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


                                   Prospectus


                                                               April 30, 2005

Class A Shares
Class C Shares

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

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

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

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

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

<page>


 TABLE OF CONTENTS

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

<page>



The Fund's Objective, Investment Strategies and Main Risks

"What is the Fund's objective?"


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


"What is the Fund's investment strategy?"

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

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

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

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

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

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

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

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

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


         The Fund's assets, being primarily or entirely Kentucky issues, are
subject to economic and other conditions affecting Kentucky. Adverse local
events, such as a downturn in the Kentucky economy, could affect the value of
the Fund's portfolio. (See "What are the main risk factors and special
considerations specifically relating to investment in Kentucky Obligations?")


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

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

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

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

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


         A description of the Fund's policies and procedures with respect to the
disclosure of the Fund's portfolio securities is available in the Fund's SAI.


<page>

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

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


 [Bar Chart]
Annual Total Returns
1995-2004

14%     13.75
        XXXX
12%     XXXX
        XXXX
10%     XXXX
        XXXX                          8.45        8.15
8%      XXXX        8.08              XXXX        XXXX
        XXXX        XXXX              XXXX        XXXX
6%      XXXX`       XXXX              XXXX        XXXX
        XXXX        XXXX  5.13        XXXX        XXXX
4%      XXXX  4.17  XXXX  XXXX        XXXX  4.02  XXXX  4.50  4.49
        XXXX  XXXX  XXXX  XXXX        XXXX  XXXX  XXXX  XXXX  XXXX
2%      XXXX  XXXX  XXXX  XXXX        XXXX  XXXX  XXXX  XXXX  XXXX
        XXXX  XXXX  XXXX  XXXX        XXXX  XXXX  XXXX  XXXX  XXXX
0%      XXXX  XXXX  XXXX  XXXX  XXXX  XXXX  XXXX  XXXX  XXXX  XXXX
                                XXXX
-2%                             -1.51

-4%

        1995  1996  1997  1998  1999  2000  2001  2002  2003  2004
                              Years

During the 10-year period shown in the bar chart, the highest return for a
quarter was 5.75% (quarter ended March 31, 1995) and the lowest return for a
quarter was -1.61% (quarter ended June 30, 2004).


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


                          Average Annual Total Return


For the Period Ended
December 31, 2004           1 Year   5 Years  10 Years
Churchill Tax-Free Fund of Kentucky
Class A Shares(1)
    Return before taxes      0.27%    5.05%     5.42%
    Return after taxes on
     distributions           0.31%    5.04%     5.41%
    Return after taxes on
     distributions and
     redemptions             1.55%    4.97%     5.37%

Lehman Brothers Quality Intermediate
  Municipal Bond Index(2)    3.02%    6.18%     6.21%


 For the Period Ended                             Since
    December 31, 2004        1 Year   5 Years  Inception(3)

Churchill Tax-Free Fund of Kentucky
Class C Shares
    Return before taxes      2.51%(4)  4.99%        4.39%

Lehman Brothers Quality Intermediate
  Municipal Bond Index(2)    3.02%     6.18%        5.58%


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


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


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

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

         <page>

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

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



                                       Class A             Class C
                                       Shares              Shares

Shareholder Fees
(fees paid directly from your investment)

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

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

Maximum Sales Charge (Load)
Imposed on Reinvested Dividends or
Distributions
 (as a percentage of offering price).....None               None
Redemption Fees..........................None               None
Exchange 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%               0.75%
Other:
 Service Fee.....................None                  0.25%
 Other Expenses..................0.18%                 0.18%
 Total....................................0.18%               0.43%
Total Annual Fund
 Operating Expenses.......................0.73%               1.58%



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


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


Example

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


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


                          1 year   3 years          5 years      10 years


Class A Shares............$472      $624             $790         $1,270
Class C Shares............$261      $499             $860         $1,439(3)


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


Class C Shares............$161      $499             $860         $1,439(3)


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

<page>

                         Investment of the Fund's Assets

"Is the Fund right for me?"

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

Kentucky Obligations

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

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

Municipal Obligations

         Municipal obligations are issued by or on behalf of states, territories
and possessions of the United States and their political subdivisions, agencies
and instrumentalities to obtain funds for public purposes.

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

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

         * obtaining funds for general operating expenses,
         * refunding outstanding obligations,
         * obtaining funds for loans to other public institutions and
           facilities, and
         * funding the construction of highways, bridges, schools,
           hospitals, housing, mass transportation, streets and water and
           sewer works.

Municipal obligations include:

         * tax, revenue or bond anticipation notes,
         * construction loan notes,
         * project notes, which sometimes carry a U.S. government guarantee,
         * municipal lease/purchase agreements, which are similar to
           installment purchase contracts for property
           or equipment, and
         *floating and variable rate demand notes.

<page>

Churchill Tax-Free Fund of Kentucky


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




The Fund invests in tax-free municipal securities, primarily the kinds of
obligations issued by various communities and political subdivisions within
Kentucky. Most of these securities are used in general to finance construction
of long-term municipal projects; examples are pictured above. The municipal
obligations that financed these particular projects were included in the Fund's
portfolio as of January 15, 2005 and together represented 13.90% of the Fund's
portfolio. Since the portfolio is subject to change, the Fund may not
necessarily own these specific securities at the time of the delivery of this
Prospectus.


<page>

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

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

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

"What are the main risk factors and special considerations specifically relating
to investment in Kentucky Obligations?"

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

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

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


In April, 2004 the Legislature adjourned without passing a budget for the fiscal
year beginning July 1, 2004. A budget was subsequently passed in March 2005.


         Economic concerns include a relatively high unemployment rate in the
non-urbanized areas of the Commonwealth. The Coal Severance Tax is a significant
revenue producer for the state and its political subdivisions, and any
substantial decrease in the amount of coal or other minerals produced could
result in revenue shortfalls. Any federal legislation that adversely affects the
tobacco and/or cigarette industry would have a negative impact on Kentucky's
economy. The effects of the recent settlement between the tobacco companies and
individual states, including Kentucky, which were just beginning to be felt,
have been put in jeopardy by recent litigation against one of the tobacco
companies that may impair its ability to fund its share of the settlement. Loss
of part of that anticipated revenue stream would put further pressure on the
state's budget.

         Although revenue obligations of the state or its political subdivisions
may be payable from a specific project, there can be no assurances that further
economic difficulties and the resulting impact on state and local government
finances will not adversely affect the market value of the bonds issued by
Kentucky municipalities or political subdivisions or the ability of the
respective entities to pay debt service. Major legislative initiatives in the
area of education reform and medicaid expenses are having an impact on the
Commonwealth's financial profile, because resources for other matters will be
reduced or tax levels will be increased, or a combination of both may occur.

         The Commonwealth of Kentucky relies upon sales and use tax, individual
income tax, property tax, corporate income tax, insurance premium tax, alcohol
beverage tax, corporate license tax, cigarette tax, and horse racing tax for its
revenue. The cities, counties and other local governments are essentially
limited to property taxes, occupational license taxes, utility taxes, transit
and restaurant meals taxes and various license fees for their revenue.

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

                                 Fund Management

"How is the Fund managed?"

