?"

     The Fund invests in tax-free municipal obligations which pay interest
exempt from Kentucky state and regular Federal income taxes. We call these
"Kentucky Obligations." In general, all or almost all of these obligations are
issued by the State of Kentucky, its counties and various other local
authorities. At least 80% of the Fund's assets will always consist of such
obligations of these issuers. These obligations can be of any maturity, but the
Fund's average portfolio maturity has traditionally been between 15 and 18
years.

     At the time of purchase, the Fund's Kentucky Obligations must be of
investment grade quality. This means that they must either

     *    be rated within the four highest credit ratings assigned by nationally
          recognized statistical rating organizations or,


     *    if unrated, be determined to be of comparable quality by the Fund's
          Manager, Aquila Investment Management LLC.


     The Manager selects obligations for the Fund's portfolio to best achieve
the Fund's objective. The Manager evaluates specific obligations for purchase by
considering various characteristics including quality, maturity and coupon rate.

     The interest paid on certain types of Kentucky Obligations may be subject
to the Federal alternative minimum tax ("AMT"). As a fundamental policy of the
Fund at least 80% of the Fund's assets must be invested in Kentucky Obligations
whose interest is exempt from Kentucky state and regular Federal income taxes
and is also not subject to AMT.

"What are the main risks of investing in the Fund?"

     Among the risks of investing in shares of the Fund and its portfolio of
securities are the following:

     Loss of money is a risk of investing in the Fund.

     The Fund's assets, being primarily or entirely Kentucky issues, are subject
to economic and other conditions affecting Kentucky. Adverse local events, such
as a downturn in the Kentucky economy, could affect the value of the Fund's
portfolio.

     There are two types of risk associated with any fixed- income debt
securities such as Kentucky Obligations: interest rate risk and credit risk.


     *    Interest rate risk relates to fluctuations in market value arising
          from changes in interest rates. If interest rates rise, the value of
          debt securities, including Kentucky Obligations, will normally
          decline. If the value of Kentucky Obligations held by the Fund
          declines, the net asset value of your shares in the Fund will also
          decline. All fixed-rate debt securities, even the most highly rated
          Kentucky Obligations, are subject to interest rate risk. Kentucky
          Obligations with longer maturities generally have a more pronounced
          reaction to interest rate changes than shorter-term securities.


     *    Credit risk relates to the ability of the particular issuers of the
          Kentucky Obligations the Fund owns to make periodic interest payments
          as scheduled and ultimately repay principal at maturity.

     An investment in the Fund is not a deposit in any bank and is not insured
or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.

     The Fund is classified as a "non-diversified" investment company under the
Investment Company Act of 1940 (the "1940 Act"). Thus, compared with
"diversified" funds, it may invest a greater percentage of its assets in
obligations of a particular issuer and may therefore not have as much
diversification among securities, and thus diversification of risk. 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.
<page>


                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                   RISK/RETURN BAR CHART AND PERFORMANCE TABLE

     The bar chart shown below provides an indication of the risks of investing
in Churchill Tax-Free Fund of Kentucky by showing changes in performance of the
Fund's Class Y Shares from year to year over a seven-year period. The table on
the following page shows the risk of investing in the Fund by showing how the
Fund's average annual returns for the designated periods compare to a broad
measure of market performance. The table also shows the effect of taxes on the
Fund's returns by presenting after-tax returns for Class Y Shares. These returns
are calculated using the highest individual Federal income and capital gains tax
rates in effect at the time of each distribution and redemption, but do not
reflect state and local taxes. A "return after taxes on distributions and
redemptions" may sometimes be higher than the other two return figures; this
happens when there is a capital loss on redemption, giving rise to a tax benefit
to the shareholder. Actual after-tax returns will depend on your specific
situation and may differ from those shown. The after-tax returns shown will be
irrelevant to investors owning shares through tax-deferred accounts, such as
IRAs or 401(k) plans. The total returns reflect reinvestment of dividends and
distributions. How the Fund has performed in the past (before and after taxes)
is not necessarily an indication of how the Fund will perform in the future.

 [Bar Chart]
 Annual Total Returns
 1997-2003

10%       8.34%             8.62%       8.30%
          XXXX              XXXX        XXXX
8%        XXXX              XXXX        XXXX
          XXXX              XXXX        XXXX
6%        XXXX              XXXX        XXXX
          XXXX  5.26%       XXXX 4.28%  XXXX  4.65%
4%        XXXX  XXXX        XXXX  XXXX  XXXX  XXXX
          XXXX  XXXX        XXXX  XXXX  XXXX  XXXX
2%        XXXX  XXXX        XXXX  XXXX  XXXX  XXXX
          XXXX  XXXX        XXXX  XXXX  XXXX  XXXX
0%        XXXX  XXXX        XXXX  XXXX  XXXX  XXXX

                      -1.46
1997     1998  1999  2000  2001  2002  2003

                     Years

During the period shown in the bar chart, the highest return for a quarter was
3.85% (quarter ended September 30, 2002) and the lowest return for a quarter was
-1.16% (quarter ended June 30, 1999).


                     Average Annual Total Return
                                                    Since
For the period               1 Year    5 Years    Inception(1)
ended December 31, 2003

Churchill Tax-Free Fund of Kentucky
Class Y Shares
    Return before taxes       4.65%      4.81       5.53%
    Return after taxes on
       Distributions          4.65%      4.79%      5.50%
    Return after taxes on
       distributions and
       redemptions            4.55%      4.81%      5.46%

Lehman Brothers Quality
Intermediate
Municipal Bond Index(2)       4.64%      4.61%      5.92%


                                                   Since
For the period               1 Year    5 Years    Inception(3)
ended December 31, 2003

Churchill Tax-Free Fund of Kentucky
Class I Shares
    Return before taxes       4.33%%      N/A        5.34%

Lehman Brothers Quality
Intermediate
Municipal Bond Index(2)       4.64%       N/A        6.16%


(1) From commencement of Class Y Shares on April 5, 1996.

(2) The Lehman Brothers Quality Intermediate Municipal Bond Index is nationally
oriented and consists of an unmanaged mix of investment-grade intermediate-term
municipal securities of issuers throughout the United States. Because of the
relatively short duration (approximately 6 years) of the Trust's portfolio,
management believes the Intermediate Index to be appropriate, although the
average maturity of the Trust's portfolio is somewhat longer than that of the
index and the Trust's portfolio may accordingly experience somewhat greater
volatility.

(3) From commencement of Class I Shares on August 6, 2001.

<page>


                                         CHURCHILL TAX-FREE FUND OF KENTUCKY
                                            FEES AND EXPENSES OF THE FUND

This table describes the fees and expenses that you may pay if
you buy and hold shares of the Fund.

                                           Class I          Class Y
                                           Shares           Shares

Shareholder Fees
(fees paid directly from your investment)

Maximum Sales Charge (Load)
Imposed on Purchases
  (as a percentage of offering price) .......None             None
Maximum Deferred Sales Charge (Load).........None             None
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends or Distributions
  (as a percentage of offering price)........None             None
Redemption Fees..............................None             None
Exchange Fees................................None             None


Annual Fund Operating Expenses (expenses that are
  deducted from the Fund's assets)


Management Fees .............................0.40%           0.40%
Distribution (12b-1) Fee.....................0.10%(1)        None
All Other Expenses (2).......................0.38%           0.17%
Total Annual Fund Operating Expenses (2).....0.88%           0.57%

(1) Current rate; up to 0.25% can be authorized.

(2) Does not reflect an offset in Fund expenses received in the year ended
December 31, 2003 for uninvested cash balances. Reflecting this offset for that
year, total annual Fund operating expenses would have been 0.87% for Class I
Shares; and 0.56% for Class Y Shares. Expenses for the two classes differ
because Class I Shares bear program costs for financial intermediaries of 0.25%,
which includes transfer agent services, and charges common to both classes of
0.13%; Class Y Shares bear only the common charges of 0.13% and an allocation
for transfer agent services of 0.04%

Example

This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.

The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
Example also assumes that your investment has a 5% return each year, that you
reinvest all dividends and distributions, and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:


                           1 year   3 years   5 years   10 years

 Class I Shares..........  $90      $281       $488       $1,084
 Class Y Shares........... $58      $183       $318       $  714


                                 Investment of the Fund's Assets

"Is the Fund right for me?"

     The shares of the Fund are designed to be a suitable investment for
individuals, corporations, institutions and fiduciaries who seek income exempt
from Kentucky state and regular Federal income taxes.

     Institutional Class Shares ("Class Y Shares") are offered only to
institutions acting for investors in a fiduciary, advisory, agency, custodial or
similar capacity. Financial Intermediary Class Shares ("Class I Shares") are
offered and sold only through financial intermediaries with which Aquila
Distributors, Inc. (the "Distributor") has entered into sales agreements. The
Fund does not sell the shares of either class directly to retail customers.

Kentucky Obligations

     The Fund invests in Kentucky Obligations, which are a type of municipal
obligation. They pay interest which bond counsel or other appropriate counsel
deems to be exempt from regular Federal and Commonwealth of Kentucky income
taxes. They include obligations of Kentucky issuers and certain non-Kentucky
issuers, of any maturity.

     The obligations of non-Kentucky issuers that the Fund can purchase as
Kentucky Obligations are those issued by or under the authority of Guam, the
Northern Mariana Islands, Puerto Rico and the Virgin Islands. Interest paid on
these obligations is currently exempt from regular Federal and Kentucky income
taxes. The Fund purchases the obligations of these issuers only when obligations
of Kentucky issuers with the appropriate characteristics of quality, maturity
and coupon rate are unavailable.

         Municipal Obligations

     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 public purposes.

     There are two principal classifications of municipal obligations: "notes"
and "bonds." Notes generally have maturities of one year or less, while bonds
are paid back over longer periods.

The various public purposes for which municipal obligations are issued include:

     *    obtaining funds for general operating expenses,

     *    refunding outstanding obligations,

     *    obtaining funds for loans to other public institutions and facilities,
          and

     *    funding the construction of highways, bridges, schools, hospitals,
          housing, mass transportation, streets and water and sewer works.

Municipal obligations include:

     *    tax, revenue or bond anticipation notes,

     *    construction loan notes,

     *    project notes, which sometimes carry a U.S. government guarantee,

     *    municipal lease/purchase agreements, which are similar to installment
          purchase contracts for property or equipment, and

     *    floating and variable rate demand notes.


"Explain  further how interest rate risk and credit risk may affect the value of
the Fund's investments and their yields."

     Change in prevailing interest rates is the most common factor that affects
the value of the obligations in the Fund's portfolio. Any such change may have
different effects on short-term and long-term Kentucky Obligations. Long-term
obligations (which usually have higher yields) may fluctuate in value more than
short-term ones. Thus, the Fund may shorten the average maturity of its
portfolio when it believes that prevailing interest rates may rise. While this
strategy may promote one part of the Fund's objective, preservation of capital,
it may also result in a lower level of income.

     An additional aspect of credit risk that is related to but distinct from
the direct risk of nonpayment by an issuer is that market perceptions may
develop, based on the determinations of a rating agency or otherwise, of
deterioration in an issuer's credit, and these may tend to depress the market
value of the issuer's outstanding debt obligations. Other market conditions may
ameliorate this effect; for example, in a period of rising demand for, and/or
diminishing supply of, Kentucky Obligations, the market value of a Kentucky
Obligation may remain relatively firm even in the face of a lowered credit
rating for an issuer. Nevertheless, deterioration in creditworthiness tends as a
general matter to be reflected over time in lower market values.

"What are the main risk factors and special considerations specifically relating
to 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 that the Fund owns. The Fund has derived this information
from sources that are generally available to investors and believes it to be
accurate, but it has not been independently verified and it may not be complete.

     The Commonwealth of Kentucky continues to rank among the top coal producers
in the country. Tobacco is the dominant agricultural product. Kentucky ranks
second among the states in the total cash value of tobacco raised. There is
significant diversification in the manufacturing sector of the Commonwealth's
economy. A few examples include the production of automobiles and trucks, heavy
machinery and other durable goods, appliances and computer equipment. There
continues to be growth in auto parts/components producers that supply the Toyota
Motors facility in Georgetown, Kentucky. Strong demand has led to major
expansions of the Ford Truck plant at Louisville. Tobacco processing plants and
distilleries produce items for export throughout the world. Thoroughbred horse
breeding and racing are important to the economy, as is tourism.

     In 2002, Kentucky faced two major difficulties. For political reasons, the
Legislature and the Governor were unable to agree on a budget, and for most of
the year, there was no budget. The state operated under a spending plan proposed
by the Governor. In addition, the nation-wide economic downturn that began in
2001 failed to abate, causing revenues to shrink. The ability of the government
of the Commonwealth was, moreover, constrained by having largely used reserves
to make up shortfalls in earlier periods. Rating agencies downgraded the
Commonwealth's debt in late 2002, although it remains at a general AA level.


     In April, 2004 the Legislature adjourned without passing a budget for the
fiscal year beginning July 1, 2004. While funding under the current budget is
adequate until that time, curtailment in education and social service spending
may be required thereafter. The Governor has indicated that he will not call a
special session of the legislature to deal with the budget. The Governor's
powers to operate without a budget are likely to be challenged in the courts and
the outcome cannot be predicted. Further curtailment of services may become
necessary.


     Economic concerns include a relatively high unemployment rate in the
non-urbanized areas of the Commonwealth. 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. Any federal legislation that adversely affects the
tobacco and/or cigarette industry would have a negative impact on Kentucky's
economy. The effects of the recent settlement between the tobacco companies and
individual states, including Kentucky, which were just beginning to be felt,
have been put in jeopardy by recent litigation against one of the tobacco
companies that may impair its ability to fund its share of the settlement. Loss
of part of that anticipated revenue stream would put further pressure on the
state's budget.

     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, because resources for other matters will be
reduced or tax levels will be increased, or a combination of both may occur.

     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.

     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.

                                 Fund Management

"How is the Fund managed?"


