<PAGE>
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Vanguard
OHIO
TAX-FREE FUND A Member of The Vanguard Group
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PROSPECTUS--MARCH 28, 1995
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT Vanguard Ohio Tax-Free Fund (the "Fund") is an open-end non-
OBJECTIVE AND diversified investment company that seeks to provide income
POLICIES that is exempt from federal and Ohio personal income taxes.
The Fund will invest primarily in securities issued by Ohio
state and local governments and public financing authorities,
but may also invest in securities of issuers other than Ohio
and its political subdivisions. The Fund consists of a Money
Market Portfolio and an Insured Long-Term Portfolio, each of
which has distinct investment objectives and policies. The
Money Market Portfolio seeks to maintain, but does not guar-
antee, a constant net asset value of $1.00 per share. Al-
though the Money Market Portfolio invests in high quality in-
struments, the shares of the Portfolio are not insured or
guaranteed by the U.S. Government. The Portfolios are avail-
able only to Ohio residents.
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OPENING AN Please complete and return the Account Registration Form. If
ACCOUNT you need assistance in completing this Form, please call our
Investor Information Department, Monday through Friday, from
8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m. to 4:00
p.m. (Eastern time). The minimum initial investment is $3,000
for each Portfolio or $500 for Uniform Gifts/Transfers to Mi-
nors Act accounts. The Fund is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees). Howev-
er, the Fund incurs expenses for investment advisory, manage-
ment, administrative, and distribution services.
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ABOUT THIS This Prospectus is designed to set forth concisely the infor-
PROSPECTUS mation that you should know about the Fund before you invest.
It should be retained for future reference. A "Statement of
Additional Information" containing additional information
about the Fund has been filed with the Securities and Ex-
change Commission. This Statement is dated March 28, 1995,
and has been incorporated by reference into this Prospectus.
It may be obtained, without charge, by writing to the Fund or
by calling the Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Fund Expenses........ 2
Financial Highlights. 3
Yield and Total
Return ............. 4
FUND INFORMATION
Investment Objective. 5
Investment Policies.. 5
Investment Risks..... 7
Who Should Invest.... 10
How to Compare Tax-
Free and Taxable
Yields.............. 11
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Implementation of
Policies............ 12
Investment Limita-
tions............... 16
Management of the
Fund................ 17
Investment Adviser... 18
Dividends, Capital
Gains and Taxes..... 18
The Share Price of
Each Portfolio...... 20
General Information.. 22
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
SHAREHOLDER GUIDE
Opening an Account
and Purchasing
Shares.............. 23
When Your Account
Will Be Credited.... 26
Selling Your Shares.. 27
Exchanging Your
Shares.............. 29
Important Information
About Telephone
Transactions........ 31
Transferring Regis-
tration............. 31
Other Vanguard Serv-
ices................ 32
</TABLE>
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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 COMMISSION PASSED UPON THE ACCURACY OR AD-
EQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OF-
FENSE.
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<PAGE>
FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for each Portfolio's 1994
fiscal year.
<TABLE>
<CAPTION>
MONEY INSURED
MARKET LONG-TERM
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO
--------------------------------------------------------------
<S> <C> <C>
Sales Load Imposed on Purchases............... None None
Sales Load Imposed on Reinvested Dividends.... None None
Redemption Fees*.............................. None None
Exchange Fees................................. None None
</TABLE>
<TABLE>
<CAPTION>
MONEY INSURED
MARKET LONG-TERM
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Management & Administrative Expenses
................................... 0.18% 0.18%
Investment Advisory Expense......... 0.01 0.01
12b-1 Fees.......................... None None
Other Expenses
Distribution Costs................. 0.03% 0.02%
Miscellaneous Expenses............. 0.01 0.02
Fund Insurance..................... None 0.00
---- ----
Total Other Expenses................ 0.04% 0.04%
---- ----
TOTAL OPERATING EXPENSES.......... 0.23% 0.23%
==== ====
</TABLE>
*Wire redemptions under $5,000 are subject to a $5 charge.
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Fund.
The following example illustrates the expenses that you would
incur on a $1,000 investment over various periods, assuming
(1) a 5% annual rate of return and (2) redemption at the end
of each period. As noted in the table above, the Fund charges
no redemption fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Portfolio............. $2 $7 $13 $29
Insured Long-Term Portfolio........ $2 $7 $13 $29
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF FU-
TURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE HIGHER
OR LOWER THAN THOSE SHOWN.
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2
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding
throughout each period have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was un-
qualified. This information should be read in conjunction
with the financial statements and notes thereto which are in-
corporated by reference in the Statement of Additional Infor-
mation and this Prospectus, and which appear, along with the
report of Price Waterhouse LLP, in the Fund's 1994 Annual Re-
port to Shareholders. For a more complete discussion of the
Fund's performance, please see the Fund's 1994 Annual Report
to Shareholders, which may be obtained without charge by
writing to the Fund or by calling our Investor Information
Department at 1-800-662-7447.
<TABLE>
<CAPTION>
-------------------------------------------
MONEY MARKET PORTFOLIO
-------------------------------------------
YEAR ENDED
NOVEMBER 30, JUNE 18+ TO
------------------------------ NOV. 30,
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERI-
OD................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............. .026 .023 .030 .045 .027
Net Realized and Unrealized Gain
(Loss) on Investments ........... -- -- -- -- --
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERA-
TIONS.......................... .026 .023 .030 .045 .027
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment In-
come............................. (.026) (.023) (.030) (.045) (.027)
Distributions from Realized Capi-
tal Gains........................ -- -- -- -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............. (.026) (.023) (.030) (.045) (.027)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL RETURN....................... 2.58% 2.37% 3.01% 4.64% 2.59%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Mil-
lions)............................ $147 $132 $92 $79 $37
Ratio of Expenses to Average Net
Assets............................ .23% .21% .31% .26% .23%*
Ratio of Net Investment Income to
Average Net Assets................ 2.56% 2.34% 2.95% 4.45% 5.65%*
Portfolio Turnover Rate............ N/A N/A N/A N/A N/A
</TABLE>
*Annualized.
+Commencement of operations.
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3
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------
INSURED LONG-TERM PORTFOLIO
--------------------------------------------
YEAR ENDED
NOVEMBER 30, JUNE 18+ TO
------------------------------- NOV. 30,
1994 1993 1992 1991 1990
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PE-
RIOD............................. $11.61 $11.07 $10.60 $10.30 $10.00
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............ .599 .608 .630 .650 .295
Net Realized and Unrealized Gain
(Loss) on Investments .......... (1.298) .685 .474 .300 .300
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERA-
TIONS.......................... (.699) 1.293 1.104 .950 .595
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment In-
come............................ (.599) (.608) (.630) (.650) (.295)
Distributions from Realized Capi-
tal Gains....................... (.032) (.145) (.004) -- --
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............. (.631) (.753) (.634) (.650) (.295)
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.... $10.28 $11.61 $11.07 $10.60 $10.30
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TOTAL RETURN...................... (6.29)% 12.03% 10.69% 9.50% 6.04%
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Net Assets, End of Period (Mil-
lions)........................... $149 $166 $101 $61 $17
Ratio of Expenses to Average Net
Assets........................... .23 .21% .31% .27% .22%*
Ratio of Net Investment Income to
Average Net Assets............... 5.38 5.29% 5.77% 6.20% 6.55%*
Portfolio Turnover Rate........... 16% 10% 27% 20% 2%
</TABLE>
*Annualized.
+Commencement of operations.
--------------------------------------------------------------------------------
YIELD AND TOTAL From time to time a Portfolio of the Fund may advertise its
RETURN yield and total return. Both yield and total return figures
are based on historical earnings and are not intended to in-
dicate future performance. The "total return" of a Portfolio
refers to the average annual compounded rates of return over
one-, five- and ten-year periods or over the life of a Port-
folio (as stated in the advertisement) that would equate an
initial amount invested at the beginning of a stated period
to the ending redeemable value of the investment, assuming
the reinvestment of all dividend and capital gains distribu-
tions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "30-day yield" of the
Insured Long-Term Portfolio is calculated by dividing net
investment income per share earned during a 30-day period by
the net asset value per share on the last day of the period.
Net investment income includes interest and dividend income
earned on the Portfolio's securities; it is net of all
expenses and all recurring and nonrecurring charges that have
been applied to all shareholder accounts. The yield
calculation assumes that net investment income earned over 30
days is compounded monthly for six months and then
annualized.
The "seven-day" or "current" yield of the Money Market Port-
folio reflects the income earned by a hypothetical account in
the Portfolio during a seven-day period, expressed as an an-
nual percentage rate. The "effective yield" of the Money Mar-
ket Portfolio assumes that the income over the seven-day pe-
riod is reinvested weekly, resulting in a slightly higher
stated yield through compounding.
4
<PAGE>
Methods used to calculate yields are standardized for money
market and bond funds. However, these methods differ from the
accounting methods used by the Portfolios to maintain their
books and records, and so advertised yields may not fully re-
flect the income paid to your own account or the yield re-
ported in the Portfolios' financial statements.
--------------------------------------------------------------------------------
INVESTMENT The Fund is an open-end non-diversified investment company.
OBJECTIVE The Fund consists of the Ohio Money Market Portfolio and the
Ohio Insured Long-Term Portfolio, each of which has a dis-
THE FUND SEEKS tinct investment objective:
TO PROVIDE
INCOME THAT IS . The objective of the OHIO MONEY MARKET PORTFOLIO is to pro-
EXEMPT FROM vide investors with income that is exempt from both federal
FEDERAL AND and Ohio personal income taxes. The Portfolio also seeks to
OHIO INCOME maintain, but does not guarantee, a constant net asset
TAXES value of $1.00 per share. Although the Portfolio invests in
high-quality instruments, the shares of the Portfolio are
not insured or guaranteed by the U.S. Government.
. The objective of the OHIO INSURED LONG-TERM PORTFOLIO is to
provide investors with a high level of income that is ex-
empt from federal and Ohio personal income taxes.
The two Portfolios of the Fund are available only to invest-
ors who reside in Ohio. There is no assurance that either
Portfolio of the Fund will achieve its stated objective.
The investment objective of each Portfolio is fundamental and
so may not be changed without the approval of a majority of
the Fund's shareholders.
--------------------------------------------------------------------------------
INVESTMENT Each Portfolio of the Fund will invest at least 80% of its
POLICIES net assets in Ohio municipal securities, exclusive of Ohio
AMT bonds, see "Implementation of Policies." Ohio municipal
securities are debt obligations issued by or on behalf of the
State of Ohio, political subdivisions thereof and agencies
and instrumentalities of the State or its political subdivi-
sions (and by certain U.S. territories) that provide interest
income that is exempt from both federal and Ohio personal in-
come taxes. The Ohio municipal securities described above,
may include securities in which the tax-exempt interest rate
is determined by an index, swap or some other formula. Al-
though both invest primarily in Ohio municipal obligations,
the two Portfolios differ in terms of credit quality and ma-
turity standards.
THE MONEY MARKET Under normal circumstances, the Ohio Money Market Portfolio
PORTFOLIO WILL will invest at least 80% of its net assets in the following
INVEST IN high-quality, short-term Ohio municipal securities:
SHORT-TERM OHIO
MUNICIPAL . Municipal notes and variable rate demand instruments, in-
SECURITIES cluding derivative securities, rated MIG-1 or VMIG-1, or P-
1 by Moody's Investors Service, Inc. ("Moody's) or SP-1+,
or SP-1, A-1+, or A-1 by Standard & Poor's Corporation
("Standard & Poor's");
5
<PAGE>
. Tax-exempt commercial paper rated P-1 by Moody's or A-1+ or
A-1 by Standard & Poor's;
. Municipal bonds, including derivative securities, with an
effective maturity of 13 months or less rated a minimum of
Aa by Moody's or AA by Standard & Poor's; and
. Unrated municipal notes considered by the Board of Trustees
to be comparable in credit quality to securities rated MIG-
1 by Moody's or SP-1+ or SP-1 by Standard & Poor's.
In seeking to provide a stable share price of $1.00, the Ohio
Money Market Portfolio is expected to maintain an average
weighted maturity of 90 days or less and will purchase secu-
rities with an effective maturity of 13 months or less and
which are eligible for purchase under Rule 2a-7 of the In-
vestment Company Act of 1940 (the "1940 Act").
Normally, the Ohio Money Market Portfolio will seek to invest
substantially all of its assets in the short-term Ohio munic-
ipal obligations listed above. However, under certain circum-
stances, such as a temporary decline in the issuance of Ohio
obligations, the Portfolio may invest up to 20% of its assets
in the following: short-term municipal securities issued out-
side of Ohio (the income from which may be subject to Ohio
income taxes) or certain taxable fixed-income securities (the
income from which may be subject to federal and Ohio income
taxes).
THE INSURED Under normal circumstances, the Ohio Insured Long-Term Port-
LONG-TERM folio will invest at least 80% of its net assets in insured
PORTFOLIO Ohio municipal securities. Insured municipal bonds are those
INVESTS IN in which scheduled payments of interest and principal are
INSURED OHIO guaranteed by a private (non-governmental) insurance company.
MUNICIPAL THE INSURANCE FEATURE DOES NOT GUARANTEE THE MARKET VALUE OF
SECURITIES THE MUNICIPAL BONDS OR THE VALUE OF THE SHARES OF THE OHIO
INSURED LONG-TERM PORTFOLIO. The insurance refers to the face
or par value of the securities in the Portfolio. See "Imple-
mentation of Policies" for a description of the insurance
feature of the Ohio Insured Long-Term Portfolio.
The Ohio Insured Long-Term Portfolio is expected to maintain
a dollar-weighted average maturity of between 15 and 25
years. BONDS WITH LONGER MATURITIES USUALLY OFFER HIGHER
YIELDS BUT ARE ALSO SUBJECT TO GREATER MARKET FLUCTUATIONS AS
INTEREST RATES CHANGE. See "Investment Risks."
Normally, the Ohio Insured Long-Term Portfolio seeks to in-
vest substantially all of its assets in insured Ohio munici-
pal obligations. However, under certain circumstances, the
Portfolio may invest up to 20% of its assets in any combina-
tion of the following securities:
. Uninsured, long-term Ohio municipal securities rated a min-
imum of Aa by Moody's or AA by Standards & Poor's;
. Uninsured, short-term municipal securities, issued in Ohio
or in other states, with the same quality standards that
apply for the Money Market Portfolio;
6
<PAGE>
. Certain taxable fixed-income securities, including U.S.
Government securities; and
. Certain tax-exempt municipal securities issued by other
states that have similar characteristics to the securities
typically purchased by the Portfolio.
In such cases, a portion of the Portfolio's income may be
subject to Ohio income taxes, federal income taxes, or both.
(See page 19).
Both the Money Market Portfolio and Insured Long-Term Portfo-
lio are authorized to invest in Ohio AMT bonds. The income
from Ohio AMT bonds is exempt from federal and Ohio personal
income taxes, but may be a tax preference item for purposes
of the federal alternative minimum tax, "Implementation of
Policies."
Under unusual circumstances, such as a national financial
emergency, each Portfolio of the Fund reserves the right to
invest more than 20% of its assets in securities other than
Ohio municipal obligations. In most instances, however, the
Portfolios of the Fund will seek to avoid such holdings in an
effort to provide income that is fully exempt from federal
and Ohio personal income taxes.