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

         The Manager provides the Fund with local advisory services.

         Under the Advisory and Administration Agreement, the Fund pays the
Manager a fee payable monthly and computed on the net asset value of the Fund as
of the close of business each business day at the annual rate of 0.50 of 1% of
such net asset value, provided, however, that for any day that the Fund pays or
accrues a fee under the Distribution Plan of the Fund based upon the assets of
the Fund, the annual management fee is payable at the annual rate of 0.40 of 1%
of such net asset value.

Information about the Manager


         The Fund's Manager is a wholly-owned subsidiary of Aquila Management
Corporation ("AMC"), founder of each fund in the Aquilasm Group of Funds, which
consists of tax-free municipal bond funds, money-market funds and an equity
fund. As of March 31, 2005, these funds had aggregate assets of approximately
$4.1 billion, of which approximately $2.4 billion consisted of assets of the
tax-free municipal bond funds. AMC's address is the same as that of the Manager.
AMC, which was founded in 1984, is controlled by Mr. Lacy B. Herrmann, directly,
through two trusts and through share ownership by his wife.


         The Fund's portfolio is managed locally in Kentucky at the Manager's
Louisville office by Mr. Thomas S. Albright, Senior Vice President and Portfolio
Manager. Mr. Albright has served as the Fund's portfolio manager since September
1995, when Banc One Investment Advisors Corporation, subsequently sub-adviser,
became adviser to the Fund. From 1981 to 1995 he was employed by Liberty
National Bank where he was responsible for management of its investment
portfolio. He also served as President of Liberty Investment Services, Inc.,
that bank's full service brokerage subsidiary. Mr. Albright attended the
University of Louisville.


         Mr. Todd Curtis is the back-up portfolio manager of the Fund. He has
been the portfolio manager of Tax-Free Trust of Arizona since its inception in
1986. Mr. Curtis is a graduate of Cornell College, has received an MBA degree
from Arizona State University and is a Chartered Financial Analyst.



         The Statement of Additional Information provides additional information
about the portfolio managers' compensation, other accounts managed by the
portfolio manager and the portfolio managers' ownership of securities of the
Fund.


                            Net Asset Value per Share


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


                                    Purchases

"Are there alternative purchase plans?"

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

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

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

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

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

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

         In addition, Class A Shares are available in Texas.

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


"How much money do I need to invest?"

Option I

         *Initially, $1,000.

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

Option II

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

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

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

"How do I purchase shares?"

You may purchase the Fund's shares:

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

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

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


         The price you will pay is net asset value plus a sales charge for Class
A Shares and net asset value for Class C Shares. (See "What price will I pay for
the Fund's shares?") Your broker/dealer may charge a service or processing fee
in connection with purchases; such a fee will be in addition to the price of the
shares.


                               Opening an Account

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

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

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

                              Adding to An Account

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


By Wire                                                   By Check

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

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

</TABLE>

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

"Can I transfer funds electronically?"

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

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

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

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

                            Redeeming Your Investment

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

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

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

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

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

         *CDSC Class A Shares.

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

         A redemption may result in a tax liability for you.

"How can I redeem my investment?"


By mail, send instructions to:

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

By telephone, call:

800-437-1000
toll free

By FAX, send instructions to:

610-312-5463

For liquidity and convenience, the Fund offers expedited redemption.

Expedited Redemption Methods
(Non-Certificate Shares Only)

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

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

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


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


                              Telephoning the Agent

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

         account name(s) and number

         name of the caller

         the social security number registered to the account

         personal identification.


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

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

         account name(s)

         account number

         amount to be redeemed

         any payment directions.

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

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

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

Regular Redemption Method
(Certificate and Non-Certificate Shares)

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

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

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

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

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

         Your signature may be guaranteed by any:

               member of a national securities exchange

               U.S. bank or trust company

               state-chartered savings bank

               federally chartered savings and loan association

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

               participant in the Securities Transfer Association Medallion
               Program ("STAMP"), the Stock Exchanges Medallion Program ("SEMP")
               or the New York Stock Exchange, Inc. Medallion Signature Program
               ("MSP").

         A notary public is not an acceptable signature guarantor.

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

               account name(s)

               account number

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

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

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

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

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

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

Redemption                 Method of Payment                  Charges

Under $1,000.              Check.                             None.

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

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

         Although the Fund does not currently intend to, it can charge up to
$5.00 per wire redemption, after written notice to shareholders who have elected
this redemption procedure. Upon 30 days' written notice to shareholders the Fund
may modify or terminate the use of the Automated Clearing House to make
redemption payments at any time or charge a service fee, although no such fee is
presently contemplated. If any such changes are made, the Prospectus will be
supplemented to reflect them.

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

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

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

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

"Are there any reinvestment privileges?"

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

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

"Is there an Automatic Withdrawal Plan?"

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

                           Alternative Purchase Plans

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

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

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

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

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

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

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

Systematic Payroll Investments

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

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

Class A Shares Offering             Class C Shares Offering
Price                                       Price

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


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


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

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

          *    an individual;

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

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

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


         You are entitled to substantial reductions in sales charges based on
aggregate holdings of Class A Shares of the Fund and Class A Shares of any of
the other funds in the Aquilasm Group of Funds that you or other members of your
immediate family already own at the time of your purchase. Be sure you tell your
broker or dealer about all of those holdings so that any applicable reduction in
sales charges on your purchase can be correctly computed. You will need to
produce proof of such ownership in the form of account statements relating to
any account at any financial intermediary that you or any member of your
immediate family own that holds any such Class A Shares.


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

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

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

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

For example:

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

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

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

Sales Charges for Purchases of $1 Million or More

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


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



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


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 may have to pay a special CDSC upon
redemption.



         The amount of the CDSC, calculated based on the lesser of net asset
value at the time of purchase or at the time of redemption, depends on the value
of your holdings of CDSC Class A Shares at the time of redemption, according to
the following table:


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


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

  Over $5 million                                              0


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

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

         The CDSC will be waived for:

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

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

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

Reduced Sales Charges for Certain Purchases of Class A Shares

         Right of Accumulation

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

         Letters of Intent

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

         General


   Class A Shares may be purchased without a sales charge by the Fund's Trustees
and officers, the directors, officers and certain employees, retired employees
and representatives of the Manager and 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. In addition,
acquisitions of shares by reinvestment of dividends or in exchanges (with
certain exceptions) do not incur a sales charge.



   The foregoing information about breakpoints in, or elimination of, sales
charges is also available free of charge in a clear and prominent format on our
website at www.aquilafunds.com. Simply click on the Fund's name, then on
"Profile," then on "Alternative Purchase Plans."



   Certain financial intermediaries may charge you additional fees in connection
with transactions in Fund shares. The Manager or the Distributor may make
payments or provide non-cash compensation out of their own resources to
securities dealers and other financial intermediaries for providing services
intended to result in the sale of Fund shares or for shareholder servicing
activities. The compensation is discretionary and may be available only to
selected selling and servicing agents. See the Statement of Additional
Information for a discussion of marketing support payments.


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

*        No sales charge at time of purchase.

