UNITED STATES
				SECURITIES AND EXCHANGE COMMISSION
					WASHINGTON, D.C. 20549


						FORM N-CSR

		CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
					INVESTMENT COMPANIES

			Investment Company Act file number 811-5086

				    Churchill Tax-Free Trust
			(Exact name of Registrant as specified in charter)

					   380 Madison Avenue
					New York, New York 10017
			(Address of principal executive offices)  (Zip code)

					  Joseph P. DiMaggio
					  380 Madison Avenue
					New York, New York 10017
				(Name and address of agent for service)

		Registrant's telephone number, including area code:	(212) 697-6666


				Date of fiscal year end:	12/31

				Date of reporting period:	12/31/04

						FORM N-CSR

ITEM 1.  REPORTS TO STOCKHOLDERS.

ANNUAL
REPORT

DECEMBER 31, 2004

                                    CHURCHILL
                                TAX-FREE FUND OF
                                    KENTUCKY

                          A TAX-FREE INCOME INVESTMENT

[Logo of the Churchill Tax-Free Fund of Kentucky: a standing pegasus in a
circle]

[Logo of the Aquila Group of Funds: an eagle's head]

                                   ONE OF THE
                            AQUILA(SM) GROUP OF FUNDS

[Logo of the Churchill Tax-Free Fund of Kentucky: a standing pegasus in a
circle]

<PAGE>

[Logo of the Churchill Tax-Free Fund of Kentucky: a standing pegasus in a
circle]

                SERVING KENTUCKY INVESTORS FOR MORE THAN 15 YEARS

                       CHURCHILL TAX-FREE FUND OF KENTUCKY

                                  ANNUAL REPORT

                    MANAGEMENT DISCUSSION OF FUND PERFORMANCE

      The year 2004 ended with neither a whimper nor a bang! It was another year
in which both bonds and stocks  provided  some  amount of positive  return.  The
Federal  Reserve  responded  aggressively  last  year to the  threat  of  rising
inflation.  Short-term rate targets were raised five times from their historical
1.00% low to 2.25% at year end.  And,  as we begin 2005,  it too  promises to be
every bit as eventful as it was in 2004: the United States prepares Iraq for the
country's  first free  elections;  relief efforts are underway in the devastated
tsunami-ravaged  areas of the world; and the ongoing  political battles continue
in  Washington  and at the local level after  November  2004's  hotly  contested
elections.

      Last  year,   inflation  started  edging  up,  driven  in  large  part  by
out-of-control oil prices.  Peaking at over $50 a barrel, oil closed the year at
just over $43 - well below  November's  average price of nearly $49. As measured
by the Producer Price Index (PPI),  inflation is expected to have risen 4.7% for
the year.  The Consumer  Price Index (CPI) is  forecasted  to have risen 3.4% in
2004.  And,  what we believe  to be the best  overall  measure  of the  nation's
economic  health - the Gross Domestic  Product (GDP) - is expected to have risen
approximately 4.0% in 2004, versus 4.6% in 2003. The national  unemployment rate
ended the year at an annual rate of 5.4%.

      2004 marks the second consecutive year that stocks provided investors with
positive year-end results.  The Dow Jones Industrial  Average rose 5.31%.  Other
measures  of equity  performance  fared  even  better:  the S & P 500  closed up
10.88%;  and the NASDAQ  Composite Index rose 9.15%. We are proud to report that
Churchill  Tax-Free  Fund  of  Kentucky  provided  Class A  shareholders  with a
positive  total rate of return of 4.49% in 2004,  outperforming  94% of our peer
group  of all  intermediate  single-state  municipal  bond  funds  according  to
Morningstar.

      As we enter 2005,  Kentucky is still without an approved budget.  With the
legislature reconvening in February,  let's hope that partisan bickering will be
the only thing  "tabled."  The absence of a budget has been a double edged sword
for  Kentucky  bond  holders.  On the one  hand,  "no  budget  means  no  bonds"
(actually,  a much reduced  amount).  Since  demand for Kentucky  bonds is still
strong,  the bonds or bond funds you  already  own have  really  retained  their
value.  But on the other  hand,  if you are  looking  for more  Kentucky  bonds,
chances  are you will have to pay a bit more for them,  since  demand is strong.
What a dilemma!  2004 saw a real  improvement  in  Kentucky's  overall  economy.
Unemployment is down,  productivity is up, and tax revenues,  as measured by the
Commonwealth's General Fund, are on the rise.

      The  investment  objective  of Churchill  Tax-Free  Fund of Kentucky is to
strive to  provide  as high a level of triple  tax-exempt  current  income as is
consistent with the  preservation of capital.  However,  for certain  investors,
some  portion of your  dividends  may be subject  to  Federal  and state  taxes,
including the Alternative Minimum Tax (AMT). We believe this objective continues
to be successfully  addressed by adhering to a discipline of solid  fundamental,
conservative  portfolio  management

<PAGE>

MANAGEMENT DISCUSSION OF FUND PERFORMANCE (CONTINUED)

ideals.  The Class A share net asset  value  began 2004 at $10.69 per share.  We
ended the year with a net asset value of $10.74 per share. The Fund continues to
maintain an average credit  quality of "AA",  with no bonds rated less than "A".
At year-end,  over 66% of the portfolio was rated "AAA". Our "laddered" maturity
structure  helps us manage  price  volatility.  The Fund has an average  life of
approximately  12.0 years and a modified duration of approximately 4.5 years. We
maintain a well-diversified portfolio of over 195 different Kentucky issues.

      We remain  cautiously  optimistic  about the  prospects  for the U. S. and
Kentucky economies in 2005, and will seek to continue to react  appropriately to
signs  of  rising  inflation.  It is  going  to  take  continued  vigilance  and
intervention  by the  Federal  Reserve to keep our  economy on a positive  track
while striving to tame  inflation  pressures over the course of 2005. To address
these  concerns,  we will seek to "stay the course" and manage the  portfolio by
taking  advantage  of  opportunities  in  the  Kentucky   marketplace  that  are
consistent with the investment objectives of the Fund.

<PAGE>

PERFORMANCE REPORT

      The following graph illustrates the value of $10,000 invested in the Class
A shares of Churchill  Tax-Free  Fund of Kentucky  for the 10-year  period ended
December  31, 2004 as compared  with the Lehman  Brothers  Quality  Intermediate
Municipal Bond Index and the Consumer Price Index (a cost of living index).  The
performance  of each of the  other  classes  is not  shown in the  graph  but is
included in the table  below.  It should be noted that the Lehman Index does not
include any operating expenses nor sales charges and being nationally  oriented,
does not reflect state specific bond market performance.

Fund's Class A Shares

     Cost           Without          With              Lehman Brothers
      of             Sales          Sales           Quality Intermediate
    Living          Charge          Charge          Municipal Bond Index

   $10,000         $10,000         $ 9,600                 $10,000
    10,254          11,345          10,887                  11,380
    10,595          11,861          11,382                  11,865
    10,775          12,794          12,277                  12,734
    10,949          13,443          12,899                  13,498
    11,242          13,240          12,705                  13,537
    11,623          14,345          13,765                  14,705
    11,804          14,925          14,321                  15,516
    12,084          16,082          15,432                  16,948
    12,311          16,886          16,203                  17,735
    12,712          17,660          16,946                  18,270

<TABLE>
<CAPTION>
                                                            AVERAGE ANNUAL TOTAL RETURN
                                                        FOR PERIODS ENDED DECEMBER 31, 2004
                                                    --------------------------------------------
                                                                                         SINCE
CLASS AND INCEPTION DATE                            1 YEAR     5 YEARS     10 YEARS    INCEPTION
------------------------                            ------     -------     --------    ---------
<S>                                                  <C>         <C>         <C>         <C>
Class A (5/21/87)
   With Sales Charge.............................    0.27%       5.05%       5.42%       6.21%
   Without Sales Charge..........................    4.49%       5.91%       5.85%       6.46%

Class C (4/1/96)
   With CDSC.....................................    2.51%       4.99%        n/a        4.39%
   Without CDSC..................................    3.51%       4.99%        n/a        4.39%

Class Y (4/1/96)
   No Sales Charge...............................    4.65%       6.08%        n/a        5.43%

Class I (8/6/01)
   No Sales Charge...............................    4.24%        n/a         n/a        5.01%

COMPARATIVE INDEX

Lehman Index.....................................    3.02%       6.18%       6.21%        6.35% (Class A)
                                                                                          5.58% (Class C&Y)
                                                                                          5.22% (Class I)
</TABLE>

Total return  figures  shown for the Fund reflect any change in price and assume
all distributions within the period were invested in additional shares.  Returns
for Class A shares are calculated  with and without the effect of the initial 4%
maximum sales charge. Returns for Class C shares are calculated with and without
the  effect of the 1%  contingent  deferred  sales  charge  (CDSC),  imposed  on
redemptions made within the first 12 months after purchase. Class I and Y shares
are sold  without  any  sales  charge.  The  rates of  return  will vary and the
principal value of an investment will fluctuate with market conditions.  Shares,
if redeemed,  may be worth more or less than their  original  cost. A portion of
each  class's  income may be subject to federal  and state  income  taxes.  Past
performance is not predictive of future investment results.

<PAGE>

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

[Logo of KPMG LLP: four solid rectangles with the letters KPMG in front of them]

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Trustees and Shareholders of
Churchill Tax-Free Fund of Kentucky:

      We have audited the  accompanying  statement of assets and  liabilities of
Churchill Tax-Free Fund of Kentucky,  including the schedule of investments,  as
of December 31, 2004, and the related  statement of operations for the year then
ended,  the statements of changes in net assets for each of the two years in the
period then ended,  and the financial  highlights  for each of the five years in
the period then ended. These financial  statements and financial  highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these  financial  statements  and financial  highlights  based on our
audits.

      We conducted  our audits in  accordance  with the  standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain  reasonable  assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes  examining,  on a test basis,  evidence supporting the amounts
and   disclosures  in  the  financial   statements.   Our  procedures   included
confirmation of securities owned as of December 31, 2004, by correspondence with
the custodian.  An audit also includes assessing the accounting  principles used
and significant estimates made by management,  as well as evaluating the overall
financial  statement  presentation.   We  believe  that  our  audits  provide  a
reasonable basis for our opinion.

      In our opinion, the financial statements and financial highlights referred
to above present fairly,  in all material  respects,  the financial  position of
Churchill  Tax-Free Fund of Kentucky as of December 31, 2004, the results of its
operations  for the year then  ended,  the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period  then  ended,  in  conformity  with U.S.  generally
accepted accounting principles.