EACH PORTFOLIO Although the Fund is organized as a non-diversified invest-
WILL DIVERSIFY ment company, each Portfolio of the Fund intends to diversify
ITS HOLDINGS its holdings of Ohio municipal securities by complying with
Subchapter M of the Internal Revenue Code. In part,
Subchapter M requires that, at the close of each quarter of
the taxable year, those issues which represent more than 5%
of each Portfolio's assets be limited in aggregate to 50% of
each Portfolio, and that no one issue exceed 25% of a Portfo-
lio's total assets. As of November 30, 1994, the Ohio -Money
Market Portfolio held securities of 27 issuers, with the
largest holding representing 12.89% of the Portfolio's as-
sets; the Ohio Insured Long-Term Portfolio held securities of
72 issuers, with the largest holding representing 6.33% of
the Portfolio's assets.
The policy of investing at least 80% of each Portfolio's net
assets in Ohio municipal securities under normal circum-
stances is fundamental and may not be changed without share-
holder approval. The other investment policies described
above are not fundamental and so may be changed by the Board
of Trustees without shareholder approval.
--------------------------------------------------------------------------------
INVESTMENT RISKS As mutual funds investing in municipal securities, both Port-
folios of the Fund are subject to interest rate, credit,
THE FUND IS call, income and manager risk. However, the risk characteris-
SUBJECT TO IN- tics of both Portfolios vary because of differing maturity
TEREST RATE, and credit quality standards.
CREDIT, CALL,
INCOME AND INTEREST RATE RISK is the potential for fluctuations in the
MANAGER RISK price of a Portfolio's investments due to changing interest
rates. In general, bond prices vary inversely with interest
rates. If interest rates rise, bond prices generally decline;
if interest rates fall, bond prices generally rise. In addi-
tion, for a given change in interest rates, longer-maturity
bonds exhibit greater price fluctuations than shorter-matu-
rity bonds. To compensate investors for this risk, longer-ma-
turity
7
<PAGE>
bonds generally offer higher yields than shorter-maturity
bonds, other factors, including credit quality, being equal.
Interest rate risk may be increased or decreased when a port-
folio initiates or purchases derivative Ohio municipal secu-
rities. Such derivative securities rely on sophisticated in-
terest rate calculation mechanisms. For certain types of de-
rivative bonds, the magnitude of increases and decreases in
their price may be proportionately larger or smaller than, or
inverse to, the price changes that broad market interest rate
fluctuations would produce in long-term bonds.
CREDIT RISK is the possibility that a bond issuer will fail
to make timely payments of interest or principal to a portfo-
lio. The credit risk of a portfolio depends on the credit
quality of its underlying securities. In general, the lower
the credit quality of a portfolio's municipal securities, the
higher a portfolio's yield, all other factors such as matu-
rity being equal.
CALL RISK is the possibility that, during periods of falling
interest rates, a municipal security with a high stated in-
terest rate will be prepaid (or "called") prior to its ex-
pected maturity date. As a result, a portfolio will be re-
quired to invest the unanticipated proceeds at lower interest
rates, and the Portfolio's income may decline. Call provi-
sions are most common for intermediate- and long-term munici-
pal bonds.
INCOME RISK is the potential for a decline in a portfolio's
income due to falling market interest rates. Because a port-
folio's income is based on interest rates, which can fluctu-
ate substantially over short periods, income risk is expected
to vary from portfolio to portfolio.
THE FUND IS
SUBJECT TO Finally, the investment adviser manages the Fund's Portfolios
MANAGER RISK according to the traditional methods of "active" investment
management, which involve the buying and selling of securi-
ties based upon economic, financial and market analysis and
investment judgment. MANAGER RISK refers to the possibility
that the Fund's investment adviser may fail to execute a
Portfolio's investment strategy effectively. As a result, a
Portfolio may fail to achieve its stated objective.
Given the Portfolio's stated objectives and policies, inter-
est rate risk for the Ohio Money Market Portfolio is expected
to be negligible. The Money Market Portfolio seeks to main-
tain, but does not guarantee, a constant net asset value of
$1.00 per share. Although the Money Market Portfolio invests
in high-quality instruments, the shares of the Portfolio are
not insured or guaranteed by the U.S. Government. In con-
trast, interest rate risk for the Ohio Insured Long-Term
Portfolio may be high. The average weighted maturity of the
Insured Long-Term Portfolio will generally exceed 15 years,
meaning that the Portfolio's share price will fluctuate,
sometimes substantially, when interest rates change.
The following chart illustrates the potential interest rate
risk of the Ohio Insured Long-Term Portfolio. The chart shows
the market value of a $1,000 investment in a single bond with
the same yield and maturity characteristics as the
8
<PAGE>
Insured Long-Term Portfolio on December 29, 1994, assuming a
1% and 2% increase or decrease in interest rates:
<TABLE>
<CAPTION>
HYPOTHETICAL VALUE OF $1,000 INVESTMENT
---------------------------------------
PERCENTAGE POINT CHANGE IN INTEREST RATES
------------------------------------------------
30-DAY AVERAGE 1% 1% 2% 2%
PORTFOLIO YIELD MATURITY INCREASE DECREASE INCREASE DECREASE
----------------- ------ ---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Insured Long-Term 6.02% 14.9 years $908 $1,104 $828 $1,223
</TABLE>
This chart is intended to provide you with general guidelines
for evaluating the effect of interest rate changes on the
Ohio Insured Long-Term Portfolio and determining the degree
of interest rate risk you may be willing to assume. The yield
and price changes shown are purely for illustrative purposes
and should not be taken as representative of current or fu-
ture yields or expected changes in the share price of the In-
sured Long-Term Portfolio.
CREDIT RISK IS Credit risk depends on the average quality of a Portfolio's
EXPECTED TO BE underlying securities and its degree of diversification. The
LOW Ohio Money Market Portfolio invests primarily in high-quali-
ty, short-term Ohio municipal securities, and the Ohio In-
sured Long-Term Portfolio invests primarily in bonds insured
by top-rated insurance companies against the possible default
of an issuer as to the timely payment of interest and princi-
pal. As a result, the average credit quality of each Portfo-
lio is expected to be very high, and credit risk is likely to
be minimal.
Ordinarily, an investment company concentrating its invest-
ments in one state, such as the Fund, would be exposed to
greater credit risks than an investment company investing in
a nationally diversified portfolio of municipal securities.
These risks include possible tax law changes, a deterioration
in economic conditions, and differing levels of supply and
demand for Ohio municipal obligations. For example, during
the past decade, as a consequence of a severe business reces-
sion in U.S. manufacturing generally, Ohio experienced above-
average rates of unemployment relative to the national aver-
age. Although the state's economy has improved significantly
in recent years, there is still the risk that a future reces-
sion could affect the market value of Ohio municipal securi-
ties or impair the ability of certain Ohio governmental au-
thorities to repay their debt obligations in a timely fash-
ion. (See the Statement of Additional Information for further
information on economic developments in Ohio.)
To minimize the effects of concentrating its investments in
Ohio obligations, each Portfolio of the Fund intends to di-
versify its holdings by complying with Subchapter M of the
Internal Revenue Code. (See "Investment Policies" for a de-
scription of the requirements of Subchapter M.) In addition,
the high-quality instruments held by the Ohio Money Market
Portfolio and the use of municipal bond insurance in the Ohio
Insured Long-Term Portfolio should minimize the credit risk
associated with the Fund.
9
<PAGE>
As of November 30, 1994, top ten portfolio holdings, based on
market value, represented 65.30% of the Money Market Portfo-
lio's net assets and 36.03% of the Insured Long-Term Portfo-
lio's net assets.
The following chart summarizes credit, interest rate, income
and call risks for the Fund's Portfolios.
<TABLE>
<CAPTION>
CREDIT INTEREST INCOME PREPAYMENT/
PORTFOLIO RISK RATE RISK RISK CALL RISK
------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Low Low High Very Low
Insured Long-Term Very Low High Low Medium
</TABLE>
--------------------------------------------------------------------------------
WHO SHOULD The Fund is intended for Ohio residents seeking income that
INVEST is exempt from federal and Ohio personal income taxes. As a
rule, tax-free income is attractive to investors in high fed-
OHIO RESIDENTS eral and Ohio tax brackets. You can determine whether tax-ex-
SEEKING TAX- empt or taxable income is more attractive in your own case by
EXEMPT INCOME comparing a Portfolio's tax-free yield with the yield from a
comparable taxable mutual fund investment. See "How to Com-
pare Tax-Free and Taxable Yields."
Assuming that tax-free income is attractive in your own tax
bracket, you should base your selection of a Portfolio (or
Portfolios) on its expected price volatility and yield, and
your own investment objectives, risk preferences and time
horizon.
The OHIO MONEY MARKET PORTFOLIO is intended for investors who
are seeking a stable share price and minimal credit risk. The
yield on the Portfolio is expected to fluctuate from day to
day and to be lower on average than the yield from the Ohio
Insured Long-Term Portfolio. The Ohio Money Market Portfolio
is suitable as a short-term investment vehicle, emphasizing
maximum protection of principal.
In contrast, the OHIO INSURED LONG-TERM PORTFOLIO is intended
for investors who are seeking the highest, most durable
streams of income and who can tolerate possibly sharp fluctu-
ations in share price in pursuit of their income objectives.
The yield of the Portfolio is expected to be higher, and the
level of income provided more stable, than that of the Ohio
Money Market Portfolio. However, because of the potential
volatility of the Portfolio's share price, the Ohio Insured
Long-Term Portfolio is appropriate only for those investors
who can hold their investment over the long term.
The Fund is intended to be a long-term investment vehicle and
is not designed to provide investors with a means of specu-
lating on short-term market movements. Investors who engage
in excessive account activity generate additional costs which
are borne by all of the Fund's shareholders. In order to min-
imize such costs, the Fund has adopted the following poli-
cies. The Fund reserves the right to reject any purchase re-
quest (including exchange purchases from other Vanguard port-
folios) that is reasonably deemed to be disruptive to effi-
cient portfolio management, either because of the timing of
the investment or previous excessive trading by the investor.
Additionally, the Fund has adopted exchange
10
<PAGE>
privilege limitations as described in the section "Exchange
Privilege Limitations." Finally, the Fund reserves the right
to suspend the offering of its shares.
--------------------------------------------------------------------------------
HOW TO COMPARE Before choosing a specific tax-exempt investment, such as a
TAX-FREE AND Portfolio of the Fund, you should determine if you would be
TAXABLE YIELDS better off with taxable or tax-exempt income in your tax
bracket. To compare taxable and tax-free income, you should
first determine your combined federal, state and local tax
brackets. Then you should calculate the "taxable equivalent
yield" for the Portfolio you are considering, and compare it
with the yield of a taxable investment with similar credit
and maturity characteristics.
1. DETERMINE YOUR COMBINED TAX BRACKET. Your combined tax
bracket depends on whether you itemize state and local taxes
as a deduction on your federal return. If you do not itemize,
then your combined tax bracket is the sum of your federal,
state and local tax brackets.
If you do itemize, then your combined tax bracket is calcu-
lated as follows. First calculate your effective state and
local tax bracket using the following formula:
Federal Effective
( 100% - Tax ) X State = State
Bracket Bracket Bracket
For example, if you are in a 5.9% state tax bracket and a 28%
federal tax bracket, your effective state and local tax
bracket would be 4.2%:
(100% - 28%) X 5.9% = 4.2%
Next, add your effective state tax bracket to your federal
tax bracket to determine your combined tax bracket:
Federal Effective Combined
Tax + State = Tax
Bracket Bracket Bracket
28% + 4.2% = 32.2%
2. CALCULATE YOUR TAXABLE EQUIVALENT YIELD. The taxable
equivalent yield for a Portfolio is based upon the Portfo-
lio's current tax-exempt yield and your combined tax bracket.
The formula is:
Portfolio's Tax-Free Yield Your Taxable
-------------------------------- = Equivalent
100% - Your Combined Tax Bracket Yield
For example, if you are in a combined tax bracket of 32.2%,
and a Portfolio's tax-free yield is 6%, the Portfolio's tax-
able equivalent yield would be 8.8%:
6%
------------ = 8.8%
100% - 32.2%
11
<PAGE>
In this example, you would choose the tax-free investment if
its taxable equivalent yield of 8.8% were greater than the
taxable yield from a comparable investment (e.g., a taxable
bond fund of comparable maturity and credit quality).
--------------------------------------------------------------------------------
IMPLEMENTATION The Fund's adviser uses a variety of investment vehicles to
OF POLICIES achieve the objective of the Fund.
THE FUND INVESTS Each Portfolio of the Fund invests principally in tax-exempt
IN MUNICIPAL Ohio municipal securities, which are debt obligations issued
BONDS, NOTES AND by state and local governments and public financing authori-
SECURITIES ties (and by certain U.S. territories) that provide interest
DERIVED FROM income that is exempt from federal and Ohio personal income
MUNICIPAL BONDS taxes. Municipal securities include both municipal bonds
AND NOTES (those securities with maturities of five years or more) mu-
nicipal notes (those securities with maturities of less than
five years) and derivative securities (those securities in
which a maturity may have been shortened by a demand
feature).
Municipal bonds are issued for a wide variety of reasons: to
construct public facilities such as airports, highways,
bridges, schools, hospitals, housing, mass transportation,
streets, water and sewer works; to obtain funds for operating
expenses; to refund outstanding municipal obligations; and,
to loan funds to various public institutions and facilities.
Certain industrial development bonds are also considered mu-
nicipal bonds if their interest is exempt from federal income
tax. Industrial development bonds are issued by, or on behalf
of, public authorities to obtain funds for privately-operated
manufacturing facilities, housing, sports arenas, convention
centers, airports, mass transportation systems, and water,
gas or sewage works.
Under Ohio law, general obligation municipal bonds are se-
cured by the issuer's pledge of full faith and credit and the
general property taxing power. Revenue bonds are payable from
sources other than general tax revenues. Industrial develop-
ment bonds are ordinarily dependent on the credit quality of
a private entity.
Municipal notes are issued to meet the short-term funding re-
quirements of local, regional and state governments. Munici-
pal notes include tax anticipation notes, bond anticipation
notes, revenue anticipation notes, tax and revenue anticipa-
tion notes, construction loan notes, short-term discount
notes, tax-exempt commercial paper, demand notes, and similar
instruments. Demand notes permit an investor (such as the
Fund) to demand from the issuer payment of principal plus ac-
crued interest upon a certain number of days' notice.
THE FUND MAY Each Portfolio is authorized to invest up to 20% of its as-
INVEST IN AMT sets in "AMT" bonds. AMT bonds are tax-exempt "private activ-
BONDS ity" bonds issued after August 7, 1986, whose proceeds are
directed at least in part to a private, for-profit organiza-
tion. While the income from AMT bonds is exempt from regular
federal income tax, it is a tax preference item for purposes
of the alternative minimum tax. The alternative minimum tax
is a special separate tax that applies to a limited number of
taxpayers who have certain adjustments to income or tax pref-
erence items.
12
<PAGE>
THE FUND MAY The Fund may invest in "Market Discount" bonds when, in the
INVEST IN opinion of the Fund's adviser, the investment will be advan-
MARKET tageous to the Fund's shareholders. A Market Discount bond is
DISCOUNT BONDS a bond purchased at a discount from its original issue price
after April 30, 1993 and with a maturity in excess of one
year from its issue date. In certain circumstances, disposi-
tion of a Market Discount bond will result in taxable ordi-
nary income to the extent of any gain realized.
Although the objective of the Fund is to provide income free
of federal income tax, certain market conditions may make
Market Discount bonds desirable investments. The Fund will
purchase Market Discount bonds only if the Fund's adviser ex-
pects that the purchase of these investments on an after-tax
basis will enhance the Fund's total return.
THE INSURED The Ohio Insured Long-Term Portfolio may utilize bond futures
LONG-TERM contracts and options to a limited extent. Specifically, the
PORTFOLIO MAY Portfolio may enter into futures contracts provided that not
USE FUTURES more than 5% of its assets are required as a futures contract
CONTRACTS AND deposit; in addition, the Portfolio may enter into futures
OPTIONS contracts and options transactions only to the extent that
obligations under such contracts or transactions represent
not more than 20% of the Portfolio's assets.