     Aquila Investment Management LLC, 380 Madison Avenue, Suite 2300, New York,
NY 10017, the Manager, is the Fund's investment adviser under an Advisory and
Administration Agreement. The Manager provides for investment supervision,
including supervising continuously the investment program of the Fund and the
composition of its portfolio, determining what securities will be purchased or
sold by the Fund and arranging for the purchase and the sale of securities held
in the portfolio of the Fund; and, at the Manager's expense, providing for
pricing of the Fund's portfolio daily. The Manager is also responsible for
administrative services, including providing for the maintenance of the
headquarters of the Fund, overseeing relationships between the Fund and the
service providers to the Fund, including the fund accounting service,
maintaining the Fund's books and records and providing other administrative
services.


         The Manager provides the Fund with local advisory services.

     Under the Advisory and Administration Agreement, the Fund pays the Manager
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 0.50 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,
the annual management fee is payable at the annual rate of 0.40 of 1% of such
net asset value.

Information about the Manager


     The Fund's Manager is a wholly-owned subsidiary of Aquila Management
Corporation ("AMC"), founder to each fund in the Aquilasm Group of Funds, which
consists of tax-free municipal bond funds, money-market funds and an equity
fund. As of March 31, 2004, these funds had aggregate assets of approximately
$3.9 billion, of which approximately $2.5 billion consisted of assets of the
tax-free municipal bond funds. AMC's address is the same as that of the Manager.
AMC, which was founded in 1984, is controlled by Mr. Lacy B. Herrmann, directly,
through two trusts and through share ownership by his wife.


     The Fund's portfolio is managed locally in Kentucky at the Manager's
Louisville office by Mr. Thomas S. Albright, Senior Vice President and Portfolio
Manager. Mr. Albright has served as the Fund's portfolio manager since September
1995, when Banc One Investment Advisors Corporation, subsequently sub-adviser,
became adviser to the Fund. From 1981 to 1995 he was employed by Liberty
National Bank 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 attended the
University of Louisville.

                            Net Asset Value per Share

     The net asset value of the shares of each of the Fund's classes of shares
is determined as of 4:00 p.m., New York time, on each day that the New York
Stock Exchange is open (a "business day"), by dividing the value of the Fund's
net assets (which means the value of the assets less liabilities) allocable to
each class by the total number of shares of such class outstanding at that time.
In general, net asset value of the Fund's shares is based on portfolio market
value, except that Kentucky Obligations maturing in 60 days or less are
generally valued at amortized cost. The price at which a purchase or redemption
of shares is effected is based on the net asset value next calculated after your
purchase or redemption order is received in proper form. The New York Stock
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, Martin Luther King, Jr. Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
However, the Exchange may close on days not included in that announcement.

                                    Purchases

"Are there alternative purchase plans?"

     This Prospectus offers two separate classes of shares. All classes
represent interests in the same portfolio of Kentucky Obligations.


"In which states can I buy shares of the Fund?"


     You can purchase shares of the Fund if you live in Kentucky or in one of
the other states listed below. You should not purchase shares of the Fund if you
do not reside in one of the following states.

     Also, if you do not reside in Kentucky, dividends from the Fund may be
subject to state income taxes of the state in which you do reside. Therefore,
you should consult your tax adviser before buying shares of the Fund.

     On the date of this Prospectus, Class Y Shares and Class I Shares are
available only in:


               *Kentucky *Alabama * Georgia * Hawaii * Illinois *
               Indiana * Missouri * New York * Ohio* Pennsylvania


     The Fund and the Distributor may reject any order for the purchase of
shares.

"How much money do I need to invest?"

For Class Y Shares:

         $1,000. Subsequent investments can be in any amount.

Class I Shares:

         Financial intermediaries can set their own requirements for initial
and subsequent investments.

"How do I purchase shares?"

         You may purchase Class Y Shares:


     *    through an investment broker or dealer, or a bank or other financial
          intermediary, that has a sales agreement with the Distributor, Aquila
          Distributors, Inc., in which case that institution will take action on
          your behalf, and you will not personally perform the steps indicated
          below; or


     *    directly through the Distributor, by mailing payment to the Fund's
          Agent, PFPC Inc.

     Your investment must be drawn in United States dollars on a United States
commercial bank, savings bank or credit union or a United States branch of a
foreign commercial bank (each of which is a "Financial Institution").

     The price you will pay is net asset value for both Class Y Shares and Class
I Shares. (See "What price will I pay for the Fund's shares?")

     You may purchase Class I Shares only through a financial intermediary.

Opening a Class Y Shares                    Adding to a Class Y
                                            Shares Account

* Make out a check for                      * Make out a check for
the investment amount                       the investment amount
payable to                                  payable to
Churchill Tax-Free Fund of                  Churchill Tax-Free Fund
Kentucky.                                   of Kentucky.

* Complete a New Account                    * Fill out the pre-printed
Application, which is                       stub attached
available with the Prospectus               to the Fund's
or upon request, indicating                 confirmations
the features you wish to                    or supply the name(s)
authorize.                                  of account owner(s),
                                            the account number, and
                                            the name of the
                                            Fund.

* Send your check and                       * Send your check and
completed New Account                       account information
Application                                 to your dealer or
to your dealer or                           to the Fund's
to the Fund's                               Agent, PFPC Inc.
Agent, PFPC Inc.

"Can I transfer funds electronically?"

     You can have funds transferred electronically, in amounts of $50 or more,
from your Financial Institution if it is a member of the Automated Clearing
House. You may make investments through two electronic transfer features,
"Automatic Investment" and "Telephone Investment."

     *    Automatic Investment: You can authorize a pre-determined amount to be
          regularly transferred from your account.

     *    Telephone Investment: You can make single investments of up to $50,000
          by telephone instructions to the Agent.

     Before you can transfer funds electronically, the Fund's Agent must have
your completed New Account Application authorizing these features. Or, if you
initially decide not to choose these conveniences and then later wish to do so,
you must complete a Ready Access Features Form which is available from the
Distributor or Agent, or if your account is set up so that your broker or dealer
makes these sorts of changes, request your broker or dealer to make them. The
Fund may modify or terminate these investment methods or charge a service fee,
upon 30 days' written notice to shareholders.

                            Redeeming Your Investment

Redeeming Class Y Shares

     You may redeem some or all of your shares by a request to the Agent. Shares
will be redeemed at the next net asset value determined after your request has
been received in proper form.

     There is no minimum period for investment in the Fund, except for shares
recently purchased by check or by Automatic or Telephone Investment as discussed
below.

     A redemption may result in a tax liability for you.

"How can I redeem my investment?"


By mail, send instructions to:


PFPC Inc.
Attn: Aquilasm Group of Funds
760 Moore Road
King of Prussia, PA 19406-1212


By telephone, call:

800-437-1000 toll free

By FAX, send
instructions to:


610-312-5463


For liquidity and convenience, the Fund offers expedited redemption for Class Y
Shares.

Expedited Redemption Methods

You may request expedited redemption in two ways:

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

          a) to a Financial Institution account you have previously specified;
          or


          b) by check in the amount of $50,000 or less, mailed to the name and
          address on the account from which you are redeeming, provided that
          neither the name nor the address has changed during the prior 30 days.
          You may only redeem by check via telephone request once in any
          seven-day period.


                              Telephoning the Agent

         Whenever you telephone the Agent, please be prepared to supply:

         account name(s) and number

         name of the caller

         the social security number registered to the account

         personal identification.

     Note: Check the accuracy of your confirmation statements immediately upon
receipt. The Fund, the Agent, and the Distributor are not responsible for losses
resulting from unauthorized telephone transactions if the Agent follows
reasonable procedures designed to verify a caller's identity. The Agent may
record calls.


     2. By FAX or Mail. You may request redemption payments to a predesignated
Financial Institution account by a letter of instruction sent to the Agent, PFPC
Inc., by FAX at 610-312-5463 or by mail to 760 Moore Road, King of Prussia, PA
19406-1212. The letter, signed by the registered shareholder(s) (no signature
guarantee is required), must indicate:


         account name(s)

         account number

         amount to be redeemed

         any payment directions.

     To have redemption proceeds sent directly to a Financial Institution
account, you must complete the Expedited Redemption section of the New Account
Application or a Ready Access Features Form. You will be required to provide (1)
details about your Financial Institution account, (2) signature guarantees and
(3) possible additional documentation.

The name(s) of the shareholder(s) on the Financial Institution account must be
identical to the name(s) on the Fund's records of your account.

You may change your designated Financial Institution account at any time by
completing and returning a revised Ready Access Features Form.

Regular Redemption Method

          To redeem by the regular redemption method, send a letter of
          instruction to the Fund's Agent, which includes:

          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 (we normally mail redemption proceeds to your
          address as registered with the Fund)

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

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

     To be in "proper form," your letter must be signed by the registered
shareholder(s) exactly as the account is registered. For a joint account, both
shareholder signatures are necessary.

     We may require additional documentation for certain types of shareholders,
such as corporations, partnerships, trustees or executors, or if redemption is
requested by someone other than the shareholder of record.


     Signature Guarantees. If sufficient documentation is on file, we do not
require a signature guarantee for redemptions of shares up to $50,000, payable
to the record holder, and sent to the address of record. In all other cases,
signatures must be guaranteed.


          Your signature may be guaranteed by any:

          member of a national securities exchange

          U.S. bank or trust company

          state-chartered savings bank

          federally chartered savings and loan association

          foreign bank having a U.S. correspondent bank; or

          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 of Class I Shares

     You may redeem all or any part of your Class I Shares at the net asset
value next determined after receipt in proper form of your redemption request by
your financial intermediary. Redemption requests for Class I Shares must be made
through a financial intermediary and cannot be made directly. Financial
intermediaries may charge a fee for effecting redemptions. There is no minimum
period for any investment in the Fund. The Fund does not impose redemption fees
or penalties on redemption of Class I Shares. A redemption may result in a
transaction taxable to you.

"When will I receive the proceeds of my redemption?"

     Redemption proceeds for Class Y Shares are normally sent on the next
business day following receipt of your redemption request in proper form. Except
as described below, payments will normally be sent to your address of record
within seven days.

Redemption                 Method of Payment                  Charges

Under $1,000.              Check.                              None.

$1,000 or more.            Check, or wired or                  None.
                           transferred through the
                           Automated Clearing House
                           to your Financial
                           Institution account, if
                           you so requested on your
                           New Account Application
                           or Ready Access Features
                           Form.

Through a                  Check or wire, to your             None.
broker/dealer.             broker/dealer.                     However your
                                                              broker/dealer
                                                              may charge a
                                                              fee.

     Although the Fund does not currently intend to, it can charge up to $5.00
per wire redemption, after written notice to shareholders who have elected this
redemption procedure. 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.

     Redemption payments for Class I Shares are made to financial
intermediaries.


     The Fund may delay payment for redemption of shares recently purchased by
check (including certified, cashier's or official bank check), Automatic
Investment or Telephone Investment for up to 15 days after purchase; however,
payment for redemption will not be delayed after (i) the check or transfer of
funds has been honored, or (ii) the Agent receives satisfactory assurance that
your Financial Institution will honor the check or transfer of funds. You can
eliminate possible delays by paying for purchased shares with wired funds or
Federal Reserve drafts.


     The Fund has the right to postpone payment or suspend redemption rights
during certain periods. These periods may occur (i) when the New York Stock
Exchange is closed for other than weekends and holidays, (ii) when the
Securities and Exchange Commission (the "SEC") restricts trading on the New York
Stock Exchange, (iii) when the SEC determines that an emergency exists which
causes disposal of, or determination of the value of, portfolio securities to be
unreasonable or impracticable, and (iv) during such other periods as the SEC may
permit.

     The Fund can redeem your shares if their value totals less than $500 as a
result of redemptions or failure to meet and maintain the minimum investment
level under an Automatic Investment program. Before such a redemption is made,
we will send you a notice giving you 60 days to make additional investments to
bring your account up to the minimum.

     Redemption proceeds may be paid in whole or in part by distribution of the
Fund's portfolio securities ("redemption in kind") in conformity with SEC rules.
This method will only be used if the Board of Trustees determines that payments
partially or wholly in cash would be detrimental to the best interests of the
remaining shareholders.

"Is there an Automatic Withdrawal Plan?"

     An Automatic Withdrawal Plan, which is only available for Class Y Shares,
allows you to receive a monthly or quarterly check in a stated amount, not less
than $50.

                           Alternative Purchase Plans

     In this Prospectus the Fund provides you with two ways to invest in the
Fund through two separate classes of shares. All classes represent interests in
the same portfolio of Kentucky Obligations.

                           Class Y Shares            Class I Shares
                           "Institutional Class"     "Financial
                                                     Intermediary Class"

Initial Sales              None.                     None.
Charge                                               Financial
                                                     intermediaries may
                                                     charge a fee for
                                                     purchase of shares.

Contingent                 None.                     None.
Deferred Sales
Charge ("CDSC")

Distributions and          None.                     Distribution fee of
Service Fees                                         up to 0.25 of 1% of
                                                     average annual net
                                                     assets allocable to
                                                     Class I Shares,
                                                     currently up to 0.10
                                                     of 1% of such net assets,
                                                     and a service fee
                                                     of up to 0.25 of 1% of
                                                     such assets.


"What price will I pay for the Fund's shares?"

     The offering price for Class Y Shares is the net asset value per share. You
will receive that day's offering price on purchase orders, including Telephone
Investments and investments by mail, received in proper form prior to 4:00 p.m.
New York time. Otherwise, orders will be filled at the next determined net asset
value. Dealers are required to submit orders promptly. Purchase orders received
on a non-business day, including those for Automatic Investment, will be
executed on the next succeeding business day.

     The offering price for Class I Shares is the net asset value per share. The
offering price determined on any day applies to all purchases received by each
financial intermediary prior to 4:00 p.m. New York time on any business day.
Purchase orders received by financial intermediaries after that time will be
filled at the next determined net asset value.

     The sale of shares will be suspended (1) during any period when net asset
value determination is suspended or (2) when the Distributor judges it is in the
Fund's best interest to do so.