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

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


         The Fund will not accept purchase orders for Class C Shares on behalf
of an individual investor (not including dealer "street name" or omnibus
accounts) in an amount of $500,000 or more or if the purchase order would bring
the value of the account over $500,000. This is because it will generally be
more advantageous for such a purchase by an individual to be invested in the
Fund's Class A Shares instead.


         Redemption of Class C Shares

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

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

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

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

         Broker/Dealer Compensation - Class C Shares

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

         Exchange Privilege


Generally, you can exchange shares of this Fund into the tax-free municipal bond
funds and the equity fund (together with the Fund, the "Bond or Equity Funds")
and money-market funds (the "Money-Market Funds") in the Aquilasm Group of Funds
(collectively, the "Aquila Funds") 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. 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.


 Frequent Trading



As stated above, the Fund and the Distributor may reject any order for the
purchase of shares. For example, because frequent movement of assets into and
out of the Fund by market timers or other investors may disrupt the management
of the Fund and increase its expenses, the Board of Trustees of the Fund has
determined that the Fund may reject purchase orders, on a temporary or permanent
basis, from investors that the Fund is able to determine are exhibiting a
pattern of frequent or short-term trading in Fund shares. The Fund may not be
able to detect frequent trading by the underlying owners of shares held in
omnibus accounts and therefore may not be able effectively to prevent frequent
trading in those accounts. Accordingly, there is no guarantee that the Fund will
be successful in identifying all investors who engage in excessive trading
activity or in curtailing that activity. The Fund's policy on frequent trading
extends to purchases through exchanges. (See "Exchange Privilege" above.)


"What about confirmations?"


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


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

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

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

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

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

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

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

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

Shareholder Services Plan for Class C Shares

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

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

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

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

                           Dividends and Distributions

"How are dividends and distributions determined?"

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

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

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

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

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

 "How are dividends and distributions paid?"

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

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

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

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


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


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

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

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

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


Fiscal Year
12/31/04



               Exempt Interest          Capital                 Ordinary
               Dividends                Gains Dividends         Dividend Income
Class A        97.91%                   0.00%                   2.09%
Shares

Class C        97.19%                   0.00%                   2.81%
Shares


                  Net capital gains of the Fund, if any, realized through
October 31st of each year and not previously paid out will be paid out after
that date. The Fund may also pay supplemental distributions after the end of its
fiscal year. Capital gains and any other taxable dividends declared in October,
November or December and paid to you in January (whether received in cash or
reinvested in shares) are taxable for Federal income tax purposes as if received
in December. If net capital losses are realized in any year, they are charged
against capital and not against net investment income, which is distributed
regardless of gains or losses.

         The Fund intends to qualify during each fiscal year under the Internal
Revenue Code to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends derived from net income earned by the Fund on Kentucky
Obligations will be excludable from gross income of the shareholders for regular
Federal income tax purposes. Capital gains dividends are not included in
"exempt-interest dividends." Although exempt-interest dividends are not subject
to regular Federal income tax, each taxpayer must report the total amount of
tax-exempt interest (including exempt-interest dividends from the Fund) received
or acquired during the year. Exempt-interest dividends are taken into account in
determining the taxable portion of any Social Security or Railroad Retirement
benefit you or your spouse receives.

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

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

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

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

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

Special Tax Matters

         Under the Internal Revenue Code, interest on loans incurred by
shareholders to enable them to purchase or carry shares of the Fund may not be
deducted for regular Federal tax purposes. In addition, under rules used by the
Internal Revenue Service for determining when borrowed funds are deemed used for
the purpose of purchasing or carrying particular assets, the purchase of shares
of the Fund may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the purchase of shares.

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

         Interest from all Kentucky Obligations is tax-exempt for purposes of
computing the shareholder's regular tax. However, interest from so-called
private activity bonds issued after August 7, 1986, constitutes a tax preference
for both individuals and corporations and thus will enter into a computation of
the alternative minimum tax ("AMT"). Whether or not that computation will result
in a tax will depend on the entire content of your return. The Fund will not
invest more than 20% of its assets in the types of Kentucky Obligations that pay
interest subject to AMT. An adjustment required by the Internal Revenue Code
will tend to make it more likely that corporate shareholders will be subject to
AMT. They should consult their tax advisers.

"What should I know about Kentucky taxes?"

          All of the exempt-interest dividends from Kentucky Obligations paid by
the Fund will be excludable from the shareholder's gross income for Kentucky
income tax purposes. The Fund may also pay "short-term gains distributions" and
"long-term gains distributions," each as discussed under "Dividends and
Distributions" above.

         Under Kentucky income tax law, short-term gains distributions are not
exempt from Kentucky income tax. Kentucky taxes long-term gains distributions at
its ordinary individual and corporate rates. Under the laws of Kentucky relating
to ad valorem taxation of property, the shareholders rather than the Fund are
considered the owners of the Fund's assets. Each shareholder will be deemed to
be the owner of a pro-rata portion of the Fund. According to the Kentucky
Revenue Cabinet, to the extent that such portion consists of Kentucky
Obligations, it will be exempt from property taxes, but it will be subject to
property taxes on intangibles to the extent it consists of cash on hand,
futures, options and other nonexempt assets.

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

<page>



                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                              FINANCIAL HIGHLIGHTS



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



<TABLE>

<CAPTION>
                                                                       CLASS A
                                              ---------------------------------------------------
                                                                YEAR ENDED DECEMBER 31,
                                              ---------------------------------------------------
                                                 2004       2003        2002      2001       2000
                                              --------    --------   --------  --------   -------
<S>                                           <C>         <C>        <C>       <C>        <C>
Net asset value, beginning of period ........ $  10.69    $  10.66   $  10.31  $  10.40   $ 10.09
                                              --------    --------   --------  --------   -------
Income (loss) from investment operations:
   Net investment income + ..................     0.42        0.44       0.47      0.50      0.52
   Net gain (loss) on securities (both
     realized and unrealized) ...............     0.05        0.03       0.35     (0.09)     0.31
                                              --------    --------   --------  --------  --------
   Total from investment operations .........     0.47        0.47       0.82      0.41      0.83
                                              --------    --------   --------  --------  --------
Less distributions:
   Dividends from net investment income .....    (0.42)      (0.44)     (0.47)    (0.50)    (0.52)
   Distributions from capital gains .........       --          --         --        --        --
                                              --------    --------   --------  --------  --------
   Total distributions ......................    (0.42)      (0.44)     (0.47)    (0.50)    (0.52)
                                              --------    --------   --------  --------  --------
Net asset value, end of period .............. $  10.74    $  10.69   $  10.66  $  10.31  $  10.40
                                              ========    ========   ========  ========  ========

Total return (not reflecting sales charge) ..     4.49%       4.50%      8.15%     4.02%    8.45%

Ratios/supplemental data
   Net assets, end of period
     (in thousands) ......................... $232,927    $229,176   $226,014  $201,604   $196,890
   Ratio of expenses to average
     net assets .............................     0.73%       0.72%      0.72%     0.72%     0.74%
   Ratio of net investment income
     to average net assets ..................     3.96%       4.14%      4.50%     4.82%     5.10%
   Portfolio turnover rate ..................    14.31%      17.92%     18.27%    21.44%     6.61%