Futures contracts and options may be used for several rea-
sons: to maintain cash reserves while simulating full invest-
ment, to facilitate trading, to reduce transaction costs, or
to seek higher investment returns when a futures contract is
priced more attractively than the underlying municipal secu-
rity or index. Although futures contracts and options trans-
actions can be used as leveraged instruments, the Portfolio
may not use futures contracts or options transactions to lev-
erage its assets.
FUTURES The primary risks associated with the use of futures and op-
CONTRACTS AND tions are: (i) imperfect correlation between the change in
OPTIONS POSE market value of the bonds held by the Portfolio and the
CERTAIN RISKS prices of futures and options; and (ii) possible lack of a
liquid secondary market for a futures contract and the re-
sulting inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be min-
imized by investing in those contracts whose price fluctua-
tions are expected to resemble those of the Portfolio's un-
derlying securities. The risk that the Portfolio will be un-
able to close out a futures position will be minimized by en-
tering into such transactions on a national exchange with an
active and liquid secondary market. In general, the futures
market is more liquid than the municipal bond market; there-
fore, the Portfolio's liquidity may be improved by investing
in futures.
The risk of loss in trading futures contracts in some strate-
gies can be substantial, due both to the low margin deposits
required and the extremely high degree of leverage involved
in futures pricing. As a result, a relatively small price
movement in a futures contract may result in immediate and
substantial loss (or gain) to the investor. When investing in
futures contracts, the Insured Long-Term Portfolio will seg-
regate cash or cash equivalents in the amount of the under-
lying obligation.
13
<PAGE>
DERIVATIVE Derivative securities represent the purchaser's right to re-
SECURITIES ceive principal and interest payments from underlying bonds.
A Fund may purchase a derivative security from another port-
folio within the Vanguard Group, as permitted by the Invest-
ment Company Act of 1940 and applicable rules thereunder, or
from an outside financial institution. There are different
derivative structures. An example of the steps involved in
creating and using a derivative structure follows: 1) a de-
positor places the underlying bond into a trust supervised by
an independent party; 2) a financial institution provides the
purchasers the right, at periodic intervals, to tender the
derivative security; 3) the financial institution receives
the difference between the prevailing short-term interest
rate (which is paid to the Portfolio holding the derivative
security) and the coupon on the underlying bond in considera-
tion for providing the tender option; and 4) the tender op-
tion may be discontinued upon the occurrence of certain
events, in which case, the Fund which owns the derivative se-
curity should receive its proportional share of the under-
lying bond. The primary risks associated with the use of de-
rivative securities are the interest rate risks discussed un-
der "Investment Risks," the possible lack of a liquid second-
ary market, the risk that the other party in a contractual
derivative agreement cannot meet its obligations and the po-
tential for greater price volatility relative to the under-
lying security on which the derivative is based.
The Portfolios intend to limit the risk of derivative securi-
ties by purchasing only those derivative securities that are
consistent with a Portfolio's investment objectives and poli-
cies. The Portfolios will not use such instruments to lever-
age securities. Hence, derivative securities' contributions
to the overall market risk characteristics of a Portfolio
will not materially alter its risk profile and will be fully
representative of the Portfolio's maturity guidelines.
THREE TYPES OF To provide an added level of credit protection, the Ohio In-
INSURANCE MAY sured Long-Term Portfolio purchases securities which have one
BE USED IN THE of the following types of insurance: new issue, mutual fund
INSURED LONG- and secondary market insurance. A new issue insurance policy
TERM PORTFOLIO is purchased by a bond issuer who wishes to increase the
credit rating of a security. By paying a premium and meeting
the insurer's underwriting standards, the bond issuer is able
to obtain a high credit rating for the security (usually Aaa
from Moody's or AAA from Standard & Poor's). New issue insur-
ance policies are non-cancellable and continue in force as
long as the bonds are outstanding.
A mutual fund insurance policy may be used to guarantee spe-
cific bonds only while owned by a mutual fund. The Insured
Long-Term Portfolio of the Fund has obtained a mutual fund
insurance policy from Financial Guaranty Insurance Company
("Financial Guaranty"), a AAA-rated insurance company. Based
upon the expected composition of the Portfolio, the annual
premiums for the policy are likely to range from 0.20% to
0.40% of the principal value of the bonds insured under the
policy, thereby reducing the Portfolio's current yield.
14
<PAGE>
A secondary market insurance policy is purchased by an in-
vestor (such as the Insured Long-Term Portfolio) subsequent
to the bond's original issuance and insures a particular bond
for the remainder of its term. The Portfolio may purchase
bonds that have already been insured under a secondary market
insurance policy by a prior investor, or the Portfolio may
itself purchase such a policy from Financial Guaranty or
other insurance company for bonds that are currently unin-
sured.
An insured municipal bond in the Portfolio will typically be
covered by only one of the three policies. For instance, if a
bond is already covered by a new issue insurance policy or a
secondary market insurance policy, then that security will
not be insured under the Portfolio's mutual fund insurance
policy. All of the insurance policies used by the Portfolio
will be obtained only from insurance companies rated Aaa by
Moody's or AAA by Standard & Poor's.
THE INSURED Each Portfolio of the Fund observes strict maturity guide-
LONG-TERM lines as set forth in detail under "Investment Policies."
PORTFOLIO MAY These maturity standards are specified in terms of a Portfo-
REPORT AN lio's average weighted maturity. From time to time, however,
EFFECTIVE the Fund may also report an effective average weighted matu-
AVERAGE rity for the Insured Long-Term Portfolio, which reflects,
WEIGHTED among other items, the likelihood that a municipal bond or
MATURITY note held by the Portfolio may be redeemed or "called" prior
to its stated maturity date. For example, if the Portfolio
consists entirely of 20-year bonds, some of which may be
"called" prior to their stated maturity in 20 years, the
Portfolio's average weighted maturity will be 20 years, while
its effective average maturity will be shorter.
A Portfolio's effective average weighted maturity will be in-
fluenced by bond market conditions and so may vary from day
to day, even if no change has been made to the Portfolio's
underlying investment securities. For example, if interest
rates decline, a greater proportion of a Portfolio's securi-
ties may be subject to call (redemption) prior to their
stated maturity. As a result, reflecting this increased call
risk, the effective average maturity of the Portfolio will
shorten, independent of actual purchases or sales of portfo-
lio securities.
TEMPORARY Except as described on page 7, Each Portfolio will not invest
INVESTMENTS in securities other than municipal bonds except that each
Portfolio may make certain investments for temporary defen-
sive purposes in (a) notes issued by or on behalf of munici-
pal or corporate issuers, obligations of the U.S. Government
and its agencies, commercial paper, bank certificates of de-
posit; (b) investment companies investing in such securities
which have investment objectives consistent with those of the
Portfolio to the extent permitted by the Investment Company
Act of 1940; and (c) any such securities or municipal bonds
subject to repurchase agreements.
THE FUND MAY Each Portfolio may purchase tax-exempt securities on a "when-
PURCHASE WHEN- issued" basis. In buying "when-issued" securities, a Portfo-
ISSUED lio commits to buy securities at a certain price even though
SECURITIES the securities may not normally be delivered for up to 45
days. The Portfolio pays for the securities and begins earn-
ing interest when the securities are actually delivered. As a
consequence, it is possible that the
15
<PAGE>
market price of the securities at the time of delivery may be
higher or lower than the purchase price.
THE FUND MAY Each Portfolio may lend its investment securities to quali-
LEND ITS fied institutional investors for either short-term or long-
SECURITIES term purposes of realizing additional net investment income.
Loans of securities by a Portfolio will be collateralized by
cash, letters of credit, or securities issued or guaranteed
by the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the loaned
securities. Income derived from the lending of securities is
not tax-exempt, and a portion of the tax-exempt interest
earned when a municipal security is on loan must be charac-
terized as taxable income. Therefore, each Portfolio will
limit such activity in accordance with its investment objec-
tive.
THE FUND MAY Each Portfolio may purchase municipal lease obligations,
INVEST IN which are securities issued by state and local governments to
MUNICIPAL LEASE acquire land, equipment and facilities. These obligations
OBLIGATIONS typically are not backed by the issuing municipality's full
authority to assess taxes to meet its debt obligations. If
the issuing authority fails to make the appropriations neces-
sary to cover lease payments, then the lease may terminate,
with the possibility of default on the lease obligation and
loss to investors.
--------------------------------------------------------------------------------
INVESTMENT The Fund has adopted certain limitations designed to reduce
LIMITATIONS its exposure to specific situations. These limitations in-
clude the following:
THE FUND HAS (a) The Ohio Insured Long-Term Portfolio will invest a mini-
ADOPTED CERTAIN mum of 80% of its net assets in insured municipal bonds,
FUNDAMENTAL the interest on which is exempt from federal and Ohio
LIMITATIONS personal income taxes, except that it may make temporary
investments except as described in the section "Implemen-
tation of Policies."
(b) The Ohio Money Market Portfolio will invest a minimum of
80% of its net assets in short-term municipal securities,
the interest on which is exempt from federal and Ohio
personal income taxes, except that it may make temporary
investments except as described in the section "Implemen-
tation of Policies."
(c) At the close of each quarter of the taxable year, those
issues which represent more than 5% of a Portfolio's as-
sets will be limited in aggregate to 50% of the assets of
that Portfolio (except U.S. Government and cash items, as
defined by the Internal Revenue Code (the "Code")).
(d) Each Portfolio will limit the aggregate value of holdings
of a single issuer (except U.S. Government and cash items
as defined in the Code) to a maximum of 25% of the Port-
folio's total assets. For the purposes of this limita-
tion, identification of the issuer will be based on a de-
termination of the source of assets and revenues commit-
ted to meeting interest and principal payments on each
security.
(e) A Portfolio will not borrow money except for temporary or
emergency purposes, and then not in excess of 10% of the
Portfolio's total assets. The
16
<PAGE>
Portfolio will repay all borrowings before making addi-
tional investments, and the interest paid on such
borrowings will reduce income.
(f) A Portfolio will not pledge, mortgage, or hypothecate
more than 10% of its total assets.
These investment limitations are considered at the time in-
vestment securities are purchased. The limitations described
here and in the Statement of Additional Information may be
changed only with the approval of a majority of the Fund's
shareholders.
--------------------------------------------------------------------------------
MANAGEMENT OF The Fund is a member of The Vanguard Group of Investment Com-
THE FUND panies, a family of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
VANGUARD in excess of $130 billion. Through their jointly-owned sub-
ADMINISTERS sidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and
AND DISTRIBUTES the other funds in the Group obtain at cost virtually all of
THE FUND their corporate management, administrative, shareholder ac-
counting and distribution services. Vanguard also provides
investment advisory services on an at-cost basis to certain
Vanguard funds. As a result of Vanguard's unique corporate
structure, the Vanguard funds have costs substantially lower
than those of most competing mutual funds. In 1994, the aver-
age expense ratio (annual costs including advisory fees di-
vided by total net assets) for the Vanguard funds amounted to
approximately .30%, compared to an average of 1.05% for the
mutual fund industry (data provided by Lipper Analytical
Services).
The Officers of the Fund manage its day-to-day operations and
are responsible to the Fund's Board of Trustees. The Trustees
set broad policies for the Fund and choose its Officers. A
list of the Trustees and Officers of the Fund and a statement
of their present positions and principal occupations during
the past five years can be found in the Statement of Addi-
tional Information.
Vanguard employs a supporting staff of management and admin-
istrative personnel needed to provide the requisite services
to the funds and also furnishes the funds with necessary of-
fice space, furnishings and equipment. Each fund pays its
share of Vanguard's total expenses, which are allocated among
the funds under methods approved by the Board of Trustees
(Directors) of each fund. In addition, each fund bears its
own direct expenses, such as legal, auditing and custodian
fees.
Vanguard also provides distribution and marketing services to
the Vanguard funds. However, each fund bears its share of the
Group's distribution costs.
The Funds are available on a no-load basis (i.e., there are
no sales commissions or 12b-1 fees).
--------------------------------------------------------------------------------
17
<PAGE>
INVESTMENT The two Portfolios of the Fund receive all investment advi-
ADVISER sory services on an at-cost basis from Vanguard's Fixed In-
come Group. The Group also provides investment advisory serv-
VANGUARD MANAGES ices to more than 40 other Vanguard money market and bond
THE FUND'S portfolios, both taxable and tax-exempt. Total assets under
INVESTMENTS management by Vanguard's Fixed Income Group were $55 billion
as of December 31, 1994. The Fixed Income Group is supervised
by the Officers of the Fund. Ian A. MacKinnon, Senior Vice
President of Vanguard, has been in charge of the Group since
its inception in 1981.
. David Hamlin, Assistant Vice President of Vanguard, serves
as portfolio manager of the Ohio Insured Long-Term Portfo-
lio. Mr. Hamlin has managed the Portfolio since its incep-
tion in 1988. Previously he managed tax-exempt money market
funds for a major investment company.
The Fixed Income Group manages the investment and reinvest-
ment of the assets of the Fund's Portfolios and continuously
reviews, supervises and administers each Portfolio's invest-
ment program, subject to the maturity and quality standards
specified in this Prospectus and supplemental guidelines ap-
proved by the Fund's Board of Trustees. The Fixed Income
Group's selection of investments for the Portfolios is based
on: (a) continuing credit analysis of those instruments held
in the Portfolios and those being considered for inclusion
therein; (b) possible disparities in yield relationships be-
tween different fixed-income securities and money market in-
struments; and (c) actual or anticipated movements in the
general level of interest rates.
Vanguard's Fixed Income Group places all orders for purchases
and sales of portfolio securities. Purchases of portfolio se-
curities are made either directly from the issuer or from mu-
nicipal securities dealers. The Fixed Income Group may sell
portfolio securities prior to their maturity if circumstances
and considerations warrant and if it believes such disposi-
tions advisable. The Fund's policy of investing in short-term
instruments in the Ohio Money Market Portfolio will likely
result in significant portfolio turnover. The Fixed Income
Group seeks to obtain the best available net price and most
favorable execution for all portfolio transactions.
--------------------------------------------------------------------------------
DIVIDENDS, Dividends consisting of virtually all of the ordinary income
CAPITAL GAINS of each Portfolio are declared daily and are payable to
AND TAXES shareholders of record at the close of the previous business
day. Such dividends are paid on the first business day of
THE FUND PAYS each month. Net capital gains distributions, if any, will be
MONTH-END made annually.
DIVIDENDS
Dividends and capital gains distributions may be automati-
cally reinvested or received in cash. See "Choosing a Distri-
bution Option" for a description of these distributions meth-
ods.
In addition, in order to satisfy certain distribution re-
quirements of the Tax Reform Act of 1986, each Portfolio may
declare special year-end dividend and capital gains distribu-
tions during December. Such distributions, if received by
shareholders by January 31, are deemed to have been paid by
the Portfolio and received by shareholders by December 31 of
the prior year.