                                                                   KPMG LLP

New York, New York
February 18, 2005

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

<PAGE>

                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                             SCHEDULE OF INVESTMENTS
                                DECEMBER 31, 2004

<TABLE>
<CAPTION>
                                                                                RATING
    FACE                                                                       MOODY'S/
   AMOUNT         GENERAL OBLIGATION BONDS (2.5%)                                 S&P                VALUE
--------------    -----------------------------------------------------       ----------         ------------
<S>               <C>                                                           <C>              <C>
                  Bowling Green, Kentucky
$      200,000    5.300%, 06/01/18 ....................................         Aa3/NR           $    218,208
                  Lexington-Fayette Urban County, Kentucky
                     Government Project Unlimited Tax
       125,000    5.000%, 12/01/15 ....................................         Aa2/AA+               134,207
       340,000    5.150%, 12/01/17 ....................................         Aa2/AA+               366,598
                  Louisville, Kentucky Unlimited Tax
     2,205,000    5.000%, 10/01/21 FGIC Insured .......................         Aaa/AAA             2,344,356
                  Louisville-Jefferson County, Kentucky Metro
                     Government Unlimited Tax
     1,590,000    5.020%, 11/01/19 ....................................         Aa2/AA              1,718,011
     1,825,000    5.00%, 11/01/20 .....................................         Aa2/AA              1,961,182
                  Warren County, Kentucky Judicial Unlimited Tax
       345,000    5.100%, 09/01/17 AMBAC Insured ......................         Aaa/NR                375,222
       365,000    5.150%, 09/01/18 AMBAC Insured ......................         Aaa/NR                398,354
                                                                                                 ------------
                     Total General Obligation Bonds ...................                             7,516,138
                                                                                                 ------------

                  REVENUE BONDS (95.6%)

                  STATE AGENCIES (37.2%)
                  Kentucky Area Development District Financing
       500,000    5.000%, 12/01/23 LOC Wachovia Bank ..................          NR/AA                522,625
                  Kentucky Infrastructure Authority
     1,000,000    5.250%, 06/01/12 ....................................         Aa3/A+              1,102,630
       635,000    5.250%, 06/01/12 ....................................         Aa3/A+                677,640
     2,740,000    5.250%, 06/01/14 ....................................         Aa3/A+              3,006,328
     1,235,000    5.250%, 08/01/17 ....................................          NR/AA              1,370,220
       100,000    5.000%, 06/01/18 ....................................         Aa3/A+                105,946
       230,000    5.000%, 06/01/21 ....................................         Aa3/A+                241,682
                  Kentucky State Property and Buildings Commission
     3,000,000    6.250%, 09/01/07 MBIA Insured .......................         Aaa/AAA             3,300,210
       220,000    6.000%, 09/01/08 ....................................         Aa3/A+                246,486
       310,000    5.50%, 11/01/09 AMBAC Insured .......................         Aaa/AAA               324,843
       190,000    5.50%, 11/01/09 AMBAC Insured (pre-refunded) ........         Aaa/AAA               199,112
     4,000,000    5.375%, 02/01/14 FSA Insured (pre-refunded) .........         Aaa/AAA             4,549,360
       400,000    5.250%, 10/01/14 (pre-refunded) .....................         Aa3/A+                448,676
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                                RATING
      FACE                                                                     MOODY'S/
     AMOUNT       REVENUE BONDS (CONTINUED)                                       S&P                VALUE
--------------    -----------------------------------------------------       ----------         ------------
<S>               <C>                                                           <C>              <C>
                  STATE AGENCIES (CONTINUED)
                  Kentucky State Property and Buildings Commission
                     (continued)
$    3,250,000    5.625%, 09/01/15 (pre-refunded) .....................         Aa3/A+           $  3,714,230
       460,000    5.125%, 09/01/15 (pre-refunded) .....................         Aa3/A+                513,779
    10,000,000    5.375%, 10/01/15 MBIA Insured (pre-refunded) ........         Aaa/AAA            11,367,000
     1,000,000    5.000%, 11/01/15 AMBAC Insured ......................         Aaa/AAA             1,097,040
       100,000    5.375%, 05/01/16 MBIA Insured (pre-refunded) ........         Aaa/AAA               112,111
     3,775,000    5.375%, 08/01/16 (pre-refunded) .....................         Aaa/AAA             4,279,604
     2,725,000    5.375%, 08/01/16 FSA Insured ........................         Aaa/AAA             2,989,053
     3,905,000    5.125%, 09/01/16 (pre-refunded) .....................         Aa3/A+              4,361,534
     5,000,000    5.250%, 10/01/16 ....................................         Aa3/A+              5,448,300
     1,100,000    5.000%, 11/01/16 AMBAC Insured ......................         Aaa/AAA             1,198,098
     1,265,000    5.250%, 08/01/17 MBIA Insured (pre-refunded) ........         Aaa/AAA             1,436,724
     1,250,000    5.000%, 08/01/17 FSA Insured (pre-refunded) .........         Aaa/AAA             1,389,425
       975,000    5.000%, 08/01/17 FSA Insured ........................         Aaa/AAA             1,039,535
     8,155,000    5.125%, 09/01/17 (pre-refunded) .....................         Aa3/A+              9,108,401
       200,000    5.375%, 10/01/17 MBIA Insured (pre-refunded) ........         Aaa/AAA               227,340
     4,735,000    5.250%, 10/01/17 ....................................         Aa3/A+              5,148,508
     1,250,000    5.500%, 11/01/17 FSA Insured ........................         Aaa/AAA             1,410,588
     1,000,000    5.000%, 11/01/17 AMBAC Insured ......................         Aaa/AAA             1,085,280
       165,000    5.375%, 02/01/18 FSA Insured (pre-refunded) .........         Aaa/AAA               187,661
     3,030,000    5.000%, 08/01/18 FSA Insured (pre-refunded) .........         Aaa/AAA             3,367,966
     3,950,000    5.125%, 09/01/18 (pre-refunded) .....................         Aa3/A+              4,400,893
     6,000,000    5.250%, 10/01/18 ....................................         Aa3/A+              6,517,020
     1,000,000    5.500%, 11/01/18 FSA Insured ........................         Aaa/AAA             1,131,390
       155,000    5.100%, 11/01/18 FSA Insured ........................         Aaa/AAA               167,862
       145,000    5.100%, 11/01/18 (pre-refunded) .....................         Aa3/A+                160,424
     1,500,000    5.000%, 11/01/18 AMBAC Insured ......................         Aaa/AAA             1,620,930
     1,040,000    5.000%, 08/01/19 FSA Insured (pre-refunded) .........         Aaa/AAA             1,156,002
     4,000,000    5.375%, 10/01/19 MBIA Insured (pre-refunded) ........         Aaa/AAA             4,546,800
     1,925,000    5.000%, 10/01/19 ....................................         Aa3/A+              2,035,688
       360,000    5.000%, 10/01/19 MBIA Insured .......................         Aaa/AAA               381,935
       705,000    5.150%, 11/01/19 FSA Insured ........................         Aaa/AAA               765,863
     3,000,000    5.000%, 11/01/19 FSA Insured ........................         Aaa/AAA             3,207,960
     2,000,000    5.750%, 05/01/20 MBIA Insured (pre-refunded) ........         Aaa/AAA             2,277,040
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                                RATING
     FACE                                                                      MOODY'S/
    AMOUNT        REVENUE BONDS (CONTINUED)                                       S&P                VALUE
--------------    -----------------------------------------------------       ----------         ------------
<S>               <C>                                                           <C>              <C>
                  STATE AGENCIES (CONTINUED)
                  Kentucky State Property and Buildings Commission
                     (continued)
$      250,000    5.000%, 05/01/20 FSA Insured .........................        Aaa/AAA          $    263,402
       160,000    5.000%, 10/01/20 MBIA Insured ........................        Aaa/AAA               169,069
       270,000    5.100%, 10/01/21 MBIA Insured ........................        Aaa/AAA               287,539
       255,000    5.150%, 02/01/22 FSA Insured .........................        Aaa/AAA               272,740
     5,000,000    5.000%, 10/01/22 MBIA Insured ........................        Aaa/AAA             5,323,650
       235,000    5.000%, 08/01/23 MBIA Insured ........................        Aaa/AAA               248,583
        80,000    5.000%, 08/01/23 MBIA Insured (pre-refunded) .........        Aaa/AAA                89,384
                                                                                                 ------------
                     Total State Agencies ..............................                          110,602,109
                                                                                                 ------------

                  COUNTY AGENCIES (8.5%)
                  Floyd County, Kentucky Public Property Courthouse
       510,000    5.500%, 09/01/14 (pre-refunded) ......................        NR/NR*                539,090
                  Jefferson County, Kentucky Capital Projects
     1,000,000    5.200%, 06/01/08 MBIA Insured ........................        Aaa/AAA             1,084,670
       430,000    5.200%, 06/01/12 MBIA Insured ........................        Aaa/AAA               464,400
       570,000    5.250%, 06/01/13 MBIA Insured ........................        Aaa/AAA               615,281
       520,000    5.250%, 06/01/14 MBIA Insured ........................        Aaa/AAA               560,674
     3,370,000    5.375%, 06/01/18 MBIA Insured ........................        Aaa/AAA             3,639,229
     1,640,000    5.375%, 06/01/22 MBIA Insured ........................        Aaa/AAA             1,771,020
     5,935,000    5.500%, 06/01/28 MBIA Insured ........................        Aaa/AAA             6,410,097
                  Pendleton County, Kentucky Multi-County Lease Revenue
     4,500,000    6.500%, 03/01/19 .....................................         NR/A               4,535,055
                  Warren County, Kentucky Justice Center
     1,580,000    5.250%, 09/01/17 MBIA Insured ........................        Aaa/AAA             1,709,402
                  Warren County, Kentucky Justice Center Expansion
                     Corp. Revenue
       700,000    5.400%, 09/01/24 .....................................        Aa3/NR                755,965
     2,895,000    5.350%, 09/01/29 MBIA Insured ........................        Aaa/AAA             3,062,939
                                                                                                 ------------
                     Total County Agencies .............................                           25,147,822
                                                                                                 ------------

                  CITY/MUNICIPALITY OBLIGATIONS (3.9%)
                  Jeffersontown, Kentucky Public Project Corp.
       500,000    5.750%, 11/01/15 .....................................         A3/NR                532,820
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                                  RATING
      FACE                                                                       MOODY'S/
     AMOUNT       REVENUE BONDS (CONTINUED)                                        S&P              VALUE
--------------    -----------------------------------------------------         ----------       ------------
<S>               <C>                                                           <C>              <C>
                  CITY/MUNICIPALITY OBLIGATIONS (CONTINUED)
                  Lexington-Fayette Urban County Government,
                     Kentucky Public Facilities Revenue
$      180,000    5.125%, 10/01/23 FSA Insured ........................         Aaa/AAA          $    192,004
                  Louisville, Kentucky Parking Authority
     1,140,000    5.000%, 12/01/14 MBIA Insured .......................         Aaa/AAA             1,218,022
                  Mount Sterling, Kentucky Lease Revenue
     2,020,000    6.150%, 03/01/13 ....................................         Aa3/NR              2,034,645
     7,000,000    6.200%, 03/01/18 ....................................         Aa3/NR              7,051,240
                  Mount Sterling, Kentucky Lease Revenue (continued)
                  Shelbyville, Kentucky Certificates of Participation
       625,000    5.000%, 10/01/22 ....................................          A2/NR                650,994
                                                                                                 ------------
                     Total City/Municipality Obligations ..............                            11,679,725
                                                                                                 ------------

