BABSON D L TAX FREE INCOME FUND INC, 497J, 1996-11-06

BABSON D L TAX FREE INCOME FUND INC
497J, 1996-11-06

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BABSON
TAX-FREE
INCOME
FUND

Prospectus
October 31, 1996

A no-load mutual fund principally invested
in municipal securities to provide regular
income exempt from federal tax.

JONES & BABSON
MUTUAL FUNDS

PROSPECTUS
October 31, 1996

D. L. BABSON TAX-FREE
INCOME FUND, INC.

Managed and Distributed By:
JONES & BABSON, INC.
2440 Pershing Road, Suite G-15
Kansas City, Missouri 64108

Toll-Free 1-800-4-BABSON
(1-800-422-2766)
In the Kansas City area 471-5200

Investment Counsel:
DAVID L. BABSON & CO. INC.
Cambridge, Massachusetts

INVESTMENT OBJECTIVE

The Babson Tax-Free Income Fund offers investors a choice among three
Portfolios with differing maturity lengths of investment-grade municipal
securities providing the highest level of regular income exempt from federal
income tax consistent with their quality and maturity standards.

The Money Market Portfolio further seeks to maintain, but does not guarantee,
a constant net asset value of $1.00 per share. Although each Portfolio invests
in high quality instruments, the shares of the Portfolios are not insured or
guaranteed by the U.S. Government and there can be no assurance that the Money
Market Portfolio will be able to maintain a constant net asset value per
share.

The Fund was founded particularly for those investors who share its investment
goals and who wish to have their investment receive continuous portfolio
supervision by the staff of David L. Babson & Co. Inc.

PURCHASE INFORMATION
Minimum Investment
(each Portfolio selected)

Initial Purchase $ 1,000
Initial Uniform Transfers (Gifts)
to Minors Purchases $ 250

Subsequent Purchase:
By Mail or Telephone Purchase (ACH) $ 100
By Wire $ 1,000

All Automatic Monthly Purchases $ 50

Shares are purchased and redeemed at net asset value. There are no sales,
redemption or Rule 12b-1 distribution charges. If you need further
information, please call the Fund at the telephone numbers indicated.

ADDITIONAL INFORMATION

This prospectus should be read and retained for future reference. It contains
the information that you should know before you invest. A "Statement of
Additional Information" of the same date as this prospectus has been filed
with the Securities and Exchange Commission and is incorporated by reference.
Investors desiring additional information about the Fund may obtain a copy
without charge by writing or calling the Fund.

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

TABLE OF CONTENTS
Page
Fund Expenses 3
Financial Highlights 5
Investment Objective and Portfolio Management Policy 7
Risk Factors Peculiar to Municipal Securities 8
Repurchase Agreements 9
Investment Restrictions 9
Performance Measures 9
How to Purchase Shares 11
Initial Investments 11
Investments Subsequent to Initial Investment 12
Telephone Investment Service 12
Automatic Monthly Investment Plan 12
How to Redeem Shares 13
Systematic Redemption Plan 16
How to Exchange Shares Between Portfolios and Funds 16
How Share Price is Determined 17
Officers and Directors 18
Management and Investment Counsel 18
General Information and History 20
Dividends, Distributions and Their Taxation 20
Shareholder Services 22
Shareholder Inquiries 23

FUND EXPENSES
PORTFOLIO L

Shareholder Transaction Expenses
Maximum sales load imposed on purchases None
Maximum sales load imposed on reinvested dividends None
Deferred sales load None
Redemption fee None
Exchange fee None
Annual Fund Operation Expenses
(as a percentage of average net assets)
Management fees .95%
12b-1 fees None
Other expenses .06%
Total Fund operating expenses 1.01%
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and
(2) redemption at the end of each time period:
1 Year 3 Year 5 Year 10 Year
$10 $32 $56 $123

PORTFOLIO S

PORTFOLIO MM

Shareholder Transaction Expenses
Maximum sales load imposed on purchases None
Maximum sales load imposed on reinvested dividends None
Deferred sales load None
Redemption fee None
Exchange fee None
Annual Fund Operation Expenses
(as a percentage of average net assets)
Management fees .50%
12b-1 fees None
Other expenses .08%
Total Fund operating expenses .58%
You would pay the following expenses on a $1,000 investment, assuming
(1) 5% annual return and
(2) redemption at the end of each time period:
1 Year 3 Year 5 Year 10 Year
$6 $19 $32 $72

The above information is provided in order to assist you in understanding the
various costs and expenses that a shareholder of the Fund will bear directly
or indirectly. The expenses set forth above are for the fiscal year ended June
30, 1996. The example should not be considered a representation of past or
future expenses. Actual expenses may be greater or less than those shown.

D. L. BABSON TAX-FREE INCOME FUND, INC.
FINANCIAL HIGHLIGHTS

The following financial highlights for each of the ten years in the period
ended June 30, 1996, have been derived from audited financial statements of
D.L. Babson Tax-Free Income Fund, Inc. Such information for each of the five
years in the period ended June 30, 1996, should be read in conjunction with
the financial statements of the Fund and the report of Arthur Andersen LLP,
independent public accountants, appearing in the June 30, 1996, Annual Report
to Shareholders which is incorporated by reference in this prospectus. The
information for each of the five years in the period ended June 30, 1991, is
not covered by the report of Arthur Andersen LLP.

<TABLE>
<CAPTION>
PORTFOLIO L 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
</CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 8.67 $ 8.52 $ 9.49 $ 9.04 $ 8.74 $ 8.63 $ 8.80 $ 8.41 $ 8.64 $ 9.45
Income from investment operations:
Net investment income 0.41 0.42 0.43 0.46 0.52 0.54 0.56 0.65 0.64 0.63
Net gains or losses on
securities (both
realized and unrealized) 0.07 0.17 (0.56) 0.57 0.57 0.11 (0.17) 0.39 (0.04) (0.21)
Total from investment
operations 0.48 0.59 (0.13) 1.03 1.09 0.65 0.39 1.04 0.60 0.42
Less distributions:
Dividends from net
investment income (0.41) (0.42) (0.43) (0.46) (0.52) (0.54) (0.56) (0.65) (0.64) (0.63)
Distributions from
capital gains - (0.02) (0.41) (0.12) (0.27) - - - (0.19) (0.60)
Total distributions (0.41) (0.44) (0.84) (0.58) (0.79) (0.54) (0.56) (0.65) (0.83) (1.23)
Net asset value, end of year $ 8.74 $ 8.67 $ 8.52 $ 9.49 $ 9.04 $ 8.74 $ 8.63 $ 8.80 $ 8.41 $ 8.64
Total return 6% 7% (2)% 12% 13% 8% 5% 13% 7% 5%

Ratios/Supplemental Data
Net assets, end of year
(in millions) $ 27 $ 28 $ 30 $ 34 $ 30 $ 29 $ 28 $ 26 $ 21 $ 22
Ratio of expenses to average
net assets 1.01% 1.02% 1.02% 1.00% 0.99% 0.98% 1.00% 0.99% 1.00% 0.99%
Ratio of net investment income to
average net assets 4.67% 4.98% 4.73% 5.03% 5.73% 6.22% 6.47% 7.51% 7.54% 6.80%
Portfolio turnover rate 39% 34% 53% 126% 128% 116% 121% 172% 168% 123%

<CAPTION>
PORTFOLIO S 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
</CAPTION>

Net asset value, beginning of year $10.71 $10.62 $11.05 $10.78 $10.54 $10.44 $10.46 $10.54 $10.74 $10.72
Income from investment operations:
Net investment income 0.44 0.45 0.46 0.50 0.55 0.59 0.61 0.68 0.64 0.64
Net gains or losses on
securities (both realized
and unrealized) 0.01 0.10 (0.37) 0.29 0.36 0.21 (0.02) (0.05) (0.11) 0.09
Total from investment
operations 0.45 0.55 0.09 0.79 0.91 0.80 0.59 0.63 0.53 0.73
Less distributions:
Dividends from net
investment income (0.44) (0.45) (0.46) (0.50) (0.55) (0.59) (0.61) (0.68) (0.64) (0.64)
Distributions from
capital gains (0.03) (0.01) (0.06) (0.02) (0.12) (0.11) - (0.03) (0.09) (0.07)
Total distributions (0.47) (0.46) (0.52) (0.52) (0.67) (0.70) (0.61) (0.71) (0.73) (0.71)
Net asset value, end of year $10.69 $10.71 $10.62 $11.05 $10.78 $10.54 $10.44 $10.46 $10.54 $10.74
Total return 4% 5% 1% 8% 9% 8% 6% 6% 5% 7%

Ratios/Supplemental Data
Net assets, end of year
(in millions) $ 25 $ 28 $ 29 $ 26 $ 22 $ 18 $ 18 $ 18 $ 17 $ 16
Ratio of expenses to average
net assets 1.01% 1.01% 1.02% 1.00% 1.00% 0.99% 0.99% 0.99% 1.00% 0.99%
Ratio of net investment income to
average net assets 4.13% 4.28% 4.22% 4.58% 5.14% 5.57% 5.82% 6.48% 6.01% 5.91%
Portfolio turnover rate 41% 34% 21% 47% 81% 98% 74% 115% 131% 66%

<CAPTION>
PORTFOLIO MM 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
</CAPTION>

Net asset value, beginning of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Income from investment operations:
Net investment income 0.03 0.03 0.02 0.02 0.03 0.05 0.05 0.05 0.04 0.04
Less distributions:
Dividends from net
investment income (0.03) (0.03) (0.02) (0.02) (0.03) (0.05) (0.05) (0.05) (0.04) (0.04)
Net asset value, end of year $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Total return 3% 3% 2% 2% 3% 5% 6% 6% 4% 4%

Ratios/Supplemental Data
Net assets, end of year
(in millions) $ 8 $ 16 $ 15 $ 9 $ 10 $ 10 $ 11 $ 14 $ 13 $ 12
Ratio of expenses to average
net assets 0.58% 0.59% 0.57% 0.56% 0.55% 0.54% 0.55% 0.54% 0.55% 0.54%
Ratio of net investment income
to average net assets 3.15% 3.07% 1.99% 2.18% 3.40% 4.82% 5.44% 5.69% 4.44% 4.05%
</TABLE>

INVESTMENT OBJECTIVE AND
PORTFOLIO MANAGEMENT POLICY

Babson Tax-Free Income Fund offers three separate Portfolios. The Fund's
objective is to provide investors with the highest level of investment income
exempt from federal income tax consistent with the quality and maturity
standards prescribed for each Portfolio. The Money Market Portfolio further
seeks to maintain liquidity and a constant price of $1.00 per share. Although
the Fund cannot guarantee that these objectives will be achieved, but through
careful management and diversification it will seek to reduce risk and enhance
the opportunities for higher income and greater price stability.

Each Portfolio will have substantially all of its assets invested in
investment-grade municipal securities, the interest on which is deemed exempt
from federal income tax (including the alternative minimum tax). The essential
difference in the Portfolios will be the time to maturity of their holdings.
Investors may suit their financial needs and circumstances by investing in one
or more of the Portfolios or by transferring from one to another. For a
description of municipal securities and their ratings, see "Municipal
Securities Described and Ratings" in the "Statement of Additional
Information." The Portfolios are:

Portfolio L - Longer Term: The weighted average maturity is expected to be
between ten and twenty-five years with maturities generally being longer than
five years at the time of purchase. There is no maximum maturity. Longer
maturities produce higher income but carry greater possibility of price
fluctuation compared to obligations with shorter terms.

Portfolio S - Shorter Term: The weighted average maturity is expected to be
between two and five years with no maturities more than ten years at the time
of purchase. Shorter maturities usually result in lower income but provide
more stability in price when compared to obligations with longer maturities.

Portfolio MM - Money Market: Expected average weighted maturity is 90 days or
less. No maturities will be more than one year at the time of purchase. Net
asset value is expected to remain constant at $1.00 per share.

During periods of normal market conditions, the Fund will invest at least 80%
of the total assets of each Portfolio (exclusive of cash) in municipal
securities, such as bonds and other debt obligations issued by or on behalf of
states, territories and possessions of the United States including their
political subdivisions or their constituted authorities, agencies and
instrumentalities, the interest on which is exempt from federal income tax
including the alternative minimum tax. This fundamental policy will not be
changed without shareholder approval, except that the Fund reserves the right
to deviate temporarily from this policy during extraordinary circumstances
when, in the opinion of management, it is advisable to do so in the best
interest of shareholders, such as when market conditions dictate a defensive
posture in taxable obligations. During the Fund's fiscal year ended June 30,
1996, the following percentages of income were exempt from federal income
taxes: Portfolio L, 98.74%, Portfolio S, 99.99% and Portfolio MM, 99.97%.

At least 90% of the municipal bonds in Portfolio L and Portfolio S will be
rated at the time of purchase within the top three classifications of Moody's
Investors Service, Inc. (Aaa, Aa and A), or by Standard and Poor's Corp. (AAA,
AA and A). Any municipal bond backed by the full faith and credit of the
federal government shall be considered to have a rating of AAA. Investments in
short-term municipal obligations and notes are limited to those obligations
which at the time of purchase: (1) are backed by the full faith and credit of
the United States; or (2) are rated MIG-1, MIG-2 or MIG-3 by Moody's; or (3)
if the notes are not rated, then the issuer's long-term bond rating must be at
least A as determined by Moody's or by S&P. Short-term discount notes are
limited to those obligations rated A-1 or A-2 by S&P, or Prime-1 or Prime-2 by
Moody's or their equivalents as determined by the Board of Directors. With
respect to short-term discount notes which are not rated, the issuer's long-
term bond rating must be at least A by S&P or Moody's.