18
<PAGE>
DIVIDENDS WILL Each Portfolio of the Fund intends to continue to qualify for
BE EXEMPT FROM taxation as a "regulated investment company" under the Inter-
FEDERAL AND OHIO nal Revenue Code so that each Portfolio will not be subject
INCOME TAXES to federal income tax to the extent that its income is dis-
tributed to shareholders. In addition, each Portfolio intends
to invest a sufficient portion of its assets in municipal
bonds and notes so that it will qualify to pay "exempt-inter-
est dividends" to shareholders. Such exempt-interest divi-
dends are excluded from a shareholder's gross income for fed-
eral tax purposes. The Revenue Reconciliation Act enacted
during 1993 provides that market discount on tax-exempt bonds
purchased after April 30, 1993 must be taxed as ordinary in-
come. Accordingly, to the extent that the Fund purchases such
discounted securities, taxable income may result. Further-
more, each Portfolio expects to invest at least 80% of its
net assets in Ohio municipal securities. As a result, each
Portfolio will be eligible to pay dividends to Ohio residents
that will be exempt from Ohio personal income taxes, Ohio
school district income taxes, or the net income base of the
Ohio corporation franchise tax to the extent that (i) those
dividends are derived from interest on Ohio municipal securi-
ties (other than obligations issued by certain United States
territories), and, (ii) at all times at least 50% of the
value of the total assets of the Portfolio consists of Ohio
municipal securities (other than obligations issued by cer-
tain United States territories), or similar obligations of
other states or their subdivisions.
Under certain circumstances, a Portfolio may invest in secu-
rities other than Ohio municipal securities. In such cases, a
portion of the Portfolio's income may be subject to Ohio in-
come taxes, federal income taxes, or both.
Net long-term capital gains realized by a Portfolio from the
sale of securities will be distributed as taxable capital
gains distributions. Any short-term capital gains or any tax-
able interest income will be distributed as a taxable ordi-
nary dividend distribution. In general, such taxable income
distributions from a Portfolio are expected to be negligible
in comparison with tax-exempt dividends.
At present, neither Portfolio invests in AMT bonds. However,
were a Portfolio to invest in such bonds, a portion of the
Portfolio's dividends, while exempt from regular federal in-
come tax, would be a tax preference item for purposes of the
alternative minimum tax.
A CAPITAL GAIN A sale of shares in the Insured Long-Term Portfolio is a tax-
OR LOSS MAY BE able event and may result in a capital gain or loss. A capi-
REALIZED UPON tal gain or loss may be realized from an ordinary redemption
EXCHANGE OR of shares, a checkwriting redemption, or an exchange of
REDEMPTION shares between two mutual funds (or two portfolios of a mu-
tual fund). In addition, if you held shares in the Insured
Long-Term Portfolio for six months or less, any capital loss
realized upon redemption is disallowed to the extent of the
tax-exempt dividend income you received.
Capital gains distributions from a Portfolio and any capital
gains or losses realized from the sale or exchange of shares
may also be subject to state and local taxes.
19
<PAGE>
The Fund is required to withhold 31% of any taxable divi-
dends, capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer identi-
fication regulations. You may avoid this withholding require-
ment by indicating your proper Social Security or Employer
Identification Number on your Account Registration Form and
by certifying that you are not subject to backup withholding.
Up to 85% of an individual's Social Security benefits may be
subject to federal income tax. Along with other factors, to-
tal tax-exempt income, including any tax-exempt dividend in-
come from Portfolios of the Fund, is used to calculate the
taxable portion of Social Security benefits.
The Fund is organized as a Pennsylvania business trust and,
in the opinion of counsel, is not liable for any income or
franchise tax in the Commonwealth of Pennsylvania. The Fund
will be subject to Pennsylvania county personal property tax
in the county which is the site of its principal office.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an in-
vestment in the Fund.
--------------------------------------------------------------------------------
THE SHARE PRICE The share price or "net asset value" per share of each Port-
OF EACH folio is computed daily by dividing the total value of the
PORTFOLIO investments and other assets of each Portfolio, less any lia-
bilities, by the Portfolio's total outstanding shares.
OHIO MONEY MARKET PORTFOLIO. For the purpose of calculating
the Ohio Money Market Portfolio's net asset value per share,
securities are valued by the "amortized cost" method of valu-
ation, which does not take into account unrealized gains or
losses. This involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctu-
ating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may re-
sult in periods during which value, as determined by amor-
tized cost, is higher or lower than the price the Portfolio
would receive if it sold the instrument.
The use of amortized cost and the maintenance of the Ohio
Money Market Portfolio's per share net asset value at $1.00
is based on its election to operate under the provisions of
Rule 2a-7 under the Investment Company Act of 1940. As a con-
dition of operating under that rule, the Ohio Money Market
Portfolio must maintain a dollar-weighted average portfolio
maturity of 90 days or less, purchase only instruments having
remaining maturities of 13 months or less, and invest only in
securities that are determined by the Trustees to present
minimal credit risks and that are of high quality as deter-
mined by any major rating service, or in the case of any in-
strument not so rated, considered by the Trustees to be of
comparable quality.
The Trustees have established procedures designed to stabi-
lize the net asset value per share as computed for the pur-
poses of sales and redemptions at $1.00.
20
<PAGE>
These procedures include periodic review, as the Trustees
deem appropriate and at such intervals as are reasonable in
light of current market conditions, of the relationship be-
tween the amortized cost value per share and a net asset
value per share based upon available indications of market
value. In such a review, investments for which market quota-
tions are readily available are valued at the most recent bid
price or quoted yield equivalent for such securities or for
securities of comparable maturity, quality and type as ob-
tained from one or more of the major market makers for the
securities to be valued. Other investments and assets are
valued at fair value, as determined in good faith by the
Trustees.
In the event of a deviation of over 1/2 of 1% between a Port-
folio's net asset value based upon available market quota-
tions or market equivalents and $1.00 per share based on am-
ortized cost, the Trustees will promptly consider what ac-
tion, if any, should be taken. The Trustees will also take
such action as they deem appropriate to eliminate or to re-
duce, to the extent reasonably practicable, any material di-
lution or other unfair results to investors or existing
shareholders which might arise from differences between the
two. Such action may include redeeming shares in kind, sell-
ing instruments prior to maturity to realize capital gains or
losses or to shorten average maturity, withholding dividends,
paying distributions from capital or capital gains, or util-
izing a net asset value per share based upon available market
quotations.
OHIO INSURED LONG-TERM PORTFOLIO. The net asset value per
share of the Ohio Insured Long-Term Portfolio is determined
at the close of regular trading on the Exchange, each day the
Exchange is open for business. When approved by the Board of
Trustees, bonds and other fixed-income securities may be val-
ued on the basis of prices provided by a pricing service when
such prices are believed to reflect the fair market value of
such securities. (The prices provided by pricing services are
generally determined without regard to bid or last sale pric-
es. Because of the large number of outstanding municipal
bonds, the majority of issues do not trade each day; there-
fore, last sale prices are not normally available. In valuing
such securities, the pricing services generally take into ac-
count institutional size trading in similar groups of securi-
ties and any developments related to specific securities.)
The methods used by the pricing service and the valuations so
established are reviewed by the Officers of the Fund under
the general supervision of the Trustees. There are a number
of pricing services available and the Trustees, on the basis
of ongoing evaluation of these services, may use other pric-
ing services or discontinue the use of any pricing service.
Securities not priced in this manner are priced at the most
recent quoted bid price provided by investment dealers.
Short-term instruments maturing within 60 days of the valua-
tion date may be valued at cost, plus or minus any amortized
discount or premium. Other assets and securities for which no
quotations are readily available will be valued in good faith
at their fair value using methods determined by the Trustees.
21
<PAGE>
The price per share of the Insured Long-Term Portfolio can be
found daily in the mutual fund section of most major newspa-
pers under the heading of The Vanguard Group.
--------------------------------------------------------------------------------
GENERAL Vanguard Ohio Tax-Free Fund is a Pennsylvania business trust.
INFORMATION The Declaration of Trust permits the Trustees to issue an un-
limited number of shares of beneficial interest, without par
value, from an unlimited number of classes of shares. Cur-
rently the Fund is offering two classes of shares (known as
"Portfolios").
Shares of each Portfolio when issued are fully paid and non-
assessable; participate equally in dividends, distributions
and net assets; are entitled to one vote per share; have pro
rata liquidation rights; and do not have pre-emptive rights.
Also, shares of the Fund have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares vot-
ing for the election of the Trustees can elect all of the
Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other ap-
plicable law. An annual meeting will be held to vote on the
removal of a Trustee or Trustees of the Fund if requested in
writing by the holders of not less than 10% of the outstand-
ing shares of the Fund.
All securities and cash are held by CoreStates Bank, N.A.,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing Agent.
Price Waterhouse LLP, serves as independent accountants for
the Fund and audits its financial statements annually. The
Fund is not involved in any litigation.
--------------------------------------------------------------------------------
22
<PAGE>
SHAREHOLDER GUIDE
OPENING AN To open a new account, either by mail or by wire, simply com-
ACCOUNT AND plete and return an Account Registration Form and any re-
PURCHASING quired legal documentation. Please indicate the Portfolio(s)
SHARES you have chosen and the amount you wish to invest. Your pur-
chase must be equal to or greater than the $3,000 minimum
initial investment requirement in any Portfolio ($500 for
Uniform Gifts/Transfers to Minors Act accounts). In addition,
you must be an Ohio resident to invest in the Fund. If you
need assistance with the Account Registration Form or have
any questions, please call our Investor Information Depart-
ment at 1-800-662-7447. NOTE: For other types of account reg-
istrations (e.g. corporations, associations, other organiza-
tions, trusts or powers of attorney), please call our In-
vestor Information Department to determine which additional
forms you may need.
Because of the risks associated with bond investments, the
Fund is intended to be a long-term investment vehicle and is
not designed to provide investors with a means of speculating
on short-term market movements. Consequently, the Fund re-
serves the right to reject any specific purchase (and ex-
change purchase) request. The Fund also reserves the right to
suspend the offering of shares for a period of time.
Each Portfolio's shares are purchased at the next-determined
net asset value after your investment has been received in
the form of Federal Funds. The Fund is offered on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees).
ADDITIONAL Subsequent investments may be made by mail ($100 minimum per
INVESTMENTS Portfolio), wire ($1,000 minimum per Portfolio), exchange
from another Vanguard Fund account ($100 minimum per Portfo-
lio), or Vanguard Fund Express.
--------------------------------------------------------------
ADDITIONAL INVESTMENTS TO
NEW ACCOUNT EXISTING ACCOUNTS
PURCHASING BY Please include the Additional investments should
MAIL amount of your initial include the Invest-by-Mail re-
Complete and investment and the mittance form attached to your
sign the name of the Portfolios Fund confirmation statements.
enclosed you have selected on Please make your check payable
Account the registration form, to The Vanguard Group--(Portfo-
Registration make your check pay- lio Number). See page 24 for
Form able to The Vanguard the appropriate Portfolio num-
Group--(Portfolio Num- ber, write your account number
ber). See page 24 for on your check and, using the
the appropriate Port- return envelope provided, mail
folio number, and mail to the address indicated on the
to: Invest-by-Mail Form.
VANGUARD FINANCIAL CENTER
P.O. BOX 2600
VALLEY FORGE, PA 19482
23
<PAGE>
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box ad-
dress.
VANGUARD OHIO TAX-FREE PORTFOLIOS:
Ohio Money Market Portfolio--96
Ohio Insured Long-Term Portfolio--97
--------------------------------------------------------------
PURCHASING BY CORESTATES BANK, N.A.
WIRE ABA 031000011
Monies should
be wired to: CORESTATES NO 0141 1274
ATTN VANGUARD
BEFORE WIRING VANGUARD OHIO TAX-FREE FUND
Please contact NAME OF PORTFOLIO
Client Services ACCOUNT NUMBER
(1-800-662-2739) ACCOUNT REGISTRATION
To assure proper receipt, please be sure your bank includes
the Portfolio name, the account number Vanguard has assigned
to you and the eight digit CoreStates number. If you are
opening a new account, please complete the Account Registra-
tion Form and mail it to the "New Account" address after com-
pleting your wire arrangement. NOTE: Federal Funds wire pur-
chase orders will be accepted only when the Fund and Custo-
dian Bank are open for business.
--------------------------------------------------------------
PURCHASING BY You may open an account or purchase additional shares of the
EXCHANGE (from Fund by making an exchange from an existing Vanguard Fund ac-
a Vanguard count. Accounts opened by exchange will have the same regis-
account) tration as the existing account. Please note: the Fund re-
serves the right to reject any exchange purchase request. For
more information, please call our Client Services Department
at 1-800-662-2739.
--------------------------------------------------------------
PURCHASING BY The Fund Express Special Purchase option lets you move money
FUND EXPRESS from your bank account to your Vanguard account on an "as
needed" basis. If you choose the Automatic Investment option,
Special money will be moved automatically from your bank account to
Purchase your Vanguard account on the schedule (monthly, bimonthly
and Automatic [every other month], quarterly or yearly) you select. To es-
Investment tablish these Fund Express options, please provide the appro-
priate information on the Account Registration Form. We will
send you a confirmation of your Fund Express service; please
wait three weeks before using the service.
--------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital
gains distributions will be reinvested in additional
shares. This option will be selected for you automatically
unless you specify one of the other options.
24
<PAGE>
2. CASH DIVIDEND OPTION--Your dividends will be paid in cash
and your capital gains will be reinvested in additional
shares.
3. ALL CASH OPTION--Both dividend and capital gains distribu-
tions will be paid in cash.
You may change your option by calling our Client Services De-
partment (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department (1-
800-662-2739) for information. You may also elect Vanguard
Dividend Express which allows you to transfer your cash divi-
dends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
--------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Fund is required to distribute
net capital gains and investment income to Fund shareholders.
INVESTORS These distributions are made to all shareholders who own Fund
SHOULD ASK shares as of the distribution's record date, regardless of
ABOUT THE TIM- how long the shares have been owned. Purchasing shares just
ING OF CAPITAL prior to the record date could have a significant impact on
GAINS AND DIV- your tax liability for the year. For example, if you purchase
IDEND DISTRI- shares immediately prior to the record date of a sizable cap-
BUTIONS BEFORE ital gain distribution, you will be assessed taxes on the
INVESTING amount of the capital gain distribution later paid even
though you owned the Fund shares for just a short period of
time. (Taxes are due on the distributions even if the capital
gain is reinvested in additional Fund shares.) While the to-
tal value of your investment will be the same after the capi-
tal gain distribution--the amount of the capital gain distri-
bution will offset the drop in the net asset value of the
shares--you should be aware of the tax implications the tim-
ing of your purchase may have.
Prospective investors should, therefore, inquire about poten-
tial distributions before investing. The Fund's annual capi-
tal gains distribution normally occurs in December, while in-
come dividends are generally paid on the first business day
of each month. For additional information on distributions
and taxes, see the section titled "Dividends, Capital Gains,
and Taxes."
--------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
ACCOUNT your account is to select the options you desire when you
INFORMATION complete your Account Registration Form. IF YOU WISH TO ADD
SHAREHOLDER OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
ESTABLISHING WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
OPTIONAL CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FUR-
SERVICES THER ASSISTANCE.
SIGNATURE For our mutual protection, we may require a signature guaran-
GUARANTEES tee on certain written transaction requests. A signature
guarantee verifies the authenticity of your signature and may
be obtained from banks, brokers and any other guarantor that
Vanguard deems acceptable. A SIGNATURE GUARANTEE CANNOT BE
PROVIDED BY A NOTARY PUBLIC.
25
<PAGE>
CERTIFICATES With the exception of the Money Market Portfolio, share cer-
tificates will be issued upon request. If a certificate is
lost, you may incur an expense to replace it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a registered
PURCHASES broker-dealer or investment adviser, the broker-dealer or ad-
viser may charge a service fee.
CANCELLING The Fund will not cancel any trade (e.g., a purchase, ex-
TRADES change or redemption) believed to be authentic, received in
writing or by telephone, once the trade request has been re-
ceived.
ELECTRONIC If you would prefer to receive a prospectus for the Fund or
PROSPECTUS any of the Vanguard Funds in an electronic format, please
DELIVERY call 1-800-231-7870 for additional information. If you elect
to do so, you may also receive a paper copy of the prospec-
tus, by calling 1-800-662-7447.