                  HOSPITALS (4.4%)
                  Jefferson County, Kentucky Health Facilities Revenue
       240,000    5.000%, 10/01/12 MBIA Insured .......................         Aaa/AAA               255,780
     1,715,000    5.650%, 01/01/17 AMBAC Insured ......................         Aaa/AAA             1,839,286
     2,200,000    5.250%, 05/01/17 ....................................          NR/A               2,330,570
     2,815,000    5.125%, 10/01/17 AMBAC Insured ETM ..................         Aaa/AAA             2,911,808
       525,000    5.125%, 10/01/18 MBIA Insured ETM ...................         Aaa/AAA               550,190
       125,000    5.750%, 01/01/26 AMBAC Insured ......................         Aaa/AAA               134,349
                  Kentucky Development Finance Authority
                     Hospital Revenue
     2,790,000    5.000%, 08/15/15 MBIA Insured .......................         Aaa/AAA             2,856,597
                  Kentucky Economic Development Finance Authority
     1,000,000    5.000%, 02/01/18 FSA Insured ........................         Aaa/AAA             1,040,340
                  Louisville & Jefferson County, Kentucky Medical
                     Center Revenue
     1,000,000    5.000%, 06/01/18 ....................................          NR/A               1,063,990
                                                                                                 ------------
                     Total Hospitals ..................................                            12,982,910
                                                                                                 ------------

                  HOUSING (6.7%)
                  Kentucky Housing Corp. Housing Revenue
       100,000    5.125%, 07/01/17 ....................................         Aaa/AAA               102,990
        95,000    5.550%, 07/01/18 AMT ................................         Aaa/AAA                95,656
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                                   RATING
      FACE                                                                        MOODY'S/
     AMOUNT       REVENUE BONDS (CONTINUED)                                          S&P             VALUE
--------------    ----------------------------------------------------------     ----------      ------------
<S>               <C>                                                              <C>           <C>
                  HOUSING (CONTINUED)
                  Kentucky Housing Corp. Housing Revenue (continued)
$      250,000    5.850%, 07/01/20 AMT .....................................       Aaa/AAA       $    263,177
     2,000,000    5.600%, 07/01/20 AMT .....................................       Aaa/AAA          2,056,740
     1,150,000    5.350%, 01/01/21 AMT .....................................       Aaa/AAA          1,174,622
     6,075,000    5.450%, 07/01/22 AMT .....................................       Aaa/AAA          6,248,988
     4,065,000    5.250%, 07/01/22 AMT .....................................       Aaa/AAA          4,170,080
       245,000    5.200%, 07/01/22 .........................................       Aaa/AAA            252,387
       300,000    5.100%, 07/01/22 AMT .....................................       Aaa/AAA            304,473
     4,140,000    5.200%, 07/01/25 AMT .....................................       Aaa/AAA          4,217,045
       275,000    5.375%, 07/01/27 .........................................       Aaa/AAA            282,323
       570,000    5.550%, 07/01/33 .........................................       Aaa/AAA            584,866
                                                                                                 ------------
                     Total Housing .........................................                       19,753,347
                                                                                                 ------------

                  POLLUTION CONTROL REVENUE (1.3%)
                  Jefferson County, Kentucky Pollution Control
                     (LG&E Energy)
     3,800,000    5.900%, 04/15/23 .........................................        A1/A-           3,887,210
                                                                                                 ------------

                  SCHOOLS (11.5%)
                  Beechwood, Kentucky Independent School District
                     Finance Corp.
       180,000    5.650%, 03/01/20 .........................................       Aa3/NR             198,709
                  Boone County, Kentucky School District Finance
                     Corp. School Building
       660,000    5.000%, 06/01/15 .........................................       Aa3/NR             693,356
       225,000    5.250%, 08/01/15 .........................................       Aa3/NR             244,955
       285,000    5.700%, 02/01/16 .........................................       Aa3/NR             317,134
     1,000,000    5.375%, 08/01/20 FSA Insured .............................       AAA/NR           1,084,930
                  Boyd County, Kentucky School District Finance Corp.
     1,025,000    5.000%, 10/01/15 .........................................       Aa3/NR           1,103,013
       575,000    5.375%, 10/01/17 .........................................       Aa3/NR             622,811
                  Christian County, Kentucky School District Finance Corp.
       500,000    5.000%, 06/01/09 .........................................       Aa3/NR             538,540
                  Daviess County Kentucky School District Finance Corp.
       200,000    5.000%, 06/01/24 .........................................       Aa3/NR             210,728
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                                  RATING
      FACE                                                                       MOODY'S/
     AMOUNT       REVENUE BONDS (CONTINUED)                                         S&P              VALUE
--------------    -------------------------------------------------------       ----------       ------------
<S>               <C>                                                             <C>            <C>
                  SCHOOLS (CONTINUED)
                  Fayette County, Kentucky School Building
$    1,780,000    5.700%, 12/01/16 ......................................         Aa3/AA-        $  1,929,395
                  Fayette County, Kentucky School Building Revenue
       200,000    5.125%, 04/01/18 AMBAC Insured ........................         Aaa/AAA             216,050
                  Fayette County, Kentucky School District Finance Corp.
       250,000    5.300%, 09/01/14 ......................................         Aa3/AA-             273,255
                  Floyd County, Kentucky School Building
       250,000    5.000%, 12/01/09 ......................................         Aa3/NR              273,958
                  Franklin County, Kentucky School District
                     Finance Corp.
     1,000,000    5.000%, 04/01/24 ......................................         Aa3/NR            1,052,840
                  Graves Co., Kentucky School Building Revenue
     1,260,000    5.000%, 06/01/22 ......................................         Aa3/NR            1,329,804
     1,320,000    5.000%, 06/01/23 ......................................         Aa3/NR            1,386,449
                  Hardin County, Kentucky School District Finance Corp.
       100,000    5.500%, 02/01/17 ......................................         Aa3/NR              109,568
                  Jefferson County, Kentucky School District Finance
                     Corp. School Building
       750,000    5.300%, 01/01/13 FSA Insured ..........................         Aaa/AAA             844,485
       695,000    5.125%, 11/01/14 FSA Insured (pre-refunded) ...........         Aaa/AAA             744,971
     3,195,000    5.125%, 02/01/16 MBIA Insured (pre-refunded) ..........         Aaa/AAA           3,359,734
       250,000    5.250%, 07/01/16 FSA Insured ..........................         Aaa/AAA             269,587
                  Kenton County, Kentucky School District
     1,800,000    5.375%, 03/01/15 ......................................         Aa3/A+            1,930,932
       955,000    5.000%, 04/01/16 ......................................         Aa3/NR            1,025,002
     1,055,000    5.000%, 04/01/17 ......................................         Aa3/NR            1,126,149
       605,000    5.000%, 04/01/19 ......................................         Aa3/NR              642,661
                  Kentucky Economic Development Finance Authority
                     College Revenue Centre College
     1,230,000    5.000%, 04/01/17 FSA Insured ..........................         Aaa/AAA           1,323,824
     1,675,000    5.000%, 04/01/19 FSA Insured ..........................         Aaa/AAA           1,790,039
                  Lexington-Fayette Urban County, Kentucky
                     Government Project Transylvania University
     1,320,000    5.125%, 08/01/18 MBIA Insured .........................         Aaa/AAA           1,407,199
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                                    RATING
      FACE                                                                         MOODY'S/
     AMOUNT       REVENUE BONDS (CONTINUED)                                           S&P              VALUE
--------------    -----------------------------------------------------           ----------       ------------
<S>               <C>                                                               <C>            <C>
                  SCHOOLS (CONTINUED)
                  Lexington-Fayette Urban County, Kentucky
                     Government Project U.K. Library
$      725,000    5.000%, 11/01/15 MBIA Insured .......................             Aaa/AAA        $    786,154
       205,000    5.000%, 11/01/18 MBIA Insured .......................             Aaa/AAA             220,713
                  Meade County, Kentucky School District Finance Corp.
       400,000    5.700%, 07/01/15 ....................................             Aa3/NR              426,852
       500,000    6.000%, 07/01/16 ....................................             Aa3/NR              535,360
                  Middlesboro, Kentucky Independent School District
                     Finance Corp.
       100,000    6.100%, 08/01/16 ....................................             Aa3/NR              107,567
                  Oldham County, Kentucky School District Finance Corp.
       500,000    5.000%, 05/01/19 MBIA Insured .......................             Aaa/NR              540,180
                  Scott County, Kentucky School Building
     2,750,000    5.900%, 06/01/18 (pre-refunded) .....................              Aa3/A            2,848,395
       100,000    5.000%, 03/01/22 ....................................             Aa3/NR              105,574
                  Taylor County, Kentucky School Building
       280,000    6.000%, 08/01/16 ....................................             Aa3/NR              299,944
       175,000    5.250%, 06/01/19 ....................................             Aa3/NR              190,025
                  University of Kentucky Revenue
     1,335,000    5.000%, 05/01/16 FGIC Insured (pre-refunded) ........             Aaa/AAA           1,474,374
       505,000    5.000%, 06/01/18 FSA insured ........................             Aaa/NR              542,845
                  Walton-Verona, Kentucky Independent School District
       105,000    5.100%, 06/01/19 ....................................             Aa3/NR              111,595
                                                                                                   ------------
                     Total Schools ....................................                              34,239,656
                                                                                                   ------------