Exchange Privilege

     Generally, you can exchange Class Y shares of this Fund into the tax-free
municipal bond funds and the equity fund (together with the Fund, the "Bond or
Equity Funds") and certain money-market funds (the "Money-Market Funds") in the
Aquilasm Group of Funds for shares of the same class of any other Bond or Equity
Fund, or for shares of any Money-Market Fund, without the payment of a sales
charge or any other fee, and there is no limit on the number of exchanges you
can make from fund to fund. This exchange privilege is available to Class I
Shares to the extent that other Aquila-sponsored funds are made available to its
customers by a financial intermediary. All exchanges of Class I Shares must be
made through your financial intermediary.



"What about confirmations and share certificates?"

     A statement will be mailed to you confirming each purchase of Class Y
Shares in the Fund. Additionally, your account at the Agent will be credited in
full and fractional shares (rounded to the nearest 1/1000th of a share).
Financial intermediaries will confirm purchases of Class I Shares. The Fund will
not issue certificates for Class Y Shares or Class I Shares.


"Is there a Distribution Plan or a Services Plan?"

     The Fund has adopted a Distribution Plan (the "Plan") under the Investment
Company Act of 1940's Rule 12b-1 in order to:

     (i) permit the Fund to finance activities primarily intended to result in
the sale of its shares;

     (ii) permit the Manager to make payment for distribution expenses out of
its own funds; and

     (iii) protect the Fund against any claim that some of the expenses which it
pays or may pay might be considered to be sales-related and therefore come
within the purview of the Rule.

     No payments are made under the Plan out of assets represented by Class Y
Shares.

     From time to time the Manager may make payments from its own resources to
trust departments and other financial intermediaries for shareholder servicing
and/or distribution assistance with respect to Class Y Shares.

     Pursuant to the Plan, the Fund makes payments with respect to Class I
Shares under agreements to certain broker/dealers and other qualified
recipients.

     For any fiscal year, these payments (currently up to 0.10 of 1%) may not
exceed 0.25 of 1% of the average annual net assets represented by the Class I
Shares of the Fund.

     Such payments can be made only out of the Fund's assets allocable to the
Class I Shares. Because these distribution fees are paid out of assets on an
ongoing basis, over time these fees will increase the cost of your investment;
they may cost you more than paying other types of sales charges.


     The Plan also permits payments out of the assets of the Fund's Class A
Shares. Whenever the Fund makes Class A payments under the Plan, the annual rate
of the advisory and administration fee otherwise payable by the Fund is reduced
from 0.50 of 1% to 0.40 of 1% of the Fund's average annual net assets.


Shareholder Services Plan for Class I Shares

     The Fund's Shareholder Services Plan authorizes it to pay a service fee
under agreements to certain qualified recipients who have agreed to provide
personal services to Class I shareholders and/or maintain their accounts. For
any fiscal year, such fees may not exceed 0.25 of 1% of the average annual net
assets represented by Class I Shares. Payment is made only out of the Fund's
assets represented by Class I Shares. No payments are made with respect to
assets represented by Class Y Shares.

"Transfer on Death" ("TOD") Registration (Not available for Class I Shares)

     If you own Class Y Shares, the Fund generally permits "transfer on death"
("TOD") registration of shares, so that on the death of the shareholder the
shares are transferred to a designated beneficiary or beneficiaries. Ask the
Agent or your broker/dealer for the Transfer on Death Registration Request Form.
With it you will receive a copy of the TOD Rules of the Aquilasm Group of Funds,
which specify how the registration becomes effective and operates. By opening a
TOD Account, you agree to be bound by the TOD Rules. This service is not
available for Class I Shares.

                           Dividends and Distributions

"How are dividends and distributions determined?"

     The Fund pays dividends and other distributions with respect to each class
of shares. The Fund calculates its dividends and other distributions with
respect to each class at the same time and in the same manner. Net income for
dividend purposes includes all interest income accrued by the Fund since the
previous dividend declaration less expenses paid or accrued. Net income also
includes any original issue discount, which occurs if the Fund purchases an
obligation for less than its face amount. The discount from the face amount is
treated as additional income earned over the life of the obligation. Because the
Fund's income varies, so will the Fund's dividends. There is no fixed dividend
rate. It is expected that most of the Fund's dividends will be comprised of
interest income. The dividends and distributions of each class can vary due to
certain class-specific charges. The Fund will declare all of its net income 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.

     Redeemed shares continue to earn dividends through and including the
earlier of:

     1. the day prior to the day when redemption proceeds are mailed, wired or
transferred by the Automated Clearing House or the Agent or paid by the Agent to
a selected dealer; or

     2. the third day the New York Stock Exchange is open after the day the net
asset value of the redeemed shares was determined.

     The Fund's present policy is to pay dividends so they will be received or
credited by approximately the first day of each month.

 "How are dividends and distributions paid?"

     Dividends and distributions on Class Y Shares will automatically be
reinvested in full and fractional shares of the Fund of the same class at net
asset value as of the payment date for the dividend or distribution unless you
elect otherwise.

     If you own or purchase Class Y Shares, you may choose to have all or any
part of your dividends or distributions paid in cash. You can elect to have the
cash portion of your dividends or distributions deposited, without charge, by
electronic funds transfers into your account at a financial institution, if it
is a member of the Automated Clearing House.

     You can make any of these elections on the New Account Application, by a
Ready Access Features Form or by a letter to the Agent. Your election to receive
some or all of your dividends and distributions in cash will be effective as of
the next payment of dividends after it has been received in proper form by the
Agent. It will continue in effect until the Agent receives written notification
of a change.

     All arrangements for the payment of dividends and distributions with
respect to Class I Shares, including reinvestment of dividends, must be made
through financial intermediaries.

     Whether your dividends and distributions are received in cash or
reinvested, you will receive a monthly statement indicating the current status
of your Class Y Shares investment account with the Fund. Financial
intermediaries provide their own statements of Class I Shares accounts.


     If you do not comply with laws requiring you to furnish taxpayer
identification numbers and report dividends, the Fund may be required to impose
backup withholding at a rate of 28% upon payment of redemptions to shareholders
and on capital gains distributions (if any) and any other distributions that do
not qualify as "exempt-interest dividends."


     The Fund reserves the right to change the dividend and distribution payment
option on your account to "reinvest" if mail sent to the address on your account
is returned by the post office as "undeliverable" and you have elected to have
your account dividends and/or distributions paid in cash. In such event, the
Fund would then purchase additional shares of the Fund with any dividend or
distribution payments that are "undeliverable." In order to change the option
back to "cash," you would need to send the Agent written instructions as
described above.

                                 Tax Information

     Net investment income includes income from Kentucky Obligations in the
portfolio that the Fund allocates as "exempt-interest dividends." Such dividends
are exempt from regular Federal income tax. The Fund will allocate
exempt-interest dividends by applying one designated percentage to all income
dividends it declares during its tax year. It will normally make this
designation in the first month following its fiscal year end for dividends paid
in the prior year.

     It is possible that, under certain circumstances, a portion of the
distributions paid by the Fund will be subject to income taxes.


     During the Fund's most recent fiscal year, the Fund's dividends consisted
of the following:


                                   Fiscal Year
                                    12/31/03

                  Exempt Interest      Capital           Ordinary
                  Dividends            Gains             Dividend Income
                                       Dividends
Class Y Shares    99.72%               0.00%             0.28%

Class I Shares    99.71%               0.00%             0.29%

     Net capital gains of the Fund, if any, 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.
Capital gains and any other taxable dividends declared in October, November or
December and paid to you in January (whether received in cash or reinvested in
shares) are taxable for Federal income tax purposes as if received in December.
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 intends to qualify during each fiscal year under the Internal
Revenue Code to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends 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 subject
to regular Federal income tax, each taxpayer must report the total amount of
tax-exempt interest (including exempt-interest dividends from the Fund) received
or acquired during the year. Exempt-interest dividends are taken into account in
determining the taxable portion of any Social Security or Railroad Retirement
benefit you or your spouse receives.

     The Fund will treat as ordinary income in the year received certain gains
on Kentucky Obligations it acquired after April 30, 1993 and sells for less than
face or redemption value. Those gains will be taxable to you as ordinary income,
if distributed.

     Capital gains dividends (net long-term gains over net short-term losses)
which the Fund distributes and so designates are reportable by shareholders as
taxable gains from the sale or exchange of a capital asset held for more than a
year. This is the case whether the shareholder reinvests the distribution in
shares of the Fund or receives it in cash, regardless of the length of time the
investment is held.

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

     The Fund's gains or losses on sales of Kentucky Obligations will be deemed
long- or short-term, depending upon the length of time the Fund holds these
obligations.

     You will receive information on the tax status of the Fund's dividends and
distributions annually.

Special Tax Matters

     Under the Internal Revenue 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.

     If you, or someone related to you, is a "substantial user" of facilities
financed by industrial development or private activity bonds, you should consult
your own tax adviser before purchasing shares of the Fund.

     Interest from all Kentucky Obligations is tax-exempt for purposes of
computing the shareholder's regular tax. However, 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 ("AMT"). Whether or not that computation will result
in a tax will depend on the entire content of your return. The Fund will not
invest more than 20% of its assets in the types of Kentucky Obligations that pay
interest subject to AMT. An adjustment required by the Internal Revenue Code
will tend to make it more likely that corporate shareholders will be subject to
AMT. They should consult their tax advisers.

"What should I know about Kentucky taxes?"

     All of the exempt-interest dividends from Kentucky Obligations 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. 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,
futures, options and other nonexempt assets.

     Shareholders of the Fund should consult their tax advisers about other
state and local tax consequences of their investment in the Fund.

<page>


                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                              FINANCIAL HIGHLIGHTS


The financial highlights table is intended to help you understand the Fund's
financial performance for the past five years of the Fund's operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned or
lost on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by KPMG LLP, whose report,
along with the Fund's financial statements, is included in the annual report, is
incorporated by reference into the SAI and is available upon request.

<TABLE>
<CAPTION>
                                                                 CLASS Y
                                               -------------------------------------------
                                                          YEAR ENDED DECEMBER 31,
                                               -------------------------------------------
                                                2003     2002     2001     2000     1999
                                               ------   ------   ------   ------   ------
<S><C><C>                                      <C>      <C>      <C>      <C>      <C>
Net asset value, beginning of period .......   $10.67   $10.32   $10.40   $10.09   $10.82
                                               ------   ------   ------   ------   ------

Income (loss) from investment operations:
   Net investment income + .................    0.46     0.49     0.51     0.53     0.53
   Net gain (loss) on securities (both
      realized and unrealized) .............    0.03     0.35    (0.07)    0.32    (0.69)
                                               ------   ------   ------   ------   ------
   Total from investment operations ........    0.49     0.84     0.44     0.85    (0.16)
                                               ------   ------   ------   ------   ------

Less distributions:
   Dividends from net investment income ....   (0.46)   (0.49)   (0.52)   (0.54)   (0.54)
   Distributions from capital gains ........      --       --       --       --    (0.03)
                                               ------   ------   ------   ------   ------
   Total distributions .....................   (0.46)   (0.49)   (0.52)   (0.54)   (0.57)
                                               ------   ------   ------   ------   ------
Net asset value, end of period .............   $10.70   $10.67   $10.32   $10.40   $10.09
                                               ======   ======   ======   ======   ======

Total return (not reflecting sales charge)..    4.65%    8.30%    4.28%    8.62%  (1.46)%

Ratios/supplemental data
   Net assets, end of period
      (in thousands) .......................   $46,313  $41,223  $25,585  $15,745  $13,346
   Ratio of expenses to average
      net assets ...........................    0.57%    0.57%    0.57%    0.59%    0.57%
   Ratio of net investment income
      to average net assets ................    4.28%    4.63%    4.94%    5.25%    5.09%
   Portfolio turnover rate .................   17.92%   18.27%   21.44%    6.61     6.35%
                                                                                                 The expense ratios after giving
effect to the expense
offset for uninvested cash
balances were:
   Ratio of expenses to average
      net assets ...........................    0.56%    0.56%    0.55%    0.58%    0.56%
</TABLE>

----------
+    Per share amounts have been  calculated  using the monthly  average  shares
     method.

Note: On July 1, 2000, Aquila Management Corporation was appointed as the Fund's
      Investment adviser, assuming investment management responsibilities,
      replacing Banc One Investment Advisers Corporation the Fund's Investment
      Sub-Adviser.

<TABLE>
<CAPTION>
                                                            CLASS I
                                                  ------------------------------
                                                     YEAR ENDED       PERIOD
                                                     DECEMBER 31,      ENDED
                                                  ----------------   -----------
                                                   2003      2002    12/31/01(1)
                                                  ------    ------   -----------
<S><C><C>                                         <C>       <C>         <C>
Net asset value, beginning of period ..........   $10.66    $10.31      $10.44
                                                  ------    ------      ------

Income (loss) from investment operations:
   Net investment income + ....................    0.43      0.46        0.19
   Net gain (loss) on securities (both
      realized and unrealized) ................    0.02      0.35       (0.13)
                                                  ------    ------      ------
   Total from investment operations ...........    0.45      0.81        0.06
                                                  ------    ------      ------
Less distributions:
   Dividends from net investment income .......   (0.42)    (0.46)      (0.19)
   Distributions from capital gains ...........     --        --          --
                                                  ------    ------      ------
   Total distributions ........................   (0.42)    (0.46)      (0.19)
                                                  ------    ------      ------
Net asset value, end of period ................   $10.69    $10.66      $10.31
                                                  ======    ======      ======
Total return (not reflecting sales charge) ....    4.33%     7.98%      0.58%++

Ratios/supplemental data
   Net assets, end of period (in thousands) ...   $4,438    $2,407      $1,426
   Ratio of expenses to average net assets ....    0.88%     0.87%      0.83%*
   Ratio of net investment income to average
      net assets ..............................    3.95%     4.32%      4.47%*
   Portfolio turnover rate ....................   17.92%    18.27%     21.44%++

The expense ratios after giving effect to the exp
for uninvested cash balances were:
   Ratio of expenses to average net assets ....    0.87%     0.86%      0.82%*
</TABLE>

----------
(1)  For the period August 6, 2001 to December 31, 2001.
+    Per share amounts have been calculated using the monthly average shares
     method.
++   Not annualized.
*    Annualized.
Note: On July 1, 2000, Aquila Management Corporation was appointed as the Fund's
      Investment adviser, assuming investment management responsibilities,
      replacing Banc One Investment Advisers Corporation the Fund's Investment
      Sub-Adviser.