--------------------------------------------------------------------------------
WHEN YOUR The trade date is the date on which your account is credited.
ACCOUNT WILL It is generally the day on which the Fund receives your in-
BE CREDITED vestment in the form of Federal Funds (monies credited to the
Fund's Custodian Bank by a Federal Reserve Bank). Your trade
date varies according to your method of payment for your
shares.
Purchases of Fund shares by check (except the Money Market
Portfolio) will receive a trade date the day the funds are
received in good order by Vanguard. Thus, if your purchase by
check is received by the close of regular trading on the New
York Stock Exchange (generally 4:00 p.m. Eastern time), your
trade date is the business day your check is received in good
order. If your purchase is received after the close of the
Exchange, your trade date is the business day following re-
ceipt of your check. Vanguard will not accept third-party
checks to open an account. Please be sure your purchase check
is made payable to the Vanguard Group.
For purchases by check for the Money Market Portfolio, the
Fund is ordinarily credited with Federal Funds within one
business day. Thus, if your purchase by check is received by
the close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time), your trade date is the business day following
receipt of your check. If your purchase is received after the
close of the Exchange, your trade date is the second business
day following receipt of your check.
For purchases by Federal Funds wire or exchange, the Fund is
credited immediately with Federal Funds. Thus, if your pur-
chase by Federal Funds wire or exchange is received by the
close of the Exchange your trade date is the day of receipt.
If your purchase is received after the close of the Exchange,
your trade date is the business day following receipt of your
wire or exchange.
Your shares are purchased at the net asset value determined
on your trade date. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.) For a
purchase of the Money Market Portfolio by Federal Funds wire,
you may qualify for a dividend on the date of purchase if you
have notified the Fund of your intention to make the purchase
by 10:45 a.m. (Eastern time) on the business day of the wire.
26
<PAGE>
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a for-
eign check which has been drawn in U.S. dollars AND has been
issued by a foreign bank with a U.S. correspondent bank. The
name of the U.S. correspondent bank must be printed on the
face of the foreign check.
--------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are nor-
mally mailed, credited or wired--depending upon the method of
withdrawal you have PREVIOUSLY chosen--within two business
days after the receipt of the request in Good Order.
SELLING BY You may withdraw funds from your account by writing a check
WRITING A CHECK payable in the amount of $250 or more. When a check is pre-
sented for payment to the Fund's agent, CoreStates Bank, the
Fund will redeem sufficient shares in your account at the
next determined net asset value to cover the amount of the
check.
In order to establish the checkwriting option on your ac-
count, all registered shareholders must sign a signature
card. After your completed signature card is received by the
Fund, an initial supply of checks will be mailed within 10
business days. There is no charge for checks or for their
clearance. CORPORATIONS, TRUSTS AND OTHER ORGANIZATIONS
SHOULD CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739)
BEFORE SUBMITTING SIGNATURE CARDS, AS ADDITIONAL DOCUMENTS
MAY BE REQUIRED TO ESTABLISH THE CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should be
aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed through
the checkwriting option.
3. Vanguard cannot guarantee a stop payment on any check. If
you wish to reverse a stop payment order, you must do so in
writing.
4. Shares held in certificate form cannot be redeemed using
the checkwriting option.
5. The Fund reserves the right to terminate or alter this
service at any time.
--------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER, VAN-
GUARD OHIO TAX-FREE FUND, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request to
Vanguard Financial Center, Vanguard Ohio Tax-Free Fund, 455
Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
--------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
27
<PAGE>
3. Signatures of all owners EXACTLY as they are registered on
the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be re-
quired in the case of estates, corporations, trusts, and
certain other accounts.
6. Any certificates that you hold for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO
YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT AT
1-800-662-2739.
--------------------------------------------------------------
SELLING BY To sell shares by telephone you or your pre-authorized repre-
TELEPHONE sentative may call our Client Services Department at 1-800-
662-2739. For telephone redemptions, you may have the pro-
ceeds sent to you either by mail or by wire. In addition to
the details below, please see "Important Information About
Telephone Transactions."
BY MAIL: Telephone mail redemption is automatically estab-
lished on your account unless you indicate otherwise on your
Account Registration Form. You may redeem any amount by call-
ing Vanguard. The proceeds will be paid to the registered
shareholders and mailed to the address of record.
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account Reg-
istration Form. If you do not presently have telephone wire
redemption and wish to establish it, please contact our Cli-
ent Services Department.
With the wire redemption option, you may withdraw a minimum
of $1,000 and have the amount wired directly to your bank ac-
count. Wire redemptions less than $5,000 are subject to a $5
charge deducted by Vanguard. There is no Vanguard charge for
wire redemptions of $5,000 or more. However, your bank may
assess a separate fee to accept incoming wires.
A request to change the bank associated with your wire re-
demption option must be received in writing, signed by each
registered shareholder, and accompanied by a voided check or
preprinted deposit slip. A signature guarantee is required if
your bank registration is not identical to your Vanguard Fund
account registration.
--------------------------------------------------------------
SELLING BY FUND If you select the Fund Express Automatic Withdrawal option,
EXPRESS money will be automatically moved from your Vanguard Fund ac-
count to your bank account according to the schedule you have
Automatic selected. The Special Redemption option lets you move money
Withdrawal & from your Vanguard account to your bank account on an "as
Special needed" basis. To establish these Fund Express options,
Redemption please provide the appropriate information on the Account
Registration Form. We will send you a confirmation of your
Fund Express service; please wait three weeks before using
the service.
--------------------------------------------------------------
SELLING BY You may sell shares of a Portfolio by making an exchange into
EXCHANGE another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
--------------------------------------------------------------
28
<PAGE>
IMPORTANT Shares purchased by check or Fund Express may be redeemed at
REDEMPTION any time. However, your redemption proceeds will not be paid
INFORMATION until payment for the purchase is collected, which may take
up to ten calendar days.
--------------------------------------------------------------
DELIVERY OF Redemption requests received by telephone after the close of
REDEMPTION the New York Stock Exchange (generally 4:00 p.m. Eastern
PROCEEDS time) are processed on the business day following receipt,
and the proceeds are normally sent on the second business day
following receipt. Redemption proceeds must be sent to you
within seven days of receipt of your request in Good Order.
The Fund reserves the right to revise or terminate the tele-
phone redemption privilege at any time.
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined
after your request has been received by Vanguard in Good Or-
der.
The Fund may suspend the redemption right or postpone payment
at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the United
States Securities and Exchange Commission.
--------------------------------------------------------------
VANGUARD'S If you make a redemption from a qualifying account, Vanguard
AVERAGE COST will send you an Average Cost Statement which provides you
STATEMENT with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
--------------------------------------------------------------
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller ac-
BALANCE counts, the Fund reserves the right to redeem shares in any
REQUIREMENT account that is below the minimum initial investment amount
of $3,000. If at any time your total investment does not have
a value of at least $3,000, you may be notified that your ac-
count is below the Fund's minimum account balance require-
ment. You would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds would
be promptly paid to the registered shareholder.
The Fund's minimum account balance requirement will not apply
if your account falls below $3,000 solely as a result of de-
clining markets (i.e. a decline in a Fund's net asset value).
--------------------------------------------------------------------------------
EXCHANGING YOUR Should your investment goals change, you may exchange your
SHARES shares of Vanguard Ohio Tax-Free Fund for those of other
available Vanguard Funds.
EXCHANGING BY When exchanging shares by telephone, please have ready the
TELEPHONE Portfolio name, account number, Social Security Number or Em-
ployer Identification Number listed on the account and the
Call Client exact name and address in which the account is registered.
Services Only the registered shareholder may complete such an ex-
(1-800-662-2739) change. Requests for telephone exchanges received prior to
the close of trading on the New York Stock Exchange (gener-
ally to 4:00 p.m. Eastern time) are processed at the close of
business that same day. Requests received after the close of
the Exchange are processed the next business day. TELEPHONE
EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD BALANCED IN-
DEX, VANGUARD INDEX TRUST,
29
<PAGE>
VANGUARD INTERNATIONAL EQUITY INDEX FUND, AND VANGUARD QUAN-
TITATIVE PORTFOLIOS. If you experience difficulty in making a
telephone exchange, your exchange request may be made by reg-
ular or express mail, and it will be implemented at the clos-
ing net asset value on the date received by Vanguard provided
the request is received in Good Order.
--------------------------------------------------------------
EXCHANGING BY Please be sure to include the name and account number of your
MAIL current Fund, and the name of the Fund you wish to exchange
into, the amount you wish to exchange, and the signatures of
all registered account holders. Send your request to VANGUARD
FINANCIAL CENTER, VANGUARD OHIO TAX-FREE FUND, P.O. BOX 1120,
VALLEY FORGE, PA 19482. (For express or registered mail, send
your request to Vanguard Financial Center, Vanguard Ohio Tax-
Free Fund, 455 Devon Park Drive, Wayne, PA 19087.)
--------------------------------------------------------------
IMPORTANT Before you make an exchange, you should consider the follow-
EXCHANGE ing:
INFORMATION
. Please read the Fund's prospectus before making an ex-
change. For a copy and for answers to any questions you may
have, call our Investor Information Department (1-800-662-
7447).
. An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
. Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
. The shares to be exchanged must be on deposit and not held
in certificate form.
. New accounts are not currently accepted in Vanguard/Windsor
Fund or Vanguard/PRIMECAP Fund.
. The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
all required documentation in Good Order.
. When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate
its provisions, limit the amount of or reject any exchange,
as deemed necessary, at any time.
The exchange privilege is only available in Ohio, the only
state in which the Fund's shares are registered for sale.
--------------------------------------------------------------------------------
EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the man-
agement of the Fund and increase transaction costs, the Fund
has established a policy of limiting excessive exchange ac-
tivity.
30
<PAGE>
Exchange activity generally will not be deemed excessive if
limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30
DAYS APART) from a Portfolio during any twelve month period.
These limitations do not apply to exchanges from Vanguard's
money market portfolios. Notwithstanding these limitations,
the Fund reserves the right to reject any purchase request
(including exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient port-
folio management.
--------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire redemptions)
INFORMATION and exchanges by telephone is automatically established on
ABOUT TELEPHONE your account unless you request in writing that telephone
TRANSACTIONS transactions on your account not be permitted. The ability to
initiate wire redemptions by telephone will be established on
your account only if you specifically elect this option in
writing.
To protect your account from losses resulting from unautho-
rized or fraudulent telephone instructions, Vanguard adheres
to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone, the
caller must know (i) the name of the Portfolio; (ii) the 10-
digit account number; (iii) the exact name and address used
in the registration; and (iv) the Social Security or Employer
Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner and
mailed to the address of record, only. In the case of a tele-
phone redemption by wire, the wire transfer will be made only
in accordance with the shareowner's prior written instruc-
tions.
Neither the Fund nor Vanguard will be responsible for the au-
thenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been fol-
lowed. Vanguard believes that the security procedures de-
scribed above are reasonable, and that if such procedures are
followed, you will bear the risk of any losses resulting from
unauthorized or fraudulent telephone transactions on your ac-
count.
--------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY
FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT. The request
must be in Good Order. BEFORE MAILING YOUR REQUEST, PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FULL
INSTRUCTIONS.
--------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time you
REPORTS initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market accounts.
You will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter state-
ment will be a year-end statement, listing all transaction
activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the aver-
age cost of shares redeemed from your account, using the av-
erage cost single category
31
<PAGE>
method. This service is available for most taxable accounts
opened since January 1, 1986. In general, investors who re-
deemed shares from a qualifying Vanguard account may expect
to receive their Average Cost Statement in February of the
following year. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you semi-an-
nually, according to the Fund's fiscal year-end.
--------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please call
SERVICES our Investor Information Department at 1-800-662-7447.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Government
DEPOSIT SERVICE checks (including Social Security and military pension
checks) and private payroll checks may be automatically de-
posited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
VANGUARD Vanguard's Automatic Exchange Service allows you to move
AUTOMATIC money automatically among your Vanguard Fund accounts. For
EXCHANGE instance, the service can be used to "dollar cost average"
SERVICE from a money market portfolio into a stock or bond fund or to
contribute to an IRA or other retirement plan. Please contact
our Client Services Department at 1-800-662-2739 for addi-
tional information.
VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or re-
demptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific Van-
guard Funds. For more information, please refer to the Van-
guard Fund Express brochure.
VANGUARD Vanguard's Dividend Express allows you to transfer your divi-
DIVIDEND dends and/or capital gains distributions automatically from
EXPRESS your Fund account, one business day after the Fund's payable
date, to your account at a bank, savings and loan associa-
tion, or a credit union that is a member of the Automated
Clearing House (ACH) system. You may elect this service on
the Account Registration Form or call our Investor Informa-
tion Department (1-800-662-7447) for a Vanguard Dividend Ex-
press application.
32
<PAGE>
VANGUARD Vanguard's Tele-Account is a convenient, automated service
TELE-ACCOUNT that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone(TM) telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent dividend
or capital gains payment. To contact Vanguard's Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure of-
fering detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
--------------------------------------------------------------------------------
33
<PAGE>
Vanguard
OHIO
TAX-FREE FUND
--------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION
SERVICE FOR THE
HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
Vanguard
OHIO
TAX-FREE FUND
P R O S P E C T U S
MARCH 28, 1995
A member of
THE Vanguard GROUP
OF INVESTMENT COMPANIES(R)
P096
<PAGE>
PART B
VANGUARD OHIO TAX-FREE FUND
STATEMENT OF ADDITIONAL INFORMATION
MARCH 28, 1995
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus dated March 28, 1995. To obtain this Prospectus,
please call:
VANGUARD'S INVESTOR INFORMATION DEPARTMENT1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Limitations..................................................... B-1
Risk Factors............................................................... B-6
Yield and Total Return..................................................... B-8
Calculation of Yield....................................................... B-9
Performance Measures....................................................... B-9
Investment Management...................................................... B-11
Purchase of Shares......................................................... B-12
Redemption of Shares....................................................... B-12
Valuation of Shares........................................................ B-13
Management of the Fund..................................................... B-14
Description of Shares and Voting Rights.................................... B-17
Financial Statements....................................................... B-18
Appendix A--Description of Municipal Bonds and their Ratings............... B-19
Appendix B--Municipal Lease Obligations.................................... B-22
</TABLE>
INVESTMENT LIMITATIONS
The following limitations cannot be changed without the consent of the hold-
ers of a majority of the Fund's outstanding shares (as defined in the Invest-
ment Company Act of 1940 (the "1940 Act")), including a majority of the shares
of each Portfolio.