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

   Ratio of expenses to average
     net assets .............................     0.73%       0.71%      0.71%    0.70%      0.73%


                                                                      CLASS C
                                             -----------------------------------------------------
                                                                YEAR ENDED DECEMBER 31,
                                             -----------------------------------------------------
                                                2004       2003        2002       2001       2000
                                             --------    --------   --------   --------   --------
<CAPTION>

<S>                                          <C>         <C>        <C>        <C>        <C>
Net asset value, beginning of period ......  $  10.69    $  10.66   $  10.31   $  10.39   $  10.08
                                             --------    --------   --------   --------   --------
Income (loss) from investment operations:
   Net investment income + ................      0.33        0.35       0.38       0.41       0.43
   Net gain (loss) on securities (both
     realized and unrealized) .............      0.04        0.03       0.35      (0.08)      0.31
                                             --------    --------   --------   --------   --------
   Total from investment operations .......      0.37        0.38       0.73       0.33       0.74
                                             --------    --------   --------   --------   --------
Less distributions:
   Dividends from net investment income ...     (0.33)      (0.35)     (0.38)     (0.41)     (0.43)
   Distributions from capital gains .......        --          --         --         --         --
                                             --------    --------   --------   --------   --------
   Total distributions ....................     (0.33)      (0.35)     (0.38)     (0.41)     (0.43)
                                             --------    --------   --------   --------   --------
Net asset value, end of period ............  $  10.73    $  10.69   $  10.66   $  10.31   $  10.39
                                             ========    ========   ========   ========   ========

Total return (not reflecting sales charge)       3.51%       3.62%      7.23%      3.24%     7.54%

Ratios/supplemental data
   Net assets, end of period
     (in thousands) .......................  $  8,166    $  7,197   $  4,804   $  3,355   $  1,861
   Ratio of expenses to average
     net assets ...........................      1.58%       1.57%      1.56%      1.56%     1.59%
   Ratio of net investment income
     to average net assets ................      3.11%       3.26%      3.62%      3.92%     4.24%
   Portfolio turnover rate ................     14.31%      17.92%     18.27%     21.44%     6.61%

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

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

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

Note: On July 1, 2000, Aquila Management Corporation was appointed as the Fund's
      Investment adviser, assuming investment management responsibilities,
      replacing Banc One Investment Advisers Corporation the Fund's Investment
      Sub-Adviser. Effective January 1, 2004, Aquila Management Corporation,
      founder of the Fund, assigned its Advisory and Administration Agreement to
      its wholly-owned subsidiary, Aquila Investment Management LLC.


<page>



 FOUNDER
 Aquila Management Corporation

 MANAGER
 Aquila Investment Management LLC
 380 Madison Avenue, Suite 2300
 New York, New York 10017

 BOARD OF TRUSTEES

 Thomas A. Christopher, Chair

 Douglas Dean
 Diana P. Herrmann
 Theodore T. Mason
 Anne J. Mills
 William J. Nightingale
 James R. Ramsey

 OFFICERS
 Diana P. Herrmann, Vice Chair and President
 Thomas S. Albright, Senior Vice President and Portfolio Manager
 Jerry G. McGrew, Senior Vice President
 Jason T. McGrew, Vice President
 Joseph P. DiMaggio, Chief Financial Officer and Treasurer
 Edward M.W. Hines, Secretary

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

 TRANSFER AND SHAREHOLDER SERVICING AGENT
 PFPC Inc.
 760 Moore Road
 King of Prussia, Pennsylvania 19406-1212

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


 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 KPMG LLP
 757 Third Avenue
 New York, New York 10017

 COUNSEL

 Hollyer Brady Barrett & Hines LLP

 551 Fifth Avenue
 New York, New York 10176

 <page>


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

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

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

 This Prospectus should be read and retained for future reference

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

 <page>

                       Churchill Tax-Free Fund of Kentucky

                                   One of The
                             Aquilasm Group Of Funds

                                   A tax-free
                                income investment

                                   PROSPECTUS


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

                     Ticker Symbol        CUSIP #

Class A Shares         CHTFX              171562101
Class C Shares         CHKCX              171562309

<PAGE>

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

                                   Prospectus


                                                             April 30, 2005

Class Y Shares
Class I Shares




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

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

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

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

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

<page>


TABLE OF CONTENTS

The Fund's Objective, Investment Strategies
and Main Risks................................... 2
Risk/Return Bar Chart and Performance Table ..... 4
Fees and Expenses of the Fund.................... 6
Investment of the Fund's Assets.................. 7
Fund Management.................................. 9
Net Asset Value per Share........................10
Purchases .......................................10
Redeeming Your Investment........................12
Alternative Purchase Plans.......................15
Dividends and Distributions......................17
Tax Information..................................19
Financial Highlights.............................21

<page>
The Fund's Objective, Investment Strategies and Main Risks

"What is the Fund's objective?"


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


"What is the Fund's investment strategy?"

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

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

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

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

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

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

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

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

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

         The Fund's assets, being primarily or entirely Kentucky issues, are
subject to economic and other conditions affecting Kentucky. Adverse local
events, such as a downturn in the Kentucky economy, could affect the value of
the Fund's portfolio. (See "What are the main risk factors and special
considerations specifically relating to investment in Kentucky Obligations?")


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

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

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

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

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


         A description of the Fund's policies and procedures with respect to the
disclosure of the Fund's portfolio securities is available in the Fund's SAI.

<page>

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


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


 [Bar Chart]
 Annual Total Returns

 1997-2004

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



                     -1.46%
1997     1998  1999  2000  2001  2002  2003  2004


                     Years


During the period shown in the bar chart, the highest return for a quarter was
3.85% (quarter ended September 30, 2002) and the lowest return for a quarter was
-1.48% (quarter ended June 30, 2004).



                     Average Annual Total Return
                                      Since
For the period               1 Year    5 Years    Inception(1)

ended December 31, 2004

Churchill Tax-Free Fund of Kentucky
Class Y Shares
    Return before taxes       4.65%      6.08%      5.43%
    Return after taxes on
       Distributions          4.64%      6.08%      5.43%
    Return after taxes on
       distributions and
       redemptions            4.47%      5.91%      5.39%

Lehman Brothers Quality
Intermediate
Municipal Bond Index(2)       3.02%      6.18%      5.58%


                                                   Since
For the period               1 Year    5 Years    Inception(3)
ended December 31, 2004

Churchill Tax-Free Fund of Kentucky
Class I Shares
    Return before taxes       4.24%       N/A        5.01%

Lehman Brothers Quality
Intermediate
Municipal Bond Index(2)       3.02%       N/A        5.22%


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


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


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

<page>
                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                          FEES AND EXPENSES OF THE FUND

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

                                           Class I          Class Y
                                           Shares           Shares

Shareholder Fees
(fees paid directly from your investment)

Maximum Sales Charge (Load)
Imposed on Purchases
  (as a percentage of offering price) .......None             None
Maximum Deferred Sales Charge (Load).........None             None
Maximum Sales Charge (Load) Imposed
on Reinvested Dividends or Distributions
  (as a percentage of offering price)........None             None
Redemption Fees..............................None             None
Exchange 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.....................0.10%(1)         None
Other (2)....................................0.39%            0.18%
Total Annual Fund Operating Expenses.........0.89%            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..........  $91      $284       $493       $1,096
 Class Y Shares........... $59      $186       $324       $  726




<PAGE>


                         Investment of the Fund's Assets

"Is the Fund right for me?"