 <page>
 FOUNDER
 Aquila Management Corporation



 MANAGER
 Aquila Investment Management LLC
 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
 Theodore T. Mason
 Anne J. Mills
 William J. Nightingale
 James R. Ramsey



 OFFICERS
 Diana P. Herrmann, Vice Chair and President
 Thomas S. Albright, Senior Vice President and Portfolio Manager
 Jerry G. McGrew, Senior Vice President
 Jason T. McGrew, Vice President
 Joseph P. DiMaggio, Chief Financial Officer and 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
 PFPC Inc.
 760 Moore Road
 King of Prussia, Pennsylvania 19406-1212


 CUSTODIAN
 Bank One Trust Company, N.A.
 1111 Polaris Parkway
 Columbus, Ohio 43240

 INDEPENDENT AUDITORS
 KPMG LLP
 757 Third Avenue
 New York, New York 10017

 COUNSEL
 Hollyer Brady Smith & Hines LLP
 551 Fifth Avenue
 New York, New York 10176

 <page>

     This Prospectus concisely states information about the Fund that you should
know before investing. A Statement of Additional Information about the Fund (the
"SAI") has been filed with the Securities and Exchange Commission. The SAI
contains information about the Fund and its management not included in this
Prospectus. The SAI is incorporated by reference in its entirety in this
Prospectus and is therefore legally a part of this Prospectus. Only when you
have read both this Prospectus and the SAI are all material facts about the Fund
available to you.

     You can get additional information about the Fund's investments in the
Fund's annual and semi-annual reports to shareholders. In the Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year. You can get the SAI and the Fund's annual and semi-annual reports
without charge, upon request by calling 800-437-1020 (toll free).

     In addition, you can review and copy information about the Fund (including
the SAI) at the Public Reference Room of the SEC in Washington, D.C. Information
on the operation of the Public Reference Room is available by calling
202-942-8090. Reports and other information about the Fund are also available on
the EDGAR Database at the SEC's Internet site at http://www.sec.gov. Copies of
this information can be obtained, for a duplicating fee, by E-mail request to
publicinfo@sec.gov or by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102.


This Prospectus should be read and retained for future reference

The file number under which the Fund is registered
with the SEC under the Investment Company Act of 1940
is 811-5086.


                       Churchill Tax-Free Fund of Kentucky

                                   One of The
                             Aquilasm Group Of Funds

                                   A tax-free
                                income investment

                                   PROSPECTUS


                     To make shareholder account inquiries,
                 call the Fund's Shareholder Servicing Agent at:
                             800-437-1000 toll free
                               or you can write to
                                    PFPC Inc.
                                 760 Moore Road
                         King of Prussia, PA 19406-1212

                    Ticker Symbol           CUSIP #
     Class Y Shares    CHKYX                171562408
     Class I Shares    CHTSX                171562507


<PAGE>
                       Churchill Tax-Free Fund of Kentucky
                          380 Madison Avenue Suite 2300
                               New York, NY 10017
                                  800-437-1020
                                  212-697-6666



Statement
of Additional
Information                                                      April 24, 2004



     This Statement of Additional Information (the "SAI") is not a Prospectus.
There are two Prospectuses for the Fund dated April 24, 2004; 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") and Financial Intermediary Class Shares ("Class
I Shares") of the Fund. References in this SAI to "the Prospectus" refer to
either of these Prospectuses. The SAI should be read in conjunction with the
Prospectus for the class of shares in which you are considering investing.

            Prospectuses may be obtained from the Fund's Distributor,
                           Aquila Distributors, Inc.

               380 Madison Avenue, Suite 2300, New York, NY 10017;
                     800-437-1020 toll free or 212-697-6666


Financial Statements


     The financial statements for the Fund for the year ended December 31, 2003,
which are contained in the Annual Report for that fiscal year, are hereby
incorporated by reference into this SAI. Those financial statements have been
audited by KPMG LLP, independent auditors, whose report thereon is incorporated
herein by reference. The Annual Report of the Fund can be obtained without
charge by calling the toll-free number listed above. The Annual Report will be
delivered with the SAI.



TABLE OF CONTENTS

Fund History..................................................................2
Investment Strategies and Risks...............................................2
Fund Policies.................................................................7
Management of the Fund........................................................8
Ownership of Securities......................................................17
Investment Advisory and Other Services.......................................19
Brokerage Allocation and Other Practices.....................................30
Capital Stock................................................................31
Purchase, Redemption, and Pricing of Shares..................................33
Additional Tax Information...................................................41
Underwriters.................................................................42
Appendix A...................................................................43

                       Churchill Tax-Free Fund of Kentucky


                       Statement of Additional Information


                                  Fund History


     Churchill Tax-Free Trust (the "Trust"), 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.

                         Investment Strategies and Risks

Ratings

     The ratings assigned by Moody's Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P") and Fitch Ratings ("Fitch"), nationally
recognized statistical rating organizations, 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.


     Rating agencies consider municipal obligations that have only the fourth
highest credit rating to be of medium quality. Thus, they may present investment
risks which do not exist with more highly rated obligations. Such obligations
possess less attractive investment characteristics. 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.


     See Appendix A to this SAI for further information about the ratings of
these organizations that apply 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, 2003, in Kentucky Obligations in the various rating
categories:


Highest rating (1)........................................................64.8%
Second highest rating (2).................................................25.8%
Third highest rating (3)................................................. .9.4%
Fourth highest rating (4)..................................................0.0%
Not rated:.................................................................0.0%
                                                                         100.0%

(1) Aaa of Moody's or AAA of S&P or Fitch.
(2) Aa of Moody's or AA of S&P or Fitch.
(3) A of Moody's, S&P or Fitch.
(4) Baa of Moody's or BBB of S&P or Fitch.


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 the 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 that
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) owns
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.

     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 that are available to the Fund.

     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 Manager's opinion as to
marketability of the issue and other factors that may be applicable to any
particular issue.

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.


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 Manager'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 and may in fact never do so, it
is permitted to buy and sell futures contracts relating to municipal security
indices ("Municipal Security 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 of protecting the
asset value of the Fund during periods of changing interest rates. 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 Security Index Futures currently are based on a municipal
security index developed by the Chicago Board of Trade ("CBT") (the "Municipal
Security Index"). Financial Futures contracts based on the current Municipal
Security Index began trading on October 25, 2002. The Municipal Security Index
is comprised of 100 to 250 tax-exempt municipal securities. Each bond included
in the Municipal Security Index must be rated Aaa by Moody's and AAA by S&P and
must have a remaining maturity of 10 to 40 years. New issues satisfying the
eligibility requirements are added to, and an equal number of old issues are
deleted from, the Municipal Security Index quarterly. The value of the Municipal
Security Index is computed daily by a recognized independent pricing service
according to a formula based on the price of each bond in the Municipal Security
Index, as evaluated by the pricing service.

     The Municipal Security Index Futures contract is traded 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 as of the date of this Statement of Additional Information U.S.
Government Securities 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 Security 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-traded 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 Futures to attempt to protect
against the price volatility of the Fund's Kentucky Obligations is that the
Manager 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 securities included in the applicable
index or from the securities 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 decides not to invest in the Kentucky Obligations 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 securities comprising the index underlying
Municipal Security 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 Security Index may be subject to change over time, as additions
to and deletions from the Municipal Security 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 obligations held by the Fund may be greater.

     Trading in Municipal Security Index Futures may be less liquid than trading
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 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 as to its long and short positions in Futures in
conformity with restrictions it has committed to pursuant to 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 from qualification as a "commodity pool operator" (as defined
under the CEA). 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 as to its Futures and options activities
due to requirements other than those described in this paragraph; the Fund will,
as to long positions, be required to abide by the more restrictive of the two
requirements.) 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 a right 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.


                                  Fund Policies

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 the 1940 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 dollar value of the Fund's shares present at a meeting or
represented by proxy if the holders of more than 50% of the dollar value of its
shares are so present or represented; or (b) more than 50% of the dollar value
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 and in
"Investment Strategies and Risks" in the SAI), Municipal Security Index Futures,
U.S. Government Securities Futures and options on such Futures; therefore the
Fund cannot buy any voting securities, any commodities or commodity contracts
other than Municipal Security 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 purchase or hold the securities of any issuer if, to its
knowledge, Trustees, Directors or officers of the Fund, its Adviser or
Sub-Adviser who individually own beneficially more than 0.5% of the securities
of that issuer, together own in the aggregate more than 5% of such securities.

     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 Security
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.

5. 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.

6. The Fund cannot make loans.

     The Fund can buy those Kentucky Obligations which it is permitted to buy;
this is investing, not making a loan. The Fund cannot lend its portfolio
securities.

7. 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 Security 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.

     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 that are subject to the Federal alternative
minimum tax.

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.


                             Management of the Fund

The Board of Trustees

     The business and affairs of the Fund are managed under the direction and
control of its Board of Trustees. The Board of Trustees has authority over every
aspect of the Fund's operations, including approval of the advisory and
sub-advisory agreements and their annual renewal, the contracts with all other
service providers and payments under the Fund's Distribution Plan and
Shareholder Services Plan. The Fund's sole standing committee is the Audit
Committee, consisting of all of the Trustees who are "independent" and are not
"interested persons" of the Fund. The Committee, which met once during the last
fiscal year, recommends to the Board of Trustees what firm of independent
auditors will be selected by the Board of Trustees, reviews the methods, scope
and result of audits and the fees charged, and reviews the adequacy of the
Fund's internal accounting procedures and controls.


     The Fund has not yet formed a nominating committee nor adopted a nominating
committee charter. It expects to do so before the end of 2004. Since 1998, the
Fund has had a Trustee Retirement and Replacement Policy which covers many of
the issues facing any nominating committee, including matters to be considered
in connection with candidates for election to the Board of Trustees. In
accordance with regulatory requirements, the selection and nomination of all
independent Trustees has been committed to the independent Trustees, and
suggestions for new Trustees are provided from management and other interested
Trustees only upon request of the independent Trustees.


Trustees and Officers

     The following material includes information about each Trustee and officer
of the Fund. All shares of the Fund listed as owned by the Trustees are Class A
Shares unless indicated otherwise.


<TABLE>
<CAPTION>
<S>                       <C>              <C>                         <C>              <C>

                                                                       Number of
                         Positions Held                                Portfolios in
                         with                                          Fund Complex
                         Fund                                          Overseen by
Name, Address(1) and     and Length of    Principal Occupation(s)      Trustee           Other Directorships
Date of Birth             Service(2)      During Past 5 Years                            Held by Trustee

Interested Trustees(3)


Lacy B. Herrmann         Chairman of      Founder and Chairman of the         11     Director or trustee, Pimco
New York, NY             the Board of     Board, Aquila Management                   Advisors VIT, Oppenheimer
(05/12/29)               Trustees since   Corporation, the sponsoring                Quest Value Funds Group,
                         1987             organization and parent of the             Oppenheimer Small Cap Value
                                          Manager or Administrator and/or            Fund, Oppenheimer Midcap
                                          Adviser or Sub-Adviser to each             Fund, and Oppenheimer
                                          fund of the Aquilasm Group of              Rochester Group of Funds.
                                          Funds, Chairman and Chief
                                          Executive Officer of the Manager
                                          or Administrator and/or Advisor
                                          or Sub-Adviser to each since
                                          2004, and Founder, Chairman of
                                          the Board of Trustees, Trustee
                                          and (currently or until 1998)
                                          President of each since its
                                          establishment, beginning in 1984,
                                          except Founder and Chairman of
                                          the Board of Trustees, Emeritus,
                                          of Hawaiian Tax-Free Trust,
                                          Pacific Capital Cash Assets
                                          Trust, Pacific Capital Tax-Free
                                          Cash Assets Trust and Pacific
                                          Capital U.S. Government
                                          Securities Cash Assets Trust
                                          since 2004; Director of the
                                          Distributor since 1981 and
                                          formerly Vice President or
                                          Secretary, 1981-1998; Trustee
                                          Emeritus, Brown University and
                                          active in university, school and
                                          charitable organizations.

Diana P. Herrmann        Trustee since    Vice Chair of Aquila Management    6                   None
New York, NY             1995,            Corporation, Founder of the
(02/25/58)               President        Aquilasm Group of Funds and
                         since 1999,      parent of the Manager, since
                         and Vice Chair   2004, President and Chief
                         since 2004       Operating Officer since 1997, a
                                          Director since 1984, Secretary
                                          since 1986 and previously its
                                          Executive Vice President, Senior
                                          Vice President or Vice
                                          President, 1986-1997; Vice Chair
                                          since 2004 and President, Chief
                                          Operating Officer and Manager of
                                          the Manager since 2003; Vice
                                          Chair, President, Senior Vice
                                          President or Executive Vice
                                          President of funds in the
                                          Aquilasm Group of Funds since
                                          1986; Director of the
                                          Distributor since 1997; trustee,
                                          Reserve Money-Market Funds,
                                          1999-2000 and Reserve Private
                                          Equity Series, 1998-2000; active
                                          in mutual fund and trade
                                          organizations and in charitable
                                          and volunteer organizations.

Non-Interested
Trustees

Thomas A.                Trustee          Vice President of Robinson,        2                   None
Christopher              since 1992       Hughes & Christopher, C.P.A.s,
Danville, KY                              P.S.C., since 1977; President, A
(12/19/47)                                Good Place for Fun, Inc., a
                                          sports facility, since 1987.

Douglas Dean             Trustee          Founder and Chairman of the        1                   None
Lexington,               since 1987       Board of Directors, Dean, Dorton
KY                                        & Ford P.S.C., a public
(03/21/49)                                accounting firm, since 1982;
                                          active as an officer and member
                                          of various charitable and
                                          community organizations.