1. Each Portfolio will limit the aggregate value of all holdings (except
U.S. Government and cash items, as defined under Subchapter M of the In-
ternal Revenue Code (the "1940 Act")), each of which exceeds 5% of the
Portfolio's total assets, to an aggregate amount of 50% of such assets;
2. Each Portfolio will limit the aggregate value of holdings of a single is-
suer (except U.S. Government and cash items, as defined in the Code) to a
maximum of 25% of the Portfolio's total assets. For the purposes of this
limitation, identification of the issuer will be based on a determination
of the source of assets and revenues committed to meeting interest and
principal payments of each security;
3. Each Portfolio will not borrow money except for temporary or emergency
purposes and then only in an amount not exceeding 10% of the value of the
total assets of that Portfolio. The Portfolio will repay all borrowings
before making additional investments. Interest paid on such borrowings
will reduce income;
4. Each Portfolio will not pledge, mortgage or hypothecate its assets to any
extent greater than 10% of the value of the total assets of the Portfo-
lio;
5. Each Portfolio will not issue senior securities as defined in the 1940
Act;
B-1
<PAGE>
6. Each Portfolio will not purchase or acquire any if, as a result, more
than 15% (10% with respect to the Money Market Portfolio) of its net as-
sets would be invested in securities that are illiquid (included in this
limitation is the Fund's investment in The Vanguard Group, Inc.);
7. Each Portfolio will not engage in the business of underwriting securities
issued by other persons except to the extent that the Portfolio may tech-
nically be deemed to be an underwriter under the Securities Act of 1933,
as amended, in disposing of investment securities;
8. Each Portfolio will not purchase or sell real estate, but this shall not
prevent investments in municipal bonds secured by real estate or inter-
ests therein;
9. Each Portfolio will not make loans to other persons, except by the pur-
chase of bonds, debentures or similar obligations which are publicly dis-
tributed and as provided under "Lending of Securities";
10. Each Portfolio will not purchase on margin or sell short, except as spec-
ified below in investment limitation No. 12;
11. Each Portfolio will not purchase or retain securities of an issuer if
those Trustees of the Fund, each of whom owns more than 1/2 of 1% of such
securities, together own more than 5% of the securities of such issuer;
12. Each Portfolio will not purchase or sell commodities or commodities con-
tracts, except that the Ohio Insured Long-Term Portfolio may invest in
bond futures contracts, bond options and options on bond futures con-
tracts to the extent that not more than 5% of the Portfolio's assets are
required as deposit on futures contracts and not more than 20% of the
Portfolio's assets are invested in futures contracts and/or options
transactions at any time;
13. Each Portfolio will not invest its assets in securities of other invest-
ment companies except as they may be acquired as part of a merger, con-
solidation, reorganization or acquisition of assets or otherwise, to the
extent permitted by Section 12 the 1940 Act;
14. Each Portfolio will not invest in securities other than municipal bonds
except that each Portfolio may make temporary investments in (a) notes
issued by or on behalf of municipal or corporate issuers, obligations of
the U. S. Government and its agencies, commercial paper, bank certifi-
cates of deposits; (b) investment companies investing in such securities
which have investment objectives consistent with those of the Portfolio
to the extent permitted by the 1940 Act; and (c) any such securities or
municipal bonds subject to repurchase agreements;
15. Each Portfolio will not invest in put, call, straddle or spread options
(except as described above in investment limitation No. 12) or interests
in oil, gas or other mineral exploration or development programs; and
16. Each Portfolio will not purchase an industrial revenue bond if as a re-
sult of such purchase (i) more than 5% of the Portfolio's total assets,
determined at market value at the time of the proposed investment, would
be invested in industrial revenue bonds where the payment of principal
and interest is the responsibility of a company with less than three (3)
years' operating history, or (ii) more than 20% of the Portfolio's total
assets, determined at market value at the time of the proposed invest-
ment, would be invested in industrial development bonds. These restric-
tions do not apply to municipal obligations where the payment of princi-
pal and interest is the responsibility of a government or the political
subdivision of a government.
The above-mentioned investment limitations are considered at the time in-
vestment securities are purchased. Nothwithstanding these limitations, each
Portfolio may own all or any portion of the securities of, or make loans to,
or contribute to the costs or other financial requirements of, any company
which will be (1) wholly owned by the Fund and one or more other investment
companies and (2) primarily engaged in the business of providing, at cost,
management, administrative, distribution and/or related services to the Fund
and such other investment companies. Additionally, the Fund
B-2
<PAGE>
may invest without limit in when-issued such securities. Please see the pro-
spectus for a description of such securities.
LENDING OF SECURITIES. Each Portfolio may lend its investment securities to
qualified institutions who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to
deliver securities or completing arbitrage operations. By lending its
investment securities, the Portfolio attempts to increase its income through
the receipt of interest on the loan. Any gain or loss in the market price of
the securities loaned that might occur during the term of the loan would be
for the account of the Portfolio. The Portfolio may lend its investment
securities to qualified brokers, dealers, banks or other financial
institutions, so long as the terms and the structure of such loans are not
inconsistent with the 1940 Act, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission (the "Commission")
thereunder, which currently require that (a) the borrower pledge and maintain
with the Portfolio collateral having a value at all times not less than 100%
of the value of the securities loaned, (b) the borrower add to such collateral
whenever the price of the securities loaned rises (i.e., the borrower "marks
to the market" on a daily basis), (c) the loan be made subject to termination
by the Portfolio at any time, and (d) the Portfolio receive reasonable
interest on the loan (which may include the Portfolio investing any cash
collateral in interest bearing short-term investments), any distribution on
the loaned securities and any increase in their market value. A Portfolio will
not lend its investment securities if, as a result, the aggregate of such
loans exceeds 10% of the value of its total assets. Loan arrangements made by
the Portfolio will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which rules presently
require the borrower, after notice, to redeliver the securities within the
normal settlement time of five business days. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the
lending of securities, subject to review by the Fund's Board of Trustees.
Income derived from lending of securities is not tax-exempt, and, thus, each
portfolio will limit such activity in accordance with its investment
objective.
FUTURES CONTRACTS AND OPTIONS
The Insured Long-Term Portfolio may enter into futures contracts, options,
and options on futures contracts for several reasons: to maintain cash re-
serves while remaining fully invested, to facilitate trading, to reduce trans-
actions costs, or to seek higher investment returns when a futures contract is
priced more attractively than the underlying municipal security or index.
Futures contracts provide for the future sale by one party and purchase by an-
other party of a specified amount of a specific security at a specified future
time and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the Com-
modity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a
U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or ac-
ceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Clos-
ing out an open futures position is done by taking an opposite position ("buy-
ing" a contract which has previously been "sold," or "selling" a contract pre-
viously purchased) in an identical contract to terminate the position. Broker-
age commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure comple-
tion of the contract (delivery or acceptance of the underlying security) if it
is not terminated prior to the specified delivery date. Minimal initial margin
requirements are established by the futures exchange and may be changed. Bro-
kers may establish deposit
B-3
<PAGE>
requirements which are higher than the exchange minimums. Futures contracts
are customarily purchased and sold at prices which may range upward from less
than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes, to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of ex-
cess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund ex-
pects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset unfavor-
able changes in the value of securities otherwise held for investment purposes
or expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
interest rates of underlying securities. The Fund intends to use futures con-
tracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. The Portfolio
will only sell futures contracts to protect securities it owns against price
declines or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, the
Portfolio expects that approximately 75% of its futures contract purchases
will be "completed," that is, equivalent amounts of related securities will
have been purchased or are being purchased by the Portfolio upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this expo-
sure. While the Portfolio will incur commission expenses in both opening and
closing out futures positions, these costs are lower than transaction costs
incurred in the purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
The Portfolio will not enter into futures contract transactions to the ex-
tent that, immediately thereafter, the sum of its initial margin deposits on
open contracts exceeds 5% of the market value of the Fund's total assets. In
addition, the Portfolio will not enter into futures contracts to the extent
that its outstanding obligations to purchase securities under these contracts
would exceed 20% of the Portfolio's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS
Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no assur-
ance that a liquid secondary market will exist for any particular futures con-
tract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, the Portfolio would con-
tinue to be required to make daily cash payments to maintain its required mar-
gin. In such situations, if the Portfolio has insufficient cash, it may have
to sell portfolio securities to meet daily margin requirements at a time when
it may be disadvantageous to do so. In addition, the Portfolio may be required
to make delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge it.
The Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to
B-4
<PAGE>
be a liquid secondary market. The principal interest rate futures exchanges in
the United States are the Board of Trade of the City of Chicago and the Chi-
cago Mercantile Exchange.
The risk of loss in trading futures contracts in some strategies can be sub-
stantial, due both to the low margin deposits required, and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and sub-
stantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin,
a subsequent 10% decrease in the value of the futures contract would result in
a total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Portfolio are engaged in only for hedging purposes, the Ad-
viser does not believe that the Portfolio is subject to the risks of loss fre-
quently associated with futures transactions. The Portfolio would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures con-
tracts have different maturities or other characteristics than the portfolio
securities being hedged. It is also possible that the Portfolio could both
lose money on futures contracts and also experience a decline in value of its
portfolio securities. There is also the risk of loss by the Portfolio of mar-
gin deposits in the event of bankruptcy of a broker with whom the Portfolio
has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades
may be made on that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and therefore does not
limit potential losses, because the limit may prevent the liquidation of unfa-
vorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses.
The Portfolios are required for federal income tax purposes to recognize as
income for each taxable year their net unrealized gains and losses on certain
futures contracts held as of the end of the year as well as those actually re-
alized during the year. In most cases, any gain or loss recognized with re-
spect to a futures contract is considered to be 60% long-term capital gain or
loss and 40% short-term capital gain or loss, without regard to the holding
period of the contract. Furthermore, sales of futures contracts which are in-
tended to hedge against a change in the value of securities held by the Port-
folio may affect the holding period of such securities and, consequently, the
nature of the gain or loss on such securities upon disposition. A Portfolio
may be required to defer the recognition of losses on futures contracts to the
extent of any unrecognized gains on related positions held by the Portfolio.
In order for the Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income, i.e., dividends,
interest, income derived from loans of securities, gains from the sale of se-
curities or of foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities. In addition, gains realized
on the sale or other disposition of securities held for less than three months
must be limited to less than 30% of the Portfolio's annual gross income. It is
anticipated that any net gain realized from the closing out of futures con-
tracts will be considered
B-5
<PAGE>
gain from the sale of securities and therefore be qualifying income for pur-
poses of the 90% requirement. In order to avoid realizing excessive gains on
securities held less than three months, the Portfolio may be required to defer
the closing out of futures contracts beyond the time when it would otherwise
be advantageous to do so. It is anticipated that unrealized gains on futures
contracts, which have been open for less than three months as of the end of
the Portfolio's fiscal year and which are recognized for tax purposes, will
not be considered gains on sales of securities held less than three months for
the purpose of the 30% test.
The Portfolio will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures trans-
actions. Such distribution will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the transactions.
RISK FACTORS
As described above, the Portfolios will invest most of their respective net
assets in securities issued by or on behalf of (or in certificates of partici-
pation in lease-purchase obligations of) the State of Ohio, political subdivi-
sions of the State, or agencies or instrumentalities of the State or its po-
litical subdivisions (Ohio Obligations). The Portfolios are therefore suscep-
tible to general or particular political, economic or regulatory factors that
may affect issuers of Ohio Obligations. The following information constitutes
only a brief summary of some of the many complex factors that may affect the
Portfolios. The information does not apply to "conduit" obligations on which
the public issuer itself has no financial responsibility. This information is
derived from official statements of certain Ohio issuers published in connec-
tion with their issuance of securities and from other publicly available docu-
ments, and is believed to be accurate. No independent verification has been
made of any of the following information.
The timely payment of principal of and interest on Ohio Obligations has been
guaranteed by bond insurance purchased by the issuers, the Portfolio or other
parties. The timely payment of debt service on Ohio Obligations that are so
insured may not be subject to the factors referred to in this section of the
Prospectus.
Ohio is the seventh most populous state. Its 1990 Census count of 10,847,000
indicates a 0.5% population increase from 1980.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products
and household appliances. As a result, general economic activity, as in many
other industrially-developed states, tends to be more cyclical than in some
other states and in the nation as a whole. Agriculture is an important segment
of the economy, with over half the State's area devoted to farming and approx-
imately 15% of total employment in agribusiness. The state's economy has also
benefitted by improved manufacturing productivity and a strong export position
which helped shield the state's economy from domestic recession in the early
1990's.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average
monthly State rate was 5.7%, compared to the 5.5% national figure. However,
the State's unemployment rate has been consistently below the national average
since 1990 and by mid-1994 the rate stood at 4.8% U.S., 5.9% for the U.S. as a
whole. The unemployment rate and its effects vary among particular geographic
areas of the State.
There can be no assurance that future national, regional or state-wide eco-
nomic difficulties, and the resulting impact on State or local government fi-
nances generally, will not adversely affect the
B-6
<PAGE>
market value of Ohio Obligations held in the Portfolio or the ability of par-
ticular obligors to make timely payments of debt service on (or lease payments
relating to) those Obligations.
Ohio's debt burden is moderate, and the state and most local governments ob-
serve prudent debt management practices. The state government has maintained
positive year-end balances in its general revenue account during the 1980s,
achieved through timely revisions in tax and spending plans. During the eco-
nomic recovery of the mid-1980's, the State accumulated sizable fund balances
in its general revenue fund and maintained a healthy budget stabilization (or
"rainy day") fund. This strong financial position provided the state with far
more flexibility than most states to weather the revenue shortfalls and in-
creased human services expenditures generated by the most recent recession.
The state's finances remain sound and poised to generate enhanced balances as
the national economy recovers from the recession of the early 1990's.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year ("FY") or fiscal biennium in a deficit position. Most State opera-
tions are financed through the General Revenue Fund ("GRF"), for which per-
sonal income and sales-use taxes are the major sources. Growth and depletion
of GRF ending fund balances show a consistent pattern related to national eco-
nomic conditions, with the ending FY balance reduced during less favorable and
increased during more favorable economic periods. The State has well-estab-
lished procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. These
procedures include general and selected reductions in appropriations spending.
In FY 1992, State officials projected and addressed an FY 1992 imbalance in
GRF resources and expenditures. GRF receipts significantly below original
forecasts resulted primarily from lower collections of certain taxes, particu-
larly sales and use taxes and personal income taxes. Higher expenditure levels
resulted from higher spending, particularly in human services (including Med-
icaid). As an initial action, the Governor ordered most State agencies to re-
duce GRF spending in the last six months of FY 1992 by a total of approxi-
mately $184 million. As authorized by the General Assembly the $100.4 million
BSF balance, and additional amounts from certain other funds, were transferred
late in the FY to the GRF, and adjustments in the timing of certain tax pay-
ments made. Other administrative revenue and spending actions resolved the re-
maining GRF imbalance.
A significant GRF shortfall (approximately $520 million) was then projected
for FY 1993. It was addressed by appropriate legislative and administrative
actions. As a first step the Governor ordered, effective July 1, 1992, $300
million in selected GRF spending reductions. Executive and legislative action
in December 1992--a combination of tax revisions and additional appropriations
spending reductions--resulted in a balance of GRF resources and expenditures
in the 1992-93 biennium. The State reported an ending GRF fund balance at June
30, 1993 of approximately $111 million, and, as a first step to BSF replenish-
ment, OBM has deposited $21 million in the BSF.
Economic recovery generated an improvement in financial operations for the
State in FY 1994. The State ended FY 1994 with a general fund balance of $560
million and transferred $260 million of this balance to the Budget Stabiliza-
tion Fund.
By 13 constitutional amendments, the last adopted in 1993, Ohio voters have
authorized the incurrence of State debt to the payment of which taxes or ex-
cises were pledged. As of September 1994, $671 million (excluding certain
highway bonds payable primarily from highway use charges) of this debt was
outstanding or awaiting delivery.
The Constitution also authorizes the issuance of State obligations for cer-
tain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Such state obligations are generally secured
by annual appropriation lease agreements with the state. Those
B-7
<PAGE>
special obligations include obligations issued by the Ohio Public Facilities
Commission and the Ohio Building Authority, $4.42 billion of which were out-
standing or awaiting sale or delivery at September 1, 1994.
In general, payment obligations under lease-purchase agreements of Ohio pub-
lic agencies (in which certificates of participation may be issued) are lim-
ited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period. Addi-
tionally, state and local agencies issue revenue obligations that are payable
from revenues from or relating to certain facilities (but not from taxes). By
judicial interpretation, these obligations are not "debt" within constitu-
tional provisions.