                  TRANSPORTATION (13.3%)
                  Kenton County, Kentucky Airport Board Airport Revenue
       800,000    5.000%, 03/01/08 MBIA Insured AMT ...................             Aaa/AAA             851,528
       500,000    5.625%, 03/01/13 MBIA Insured AMT ...................             Aaa/AAA             551,080
     1,570,000    5.000%, 03/01/13 MBIA Insured AMT ...................             Aaa/AAA           1,681,643
       750,000    5.625%, 03/01/14 MBIA Insured AMT ...................             Aaa/AAA             826,620
     1,000,000    5.500%, 03/01/17 MBIA Insured AMT ...................             Aaa/AAA           1,098,340
     2,230,000    5.500%, 03/01/18 MBIA Insured AMT ...................             Aaa/AAA           2,437,970
     1,300,000    5.000%, 03/01/23 MBIA Insured AMT ...................             Aaa/AAA           1,342,094
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                                  RATING
      FACE                                                                       MOODY'S/
     AMOUNT       REVENUE BONDS (CONTINUED)                                         S&P            VALUE
--------------    ------------------------------------------------------        ----------     ------------
<S>               <C>                                                             <C>          <C>
                  TRANSPORTATION (CONTINUED)
                  Kentucky Interlocal School Transportation Authority
$      150,000    5.100%, 03/01/05 .....................................          Aa3/A+       $    150,727
       145,000    5.400%, 06/01/17 .....................................           NR/A+            146,879
       400,000    6.000%, 12/01/20 .....................................           NR/A+            408,536
       200,000    6.000%, 12/01/20 .....................................           NR/A+            204,268
       300,000    5.800%, 12/01/20 .....................................           NR/A+            305,172
       400,000    5.650%, 12/01/20 .....................................           NR/A+            406,656
       350,000    5.600%, 12/01/20 .....................................           NR/A+            355,754
                  Kentucky State Turnpike Authority Economic
                     Development & Resource Recovery Road Revenue
       120,000    8.500%, 07/01/06 .....................................          Aa3/A+            130,680
     1,000,000    6.500%, 07/01/08 AMBAC Insured .......................          Aaa/AAA         1,134,640
     1,000,000    5.625%, 07/01/12 FSA Insured .........................          Aaa/AAA         1,142,910
       200,000    5.625%, 07/01/13 FSA Insured .........................          Aaa/AAA           228,582
       500,000    5.625%, 07/01/14 FSA Insured .........................          Aaa/AAA           571,455
       250,000    5.200%, 07/01/14 FSA Insured .........................          Aaa/AAA           279,945
     2,760,000    5.625%, 07/01/15 AMBAC Insured (pre-refunded) ........          Aaa/AAA         2,864,052
       940,000    5.625%, 07/01/15 AMBAC Insured .......................          Aaa/AAA           974,451
       450,000    5.250%, 07/01/15 FSA Insured .........................          Aaa/AAA           505,125
     2,500,000    5.250%, 07/01/16 FSA Insured .........................          Aaa/AAA         2,721,725
     3,455,000    5.100%, 07/01/18 FSA Insured .........................          Aaa/AAA         3,698,819
                  Louisville-Jefferson County Regional Airport, Kentucky
     2,500,000    5.250%, 07/1/10 FSA Insured AMT ......................          Aaa/AAA         2,720,650
     1,000,000    5.500%, 07/01/12 FSA Insured AMT .....................          Aaa/AAA         1,108,520
     2,000,000    5.750%, 07/01/15 FSA Insured AMT .....................          Aaa/AAA         2,218,600
     2,000,000    5.500%, 07/01/15 FSA Insured AMT .....................          Aaa/AAA         2,212,620
     1,000,000    5.250%, 07/01/18 FSA Insured AMT .....................          Aaa/AAA         1,075,060
     1,000,000    5.000%, 07/01/18 FSA Insured AMT .....................          Aaa/AAA         1,042,960
     1,370,000    5.250%, 07/01/21 FSA Insured AMT .....................          Aaa/AAA         1,457,735
     2,390,000    5.250%, 07/01/22 FSA Insured AMT .....................          Aaa/AAA         2,525,656
       275,000    5.375%, 07/01/23 FSA Insured AMT .....................          Aaa/AAA           292,490
                                                                                               ------------
                     Total Transportation ..............................                         39,673,942
                                                                                               ------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                                  RATING
     FACE                                                                        MOODY'S/
    AMOUNT        REVENUE BONDS (CONTINUED)                                         S&P            VALUE
--------------    ------------------------------------------------------        ----------     ------------
<S>               <C>                                                             <C>          <C>
                  UTILITIES (8.8%)
                  Bardstown, Kentucky
$      200,000    5.000%, 12/01/19 MBIA Insured .......................          Aaa/NR        $    215,054
                  Campbell & Kenton Counties, Kentucky Sanitation
                     Sewer District
       125,000    5.000%, 08/01/18 FGIC Insured .......................          Aaa/AAA            134,456
                  Hardin County, Kentucky Water District
       605,000    5.900%, 01/01/25 MBIA Insured (pre-refunded) ........          Aaa/AAA            630,561
       395,000    5.900%, 01/01/25 MBIA Insured .......................          Aaa/AAA            411,270
                  Kentucky Rural Water Finance Corp.
       595,000    5.000%, 02/01/20 AMBAC Insured ......................          Aaa/AAA            634,681
                  Lexington-Fayette Urban County Government,
                     Kentucky Sewer System
     1,000,000    5.000%, 07/01/19 ....................................          Aa3/AA           1,067,340
                  Louisville and Jefferson County, Kentucky
                     Metropolitan Sewer District
     1,000,000    5.000%, 05/15/12 FGIC Insured .......................          Aaa/AAA          1,080,520
     2,565,000    5.375%, 05/15/17 MBIA Insured .......................          Aaa/AAA          2,851,305
     1,410,000    5.400%, 05/15/22 FGIC Insured .......................          Aaa/AAA          1,454,528
       400,000    5.000%, 05/15/22 FGIC Insured .......................          Aaa/AAA            418,388
       120,000    6.250%, 05/15/26 MBIA Insured .......................          Aaa/AAA            131,005
                  Louisville, Kentucky Waterworks Board Water
                     System Revenue
     1,000,000    5.250%, 11/15/16 FSA Insured ........................          Aaa/AAA          1,098,630
     1,000,000    5.250%, 11/15/17 FSA Insured ........................          Aaa/AAA          1,096,400
     2,485,000    5.250%, 11/15/18 FSA Insured ........................          Aaa/AAA          2,721,796
       205,000    5.250%, 11/15/19 FSA Insured ........................          Aaa/AAA            220,924
     6,600,000    5.250%, 11/15/22 FSA Insured ........................          Aaa/AAA          7,194,198
     2,415,000    5.250%, 11/15/24 FSA Insured ........................          Aaa/AAA          2,594,869
                  Northern Kentucky Water District
       240,000    5.000%, 02/01/23 FGIC Insured .......................          Aaa/NR             251,784
                  Owensboro-Davies County, Kentucky Water District
       600,000    5.000%, 01/01/13 AMBAC Insured ......................          Aaa/AAA            627,480
                  Owensboro, Kentucky Electric and Power
     1,310,000    5.000%, 01/01/20 FSA Insured ........................          Aaa/AAA          1,398,569
                                                                                               ------------
                     Total Utilities ..................................                          26,233,758
                                                                                               ------------
</TABLE>

<PAGE>

<TABLE>
<CAPTION>
                                                                               RATING
      FACE                                                                    MOODY'S/
     AMOUNT       REVENUE BONDS (CONTINUED)                                      S&P            VALUE
--------------    -----------------------------------------------------      ----------     -------------
<S>                  <C>                                                       <C>          <C>
                     Total Revenue Bonds ..............................                     $ 284,200,479
                                                                                            -------------

                     Total Investments (cost $278,666,842**) ..........         98.1%         291,716,617
                     Other assets less liabilities ....................          1.9            5,736,734
                                                                               -----        -------------
                     Net Assets .......................................        100.0%       $ 297,453,351
                                                                               =====        =============

                  Portfolio Distribution By Quality Rating (unaudited)

                  Highest rating(1) ...................................         65.8%
                  Second highest rating(2) ............................         28.9
                  Third highest rating(3) .............................          5.1
                  Not rated* ..........................................          0.2
                                                                               -----
                                                                               100.0%
                                                                               =====
</TABLE>

                  (1)   Aaa of Moody's or AAA of S&P.

                  (2)   Aa of Moody's or AA of S&P.

                  (3)   A of Moody's or S&P.

                  *     Any  security  not rated  (NR) by either  credit  rating
                        service  has  been  determined  by the  Manager  to have
                        sufficient  quality to be ranked in the top four  credit
                        ratings  if a  credit  rating  was to be  assigned  by a
                        rating service.

                  **    See note 4.

                                PORTFOLIO ABBREVIATIONS:
                  -----------------------------------------------
                  AMBAC - American Municipal Bond Assurance Corp.
                  AMT - Alternative Minimum Tax
                  ETM - Escrowed To Maturity
                  FGIC - Financial Guaranty Insurance Co.
                  FSA - Financial Security Assurance
                  LOC - Letter of Credit
                  MBIA - Municipal Bond Investors Assurance
                  NR - Not Rated

                 See accompanying notes to financial statements.

<PAGE>

                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                       STATEMENT OF ASSETS AND LIABILITIES
                                DECEMBER 31, 2004

<TABLE>
<S>                                                                                                                  <C>
ASSETS
   Investments at value (cost $278,666,842) .............................................................            $ 291,716,617
   Cash .................................................................................................                1,279,083
   Interest receivable ..................................................................................                4,338,491
   Receivable for Fund shares sold ......................................................................                  855,890
   Other assets .........................................................................................                    8,400
                                                                                                                     -------------
   Total assets .........................................................................................              298,198,481
                                                                                                                     -------------
LIABILITIES
   Dividends payable ....................................................................................                  266,635
   Payable for Fund shares redeemed .....................................................................                  199,987
   Management fee payable ...............................................................................                   98,968
   Distribution and service fees payable ................................................................                   70,611
   Accrued expenses .....................................................................................                  108,929
                                                                                                                     -------------
Total liabilities .......................................................................................                  745,130
                                                                                                                     -------------
NET ASSETS ..............................................................................................            $ 297,453,351
                                                                                                                     =============
   Net Assets consist of:
   Capital Stock - Authorized an unlimited number of shares, par value $.01 per share ...................            $     276,972
   Additional paid-in capital ...........................................................................              283,848,743
   Net unrealized appreciation on investments (note 4) ..................................................               13,049,775
   Undistributed net investment income ..................................................................                  468,091
   Accumulated net realized loss on investments .........................................................                 (190,230)
                                                                                                                     -------------
                                                                                                                     $ 297,453,351
                                                                                                                     =============
CLASS A
   Net Assets ...........................................................................................            $ 232,927,160
                                                                                                                     =============
   Capital shares outstanding ...........................................................................               21,690,576
                                                                                                                     =============
   Net asset value and redemption price per share .......................................................            $       10.74
                                                                                                                     =============
   Offering price per share (100/96 of $10.74 adjusted to nearest cent) .................................            $       11.19
                                                                                                                     =============
CLASS C
   Net Assets ...........................................................................................            $   8,166,456
                                                                                                                     =============
   Capital shares outstanding ...........................................................................                  760,808
                                                                                                                     =============
   Net asset value and offering price per share .........................................................            $       10.73
                                                                                                                     =============
   Redemption price per share (*a charge of 1% is imposed on the redemption
      proceeds of the shares, or on the original price, whichever is lower, if redeemed
      during the first 12 months after purchase) ........................................................            $       10.73*
                                                                                                                     =============
CLASS I
   Net Assets ...........................................................................................            $   7,564,281
                                                                                                                     =============
   Capital shares outstanding ...........................................................................                  704,736
                                                                                                                     =============
   Net asset value, offering and redemption price per share .............................................            $       10.73
                                                                                                                     =============
CLASS Y
   Net Assets ...........................................................................................            $  48,795,454
                                                                                                                     =============
   Capital shares outstanding ...........................................................................                4,541,110
                                                                                                                     =============
   Net asset value, offering and redemption price per share .............................................            $       10.75
                                                                                                                     =============
</TABLE>

                 See accompanying notes to financial statements.

<PAGE>

                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                             STATEMENT OF OPERATIONS
                          YEAR ENDED DECEMBER 31, 2004

<TABLE>
<S>                                                                          <C>             <C>
INVESTMENT INCOME:

     Interest income .............................................                           $13,578,718
Expenses:

     Management fee (note 3) .....................................           $ 1,156,672
     Distribution and service fees (note 3) ......................               434,518
     Transfer and shareholder servicing agent fees ...............               131,997
     Trustees' fees and expenses (note 8) ........................                93,711
     Fund accounting fees ........................................                68,464
     Shareholders' reports and proxy statements ..................                62,575
     Legal fees ..................................................                56,669
     Auditing and tax fees .......................................                32,775
     Custodian fees ..............................................                29,984
     Insurance ...................................................                17,538
     Registration fees and dues ..................................                10,622
     Chief compliance officer (note 3) ...........................                 1,136
     Miscellaneous ...............................................                30,211
                                                                             -----------
     Total expenses ..............................................             2,126,872

     Expenses paid indirectly (note 6) ...........................               (12,557)
                                                                             -----------
     Net expenses ................................................                             2,114,315
                                                                                             -----------
     Net investment income .......................................                            11,464,403

REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS:

     Net realized gain (loss) from securities transactions .......               950,051
     Change in unrealized appreciation on investments ............               (56,557)
                                                                             -----------
     Net realized and unrealized gain (loss) on investments ......                               893,494
                                                                                             -----------
     Net change in net assets resulting from operations ..........                           $12,357,897
                                                                                             ===========
</TABLE>

                 See accompanying notes to financial statements.