Theodore T. Mason        Trustee since    Executive Director, East Wind      5       Trustee, Pimco Advisors VIT.
New York, NY             1992             Power Partners LTD since 1994
(11/24/35)                                and Louisiana Power Partners,
                                          LLC since 1999; President,
                                          Alumni Association of SUNY
                                          Maritime College since 2002
                                          (First Vice President,
                                          2000-2001, Second Vice
                                          President, 1998-2000) and
                                          director of the same
                                          organization since 1997;
                                          Director, STCM Management
                                          Company, Inc., since 1973; twice
                                          national officer of Naval
                                          Reserve Association, commanding
                                          officer of four naval reserve
                                          units and Captain, USNR (Ret);
                                          director, The Navy League of the
                                          United States New York Council
                                          since 2002; trustee, The
                                          Maritime Industry Museum at Fort
                                          Schuyler and the Maritime
                                          College at Fort Schuyler
                                          Foundation, Inc. since 2000.

Anne J. Mills            Trustee since    President, Loring Consulting       4                   None
Castle Rock, CO          1987             Company since 2001; Vice
(12/23/38)                                President for Business Affairs,
                                          Ottawa University, 1992-2001;
                                          IBM Corporation, 1965-1991;
                                          Budget Review Officer, the
                                          American Baptist Churches/USA,
                                          1994-1997; director, the
                                          American Baptist Foundation;
                                          Trustee, Ottawa University; and
                                          Trustee Emerita, Brown
                                          University.

William J. Nightingale   Trustee since    Retired; formerly Chairman,        2             Ring's End, Inc.
Rowayton, CT             1993             founder (1975) and Senior
(09/16/29)                                Advisor until 2000 of
                                          Nightingale & Associates,
                                          L.L.C., a general management
                                          consulting firm focusing on
                                          interim management,
                                          divestitures, turnaround of
                                          troubled companies, corporate
                                          restructuring and financial
                                          advisory services.
James R. Ramsey          Trustee since    President, University of           1         Community Bank and Trust,
Louisville, KY           1987             Louisville since Nov. 2002;                  Pikeville, KY
(11/14/48)                                Professor of Economics,
                                          University of Louisville,
                                          1999-present; Kentucky
                                          Governor's Senior Policy Advisor
                                          and State Budget Director,
                                          1999-2002; Vice Chancellor for
                                          Finance and Administration, the
                                          University of North Carolina at
                                          Chapel Hill, 1998 to 1999;
                                          previously Vice President for
                                          Finance and Administration at
                                          Western Kentucky University,
                                          State Budget Director for the
                                          Commonwealth of Kentucky, Chief
                                          State Economist and Executive
                                          Director for the Office of
                                          Financial Management and
                                          Economic Analysis for the
                                          Commonwealth of Kentucky,
                                          Adjunct Professor at the
                                          University of Kentucky,
                                          Associate Professor at Loyola
                                          University-New Orleans and
                                          Assistant Professor at Middle
                                          Tennessee State University.

Officers

Charles E.               Executive Vice   Executive Vice President of all      N/A                N/A
Childs, III              President        Funds since 2003; Senior Vice
New York, NY             since 2003       President, corporate development,
(04/01/57)                                formerly Vice President,
                                          Assistant Vice President and
                                          Associate of the Manager's parent
                                          since 1987; Senior Vice
                                          President, Vice President or
                                          Assistant Vice President of the
                                          Money-Market Funds since 1988.
Thomas S. Albright       Senior Vice      Senior Vice President and           N/A                 N/A
Louisville, KY           President        Portfolio Manager, Churchill
(07/26/52)               since 2000       Tax-Free Fund of Kentucky since
                                          July 2000; Vice President and
                                          Co-portfolio manager, Tax-Free
                                          Fund For Utah since 2001; Vice
                                          President and Portfolio Manager,
                                          Banc One Investment Advisors,
                                          Inc., 1994-2000.

Jerry G. McGrew          Senior Vice      President of the Distributor        N/A                 N/A
New York, NY (06/18/44)  President        since 1998, Registered Principal
                         since 1994       since 1993, Senior Vice
                                          President, 1997-1998 and Vice
                                          President, 1993-1997; Senior Vice
                                          President, Aquila Rocky Mountain
                                          Equity Fund and five Aquila Bond
                                          Funds since 1995; Vice President,
                                          Churchill Cash Reserves Trust,
                                          1995-2001.
James M. McCullough      Vice President   Senior Vice President or Vice      N/A                  N/A
Portland, OR (06/11/45)  since 2000       President of Aquila Rocky
                                          Mountain Equity Fund and four
                                          Aquila Bond Funds; Senior Vice
                                          President of the Distributor
                                          since 2000; Director of Fixed
                                          Income Institutional Sales, CIBC
                                          Oppenheimer & Co. Inc., Seattle,
                                          WA, 1995-1999.

Jason T. McGrew          Vice President   Vice President, Churchill          N/A                  N/A
Elizabethtown, KY        since 2001       Tax-Free Fund of Kentucky since
(08/14/71)                                2001, Assistant Vice President,
                                          2000-2001; Investment Broker
                                          with Raymond James Financial
                                          Services 1999-2000 and with J.C.
                                          Bradford and Company 1997-1999;
                                          Associate Broker at Prudential
                                          Securities 1996-1997.

Joseph P. DiMaggio       Chief            Chief Financial Officer of the     N/A                  N/A
New York, NY             Financial        Aquilasm Group of Funds since
(11/06/56)               Officer since    2003 and Treasurer since 2000;
                         2003 and         Controller, Van Eck Global
                         Treasurer        Funds, 1993-2000.
                         since 2000
Edward M. W. Hines       Secretary        Partner, Hollyer Brady Smith &     N/A                  N/A
New York, NY             since 1987       Hines LLP, legal counsel to the
(12/16/39)                                Fund, since 1989; Secretary of
                                          the Aquilasm Group of Funds.

Robert W. Anderson       Assistant        Compliance Officer of the          N/A                  N/A
New York, NY (08/23/40)  Secretary        Manager or its predecessor and
                         since 2000       current parent since 1998 and
                                          Assistant Secretary of the
                                          Aquilasm Group of Funds since
                                          2000; trustee, Alpha Strategies
                                          Fund since July, 2002;
                                          Consultant, The Wadsworth Group,
                                          1995-1998.

John M. Herndon          Assistant        Assistant Secretary of the         N/A                  N/A
New York, NY (12/17/39)  Secretary        Aquilasm Group of Funds since
                         since 1995       1995 and Vice President of the
                                          three Aquila Money-Market Funds
                                          since 1990; Vice President of
                                          the Manager or its predecessor
                                          and current parent since 1990.

Lori A. Vindigni         Assistant        Assistant Treasurer of the         N/A                  N/A
New York, NY             Treasurer        Aquilasm Group of Funds since
(11/02/66)               since 2000       2000; Assistant Vice President
                                          of the Manager or its
                                          predecessor and current parent
                                          since 1998; Fund Accountant for
                                          the Aquilasm Group of Funds,
                                          1995-1998.
Trustee Emeritus
Carroll F. Knicely(5)    Trustee          President, Associated              N/A     West Kentucky Corporation;
Glasgow, KY              Emeritus since   Publications Inc, Glasgow,                 South Gate Plaza, Inc.;
(12/08/28)               2004             Kentucky; director and member,             Knicely and Knicely, Inc.
                                          Executive Board of West Kentucky
                                          Corporation and director and
                                          Secretary-Treasurer, South Gate
                                          Plaza, Inc. (owner and developer
                                          of shopping centers and
                                          commercial real estate);
                                          director, Vice President and
                                          Treasurer, Knicely and Knicely,
                                          Inc. (owner and developer of
                                          rental properties and
                                          residential real estate); former
                                          trustee, Cambellsville
                                          University; formerly Secretary
                                          of Commerce and Commissioner of
                                          Commerce, Commonwealth of
                                          Kentucky.

</TABLE>

(1) The mailing address of each Trustee and officer is c/o Churchill Tax-Free
Fund of Kentucky, 380 Madison Avenue, New York, NY 10017.

(2) Each Trustee holds office until the next annual meeting of shareholders or
until his or her successor is elected and qualifies. The term of office of each
officer is one year.

(3) 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 Manager's corporate parent, as an officer and Manager of the Manager, and
as a shareholder and director of the Distributor. Ms. Herrmann is an interested
person of the Trust as an officer of the Trust, as a director, officer and
shareholder of the Manager's corporate parent, as an officer and Manager of the
Manager, and as a shareholder and director of the Distributor. Each is also an
interested person as a member of the immediate family of the other.

(4) In this material Pacific Capital Cash Assets Trust, Pacific Capital U.S.
Government Securities Cash Assets Trust and Pacific Capital Tax-Free Cash Assets
Trust, each of which is a money-market fund, are called the "Aquila Money-Market
Funds"; Hawaiian Tax-Free Trust, Tax-Free Trust of Arizona, Tax-Free Trust of
Oregon, Tax-Free Fund of Colorado, Churchill Tax-Free Fund of Kentucky,
Narragansett Insured Tax-Free Income Fund and Tax-Free Fund For Utah, each of
which is a tax-free municipal bond fund, are called the "Aquila Bond Funds";
Aquila Rocky Mountain Equity Fund is an equity fund; considered together, these
11 funds are called the "Aquilasm Group of Funds."

(5) Mr. Knicely will cease to be a Trustee of the Trust at the close of the
Annual Meeting on April 23, 2004. A Trustee Emeritus may attend Trustee meetings
but has no voting power.



                       Securities Holdings of the Trustees
                                (as of 12/31/03)

                     Dollar Range of Ownership      Aggregate Dollar Range of
                    in Churchill Tax-Free           of Ownership in Aquilasm
Name of Trustee     Fund of Kentucky(1)             Investment Companies
                                                    Overseen by Trustee(1)

Interested Trustees

Lacy B. Herrmann                  B                       E

Diana P. Herrmann                 B                       E

Non-interested Trustees

Thomas A. Christopher             C                       C

Douglas Dean                      D                       D

Theodore T. Mason                 B                       C

Anne J. Mills                     B                       D

William J. Nightingale            C                       C

James R. Ramsey                   C                       C


(1)      A. None
         B. $1-$10,000
         C. $10,001-$50,000
         D. $50,001-$100,000
         E. over $100,000


     None of the non-interested Trustees or their immediate family members holds
of record or beneficially any securities of the Manager, Aquila Investment
Management LLC, or the Distributor.


     The Fund does not currently pay fees to any of the Fund's officers or to
Trustees affiliated with the Manager. For its fiscal year ended December 31,
2003, the Fund paid a total of $87,053 in compensation and reimbursement of
expenses to the Trustees. No other compensation or remuneration of any type,
direct or contingent, was paid by the Fund to its Trustees.


     The Fund is one of the eleven funds in the Aquilasm Group of Funds, which
consist of tax-free municipal bond funds, money- market funds and an equity
fund. The following table lists the compensation of all non-interested 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.

<TABLE>
<CAPTION>
<S>                          <C>                           <C>                       <C>

                                                           Compensation from all
                           Compensation from the Fund      funds in the Aquilasm      Number of boards on which
             Name                                             Group of Funds             the Trustee serves


Thomas A. Christopher                 $7,950                     $9,050(1)                        2

Douglas Dean                          $8,850                      $8,850                          1

Theodore T. Mason                     $7,850                      $54,775                         5

Anne J. Mills                         $7,850                      $37,550                         4

William J. Nightingale                $8,450                      $16,650                         2

James R. Ramsey                       $7,850                      $7,850                          1

</TABLE>

(1) Includes compensation from each of the funds in the Aquilasm Group of Funds
for services as Chair of a committee of Trustees of all such funds.


     Class A Shares may be purchased without a sales charge by the Fund's
Trustees and officers. (See "Reduced Sales Charges for Class A Shares," below.)


                             Ownership of Securities


     On April 7, 2004, the following institutional holders held 5% or more of
any class of the Fund's outstanding shares. On the basis of information received
from the holders, the Fund's management believes that all of the shares
indicated are held for the benefit of clients.
<TABLE>
<CAPTION>
<S>                                           <C>                                        <C>

   Name and address of the holder of               Number of shares                       Percent of class
                record

     Institutional 5% shareholders

SYAG                                           2,322,338 Class A Shares                        10.64%
c/o Stock Yards Bank & Trust Co,
P.O. Box 34290
Louisville, KY

MLPF&S for the sole                              63,098 Class C Shares                          9.21%
 benefit of its customers
4800 Deer Lake Dr East
Jacksonville, FL

National Financial Services Corp.              2,273,367 Class Y Shares                        51.10%
200 Liberty St.
New York, NY

Bankdan                                        1,078,182 Class Y Shares                        24.24%
c/ Kentucky Trust Company
218 W. Main Street
Danville, KY

J.J.B. Hilliard Lyons                           250,509 Class Y Shares                          5.63%
FBO Cardinal Aluminum Co.
501 S. 4th Street
Louisville, KY

Danky & Co.                                     248,546 Class Y Shares                          5.59%
P.O.Box 28
Danville, KY

Wexford Clearing Services Corp.                 146,825 Class I Shares                         35.43%
FBO Ms. L. Anne H. Dishman
Equity Account
123 Arrowhead Road
Louisville, KY

                                                100,230 Class I Shares                         24.19%
Wexford Clearing Services Corp.
FBO Ms. L. Anne H. Dishman
Bond Account
123 Arrowhead Road
Louisville, KY
                                                 81,394 Class I Shares                         19.64%
Charles Schwab and Company
Special Custody Account FBO
  Customers
101 Montgomery Street
San Francisco, CA
Additional 5% shareholders

Mark A Campisano TTEE Patricia E.                29,908 Class I Shares                          7.22%
Campisano rev trust
P.O. Box 34006
Louisville, KY

</TABLE>

     The Fund's management is not aware of any other person beneficially owning
more than 5% of any class of its outstanding shares as of such date.

Management Ownership


     As of the date of this SAI, all of the Fund's Trustees and officers of the
Fund as a group owned less than 1% of its outstanding shares.