One hundred percent of the bonds in Portfolio MM must be rated at the time of
purchase within the two highest grades assigned by Moody's Investors Service,
Inc. (Aaa and Aa), or Standard & Poor's Corporation (AAA and AA), or of
comparable quality as determined by the Board of Directors. Any municipal bond
held in Portfolio MM- Money Market that is backed by the full faith and credit
of the federal government shall be considered to have a rating of AAA.
Investments in short-term municipal obligations and notes will be limited to
those obligations which at the time of purchase: (1) are backed by the full
faith and credit of the United States; (2) are rated MIG-1 or MIG-2 by
Moody's; or (3) if the obligations or notes are not rated, then of comparable
quality as determined by the Board of Directors. Short-term discount notes
will be limited to those obligations rated A-1 by S&P or Prime-1 by Moody's or
their equivalents as determined by the Board of Directors. If the short-term
discount notes are not rated, then they must be of comparable quality as
determined by the Board of Directors.

While the Fund normally maintains at least 80% of each Portfolio in municipal
securities, it may invest any remaining balance in taxable money market
instruments on a temporary basis, if management believes this action would be
in the best interest of shareholders. Included in this category are:
obligations of the United States of America, its agents or instrumentalities;
certificates of deposit; bankers' acceptances and other short-term debt
obligations of United States banks with total assets of $1 billion or more;
and commercial paper rated A-2 or better by Standard & Poor's Corp. or
Prime-2 or better by Moody's Investors Service, Inc., or certain rights to
acquire these securities.
The Fund reserves the right to hold cash reserves as management deems
necessary for defensive or emergency purposes.

It is the policy of the Fund not to invest more than 25% of its assets in any
one classification of municipal securities, except project notes or other tax-
exempt obligations which are backed by the U.S. government.

Should the rating organizations used by the Fund cease to exist or change
their systems, the Fund will attempt to use other comparable ratings as
standards for its investments in municipal securities in accordance with its
investment policies.

For the three years ended June 30, 1996, the annual portfolio turnover rates
were as follows:

Portfolio
Fiscal Turnover
Year Rate
Portfolio L - 1994 53%
Longer Term 1995 34%
1996 39%
Portfolio S - 1994 21%
Shorter Term 1995 34%
1996 41%

Since short-term debt securities with maturities of less than one year are
excluded from calculation of portfolio turnover, Portfolio MM - Money Market
has no portfolio turnover. The Fund has paid no commissions.

RISK FACTORS PECULIAR TO
MUNICIPAL SECURITIES

The values of the Portfolios and in turn the price of their shares, may
increase or decrease whenever interest rates change on new issues. Normally,
Portfolio price volatility declines as its average maturity shortens. The
Money Market Portfolio will attempt to maintain a constant price, but there is
no guarantee. There also is a possibility that any of the issues may default
on their obligation. Management intends to minimize this risk by maintaining
all Portfolios in issues rated high in quality.

REPURCHASE AGREEMENTS

A repurchase agreement involves the sale of securities to the Fund with the
concurrent agreement by the seller to repurchase the securities at the Fund's
cost plus interest at an agreed rate upon demand or within a specified time,
thereby determining the yield during the purchaser's period of ownership. The
result is a fixed rate of return insulated from market fluctuations during
such period. Under the Investment Company Act of 1940, repurchase agreements
are considered loans by the Fund.

The Fund will enter into such repurchase agreements only with United States
banks having assets in excess of $1 billion which are members of the Federal
Deposit Insurance Corporation, and with certain securities dealers who meet
the qualifications set from time to time by the Board of Directors of the
Fund. The term to maturity of a repurchase agreement normally will be no
longer than a few days. Repurchase agreements maturing in more than seven days
and other illiquid securities will not exceed 10% of the total assets of the
Fund.

Risk Factors Applicable
to Repurchase Agreements

Repurchase agreements involve investments in debt securities where the seller
(broker-dealer or bank) agrees to repurchase the securities from the Fund at
cost plus an agreed-to interest rate within a specified time. A risk of
repurchase agreements is that if the seller seeks the protection of the
bankruptcy laws, the Fund's ability to liquidate the security involved could
be temporarily impaired, and it subsequently might incur a loss if the value
of the security declines or if the other party to a repurchase agreement
defaults on its obligation. There is also the risk that the Fund may be
delayed or prevented from exercising its rights to dispose of the collateral.

INVESTMENT RESTRICTIONS

In addition to the policies set forth under the caption "Investment Objective
and Portfolio Management Policy" the Fund is subject to certain other
restrictions which may not be changed without approval of the "holders of a
majority of the outstanding shares" of the Fund or the affected Portfolio
series. Among these restrictions, the more important ones are that the Fund
(Portfolio) will not invest in equity securities; purchase the securities of
any issuer if more than 5% of the Fund's total assets would be invested in the
securities of such issuer, or the Fund would hold more than 10% of any class
of securities of such issuer; borrow money in any Portfolio except for
temporary emergency purposes, and then only in an amount not exceeding 10% of
the value of the total assets of that Portfolio. The full text of these
restrictions is set forth in the "Statement of Additional Information."

There is no limitation with respect to investments in U.S. Treasury Bills, or
other obligations issued or guaranteed by the federal government, its agencies
and instrumentalities.

PERFORMANCE MEASURES

From time to time, each of the Portfolios may advertise its performance in
various ways, as summarized below. Further discussion of these matters also
appears in the "Statement of Additional Information." A discussion of Fund
performance is included in the Fund's Annual Report to Shareholders which is
available from the Fund upon request at no charge.

Yield of Portfolio MM

From time to time, Portfolio MM may advertise "yield" and "effective yield."
The "yield" of a Fund refers to the income generated by an investment over a
seven-day period (which period will be stated in the advertisement). This
income is then "annualized." That is, the amount of income generated by the
investment during that week is assumed to be generated each week over a 52-
week period and is shown as a percentage of the investment. The "effective
yield" is calculated similarly, but, when annualized, the income earned by an
investment in a Fund is assumed to be reinvested. The "effective yield" will
be slightly higher than the "yield" because of the compounding effect of this
assumed reinvestment.

Portfolio MM may quote its yield in advertisements or in reports to
shareholders. Yield information may be useful in reviewing the performance of
Portfolio MM and in providing a basis for comparison with other investment
alternatives. However, since the net investment income of Portfolio MM changes
in response to fluctuations in interest rates and Portfolio expenses, any
given yield quotations should not be considered representative of the
Portfolio's yield for any future period. Current yield and price quotations
for the Portfolio may be obtained by telephoning 1-800-4-BABSON (1-800-422-
2766), or in the Kansas City area 471-5200.

Total Return of Portfolios L and S

Portfolio L and Portfolio S may advertise "average annual total return" over
various periods of time. Such total return figures show the average percentage
change in value of an investment in a Portfolio from the beginning date of the
measuring period to the end of the measuring period. These figures reflect
changes in the price of the Portfolio's shares and assume that any income
dividends and/or capital gains distributions made by the Portfolios during the
period were reinvested in additional shares. Figures will be given for recent
one-, five- and ten-year periods (if applicable), and may be given for other
periods as well (such as from commencement of a Portfolio's operations, or on
a year-by-year basis). When considering "average" total return figures for
periods longer than one year, it is important to note that a Portfolio's
annual total return for any one year in the period might have been greater or
less than the average for the entire period.

Performance Comparisons

In advertisements or in reports to shareholders, each Portfolio may compare
its performance to that of other mutual funds with similar investment
objectives and to bond or other relevant indices. Portfolio S and Portfolio L
may compare their performance to rankings prepared by Lipper Analytical
Services, Inc. (Lipper), a widely recognized independent service and to the
Shearson Lehman Hutton Government/Corporate Index, an unmanaged index of
government and corporate bonds, or the Consumer Price Index. Performance
information, rankings, ratings, published editorial comments and listings as
reported in national financial publications such as Kiplinger's Personal
Finance Magazine, Business Week, Morningstar Mutual Funds, Investor's Business
Daily, Institutional Investor, The Wall Street Journal, Mutual Fund
Forecaster, No-Load Investor, Money, Forbes, Fortune and Barron's may also be
used in comparing performance of the Fund. Similarly, Portfolio MM may compare
its yields to the Donoghue's Money Fund Average and the Donoghue's Government
Money Fund Average which are averages compiled by Donoghue's Money Fund
Report, a widely recognized independent publication that monitors the
performance of money market mutual funds, or to the average yield reported by
the Bank Rate Monitor for money market deposit accounts offered by the 50
leading banks and thrift institutions in the top five standard metropolitan
statistical areas. Performance comparisons should not be considered as
representative of the future performance of any Fund. Further information
regarding the performance of the Fund is contained in the "Statement of
Additional Information."

Performance rankings, recommendations, published editorial comments and
listings reported in Money, Barron's, Kiplinger's Personal Finance Magazine,
Financial World, Forbes, U.S. News & World Report, Business Week, The Wall
Street Journal, Investors Business Daily, USA Today, Fortune and Stanger's,
may also be cited (if a Fund is listed in any such publication) or used for
comparison, as well as performance listings and rankings from Morningstar
Mutual Funds, Personal Finance, Income and Safety, The Mutual Fund Letter, No-
Load Fund Investor, United Mutual Fund Selector, No-Load Fund Analyst, No-Load
Fund X, Louis Rukeyeser's Wall Street newsletter, Donoghue's Money Letter, CDA
Investment Technologies, Inc., Wiesenberger Investment Company Service and
Donoghue's Mutual Fund Almanac.

HOW TO PURCHASE SHARES

Shares are purchased at net asset value (no sales charge) from the Fund
through its agent, Jones & Babson, Inc., 2440 Pershing Road, Suite G-15,
Kansas City, MO 64108. For information call toll free 1-800-4-BABSON (1-800-
422-2766), or in the Kansas City area 471-5200. If an investor wishes to
engage the services of any other broker to purchase (or redeem) shares of the
Fund, a fee may be charged by such broker. The Fund will not be responsible
for the consequences of delays including delays in the banking or Federal
Reserve wire systems.

You do not pay a sales commission when you buy shares of the Fund. Shares are
purchased at the Portfolio's net asset value (price) per share next effective
after a purchase order and payment have been received by the Fund. In the case
of certain institutions which have made satisfactory payment arrangements with
the Fund, orders may be processed at the net asset value per share next
effective after a purchase order has been received by the Fund.

The Fund reserves the right in its sole discretion to withdraw all or any part
of the offerings made by the prospectus or to reject purchase orders when, in
the judgment of management, such withdrawal or rejection is in the best
interest of the Fund and its shareholders. The Fund also reserves the right at
any time to waive or increase the minimum requirements applicable to initial
or subsequent investments with respect to any person or class of persons,
which includes shareholders of the Fund's special investment programs. The
Fund reserves the right to refuse to accept orders for Fund shares unless
accompanied by payment, except when a responsible person has indemnified the
Fund against losses resulting from the failure of investors to make payment.
In the event that the Fund sustains a loss as the result of failure by a
purchaser to make payment, the Fund's underwriter, Jones & Babson, Inc. will
cover the loss.

INITIAL INVESTMENTS

Initial investments - By mail. You may open an account and make an investment
by completing and signing the application which accompanies this prospectus.
Make your check ($1,000 minimum for each Portfolio selected unless your
purchase is pursuant to the Uniform Transfers (Gifts) to Minors Act, in which
case the minimum initial purchase is $250 for each portfolio selected) payable
to UMB Bank, n.a. Mail your application and check to:

D.L. Babson Tax-Free Income Fund, Inc.
2440 Pershing Road, Suite G-15
Kansas City, Missouri 64108

Initial investments - By wire. You may purchase shares of the Fund by wiring
the purchase price ($1,000 minimum for each Portfolio selected) through the
Federal Reserve Bank to the custodian, UMB Bank, n.a. Prior to sending your
money, you must call the Fund toll free 1-800-4-BABSON (1-800-422-2766), or in
the Kansas City area 471-5200 and provide it with the identity of the
registered account owner, the registered address, the Social Security or Tax
Identification Number of the registered owner, the amount being wired, the
name and telephone number of the wiring bank and the person to be contacted in
connection with the order. You will then be provided a Fund account number,
after which you should instruct your bank to wire the specified amount, along
with the account number and the account registration to:

UMB Bank, n.a.
Kansas City, Missouri, ABA #101000695
For Babson Tax-Free Income Fund (insert name and number of Portfolio)
Portfolio L - Longer Term/AC=987032-619-1
Portfolio S - Shorter Term/AC=987032-618-3
Portfolio MM - Money Market/AC=987032-617-5
OBI=(assigned Fund number and name in which registered.)

A completed application must be sent to the Fund as soon as possible so the
necessary remaining information can be recorded in your account. Payment of
redemption proceeds will be delayed until the completed application is
received by the Fund.

INVESTMENTS SUBSEQUENT
TO INITIAL INVESTMENT

You may add to your Fund account at any time in amounts of $100 or more if
purchases are made by mail or telephone purchase (ACH), or $1,000 or more if
purchases are made by wire. Automatic monthly investments must be in amounts
of $50 or more.