<PAGE>

                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                       STATEMENTS OF CHANGES IN NET ASSETS

<TABLE>
<CAPTION>
                                                                                            YEAR ENDED          YEAR ENDED
                                                                                        DECEMBER 31, 2004    DECEMBER 31, 2003
                                                                                        -----------------    -----------------
<S>                                                                                        <C>                  <C>
OPERATIONS:
     Net investment income ...................................................             $  11,464,403        $  11,709,378
     Net realized gain (loss) from securities transactions ...................                   950,051              259,635
     Change in unrealized appreciation on investments ........................                   (56,557)             183,334
                                                                                           -------------        -------------
       Change in net assets from operations ..................................                12,357,897           12,152,347
                                                                                           -------------        -------------

DISTRIBUTIONS TO SHAREHOLDERS (NOTE 10):
     Class A Shares:
     Net investment income ...................................................                (9,151,161)          (9,367,500)

     Class C Shares:
     Net investment income ...................................................                  (225,967)            (200,217)

     Class I Shares:
     Net investment income ...................................................                  (239,947)            (146,438)

     Class Y Shares:
     Net investment income ...................................................                (1,763,764)          (1,944,616)
                                                                                           -------------        -------------
       Change in net assets from distributions ...............................               (11,380,839)         (11,658,771)
                                                                                           -------------        -------------

CAPITAL SHARE TRANSACTIONS (NOTE 7):
     Proceeds from shares sold ...............................................                45,176,081           44,639,694
     Reinvested dividends and distributions ..................................                 5,174,766            5,821,000
     Cost of shares redeemed .................................................               (40,998,605)         (38,277,178)
                                                                                           -------------        -------------
     Change in net assets from capital share transactions ....................                 9,352,242           12,183,516
                                                                                           -------------        -------------

     Change in net assets ....................................................                10,329,300           12,677,092

NET ASSETS:
     Beginning of period .....................................................               287,124,051          274,446,959
                                                                                           -------------        -------------

     End of period* ..........................................................             $ 297,453,351        $ 287,124,051
                                                                                           =============        =============

   * Includes undistributed net investment income of: ........................             $     468,091        $     384,527
                                                                                           =============        =============
</TABLE>

                 See accompanying notes to financial statements.

<PAGE>

                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                          NOTES TO FINANCIAL STATEMENTS

1. ORGANIZATION

      Churchill  Tax-Free  Fund of Kentucky  (the  "Fund"),  a  non-diversified,
open-end  investment  company,  was organized in March,  1987 as a Massachusetts
business trust and commenced  operations on May 21, 1987. The Fund is authorized
to issue an  unlimited  number of shares and,  since its  inception  to April 1,
1996,  offered only one class of shares.  On that date,  the Fund began offering
two  additional  classes  of  shares,  Class C and  Class Y shares.  All  shares
outstanding  prior to that date were  designated  as Class A shares and are sold
with a front-payment  sales charge and bear an annual  distribution fee. Class C
shares are sold with a  level-payment  sales  charge  with no payment at time of
purchase but level service and distribution fees from date of purchase through a
period of six years  thereafter.  A  contingent  deferred  sales charge of 1% is
assessed to any Class C shareholder  who redeems shares of this Class within one
year from the date of purchase.  Class C Shares together with a pro-rata portion
of all Class C Shares  acquired  through  reinvestment  of  dividends  and other
distributions paid in additional Class C Shares,  automatically convert to Class
A Shares  after 6 years.  The Class Y shares are only  offered  to  institutions
acting for an investor in a fiduciary,  advisory,  agency,  custodian or similar
capacity and are not offered  directly to retail  investors.  Class Y shares are
sold at net asset value without any sales charge,  redemption  fees,  contingent
deferred  sales charge or  distribution  or service fees. On April 30, 1998, the
Fund  established  Class I shares,  which  are  offered  and sold  only  through
financial intermediaries and are not offered directly to retail investors. Class
I Shares are sold at net asset value without any sales charge,  redemption fees,
or contingent deferred sales charge. Class I shares carry a distribution fee and
a service fee. All classes of shares  represent  interests in the same portfolio
of  investments  and are identical as to rights and  privileges  but differ with
respect to the effect of sales  charges,  the  distribution  and/or service fees
borne by each class,  expenses specific to each class,  voting rights on matters
affecting a single class and the exchange privileges of each class.

2. SIGNIFICANT ACCOUNTING POLICIES

      The following is a summary of significant  accounting policies followed by
the Fund in the  preparation  of its financial  statements.  The policies are in
conformity with accounting principles generally accepted in the United States of
America for investment companies.

a)    PORTFOLIO VALUATION:  Municipal securities which have remaining maturities
      of more than 60 days are valued each  business day based upon  information
      provided  by  a  nationally  prominent  independent  pricing  service  and
      periodically  verified  through  other  pricing  services.  In the case of
      securities for which market quotations are readily  available,  securities
      are valued by the pricing service at the mean of bid and asked quotations.
      If market  quotations  or a  valuation  from the  pricing  service  is not
      readily  available,  the security is valued at fair value determined under
      procedures  established by and under the general  supervision of the Board
      of  Trustees.  Securities

<PAGE>

      which mature in 60 days or less are valued at amortized cost if their term
      to  maturity  at  purchase  is 60 days or  less,  or by  amortizing  their
      unrealized appreciation or depreciation on the 61st day prior to maturity,
      if their term to maturity at purchase exceeds 60 days.

b)    SECURITIES   TRANSACTIONS  AND  RELATED  INVESTMENT   INCOME:   Securities
      transactions  are  recorded on the trade date.  Realized  gains and losses
      from  securities  transactions  are reported on the identified cost basis.
      Interest income is recorded daily on the accrual basis and is adjusted for
      amortization  of  premium  and  accretion  of  original  issue and  market
      discount.

c)    FEDERAL  INCOME  TAXES:  It is the  policy  of the  Fund to  qualify  as a
      regulated  investment  company by  complying  with the  provisions  of the
      Internal Revenue Code applicable to certain investment companies. The Fund
      intends to make  distributions of income and securities profits sufficient
      to relieve it from all, or  substantially  all,  Federal income and excise
      taxes.

d)    MULTIPLE   CLASS   ALLOCATIONS:   All   income,   expenses   (other   than
      class-specific  expenses), and realized and unrealized gains or losses are
      allocated  daily to each class of shares  based on the relative net assets
      of each class.  Class-specific  expenses,  which include  distribution and
      service  fees and any other items that are  specifically  attributed  to a
      particular class, are charged directly to such class.

e)    USE OF ESTIMATES:  The  preparation of financial  statements in conformity
      with  accounting  principles  generally  accepted in the United  States of
      America requires  management to make estimates and assumptions that affect
      the  reported   amounts  of  assets  and  liabilities  and  disclosure  of
      contingent assets and liabilities at the date of the financial  statements
      and the  reported  amounts of increases  and  decreases in net assets from
      operations during the reporting  period.  Actual results could differ from
      those estimates.

3.    FEES AND RELATED PARTY TRANSACTIONS

a)    MANAGEMENT ARRANGEMENTS:

      Aquila   Investment   Management  LLC  (the  "Manager"),   a  wholly-owned
subsidiary of Aquila  Management  Corporation,  the Fund's  founder and sponsor,
serves  as the  Manager  for the  Fund  under  an  Advisory  and  Administration
Agreement with the Fund. Under the Advisory and  Administration  Agreement,  the
Manager provides all investment  management and  administrative  services to the
Fund. The Manager's  services  include  providing the office of the Fund and all
related  services  as well as  managing  relationships  with of all the  various
support  organizations  to  theFund  such as the  shareholder  servicing  agent,
custodian,  legal counsel, fund accounting agent, auditors and distributor.  For
its services,  the Manager is entitled to receive a fee which is payable monthly
and computed as of the close of business  each day at the annual rate of 0.40 of
1% on the Fund's average net assets.

      Under the October 1, 2004,  Compliance  Agreement  with the  Manager,  the
Manager is compensated for Chief Compliance Officer related services provided to
enable the Fund to comply with Rule 38a-1 of the Investment Company Act of 1940.

<PAGE>

      Specific  details as to the nature and extent of the services  provided by
the Manager are more fully  defined in the Fund's  Prospectus  and  Statement of
Additional Information.

b)    DISTRIBUTION AND SERVICE FEES:

      The Fund has adopted a  Distribution  Plan (the  "Plan")  pursuant to Rule
12b-1 (the "Rule") under the Investment  Company Act of 1940.  Under one part of
the  Plan,  with  respect  to Class A  Shares,  the Fund is  authorized  to make
distribution fee payments to broker-dealers  ("Qualified  Recipients") or others
selected by Aquila  Distributors,  Inc. (the "Distributor")  including,  but not
limited to, any principal  underwriter of the Fund,  with which the  Distributor
has entered  into  written  agreements  contemplated  by the Rule and which have
rendered assistance in the distribution and/or retention of the Fund's shares or
servicing of shareholder accounts. The Fund makes payment of this service fee at
the annual rate of 0.15% of the Fund's average net assets represented by Class A
Shares.  For the year ended  December  31,  2004,  distribution  fees on Class A
Shares amounted to $348,547 of which the Distributor retained $8,438.

      Under  another part of the Plan,  the Fund is  authorized to make payments
with  respect to Class C Shares to  Qualified  Recipients  which  have  rendered
assistance in the distribution  and/or retention of the Fund's Class C shares or
servicing of shareholder accounts. These payments are made at the annual rate of
0.75% of the Fund's average net assets represented by Class C Shares and for the
year ended  December  31,  2004,  amounted  to  $54,943.  In  addition,  under a
Shareholder  Services  Plan, the Fund is authorized to make service fee payments
with respect to Class C Shares to Qualified  Recipients  for providing  personal
services and/or maintenance of shareholder accounts.  These payments are made at
the annual rate of 0.25% of the Fund's average net assets represented by Class C
Shares and for the year ended December 31, 2004, amounted to $18,314.  The total
of these  payments  with respect to Class C Shares  amounted to $73,257 of which
the Distributor retained $12,102.

      Under  another part of the Plan,  the Fund is  authorized to make payments
with respect to Class I Shares to Qualified Recipients.  Class I payments, under
the Plan,  may not  exceed  for any  fiscal  year of the Fund a rate  (currently
0.20%),  set from time to time by the Board of Trustees,  of not more than 0.25%
of the average annual net assets represented by the Class I Shares. In addition,
Class I has a  Shareholder  Services  Plan under which it may pay  service  fees
(currently  0.15%) of not more  than  0.25% of the  average  annual  net  assets
represented by Class I Shares. That is, the total payments under both plans will
not exceed 0.50% of such net assets. For the year ended December 31, 2004, these
payments  were made at the  average  annual rate of 0.35% of such net assets and
amounted to $22,249 of which $12,714  related to the Plan and $9,535  related to
the Shareholder Services Plan.

      Specific  details  about the Plans are more  fully  defined  in the Fund's
Prospectus and Statement of Additional Information.