                     Investment Advisory and Other Services


Information about the Manager and the Distributor

Management Fees


During the fiscal years ended December 31, 2003, 2002 and 2001 the Fund incurred
management fees (investment advisory fees) as follows:

                           Manager

2003                       $1,129,293

2002                       $1,010,893

2001                       $  895,260


     The management fee is treated as a Fund expense and, as such, is allocated
to each class of shares based on the relative net assets of that class.


     Aquila Distributors, Inc. 380 Madison Avenue, Suite 2300, New York, NY
10017 is the Fund's Distributor. The Distributor currently handles the
distribution of the shares of eleven funds (three money-market funds, seven
tax-free municipal bond funds and an equity fund), 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.


     The shares of the Distributor are owned 24% by Diana P. Herrmann, 72% by
Mr. Herrmann and other members of his immediate family, and the balance by
current employees of Aquila Investment Management LLC.


The Advisory and Administration Agreement

     The Advisory and Administration Agreement provides that subject to the
direction and control of the Board of Trustees of the Fund, the Manager shall:

     (i)  supervise continuously the investment program of the Fund and the
          composition of its portfolio;

     (ii) determine what securities shall be purchased or sold by the Fund;

     (iii) arrange for the purchase and the sale of securities held in the
          portfolio of the Fund; and

     (iv) 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.


     The Advisory and Administration Agreement provides that any investment
program furnished by the Manager shall at all times conform to, and be in
accordance with, any requirements imposed by: (1) the 1940 Act and any rules or
regulations in force thereunder; (2) any other applicable laws, rules and
regulations; (3) the Declaration of Trust and By-Laws of the Fund as amended
from time to time; (4) any policies and determinations of the Board of Trustees
of the Fund; and (5) the fundamental policies of the Fund, as reflected in its
registration statement under the 1940 Act or as amended by the shareholders of
the Fund.


     The Advisory and Administration Agreement provides that the Manager shall
give, as defined therein, to the Fund the benefit of its best judgment and
effort in rendering services hereunder, but the Manager shall not be liable for
any loss sustained by reason of the adoption of any investment policy or the
purchase, sale or retention of any security, whether or not such purchase, sale
or retention shall have been based upon (i) its own investigation and research
or (ii) investigation and research made by any other individual, firm or
corporation, if such purchase, sale or retention shall have been made and such
other individual, firm or corporation shall have been selected in good faith by
the Manager. Nothing therein contained shall, however, be construed to protect
the Manager against any liability to the Fund or its security holders by reason
of willful misfeasance, bad faith or gross negligence in the performance of its
duties, or by reason of its reckless disregard of its obligations and duties
under the Agreement.

     The Advisory and Administration Agreement provides that nothing in it shall
prevent the Manager or any affiliated person (as defined in the 1940 Act) of the
Manager from acting as investment adviser or manager for any other person, firm
or corporation and shall not in any way limit or restrict the Manager or any
such affiliated person from buying, selling or trading any securities for its
own or their own accounts or for the accounts of others for whom it or they may
be acting, provided, however, that the Manager expressly represents that, while
acting as Manager, it will undertake no activities which, in its judgment, will
adversely affect the performance of its obligations to the Fund under the
Agreement. It is agreed that the Manager shall have no responsibility or
liability for the accuracy or completeness of the Fund's Registration Statement
under the 1940 Act and the Securities Act of 1933, except for information
supplied by the Manager for inclusion therein. The Manager shall promptly inform
the Fund as to any information concerning the Manager appropriate for inclusion
in such Registration Statement, or as to any transaction or proposed
transaction, which might result in an assignment (as defined in the 1940 Act) of
the Agreement. To the extent that the Manager is indemnified under the Fund's
Declaration of Trust with respect to the services provided by the Manager, the
Fund agrees to provide the benefits of such indemnification.

     The Advisory and Administration Agreement also provides that subject to the
direction and control of the Board of Trustees of the Fund, the Manager shall
provide all administrative services to the Fund other than those relating to its
investment portfolio which have been delegated to a sub-adviser of the Fund
under a sub-advisory agreement; as part of such administrative duties, the
Manager shall:

     (i)  provide office space, personnel, facilities and equipment for the
          performance of the following functions and for the maintenance of the
          headquarters of the Fund;

     (ii) oversee all relationships between the Fund and any sub-adviser,
          transfer agent, custodian, legal counsel, auditors, fund accounting
          agent 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 the
          effective operation of the Fund and for the sale, servicing or
          redemption of the Fund's shares;

     (iii) maintain the Fund's books and records, and prepare (or assist 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 oversee the insurance
          relationships of the Fund;

     (iv) prepare, on behalf of the Fund and at the Fund's expense, such
          applications and reports as may be necessary to register or maintain
          the registration of the Fund and/or its shares under the securities or
          "Blue-Sky" laws of all such jurisdictions as may be required from time
          to time;

     (v)  respond to any inquiries or other communications of shareholders of
          the Fund 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, oversee such shareholder
          servicing and transfer agent's or distributor's response thereto.

     The Advisory and Administration Agreement contains provisions relating to
compliance of the investment program, responsibility of the Manager for any
investment program managed by it, allocation of brokerage, and responsibility
for errors.

     The Advisory and Administration Agreement provides that the Manager shall,
at its own expense, pay all compensation of Trustees, officers, and employees of
the Fund who are affiliated persons of the Manager.

     The Fund bears the costs of preparing and setting in type its prospectuses,
statements of additional information and reports to its 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. All costs and expenses not expressly assumed by the Manager
under the agreement or otherwise by the Manager, administrator or principal
underwriter or by any Sub-Adviser shall be paid by the Fund, including, but not
limited to (i) interest and taxes; (ii) brokerage commissions; (iii) insurance
premiums; (iv) compensation and expenses of its Trustees other than those
affiliated with the Manager or such sub-adviser, administrator or principal
underwriter; (v) legal and audit expenses; (vi) custodian and transfer agent, or
shareholder servicing agent, fees and expenses; (vii) expenses incident to the
issuance of its shares (including issuance on the payment of, or reinvestment
of, dividends); (viii) fees and expenses incident to the registration under
Federal or State securities laws of the Fund or its shares; (ix) expenses of
preparing, printing and mailing reports and notices and proxy material to
shareholders of the Fund; (x) all other expenses incidental to holding meetings
of the Fund's shareholders; (xi) expenses of keeping the Fund's accounting
records including the computation of net asset value per share and the
dividends; and (xii) such non-recurring expenses as may arise, including
litigation affecting the Fund and the legal obligations for which the Fund may
have to indemnify its officers and Trustees.

     The Advisory and Administration Agreement provides that it may be
terminated by the Manager at any time without penalty upon giving the Fund sixty
days' written notice (which notice may be waived by the Fund) and may be
terminated by the Fund at any time without penalty upon giving the Manager sixty
days' written notice (which notice may be waived by the Manager), provided that
such termination by the Fund shall be directed or approved by a vote of a
majority of its Trustees in office at the time or by a vote of the holders of a
majority (as defined in the 1940 Act) of the voting securities of the Fund
outstanding and entitled to vote. The specific portions of the Advisory and
Administration Agreement which relate to providing investment advisory services
will automatically terminate in the event of the assignment (as defined in the
1940 Act) of the Advisory and Administration Agreement, but all other provisions
relating to providing services other than investment advisory services will not
terminate, provided however, that upon such an assignment the annual fee payable
monthly and computed on the net asset value of the Fund as of the close of
business each business day shall be reduced to the annual rate of 0.26 of 1% of
such net asset value.


Renewal of the Advisory and Administration Agreement



     Renewals until June 30, 2004 of the Advisory and Administration Agreement
between the Fund and the Manager was approved by the Board of Trustees and the
independent Trustees in June, 2003. At a meeting called and held for the purpose
at which a majority of the independent Trustees were present in person, the
following materials were considered:

     o    Copies of the agreements to be renewed;

     o    A term sheet describing the material terms of each contract;

     o    The report of the Manager containing data about the performance of the
          Fund, and data about the fees, expenses and profitability of the
          Manager and comparisons of such data with similar data about other
          comparable funds;

     o    The Trustees had also reviewed on a quarterly basis reports on the
          Fund's performance, operations, portfolio and compliance.



     In considering the Advisory Agreement, the Trustees also drew upon prior
discussions with representatives of the Manager, at each quarterly meeting, of
the Fund's performance and expenses and their familiarity with the personnel and
resources of the Manager. The Trustees noted that the Fund had good performance
and had enjoyed net new inflows of investments during 2002. In considering the
nature and quality of the services provided by the Manager in relation to the
fees and other benefits received, they concluded that the overall investment
performance of the Fund had been satisfactory in the light of market conditions.
They concluded that the Management fee paid by the Fund was fair and reasonable
in relation to the services rendered and that the services rendered were
satisfactory. Accordingly, the Trustees determined that renewal of the Advisory
Agreement until June 30, 2004 was appropriate and it was approved by the
unanimous vote of all of the Trustees, including a majority of the
non-interested trustees.

Underwriting Commissions


     During the fiscal years ended December 31, 2003, 2002 and 2001 the
aggregate dollar amount of sales charges on sales of shares in the Fund was
$480,078, $485,352 and $345,843, respectively, and the amount retained by the
Distributor was $42,855, $35,202 and $36,831, respectively.


     In connection with sales of Class A Shares, the Distributor pays a portion
of the sales charge on such shares to dealers in the form of discounts and to
brokers in the form of agency commissions (together, "Commissions"), in amounts
that vary with the size of the sales charge as follows:

         Sales Charge as
         Percentage                         Commissions
         of Public                          as Percentage
         Offering                           of Offering
         Price                              Price


         4.00%                              3.50%
         3.75%                              3.50%
         3.50%                              3.25%
         3.25%                              3.00%
         3.00%                              2.75%
         2.50%                              2.25%


Distribution Plan

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

     For purposes of Parts I, II and III, the Distributor will consider shares
which are not Qualified Holdings of broker/dealers unaffiliated with the
Manager, Sub-Adviser or Distributor 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.

Provisions Relating to Class A Shares  (Part I)

     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) as to 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 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 Manager or Distributor paid
or accrued during such quarter. In addition, if any such Qualified Recipient is
an affiliated person, as that term is defined in the 1940 Act, of the Fund,
Manager or 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 dollar value 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
dollar value 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 from year to year 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 dollar value 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 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) as to 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 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 Manager or Distributor paid
or accrued during such quarter. In addition, if any such Qualified Recipient is
an affiliated person, as that term is defined in the 1940 Act, of the Fund,
Manager or 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 dollar value of
the outstanding voting securities of the Level-Payment Class Shares. Part II has
continued, and will, unless terminated as therein provided, continue in effect
from year to year 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 dollar value 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.

Provisions Relating to Class I Shares (Part III)

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

     As used in Part III 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 III ("Class I Plan Agreements") and which have rendered
assistance (whether direct, administrative, or both) in the distribution and/or
retention of the Fund's Class I Shares or servicing of shareholder accounts with
respect to such shares. "Qualified Holdings" shall mean, as to any Qualified
Recipient, all Class I 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 I Permitted Payments") to Qualified Recipients,
which Class I 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), a rate fixed from time to time by
the Board of Trustees, initially 0.10 of 1% of the average annual net assets of
the Fund represented by the Class I Shares, but not more than 0.25 of 1% of such
assets. Such payments shall be made only out of the Fund's assets allocable to
Class I 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) as to the amount of Class I Permitted Payments,
if any, to each Qualified Recipient provided that the total Class I 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 Class I 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 III 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 I Permitted Payments made under 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 Manager or Distributor paid
or accrued during such quarter. In addition, if any such Qualified Recipient is
an affiliated person, as that term is defined in the 1940 Act, of the Fund,
Manager or 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 III 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 III of the Plan; and (ii) by a
vote of holders of at least a "majority" (as so defined) of the dollar value of
the outstanding voting securities of the Class I Shares Class. Part III has
continued, and will, unless terminated as thereinafter provided, continue in
effect from year to year 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 III 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 dollar value of the outstanding voting
securities of the Fund to which Part III applies. Part III 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 III 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 I 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 I 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 I Plan Agreements entered into
thereafter.

Defensive Provisions (Part IV)

     Another part of the Plan (Part IV) 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 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 therein 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 dollar value 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 IV 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.

Payments Under the Plan


     During the fiscal year ended December 31, 2003, payments were made only
under Part I, Part II and Part III of the Plan. All payments were to Qualified
Recipients and were for compensation. No payments were made under Part IV of the
Plan.


Payments to Qualified Recipients


     During the fiscal year ended December 31, 2003, $340,461 was paid to
Qualified Recipients under Part I of the Plan, $46,125 was paid to Qualified
Recipients under Part II and $12,976 was paid to Qualified Recipients under Part
III. Of these amounts, $8,968, $662 and $0, respectively, were paid as
compensation to the Distributor, and $331,493, $45,463 and $12,976;
respectively, were paid as compensation to other Qualified Recipients, most of
whom are broker/dealers. Payments with respect to Class C Shares during the
first year after purchase are paid to the Distributor and thereafter to other
Qualified Recipients.


     Amounts paid under the Plan as compensation to Qualified Recipients,
including the Distributor, are not based on the recipient's expenses in
providing distribution, retention and /or shareholder servicing assistance to
the Fund and, accordingly, are not regarded as reimbursement of such expenses.

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 and Class I Shares of the
Fund of "Service Fees" within the meaning of the Conduct Rules of the National
Association of Securities Dealers, Inc. The Services Plan applies only to the
Class C Shares and Class I Shares of the Fund (regardless of whether such class
is so designated or is redesignated by some other name).

Provisions for Level-Payment Class Shares (Part I)


     As used in Part I of 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. "Manager" shall mean Aquila
Investment Management LLC 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. Service Fees with respect to Class C Shares
will be paid to the Distributor. During the fiscal year ended December 31, 2003,
$15,375 was paid to the Distributor under Part I of the Plan.