Checks should be mailed to the Fund at its address, and make them payable to
UMB Bank, n.a. Always identify your account number or include the detachable
reminder stub which accompanies each confirmation.

Wire share purchases should include your account registration, your account
number and the Babson Fund (Portfolio) in which you are purchasing shares. It
also is advisable to notify the Fund by telephone that you have sent a wire
purchase order to the bank.

TELEPHONE INVESTMENT SERVICE

To use the Telephone Investment Service, you must first establish your Fund
account and authorize telephone orders in the application form, or,
subsequently, on a special authorization form provided upon request. If you
elect the Telephone Investment Service, you may purchase Fund shares by
telephone and authorize the Fund to draft your checking account ($100 minimum)
for the cost of the shares so purchased. You will receive the next available
price after the Fund has received your telephone call. Availability and
continuance of this privilege is subject to acceptance and approval by the
Fund and all participating banks. During periods of increased market activity,
you may have difficulty reaching the Fund by telephone, in which case you
should contact the Fund by mail or telegraph. The Fund will not be responsible
for the consequences of delays, including delays in the banking or Federal
Reserve wire systems.

The Fund will employ reasonable procedures to confirm that instructions
communicated by telephone are genuine, and if such procedures are not
followed, the Fund may be liable for losses due to unauthorized or fraudulent
instructions. Such procedures may include, but are not limited to requiring
personal identification prior to acting upon instructions received by
telephone, providing written confirmations of such transactions, and/or tape
recording of telephone instructions.

The Fund reserves the right to initiate a charge for this service and to
terminate or modify any or all of the privileges in connection with this
service at any time upon 15 days written notice to shareholders, and to
terminate or modify the privileges without prior notice in any circumstances
where such termination or modification is in the best interest of the Fund and
its investors.

AUTOMATIC MONTHLY
INVESTMENT PLAN

You may elect to make monthly investments in a constant dollar amount from
your checking account ($50 minimum). The Fund will draft your checking account
on the same day each month in the amount you authorize in your application,
or, subsequently, on a special authorization form provided upon request.
Availability and continuance of this privilege is subject to acceptance and
approval by the Fund and all participating banks. If the date selected falls
on a day upon which the Fund shares are not priced, investment will be made on
the first date thereafter upon which Fund shares are priced. The Fund will not
be responsible for the consequences of delays, including delays in the banking
or Federal Reserve wire systems.

HOW TO REDEEM SHARES

The Fund will redeem shares at the price (net asset value per share) effective
after receipt of a redemption request in "good order." (See "How Share Price
is Determined"). Shares can be redeemed by written request or if previously
authorized by telephone toll free 1-800-4-BABSON (1-800-422-2766), or in the
Kansas City area 471-5200.

All telephone requests to redeem shares, the proceeds of which are to be paid
by check, made within 30 days of our receipt of an address change (including
requests to redeem that accompany an address change) must be in writing. The
request must be signed by each person in whose name the shares are owned, and
all signatures must be guaranteed.

In each instance you must comply with the general requirements relating to all
redemptions as well as with specific requirements set out for the particular
redemption method you select. If you wish to expedite redemptions by using the
telephone/telegraph privilege, you should carefully note the special
requirements and limitations relating to these methods. Draft writing (check)
privileges are available for Portfolio MM - Money Market only. If an investor
wishes to engage the services of any other broker to redeem (or purchase)
shares of the Fund, a fee may be charged by such broker.

Where additional documentation is normally required to support redemptions as
in the case of corporations, fiduciaries, and others who hold shares in a
representative or nominee capacity, such as certified copies of corporate
resolutions, or certificates of incumbency, or such other documentation as may
be required under the Uniform Commercial Code or other applicable laws or
regulations, it is the responsibility of the shareholder to maintain such
documentation on file and in a current status. A failure to do so will delay
the redemption. If you have questions concerning redemption requirements,
please write or telephone the Fund well ahead of an anticipated redemption in
order to avoid any possible delay.

Requests which are subject to special conditions or which specify an effective
date other than as provided herein cannot be accepted. All redemption requests
must be transmitted to the Fund at 2440 Pershing Road, Suite G-15, Kansas
City, Missouri 64108. The Fund will redeem shares at the price (net asset
value per share) next computed after receipt of a redemption request in "good
order." (For more information on how the Fund intends to maintain a constant
price for shares of Portfolio MM, see "How Share Price is Determined.")

The Fund will endeavor to transmit redemption proceeds to the proper party, as
instructed, as soon as practicable after a redemption request has been
received in "good order" and accepted, but in no event later than the third
business day thereafter. Transmissions are made by mail unless an expedited
method has been authorized and specified in the redemption request. The Fund
will not be responsible for the consequences of delays including delays in the
banking or Federal Reserve wire systems.

Redemptions will not become effective until all documents in the form required
have been received. In the case of redemption requests made within 15 days of
the date of purchase, the Fund will delay transmission of proceeds until such
time as it is certain that unconditional payment in federal funds has been
collected for the purchase of shares being redeemed or 15 days from the date
of purchase. You can avoid the possibility of delay by paying for all of your
purchases with a transfer of federal funds.

Shares redeemed will be entitled to receive all dividends declared through the
date of redemption. If you redeem all of the shares in your account, in
addition to the share redemption check, a separate check representing all
dividends declared but unpaid on the shares redeemed will be distributed on
the next dividend payment date, according to your dividend instructions on
file with the Fund. Any amount due you in your declared but unpaid dividend
account cannot be redeemed by draft.

Signature Guarantees are required in connection with all redemptions of
$50,000 or more by mail, or changes in share registration, except as
hereinafter provided. These requirements may be waived by the Fund in certain
instances where it appears reasonable to do so and will not unduly affect the
interests of other shareholders. Signature(s) must be guaranteed by an
"eligible Guarantor institution" as defined in Rule 17Ad-15 under the
Securities Exchange Act of 1934. Eligible guarantor institutions include: (1)
national or state banks, savings associations, savings and loan associations,
trust companies, savings banks, industrial loan companies and credit unions;
(2) national securities exchanges, registered securities associations and
clearing agencies; or (3) securities broker/dealers which are members of a
national securities exchange or clearing agency or which have a minimum net
capital of $100,000. A notarized signature will not be sufficient for the
request to be in proper form.

Signature guarantees will be waived for mail redemptions of $50,000 or less,
but they will be required if the checks are to be payable to someone other
than the registered owner(s), or are to be mailed to an address different from
the registered address of the shareholder(s), or where there appears to be a
pattern of redemptions designed to circumvent the signature guarantee
requirement, or where the Fund has other reason to believe that this
requirement would be in the best interests of the Fund and its shareholders.

The right of redemption may be suspended or the date of payment postponed
beyond the normal three-day period when the New York Stock Exchange is closed
or under emergency circumstances as determined by the Securities and Exchange
Commission. Further, the Fund reserves the right to redeem its shares in kind
under certain circumstances. If shares are redeemed in kind, the shareholder
may incur brokerage costs when converting into cash. Additional details are
set forth in the "Statement of Additional Information."

Due to the high cost of maintaining smaller accounts, the Board of Directors
has authorized the Fund to close shareholder accounts where their value falls
below the current minimum initial investment requirement at the time of
initial purchase as a result of redemptions and not as the result of market
action, and remains below this level for 60 days after each such shareholder
account is mailed a notice of: (1) the Fund's intention to close the account,
(2) the minimum account size requirement, and (3) the date on which the
account will be closed if the minimum size requirement is not met. Since the
minimum investment amount and the minimum account size are the same, any
redemption from an account containing only the minimum investment amount may
result in redemption of that account.

Withdrawal By Mail - Shares may be redeemed by mailing your request to the
Fund. To be in "good order" the request must include the following:

A written request for redemption, together with an endorsed share certificate
where a certificate has been issued, must be received by the Fund in order to
constitute a valid tender for redemption. For authorization of redemptions by
a corporation, it will also be necessary to have an appropriate certified copy
of resolutions on file with the Fund before a redemption request will be
considered in "good order." In the case of certain institutions which have
made satisfactory redemption arrangements with the Fund, redemption orders may
be processed by facsimile or telephone transmission at net asset value per
share next effective after receipt by the Fund.

(1) A written redemption request or stock assignment (stock power)
containing the genuine signature of each registered owner exactly as the
shares are registered with clear identification of the account by registered
name(s) and account number and the number of shares or the dollar amount to be
redeemed;

(2) any outstanding stock certificates representing shares to be redeemed;

(3) signature guarantees as required (see Signature Guarantees); and

(4) any additional documentation which the Fund may deem necessary to insure
a genuine redemption.

Withdrawal By Telephone or Telegraph - You may withdraw any amount
($1,000 minimum if wired) or more by telephone toll free 1-800-4-BABSON
(1-800-422-2766), or in the Kansas City area 471-5200, or by telegram to
the Fund's address. Telephone/telegraph redemption authorization signed
by all registered owners with signatures guaranteed must be on file with
the Fund before you may redeem by telephone or telegraph. Funds will be
sent only to the address of record. The signature guarantee requirement
may be waived by the Fund if the request for this redemption method is
made at the same time the initial application to purchase shares is
submitted.

All communications must include the Fund's name, Portfolio name, your account
number, the exact registration of your shares, the number of shares or dollar
amount to be redeemed, and the identity of the bank and bank account (name and
number) to which the proceeds are to be wired. This procedure may only be used
for noncertificated shares held in open account. For the protection of
shareholders, your redemption instructions can only be changed by filing with
the Fund new instructions on a form obtainable from the Fund which must be
properly signed with signature(s) guaranteed.

Telephone or telegraph redemption proceeds may be transmitted to your pre-
identified bank account. Requests received prior to 1:00 P.M. (Eastern Time)
for Portfolio MM and 4:00 P.M. (Eastern Time) for Portfolios L and S, proceeds
will be wired the following business day. Once the funds are transmitted, the
time of receipt and the funds' availability are not under our control. If your
request is received during the day thereafter, proceeds normally will be wired
on the second business day following the day of receipt of your request. Wired
funds are subject to a $10 fee to cover bank wire charges, which is deducted
from redemption proceeds, but this charge may be reduced or waived in
connection with certain accounts. The Fund reserves the right to change this
policy or to refuse a telephone or telegraph redemption request or require
additional documentation to assure a genuine redemption, and, at its option,
may pay such redemption by wire or check and may limit the frequency or the
amount of such request. The Fund reserves the right to terminate or modify any
or all of the services in connection with this privilege at any time without
prior notice. Neither the Fund nor Jones & Babson, Inc. assumes responsibility
for the authenticity of withdrawal instructions, and there are provisions on
the authorization form limiting their liability in this respect.

Withdrawal by Draft ("Check") (Portfolio MM only) - This method of redemption
is limited to open account shares. You may elect this method of redemption on
your initial application, or on a form which will be sent to you upon request.
All signatures must be guaranteed unless this method of redemption is elected
on your initial application. The authorization form, which all registered
owners must sign, also contains a provision relieving the Fund and Jones &
Babson, Inc. from liability for loss, if any, which you may sustain arising
out of a non-genuine redemption pursuant to this redemption feature. Any
additional documentation required to assure a genuine redemption must be
maintained on file with the Fund in such current status as the Fund may deem
necessary. A new form properly signed, with signature(s) guaranteed must be
received and accepted by the Fund before authorized redemption instructions
already on file with the Fund can be changed.

When the draft authorization form is received by the Fund in "good order" and
accepted, you will be provided a supply of drafts ("checks") which may be
drawn on the Fund. Drafts must be deposited in a bank account of the payee to
be cleared through the banking system in order to be presented to the Fund for
payment through UMB Bank, n.a. An additional supply of drafts will be
furnished upon request. There presently is no charge for these drafts or their
clearance. However, the Fund and UMB Bank, n.a. reserve the right to make
reasonable charges and to terminate or modify any or all of the services in
connection with this privilege at any time and without prior notice.

These drafts must be signed by all registered owners exactly as the shares are
registered, except that if shares are owned in joint tenancy, drafts may be
signed by any one joint owner unless otherwise indicated on the application.
They may be made payable to the order of any person in any amount ranging from
$500 to $100,000. The bank of the draft payee must present it for collection
through UMB Bank, n.a. which delivers it to the Fund for redemption of a
sufficient number of shares to cover the amount of the draft. Dividends will
be earned by the shareholder on the draft proceeds until it clears at UMB
Bank, n.a. Drafts will not be honored by the Fund and will be returned unpaid
if there are insufficient open account shares to meet the withdrawal amount.
The Fund reserves the right to withhold the bank's redemption request until it
determines that it has received unconditional payment in federal funds for at
least the number of shares required to be redeemed to make payment on the
draft. If such a delay is necessary, the bank may return the draft not
accepted (by the Fund) because there are not sufficient shares for which good
payment has been received in the shareholder account. Dividends declared but
not yet paid to you cannot be withdrawn by drafts. Drafts (checks) written on
the Babson Tax-Free Income Fund (Portfolio MM) should not be used as a
redemption form or for the transfer of shares to another Babson Fund unless
the registration of the accounts involved is identical.

SYSTEMATIC REDEMPTION PLAN

If you own shares in an open account valued at $10,000 or more, and desire to
make regular monthly or quarterly withdrawals without the necessity and
inconvenience of executing a separate redemption request to initiate each
withdrawal, you may enter into a Systematic Withdrawal Plan by completing
forms obtainable from the Fund. For this service, the manager may charge you a
fee not to exceed $1.50 for each withdrawal. Currently the manager assumes the
additional expenses arising out of this type of plan, but it reserves the
right to initiate such a charge at any time in the future when it deems it
necessary. If such a charge is imposed, participants will be provided 30 days
notice.