<PAGE>

      Under a Distribution  Agreement,  the Distributor  serves as the exclusive
distributor of the Fund's shares. Through agreements between the Distributor and
various  broker-dealer  firms ("dealers"),  the Fund's shares are sold primarily
through the facilities of these dealers having offices within Kentucky, with the
bulk of sales commissions  inuring to such dealers.  For the year ended December
31, 2004,  total  commissions on sales of Class A Shares amounted to $315,473 of
which the Distributor received $37,104.

c)    OTHER RELATED PARTY TRANSACTIONS:

      For the year ended December 31, 2004,  the Fund incurred  $55,624 of legal
fees  allocable to Hollyer  Brady  Barrett & Hines LLP,  counsel to the Fund for
legal services in conjunction with the Fund's ongoing operations.  The Secretary
of the Fund is a Partner of Hollyer Brady Barrett & Hines LLP.

4.    PURCHASES AND SALES OF SECURITIES

      During the year ended  December 31,  2004,  purchases  of  securities  and
proceeds from the sales of securities  aggregated  $50,200,915 and  $40,975,204,
respectively.

      At December  31,  2004,  the  aggregate  tax cost for all  securities  was
$278,532,352.  At December 31, 2004, the aggregate gross unrealized appreciation
for all  securities  in which  there is an excess of market  value over tax cost
amounted to $13,222,081  and aggregate  gross  unrealized  depreciation  for all
securities in which there is an excess of tax cost over market value amounted to
$37,816 for a net unrealized appreciation of $13,184,265.

5.    PORTFOLIO ORIENTATION

      Since the Fund  invests  principally  and may  invest  entirely  in triple
tax-free  municipal  obligations  of issuers within  Kentucky,  it is subject to
possible risks  associated with economic,  political,  or legal  developments or
industrial  or regional  matters  specifically  affecting  Kentucky and whatever
effects these may have upon Kentucky issuers' ability to meet their obligations.

6.    EXPENSES

      The Fund has negotiated an expense offset  arrangement  with its custodian
wherein it receives credit toward the reduction of custodian fees and other Fund
expenses  whenever  there  are  uninvested  cash  balances.   The  Statement  of
Operations  reflects the total expenses before any offset,  the amount of offset
and the net expenses.  It is the general intention of the Fund to invest, to the
extent  practicable,  some or all of cash  balances in  income-producing  assets
rather than leave cash on deposit.

<PAGE>

7.    CAPITAL SHARE TRANSACTIONS

      Transactions in Capital Shares of the Fund were as follows:

<TABLE>
<CAPTION>
                                                                 YEAR ENDED                           YEAR ENDED
                                                             DECEMBER 31, 2004                     DECEMBER 31, 2003
                                                      ------------------------------        ------------------------------
                                                        SHARES              AMOUNT             SHARES             AMOUNT
                                                        ------              ------             ------             ------
<S>                                                   <C>               <C>                  <C>              <C>
CLASS A SHARES:
   Proceeds from shares sold ...............           1,986,073        $ 21,266,749         2,169,701        $ 23,197,568
   Reinvested distributions ................             404,551           4,328,795           423,111           4,508,492
   Cost of shares redeemed .................          (2,129,569)        (22,709,719)       (2,359,392)        (25,070,993)
                                                      ----------        ------------        ----------        ------------
      Net change ...........................             261,055           2,885,825           233,420           2,635,067
                                                      ----------        ------------        ----------        ------------
CLASS C SHARES:
   Proceeds from shares sold ...............             262,256           2,800,388           285,083           3,053,437
   Reinvested distributions ................              13,189             141,099            12,041             128,176
   Cost of shares redeemed .................            (187,886)         (2,010,343)          (74,572)           (795,113)
                                                      ----------        ------------        ----------        ------------
      Net change ...........................              87,559             931,144           222,552           2,386,500
                                                      ----------        ------------        ----------        ------------
CLASS I SHARES:
   Proceeds from shares sold ...............             283,026           2,993,441           198,482           2,130,432
   Reinvested distributions ................              21,333             227,786            12,722             135,513
   Cost of shares redeemed .................             (14,757)           (156,921)          (21,821)           (232,654)
                                                      ----------        ------------        ----------        ------------
      Net change ...........................             289,602           3,064,306           189,383           2,033,291
                                                      ----------        ------------        ----------        ------------
CLASS Y SHARES:
   Proceeds from shares sold ...............           1,685,639          18,115,503         1,511,098          16,258,257
   Reinvested distributions ................              44,562             477,086            98,382           1,048,819
   Cost of shares redeemed .................          (1,516,929)        (16,121,622)       (1,145,269)        (12,178,418)
                                                      ----------        ------------        ----------        ------------
      Net change ...........................             213,272           2,470,967           464,211           5,128,658
                                                      ----------        ------------        ----------        ------------
Total transactions in Fund
   shares ..................................             851,488        $  9,352,242         1,109,566        $ 12,183,516
                                                      ==========        ============        ==========        ============
</TABLE>

8.    TRUSTEES' FEES AND EXPENSES

      During the fiscal year ended  December 31, 2004 there were nine  trustees,
two of whom were  affiliated with the Manager and are not paid any trustee fees.
Each  Trustees'  fee paid  during the year was at the annual  rate of $8,750 for
carrying out responsibilities and attendance at regularly

<PAGE>

scheduled  Board Meetings.  If additional or special  meetings are scheduled for
the Fund, separate meeting fees are paid for each such meeting to those Trustees
in attendance.  The Fund also  reimburses  Trustees for expenses such as travel,
accommodations,  and meals incurred in connection  with  attendance at regularly
scheduled or special Board Meetings and at the Annual  Meeting of  Shareholders.
For the  fiscal  year  ended  December  31,  2004 such  reimbursements  averaged
approximately $4,550 per Trustee.

9.    SECURITIES TRADED ON A WHEN-ISSUED BASIS

      The  Fund  may  purchase  or  sell  securities  on  a  when-issued  basis.
When-issued transactions arise when securities are purchased or sold by the Fund
with payment and delivery  taking place in the future in order to secure what is
considered  to be an  advantageous  price  and  yield to the Fund at the time of
entering  into the  transaction.  Beginning  on the date the Fund  enters into a
when-issued  transaction,  cash or other liquid  securities are segregated in an
amount equal to or greater than the amount of the when-issued transaction. These
transactions  are  subject to market  fluctuations  and their  current  value is
determined in the same manner as for other securities.

10.   INCOME TAX INFORMATION AND DISTRIBUTIONS

      The Fund declares  dividends  daily from net  investment  income and makes
payments monthly in additional shares at the net asset value per share, in cash,
or in a combination of both, at the shareholder's  option.  Net realized capital
gains, if any, are distributed annually and are taxable.

      The  Fund  intends  to  maintain,  to the  maximum  extent  possible,  the
tax-exempt  status  of  interest  payments  received  from  portfolio  municipal
securities in order to allow dividends paid to shareholders  from net investment
income to be exempt from  regular  Federal and State of Kentucky  income  taxes.
However,  due to differences  between financial  statement reporting and Federal
income tax reporting requirements, distributions made by the Fund may not be the
same as the Fund's net investment income,  and/or net realized securities gains.
Further,  a small portion of the dividends  may,  under some  circumstances,  be
subject to taxes at ordinary  income  and/or  capital  gain  rates.  For certain
shareholders,  some dividend income may, under some circumstances, be subject to
the alternative minimum tax.

      At December  31, 2004,  the Fund had a capital loss  carryover of $185,263
which expires on December 31, 2008. This carryover is available to offset future
net realized gains on securities  transactions to the extent provided for in the
Internal  Revenue Code. To the extent that this loss carryover is used to offset
future  realized  capital gains,  it is probable the gains so offset will not be
distributed.

<PAGE>

      The tax character of distributions:

                                                YEAR ENDED DECEMBER 31,
                                                2004               2003
                                            -----------        -----------
      Net tax-exempt income                 $11,146,096        $11,625,804
      Ordinary income                           234,743             32,967
                                            -----------        -----------
                                            $11,380,839        $11,658,771
                                            ===========        ===========

      As of December 31, 2004, the components of distributable earnings on a tax
basis were as follows:

      Accumulated net realized loss                          $   (185,263)
      Unrealized appreciation                                  13,184,265
      Undistributed tax-exempt income                             328,636
                                                             ------------
                                                             $ 13,327,638
                                                             ============

      The difference between book basis and tax basis unrealized appreciation is
attributable primarily to premium/discount adjustments.

<PAGE>

                       CHURCHILL TAX-FREE FUND OF KENTUCKY
                              FINANCIAL HIGHLIGHTS

FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

<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 (note 10):
   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%         4.82%         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%

<CAPTION>
                                                                                       CLASS C
                                                          ----------------------------------------------------------------
                                                                               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      $  10.39      $  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 (note 10):
   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.

                 See accompanying notes to financial statements.

<PAGE>

FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD

<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 (note 10):
   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 (note 10):
   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.

                 See accompanying notes to financial statements.

<PAGE>

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

ANALYSIS OF EXPENSES (UNAUDITED)

      As a  shareholder  of the Fund,  you may  incur  two  types of costs:  (1)
transaction  costs,  including  front-end  sales charges with respect to Class A
shares or contingent  deferred  sales  charges  ("CDSC") with respect to Class C
shares; and (2) ongoing costs,  including  management fees;  distribution and/or
service (12b-1) fees; and other Fund expenses.  The tables below are intended to
help you understand your ongoing costs (in dollars) of investing in the Fund and
to compare  these  costs with the ongoing  costs of  investing  in other  mutual
funds.

      The tables below are based on an investment of $1,000  invested on July 1,
2004 and held for the six months ended December 31, 2004.

ACTUAL EXPENSES

      This table  provides  information  about actual  account values and actual
expenses.  You may use the information provided in this table, together with the
amount you invested,  to estimate the expenses that you paid over the period. To
estimate the expenses you paid on your account, divide your ending account value
by $1,000 (for example, an $8,600 ending account value divided by $1,000 = 8.6),
then multiply the result by the number under the heading entitled "Expenses Paid
During the Period".

FOR THE SIX MONTHS ENDED DECEMBER 31, 2004

                         ACTUAL
                      TOTAL RETURN      BEGINNING      ENDING         EXPENSES
                         WITHOUT         ACCOUNT       ACCOUNT      PAID DURING
                    SALES CHARGES(1)      VALUE         VALUE      THE PERIOD(2)
--------------------------------------------------------------------------------
Class A                    4.20%        $1,000.00     $1,042.00        $3.80
--------------------------------------------------------------------------------
Class C                    3.66%        $1,000.00     $1,036.60        $8.09
--------------------------------------------------------------------------------
Class I                    4.02%        $1,000.00     $1,040.20        $4.62
--------------------------------------------------------------------------------
Class Y                    4.28%        $1,000.00     $1,042.80        $3.03
--------------------------------------------------------------------------------

(1)   ASSUMES  REINVESTMENT OF ALL DIVIDENDS AND CAPITAL GAIN DISTRIBUTIONS,  IF
      ANY,  AT NET  ASSET  VALUE  AND  DOES NOT  REFLECT  THE  DEDUCTION  OF THE
      APPLICABLE  SALES CHARGES WITH RESPECT TO CLASS A SHARES OR THE APPLICABLE
      CONTINGENT DEFERRED SALES CHARGES ("CDSC") WITH RESPECT TO CLASS C SHARES.
      TOTAL RETURN IS NOT  ANNUALIZED,  AS IT MAY NOT BE  REPRESENTATIVE  OF THE
      TOTAL RETURN FOR THE YEAR.

