Churchill Tax-Free Fund of Kentucky
                                Supplement to the
                                  Prospectuses
                              Dated April 30, 2005


         The following sub-section is added to the section entitled "Alternative
Purchase Plans":

Additional Information

         The Distributor and/or its related companies may pay compensation (out
of their own assets and not as an additional charge to the Fund) to certain
brokers/dealers and other financial intermediaries ("financial advisors") in
connection with the sale or retention of Fund shares, certain shareholder
servicing and/or certain recordkeeping/sub-transfer agency services. For
example, the Distributor and/or its related companies may pay compensation to
financial advisors for administrative, sub-accounting or shareholder transaction
processing services above and beyond the normal such costs which would normally
be paid by the Fund, assistance in training and education and/or other forms of
marketing support, including costs related to providing the Fund with "shelf
space." Payments made to financial advisors may be based on a fixed dollar
amount and/or one or more of the following factors: gross sales, current assets,
number of accounts attributable to or maintained by the financial advisor and/or
reimbursement for marketing expenses of the financial advisor. Some of these
amounts may be significant to the Distributor, although they may be small
compared to amounts a financial advisor may receive from other Distributors.
Nonetheless, the prospect of receiving additional compensation may provide
financial advisors with an incentive to favor sales of shares of the Fund over
other investment options. You should ask your financial advisor to obtain more
information on how additional compensation may have influenced your advisor's
recommendation of the Fund. For more information, please see the Fund's
Statement of Additional Information.


                           The date of this supplement
                                is June 17, 2005


<PAGE>


                       Churchill Tax-Free Fund of Kentucky
                          Supplement to the Prospectus
                      For Class I Shares and Class Y Shares
                              Dated April 30, 2005


         The table of fees and expenses is replaced by the following:

                       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 Fee ................................None             None


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


Management Fee ..............................0.40%            0.40%
Distribution (12b-1) Fee.....................0.15%(1)         None
Other (2)....................................0.39%            0.18%
Total Annual Fund Operating Expenses.........0.94%            0.58%

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

(2) "Other" expenses for the two classes differ because Class I Shares pay
service fees to financial intermediaries of 0.25%, which includes transfer agent
services, and charges common to both classes of 0.14% while Class Y Shares bear
only the common charges of 0.14% 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, regardless of whether you 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..........  $96      $300       $520       $1,155
 Class Y Shares........... $59      $186       $324       $  726

----------------------

         The chart in the section entitled "Alternative Purchase Plans" is
replaced with the following:

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


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

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

Contingent Deferred Sales Charge         None.                           None.

Distribution and Service Fees            None.                           Distribution fee of up to 0.25 of 1%
                                                                         of average annual net assets
                                                                         allocable to Class I Shares,
                                                                         currently up to 0.15 of 1% of such
                                                                         net assets, and a service fee of up
                                                                         to 0.25 of 1% of such assets.
</TABLE>


        The fifth paragraph under the caption "Is there a Distribution Plan or a
Services Plan?" is changed to read as follows:

         For any fiscal year, these payments (currently up to 0.15 of 1%) may
not exceed 0.25 of 1% of the average annual net assets represented by the Class
I Shares of the Fund.


                                            The date of this supplement
                                                 is June 17, 2005

<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 30, 2005
                                                 As Supplemented June 17, 2005

         This Statement of Additional Information (the "SAI") is not a
Prospectus. There are two Prospectuses for the Fund dated April 30, 2005; 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,
2004, 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 registered public accounting firm, 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.....................................31
Capital Stock................................................................31
Purchase, Redemption, and Pricing of Shares..................................33
Additional Tax Information...................................................42
Underwriters.................................................................43
Appendix A...................................................................44


<PAGE>



                       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, 2004, in Kentucky Obligations in the various
rating categories:

Highest rating (1) ...................................................65.8%
Second highest rating (2) ..........................................  28.9%
Third highest rating (3) ............................................. 5.1%
Fourth highest rating (4)............................................  0.0%
Not rated............................................................. 0.2%
                                                                     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.


<PAGE>


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.

Additional Information about the Commonwealth of Kentucky and Kentucky
Obligations

..........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 has an Audit Committee, consisting of all of the Trustees who
are "independent" and are not "interested persons" of the Fund. The Committee
recommends to the Board of Trustees what independent registered public
accounting firm 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 Audit Committee had one
meeting during the last fiscal year.