Subject to a $50 minimum, you may withdraw each period a specified dollar
amount. Shares also may be redeemed at a rate calculated to exhaust the
account at the end of a specified period of time.

Dividends and capital gains distributions must be reinvested in additional
shares. Under all withdrawal programs, liquidation of shares in excess of
dividends and distributions reinvested will diminish and may exhaust your
account, particularly during a period of declining share values.

You may revoke or change your plan or redeem all of your remaining shares at
any time. Withdrawal payments will be continued until the shares are exhausted
or until the Fund or you terminate the plan by written notice to the other.

HOW TO EXCHANGE SHARES
BETWEEN PORTFOLIOS AND FUNDS

Shareholders may exchange without a waiting period their shares of Portfolio
MM which are held in open account, and shareholders may exchange their shares
of Portfolio S and Portfolio L if held in open account for 15 days or more for
identically registered shares of any other Babson Fund, or any other Portfolio
in the Babson Fund or Buffalo Group which is legally registered for sale in
the state of residence of the investor, except Babson Enterprise Fund, Inc.,
provided that the minimum amount exchanged has a value of $1,000 or meets the
minimum investment requirement of the Fund or Portfolio into which it is
exchanged.

Effective at the close of business on January 31, 1992, the Directors of the
Babson Enterprise Fund, Inc. took action to limit the offering of that Fund's
shares. Babson Enterprise Fund, Inc. will not accept any new accounts,
including IRAs and other retirement plans, until further notice, nor will
Babson Enterprise Fund accept transfers from shareholders of other Babson
Funds, who were not shareholders of record of Babson Enterprise Fund at the
close of business on January 31, 1992. Investors may want to consider
purchasing shares in Babson Enterprise Fund II, Inc. as an alternative.

To authorize the Telephone/Telegraph Exchange Privilege, all registered owners
must sign the appropriate section on the original application, or the Fund
must receive a special authorization form, provided upon request. During
periods of increased market activity, you may have difficulty reaching the
Fund by telephone, in which case you should contact the Fund by mail or
telegraph. The Fund reserves the right to initiate a charge for this service
and to terminate or modify any or all of the privileges in connection with
this service at any time and without prior notice under any circumstances
where continuance of these privileges would be detrimental to the Fund or its
shareholders such as an emergency, or where the volume of such activity
threatens the ability of the Fund to conduct business, or under any other
circumstances, upon 60 days written notice to shareholders. The Fund will not
be responsible for the consequences of delays including delays in the banking
or Federal Reserve wire systems.

Exchanges by mail may be accomplished by a written request properly signed by
all registered owners identifying the account, the number of shares or dollar
amount to be redeemed for exchange, and the Babson Fund into which the account
is being transferred.

If you wish to exchange part or all of your shares in the Fund for shares of
another Fund or Portfolio in the Babson or Buffalo Fund Group, you should
review the prospectus of the Fund to be purchased which can be obtained from
Jones & Babson, Inc. Any such exchange will be based on the respective net
asset values of the shares involved. Any exchange between Funds or Portfolios
involves the sale of an asset. Unless the shareholder account is tax-deferred,
this is a taxable event.

HOW SHARE PRICE IS DETERMINED

In order to determine the price at which new shares will be sold and at which
issued shares presented for redemption will be liquidated, the net asset value
per share of each Portfolio is computed once daily, Monday through Friday, at
the specific time during the day that the Board of Directors sets at least
annually, except on days on which changes in the value of portfolio securities
will not materially affect the net asset value, or days during which no
security is tendered for redemption and no order to purchase or sell such
security is received by the Fund, or customary holidays. For a list of the
holidays during which the Fund is not open for business, see "How Share Price
is Determined" in the "Statement of Additional Information."

The prices for Portfolio S and Portfolio L are determined at 4:00 P.M.(Eastern
Time). The price for Portfolio MM is determined at 1:00 P.M. (Eastern Time),
except on those days when the Fund is not open for business.

The per share calculation is made by subtracting from each Portfolio's total
assets any liabilities and then dividing into this amount the total
outstanding shares as of the date of the calculation.

Portfolio L and Portfolio S - Securities in Portfolio L and Portfolio S for
which market quotations are readily available are valued at the mean between
the most recent bid and asked prices which may be furnished by a pricing
service or directly by market makers for such securities. Portfolio securities
for which market quotations are not readily available, and other assets, will
be valued at fair value using methods determined in good faith by the Board of
Directors and may include yield equivalents (bonds are frequently quoted on
the basis of yield), which will be applied on a consistent basis. This shall
include valuations which may be furnished by a pricing service which may
employ electronic data processing techniques, including a matrix system to
determine valuations. Short-term instruments maturing within 60 days of the
valuation date may be valued at cost plus or minus any amortized discount or
premium. The Board of Directors will review valuation methods regularly in
order to determine their appropriateness.

Portfolio MM - Normally Portfolio MM's price will be $1.00 per share.
Although unlikely, it still is possible that the value of the shares you
redeem may be more or less than your cost depending on the market value of the
Portfolio's securities at the time a redemption becomes effective. The Fund
has received an order of exemption permitting the Money Market Portfolio to
value its assets on the basis of amortized cost.

The valuation of securities based upon amortized cost does not take into
account unrealized capital gains or losses. Using amortized cost, an
instrument is valued at its cost and thereafter a constant amortization to
maturity of any discount or premium is assumed, regardless of the impact of
fluctuating interest rates on the market value of the instrument. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Portfolio would receive if it sold the instrument. During periods of declining
interest rates, the daily yield on shares of the Portfolio computed as
described above may tend to be higher than a like computation made by a fund
with identical investments utilizing a method of valuation based upon market
prices and estimates of market prices for its portfolio instruments. Thus, if
the use of amortized cost by the Portfolio resulted in a lower aggregate
Portfolio value on a particular day, a prospective investor in the Portfolio
would be able to obtain a somewhat higher yield than would result from
investment in a fund utilizing market values, and existing investors in the
Portfolio would receive less investment income. The converse would apply in a
period of rising interest rates.

The Exemptive Order permitting the Money Market Portfolio to value its assets
on the basis of amortized cost and to maintain a stable net asset value of
$1.00 per share, is subject to certain conditions which have been agreed to by
the Fund. Accordingly, the Fund maintains a dollar-weighted average Portfolio
maturity for the Money Market Portfolio of 90 days or less, and has agreed to
purchase instruments having remaining maturities not exceeding one year, and
to invest only in securities determined by the Board of Directors to be of
good quality with minimal credit risks.

The Directors have established procedures designed to maintain the Money
Market Portfolio's price per share, as computed for the purpose of sales and
redemptions, at $1.00. These procedures include a review of the Portfolio's
holdings by the Directors at such intervals as they deem appropriate to
determine whether the Portfolio's net asset value calculated by using
available market quotations deviates from $1.00 per share based on amortized
cost. If any deviation exceeds one-half of one percent, the Directors will
promptly consider what action, if any, will be initiated. In the event the
Directors determine that a deviation exists which may result in material
dilution or other unfair results to investors or existing shareholders, they
have agreed to take such corrective action as they regard as necessary and
appropriate, including the sale of Portfolio instruments prior to maturity to
realize capital gains or losses or to shorten average Portfolio maturity;
withhold dividends; make a special capital distribution; redeem shares in
kind; or establish net asset value per share using available market
quotations.

OFFICERS AND DIRECTORS

The officers of the Fund manage its day-to-day operations. The Fund's manager
and its officers are subject to the supervision and control of the Board of
Directors. A list of the officers and directors of the Fund and a brief
statement of their present positions and principal occupations during the past
five years is set forth in the "Statement of Additional Information."

MANAGEMENT AND INVESTMENT COUNSEL

Jones & Babson, Inc. was founded in 1960. It organized the Fund in 1979, and
acts as its manager and principal underwriter. Pursuant to the current
Management Agreement, Jones & Babson, Inc. provides or pays the cost of all
management, supervisory and administrative services required in the normal
operation of the Fund. This includes investment management and supervision;
fees of the custodian, independent public accountants and legal counsel;
remuneration of officers, directors and other personnel; rent; shareholder
services, including maintenance of the shareholder accounting system and
transfer agency; and such other items as are incidental to corporate
administration.

Not considered normal operating expenses, and therefore payable by the Fund,
are taxes, interest, governmental charges and fees, including registration of
the Fund and its shares with the Securities and Exchange Commission and the
Securities Departments of the various States, brokerage costs, dues, and all
extraordinary costs and expenses including but not limited to legal and
accounting fees incurred in anticipation of or arising out of litigation or
administrative proceedings to which the Fund, its officers or directors may be
subject or a party thereto.

As a part of the Management Agreement, Jones & Babson, Inc. employs at its own
expense David L. Babson & Co. Inc. as its investment counsel to assist in the
investment advisory function. David L. Babson & Co. Inc. is an investment
counseling firm founded in 1940. It serves a broad variety of individual,
corporate and other institutional clients by maintaining an extensive research
and analytical staff. It has an experienced investment analysis and research
staff which eliminates the need for Jones & Babson, Inc. and the Fund to
maintain an extensive duplicate staff, with the consequent increase in the
cost of investment advisory service. The cost of the services of David L.
Babson & Co. Inc. is included in the fee of Jones & Babson, Inc. The
Management Agreement limits the liability of the manager and its investment
counsel, as well as their officers, directors and personnel, to acts or
omissions involving willful malfeasance, bad faith, gross negligence, or
reckless disregard of their duties. Joanne E. Keers has been the portfolio
manager of Babson Tax-Free Portfolio MM since 1989. She joined David L. Babson
& Co. in 1987, and has nine years investment management experience. Joel M.
Vernick has been the portfolio manager of Portfolios L and S since 1986. He is
Chartered Financial Analyst. He joined David L. Babson & Co. in 1986, and has
17 years investment management experience.

As compensation for all the foregoing services, Portfolio L and Portfolio S
pay Jones & Babson, Inc. a fee at the annual rate of 95/100 of one percent
(.95%) of each Portfolio's average daily net assets, which is computed daily
and paid semimonthly, from which Jones & Babson, Inc. pays David L. Babson &
Co. Inc. a fee of 25/100 of one percent (.25%). Portfolio MM pays Jones &
Babson, Inc. a fee at the annual rate of 50/100 of one percent (.50%) computed
daily and paid semimonthly, from which Jones & Babson, Inc. pays David L.
Babson & Co. Inc. a fee of 10/100 of one percent (.10%).

The annual fee charged by Jones & Babson, Inc. covers all normal operating
costs of the Fund. As a result, it is higher than the fees of most other
investment advisers whose charges cover only investment advisory services with
all remaining operational expenses absorbed directly by the Fund. Yet, it
compares favorably with these other advisers when all expenses to Fund
shareholders are taken into account. The total expenses of the Fund for the
fiscal year ended June 30, 1996, amounted to 1.01% of the average net assets
for Portfolio L; 1.01% for Portfolio S and .58% for Portfolio MM. Per share
expenses of the three series may differ due to differences in registration
fees.

Certain officers and directors of the Fund are also officers or directors or
both of other Babson Funds, Jones & Babson, Inc. or David L. Babson and Co.
Inc.

Jones & Babson, Inc. is a wholly-owned subsidiary of Business Men's Assurance
Company of America which is considered to be a controlling person under the
Investment Company Act of 1940. Assicurazioni Generali S.p.A., an insurance
organization founded in 1831 based in Trieste, Italy, is considered to be a
controlling person and is the ultimate parent of Business Men's Assurance
Company of America. Mediobanca is a 5% owner of Generali.

David L. Babson & Co. Inc. is a wholly-owned subsidiary of Massachusetts
Mutual Life Insurance Company headquartered in Springfield, Massachusetts.
Massachusetts Mutual Life Insurance Company is an insurance organization
founded in 1851 and is considered to be a controlling person of David L.
Babson & Co. Inc., under the Investment Company Act of 1940.

The current Management Agreement between the Fund and Jones & Babson, Inc.,
which includes the Investment Counsel Agreement between Jones & Babson, Inc.
and David L. Babson & Co. Inc., will continue in effect until October 31,
1997, and will continue automatically for successive annual periods ending
each October 31 so long as such continuance is specifically approved at least
annually by the Board of Directors of the Fund or by the vote of a majority of
the outstanding voting securities of the Fund, and, provided also that such
continuance is approved by the vote of a majority of the directors who are not
parties to the Agreements or interested persons of any such party at a meeting
held in person and called specifically for the purpose of evaluating and
voting on such approval. Both Agreements provide that either party may
terminate by giving the other 60 days written notice. The Agreements terminate
automatically if assigned by either party.

GENERAL INFORMATION AND HISTORY

The Fund, incorporated in Maryland on August 22, 1979, has a present
authorized capitalization of 200,000,000 shares of $.10 par value common stock
to be issued in three separate classes ("Portfolios"). Each full and
fractional share, when issued and outstanding, has: (1) equal voting rights
with respect to matters which affect the Fund in general and with respect to
matters relating solely to the interests of the Portfolio for which issued,
and (2) equal dividend, distribution and redemption rights to the assets of
the Portfolio for which issued and to general assets, if any, of the Fund
which are not specifically allocated to a particular Portfolio. Shares when
issued are fully paid and non-assessable. Except for the priority of each
share in the assets of its Portfolio, the Fund will not issue any class of
securities senior to any other class. Shareholders do not have pre-emptive or
conversion rights. The Fund may issue additional series of stock with the
approval of the Fund's Board of Directors.