Provisions for Financial Intermediary Class Shares (Part II)


     As used in Part II of 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 Financial Intermediary Class Shares, maintenance of Financial Intermediary
Class Shares shareholder accounts and/or pursuant to specific agreements
entering confirmed purchase orders on behalf of customers or clients. "Qualified
Holdings" shall mean, as to any Qualified Recipient, all Financial Intermediary
Class Shares beneficially owned by such Qualified Recipient's customers, clients
or other contacts. "Manager" shall mean Aquila Investment Management LLC 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 Financial Intermediary Class Shares. Such payments shall
be made only out of the Fund's assets allocable to the Financial Intermediary
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 Financial Intermediary 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.

General Provisions

     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 1940 Act, of the Fund,
Manager or 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 1940 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 therein 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.

Codes of Ethics

     The Fund, the Manager and the Distributor have adopted codes of ethics
pursuant to Rule 17j-1 under the 1940 Act. The codes permit personnel of these
organizations who are subject to the codes to purchase securities, including the
types of securities in which the Fund invests, but only in compliance with the
provisions of the codes.

Transfer Agent, Custodian and Auditors


     The Fund's Shareholder Servicing Agent (transfer agent) is PFPC Inc., 760
Moore Road, King of Prussia, Pennsylvania 19406-1212.


     The Fund's Custodian, Bank One Trust Company, N.A., 1111 Polaris Parkway,
Columbus, Ohio 43240, is responsible for holding the Fund's assets.

     The Fund's auditors, KPMG LLP, 757 Third Avenue, New York, New York, 10017,
perform an annual audit of the Fund's financial statements.

                    Brokerage Allocation and Other Practices


     During the fiscal years ended December 31, 2003, 2002 and 2001 all of the
Fund's transactions were principal transactions and no brokerage commissions
were paid.


     The following provisions regarding brokerage allocation and other practices
relating to purchases and sales of the Fund's securities are contained in the
Advisory and Administration Agreement. It provides that the Manager shall select
such broker/dealers ("dealers") as shall, in the Manager'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 Manager shall
cause the Fund to deal directly with the selling or purchasing principal or
market maker without incurring brokerage commissions unless the Manager
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 prices. In allocating transactions to dealers, the Manager 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 Manager 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 Manager's overall responsibilities. If, on the foregoing basis, the
transaction in question could be allocated to two or more dealers, the Manager
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. 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
and that such research services may or may not be useful to the Fund and may be
used for the benefit of the Manager or its other clients.


                                  Capital Stock

         The Fund has four classes of shares.


     *    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 including previous purchases of Class A
          Shares of the Fund or of any Class A Shares of any of the funds in the
          Aquilasm Group of Funds.. Class A Shares are subject to a 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.


     *    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. 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. 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.

     *    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.


     *    Financial Intermediary Class Shares ("Class I Shares") are offered and
          sold only through financial intermediaries with which Aquila
          Distributors, Inc. has entered into sales agreements, and are not
          offered directly to retail customers. Class I Shares are offered at
          net asset value with no sales charge and no redemption fee or
          contingent deferred sales charge, although a financial intermediary
          may charge a fee for effecting a purchase or other transaction on
          behalf of its customers. Class I Shares may carry a distribution fee
          of up to 0.25 of 1% of average annual net assets allocable to Class I
          Shares, currently up to 0.10 of 1% of such net assets, and a service
          fee of up to 0.25 of 1% of such assets.


     The Fund's four classes of shares differ in their sales charge structures
and ongoing expenses, which are likely to be reflected in differing yields and
other measures of investment performance. All four 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.

     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, whether or not affecting
the rights of the shareholders, may be made to the Declaration of Trust without
the affirmative vote of the holders of a majority of the dollar value of the
outstanding shares of the Fund, except that the Fund's Board of Trustees may
change the name of the Fund.

     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 four 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").
Shares are fully paid and non-assessable, except as set forth in the next
paragraph; the holders of shares have no pre-emptive or conversion rights,
except that Class C Shares automatically convert to Class A Shares after being
held for six years.

     The Fund is an entity of the type commonly known as a "Massachusetts
business trust." 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 trust. 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
Business Trust had two or more Series, and if any such Series were to be unable
to meet the obligations attributable to it (which, as with the Fund, is
relatively remote), the other Series would be subject to such obligations, with
a corresponding increase in the risk of the shareholder liability mentioned in
the prior sentence.


                   Purchase, Redemption, and Pricing of Shares

     The following supplements the information about purchase, redemption and
pricing of shares set forth in the Prospectus.

Sales Charges for Purchases of $1 Million or More of Class A Shares

     You will not pay a sales charge at the time of purchase when you purchase
"CDSC Class A Shares." CDSC Class A Shares include:

     (i)  Class A Shares issued in a single purchase of $1 million or more by a
          single purchaser;


     (ii) Class A Shares issued when the value of the purchase, together with
          the value of shares of the Fund or any other fund in the Aquilasm
          Group of Funds that are owned by the purchaser and are either CDSC
          Class A Shares or Class A Shares on which a sales charge was paid,
          exceeds $1 million; and


     (iii) Class A Shares purchased with the proceeds of redemption of shares of
          another investment company.

     CDSC Class A Shares do not include: (i) Class A Shares purchased without a
sales charge as described under "General" below and (ii) Class A Shares
purchased in transactions of less than $1 million unless certain special dealer
arrangements are in effect under "Certain Investment Companies" set forth under
"Reduced Sales Charges" below.

Broker/Dealer Compensation - Class A Shares

     Upon notice to all selected dealers, the Distributor may distribute up to
the full amount of the applicable sales charge to broker/dealers. Under the
Securities Act of 1933, broker/dealers may be deemed to be underwriters during
periods when they receive all, or substantially all, of the sales charge.

Redemption of CDSC Class A Shares


     If you redeem all or part of your CDSC Class A Shares during the two years
after you purchase them, you must pay a special contingent deferred sales charge
upon redemption.


     As described in the Prospectus it is the Fund's intention not to charge you
a CDSC that is greater than the amount of the commission that was paid to the
broker/dealer in connection with your purchase transaction. If the broker/dealer
was paid less than the maximum commission, your actual CDSC will be reduced as
described by the following table:

Commission Paid                        CDSC You Will Pay
 To Broker/Dealer                      on Redemption

         1%                               1%           in years 1 & 2

         0.50%                            0.50 of 1%   in year 1
                                          0.25 of 1%   in year 2

         0.25 in 4
         payments over 4 years            None



     This special charge also applies to CDSC Class A Shares purchased without a
sales charge pursuant to a Letter of Intent (see "Reduced Sales Charges for
Certain Purchases of Class A Shares.") This special charge will not apply to
shares acquired through the reinvestment of dividends or distributions on CDSC
Class A Shares or to CDSC Class A Shares held for longer than two years. When
redeeming shares, the Agent will redeem the CDSC Class A Shares held the
longest, unless otherwise instructed. If you own both CDSC and non-CDSC Class A
Shares, the latter will be redeemed first.


     The Fund will treat all CDSC Class A Share purchases made during a calendar
month as if they were made on the first business day of that month at the
average cost of all purchases made during that month. Therefore, the two-year
holding period will end on the first business day of the 24th calendar month
after the date of those purchases. Accordingly, the holding period may, in fact,
be one month less than the full 24 depending on when your actual purchase was
made. If you exchange your CDSC Class A Shares for shares of an Aquila
money-market fund (see "Exchange Privilege" below), running of the 24-month
holding period for those exchanged shares will be suspended.

Broker/Dealer Compensation - CDSC Class A Shares

     The Distributor currently intends to pay any dealer executing a purchase of
CDSC Class A Shares as follows:

Amount of Purchase                                   Amount Distributed to
                                                     Broker/Dealer as a %
                                                     of Purchase Price

$1 million but less than $2.5 million                        1%

$2.5 million but less than $5 million                0.50 of 1%

$5 million or more                                   0.25 of 1%

Reduced Sales Charges for Certain Purchases of Class A Shares

Right of Accumulation


     "Single purchasers" may qualify for a reduced sales charge in accordance
with the schedule set forth in the Prospectus for Class A and Class C Shares
when making subsequent purchases of Class A Shares. A reduced sales charge
applies if the cumulative value (based on purchase cost or current net asset
value, whichever is higher) of Class A Shares previously purchased with a sales
charge, together with Class A Shares of your subsequent purchase, also with a
sales charge, amounts to $25,000 or more.


Letters of Intent


     "Single purchasers" may also qualify for reduced sales charges, in
accordance with the same schedule, after a written Letter of Intent (included in
the New Account Application) is received by the Distributor. The Letter of
Intent confirms that you intend to purchase, within a thirteen month period,
Class A Shares of the Fund through a single selected dealer or the Distributor.
Class A Shares of the Fund which you previously purchased within 90 days prior
to the Distributor's receipt of your Letter of Intent and which you still own
may also be included in determining the applicable reduction. For more
information, including escrow provisions, see the Letter of Intent provisions of
the New Account Application.


General

         Class A Shares may be purchased without a sales charge by:

     *    the Fund's Trustees and officers,

     *    the directors, officers and certain employees, retired employees and
          representatives of the Manager, Distributor, and their parents and/or
          affiliates,

     *    selected dealers and brokers and their officers and employees,

     *    certain persons connected with firms providing legal, advertising or
          public relations assistance,

     *    certain family members of, and plans for the benefit of, the
          foregoing, and

     *    plans for the benefit of trust or similar clients of banking
          institutions over which these institutions have full investment
          authority, if the Distributor has 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. Since there may be tax consequences of these
purchases, your tax advisor should be consulted.

     Class A Shares may also be issued without a sales charge 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.

     A qualified group is a group or association, or a category of purchasers
who are represented by a fiduciary, professional or other representative ,
including a registered broker/dealer that is acting as a registered investment
adviser or certified financial planner for investors participating in
comprehensive fee programs (but not any other broker/dealer), which

     (i)  satisfies uniform criteria which enable the Distributor to realize
          economies of scale in its costs of distributing shares;

     (ii) 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

     (iii) complies with the conditions of purchase that make up an agreement
          between the Fund and the group, representative or broker or dealer.

     At the time of purchase, the Distributor must receive 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 without sales charge from
proceeds of a redemption, made within 120 days prior to such purchase, of shares
of an investment company (not a member of the Aquilasm Group of Funds) on which
a sales charge, including a contingent deferred sales charge, has been paid.
Additional information is available from the Distributor.

         To qualify, follow these special procedures:

     1.   Send a completed New Account Application and payment for the shares to
          be purchased directly to the Distributor, Aquila Distributors, Inc.,
          380 Madison Avenue, Suite 2300, New York, NY 10017-2513. Do not send
          this material to the address indicated on the New Account Application.

     2.   Your completed New Account Application must be accompanied by evidence
          satisfactory to the Distributor that you, as the prospective
          shareholder, have made a qualifying 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.

     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

     The Distributor (not the Fund) will pay to any dealer with which it has
made prior arrangements and which effects a purchase of Class A Shares of the
Fund from the proceeds of a qualifying redemption of the shares of an investment
company (not a member of the Aquilasm Group of Funds) up to 1% of the purchase.
The shareholder, however, will not be subject to any sales charge upon purchase
of the shares.


     Dealer payments will be made in up to 4 payments of 0.25 of 1% of the
proceeds over a four-year period. The first payment will be made subsequent to
receipt of the proper documentation detailed above. Future payments will be made
at the end of the second, third and fourth years and at the end of the quarter
of the anniversary month that the purchase of Class A Shares took place, with
respect to any part of the investment that remains in the Fund during the entire
period based on the original purchase amount.


Additional Compensation for Broker/Dealers

     The Distributor may compensate broker/dealers, above the normal sales
commissions, in connection with sales of any class of shares. However,
broker/dealers may receive levels of compensation which differ as between
classes of shares sold.

     The Distributor, not the Fund, will pay these additional expenses.
Therefore, the price you pay for shares and the amount that the Fund receives
from your payment will not be affected.

         Additional compensation may include full or partial payment for:

     *    advertising of the Fund's shares;

     *    payment of travel expenses, including lodging, for attendance at sales
          seminars by qualifying registered representatives; and/or

     *    other prizes or financial assistance to broker/dealers conducting
          their own seminars or conferences.

     Such compensation may be limited to broker/dealers whose representatives
have sold or are expected to sell significant amounts of the Fund's shares.
However, broker/dealers may not use sales of the Fund's shares to qualify for
additional compensation to the extent such may be prohibited by the applicable
regulations of any state or self-regulatory agency, such as the National
Association of Securities Dealers, Inc.


     From time to time, the Distributor makes payments to help support
promotional and/or educational seminars given by broker/dealers or other
financial institutions. These payments may be substantial and could create an
incentive for an intermediary to sell Fund shares.


     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. Any of the foregoing payments to be made by
the Distributor may be made instead by the Manager out of its own funds,
directly or through the Distributor.

Automatic Withdrawal Plan

     You may establish an Automatic Withdrawal Plan if you own or purchase Class
A Shares or Class Y 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 or
Class I 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 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 New Account Application.)

     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.

Share Certificates

     You may obtain Share certificates for full Class A Shares only if you make
a written request to the Agent. All share certificates previously issued by the
Fund represent Class A Shares. If you lose the certificates, you may incur delay
and expense when redeeming shares or having the certificates reissued.

         Share certificates will not be issued:

     *    for fractional Class A Shares;

     *    if you have selected Automatic Investment or Telephone Investment for
          Class A Shares;

     *    if you have selected Expedited Redemption. However, if you
          specifically request, Class A Share certificates will be issued with a
          concurrent automatic suspension of Expedited Redemption on your
          account; or

     *    for Class C Shares, Class Y Shares or Class I Shares.

Reinvestment Privilege

     If you reinvest proceeds of a redemption within 120 days of the redemption
you will not have to pay any additional sales charge on the reinvestment. You
must reinvest in the same class as the shares redeemed. You may exercise this
privilege only once a year, unless otherwise approved by the Distributor.

     The Distributor will refund to you any CDSC deducted at the time of
redemption by adding it to the amount of your reinvestment. The Class C or CDSC
Class A Shares purchased upon 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.

     Reinvestment will not alter the tax consequences of your original
redemption.