Local school districts in Ohio receive a major portion (on a state-wide ba-
sis, recently approximately 46%) of their operating moneys from State subsi-
dies, but are dependent on local property taxes, and in 98 districts from vot-
er-authorized income taxes, for significant portions of their budgets. Litiga-
tion, similar to that in other states, is pending questioning the constitu-
tionality of Ohio's system of school funding. A small number of the State's
612 local school districts have in any year required special assistance to
avoid year-end deficits. A current program provides for school district cash
need borrowing directly from commercial lenders, with diversion of State sub-
sidy distributions to repayment if needed; in FY 1991 under this program 26
districts borrowed a total of $41.8 million (including over $27 million by one
district), and in FY 1992 borrowings totalled $68.6 million (including $46.6
million for one district). FY 1993 loans totalled $94.5 million for 43 dis-
tricts (including $75 million for one). FY 1994 loan approvals totalled at
January 31, 1994, $9.90 million for 16 districts.
Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations, and, with other local govern-
ments, receive local government support and property tax relief moneys dis-
tributed by the State. For those few municipalities that on occasion have
faced significant financial problems, there are statutory procedures for a
joint State/local commission to monitor the municipality's fiscal affairs and
for development of a financial plan to eliminate deficits and cure any de-
faults. Since inception in 1979, these procedures have been applied to 23 cit-
ies and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated.
At present the State itself does not levy ad valorem taxes on real or tangi-
ble personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited the
amount of the aggregate levy (including a levy for unvoted general obliga-
tions) of property taxes by all overlapping subdivisions, without a vote of
the electors or a municipal charter provision, to 1% of true value in money,
and statutes limit the amount of that aggregate levy to 10 mills per $1 of as-
sessed valuation (commonly referred to as the "ten-mill limitation"). Voted
general obligations of subdivisions are payable from property taxes that are
unlimited as to amount or rate.
YIELD AND TOTAL RETURN
The yield of the Ohio Insured Long-Term Portfolio for the 30-day period
ended November 30, 1994 was 6.31%.
The average annual total return of the Ohio Insured Long-Term Portfolio for
the fiscal year ended November 30, 1994, and since the inception of the Fund
on June 18, 1990 was -6.29% and +6.96%, respectively. The average annual total
return of the Ohio Money Market Portfolio for the fiscal year ended November
30, 1994, and since the inception of the Fund on June 18, 1990 was +2.58% and
+3.42%, respectively.
B-8
<PAGE>
CALCULATION OF YIELD
The current yield of the Ohio Money Market Portfolio is calculated daily on
a base period return of a hypothetical account having a beginning balance of
one share for a particular period of time (generally 7 days). The return is
determined by dividing the net change (exclusive of any capital changes) in
such account by its average net asset value for the period, and then multiply-
ing it by 365/7 to get the annualized current yield. The calculation of net
change reflects the value of additional shares purchased with the dividends by
the Portfolio, including dividends on both the original share and on such ad-
ditional shares. An effective yield, which reflects the effects of compounding
and represents an annualization of the current yield with all dividends rein-
vested, may also be calculated for the Portfolio by adding 1 to the net change
for seven days, raising the sum to the 365/7 power, and subtracting 1 from the
result.
Set forth below is an example, for purposes of illustration only, of the
current and effective yield calculations for the Ohio Money Market Portfolio
for the 7-day base period ended November 30, 1994.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
----------------------
11/30/94
--------
<S> <C>
Value of account at beginning of period ................ $1.00000
Value of same account at end of period* ................ 1.00067
--------
Net Change in account value ............................ $ .00067
Annualized Current Net Yield (Net Change 365/7)/average
net asset value ....................................... 3.47%
Effective Yield [(Net Change) + 1] 365/7 - 1 ........... 3.55%
Average Weighted Maturity of Investments ............... 50 Days
</TABLE>
--------
* Exclusive of any capital changes.
The net asset value of the Ohio Money Market Portfolio is $1.00 and it is
not expected to fluctuate. The Money Market Portfolio seeks to maintain, but
does not guarantee a constant net asset value of $1.00 per share. Although the
Money Market Portfolio invests in high-quality instruments, the shares of the
Portfolio are not insured or guaranteed by the U.S. Government. The yield of
the Portfolio will fluctuate. The annualization of a week's dividend is not a
representation by the Portfolio as to what an investment in the Portfolio will
actually yield in the future. Actual yields will depend on such variables as
investment quality, average maturity, the type of instruments the Portfolio
invests in, changes in interest rates on instruments, changes in the expenses
of the Fund and other factors. Yields are one basis investors may use to ana-
lyze the Portfolios of the Fund and other investment vehicles however, yields
of other investment vehicles may not be comparable because of the factors set
forth in the preceding sentence, differences in the time periods compared, and
differences in the methods used in valuing portfolio instruments, computing
net asset value and calculating yield.
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including Van-
guard Ohio Tax Free Fund, may from time to time, use one or more of the fol-
lowing unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEXES -- consists of more than 6,000 common equity se-
curities, covering all stocks in the U.S. for which daily pricing is avail-
able.
B-9
<PAGE>
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 ex-
cept for the 500 stocks in the Standard and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.
RUSSELL 2000 STOCK INDEX -- a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000; a widely-used benchmark for small capi-
talization common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for convert-
ible issues of 100 million or greater in market capitalization. The index is
priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by pri-
vate lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly is-
sued, non-convertible corporate bonds rated AA or AAA. It is a value-weighted,
total return index, including approximately 800 issues with maturities of 12
years or greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S. Trea-
sury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate, noncon-
vertible domestic corporate bonds rated Baa by Moody's, with a maturity longer
than 1 year and with more than $25 million outstanding. This index includes
over 1,000 issues.
BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current cou-
pon high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high- grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues.
It is a value-weighted index calculated on price change only and does not in-
clude income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High-Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that
contains individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB- or better. The Index has a market
value of over $4 trillion.
B-10
<PAGE>
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX --
is a market weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between
5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper de-
fines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average perfor-
mance and/or the average expense ratio of the small company growth funds.
(This fund category was first established in 1982. For years prior to 1982,
the results of the Lipper Small Company Growth category were estimated using
the returns of the Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives
and policies, as measured by Lipper Analytical Services, Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of aver-
age government money market funds with similar investment objectives and poli-
cies, as measured by Lipper Analytical Services, Inc.
INVESTMENT MANAGEMENT
Each Portfolio of the Fund receives all investment advisory services on an
at-cost basis from the Vanguard Fixed Income Group, an investment management
staff employed directly by The Vanguard Group, Inc. ("Vanguard"), a subsidiary
jointly owned by the Fund and the other Funds in The Vanguard Group of Invest-
ment Companies. The Fixed Income Group is supervised by the senior Officers of
the Fund.
The Fixed Income Group is responsible for: maintaining the specified stan-
dards set forth for each Portfolio; making changes in specific issues in light
of changes in the fundamental basis for purchasing such securities; and ad-
justing each Portfolio to meet cash inflow (or outflow), which reflects net
purchases and exchanges of shares by investors (or net redemptions of shares)
and reinvestment of a Portfolio's income.
A change in securities held by a Portfolio is known as "portfolio turnover"
and may involve the payment by the Portfolio of dealer mark-ups, underwriting
commissions and other transaction costs on the sales of securities as well as
on the reinvestment of the proceeds in other securities. The portfolio turn-
over rate is not a limiting factor when management deems it desirable to sell
or purchase securities. It is impossible to predict whether or not the portfo-
lio turnover rate in future years will vary significantly from the rates in
recent years.
B-11
<PAGE>
PURCHASE OF SHARES
Each Portfolio of the Fund reserves the right in its sole discretion (i) to
suspend the offering of its shares, (ii) to reject purchase orders when in the
judgment of management such rejection is in the best interest of a Portfolio,
and (iii) to reduce or waive the minimum for initial and subsequent invest-
ments under circumstances where certain economies can be achieved in sales of
a Portfolio's shares.
STOCK CERTIFICATES. Your purchase will be made in full and fractional shares
of a Portfolio calculated to three decimal places. Shares are normally held on
deposit for shareholders by the Fund, which will send to shareholders a
statement of shares owned at the time of each transaction. This saves the
shareholders the trouble of safekeeping the certificates and saves the Fund
the cost of issuing certificates. For the Insured Long-Term Portfolio, share
certificates are available at any time upon written request at no additional
cost to shareholders. No certificates will be issued for the Money Market
Portfolio, nor will certificates be issued for fractional shares in the
Insured Long-Term Portfolio.
REDEMPTION OF SHARES
Each Portfolio of the Fund may suspend redemption privileges or postpone the
date of payment (i) during any period that the New York Stock Exchange is
closed, or trading on the Exchange is restricted as determined by the Securi-
ties and Exchange Commission (the "Commission"), (ii) during any period when
an emergency exists as defined by the rules of the Commission as a result of
which it is not reasonably practicable for a Portfolio to dispose of securi-
ties owned by it, or fairly to determine the value of its assets, and (iii)
for such other periods as the Commission may permit.
If the Board of Trustees determines that it would be detrimental to the best
interests of the remaining shareholders of a Portfolio to make payment wholly
or partly in cash, a Portfolio may pay the redemption price in whole or in
part by a distribution in kind of securities held by the Portfolio in lieu of
cash in conformity with applicable rules of the Commission. Investors may in-
cur brokerage charges on the sale of such securities so received in payment of
redemptions.
No charge is made by a Portfolio for redemptions except for wire redemptions
of under $5,000 which may be charged a maximum fee of $5.00. Any redemption
may be more or less than the shareholder's cost depending on the Portfolio's
net asset value.
SIGNATURE GUARANTEES. To protect your account, the Fund and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Fund to verify the authenticity of the person who has
authorized a redemption from your account. Signature guarantees are required
in connection with: (1) redemptions involving more than $25,000 on the date of
receipt by Vanguard of all necessary documents; (2) all redemptions,
regardless of the amount involved, when the proceeds are to be paid to someone
other than the registered owners; and (3) share transfer requests. A signature
guarantee may be obtained from a bank, broker, or any other guarantor that
Vanguard deems to be acceptable. Notaries public are not acceptable
guarantors.
A signature guarantee must appear either: (1) on the written request for re-
demption, (2) on a separate instrument for assignment ("stock power") which
should specify the total number of shares to be redeemed, or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
B-12
<PAGE>
VALUATION OF SHARES
The valuation of shares of the Ohio Insured Long-Term Portfolio is described
in detail in the Prospectus.
OHIO MONEY MARKET PORTFOLIO. The net asset value per share of the Ohio Money
Market Portfolio is determined on each day that the New York Stock Exchange is
open and on any other day on which there is sufficient trading in the
Portfolio's securities to materially affect the Portfolio's net asset value
per share.
It is the policy of the Ohio Money Market Portfolio to attempt to maintain a
net asset value of $1.00 per share for purposes of sales and redemptions. The
Money Market Portfolio seeks to maintain, but does not guarantee, a constant
net asset value of $1.00 per share. Although the Money Market Portfolio in-
vests in high-quality instruments, the shares of the Portfolio are not insured
or guaranteed by the U.S. Government. The instruments held by the Ohio Money
Market Portfolio are valued on the basis of amortized cost which does not take
into account unrealized capital gains or losses. This involves valuing an in-
strument at-cost and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. While this method provides cer-
tainty in valuation, it may result in periods during which value, as deter-
mined 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 in-
vestments utilizing a method of valuation based upon market prices and esti-
mates of market prices for all of 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 solely 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 valuation of the Ohio Money Market Portfolio's instruments based upon
their amortized cost and the commitment to maintain the Portfolio's per share
net asset value of $1.00 is permitted by Rule 2a-7 under the Investment Com-
pany Act of 1940, pursuant to which the Fund must adhere to certain condi-
tions. Accordingly, the Fund has agreed to maintain a dollar-weighted average
portfolio maturity for the Ohio Money Market Portfolio of 90 days or less, to
purchase instruments having remaining maturities of thirteen months or less
only, and to invest only in securities determined by the Board of Trustees to
be of good quality with minimal credit risks.
It is a fundamental objective of management to maintain the Portfolio's
price per share as computed for the purpose of sales and redemptions at $1.00.
The Trustees have established procedures designed to achieve this objective.
Such procedures will include a review of the Portfolio's holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the Portfolio's net asset value calculated by using available market quota-
tions deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Trustees. If such deviation exceeds 1/2 of
1%, the Trustees will promptly consider what action, if any, will be initiat-
ed. In the event the Trustees determine that a deviation exists which may re-
sult 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 selling portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity; withholding dividends; making a special capital distribution; re-
deeming shares in kind; or establishing a net asset value per share by using
available market quotations.
B-13
<PAGE>
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The Fund's Officers, under the supervision of the Board of Trustees, manage
the day-to-day operations of the Fund. The Trustees set broad policies for the
Fund and choose its Officers. A list of the Trustees and Officers of the Fund
and a brief statement of their present positions and principal occupations
during the past five years is set forth below. The mailing address of the
Fund's Trustees and Officers is Post Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman, Chief Exec- JOHN J. SAWHILL, Trustee*
utive Officer and Trustee* President and Chief Exeuctive Offi-
Chairman, Chief Executive Officer, cer, The Nature Conservancy; for-
and Director of The Vanguard Group, merly, Director and Senior Partner,
Inc., and of each of the investment McKinsey & Co.; President, New York
companies in The Vanguard Group; University; Director of Pacific Gas
Director of The Mead Corporation and Electric Company and NACCO In-
and General Accident Insurance. dustries.
JOHN J. BRENNAN, President & Trust- ALFRED M. RANKIN, JR., Trustee
ee* Chairman, President and Chief Exec-
President and Director of The Van- utive Officer of NACCO Industries,
guard Group, Inc. and of each of Inc.; Director of The BFGoodrich
the investment companies in The Company, The Standard Products Co.
Vanguard Group. and The Reliance Electric Company.
ROBERT E. CAWTHORN, Trustee J. LAWRENCE WILSON, Trustee
Chairman of Rhone-Poulenc Rorer, Chairman and Chief Executive Offi-
Inc.; Director of Sun Company, Inc. cer of Rohm & Haas Company; Direc-
tor of Cummins Engine Company;
Trustee of Vanderbilt University
and the Culver Educational Founda-
tion.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and
Pacific Tea Company, ALCO Standard
Corp., Raytheon Company, Knight-
Ridder, Inc., and Massachusetts Mu- RAYMOND J. KLAPINSKY, Secretary*
tual Life Insurance Co. and Trustee Senior Vice President and Secretary
Emerita of Wellesley College. of The Vanguard Group, Inc.; Secre-
tary of each of the investment com-
panies in The Vanguard Group.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor
of Economics, Princeton University; RICHARD F. HYLAND, Treasurer*
Director of Prudential Insurance Treasurer of The Vanguard Group,
Co. of America, Amdahl Corporation, Inc. and of each of the investment
Baker Fentress & Co., The Jeffrey companies in The Vanguard Group.
Co., and Southern New England Com-
munications Company. KAREN E. WEST, Controller*
Vice President of The Vanguard
JAMES O. WELCH, JR., Trustee Group, Inc.; Controller of each of
Retired Chairman of Nabisco Brands, the investment companies in The
Inc.; retired Vice Chairman and Di- Vanguard Group.
rector of RJR Nabisco; Director of --------
TECO Energy, Inc. * Officers of the Fund are "inter-
ested persons" as defined in the
Investment Company Act of 1940.
THE VANGUARD GROUP
Vanguard Ohio Tax-Free Fund is a member of The Vanguard Group of Investment
Companies. Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and other Funds in the Group obtain at cost virtually
all of their corporate management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-cost basis to
several other Vanguard Funds, including the Vanguard Ohio Tax-Free Fund.