Non-cumulative voting - These shares have non-cumulative voting rights, which
means that the holders of more than 50% of the shares voting for the election
of directors can elect 100% of the directors, if they choose to do so, and in
such event, the holders of the remaining less than 50% of the shares voting
will not be able to elect any directors. Each series will vote separately on
investment advisory agreements, changes in fundamental policies, and other
matters affecting each series separately.

The Maryland Statutes permit registered investment companies, such as the
Fund, to operate without an annual meeting of shareholders under specified
circumstances if an annual meeting is not required by the Investment Company
Act of 1940. There are procedures whereby the shareholders may remove
directors. These procedures are described in the "Statement of Additional
Information" under the caption "Officers and Directors." The Fund has adopted
the appropriate provisions in its By-Laws and may not, at its discretion, hold
annual meetings of shareholders for the following purposes unless required to
do so: (1) election of directors; (2) approval of any investment advisory
agreement; (3) ratification of the selection of independent public
accountants; and (4) approval of a distribution plan. As a result, the Fund
does not intend to hold annual meetings.

The Fund may use the name "Babson" in its name so long as Jones & Babson, Inc.
is continued as manager and David L. Babson & Co. Inc. as its investment
counsel. Complete details with respect to the use of the name are set out in
the Management Agreement between the Fund and Jones & Babson, Inc.

This prospectus omits certain of the information contained in the registration
statement filed with the Securities and Exchange Commission, Washington, D.C.
These items may be inspected at the offices of the Commission or obtained from
the Commission upon payment of the fee prescribed.

DIVIDENDS, DISTRIBUTIONS AND THEIR TAXATION

At the close of each business day, dividends consisting of substantially all
of each Portfolio's net investment income are declared payable to shareholders
of record at the close of the previous business day, and credited to their
accounts. All daily dividends declared during a given month will be
distributed on the last day of the month. Dividend and capital gains
distributions, if any, are automatically reinvested in additional shares at
net asset value, unless the shareholder has elected in writing to receive
cash. The method of payment elected remains in effect until the Fund is
notified in writing to the contrary. If at the time of a complete redemption
and closing of a shareholder account, there is net undistributed income to the
credit of the shareholder, it will be paid by separate check on the next
dividend distribution date. In the case of a partial redemption, any net
undistributed credit will be distributed on the next dividend date according
to the shareholder's instructions on file with the Fund.

Shares begin earning income on the day following the effective date of
purchase. Income earned by the Fund on weekends, holidays and other days on
which the Fund is closed for business is declared as a dividend on the next
day on which the Fund is open for business, except for month-ends when such
dividend is declared as of the last day of the month.

Shareholders are notified annually by the Fund as to the Federal tax status of
dividends and distributions paid by each Portfolio during the calendar year.

Each Portfolio within the Fund has qualified and intends to continue to
qualify for taxation as a "regulated investment company" under the Internal
Revenue Code so that each Portfolio will not be subject to Federal income tax
to the extent that it distributes its income to its shareholders. In addition
each Portfolio intends to invest a sufficient portion of its assets in
municipal bonds and municipal notes so that it will qualify to pay "exempt-
interest dividends" (as defined in the Internal Revenue Code) to shareholders.
The dividends payable by a Portfolio from net tax-exempt interest from
municipal bonds will qualify as exempt-interest dividends if, at the close of
each quarter of its taxable year, at least 50% of the value of the total
assets of such Portfolio consists of municipal bonds.

Exempt-interest dividends distributed to shareholders are not includable in
the shareholder's gross income for Federal income tax purposes. Any insurance
proceeds which represent maturing interest on defaulted municipal obligations
held by a Portfolio will be excludable from Federal gross income.
Distributions of net investment income received by a Portfolio from
investments in debt securities other than municipal obligations, and any net
realized short-term capital gains distributed by a Portfolio, will be taxable
to the shareholders as ordinary income and will not be eligible for the
dividends-received deduction for corporations. Further, any distribution of
net realized capital gains will generally be subject to taxation at the state
and local level.

Any loss incurred on sale or exchange of shares, held for six months or less,
will be disallowed to the extent of exempt interest dividends received with
respect to such shares.

The Tax Reform Act of 1986 imposes certain additional restrictions on the use
of tax-exempt bond financing for non-governmental business activities, such as
industrial development bonds. Accordingly, interest on certain types of non-
essential, or private activity bonds may no longer be exempt from Federal
income tax. Interest on other types of non-essential or private activity bonds
while still tax-exempt, will be treated as a tax preference item for corporate
and individual investors in determining their liability in tax years beginning
after 1986.

Whether paid in cash or additional shares of a Portfolio, and regardless of
the length of time the shares in such Portfolio have been owned by the
shareholder, distributions from long-term capital gains are taxable to
shareholders as such, but are not eligible for the dividends-received
deduction for corporations. Information as to tax status of dividends will be
provided annually showing on an average basis that portion which is taxable
and that portion which is tax-exempt based on income received during the
previous year. Shareholders who have not been in a Portfolio for a full fiscal
year may have designated as tax-exempt a percentage of income which is not
equivalent to the actual amount applicable to the period for which they have
held shares. Such dividends and distributions may also be subject to state and
local taxes.

Exchanges and redemptions of shares in a Portfolio are taxable events for
Federal income tax purposes. Shareholders may also be subject to state and
municipal taxes on such exchanges and redemptions. You should consult your tax
adviser with respect to the tax status of distributions from the Fund in your
state and locality.

Each Portfolio intends to declare and pay dividends and capital gains
distributions so as to avoid imposition of the federal excise tax. To do so,
each Portfolio expects to distribute during the calendar year an amount equal
to: (1) 98% of its calendar year ordinary income; (2) 98% of its capital gains
net income (the excess of short- and long-term capital gain over short- and
long-term capital loss) for the one-year period ending each October 31; and
(3) 100% of any undistributed ordinary or capital gain net income from the
prior calendar year. Dividends declared in December by a Portfolio will be
deemed to have been paid by such Portfolio and received by shareholders on
December 31 so long as the dividends are actually paid before February 1 of
the following year.

Pursuant to the Social Security Act Amendments of 1983, up to 50% of a social
security recipient's benefits may be included in federal taxable income for
benefit recipients whose adjusted gross income (including income from the tax-
exempt sources such as tax-exempt bonds in each Portfolio) plus 50% of their
benefits exceeds certain established amounts.

To comply with IRS regulations, the Fund is required by federal law to
withhold 31% of reportable payments (which may include dividends, capital
gains distributions, and redemptions) paid to shareholders who have not
complied with IRS regulations. In order to avoid this withholding requirement,
shareholders must certify on their Application, or on a separate form supplied
by the Fund, that their Social Security or Taxpayer Identification Number
provided is correct and that they are not currently subject to backup
withholding, or that they are exempt from backup withholding.

The exemption of interest income for federal income tax purposes may not
result in similar exemptions under the laws of a particular state or local
taxing authority. The Fund will report annually to its shareholders the
percentage and source, on a state-by-state basis, of interest income earned on
municipal securities held be each Portfolio during the preceding year.

THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL INFORMATION
ONLY. PROSPECTIVE INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS WITH RESPECT
TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE FUND.

SHAREHOLDER SERVICES

The Fund and its manager offer shareholders a broad variety of services
described throughout this prospectus. In addition, the following services are
available:

Automatic Monthly Investment - You may elect to make monthly investments in a
constant dollar amount from your checking account ($50 minimum). The Fund will
draft your checking account on the same day each month in the amount you
authorize in your application, or, subsequently, on a special authorization
form provided upon request.

Automatic Reinvestment - Dividends and capital gains distributions may be
reinvested automatically, or shareholders may elect to have dividends paid in
cash and capital gains reinvested, or to have both paid in cash.

Telephone Investments - You may make investments of $100 or more by telephone
if you have authorized such investments in your application, or, subsequently,
on a special authorization form provided upon request. See "Telephone
Investment Service."

Automatic Exchange - You may exchange shares from your account ($100 minimum)
in any of the Babson Funds to an identically registered account in any other
fund in the Babson or Buffalo Group except Babson Enterprise Fund, Inc.
according to your instructions. Monthly exchanges will be continued until all
shares have been exchanged or until you terminate the Automatic Exchange
authorization. A special authorization form will be provided upon request.

Transfer of Ownership - A shareholder may transfer shares to another
shareholder account. The requirements which apply to redemptions apply to
transfers. A transfer to a new account must meet initial investment
requirements.

Systematic Redemption Plan - Shareholders who own shares in open account
valued at $10,000 or more may arrange to make regular withdrawals without the
necessity of executing a separate redemption request to initiate each
withdrawal.

Sub-Accounting - Investors who must maintain separate participant accounting
records may meet these needs through services provided by the Fund's manager,
Jones & Babson, Inc. Investment minimums may be met by accumulating the
separate accounts of the group. Although there is currently no charge for sub-
accounting, the Fund and its manager reserve the right to make reasonable
charges for this service.

SHAREHOLDER INQUIRIES

Telephone inquiries may be made toll free to the Fund,
1-800-4-BABSON (1-800-422-2766), or in the Kansas City area 471-5200.

Shareholders may address written inquiries to the Fund at:

D.L. Babson Tax-Free Income Fund, Inc.
2440 Pershing Road, Suite G-15
Kansas City, MO 64108

AUDITORS
ARTHUR ANDERSEN LLP
Kansas City, Missouri

LEGAL COUNSEL
STRADLEY, RONON, STEVENS & YOUNG
Philadelphia, Pennsylvania

JOHN G. DYER
Kansas City, Missouri

CUSTODIAN
UMB BANK, n.a.
Kansas City, Missouri

TRANSFER AGENT
JONES & BABSON, INC.
Kansas City, Missouri

EQUITIES
Growth Fund
Enterprise Fund*
Enterprise Fund II
Value Fund
Shadow Stock Fund
International Fund

FIXED INCOME
Bond Trust
Money Market Fund
Tax-Free Income Fund

* Closed to new investors.

JONES & BABSON
MUTUAL FUNDS

2440 Pershing Road
Kansas City, MO 64108-2561
816-471-5200

1-800-4-BABSON
(1-800-422-2766)

http://www.jbfunds.com

PART B

D.L. BABSON TAX-FREE INCOME FUND, INC.

STATEMENT OF ADDITIONAL INFORMATION

October 31, 1996

This Statement is not a prospectus but should be read in conjunction
with the Fund's current Prospectus dated October 31, 1996. To obtain
the Prospectus please call the Fund toll free 1-800-4-BABSON
(1-800-422-2766), or in the Kansas City area 471-5200.

TABLE OF CONTENTS
PAGE
Investment Objective and Policies 2
Portfolio Transactions 2
Investment Restrictions 3
Performance Measures 4
How the Fund's Shares are Distributed 4
How Share Purchases are Handled 5
Redemption of Shares 5
Signature Guarantees 6
Management and Investment Counsel 6
How Share Price is Determined 6
Officers and Directors 7
Custodian 9
Independent Public Accountants 9
Other Jones & Babson Funds 9
Municipal Securities Described and Ratings 11
Financial Statements 14

<PAGE>

INVESTMENT OBJECTIVE
AND POLICIES

The following policies supplement the Fund's
investment objective and policies set forth in the
Prospectus.

PORTFOLIO TRANSACTIONS

Decisions to buy and sell securities for the
Fund are made by Jones & Babson, Inc.
pursuant to recommendations by David L.
Babson & Co. Inc. Officers of the Fund and
Jones & Babson, Inc. are generally responsible
for implementing or supervising these decisions,
including allocation of portfolio brokerage and
principal business as well as the negotiation of
commissions and/or the price of the securities.
In instances where securities are purchased on a
commission basis, the Fund will seek
competitive and reasonable commission rates
based on the circumstances of the trade involved
and to the extent that they do not detract from
the quality of the execution.

In all transactions, it is the Fund's policy to
obtain the best combination of price and
execution commensurate with the circumstances
as viewed at the time.

The Fund expects that purchases and sales of
portfolio securities usually will be principal
transactions. Portfolio securities normally will
be purchased directly from the issuer or in the
over-the-counter market from a principal market
maker for the securities, unless it appears that a
better combination of price and execution may
be obtained elsewhere. Usually there will be no
brokerage commission paid by the Fund for such
purchases. Purchases from underwriters of
portfolio securities will include a commission or
concession paid by the issuer to the underwriter,
and purchases from dealers serving as market
makers will include the spread between the bid
and asked price.

The Fund believes it is in its best interest and
that of its shareholders to have a stable and
continuous relationship with a diverse group of
financially strong and technically qualified
broker-dealers who will provide quality
executions at competitive rates. Broker-dealers
meeting these qualifications also will be selected
for their demonstrated loyalty to the Fund, when
acting on its behalf, as well as for any research
or other services provided to the Fund. The
Fund normally will not pay a higher commission
rate to broker-dealers providing benefits or
services to it than it would pay to broker-dealers
who do not provide it such benefits or services.
However, the Fund reserves the right to do so
within the principles set out in Section 28(e) of
the Securities Act of 1934 when it appears that
this would be in the best interests of the
shareholders.