Exchange Privilege


     Shareholders of the Fund have an exchange privilege as set forth below.
Exchanges can be made among this Fund, the other tax-free municipal bond funds
and an equity fund (together with the Fund, the "Bond or Equity Funds") and
certain money-market funds (the "Money-Market Funds") in the Aquilasm Group of
funds. All of the funds have the same Manager or Administrator and Distributor
as the Fund. All exchanges are subject to certain conditions described below. As
of the date of this SAI, the Bond or Equity Funds are Aquila Rocky Mountain
Equity Fund, Hawaiian Tax-Free Trust, Tax-Free Trust of Oregon, Tax-Free Trust
of Arizona, Churchill Tax-Free Fund of Kentucky, Tax-Free Fund of Colorado,
Tax-Free Fund For Utah and Narragansett Insured Tax-Free Income Fund; the Aquila
Money-Market Funds are Pacific Capital Cash Assets Trust (Original Shares),
Pacific Capital Tax-Free Cash Assets Trust (Original Shares) and Pacific Capital
U.S. Government Securities Cash Assets Trust (Original Shares).


     Generally, you can exchange shares of a given class of a Bond or Equity
Fund including the Fund for shares of the same class of any other Bond or Equity
Fund, or for shares of any Money-Market Fund, without the payment of a sales
charge or any other fee, and there is no limit on the number of exchanges you
can make from fund to fund. This exchange privilege is available to Class I
Shares to the extent that other Aquila-sponsored funds are made available to its
customers by a financial intermediary. All exchanges of Class I Shares must be
made through your financial intermediary.

         The following important information should be noted:

     (1) CDSCs Upon Redemptions of Shares Acquired Through Exchanges. If you
exchange shares subject to a CDSC, no CDSC will be imposed at the time of
exchange, but the shares you receive in exchange for them will be subject to the
applicable CDSC if you redeem them before the requisite holding period
(extended, if required) has expired.

     If the shares you redeem would have incurred a CDSC if you had not made any
exchanges, then the same CDSC will be imposed upon the redemption regardless of
the exchanges that have taken place since the original purchase.

     (2) Extension of Holding Periods by Owning Money-Market Funds. Any period
of 30 days or more during which Money-Market Fund shares received on an exchange
of CDSC Class A Shares or Class C Shares are held is not counted in computing
the applicable holding period for CDSC Class A Shares or Class C Shares.

     (3) Originally Purchased Money-Market Fund Shares. Shares of a Money-Market
Fund (and any shares acquired as a result of reinvestment of dividends and/or
distributions on these shares) acquired directly in a purchase (or in exchange
for Money-Market Fund shares that were themselves directly purchased), rather
than in exchange for shares of a Bond or Equity Fund, may be exchanged for
shares of any class of any Bond or Equity Fund that the investor is otherwise
qualified to purchase, but the shares received in such an exchange will be
subject to the same sales charge, if any, that they would have been subject to
had they been purchased rather than acquired in exchange for Money-Market Fund
shares. If the shares received in exchange are shares that would be subject to a
CDSC if purchased directly, the holding period governing the CDSC will run from
the date of the exchange, not from the date of the purchase of Money-Market Fund
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 is 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:


                             800-437-1000 toll free

     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.

     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; 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. Government Securities Cash Assets Trust (which invests in
U.S. Government obligations) are exempt from state income taxes. Dividends paid
by Aquila Rocky Mountain 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.

Conversion of Class C Shares

     Conversion of Class C Shares into Class A Shares 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
Bond 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.

"Transfer on Death" ("TOD") Registration (Not Available for Class I Shares)

     Each of the funds in the Aquilasm Group of Funds now permits registration
of its shares in beneficiary form, subject to the funds' rules governing
Transfer on Death ("TOD") registration, if the investor resides in a state that
has adopted the Uniform Transfer on Death Security Registration Act (a "TOD
State"; for these purposes, Missouri is deemed to be a TOD State). This form of
registration allows you to provide that, on your death, your shares are to be
transferred to the one or more persons that you specify as beneficiaries. To
register shares of the Fund in TOD form, complete the special TOD Registration
Request Form and review the Rules Governing TOD Registration; both are available
from the Agent. The Rules, which are subject to amendment upon 60 days' notice
to TOD account owners, contain important information regarding TOD accounts with
the Fund; by opening such an account you agree to be bound by them, and failure
to comply with them may result in your shares' not being transferred to your
designated beneficiaries. If you open a TOD account with the Fund that is
otherwise acceptable but, for whatever reason, neither the Fund nor the Agent
receives a properly completed TOD Registration Request Form from you prior to
your death, the Fund reserves the right not to honor your TOD designation, in
which case your account will become part of your estate.

     You are eligible for TOD registration only if, and as long as, you reside
in a TOD State. If you open a TOD account and your account address indicates
that you do not reside in a TOD State, your TOD registration will be ineffective
and the Fund may, in its discretion, either open the account as a regular
(non-TOD) account or redeem your shares. Such a redemption may result in a loss
to you and may have tax consequences. Similarly, if you open a TOD account while
residing in a TOD State and later move to a non-TOD State, your TOD registration
will no longer be effective. In both cases, should you die while residing in a
non-TOD State the Fund reserves the right not to honor your TOD designation. At
the date of this SAI, most states are TOD States.

Computation of Net Asset Value


     The net asset value of the shares of each of the Fund's classes 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 allocable to
each class by the total number of its shares of such class then outstanding.
With the approval of the Fund's Board of Trustees the Fund's normal practice is
that most or all of the Kentucky Obligations in the Fund's portfolio are priced
using a reputable pricing service which may employ 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. Portfolio securities other than
those with a remaining maturity of sixty days or less are valued at the mean
between bid and asked quotations, if available, which, for Kentucky Obligations,
may be obtained from a reputable pricing service which may, in turn, obtain
quotations from broker/dealers or banks dealing in Kentucky Obligations. Any
securities or assets for which such 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. Securities having a remaining maturity of sixty days
or less 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. With the approval of the Fund's Board of Trustees, the Manager 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.


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 Class A 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 for Class A Shares 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 of Class A Shares and Class C Shares 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.


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.

                           Additional Tax Information


Certain Exchanges

     If you incur a sales commission on a 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.


Tax Status of the Fund

     During its last fiscal year, the Fund qualified as a "regulated investment
company" under the Internal Revenue Code and intends to continue such
qualification. A regulated investment company is not liable for Federal income
taxes on amounts paid by it as dividends and distributions.

     The Code, however, contains a number of complex qualifying tests.
Therefore, it is possible, although not likely, that the Fund might not meet one
or more of these tests in any particular year. If the Fund fails to qualify, it
would be treated for tax purposes as an ordinary corporation. As a consequence,
it would receive no tax deduction for payments made to shareholders and would be
unable to pay dividends and distributions which would qualify as
"exempt-interest dividends" or "capital gains dividends." Additionally the Fund
must meet certain distribution requirements or it will be subject to an excise
tax on amounts not properly distributed. The Fund intends to meet such
requirements.


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
contingent 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 one year and short-term if for a year or less. Long-term capital
gains are currently taxed at a maximum rate of 15% and short-term gains are
currently taxed at ordinary income tax rates. 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

     When Class C Shares automatically convert to Class A Shares, approximately
six years after purchase, you will recognize no gain or loss. Your adjusted tax
basis in the Class A Shares you receive upon conversion will equal your adjusted
tax basis in the Class C Shares you held immediately before conversion. Your
holding period for the Class A Shares you receive will include the period you
held the converted Class C Shares.

                                  Underwriters

     Aquila Distributors, Inc. acts as the Fund's principal underwriter in the
continuous public offering of all of the Fund's classes of shares. The
Distributor is not obligated to sell a specific number of shares. 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. Payments of the amounts listed below for the fiscal year
ended December 31, 2003 were as follows:

<TABLE>
<CAPTION>
<S>                      <C>                     <C>                     <C>                    <C>


Name of Principal         Net Under writing      Compensation on         Brokerage Commissions  Other
Underwriter               Discounts and          Redemptions and                                Compensation
                          Commissions            Repurchases


Aquila Distributors Inc.  $42,855                None                    None                   None(*)


</TABLE>

          (*) Amounts paid to the Distributor under the Fund's Distribution Plan
          are for compensation.


<PAGE>
                                   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.

     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 three rating categories for
short-term obligations, all of which define an investment grade situation. These
are designated as Moody's Investment Grade MIG 1 through MIG 3. 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 superior credit quality.
Excellent protection is afforded by established cash flows, highly reliable
liquidity support or demonstrated broad-based access to the market for
refinancing.

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

         MIG3/VMIG3        This designation denotes acceptable credit quality.
Liquidity and cash flow protection may be narrow, and market access for
refinancing is likely to be less well established.


     Dominion Bond Rating Service Limited ("DBRS") Bond and Long Term Debt
Rating Scale. Long term debt ratings are meant to give an indication of the risk
that the borrower will not fulfill its full obligations in a timely manner with
respect to both interest and principal commitments.

     AAA  Bonds rated AAA are of the highest credit quality, with exceptionally
          strong protection for the timely repayment of principal and interest.

     AA   Bonds rated AA are of superior credit quality, and protection of
          interest and principal is considered high.

     A    Bonds rated A are of satisfactory credit quality. Protection of
          interest and principal is still substantial, but the degree of
          strength is less than with AA rated entities.

     BBB  Bonds rated BBB are of adequate credit quality.

     BB   Bonds rated BB are defined to be speculative, where the degree of
          protection afforded interest and principal is uncertain, particularly
          during periods of economic recession.

     B    Bonds rated B are highly speculative and there is a reasonably high
          level of uncertainty which exists as to the ability of the entity to
          pay interest and principal on a continuing basis in the future,
          especially in periods of economic recession or industry adversity.

     DBRS Commercial Paper and Short Term Debt Rating Scale. Commercial paper
ratings are meant to give an indication of the risk that the borrower will not
fulfill its obligations in a timely manner. All three DBRS rating categories for
short term debt use "high," "middle" or "low" as subset grades to designate the
relative standing of the credit within a particular rating category.

R-1 (high)      Short term debt rated R-1 (high) is of the highest credit
                quality, and indicates an entity which possesses unquestioned
                ability to repay current liabilities as they fall due.

R-1 (middle)    Short term debt rated R-1 (middle) is of superior credit
                quality and, in most cases, ratings in this category differ
                from R-1 (high) credits to only a small degree.

R-1 (low)       Short term debt rated R-1 (low) is of satisfactory credit
                quality.  the overall strength and outlook for key
                liquidity, debt and profitability ratios is not normally as
                favorable as with higher rating categories, but these
                considerations are still respectable.

R-2 (high),     Short term debt rated R-2 is of adequate credit quality and
R-2 (middle),   within the three subset grades, debt protection ranges from
R-2 (low)       having reasonable ability for timely repayment to a level
                which is considered only just adequate.

R-3 (high),     Short term debt rated R-3 is speculative, and within the three
R-3 (middle),   subset grades, the capacity for timely payment ranges from
R-3 (low)       mildly speculative to doubtful.



     Fitch Ratings. A brief description of the applicable rating symbols and
their meanings follows:

     AAA  Highest credit quality. `AAA' ratings denote the lowest expectation of
          credit risk. They are assigned only in case of exceptionally strong
          capacity for timely payment of financial commitments. This capacity is
          highly unlikely to be adversely affected by foreseeable events.

     AA   Very high credit quality. `AA' ratings denote a very low expectation
          of credit risk. They indicate very strong capacity for timely payment
          of financial commitments. This capacity is not significantly
          vulnerable to foreseeable events.

     A    High credit quality. `A' ratings denote a low expectation of credit
          risk. The capacity for timely payment of financial commitments is
          considered strong. This capacity may, nevertheless, be more vulnerable
          to changes in circumstances or in economic conditions than is the case
          for higher ratings.

     BBB  Good credit quality. `BBB' ratings indicate that there is currently a
          low expectation of credit risk. The capacity for timely payment of
          financial commitments is considered adequate, but adverse changes in
          circumstances and in economic conditions are more likely to impair
          this capacity. This is the lowest investment-grade category.

Notes to Long-term and Short-term ratings:

"+" or "-" may be appended to a rating to denote relative status within major
rating categories. Such suffixes are not added to the `AAA' Long-term rating
category, to categories below `CCC', or to Short-term ratings other than `F1'.

`NR' indicates that Fitch does not rate the issuer or issue in question.

`Withdrawn': A rating is withdrawn when Fitch deems the amount of information
available to be inadequate for rating purposes, or when an obligation matures,
is called, or refinanced.

Rating Watch: Ratings are placed on Rating Watch to notify investors that there
is a reasonable probability of a rating change and the likely direction of such
change. These are designated as "Positive", indicating a potential upgrade,
"Negative", for a potential downgrade, or "Evolving", if ratings may be raised,
lowered or maintained. Rating Watch is typically resolved over a relatively
short period.

A Rating Outlook indicates the direction a rating is likely to move over a one
to two-year period. Outlooks may be positive, stable or negative. A positive or
negative Rating Outlook does not imply a rating change is inevitable. Similarly,
companies whose outlooks are `stable` could be upgraded or downgraded before an
outlook moves to positive or negative if circumstances warrant such an action.
Occasionally, Fitch may be unable to identify the fundamental trend. In these
cases, the Rating Outlook may be described as evolving.

     Short-Term Obligations. The following ratings scale applies to foreign
currency and local currency ratings. A Short-term rating has a time horizon of
less than 12 months for most obligations, or up to three years for US public
finance securities, and thus places greater emphasis on the liquidity necessary
to meet financial commitments in a timely manner.

     F1   Highest credit quality. Indicates the strongest capacity for timely
          payment of financial commitments; may have an added "+" to denote any
          exceptionally strong credit feature.

     F2   Good credit quality. A satisfactory capacity for timely payment of
          financial commitments, but the margin of safety is not as great as in
          the case of the higher ratings.

     F3   Fair credit quality. The capacity for timely payment of financial
          commitments is adequate; however, near-term adverse changes could
          result in a reduction to non-investment grade.