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

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

Kentucky Obligations

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

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

         Municipal Obligations

         Municipal obligations are issued by or on behalf of states, territories
and possessions of the United States and their political subdivisions, agencies
and instrumentalities to obtain funds for public purposes.

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

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

     *    obtaining funds for general operating expenses,

     *    refunding outstanding obligations,

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

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

Municipal obligations include:

     *    tax, revenue or bond anticipation notes,

     *    construction loan notes,

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

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

     *    floating and variable rate demand notes.


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

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

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

"What are the main risk factors and special considerations specifically relating
to investment in Kentucky Obligations?"

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

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

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


         In April, 2004 the Legislature adjourned without passing a budget for
the fiscal year beginning July 1, 2004. A budget was subsequently passed in
March 2005.


         Economic concerns include a relatively high unemployment rate in the
non-urbanized areas of the Commonwealth. The Coal Severance Tax is a significant
revenue producer for the state and its political subdivisions, and any
substantial decrease in the amount of coal or other minerals produced could
result in revenue shortfalls. Any federal legislation that adversely affects the
tobacco and/or cigarette industry would have a negative impact on Kentucky's
economy. The effects of the recent settlement between the tobacco companies and
individual states, including Kentucky, which were just beginning to be felt,
have been put in jeopardy by recent litigation against one of the tobacco
companies that may impair its ability to fund its share of the settlement. Loss
of part of that anticipated revenue stream would put further pressure on the
state's budget.

         Although revenue obligations of the state or its political subdivisions
may be payable from a specific project, there can be no assurances that further
economic difficulties and the resulting impact on state and local government
finances will not adversely affect the market value of the bonds issued by
Kentucky municipalities or political subdivisions or the ability of the
respective entities to pay debt service. Major legislative initiatives in the
area of education reform and medicaid expenses are having an impact on the
Commonwealth's financial profile, because resources for other matters will be
reduced or tax levels will be increased, or a combination of both may occur.

         The Commonwealth of Kentucky relies upon sales and use tax, individual
income tax, property tax, corporate income tax, insurance premium tax, alcohol
beverage tax, corporate license tax, cigarette tax, and horse racing tax for its
revenue. The cities, counties and other local governments are essentially
limited to property taxes, occupational license taxes, utility taxes, transit
and restaurant meals taxes and various license fees for their revenue.

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

                                 Fund Management

"How is the Fund managed?"

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

         The Manager provides the Fund with local advisory services.

         Under the Advisory and Administration Agreement, the Fund pays the
Manager a fee payable monthly and computed on the net asset value of the Fund as
of the close of business each business day at the annual rate of 0.50 of 1% of
such net asset value, provided, however, that for any day that the Fund pays or
accrues a fee under the Distribution Plan of the Fund based upon the assets of
the Fund, the annual management fee is payable at the annual rate of 0.40 of 1%
of such net asset value.

Information about the Manager


         The Fund's Manager is a wholly-owned subsidiary of Aquila Management
Corporation ("AMC"), founder of each fund in the Aquilasm Group of Funds, which
consists of tax-free municipal bond funds, money-market funds and an equity
fund. As of March 31, 2005, these funds had aggregate assets of approximately
$4.1 billion, of which approximately $2.4 billion consisted of assets of the
tax-free municipal bond funds. AMC's address is the same as that of the Manager.
AMC, which was founded in 1984, is controlled by Mr. Lacy B. Herrmann, directly,
through two trusts and through share ownership by his wife.


         The Fund's portfolio is managed locally in Kentucky at the Manager's
Louisville office by Mr. Thomas S. Albright, Senior Vice President and Portfolio
Manager. Mr. Albright has served as the Fund's portfolio manager since September
1995, when Banc One Investment Advisors Corporation, subsequently sub-adviser,
became adviser to the Fund. From 1981 to 1995 he was employed by Liberty
National Bank where he was responsible for management of its investment
portfolio. He also served as President of Liberty Investment Services, Inc.,
that bank's full service brokerage subsidiary. Mr. Albright attended the
University of Louisville.


         Mr. Todd Curtis is the back-up portfolio manager of the Fund. He has
been the portfolio manager of Tax-Free Trust of Arizona since its inception in
1986. Mr. Curtis is a graduate of Cornell College, has received an MBA degree
from Arizona State University and is a Chartered Financial Analyst.



         The Statement of Additional Information provides additional information
about the portfolio managers' compensation, other accounts managed by the
portfolio manager and the portfolio managers' ownership of securities of the
Fund.


                            Net Asset Value per Share


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


                                    Purchases

"Are there alternative purchase plans?"

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

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

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

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

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


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


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

"How much money do I need to invest?"

For Class Y Shares:

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

Class I Shares:

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

"How do I purchase shares?"

         You may purchase Class Y Shares:

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

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

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


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


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

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

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

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

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

"Can I transfer funds electronically?"

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

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

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

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

                            Redeeming Your Investment

Redeeming Class Y Shares

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

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

         A redemption may result in a tax liability for you.

"How can I redeem my investment?"


By mail, send instructions to:

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

By telephone, call:

800-437-1000 toll free

By FAX, send instructions to:

610-312-5463

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

Expedited Redemption Methods

You may request expedited redemption in two ways:

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

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


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


                              Telephoning the Agent

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

         account name(s) and number

         name of the caller

         the social security number registered to the account

         personal identification.

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

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

         account name(s)

         account number

         amount to be redeemed

         any payment directions.

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

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

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

Regular Redemption Method

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

          account name(s)

          account number

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

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

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

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

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

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

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

          Your signature may be guaranteed by any:

          member of a national securities exchange

          U.S. bank or trust company

          state-chartered savings bank

          federally chartered savings and loan association

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

          participant in the Securities Transfer Association Medallion Program
          ("STAMP"), the Stock Exchanges Medallion Program ("SEMP") or the New
          York Stock Exchange, Inc. Medallion Signature Program ("MSP").

         A notary public is not an acceptable signature guarantor.

Redemption of Class I Shares

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

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

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

Redemption                 Method of Payment               Charges

Under $1,000.              Check.                          None.

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

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

         Although the Fund does not currently intend to, it can charge up to
$5.00 per wire redemption, after written notice to shareholders who have elected
this redemption procedure. Upon 30 days' written notice to shareholders the Fund
may modify or terminate the use of the Automated Clearing House to make
redemption payments at any time or charge a service fee, although no such fee is
presently contemplated. If any such changes are made, the Prospectus will be
supplemented to reflect them.

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

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

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

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

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

"Is there an Automatic Withdrawal Plan?"

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

                           Alternative Purchase Plans

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

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

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

Contingent                 None.                     None.
Deferred Sales
Charge

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


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


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


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

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

Exchange Privilege


         Generally, you can exchange Class Y shares of this Fund into the
tax-free municipal bond funds and the equity fund (together with the Fund, the
"Bond or Equity Funds") and money-market funds (the "Money-Market Funds") in the
Aquilasm Group of Funds (collectively, the "Aquila Funds") 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 also 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.