No commitment is made to any broker or
dealer with regard to placing of orders for the
purchase or sale of Fund portfolio securities, and
no specific formula is used in placing such
business. Allocation is reviewed regularly by
both the Board of Directors of the Fund and
Jones and Babson, Inc.

Since the Fund does not market its shares
through intermediary brokers or dealers, it is not
the Fund's practice to allocate brokerage or
principal business on the basis of sales of its
shares which may be made through such firms.
However, it may place portfolio orders with
qualified broker-dealers who recommend the
Fund to other clients, or who act as agent in the
purchase of the Fund's shares for their clients.

Research services furnished by broker-dealers
may be useful to the Fund manager and its
investment counsel in serving other clients, as
well as the Fund. Conversely, the Fund may
benefit from research services obtained by the
manager or its investment counsel from the
placement of portfolio brokerage of other clients.

When it appears to be in the best interest of its
shareholders, the Fund may join with other
clients of the manager and its investment
counsel in acquiring or disposing of a portfolio
holding. Securities acquired or proceeds
obtained will be equitably distributed between
the Fund and other clients participating in the
transaction. In some instances, this investment
procedure may affect the price paid or received
by the Fund or the size of the position obtained
by the Fund.

The Fund does not intend to purchase
securities solely for short-term trading; nor will

2
<PAGE>

securities be sold for the sole purpose of
realizing gains. A security may be sold and
another of comparable quality purchased at
approximately the same time, however, to take
advantage of what the Fund's manager believes
to be a disparity in the normal yield relationship
between the two securities. In addition, a
security may be sold and another purchased
when, in the opinion of the Fund's management,
a favorable yield spread exists between specific
issues or different market sectors.

Since short-term debt instruments with
maturities of less than one year are excluded
from the calculation of portfolio turnover, the
Fund does not anticipate having a portfolio
turnover ratio for Portfolio MM.

INVESTMENT RESTRICTIONS

In addition to the investment objective and
portfolio management policies set forth in the
Prospectus under the caption "Investment
Objective and Portfolio Management Policy,"
the following restrictions also may not be
changed without approval of the "holders of a
majority of the outstanding shares" of the Fund
or the affected Portfolio series.

The Fund will not: (1) invest in equity
securities or securities convertible into equities;
(2) purchase more than 10% of the outstanding
publicly issued debt obligations of any issuer; (3)
borrow money in any Portfolio except for
temporary emergency purposes, and then only in
an amount not exceeding 10% of the value of
the total assets of that Portfolio; (4) pledge,
mortgage or hypothecate the assets of any
Portfolio to an extent greater than 10% of the
value of the net assets of that Portfolio; (5) issue
senior securities, as defined in the Investment
Company Act of 1940, as amended; (6)
underwrite any issue of securities; (7) purchase
or sell real estate, but this shall not prevent
investment in municipal bonds secured by real
estate; (8) make loans to other persons, except
by the purchase of bonds, debentures or similar
obligations which are publicly distributed; (9)
purchase on margin or sell short; (10) purchase
or retain securities of an issuer if to the
knowledge of the Fund's management those
directors of the Fund, each of whom owns more
than one-half of one percent (.5%) of such
securities, together own more than five percent
(5%) of the securities of such issuer; (11)
purchase or sell commodities or commodity
contracts; (12) invest in put, call, straddle or
special options; (13) purchase securities of any
issuer (except the United States government, its
agencies and instrumentalities, and any
municipal bond guaranteed by the United States
government) in any Portfolio if, as a result, more
than 5% of the total assets of that Portfolio
would be invested in the securities of such
issuer; for purposes of this limitation, "issuer"
will be based on a determination of the source of
assets and revenues committed to meeting
interest and principal payments of each security,
and a government entity which guarantees the
securities issued by another entity is also
considered an issuer of that security; (14) invest
in companies for the purpose of exercising
control; (15) invest in securities of other
investment companies, except as they may be
acquired as part of a merger, consolidation or
acquisition of assets; or (16) invest more than
5% of the value of its total assets at the time of
investment in the securities of any issuer or
issuers which have records of less than three
years continuous operation, including the
operation of any predecessor, but this limitation
does not apply to securities issued or guaranteed
as to interest and principal by the United States
government or its agencies or instrumentalities.

In addition to the fundamental investment
restrictions set out above, in order to comply
with the law or regulations of various states, the
Fund will not engage in the following practices:
(1) invest in securities which are not readily
marketable or in securities of foreign issuers
which are not listed on a recognized domestic or
foreign securities exchange; (2) write put or call
options (3) invest in oil, gas and other mineral
leases or arbitrage transactions; or (4) purchase
or sell real estate (including limited partnership
interests, but excluding readily marketable
interests in real estate investment trusts or
readily marketable securities of companies
which invest in real estate).

Certain states also require that the Fund's
investments in warrants which are not listed on
the New York or American Stock Exchange,
valued at the lower of cost or market, may not
exceed 5% of the value of the Fund's net assets.
Included within that amount, but not to exceed
2% of the value of the Fund's net assets may be

3
<PAGE>

warrants which are not listed on the New York
or American Stock Exchange. Warrants
acquired by the Fund in units or attached to
securities may be deemed to be without value for
purposes of this limitation.

PERFORMANCE MEASURES

Yield of Portfolio MM

From time to time, Portfolio MM may quote
its yield in advertisements, shareholder reports
or other communications to shareholders. Yield
information is generally available by calling the
Fund toll free 1-800-4-BABSON (1-800-422-
2766), or in the Kansas City area 471-5200.

The current annualized yield for Portfolio
MM is computed by: (a) determining the net
change in the value of a hypothetical pre-
existing account in a Fund having a balance of
one share at the beginning of a seven calendar-
day period for which yield is to be quoted, (b)
dividing the net change by the value of the
account at the beginning of the period to obtain
the base period return, and (c) annualizing the
results (i.e., multiplying the base period return
by 365/7). The net change in value of the
account reflects the value of additional shares
purchased with dividends declared on the
original share and any such additional shares,
but does not include realized gains and losses or
unrealized appreciation and depreciation. In
addition, each Fund may calculate a compound
effective yield by adding 1 to the base period
return (calculated as described above, raising the
sum to a power equal to 365/7 and subtracting
1).

For the seven-day period ended June 30, 1996,
the current annualized yield of Portfolio MM
was 2.67% and the compound effective yield
was 2.71%. At June 30, 1996, Portfolio MM's
average maturity was 46 days.

Total Return for Portfolio L and Portfolio S

These Portfolios' "average annual total return"
figures described and shown below are
computed according to a formula prescribed by
the Securities and Exchange Commission. The
formula can be expressed as follows:

P(1+T)n = ERV

Where: P = a hypothetical initial payment
of $1000

T = average annual total return

n = number of years

ERV = Ending Redeemable Value of
a hypothetical $1000
payment made at the
beginning of the 1, 5, or 10
years (or other) periods at the
end of the 1,5, or 10 years (or
other) periods (or fractional
portions thereof);

The table below shows the average total return
for each of the Funds or Portfolios for the
specified periods.

Portfolio L Portfolio S
For the one year
7/1/95-6/30/96 5.60% 4.25%

For the five years
7/1/91-6/30/96 7.03% 5.29%

For the ten years
7/1/86-6/30/96 7.20% 5.82%

From commencement
of operations
to 6/30/96* 7.56% 6.58%
__________________________________
*Portfolios L & S commenced operation
on February 22, 1980.

HOW THE FUND'S SHARES
ARE DISTRIBUTED

Jones & Babson, Inc., as agent of the Fund,
agrees to supply its best efforts as sole
distributor of the Fund's shares and, at its own
expense, pay all sales and distribution expenses
in connection with their offering other than
registration fees and other government charges.

Jones & Babson, Inc. does not receive any fee
or other compensation under the distribution

4
<PAGE>

agreement which continues in effect until
October 31, 1997, and which will continue
automatically for successive annual periods
ending each October 31, if continued at least
annually by the Fund's Board of Directors,
including a majority of those Directors who are
not parties to such agreements or interested
persons of any such party. It terminates
automatically if assigned by either party or upon
60 days written notice by either party to the
other.

Jones & Babson, Inc. also acts as sole
distributor of the shares of David L. Babson
Growth Fund, Inc., Babson Enterprise Fund,
Inc., Babson Enterprise Fund II, Inc., Babson
Value Fund, Inc., D. L. Babson Money Market
Fund, Inc., D. L. Babson Bond Trust, Shadow
Stock Fund, Inc., Babson-Stewart Ivory
International Fund, Inc., Scout Stock Fund, Inc.,
Scout Bond Fund, Inc., Scout Money Market
Fund, Inc., Scout Tax-Free Money Market Fund,
Inc., Scout Regional Fund, Inc., Scout
WorldWide Fund, Inc., Scout Balanced Fund,
Inc., Buffalo Balanced Fund, Inc., Buffalo
Equity Fund, Inc., Buffalo High Yield Fund,
Inc. and Buffalo USA Global Fund, Inc.

HOW SHARE PURCHASES
ARE HANDLED

Each order accepted will be fully invested in
whole and fractional shares, unless the purchase
of a certain number of whole shares is specified,
at the net asset value per share next effective
after the order is accepted by the Fund.

Each investment is confirmed by a year-to-
date statement which provides the details of the
immediate transaction, plus all prior trans-
actions in your account during the current year.
This includes the dollar amount invested, the
number of shares purchased or redeemed, price
per share, and aggregate shares owned. A
transcript of all activity in your account during
the previous year will be furnished each January.
By retaining each annual summary and the last
year-to-date statement, you have a complete
detailed history of your account. A duplicate
copy of a past annual statement is available from
Jones & Babson, Inc. at its cost, subject to a
minimum charge of $5 per account, per year
requested.

Normally, the shares which you purchase are
held by the Fund in open account, thereby
relieving you of the responsibility of providing
for the safekeeping of a negotiable share
certificate. Should you have a special need for a
certificate, one will be issued on request for all
or a portion of the whole shares in your account.
There is no charge for the first certificate issued.
A charge of $3.50 will be made for any
replacement certificates issued. In order to
protect the interests of the other shareholders,
share certificates will be sent to those
shareholders who request them only after the
Fund has determined that unconditional
payment for the shares represented by the
certificate has been received by its custodian,
UMB Bank, n.a.

If an order to purchase shares must be
canceled due to non-payment, the purchaser will
be responsible for any loss incurred by the Fund
arising out of such cancellation. To recover any
such loss, the Fund reserves the right to redeem
shares owned by any purchaser whose order is
canceled, and such purchaser may be prohibited
or restricted in the manner of placing further
orders.

The Fund reserves the right in its sole
discretion to withdraw all or any part of the
offering made by the prospectus or to reject
purchase orders when, in the judgment of
management, such withdrawal or rejection is in
the best interest of the Fund and its
shareholders. The Fund also reserves the right
at any time to waive or increase the minimum
requirements applicable to initial or subsequent
investments with respect to any person or class
of persons, which includes shareholders of the
Fund's special investment programs.

REDEMPTION OF SHARES

The right of redemption may be suspended, or
the date of payment postponed beyond the
normal three-day period by the Fund's Board of
Directors under the following conditions
authorized by the Investment Company Act of
1940: (1) for any period (a) during which the
New York Stock Exchange is closed, other than
customary weekend and holiday closing, or (b)
during which trading on the New York Stock
Exchange is restricted; (2) for any period during
which an emergency exists as a result of which

5
<PAGE>

(a) disposal by the Fund of securities owned by it
is not reasonably practical, or (b) it is not
reasonably practicable for the Fund to determine
the fair value of its net assets; or (3) for such
other periods as the Securities and Exchange
Commission may by order permit for the
protection of the Fund's shareholders.

SIGNATURE GUARANTEES

Signature guarantees normally reduce the
possibility of forgery and are required in
connection with each redemption method to
protect shareholders from loss. Signature
guarantees are required in connection with all
redemptions of $50,000 or more by mail or
changes in share registration, except as provided
in the Prospectus.

Signature guarantees must appear together
with the signature(s) of the registered owner(s),
on:

(1) a written request for redemption;

(2) a separate instrument of assignment,
which should specify the total number
of shares to be redeemed (this "stock
power" may be obtained from the Fund
or from most banks or stock brokers); or

(3) all stock certificates tendered for
redemption.

MANAGEMENT AND
INVESTMENT COUNSEL

As a part of the Management Agreement,
Jones & Babson, Inc. employs at its own
expense David L. Babson & Co. Inc., as its
investment counsel. David L. Babson & Co.
Inc. was founded in 1940 as a private
investment research and counseling
organization. On June 30, 1995, David L.
Babson & Co. Inc. became a wholly-owned
subsidiary of Massachusetts Mutual Life
Insurance Company. David L. Babson & Co.
Inc. serves individual, corporate and other
institutional clients and participates with Jones
& Babson in the management of nine Babson
no-load mutual funds.

The aggregate management fee paid to Jones
& Babson, Inc. during the most recent fiscal
year ended June 30, 1996, from which Jones &
Babson, Inc. paid all the Fund's expenses except
those payable directly by the Fund, was
$585,550. The .95% annual fee charged by
Jones & Babson, Inc. covers all normal
operating costs of the Fund. As a result, it is
higher than the fees of some other advisers
whose charges cover only investment advisory
services with all remaining operational expenses
absorbed directly by the Fund. Yet, Jones &
Babson's charges compare favorably with these
other advisers when all expenses to Fund
shareholders (i.e., operating expenses as a
percent of average net assets) are taken into
account.