         The Fund has a Nominating Committee, consisting of all of the
non-interested Trustees. The Nominating Committee held no meetings during the
last fiscal year. The committee will consider nominees recommended by the
shareholders who may send recommendations to the committee in care of the
Manager at 380 Madison Avenue, New York, NY 10017.



<PAGE>


Trustees and Officers


      The following material includes information about each Trustee, Trustee
emeritus 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
                                                                             Portfolios in     Other Directorships
                          Positions Held                                     Fund              Held by Trustee
                          with Fund and                                      Complex(3)       (The position held is
Name, Address(1) and      Length of         Principal Occupation(s)          Overseen by      a directorship unless
Date of Birth             Service(2)        During Past 5 Years              Trustee          indicated otherwise.)
-------------             ----------        -------------------              -------          ---------------------

Interested
Trustee (4)

Diana P. Herrmann         Trustee since     Vice Chair and Chief Executive       10                    None
New York, NY              1995 and          Officer of Aquila Management
(02/25/58)                President since   Corporation, Founder of the
                          1999              Aquilasm Group of Funds(5) and
                                            parent of Aquila Investment
                                            Management LLC, Manager, since 2004,
                                            President and Chief 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; Chief
                                            Executive Officer and Vice Chair
                                            since 2004 and President, Chief
                                            Operating Officer and Manager of the
                                            Manager since 2003; Vice Chair,
                                            President, Executive Vice President
                                            or Senior 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; Governor, Investment
                                            Company Institute (2004) and head of
                                            its Small Funds Committee since
                                            2004; active in charitable and
                                            volunteer organizations.





Non-interested Trustees

Thomas A.                 Chair of the      Vice President of Robinson,          2                     None
Christopher               Board of          Hughes & Christopher, C.P.A.s,
Danville, KY              Trustees since    P.S.C., since 1977; President, A
(12/19/47)                2005 and          Good Place for Fun, Inc., a
                          Trustee since     sports facility, since 1987;
                          1992              currently or formerly active
                                            with various professional and
                                            community organizations.

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        10      Trustee, Pimco Advisors VIT.
New York, NY              1987              Power Partners LTD since 1994
(11/24/35)                                  and Louisiana Power Partners,
                                            1999-2003; Treasurer, Alumni
                                            Association of SUNY Maritime
                                            College since 2004 (President,
                                            2002-2003, First Vice President,
                                            2000-2001, Second Vice
                                            President, 1998-2000) and
                                            director of the same
                                            organization since 1997;
                                            Director, STCM Management
                                            Company, Inc., 1973-2004; 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, 2000-2004, 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             2         Community Bank and Trust,
Louisville, KY            1987              Louisville since November 2002;                Pikeville, KY and Texas
(11/14/48)                                  Professor of Economics,                        Roadhouse Inc.
                                            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.
</TABLE>

Trustees Emeritus

     Because of their importance to the shareholders and to enable the Board of
Trustees to continue to have the benefit of their counsel, Mr. Lacy Herrmann and
Mr. Carroll Knicely have agreed to continue to be Trustees emeritus. A Trustee
emeritus may attend Board meetings but has no voting power.

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


Lacy B. Herrmann          Trustee           Founder and Chairman of the Board,   N/A                   N/A
New York, NY              Emeritus since    Aquila Management Corporation, the
(05/12/29)                2005; Founder,    sponsoring organization and parent
                          Chairman of the   of the Manager or Administrator
                          Board of          and/or Adviser or Sub-Adviser to
                          Trustees          each fund of the Aquilasm Group of
                          1987-2004         Funds, Chairman of the Manager or
                                            Administrator and/or Adviser 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 Chairman of the Board
                                            of Trustees 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 through 2003, Trustee
                                            until 2004 and Chairman of the
                                            Board, Emeritus since 2004; Director
                                            of the Distributor since 1981 and
                                            formerly Vice President or
                                            Secretary, 1981-1998; Trustee
                                            Emeritus, Brown University and the
                                            Hopkins School; active in
                                            university, school and charitable
                                            organizations.

Carroll F. Knicely        Trustee           President, Associated                N/A                       N/A
Glasgow, KY               Emeritus since    Publications Inc, Glasgow,
(12/08/28)                2004              Kentucky; director and member,
                                            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.

Officers

Charles E.                Executive Vice    Executive Vice President of all       N/A                  N/A
Childs, III               President since   funds in the Aquilasm Group of
New York, NY              2003              Funds and the Manager since
(04/01/57)                                  2003; Senior Vice President,
                                            corporate development, 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
                                            Aquila Money-Market Funds,
                                            1988-2003.