 Frequent Trading



As stated above, the Fund and the Distributor may reject any order for the
purchase of shares. For example, because frequent movement of assets into and
out of the Fund by market timers or other investors may disrupt the management
of the Fund and increase its expenses, the Board of Trustees of the Fund has
determined that the Fund may reject purchase orders, on a temporary or permanent
basis, from investors that the Fund is able to determine are exhibiting a
pattern of frequent or short-term trading in Fund shares. The Fund may not be
able to detect frequent trading by the underlying owners of shares held in
omnibus accounts and therefore may not be able effectively to prevent frequent
trading in those accounts. Accordingly, there is no guarantee that the Fund will
be successful in identifying all investors who engage in excessive trading
activity or in curtailing that activity. The Fund's policy on frequent trading
extends to purchases through exchanges. (See "Exchange Privilege" above.)


"What about confirmations and share certificates?"

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


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

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

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

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

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

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

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

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

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

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

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

Shareholder Services Plan for Class I Shares

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

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

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

                           Dividends and Distributions

"How are dividends and distributions determined?"

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

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

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

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

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

 "How are dividends and distributions paid?"

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

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

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

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

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


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


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

                                 Tax Information

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

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

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


                                Fiscal Year
                                 12/31/04

                   Exempt Interest      Capital          Ordinary
                   Dividends            Gains            Dividend Income
                                        Dividends
Class Y Shares     97.79%               0.00%            2.21%

Class I Shares     97.91%               0.00%            2.09%


                  Net capital gains of the Fund, if any, realized through
October 31st of each year and not previously paid out will be paid out after
that date. The Fund may also pay supplemental distributions after the end of its
fiscal year. Capital gains and any other taxable dividends declared in October,
November or December and paid to you in January (whether received in cash or
reinvested in shares) are taxable for Federal income tax purposes as if received
in December. If net capital losses are realized in any year, they are charged
against capital and not against net investment income which is distributed
regardless of gains or losses.

         The Fund intends to qualify during each fiscal year under the Internal
Revenue Code to pay exempt-interest dividends to its shareholders.
Exempt-interest dividends derived from net income earned by the Fund on Kentucky
Obligations will be excludable from gross income of the shareholders for regular
Federal income tax purposes. Capital gains dividends are not included in
"exempt-interest dividends". Although exempt-interest dividends are not subject
to regular Federal income tax, each taxpayer must report the total amount of
tax-exempt interest (including exempt-interest dividends from the Fund) received
or acquired during the year. Exempt-interest dividends are taken into account in
determining the taxable portion of any Social Security or Railroad Retirement
benefit you or your spouse receives.

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

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

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

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

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

Special Tax Matters

         Under the Internal Revenue Code, interest on loans incurred by
shareholders to enable them to purchase or carry shares of the Fund may not be
deducted for regular Federal tax purposes. In addition, under rules used by the
Internal Revenue Service for determining when borrowed funds are deemed used for
the purpose of purchasing or carrying particular assets, the purchase of shares
of the Fund may be considered to have been made with borrowed funds even though
the borrowed funds are not directly traceable to the purchase of shares.

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

         Interest from all Kentucky Obligations is tax-exempt for purposes of
computing the shareholder's regular tax. However, interest from so-called
private activity bonds issued after August 7, 1986, constitutes a tax preference
for both individuals and corporations and thus will enter into a computation of
the alternative minimum tax ("AMT"). Whether or not that computation will result
in a tax will depend on the entire content of your return. The Fund will not
invest more than 20% of its assets in the types of Kentucky Obligations that pay
interest subject to AMT. An adjustment required by the Internal Revenue Code
will tend to make it more likely that corporate shareholders will be subject to
AMT. They should consult their tax advisers.

"What should I know about Kentucky taxes?"

          All of the exempt-interest dividends from Kentucky Obligations paid by
the Fund will be excludable from the shareholder's gross income for Kentucky
income tax purposes. The Fund may also pay "short-term gains distributions" and
"long-term gains distributions," each as discussed under "Dividends and
Distributions" above.

         Under Kentucky income tax law, short-term gains distributions are not
exempt from Kentucky income tax. Kentucky taxes long-term gains distributions at
its ordinary individual and corporate rates. Under the laws of Kentucky relating
to ad valorem taxation of property, the shareholders rather than the Fund are
considered the owners of the Fund's assets. Each shareholder will be deemed to
be the owner of a pro-rata portion of the Fund. According to the Kentucky
Revenue Cabinet, to the extent that such portion consists of Kentucky
Obligations, it will be exempt from property taxes, but it will be subject to
property taxes on intangibles to the extent it consists of cash on hand,
futures, options and other nonexempt assets.

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

<page>


                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                              FINANCIAL HIGHLIGHTS



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



<TABLE>

<CAPTION>
                                                                CLASS I
                                                  -----------------------------------------------
                                                       YEAR ENDED                        PERIOD
                                                       DECEMBER 31,                       ENDED
                                                     2004         2003         2002    12/31/01(1)
                                                  --------      --------    --------   ----------
<S>                                               <C>           <C>         <C>         <C>
Net asset value, beginning of period ............ $  10.69      $  10.66    $  10.31    $  10.44
                                                  --------      --------    --------    --------
Income (loss) from investment operations:
   Net investment income + ......................     0.41          0.43        0.46        0.19
   Net gain (loss) on securities (both realized
     and unrealized) ............................     0.03          0.02        0.35       (0.13)
                                                  --------      --------    --------    --------
   Total from investment operations .............     0.44          0.45        0.81        0.06
                                                  --------      --------    --------    --------
Less distributions:
   Dividends from net investment income .........    (0.40)        (0.42)      (0.46)      (0.19)
   Distributions from capital gains .............       --            --          --          --
                                                  --------      --------    --------    --------
   Total distributions ..........................    (0.40)        (0.42)      (0.46)      (0.19)
                                                  --------      --------    --------    --------
Net asset value, end of period .................. $  10.73      $  10.69    $  10.66    $  10.31
                                                  ========      ========    ========    ========
Total return (not reflecting sales charge) ......     4.24%         4.33%       7.98%       0.58%++
Ratios/supplemental data
   Net assets, end of period
     (in thousands) ............................. $  7,564      $  4,438    $  2,407    $  1,426
   Ratio of expenses to average net assets ......     0.89%         0.88%       0.87%       0.83%*
   Ratio of net investment income to average
     net assets .................................     3.79%         3.95%       4.32%       4.47%*
   Portfolio turnover rate ......................    14.31%        17.92%      18.27%      21.44%++

The expense ratios after giving effect to the expense offset for uninvested cash
balances were:
   Ratio of expenses to average net assets ......     0.89%         0.87%       0.86%       0.82%*

<CAPTION>
                                                                                CLASS Y
                                                   -------------------------------------------------