David L. Babson & Co. has an experienced
investment analysis and research staff which
eliminates the need for Jones & Babson, Inc.
and the Fund to maintain an extensive duplicate
staff, with the consequent increase in the cost of
investment advisory service. The cost of the
services of David L. Babson & Co. Inc. is
included in the services of Jones & Babson, Inc.
For its investment supervisory services and
counsel, Jones & Babson, Inc. pays David L.
Babson & Co. Inc. a fee computed on an annual
basis at the rate of .25% of the average daily
total net assets of the Fund. During the most
recent fiscal year ended June 30, 1996, Jones &
Babson, Inc. paid David L. Babson & Co. Inc.
fees amounting to $149,861.

HOW SHARE PRICE IS DETERMINED

The net asset value per share of each Fund
Portfolio is computed once daily, Monday
through Friday, at the specific time during the
day that the Board of Directors of each Fund sets
at least annually, except on days on which
changes in the value of a Fund's portfolio
securities will not materially affect the net asset
value, or days during which no security is
tendered for redemption and no order to
purchase or sell such security is received by the
Fund, or the following holidays:

New Years Day January 1
Martin Luther Third Monday
King Day* in January
Presidents' Holiday Third Monday
in February
Good Friday Friday before Easter
Memorial Day Last Monday in May

6
<PAGE>

Independence Day July 4
Labor Day First Monday
in September
Columbus Day* Second Monday
in October
Veterans' Day* November 11
Thanksgiving Day Fourth Thursday
in November
Christmas Day December 25

*Money Market Portfolio only.

OFFICERS AND DIRECTORS

The Fund is managed by Jones & Babson
subject to the supervision and control of the
Board of Directors. Following is a list of the
officers and directors of the Fund. Unless noted
otherwise, the address of each officer and
director is 2440 Pershing Road, Suite G-15,
Kansas City, Missouri 64108. Except as
indicated, each has been an employee of Jones &
Babson, Inc. for more than five years.

*Larry D. Armel, President and Director.
President and Director, Jones & Babson, Inc.,
David L. Babson Growth Fund, Inc., D.L.
Babson Money Market Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise
Fund II, Inc., Babson Value Fund Inc.,
Shadow Stock Fund, Inc., Babson-Stewart
Ivory International Fund, Inc., Scout Stock
Fund, Inc., Scout Bond Fund, Inc., Scout
Money Market Fund, Inc., Scout Tax-Free
Money Market Fund, Inc., Scout Regional
Fund, Inc., Scout WorldWide Fund, Inc.,
Scout Balanced Fund, Inc., Buffalo Balanced
Fund, Inc., Buffalo Equity Fund, Inc., Buffalo
High Yield Fund, Inc., Buffalo USA Global
Fund, Inc.; Trustee and President, D. L.
Babson Bond Trust.

__________________________________

*Directors who are interested persons as
that term is defined in the Investment
Company Act of 1940, as amended.

Francis C. Rood, Director.
Retired, 6429 West 92nd Street, Overland Park,
Kansas 66212. Formerly, Group Vice President-
Administration of Hallmark Cards, Inc.;
Director, David L. Babson Growth Fund, Inc.,
D.L. Babson Money Market Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund
II, Inc., Babson Value Fund Inc., Shadow Stock
Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo
Equity Fund, Inc., Buffalo High Yield Fund,
Inc., Buffalo USA Global Fund, Inc.; Trustee,
D.L. Babson Bond Trust.

William H. Russell, Director.
Financial Consultant, 645 West 67th Street,
Kansas City, Missouri 64113; previously Vice
President, United Telecommunications, Inc.;
Director, David L. Babson Growth Fund, Inc.,
D. L. Babson Money Market Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund
II, Inc., Babson Value Fund, Inc., Shadow Stock
Fund, Inc., Babson-Stewart Ivory International
Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo
Equity Fund, Inc., Buffalo High Yield Fund,
Inc., Buffalo USA Global Fund, Inc.; Trustee,
D. L. Babson Bond Trust.

H. David Rybolt, Director.
Consultant, HDR Associates, P.O. Box 2468,
Shawnee Mission, Kansas 66202; Director,
David L. Babson Growth Fund, Inc., D.L.
Babson Money Market Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund
II, Inc., Babson Value Fund, Inc., Shadow Stock
Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo
Equity Fund, Inc., Buffalo High Yield Fund,
Inc., Buffalo USA Global Fund, Inc.; Trustee,
D.L. Babson Bond Trust.

P. Bradley Adams, Vice President and
Treasurer.
Vice President and Treasurer, Jones & Babson,
Inc., David L. Babson Growth Fund, Inc., D.L.
Babson Money Market Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund
II, Inc., Babson Value Fund, Inc., Shadow Stock
Fund, Inc., Babson-Stewart Ivory International
Fund, Inc., D.L. Babson Bond Trust, Scout
Stock Fund, Inc., Scout Bond Fund, Inc., Scout

7
<PAGE>

Money Market Fund, Inc., Scout Tax-Free
Money Market Fund, Inc., Scout Regional Fund,
Inc., Scout WorldWide Fund, Inc., Scout
Balanced Fund, Inc., Buffalo Balanced Fund,
Inc., Buffalo Equity Fund, Inc., Buffalo High
Yield Fund, Inc., Buffalo USA Global Fund,
Inc.

Elizabeth L. Allwood, Vice President and
Assistant Secretary.
Assistant Vice President and Assistant
Secretary, Jones & Babson, Inc. Vice President
and Assistant Secretary, David L. Babson
Growth Fund, Inc., D.L. Babson Money Market
Fund, Inc., Babson Enterprise Fund, Inc.,
Babson Enterprise Fund II, Inc., Babson Value
Fund, Inc., Shadow Stock Fund, Inc., Babson-
Stewart Ivory International Fund, Inc., D.L.
Babson Bond Trust, Scout Stock Fund, Inc.,
Scout Bond Fund, Inc., Scout Money Market
Fund, Inc., Scout Tax-Free Money Market Fund,
Inc., Scout Regional Fund, Inc., Scout
WorldWide Fund, Inc., Scout Balanced Fund,
Inc., Buffalo Balanced Fund, Inc., Buffalo
Equity Fund, Inc., Buffalo High Yield Fund,
Inc., Buffalo USA Global Fund, Inc.

Michael A. Brummel, Vice President,
Assistant Secretary and Assistant Treasurer.
Vice President, Jones & Babson, Inc., David L.
Babson Growth Fund, Inc., D.L. Babson Money
Market Fund, Inc., Babson Enterprise Fund,
Inc., Babson Enterprise Fund II, Inc., Babson
Value Fund, Inc., Shadow Stock Fund, Inc.,
Babson-Stewart Ivory International Fund, Inc.,
D.L. Babson Bond Trust, Scout Stock Fund,
Inc., Scout Bond Fund, Inc., Scout Money
Market Fund, Inc., Scout Tax-Free Money
Market Fund, Inc., Scout Regional Fund, Inc.,
Scout WorldWide Fund, Inc., Scout Balanced
Fund, Inc., Buffalo Balanced Fund, Inc., Buffalo
Equity Fund, Inc., Buffalo High Yield Fund,
Inc., Buffalo USA Global Fund, Inc.

Martin A. Cramer, Vice President and
Secretary.
Vice President and Secretary, Jones & Babson,
Inc., David L. Babson Growth Fund, Inc., D.L.
Babson Money Market Fund, Inc., Babson
Enterprise Fund, Inc., Babson Enterprise Fund
II, Inc., Babson Value Fund, Inc., Shadow Stock
Fund, Inc., Babson-Stewart Ivory International
Fund, Inc., D.L. Babson Bond Trust, Scout
Stock Fund, Inc., Scout Bond Fund, Inc., Scout
Money Market Fund, Inc., Scout Tax-Free
Money Market Fund, Inc., Scout Regional Fund,
Inc., Scout WorldWide Fund, Inc., Scout
Balanced Fund, Inc., Buffalo Balanced Fund,
Inc., Buffalo Equity Fund, Inc., Buffalo High
Yield Fund, Inc., Buffalo USA Global Fund,
Inc.

Constance E. Martin, Vice President.
Assistant Vice President, Jones & Babson, Inc.
Vice President, David L. Babson Growth Fund,
Inc., D.L. Babson Money Market Fund, Inc.,
Babson Enterprise Fund, Inc., Babson
Enterprise Fund II, Inc., Babson Value Fund,
Inc., Shadow Stock Fund, Inc., Babson-Stewart
Ivory International Fund, Inc., D.L. Babson
Bond Trust, Scout Stock Fund, Inc., Scout Bond
Fund, Inc., Scout Money Market Fund, Inc.,
Scout Tax-Free Money Market Fund, Inc., Scout
Regional Fund, Inc., Scout WorldWide Fund,
Inc., Scout Balanced Fund, Inc., Buffalo
Balanced Fund, Inc., Buffalo Equity Fund, Inc.,
Buffalo High Yield Fund, Inc., Buffalo USA
Global Fund, Inc.

Edward L. Martin, Vice President.
Executive Vice President and Director, David L.
Babson & Co. Inc., One Memorial Drive,
Cambridge, Massachusetts 02142; Vice
President, D.L. Babson Money Market Fund,
Inc., D.L. Babson Bond Trust.

Remuneration of Officers and Directors.
None of the officers or directors will be
remunerated by the Fund for their normal duties
and services. Their compensation and expenses
arising out of normal operations will be paid by
Jones & Babson, Inc. under the provisions of the
Management Agreement.

8
<PAGE>

<TABLE>
<CAPTION>
COMPENSATION TABLE

Pension or Estimated Total
Aggregate Retirement Annual Compensation
Name of Compensation Benefits Accrued Benefits From All Babson
Director From each As Part of Fund Upon Funds Paid to
Fund Expenses Retirement Directors**
______________ ____________ ________________ __________ _____________
</CAPTION>
<S> <C> <C> <C> <C>
Larry D. Armel* -- -- -- --
Francis C. Rood $7,250 -- -- $7,250
William H. Russell $7,250 -- -- $7,500
H. David Rybolt $7,250 -- -- $7,250
</TABLE>
______________ ____________ ________________ ___________ _____________

* As an "interested director," Mr. Armel received no compensation for
his services as a director.
** The amounts reported in this column reflect the total compensation
paid to each director for his services as a director of nine Babson
Funds during the fiscal year ended June 30, 1996. Directors fees
are paid by the Funds' manager and not by the Funds themselves.

Messrs. Rood, Russell and Rybolt have no
financial interest in, nor are they affiliated with,
either Jones & Babson, Inc. or David L. Babson
& Co. Inc.

The Audit Committee of the Board of
Directors is composed of Messrs. Rood, Russell
and Rybolt.

The Officers and Directors of the Fund as a
group own less than 1% of the Fund.

The Fund will not hold annual meetings
except as required by the Investment Company
Act of 1940 and other applicable laws. The
Fund is a Maryland corporation. Under
Maryland law, a special meeting of stockholders
of the Fund must be held if the Fund receives
the written request for a meeting from the
stockholders entitled to cast at least 25 percent
of all the votes entitled to be cast at the meeting.
The Fund has undertaken that its Directors will
call a meeting of stockholders if such a meeting
is requested in writing by the holders of not less
than 10% of the outstanding shares of the Fund.
To the extent required by the undertaking, the
Fund will assist shareholder communications in
such matters.

CUSTODIAN

The Fund's assets are held for safekeeping by
an independent custodian, UMB Bank, n.a.
This means the bank, rather than the Fund, has
possession of the Fund's cash and securities.
The custodian bank is not responsible for the
Fund's investment management or administra-
tion. But, as directed by the Fund's officers, it
delivers cash to those who have sold securities to
the Fund in return for such securities, and to
those who have purchased portfolio securities
from the Fund, it delivers such securities in
return for their cash purchase price. It also
collects income directly from issuers of
securities owned by the Fund and holds this for
payment to shareholders after deduction of the
Fund's expenses. The custodian is compensated
for its services by the manager. There is no
charge to the Fund.

INDEPENDENT PUBLIC
ACCOUNTANTS

The Fund's financial statements are examined
annually by independent public accountants
approved by the directors each year, and in years
in which an annual meeting is held the directors
may submit their selection of independent public
accountants to the shareholders for ratification.
Arthur Andersen LLP, P.O. Box 13406, Kansas
City, Missouri 64199, is the Fund's present
independent public accountant.

Reports to shareholders will be published at
least semiannually.

OTHER JONES & BABSON FUNDS

The Fund is one of nine no-load funds
comprising the Babson Mutual Fund Group
managed by Jones & Babson, Inc. in association

9
<PAGE>

with its investment counsel, David L. Babson &
Co. Inc. The other funds are:

EQUITY FUNDS

DAVID L. BABSON GROWTH FUND,
INC. was organized in 1960, with the
objective of long-term growth of both capital
and dividend income through investment in
the common stocks of well-managed
companies which have a record of long-term
above-average growth of both earnings and
dividends.

BABSON ENTERPRISE FUND, INC. was
organized in 1983, with the objective of long-
term growth of capital by investing in a
diversified portfolio of common stocks of
smaller, faster-growing companies with
market capital of $15 million to $300 million
at the time of purchase. This Fund is
intended to be an investment vehicle for that
part of an investor's capital which can
appropriately be exposed to above-average
risk in anticipation of greater rewards. This
Fund is currently closed to new shareholders.