(2)   EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.74%,  1.58%, 0.90%
      AND  0.59%  FOR  THE  FUND'S  CLASS  A, C, I AND Y  SHARES,  RESPECTIVELY,
      MULTIPLIED  BY THE AVERAGE  ACCOUNT  VALUE OVER THE PERIOD,  MULTIPLIED BY
      184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).

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

<PAGE>

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

ANALYSIS OF EXPENSES (UNAUDITED) (CONTINUED)

HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES

      The table below provides information about hypothetical account values and
hypothetical  expenses  based on the actual expense ratio and an assumed rate of
return of 5.00% per year before expenses, which is not the Fund's actual return.
The  hypothetical  account  values and  expenses may not be used to estimate the
actual ending account  balance or expenses you paid for the period.  You may use
the information provided in this table to compare the ongoing costs of investing
in the Fund and other mutual funds.  To do so,  compare this 5.00%  hypothetical
example relating to the Fund with the 5.00% hypothetical examples that appear in
the shareholder reports of other mutual funds.

      Please  note  that the  expenses  shown in the  table  below  are meant to
highlight  your ongoing costs only and do not reflect any  transactional  costs,
with respect to Class A shares.  The example  does not reflect the  deduction of
contingent  deferred  sales  charges  ("CDSC")  with  respect to Class C shares.
Therefore,  the table is useful in comparing  ongoing  costs only,  and will not
help you determine the relative total costs of owning different mutual funds. In
addition,  if these transaction costs were included,  your costs would have been
higher.

FOR THE SIX MONTHS ENDED DECEMBER 31, 2004

                    HYPOTHETICAL
                     ANNUALIZED       BEGINNING       ENDING          EXPENSES
                        TOTAL          ACCOUNT        ACCOUNT       PAID DURING
                       RETURN           VALUE          VALUE       THE PERIOD(1)
--------------------------------------------------------------------------------
Class A                 5.00%         $1,000.00      $1,021.42         $3.76
--------------------------------------------------------------------------------
Class C                 5.00%         $1,000.00      $1,017.19         $8.01
--------------------------------------------------------------------------------
Class I                 5.00%         $1,000.00      $1,020.61         $4.57
--------------------------------------------------------------------------------
Class Y                 5.00%         $1,000.00      $1,022.17         $3.00
--------------------------------------------------------------------------------

(1)   EXPENSES ARE EQUAL TO THE ANNUALIZED EXPENSE RATIO OF 0.74%,  1.58%, 0.90%
      AND  0.59%  FOR  THE  FUND'S  CLASS  A, C, I AND Y  SHARES,  RESPECTIVELY,
      MULTIPLIED  BY THE AVERAGE  ACCOUNT  VALUE OVER THE PERIOD,  MULTIPLIED BY
      184/366 (TO REFLECT THE ONE-HALF YEAR PERIOD).

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

<PAGE>

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

FEDERAL TAX STATUS OF DISTRIBUTIONS (UNAUDITED)

      This information is presented in order to comply with a requirement of the
Internal Revenue Code AND NO ACTION ON THE PART OF SHAREHOLDERS IS REQUIRED.

      For the fiscal year ended December 31, 2004, $11,146,096 of dividends paid
by Churchill Tax-Free Fund of Kentucky,  constituting 97.937% of total dividends
paid during fiscal 2004, were exempt-interest dividends.

      Prior to January 31,  2005,  shareholders  were  mailed IRS Form  1099-DIV
which  contained  information on the status of  distributions  paid for the 2004
CALENDAR YEAR.

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

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

INFORMATION AVAILABLE (UNAUDITED)

      Much of the  information  that the funds in the Aquila(sm)  Group of Funds
produce is automatically sent to you and all other  shareholders.  Specifically,
you are  routinely  sent the entire list of  portfolio  securities  of your Fund
twice a year in the semi-annual and annual reports you receive. Additionally, we
prepare,  and have  available,  portfolio  listings at the end of each  quarter.
Whenever  you may be  interested  in seeing a listing of your  Fund's  portfolio
other   than  in  your   shareholder   reports,   please   check   our   website
(www.aquilafunds.com) or call us at 1-800-437-1020.

      The Fund additionally files a complete list of its portfolio holdings with
the SEC for the first and third  quarters of each fiscal year on Form N-Q. Forms
N-Q are available free of charge on the SEC website at www.sec.gov. You may also
review  or,  for a fee,  copy the forms at the SEC's  Public  Reference  Room in
Washington, DC or by calling 800-SEC-0330.

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

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

PROXY VOTING RECORD. The Fund does not invest in equity securities. Accordingly,
there  were no  matters  relating  to a  portfolio  security  considered  at any
shareholder  meeting  held during the 12 months ended June 30, 2004 with respect
to which the Fund was  entitled to vote.  Applicable  regulations  require us to
inform you that the foregoing  proxy voting  information is available on the SEC
website at http://www.sec.gov.

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

<PAGE>

ADDITIONAL INFORMATION (UNAUDITED)

INFORMATION ABOUT
TRUSTEES(1) AND OFFICERS

<TABLE>
<CAPTION>
                                                                                               NUMBER OF
                           POSITIONS                                                           PORTFOLIOS     OTHER DIRECTORSHIPS
                           HELD WITH                                                           IN FUND        HELD BY TRUSTEE
NAME,                      FUND AND       PRINCIPAL                                            COMPLEX(4)     (THE POSITION HELD IS
ADDRESS(2)                 LENGTH OF      OCCUPATION(S)                                        OVERSEEN       A DIRECTORSHIP UNLESS
AND DATE OF BIRTH          SERVICE(3)     DURING PAST 5 YEARS                                  BY TRUSTEE     INDICATED OTHERWISE.)
-----------------          ----------     -------------------                                  ----------     ---------------------
<S>                        <C>            <C>                                                  <C>            <C>
INTERESTED TRUSTEES(5)

Lacy B. Herrmann(6)        Founder and    Founder and Chairman of the Board, Aquila            12             Director or trustee,
New York, NY               Chairman of    Management Corporation, the sponsoring                              Pimco Advisors VIT,
(05/12/29)                 the Board of   organization and parent of the Manager or                           Oppenheimer Quest
                           Trustees       Administrator and/or Adviser or Sub-Adviser to                      Value Funds Group,
                           since 1987     each fund of the Aquila(sm) Group of Funds,(7)                      Oppenheimer Small Cap
                                          Chairman of the Manager or Administrator                            Value Fund,
                                          and/or Adviser or Sub-Adviser to each since                         Oppenheimer Midcap
                                          2004, and Founder, Chairman of the Board of                         Fund, and Oppenheimer
                                          Trustees, Trustee and (currently or until                           Rochester Group of
                                          1998) President of each since its                                   Funds.
                                          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.

Diana P. Herrmann          Trustee since  Vice Chair and Chief Executive Officer of Aquila     10             None
New York, NY               1995 and       Management Corporation, Founder of the Aquila(sm)
(02/25/58)                 President      Group of Funds and parent of Aquila Investment
                           since 1999     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 Aquila(sm) 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.
</TABLE>

<PAGE>

<TABLE>
<S>                        <C>            <C>                                                  <C>            <C>
NON-INTERESTED TRUSTEES

Thomas A. Christopher(6)   Trustee        Vice President of Robinson, Hughes &                 2              None
Danville, KY               since 1992     Christopher, C.P.A.s, P.S.C., since 1977;
(12/19/47)                                President, A Good Place for Fun, Inc., a sports
                                          facility, since 1987.

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

Theodore T. Mason          Trustee        Executive Director, East Wind Power Partners LTD     10             Trustee, Pimco
New York, NY               since 1987     since 1994 and Louisiana Power Partners,                            Advisors VIT.
(11/24/35)                                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        President, Loring Consulting Company since 2001;     4              None
Castle Rock, CO            since 1987     Vice President for Business Affairs, Ottawa
(12/23/38)                                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        Retired; formerly Chairman, founder (1975) and       2              Ring's End, Inc.
Rowayton, CT               since 1993     Senior Advisor until 2000 of Nightingale &
(09/16/29)                                Associates, L.L.C., a general management
                                          consulting firm focusing on interim management,
                                          divestitures, turnaround of troubled companies,
                                          corporate restructuring and financial advisory
                                          services.
</TABLE>

<PAGE>

<TABLE>
<S>                        <C>             <C>                                                 <C>            <C>
James R. Ramsey            Trustee         President, University of Louisville since           2              Community Bank and
Louisville, KY             since 1987      November 2002; Professor of Economics,                             Trust, Pikeville, KY
(11/14/48)                                 University of Louisville, 1999-present; Kentucky
                                           Governor's Senior Policy Advisor and State
                                           Budget Director, 1999-2002; Vice Chancellor for
                                           Finance and Administration, the University of
                                           North Carolina at Chapel Hill, 1998 to 1999;
                                           previously Vice President for Finance and
                                           Administration at Western Kentucky University,
                                           State Budget Director for the Commonwealth of
                                           Kentucky, Chief State Economist and Executive
                                           Director for the Office of Financial Management
                                           and Economic Analysis for the Commonwealth of
                                           Kentucky, Adjunct Professor at the University of
                                           Kentucky, Associate Professor at Loyola
                                           University-New Orleans and Assistant Professor
                                           at Middle Tennessee State University.
OFFICERS

Charles E. Childs, III     Executive Vice  Executive Vice President of all funds in the        N/A            N/A
New York, NY               President       Aquila(sm) Group of Funds and the Manager since
(04/01/57)                 since 2003      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 Portfolio Manager,        N/A            N/A
Louisville, KY             President       Churchill Tax-Free Fund of Kentucky since July
(07/26/52)                 since 2000      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 since 1998,            N/A            N/A
New York, NY               President       Registered Principal since 1993, Senior Vice
(06/18/44)                 since 1994      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.
</TABLE>

<PAGE>

<TABLE>
<S>                        <C>             <C>                                                 <C>            <C>
Todd W. Curtis             Vice President  Senior Vice President and Portfolio Manager,        N/A            N/A
Phoenix, AZ                since 2004      Tax-Free Trust of Arizona, since August 2004;
(06/08/49)                                 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 President of          N/A            N/A
Portland, OR               since 2000      Aquila Rocky Mountain Equity Fund and four
(06/11/45)                                 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 Tax-Free Fund of          N/A            N/A
Elizabethtown, KY          since 2001      Kentucky since 2001, Assistant Vice President,
(08/14/71)                                 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 Fund, the           N/A            N/A
New York, NY               Compliance      Manager and the Distributor since 2004,
(08/23/40)                 Officer since   Compliance Officer of the Manager or its
                           2004 and        predecessor and current parent since 1998 and
                           Assistant       Assistant Secretary of the Aquila(sm) Group of
                           Secretary       Funds since 2000; Consultant, The Wadsworth
                           since 2000      Group, 1995-1998.

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

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

<PAGE>

<TABLE>
<S>                        <C>             <C>                                                 <C>            <C>
John M. Herndon            Assistant       Assistant Secretary of the Aquila(sm) Group of      N/A            N/A
New York, NY               Secretary       Funds since 1995 and Vice President of the
(12/17/39)                 since 1995      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 Aquila(sm) Group of      N/A            N/A
New York, NY               Treasurer       Funds since 2000; Assistant Vice President of
(11/02/66)                 since 2000      the Manager or its predecessor and current
                                           parent since 1998; Fund Accountant for the
                                           Aquila(sm) Group of Funds, 1995-1998.