                                                                       YEAR ENDED DECEMBER 31,
                                                   -------------------------------------------------
                                                     2004        2003      2002       2001      2000
                                                   --------    --------  --------   --------  --------
<S>                                                <C>         <C>       <C>        <C>       <C>
Net asset value, beginning of period ............  $  10.70    $  10.67  $  10.32   $  10.40  $  10.09
                                                   --------    --------  --------   --------  --------
Income (loss) from investment operations:
   Net investment income + ......................      0.44        0.46      0.49       0.51      0.53
   Net gain (loss) on securities (both realized
     and unrealized) ............................      0.05        0.03      0.35      (0.07)     0.32
                                                   --------    --------  --------   --------  --------
   Total from investment operations .............      0.49        0.49      0.84       0.44      0.85
                                                   --------    --------  --------   --------  --------
Less distributions:
   Dividends from net investment income .........     (0.44)      (0.46)    (0.49)     (0.52)    (0.54)
   Distributions from capital gains .............        --          --        --         --        --
                                                   --------    --------  --------   --------  --------
   Total distributions ..........................     (0.44)      (0.46)    (0.49)     (0.52)    (0.54)
                                                   --------    --------  --------   --------  --------
Net asset value, end of period ..................  $  10.75    $  10.70  $  10.67   $  10.32  $  10.40
                                                   ========    ========  ========   ========  ========
Total return (not reflecting sales charge) ......      4.65%       4.65%     8.30%      4.28%     8.62%
Ratios/supplemental data
   Net assets, end of period
     (in thousands) .............................  $ 48,795    $ 46,313  $ 41,223   $ 25,585  $ 15,745
   Ratio of expenses to average net assets ......      0.58%       0.57%     0.57%      0.57%     0.59%
   Ratio of net investment income to average
     net assets .................................      4.11%       4.28%     4.63%      4.94%     5.25%
   Portfolio turnover rate ......................     14.31%      17.92%    18.27%     21.44%     6.61%

The expense ratios after giving effect to the expense offset for uninvested cash
balances were:
   Ratio of expenses to average net assets ......      0.58%       0.56%     0.56%      0.55%     0.58%
</TABLE>


----------
(1)   For the period August 6, 2001 to December 31, 2001.

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

++    Not annualized.

*     Annualized.


Note: On July 1, 2000, Aquila Management Corporation was appointed as the Fund's
      Investment adviser, assuming investment management responsibilities,
      replacing Banc One Investment Advisers Corporation the Fund's Investment
      Sub-Adviser. Effective January 1, 2004, Aquila Management Corporation,
      founder of the Fund, assigned its Advisory and Administration Agreement to
      its wholly-owned subsidiary, Aquila Investment Management LLC.

 <page>
 FOUNDER
 Aquila Management Corporation


 MANAGER
 Aquila Investment Management LLC
 380 Madison Avenue, Suite 2300
 New York, New York 10017


 BOARD OF TRUSTEES

 Thomas A. Christopher, Chair

 Douglas Dean
 Diana P. Herrmann
 Theodore T. Mason
 Anne J. Mills
 William J. Nightingale
 James R. Ramsey


 OFFICERS
 Diana P. Herrmann, Vice Chair and President
 Thomas S. Albright, Senior Vice President and Portfolio Manager
 Jerry G. McGrew, Senior Vice President
 Jason T. McGrew, Vice President
 Joseph P. DiMaggio, Chief Financial Officer and Treasurer
 Edward M. W. Hines, Secretary

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

 TRANSFER AND SHAREHOLDER SERVICING AGENT
 PFPC Inc.
 760 Moore Road
 King of Prussia, Pennsylvania 19406-1212

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

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

 COUNSEL

 Hollyer Brady Barrett & Hines LLP

 551 Fifth Avenue
 New York, New York 10176

 <page>

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

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

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


This Prospectus should be read and retained for future reference

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



<PAGE>




                       Churchill Tax-Free Fund of Kentucky

                                   One of The
                             Aquilasm Group Of Funds

                                   A tax-free
                                income investment

                                   PROSPECTUS

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

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

<PAGE>

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


Statement
of Additional
Information                                                     April 30, 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......................................................
Investment Strategies and Risks...................................
Fund Policies.....................................................
Management of the Fund............................................
Ownership of Securities...........................................
Investment Advisory and Other Services............................
Brokerage Allocation and Other Practices..........................
Capital Stock.....................................................
Purchase, Redemption, and Pricing of Shares.......................
Additional Tax Information........................................
Underwriters......................................................
Appendix A........................................................


<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.


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.



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:



          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:

<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 0.10 of 1% of the average annual net assets
of the Fund represented by the Class I Shares, but not more than 0.25 of 1% of
such assets. Such payments shall be made only out of the Fund's assets allocable
to Class I Shares. The Distributor shall have sole authority (i) as to the
selection of any Qualified Recipient or Recipients; (ii) not to select any
Qualified Recipient; and (iii) as to the amount of Class I Permitted Payments,
if any, to each Qualified Recipient provided that the total Class I Permitted
Payments to all Qualified Recipients do not exceed the amount set forth above.
The Distributor is authorized, but not directed, to take into account, in
addition to any other factors deemed relevant by it, the following: (a) the
amount of the Qualified Holdings of the Qualified Recipient; (b) the extent to
which the Qualified Recipient has, at its expense, taken steps in the
shareholder servicing area with respect to holders of Class I Shares, including
without limitation, any or all of the following activities: answering customer
inquiries regarding account status and history, and the manner in which
purchases and redemptions of shares of the Fund may be effected; assisting
shareholders in designating and changing dividend options, account designations
and addresses; providing necessary personnel and facilities to establish and
maintain shareholder accounts and records; assisting in processing purchase and
redemption transactions; arranging for the wiring of funds; transmitting and
receiving funds in connection with customer orders to purchase or redeem shares;
verifying and guaranteeing shareholder signatures in connection with redemption
orders and transfers and changes in shareholder designated accounts; furnishing
(either alone or together with other reports sent to a shareholder by such
person) monthly and year-end statements and confirmations of purchases and
redemptions; transmitting, on behalf of the Fund, proxy statements, annual
reports, updating prospectuses and other communications from the Fund to its
shareholders; receiving, tabulating and transmitting to the Fund proxies
executed by shareholders with respect to meetings of shareholders of the Fund;
and providing such other related services as the Distributor or a shareholder
may request from time to time; and (c) the possibility that the Qualified
Holdings of the Qualified Recipient would be redeemed in the absence of its
selection or continuance as a Qualified Recipient. Notwithstanding the foregoing
two sentences, a majority of the Independent Trustees (as defined below) may
remove any person as a Qualified Recipient. Amounts within the above limits
accrued to a Qualified Recipient but not paid during a fiscal year may be paid
thereafter; if less than the full amount is accrued to all Qualified Recipients,
the difference will not be carried over to subsequent years.

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

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

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

Defensive Provisions (Part IV)

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

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

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

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

Payments Under the Plan


         During the fiscal year ended December 31, 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).


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.

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 0.10 of 1% of such net assets, and a service fee of up to 0.25 of
         1% of such assets.