Thomas S. Albright        Senior Vice       Senior Vice President and             N/A                   N/A
Louisville, KY            President since   Portfolio Manager, Churchill
(07/26/52)                2000              Tax-Free Fund of Kentucky since
                                            July 2000; Senior Vice
                                            President, Tax-Free Fund For Utah
                                            since 2003, Vice President,
                                            2001-2003 and co-portfolio manager
                                            since 2001; Vice President and
                                            backup portfolio manager, Tax-Free
                                            Trust of Arizona, since 2004; 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   since 1998, Registered Principal
                          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.

Todd W. Curtis            Vice President    Senior Vice President and             N/A                  N/A
Phoenix, AZ               since 2004        Portfolio Manager, Tax-Free
(06/08/49)                                  Trust of Arizona, since August
                                            2004; Vice President and backup
                                            portfolio manager, Churchill
                                            Tax-Free Fund of Kentucky, since
                                            2004; Vice President and
                                            Portfolio Manager, Banc One
                                            Investment Advisors, Inc. and
                                            its predecessors, 1981-2004.

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.

Robert W. Anderson        Chief             Chief Compliance Officer of the       N/A                  N/A
New York, NY (08/23/40)   Compliance        Fund, the Manager and the
                          Officer since     Distributor since 2004,
                          2004 and          Compliance Officer of the
                          Assistant         Manager or its predecessor and
                          Secretary         current parent since 1998 and
                          since 2000        Assistant Secretary of the
                                            Aquilasm Group of Funds since
                                            2000; Consultant, The Wadsworth
                                            Group, 1995-1998.

Joseph P. DiMaggio        Chief Financial   Chief Financial Officer of the        N/A                  N/A
New York, NY              Officer since     Aquilasm Group of Funds since
(11/06/56)                2003 and          2003 and Treasurer since 2000;
                          Treasurer since   Controller, Van Eck Global
                          2000              Funds, 1993-2000.

Edward M. W. Hines        Secretary since   Partner, Hollyer Brady Barrett &      N/A                  N/A
New York, NY              1987              Hines LLP, legal counsel to the
(12/16/39)                                  Fund, since 1989; Secretary of
                                            the Aquilasm Group of Funds.

John M. Herndon           Assistant         Assistant Secretary of the            N/A                  N/A
New York, NY (12/17/39)   Secretary since   Aquilasm Group of Funds 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 since   Aquilasm Group of Funds since
(11/02/66)                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.
</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) Includes certain Aquila-sponsored funds that are dormant and have no public
shareholders.



(4) Ms. Herrmann is an interested person of the Fund as an officer of the Fund,
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.



(5) 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, which do not include the dormant funds described in footnote 3, are
called the "Aquilasm Group of Funds."




                       Securities Holdings of the Trustees
                                (as of 12/31/04)


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

Interested Trustees

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,
2004, the Fund paid a total of $93,711 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 11 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                 $8,500                      $16,467                         2

Douglas Dean                          $9,050                      $9,050                          1

Theodore T. Mason                     $8,550                      $63,100                        10

Anne J. Mills                         $8,350                      $38,275                         4

William J. Nightingale                $9,125                      $18,400                         2

James R. Ramsey                       $8,350                      $8,685                          2


</TABLE>



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



                             Ownership of Securities


         On April 4, 2005, the following persons held 5% or more of any class of
the Fund's outstanding shares. On the basis of information received from the
institutional holders, the Fund's management believes that all of the shares
indicated are held by them for the benefit of clients.



<PAGE>

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


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

     Institutional 5% shareholders


SYAG                                           2,705,944 Class A Shares              12.33%
c/o Stock Yards Bank & Trust Co.
P.O. Box 34290 Louisville, KY

MLPF&S for the sole                              67,906 Class C Shares                8.80%
benefit of its customers
4800 Deer Lake Dr East
Jacksonville, FL

USB Financial Services Inc.                      46,539 Class C Shares                6.03%
FBO Mrs. Frances Carletta Jewell
Mr. Kenneth Dewany Jewell JTWROS
6971 Mt. Washington Road
Taylorsville, KY

Ray N. Cossey and Elizabeth S. Cossey,           42,861 Class C Shares                5.55%
Trustees
Cossey Family Revoc. Living Trust
c/o Carolyn E. Pitchford
1049 Halifax Bailey Road
Scottsdale, KY