BABSON ENTERPRISE FUND II, INC.
was organized in 1991, with the objective of
long-term growth of capital by investing in a
diversified portfolio of common stocks of
smaller, faster-growing companies which at
the time of purchase are considered by the
Investment Adviser to be realistically valued
in the smaller company sector of the market.
This Fund is intended to be an investment
vehicle for that part of an investor's capital
which can appropriately be exposed to above-
average risk in anticipation of greater
rewards.

BABSON VALUE FUND, INC. was
organized in 1984, with the objective of long-
term growth of capital and income by
investing in a diversified portfolio of common
stocks which are considered to be undervalued
in relation to earnings, dividends and/or
assets.

SHADOW STOCK FUND, INC. was
organized in 1987, with the objective of long-
term growth of capital that can be exposed to
above-average risk in anticipation of greater-
than-average rewards. The Fund expects to
reach its objective by investing in small
company stocks called "Shadow Stocks", i.e.,
stocks that combine the characteristics of
"small stocks" (as ranked by market
capitalization) and "neglected stocks" (least
held by institutions and least covered by
analysts).

BABSON-STEWART IVORY INTERNA-
TIONAL FUND, INC. was organized in
1987, with the objective of seeking a favorable
total return (from market appreciation and
income) by investing primarily in a diversified
portfolio of equity securities (common stocks
and securities convertible into common
stocks) of established companies whose
primary business is carried on outside the
United States.

FIXED INCOME FUNDS

D.L. BABSON BOND TRUST was
organized in 1944, and has been managed by
Jones & Babson, Inc. since 1972, with the
objective of a high level of current income and
reasonable stability of principal. It offers two
portfolios - Portfolio L and Portfolio S.

D. L. BABSON MONEY MARKET FUND,
INC., was organized in 1979, to provide
investors the opportunity to manage their
money over the short term by investing in
high-quality short-term debt instruments for
the purpose of maximizing income to the
extent consistent with safety of principal and
maintenance of liquidity. It offers two
portfolios - Prime and Federal. Money market
funds are neither insured nor guaranteed by
the U.S. Government and there is no
assurance that the funds will maintain a stable
net asset value.

BUFFALO FUNDS

Jones & Babson also sponsors and manages
the Buffalo Group of Mutual Funds. They are:

BUFFALO BALANCED FUND, INC. was
organized in 1994, with the objective of long-
term capital growth and high current income
through investing in common stocks and
secondarily by investing in convertible bonds,

10
<PAGE>

preferred stocks and convertible preferred
stocks.

BUFFALO EQUITY FUND, INC. was
organized in 1994, with the objective of long-
term capital appreciation to be achieved
primarily by investment in common stocks.
Realization of dividend income is a secondary
consideration.

BUFFALO HIGH YIELD FUND, INC. was
organized in 1994, with the objective of a
high level of current income and secondarily,
capital growth by investing primarily in high-
yielding fixed income securities.

BUFFALO USA GLOBAL FUND, INC.
was organized in 1994, with the objective of
capital growth by investing in common stocks
of companies based in the United States that
receive greater than 40% of their revenues or
pre-tax income from international operations.

A prospectus for any of the Funds may be
obtained from Jones & Babson, Inc., 2440
Pershing Road, Suite G-15, Kansas City,
Missouri 64108.

Jones & Babson, Inc. also sponsors seven
mutual funds which especially seek to provide
services to customers of affiliate banks of UMB
Financial Corporation. They are: Scout Stock
Fund, Inc., Scout Bond Fund, Inc., Scout Money
Market Fund, Inc., Scout Tax-Free Money
Market Fund, Inc., Scout Regional Fund, Inc.,
Scout WorldWide Fund, Inc. and Scout
Balanced Fund, Inc.

MUNICIPAL SECURITIES
DESCRIBED
AND RATINGS

In evaluating investment suitability, each
investor must relate the characteristics of a
particular investment under consideration to
personal financial circumstances and goals.

Municipal securities include bonds and other
debt obligations issued by or on behalf of states,
territories and possessions of the United States
of America and the District of Columbia
including their political subdivisions or their
duly constituted authorities, agencies and
instrumentalities, the interest on which is
exempt from federal income tax.

Municipal securities are issued to obtain funds
for various public purposes, including the
construction of a wide range of public facilities,
such as airports, bridges, highways, housing,
hospitals, mass transportation, schools, streets,
waterworks and sewer systems. Municipal
securities also may be issued in connection with
the refunding of outstanding obligations and
obtaining funds to lend to other public
institutions and facilities or for general
operating expenses.

The two principal classifications of municipal
bonds are "general obligation" and "revenue."
General obligation bonds are secured by the
issuer's pledge of its full faith, credit and taxing
power for the payment of principal and interest.
Revenue bonds are payable only from the
revenues derived from a particular facility or
class of facilities, or in some cases, from the
proceeds of a special excise tax or other specific
revenue source.

The Fund may invest in industrial
development bonds, the interest from which is
exempt from federal income tax. Under certain
circumstances, "substantial users" of the
facilities financed with such obligations, or
persons related to "substantial users," may be
required to pay federal income tax on this
otherwise exempted interest. Such persons
should consult the Internal Revenue Code and
their financial adviser to determine whether or
not the Fund is an appropriate investment for
them.

There are a variety of hybrid and special types
of municipal obligations, as well as numerous
differences in the security of municipal bonds,
both within and between the two principal
classifications of general obligation and revenue.

Municipal notes include tax, revenue and
bond anticipation notes of short maturity,
generally less than three years, which are issued
to obtain temporary funds for various public
purposes. Also included in this category are
Construction Loan Notes, Short-Term Discount
Notes and Project Notes issued by a state or local
housing agency but secured by the full faith and
credit of the United States.

11
<PAGE>

Yields on municipal securities depend on a
variety of factors, such as the size of a particular
offering, the maturity and the rating of the
obligation, economic and monetary conditions,
and conditions of the municipal securities
market, including the volume of municipal
securities available. Market values of municipal
securities will vary according to the relation of
their yields available. Consequently, the net
asset value of the Fund and its shares can be
expected to change as the level of interest rates
fluctuates.

Municipal obligations, like all other debt
obligations, carry a risk of default. Through
careful selection and supervision, and
concentration in the higher-quality investment
grade issues, management intends to reduce this
risk.

Prices of outstanding municipal securities will
fluctuate with changes in the interest rates on
new issues. Thus, the price of the Fund's shares
will tend to increase as the rates on new issues
decline, and decrease whenever the current rate
is rising. Management will seek to minimize
such share price fluctuation to the extent this
can be achieved without detracting from the
Fund's primary objective of the highest quality
and maturity characteristics of the Portfolio.

Municipal securities are not traded as actively
as other securities. Even though municipal
securities will be redeemed at face value upon
maturity, from time to time, when there has
been no active trading in a particular Portfolio
holding, its interim pricing for the purpose of
the daily valuation of the Fund shares may have
to be based on other sources of information and
methods deemed fair and reasonable by the
Board of Directors. One principal method which
is commonly used by Funds and other investors
who own municipal securities is called matrix
pricing.

From time to time, proposals have been
introduced in Congress to restrict or eliminate
the federal income tax exemption for interest on
municipal securities. Similar proposals may be
introduced in the future. If such a proposal was
enacted, the availability of municipal securities
for investment by the Fund would be adversely
affected. In such event, the Fund would re-
evaluate its investment objective and policies
and submit possible changes in the structure of
the Fund for the consideration of the
shareholders.

RATINGS OF MUNICIPAL
SECURITIES

The ratings of bonds by Moody's and Standard
and Poor's Corporation represent their opinions
of quality of the municipal bonds they undertake
to rate. These ratings are general and are not
absolute standards. Consequently, municipal
bonds with the same maturity, coupon and
rating may have different yields, while
municipal bonds of the same maturity and
coupon with different ratings may have the same
yield.

Both Moody's and S&P's Municipal Bond
Ratings cover obligations of states and political
subdivisions. Ratings are assigned to general
obligation and revenue bonds. General
obligation bonds are usually secured by all
resources available to the municipality and the
factors outlined in the rating definitions below
are weighted in determining the rating. Because
revenue bonds in general are payable from
specifically pledged revenues, the essential
element in the security for a revenue bond is the
quantity and quality of the pledged revenues
available to pay debt service.

Although an appraisal of most of the same
factors that bear on the quality of general
obligation bond credit is usually appropriate in
the rating analysis of a revenue bond, other
factors are important, including particularly the
competitive position of the municipal enterprise
under review and the basic security covenants.
Although a rating reflects S&P's judgment as to
the issuer's capacity for the timely payment of
debt service, in certain instances it may also
reflect a mechanism or procedure for an assured
and prompt cure of a default, should one occur,
i.e., an insurance program, federal or state
guaranty, or the automatic withholding and use
of state aid to pay the defaulted debt service.

S&P'S RATINGS

AAA Prime - These are obligations of the
highest quality. They have the strongest capacity
for timely payment of debt service.

12
<PAGE>

General Obligation Bonds - In a period of
economic stress, the issuers will suffer the
smallest declines in income and will be least
susceptible to autonomous decline. Debt burden
is moderate. A strong revenue structure appears
more than adequate to meet future expenditure
requirements. Quality of management appears
superior.

Revenue Bonds - Debt service coverage has
been, and is expected to remain, substantial.
Stability of the pledged revenues is also
exceptionally strong, due to the competitive
position of the municipal enterprise or to the
nature of the revenues. Basic security provisions
(including rate covenant, earnings test for
issuance of additional bonds, debt service,
reserve requirements) are rigorous. There is
evidence of superior management.

AA - High Grade - The investment
characteristics of general obligation and revenue
bonds in this group are only slightly less marked
than those of the prime quality issues. Bonds
rated "AA" have the second strongest capacity
for payment of debt service.

A - Good Grade - Principal and interest
payments on bonds in this category are regarded
as safe. This rating describes the third strongest
capacity for payment of debt service. It differs
from the two higher ratings because:

General Obligation Bonds - There is some
weakness, either in the local economic base, in
debt burden, in the balance between revenues
and expenditures, or in quality of management.
Under certain adverse circumstances, any one
such weakness might impair the ability of the
issuer to meet debt obligations at some future
date.

Revenue Bonds - Debt service coverage is
good, but not exceptional. Stability of the
pledged revenues could show some variations
because of increased competition or economic
influences on revenues. Basic security
provisions, while satisfactory, are less stringent.
Management performance appears adequate.

MOODY'S RATINGS OF
MUNICIPAL BONDS

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

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

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

MOODY'S RATINGS OF
MUNICIPAL NOTES

MIG 1: The best quality, enjoying strong
protection from established cash flows of funds
for their servicing or from established and broad
based access to the market for refinancing, or
both.

MIG 2: High quality, with margins of
protection ample, although not so large as in the
preceding group.

MIG 3: Favorable quality, with all security
elements accounted for, but lacking the
undeniable strength of the preceding grades.
Market access for refinancing, in particular, is
likely to be less well established.

13
<PAGE>

COMMERCIAL PAPER RATINGS

Moody's . . . Moody's commercial paper rating
is an opinion of the ability of an issuer to repay
punctually promissory obligations not having an
original maturity in excess of nine months.
Moody's has one rating - prime. Every such
prime rating means Moody's believes that the
commercial paper note will be redeemed as
agreed. Within this single rating category are
the following classifications:

Prime - 1 Highest Quality
Prime - 2 Higher Quality
Prime - 3 High Quality

The criteria used by Moody's for rating a
commercial paper issuer under this graded
system include, but are not limited to the
following factors:

(1) evaluation of the management of the
issuer;

(2) economic evaluation of the issuer's
industry or industries and an appraisal of
speculative type risks which may be
inherent in certain areas;

(3) evaluation of the issuer's products in
relation to competition and customer
acceptance;

(4) liquidity;

(5) amount and quality of long-term debt;

(6) trend of earnings over a period of ten
years;

(7) financial strength of a parent company
and relationships which exist with the
issuer; and

(8) recognition by the management of
obligations which may be present or may
arise as a result of public interest
questions and preparations to meet such
obligations.

S&P . . . Standard & Poor's commercial paper
rating is a current assessment of the likelihood
of timely repayment of debt having an original
maturity of no more than 270 days. Ratings are
graded into four categories, ranging from "A"
for the highest quality obligations to "D" for the
lowest. The four categories are as follows:

"A" Issues assigned this highest rating are
regarded as having the greatest capacity
for timely payment. Issues in this category
are further refined with the designations 1,
2 and 3 to indicate the relative degree of
safety.

"A-1" This designation indicates that the
degree of safety regarding timely
payment is very strong.

"A-2" Capacity for timely payment on
issues with this designation is
strong. However, the relative degree
of safety is not as overwhelming.

"A-3" Issues carrying this designation
have a satisfactory capacity for
timely payment. They are, however,
somewhat more vulnerable to the
adverse effects of changes in
circumstances than obligations
carrying the higher designations.

"B" Issues rated "B" are regarded as having
only an adequate capacity for timely
payment. Furthermore, such capacity may
be damaged by changing conditions or
short-term adversities.

"C" This rating is assigned to short-term debt
obligations with a doubtful capacity for
payment.

"D" This rating indicates that the issuer is
either in default or is expected to be in
default upon maturity.

FINANCIAL STATEMENTS

The audited financial statements of the Fund
which are contained in the June 30, 1996,
Annual Report to Shareholders, are incorporated
herein by reference.

14
<PAGE>