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

         At any meeting of shareholders, shareholders are entitled to one vote
for each dollar of net asset value (determined as of the record date for the
meeting) per share held (and proportionate fractional votes for fractional
dollar amounts). Shareholders will vote on the election of Trustees and on other
matters submitted to the vote of shareholders. Shares vote by classes on any
matter specifically affecting one or more classes, such as an amendment of an
applicable part of the Distribution Plan. No amendment, whether or not affecting
the rights of the shareholders, may be made to the Declaration of Trust without
the affirmative vote of the holders of a majority of the dollar value of the
outstanding shares of the Fund, except that the Fund's Board of Trustees may
change the name of the Fund.

         The Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional shares and to divide or combine the shares into a
greater or lesser number of shares without thereby changing the proportionate
beneficial interests in the Fund. Each share represents an equal proportionate
interest in the Fund with each other share of its class; shares of the
respective classes represent proportionate interests in the Fund in accordance
with their respective net asset values. Upon liquidation of the Fund,
shareholders are entitled to share pro-rata in the net assets of the Fund
available for distribution to shareholders, in accordance with the respective
net asset values of the shares of each of the Fund's classes at that time. All
shares are presently divided into four classes; however, if they deem it
advisable and in the best interests of shareholders, the Board of Trustees of
the Fund may create additional classes of shares, which may differ from each
other as provided in rules and regulations of the Securities and Exchange
Commission or by exemptive order. The Board of Trustees may, at its own
discretion, create additional series of shares, each of which may have separate
assets and liabilities (in which case any such series will have a designation
including the word "Series"). Shares are fully paid and non-assessable, except
as set forth in the next paragraph; the holders of shares have no pre-emptive or
conversion rights, except that Class C Shares automatically convert to Class A
Shares after being held for six years.

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


                   Purchase, Redemption, and Pricing of Shares

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

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

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

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


                  (ii) Class A Shares issued when the value of the purchase,
                  together with the value (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:


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

         1%                                 1%            in years 1 & 2

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

         0.25 in 4
         payments over 4 years               None

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


         The Fund will treat all CDSC Class A Share purchases made during a
calendar month as if they were made on the first business day of that month at
the average cost of all purchases made during that month. Therefore, the
two-year holding period will end on the first business day of the 24th calendar
month after the date of those purchases. Accordingly, the holding period may, in
fact, be 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.


Additional Compensation for Broker/Dealers

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

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

         Additional compensation may include full or partial payment for:

          *    advertising of the Fund's shares;

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

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

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

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


         The Fund's Distributor, out of its own resources and without additional
cost to the Funds or its shareholders, may provide additional cash payments or
non-cash compensation to financial intermediaries who sell shares of the Fund.
Such payments and compensation are in addition to Rule 12b-1 fees and service
fees paid by the Fund, and are hereafter referred to as "marketing support
payments."



         Marketing support payments may be made by the Distributor to financial
intermediaries so that the Distributor or Fund representatives have access to
financial intermediary sales meetings and sales representatives. Marketing
support payments include payments for exhibit space or sponsorships at regional
or national events of financial intermediaries and for the Fund to participate
in certain dealers' programs.



         From time to time the Distributor, at its expense from its own
resources, may pay compensation to brokers, dealers, investment advisers or
others ("financial intermediaries") who are instrumental in effecting
investments by their clients or customers in the Fund and may make payments to
other financial intermediaries with such payments structured as a percentage of
gross sales, a percentage of net assets, and/or as a fixed dollar amount. The
Distributor determines whether to make any additional cash payments and the
amount of any such payments in response to requests from financial
intermediaries, based on factors the Distributor deems relevant. Factors
considered by the Distributor generally include the financial intermediary's
reputation, ability to attract and retain assets for the Fund, expertise in
distributing a particular class of shares of the Fund, entry into target
markets, and/or quality of service.



        The Distributor may also pay cash or non-cash compensation to sales
representatives of financial intermediaries in the form of (i) occasional gifts;
(ii) occasional meals, tickets or other entertainment; and/or (iii) sponsorship
support for the financial intermediary's client seminars and cooperative
advertising. Marketing support payments to financial intermediaries are usually
structured in as a fixed dollar amount.


         The cost to the Distributor of such promotional activities and such
payments to participating dealers will not exceed the amount of the sales
charges in respect of sales of all classes of shares of the Fund effected
through such participating dealers, whether retained by the Distributor or
reallowed to participating dealers. Any of the foregoing payments to be made by
the Distributor may be made instead by the Manager out of its own funds,
directly or through the Distributor.

Automatic Withdrawal Plan

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

         Under an Automatic Withdrawal Plan you will receive a monthly or
quarterly check in a stated amount, not less than $50. If such a plan is
established, all dividends and distributions must be reinvested in your
shareholder account. Redemption of shares to make payments under the Automatic
Withdrawal Plan will give rise to a gain or loss for tax purposes. (See the
Automatic Withdrawal Plan provisions of the New Account Application.)

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

Share Certificates

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

         Share certificates will not be issued:

          *    for fractional Class A Shares;

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

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

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

Reinvestment Privilege

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

         The Distributor will refund to you any CDSC deducted at the time of
redemption by adding it to the amount of your reinvestment. The Class C or CDSC
Class A Shares purchased upon reinvestment will be deemed to have been
outstanding from the date of your original purchase of the redeemed shares, less
the period from redemption to reinvestment.

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

Exchange Privilege

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


         Generally, you can exchange shares of a given class of a Bond or Equity
Fund including the Fund for shares of the same class of any other Bond or Equity
Fund, or for 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 first business day of the month following that
in which the sixth anniversary of your purchase of the Class C Shares occurred,
except as noted below. Accordingly, the holding period applicable to your Class
C Shares may be up to one month more than the six years depending upon when your
actual purchase was made during a month. Because the per share value of Class A
Shares may be higher than that of Class C Shares at the time of conversion, you
may receive fewer Class A Shares than the number of Class C Shares converted. If
you have made one or more exchanges of Class C Shares among the Aquila-sponsored
Bond or Equity Funds under the Exchange Privilege, the six-year holding period
is deemed to have begun on the date you purchased your original Class C Shares
of the Fund or of another of the Aquila Bond or Equity Funds. The six-year
holding period will be suspended by one month for each period of thirty days
during which you hold shares of a Money-Market Fund you have received in
exchange for Class C Shares under the Exchange Privilege.

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

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

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

Computation of Net Asset Value


         The net asset value of the shares of each of the Fund's classes is
determined as of 4:00 p.m., New York time, on each day that the New York Stock
Exchange is open, by dividing the value of the Fund's net assets allocable to
each class by the total number of its shares of such class then outstanding.
With the approval of the Fund's Board of Trustees the Fund's normal practice is
that most or all of the Kentucky Obligations in the Fund's portfolio are priced
using a reputable pricing service which may employ differential comparisons to
the market in other municipal bonds under methods which include consideration of
the current market value of tax-free debt instruments having varying
characteristics of quality, yield and maturity. Portfolio securities other than
those with a remaining maturity of sixty days or less are valued at the mean
between bid and asked quotations, if available, which, for Kentucky Obligations,
may be obtained from a reputable pricing service which may, in turn, obtain
quotations from broker/dealers or banks dealing in Kentucky Obligations. Any
securities or assets for which such market quotations are not readily available
are valued at their fair value as determined in good faith under procedures
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.