US Bancorp Investments                           40,389 Class C Shares                5.23%
FBO 228998431
60 Livingston Avenue
St. Paul, MN

Glenview Trust Company                         3,098,333 Class Y Shares              66.06%
4969 US Highway 42, Suite 2000
Louisville, KY

Bankdan                                         484,915 Class Y Shares               10.34%
c/o Kentucky Trust Company
218 W. Main Street
Danville, KY

J.J.B. Hilliard Lyons                           250,509 Class Y Shares                5.34%
FBO Cardinal Aluminum Co.
501 S. 4th Street
Louisville, KY

Danky & Co.                                     244,403 Class Y Shares                5.21%
P.O.Box 28
Danville, KY


Pershing LLC                                    642,825 Class I Shares               86.24%
P.O. Box 2052
Jersey City, NJ

                                                64,070 Class I Shares                 8.60%
Charles Schwab and Company
Special Custody Account
FBO Customers
101 Montgomery Street
San Francisco, CA

</TABLE>


Additional 5% shareholders

         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, 2004, 2003 and 2002 the Fund incurred
management fees (investment advisory fees) as follows:


                           Manager


2004                       $1,156,672


2003                       $1,129,293

2002                       $1,010,893


         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%
from the current fees of 0.40 of 1%.

Renewal of the Advisory and Administration Agreement

     Renewals until June 30, 2005 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, 2004. 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:


<PAGE>

          o    Copies of the agreement 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 2003. 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, 2005 was appropriate and it was approved
by the unanimous vote of all of the Trustees, including a majority of the
non-interested trustees.

Additional Information About the Portfolio Managers

         The Fund's portfolio manager is Mr. Thomas S. Albright. He manages the
Fund, is co-portfolio manager of Tax-Free Fund For Utah, and is backup portfolio
manager of Tax-Free Trust of Arizona. There are no conflicts of interest between
the Fund and these other funds in the Aquilasm Group of Funds. Mr. Albright
manages no other investment companies, no pooled investment vehicles and no
other separate accounts. His compensation is a fixed salary, which is not based
on performance, with no bonus, and he participates in the Manager's 401-K Plan.
He is compensated by the Manager and receives no compensation from the Fund. Mr.
Albright owns securities of the Fund in the range of under $10,000.

     The Fund's backup portfolio manager is Mr. Todd W. Curtis. Mr. Curtis is
also portfolio manager of Tax-Free Trust of Arizona. There is no conflict of
interest between these two funds. Mr. Curtis manages no other investment
companies, no pooled investment vehicles and no other separate accounts. He
receives a fixed salary without any bonus, deferred compensation or retirement
plan. His compensation is not performance based. Mr. Curtis does not own any
securities of the Fund.

Underwriting Commissions

         During the fiscal years ended December 31, 2004, 2003 and 2002 the
aggregate dollar amount of sales charges on sales of shares in the Fund was
$315,473, $480,078 and $485,352, respectively, and the amount retained by the
Distributor was $37,104, $42,855 and $35,202, 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:



<PAGE>



<TABLE>

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

Amount of Purchase and Value of All
Class A Shares Held by a Single      Sales Charge as Percentage of Public   Commissions as Percentage of
Purchaser                            Offering Price                         Offering Price

Less than $25,000                      4.00%                                  3.00%
$25,000 but less than $50,000          3.75%                                  3.00%
$50,000 but less than $100,000         3.50%                                  2.75%
$100,000 but less than $250,000        3.25%                                  2.75%
$250,000 but less than $500,000        3.00%                                  2.50%
$500,000 but less than $1,000,000      2.50%                                  2.25%

</TABLE>


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 up to 0.15 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, 2004, 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, 2004, $348,547 was paid to
Qualified Recipients under Part I of the Plan, $54,943 was paid to Qualified
Recipients under Part II and $12,714 was paid to Qualified Recipients under Part
III. Of these amounts, $8,438, $12,102 and $0, respectively, were paid as
compensation to the Distributor, and $340,109, $42,841 and $12,714;
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).



<PAGE>


Provisions for Level-Payment Class Shares (Class C 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, 2004,
$18,314 was paid to the Distributor under Part I of the Plan.

Provisions for Financial Intermediary Class Shares (Class I 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. During the fiscal year ended December 31,
2004 payments made to Qualified Recipients under Part II of the Plan with
respect to the Fund's Class I Shares amounted to $9,535.

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.