TRUSTEE EMERITUS

Carroll F. Knicely(8)      Trustee         President, Associated Publications Inc,             N/A            N/A
Glasgow, KY                Emeritus        Glasgow, Kentucky; director and member,
(12/08/28)                 since 2004      Executive Board of West Kentucky Corporation
                                           and director and Secretary-Treasurer, South
                                           Gate Plaza, Inc. (owner and developer of
                                           shopping centers and commercial real estate);
                                           director, Vice President and Treasurer, Knicely
                                           and Knicely, Inc. (owner and developer of
                                           rental properties and residential real estate);
                                           former trustee, Cambellsville University;
                                           formerly Secretary of Commerce and Commissioner
                                           of Commerce, Commonwealth of Kentucky.
</TABLE>

(1)   The  Fund's  Statement  of  Additional   Information  includes  additional
      information  about the Trustees and is  available,  without  charge,  upon
      request by calling 800-437-1020 (toll free).

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

(3)   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.

(4)   Includes  certain  Aquila-sponsored  funds  that are  dormant  and have no
      public shareholders.

(5)   Mr. Herrmann and Ms. Herrmann are interested  persons of the Fund, as that
      term is defined in the 1940 Act, as officers of the Fund and through their
      affiliations  with both the Manager and the  Distributor.  Each is also an
      interested person as a member of the immediate family of the other.

(6)   Effective January 1, 2005, Mr.  Christopher  became Chair and Mr. Herrmann
      became Chairman Emeritus, continuing as Trustee.

(7)   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 4, are called the "Aquila(sm) Group of
      Funds."

(8)   A Trustee Emeritus may attend Trustee meetings but has no voting power.

<PAGE>

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

PRIVACY NOTICES (UNAUDITED)

                       CHURCHILL TAX-FREE FUND OF KENTUCKY

OUR PRIVACY POLICY. In providing services to you as an individual who owns or is
considering  investing  in  shares  of the  Fund we  collect  certain  nonpublic
personal  information about you. Our policy is to keep this information strictly
safeguarded  and  confidential,  and to use or disclose it only as  necessary to
provide  services to you or as otherwise  permitted  by law. Our privacy  policy
applies equally to former shareholders and persons who inquire about a fund.

INFORMATION  WE  COLLECT.   "Nonpublic   personal   information"  is  personally
identifiable  financial  information  about you as an individual or your family.
The kinds of nonpublic  personal  information  we have about you may include the
information  you provide us on your share  purchase  application or in telephone
calls or  correspondence  with us, and information  about your fund transactions
and  holdings,  how you voted your shares and the account  where your shares are
held.

INFORMATION WE DISCLOSE. We disclose nonpublic personal information about you to
companies  that provide  necessary  services to us, such as the Fund's  transfer
agent, distributor or investment adviser, as permitted or required by law, or as
authorized  by  you.  Any  other  use is  strictly  prohibited.  We do not  sell
information about you or any of our fund shareholders to anyone.

HOW WE SAFEGUARD  YOUR  INFORMATION.  We restrict  access to nonpublic  personal
information  about you to only those persons who need it to provide  services to
you or who are permitted by law to receive it. We maintain physical,  electronic
and  procedural  safeguards  to protect  the  confidentiality  of all  nonpublic
personal information we have about you.

If you have any questions  regarding our Privacy  Policy,  please  contact us at
1-800-437-1020.

                            AQUILA DISTRIBUTORS, INC.
                        AQUILA INVESTMENT MANAGEMENT LLC

This  Privacy  Policy also has been  adopted by Aquila  Distributors,  Inc.  and
Aquila Investment  Management LLC and applies to all nonpublic information about
you that each of these companies may obtain in connection with services provided
to the Fund or to you as a shareholder of the Fund.

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

<PAGE>

FOUNDER

   AQUILA MANAGEMENT CORPORATION

MANAGER

   AQUILA INVESTMENT MANAGEMENT LLC
   380 Madison Avenue, Suite 2300
   New York, New York 10017

BOARD OF TRUSTEES

   Lacy B. Herrmann, Chairman (thru 12/31/04)
   Thomas A. Christopher, Chair (effective 1/01/05)
   Douglas Dean
   Diana P. Herrmann
   Theodore T. Mason
   Anne J. Mills
   William J. Nightingale
   James R. Ramsey

OFFICERS

   Diana P. Herrmann, 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

CUSTODIAN

   BANK ONE TRUST COMPANY, N.A.
   1111 Polaris Parkway
   Columbus, Ohio 43240

TRANSFER AND SHAREHOLDER SERVICING AGENT

   PFPC INC.
   760 Moore Road
   King of Prussia, Pennsylvania 19406

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

   KPMG LLP
   757 Third Avenue
   New York, New York 10017

Further information is contained in the Prospectus, which must precede or
accompany this report.



ITEM 2.  CODE OF ETHICS.

(a) As of December 31, 2004 (the end of the reporting period) the
Trust has adopted a code of ethics that applies to the Fund's
principal executive officer(s)and principal financial officer(s)
and persons performing similar functions ("Covered Officers") as
defined in the Aquila Group of Funds Code of Ethics for Principal
Executive and Senior Financial Officers under Section 406 of the
Sarbanes-Oxley Act of 2002.;

(f)(1) Pursuant to Item 10(a)(1), a copy of the Fund's Code of
 Ethics that applies to the Trust's principal executive officer(s)
 and principal financial officer(s) and persons performing similar
functions is included as an exhibit to its annual report on this
Form N-CSR;

(f)(2)  The text of the Fund's Code of Ethics that applies to the
Fund's principal executive officer(s) and principal financial
officer(s) and persons performing similar functions has been
posted on its Internet website which can be found at the Fund's
Internet address at aquilafunds.com.

ITEM 3.  AUDIT COMMITTEE FINANCIAL EXPERT.

	(a)(1)(ii) The Board of Trustees of the Fund has determined that
it does not have at least one audit committee financial expert
serving on its audit committee.  The Fund does not have such a
person serving on the audit committee because none of the persons
currently serving as Trustees happens to have the technical
accounting and auditing expertise included in the definition of
"audit committee financial expert" adopted by the Securities
and Exchange Commission in connection with this Form N-CSR, and the
Board has not heretofore deemed it necessary to seek such a person
for election to the Board.

The primary mission of the Board, which is that of oversight over
the operations and affairs of the Fund, confronts the Trustees with
a wide and expanding range of issues and responsibilities. The
Trustees believe that, accordingly, it is essential that the Board's
membership consist of persons with as extensive experience as possible
in fulfilling the duties and responsibilities of mutual fund directors
and audit committee members and, ideally, with extensive experience
and background relating to the economic and financial sectors and
securities in which the Fund invests, including exposure to the
financial and accounting matters commonly encountered with respect
to those sectors and securities.  The Board believes that its current
membership satisfies those criteria.  It recognizes that it would
also be helpful to have a member with the relatively focused accounting
and auditing expertise reflected in the applicable definition of
"audit committee financial expert," just as additional members with
similarly focused technical expertise in other areas relevant to
the Fund's operations and affairs would also contribute added value.
However, the Board believes that the Fund is better served, and its
assets better employed, by a policy of hiring experts in various
areas, including the specialized area of technical accounting and
auditing matters, if and as the Board identifies the need, rather
than by seeking to expand its numbers by adding technical experts
in the areas constituting its domain of responsibility.  The Fund's
Audit Committee Charter explicitly authorizes the Committee to
retain such experts as it deems necessary in fulfilling its duties
under the Charter.

ITEM 4.  PRINCIPAL ACCOUNTANT FEES AND SERVICES.

a) Audit Fees - The aggregate fees billed for professional services rendered
by the principal accountant for the audit of the Registrant's annual
financial statements were $20,700 in 2004 and $20,100 in 2003.

b) Audit Related Fees - There were no amounts billed for audit-related
fees over the past two years.

c)  Tax Fees - The Registrant was billed by the principal accountant $8,350
and $8,942 in 2003 and 2004, respectively, for return preparation.

d)  All Other Fees - There were no additional fees paid for audit and non-
audit services other than those disclosed in a) thorough c) above.

e)(1)  Currently, the audit committee of the Registrant pre-approves audit
services and fees on an engagement-by-engagement basis

e)(2)  None of the services described in b) through d) above were approved
by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X, all were pre-approved on an engagement-by-engagement basis.

f)  No applicable.

g) There were no non-audit services fees billed by the Registrant's accountant
 to the Registrant's investment adviser or distributor over the past two years.

h)  Not applicable.

ITEM 5.  AUDIT COMMITTEE OF LISTED REGISTRANTS.
		Not applicable.

ITEM 6.  [RESERVED]

ITEM 7.  DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR
         CLOSED-END MANAGEMENT INVESTMENT COMPANIES.

905:   	Not applicable.

ITEM 8. [RESERVED]

ITEM 9.  CONTROLS AND PROCEDURES.

(a)  Based on their evaluation of the registrant's disclosure controls and
procedures (as defined in Rule 30a-2(c) under the Investment Company Act of
1940) as of a date within 90 days of the fling of this report, the registrant's
chief financial and executive officers have concluded that the disclosure
controls and procedures of the registrant are appropriately designed to ensure
that information required to be disclosed in the registrant's reports that are
filed under the Securities Exchange Act of 1934 are accumulated and communicated
to registrant's management, including its principal executive officer(s) and
principal financial officer(s), to allow timely decisions regarding required
disclosure and is recorded, processed, summarized and reported, within the time
periods specified in the rules and forms adopted by the Securities and Exchange
Commission.

(b)  There have been no significant changes in registrant's internal controls or
in other factors that could significantly affect registrant's internal controls
subsequent to the date of the most recent evaluation, including no significant
deficiencies or material weaknesses that required corrective action.

ITEM 10.  EXHIBITS.

(a)(1) (a)(1) Aquila Group of Funds Code of Ethics for Principal Executive and
Senior Financial Officers under Section 406 of the Sarbanes-Oxley Act of 2002.

(a)(2) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(a) under the Investment Company Act of
1940.

(b) Certifications of principal executive officer and principal financial
officer as required by Rule 30a-2(b) under the Investment Company Act of 1940.

SIGNATURES

	Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
 to be signed on its behalf by the undersigned thereunto duly authorized.

CHURCHILL TAX-FREE TRUST


By:  /s/  Diana P. Herrmann
---------------------------------
President and Trustee
February 28, 2005


By:  /s/  Joseph P. DiMaggio
-----------------------------------
Chief Financial Officer and Treasurer
February 28, 2005


Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.

By:  /s/  Diana P. Herrmann
---------------------------------
Diana P. Herrmann
President and Trustee
February 28, 2005

By:  /s/  Joseph P. DiMaggio
-----------------------------------
Joseph P. DiMaggio
Chief Financial Officer and Treasurer
February 28, 2005


CHURCHILL TAX-FREE TRUST


EXHIBIT INDEX

(a) (2)	Certifications of principal executive officer and principal
 financial officer as required by Rule 30a-2(a) under the Investment
Company Act of 1940.

(b)	Certification of chief executive officer and chief financial officer as
required by Rule 30a-2(b) of the Investment Company Act of 1940.