<PAGE>


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 Independent Registered Public Accounting Firm

     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 independent registered public accounting firm, KPMG LLP, 757
Third Avenue, New York, New York, 10017, performs 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 whether a dealer has
provided research services, as further discussed below. 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.. There is no sales charge on purchases of $1
         million or more, but redemptions of shares so purchased are generally
         subject to a contingent deferred sales charge ("CDSC"). 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 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. Class C Shares are subject to a fee under the Fund's
         Distribution Plan at the rate of 0.75 of 1% of the average annual net
         assets represented by the Class C Shares.

         *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 0.15 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 (based on purchase cost or current net
                  asset value, whichever is higher) 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, is $1 million or
                  more.

         CDSC Class A Shares do not include Class A Shares purchased without a
sales charge as described under "General" 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 CDSC upon redemption.

         As stated 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:

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

       Value of Holdings At the                 CDSC You will Pay on          Commission Paid to Broker/Dealer
           Time of Purchase                          Redemption
  $1 million and up to $2.5 million                1% in years 1 & 2                         1%

  Over $2.5 million and up to $5                0.50 of 1% in year 1                        0.50%
  million                                       0.25 of 1% in year 2

  Over $5 million                                       None                   0.25 in 4 payments over 4 years
</TABLE>

         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 almost 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 Percentage
                                                         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.



<PAGE>


Additional Compensation for Financial Intermediaries

         The Distributor and/or its related companies may pay compensation out
of their own assets to certain broker/dealers and other financial intermediaries
("financial advisors") above and beyond sales commissions, 12b-1 or certain
service fees and certain recordkeeping/sub-transfer agency fees paid by the
Fund, in connection with the sale, servicing or retention of Fund shares. This
compensation, which may be significant in dollar amounts to the Distributor,
could create an incentive for a financial advisor to sell Fund shares. You
should ask your financial advisor to obtain more information on how this
additional compensation may have influenced your advisor's recommendation of the
Fund.

         Such additional compensation is paid out of the Distributor's (or
related company's) own resources, without additional charge to the Fund or its
shareholders. Additional cash payments may be based on a percentage of gross
sales, a percentage of assets or number of accounts maintained or serviced by
the financial advisor, and/or a fixed dollar amount.

         At its discretion, the Distributor determines whether to pay additional
compensation and the amount of any such payments based on factors the
Distributor deems relevant. Factors considered by the Distributor generally
include the financial advisor's reputation, training of the financial advisor's
sales force, quality of service, ability to attract and retain assets for the
Fund, expertise in distributing a particular class of shares of the Fund, and/or
access to target markets. The Distributor may pay additional compensation for
services with respect to the Fund and other funds in the Aquilasm Group of Funds
without allocation for services provided to particular funds.

         Typically, additional compensation in the form of education and/or
marketing support payments is made towards one or more of the following:

o    assistance in training and educating the financial advisor's personnel;

o    participation in the financial advisor's conferences and meetings;

o    advertising of the Fund's shares;

o    payment of travel expenses, including lodging, for attendance at sales
     seminars by qualifying registered representatives;

o    other incentives or financial assistance to financial advisors in
     connection with promotional, training or educational seminars or
     conferences;

o    shareholder appreciation events;

o    exhibit space or sponsorships at regional or national events of financial
     intermediates;

o    participation in special financial advisor programs;

o    continued availability of the Fund's shares through the financial advisor's
     automated trading platform;

o    access to the financial advisor's sales representatives and national sales
     management personnel by the Distributor or Fund representatives;

o    inclusion of the Fund and/or the Aquilasm Group of Funds on preferred or
     recommended sales lists; and

o    other comparable expenses at the discretion of the Distributor.

     The financial advisors to whom the Distributor may pay, or has paid
additional compensation in the form of education and/or marketing support
payments since January 1, 2004, include A.G. Edwards & Sons Inc., Bank One
Securities Corp., Charles Schwab & Co., Inc., DA Davidson & Co., Edward D. Jones
& Co., First Federal Savings Bank, Invest Financial Corporation, J.J.B.
Hilliard, W.L. Lyons Inc., Legg Mason Wood Walker, Incorporated, Merrill, Lynch,
Pierce Fenner & Smith Inc., Morgan Keegan & Company, Inc., Morgan Stanley DW
Inc. (including anticipated fixed dollar payments ranging from $21,000 to
$25,000 annually), Pershing LLC, Piper Jaffray Inc., RBC Dain Rauscher Inc.,
Raymond James Securities, Stifel, Nicolaus & Company, Inc., Stock Yards Bank &
Trust Co., The Glenview Trust Co., The Investment Center Inc., UBS Financial
Services, US Bancorp Investments, Inc., US Bank Securities, UVEST Investment
Services, Inc., Wachovia Securities, Inc., and Zions Investment Securities Inc.

         The Distributor and/or related companies may compensate financial
advisors not listed above. The Distributor and/or related companies may enter
into additional compensation arrangements or change arrangements at any time
without notice.

         The Distributor and/or its related companies currently compensate
financial advisors on a case by case basis. 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 Original Shares of any Money-Market Fund, without the payment of a
sales charge or any other fee. The exchange privilege is available to Class I
Shares to the extent that other Aquila Funds are made available to its customers
by your financial intermediary. All exchanges of Class I Shares must be made
through your financial intermediary.

         Because excessive trading in Fund shares can be harmful to the Fund and
its other shareholders, the right is reserved to revise or terminate the
exchange privilege, to limit the number of exchanges or to reject any exchange
if (i) the Fund or any of the other Aquila Funds believe that it or they would
be harmed or be unable to invest effectively or (ii) it or they receive or
anticipate receiving simultaneous orders that may significantly affect the Fund
or any other Aquila Fund.

         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 15th day (or the next business day thereafter)
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 seven weeks 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
subject to 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.

Purchases and Redemptions Through Broker/Dealers

         A broker/dealer may charge its customers a processing or service fee in
connection with the purchase or redemption of Fund shares. The amount and
applicability of such a fee is determined and should be disclosed to its
customers by each individual broker/dealer. These processing or service fees are
typically fixed, nominal dollar amounts and are in addition to the sales and
other charges described in the Prospectus and this SAI. Your broker/dealer
should provide you with specific information about any processing or service
fees you will be charged.

Purchases and Redemptions of Class I Shares

         The Fund has authorized one or more financial intermediaries to receive
on its behalf purchase and redemption orders for Class I Shares; one or more of
those financial intermediaries are also authorized to designate other
intermediaries to receive purchase and redemption orders for Class I Shares on
the Fund's behalf. The Fund will be deemed to have received a purchase or
redemption order for Class I Shares when an authorized financial intermediary
or, if applicable, the financial intermediary's authorized designee receives the
order. Such orders will be priced at the Fund's net asset value for Class I
Shares next determined after they are received by the authorized financial
intermediary or, if applicable, its authorized designee and accepted by the
Fund.

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.

Disclosure of Portfolio Holdings

         Under Fund policies, the Manager publicly discloses the complete
schedule of the Fund's portfolio holdings, as reported at the end of each
calendar quarter, generally by the 15th day after the end of each calendar
quarter. Such information will remain accessible until the next schedule is made
publicly available. You may obtain a copy of the Fund's schedule of portfolio
holdings for the most recently completed period by accessing the information on
the Fund's website at www.aquilafunds.com.

         In addition, the Manager may share the Fund's non-public portfolio
holdings information with pricing services and other service providers to the
Fund who require access to such information in order to fulfill their
contractual duties to the Fund. The Manager may also disclose non-public
information regarding the Fund's portfolio holdings information to certain
mutual Fund analysts and rating and tracking entities, such as Morningstar and
Lipper Analytical Services, or to other entities that have a legitimate business
purpose in receiving such information on a more frequent basis. Exceptions to
the frequency and recipients of the disclosure may be made only with the advance
authorization of the Fund's Chief Compliance Officer upon a determination that
such disclosure serves a legitimate business purpose and is in the best
interests of the Fund and will be reported to the Board of Trustees at the next
regularly scheduled board meeting. All non-public portfolio holdings information
is provided pursuant to arrangements as to confidentiality.

         Whenever portfolio holdings disclosure made pursuant to these
procedures involves a possible conflict of interest between the Fund's
shareholders and the Fund's Manager, Distributor or any affiliated person of the
Fund, the disclosure may not be made unless a majority of the independent
Trustees or a majority of a board committee consisting solely of independent
Trustees approves such disclosure. The Fund and the Manager shall not enter into
any arrangement providing for the disclosure of non-public portfolio holdings
information for the receipt of compensation or benefit of any kind. Any material
changes to the policies and procedures for the disclosure of portfolio holdings
will be reported to the Board on at least an annual basis.

                           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, 2004 were as follows:


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



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

Aquila Distributors Inc.   $37,104                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.