Vanguard employs a supporting staff of management and administrative person-
nel needed to provide the requisite services to the Funds and also furnishes
the Funds with necessary office space, furnishings and equipment. Each Fund
pays its share of Vanguard's net expenses which are allocated among the Funds
under methods approved by the Board of Trustees (Directors) of each Fund. In
addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.
B-14
<PAGE>
The Fund's Officers are also Officers and employees of Vanguard. No Officer
or employee owns, or is permitted to own, any securities of any external ad-
viser for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to pre-
vent unlawful practices in connection with the purchase or sale of securities
by persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are per-
mitted to engage in personal securities transactions. However, such transac-
tions are subject to procedures and guidelines substantially similar to those
recommended by the mutual fund industry and approved by the U.S. Securities
and Exchange Commission.
The Vanguard Group, Inc. ("Vanguard") was established and operates under a
Funds' Service Agreement which was approved by the shareholders of each of the
Funds. The amounts which each of the Funds have invested are adjusted from
time to time in order to maintain the proportionate relationship between each
Fund's relative net assets and its contribution to Vanguard's capital. At No-
vember 30, 1994, Vanguard Ohio Tax-Free Fund had contributed capital of
$46,000 to Vanguard representing .2% of Vanguard's capitalization. The Funds'
Service Agreement provides as follows: (1) each Vanguard Fund may invest a
maximum of 0.40% of its assets in Vanguard and (2) there is no restriction on
the maximum cash investment that the Vanguard Funds may make in Vanguard.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended November 30, 1994, the Fund's share at Vanguard's actual net
costs of operations relating to management and administrative services
including transfer agency totaled approximately $539,000.
DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of the
Funds in connection with any sales made directly to investors in the states of
Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional materi-
als and marketing personnel. Distribution services may also include organizing
and offering to the public, from time to time, one or more new investment com-
panies which will become members of the Group. The Trustees (Directors) and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to or-
ganize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remain-
ing one half of these expenses is allocated among the Funds based upon each
Fund's sales for the preceding 24 months relative to the total sales of the
Funds as a Group; provided, however, that no Fund's aggregate quarterly rate
of contribution for distribution expenses of a marketing and promotional na-
ture shall exceed 125% of the average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100
of 1% of its average month-end net assets. During the year ended November 30,
1994, the Fund paid approximately $77,000 of the Group's distribution and mar-
keting expenses.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to the Fund, Vanguard Municipal Bond Fund, Vanguard Bond Index Fund,
Vanguard Money Market Reserves, Vanguard Institutional Money Market Portfolio,
Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey Tax-Free Fund,
Vanguard New York Insured Tax-Free Fund, Vanguard
B-15
<PAGE>
Pennsylvania Tax-Free Fund, Vanguard California Tax-Free Fund, Vanguard Tax-
Managed Fund, Vanguard Index Trust, Vanguard Admiral Funds, Vanguard
International Equity Index Fund, Vanguard Balanced Index Fund, Vanguard
Institutional Index Fund, several portfolios of Vanguard Variable Insurance
Fund, several Portfolios of Vanguard Fixed Income Securities Fund, a portion
of Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund as well as
several indexed separate accounts. These services are provided on an at-cost
basis from a money management staff employed directly by Vanguard. The
compensation and other expenses of this staff are paid by the Funds utilizing
these services. During the year ended November 30, 1992, 1993 and 1994, the
Fund paid approximately $12,000, $22,000 and $34,000, respectively, of
Vanguard's investment advisory expenses.
REMUNERATION OF TRUSTEES AND OFFICERS. The Fund pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's Officers and employees are paid by Van-
guard which, in turn, is reimbursed by the Fund, and each other Fund in the
Group, for its proportionate share of Officers' and employees' salaries and
retirement benefits. During the year ended November 30, 1994, the Fund's pro-
portionate share of renumeration paid to all Officers of the Fund, as a group,
was approximately $12,281.
Trustees who are not Officers receive an annual fee upon retirement equal to
$1,000 for each year of service on the board up to a maximum of $15,000. Under
its retirement plan, Vanguard contributes annually an amount equal to 10% of
each Officer's annual compensation plus 5.7% of that part of the Officer's
compensation during the year, if any, that exceed the Social Security Taxable
Wage Base then in effect. Under Vanguard's thrift plan, all employees are per-
mitted to make pre-tax contributions in a maximum amount equal to 4% of total
compensation. Vanguard matches the basic contribution on a 100% basis. During
the year ended November 30, 1994 the Fund's proportionate share of retirement
benefits paid to all Officers of the Fund, as a group, was approximately
$1,204.
VANGUARD OHIO TAX-FREE FUND
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS ESTIMATED FROM ALL
COMPENSATION ACCRUED AS PART ANNUAL BENEFITS VANGUARD FUNDS PAID
NAMES OF TRUSTEES FROM FUND OF FUND EXPENSES UPON RETIREMENT TO TRUSTEES(2)
----------------- ------------ ------------------- --------------- -------------------
<S> <C> <C> <C> <C>
John C. Bogle(1)........ -- -- -- --
John J. Brennan(1)...... -- -- -- --
Barbara Barnes
Hauptfuhrer............ $252 $51 $15,000 $50,000
Robert E. Cawthorn...... $252 $43 $13,000 $50,000
Burton G. Malkiel....... $252 $34 $15,000 $50,000
Alfred M. Rankin, Jr.... $252 $27 $15,000 $50,000
John C. Sawhill......... $252 $32 $15,000 $50,000
James O. Welch, Jr...... $242 $39 $15,000 $48,000
J. Lawrence Wilson...... $247 $28 $15,000 $49,000
</TABLE>
--------
(1) As "Interested Trustees," Messrs. Bogle and Brennan receive no compensa-
tion for their service as Trustees.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Director or Trustee of 33 Vanguard
Funds.
B-16
<PAGE>
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Fund was organized as a Pennsylvania business trust on March 16, 1990.
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest, without par value, from an unlimited number
of separate classes ("Portfolios") of shares. Currently, the Fund is offering
shares of two Portfolios.
The shares of the Fund are fully paid and nonassessable, except as set forth
under "Shareholder and Trustee Liability," and have no preference as to con-
version, exchange, dividends, retirement or other features. The shares of the
Fund have no pre-emptive rights. The shares of the Fund have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A shareholder is entitled to one vote for each full share
held (and a fractional vote for each fractional share held), then standing in
his name on the books of the Fund. On any matter submitted to a vote of share-
holders, all shares of the Fund then issued and outstanding and entitled to
vote, irrespective of the class, shall be voted in the aggregate and not by
class: except (i) when required by the Investment Company Act of 1940, shares
shall be voted by individual class; and (ii) when the matter does not affect
any interest of a particular class, then only shareholders of the affected
class or classes shall be entitled to vote thereon.
The Fund will continue without limitation of time, provided, however that:
1) Subject to the majority vote of the holders of shares of the Fund out-
standing, the Trustees may sell or convert the assets of the Fund to an-
other investment company in exchange for shares of such investment company,
and distribute such shares, ratably among the shareholders of the Fund; and
2) Subject to the majority vote of shares of the Fund outstanding, the
Trustees may sell and convert into money the assets of the Fund and dis-
tribute such assets ratably among the shareholders of the Fund.
Upon completion of the distribution of the remaining proceeds or the remain-
ing assets of any Portfolio as provided in paragraphs 1) and 2) above, the
Fund shall terminate and the Trustees shall be discharged of any and all fur-
ther liabilities and duties hereunder and the right, title and interest of all
parties shall be cancelled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Pennsylvania law shareholders of
such a Trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Fund. Therefore, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or
obligations of the Fund and requires that notice of such disclaimer be given
in each agreement, obligation, or instrument entered into or executed by the
Fund or the Trustees. The Declaration of Trust provides for indemnification
out of the Fund property of any shareholder held personally liable for the
obligations of the Fund. The Declaration of Trust also provides that the Fund
shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Fund and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Fund itself
would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be lia-
ble for errors of judgment or mistakes of fact or law but nothing in the Dec-
laration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross negli-
gence, or reckless disregard of the duties involved in the conduct of his of-
fice.
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<PAGE>
FINANCIAL STATEMENTS
The Fund's Financial Statements for the year ended November 30, 1994 and the
financial highlights for each of the periods presented, appearing in the
Fund's 1994 Annual Report to Shareholders, and the report thereon of Price
Waterhouse LLP, independent accountants, also appearing therein, are incorpo-
rated by reference in this Statement of Additional Information. The Fund's
1994 Annual Report to Shareholders is enclosed with this Statement of Addi-
tional Information.
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<PAGE>
APPENDIX A--DESCRIPTION OF MUNICIPAL BONDS AND THEIR RATINGS
MUNICIPAL BONDS--GENERAL. Municipal bonds generally include debt obligations
issued by states and their political subdivisions, and duly constituted au-
thorities and corporations, to obtain funds to construct, repair or improve
various public facilities such as airports, bridges, highways, hospitals,
housing, schools, streets and water and sewer works. Municipal bonds may also
be issued to refinance outstanding obligations as well as to obtain funds for
general operating expenses and for loan to other public institutions and fa-
cilities.
The two principal classifications of municipal bonds are "general obliga-
tion" and "revenue" or "special tax" bonds. General obligation bonds are se-
cured by the issuer's pledge of its full faith, credit and taxing power for
the payment of principal and interest. Revenue or special tax bonds are pay-
able only from the revenues derived from a particular facility or class of fa-
cilities or, in some cases, from the proceeds of a special excise or other
tax, but not from general tax revenues. The Fund may also invest in tax-exempt
industrial development bonds, short-term municipal obligations (rated SP-1+ or
SP-1 by Standard & Poor's Corp. or MIG-1 by Moody's Investors Service), proj-
ect notes, demand notes and tax-exempt commercial papers (rated A-1 by Stan-
dard & Poor's Corp. or P-1 by Moody's Investors Service).
Industrial revenue bonds in most cases are revenue bonds and generally do
not have the pledge of the credit of the issuer. The payment of the principal
and interest on such industrial revenue bonds is dependent solely on the abil-
ity of the user of the facilities financed by the bonds to meet its financial
obligations and the pledge, if any, of real and personal property so financed
as security for such payment. Short-term municipal obligations issued by
states, cities, municipalities or municipal agencies include tax anticipation
notes, revenue anticipation notes, bond anticipation notes, construction loan
notes and short-term discount notes. Project notes are instruments insured by
the Department of Housing and Urban Development but issued by a state or local
housing agency. While the issuing agency has the primary obligation on such
project notes, they are also secured by the full faith and credit of the
United States.
Note obligations with demand or put options may have a stated maturity in
excess of one year, but permit any holder to demand payment of principal plus
accrued interest upon a specified number of days' notice. Frequently, such ob-
ligations are secured by letters of credit or other credit support arrange-
ments provided by banks. The issuer of such notes normally has a corresponding
right, after a given period, to repay in its discretion the outstanding prin-
cipal of the note plus accrued interest upon a specific number of days' notice
to the bondholders. The interest rate on a demand note may be based upon a
known lending rate, such as a bank's prime rate, and be adjusted when such
rate changes, or the interest rate on a demand note may be a market rate that
is adjusted at specified intervals. The demand notes in which the Fund will
invest are payable on not more than one year's notice. Each note purchased by
the Fund will meet the quality criteria set out above for the Fund.
The yields of municipal bonds depend on, among other things, general money
market conditions, conditions in the municipal bond market, the size of a par-
ticular offering, the maturity of the obligation, and the rating of the issue.
The ratings of Moody's Investors Service, Inc. and Standard & Poor's Corpora-
tion represent their opinions of the quality of the municipal bonds rated by
them. It should be emphasized that such ratings are general and are not abso-
lute standards of quality. Consequently, municipal bonds with the same maturi-
ty, coupon and rating may have different yields, while municipal bonds of the
same maturity and coupon, but with different ratings may have the same yield.
It will be the responsibility of Vanguard's Fixed Income Group to appraise in-
dependently the fundamental quality of the bonds held by the Fund.
Municipal bonds are sometimes purchased on a "when-issued" basis meaning the
Fund has committed to purchasing certain specified securities at an agreed
upon price when they are issued. The
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<PAGE>
period between commitment date and issuance date can be a month or more. It is
possible that the securities will never be issued and the commitment canceled.
From time to time proposals have been introduced before Congress to restrict
or eliminate the federal income tax exemption for interest on municipal bonds.
Similar proposals may be introduced in the future. If any such proposal were
enacted, it might restrict or eliminate the ability of the Fund to achieve its
investment objective. In that event, the Fund's Trustees and Officers would
reevaluate its investment objective and policies and consider recommending to
its shareholders changes in such objective and policies.
Similarly, from time to time proposals have been introduced before state and
local legislatures to restrict or eliminate the state and local income tax ex-
emption for interest on municipal bonds. Similar proposals may be introduced
in the future. If any such proposal were enacted, it might restrict or elimi-
nate the ability of each Portfolio to achieve its respective investment objec-
tive. In that event, the Fund's Trustees and Officers would reevaluate its in-
vestment objective and policies and consider recommending to its shareholders
changes in such objective and policies.
RATINGS. Excerpts from Moody's Investors Service, Inc.'s municipal bond rat-
ings: Aaa--judged to be of the "best quality" and are referred to as "gilt
edge"; interest payments are protected by a large or by an exceptionally sta-
ble margin and principal is secure, Aa--judged to be of "high quality by all
standards" but as to which margins of protection or other elements make long-
term risks appear somewhat larger than Aaa-rated municipal bonds; together
with Aaa group they comprise what are generally known as "high grade bonds";
A--possess many favorable investment attributes and are considered "upper me-
dium grade obligations." Factors giving security to principal and interest of
A-rated municipal bonds are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future; Baa--con-
sidered as medium grade obligations; i.e., they are neither highly protected
nor poorly secured; interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or may be char-
acteristically unreliable over any great length of time; Ba--protection of
principal and interest payments may be very moderate; judged to have specula-
tive elements; their future cannot be considered as well-assured; B--lack
characteristics of a desirable investment; assurance of interest and principal
payments over any long period of time may be small; Caa--poor standing; may be
in default or there may be present elements of danger with respect to princi-
pal and interest; Ca--speculative in a high degree; often in default; C--low-
est rated class of bonds; issues so rated can be regarded as having extremely
poor prospects for ever attaining any real investment standing.
Description of Moodys' ratings of state and municipal notes: Moody's ratings
for state and municipal notes and other short-term obligations are designated
Moody's Investment Grade ("MIG"). Symbols used will be as follows: MIG-1--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 al-
though not so large as in the preceding group.
Description of Moody's highest commercial paper rating: PRIME-1 ("P-1")--
Judged to be of the best quality. Their short-term debt obligations carry the
smallest degree of investment risk.
Excerpts from Standard & Poor's Corporation's municipal bond ratings: AAA--
has the highest rating assigned by S&P; extremely strong capacity to pay prin-
cipal and interest; AA--has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree; A--
has a strong capacity to pay principal and interest, although somewhat more
susceptible to the adverse changes in circumstances and economic conditions;
BBB--regarded as having an adequate capacity to pay principal and interest;
normally exhibit adequate protection parameters but adverse economic condi-
tions or changing circumstances are more likely to lead to a weakened
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<PAGE>
capacity to pay principal and interest than for bonds in A category; BB--B--
CCC--CC--predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with terms of obligations; BB is being paid;
D--in default, and payment of principal and/ or interest is in arrears.
The ratings from "AA" to "B" may be modified by the addition of a plus or
minus sign to show relative standing within the major rating categories.
Excerpt from Standard & Poor's Corporation's rating of municipal notes is-
sues: SP-1 + -- very strong capacity to pay principal and interest; SP-1--
strong capacity to pay principal and interest.
Description of S&P's highest commercial papers ratings: A-1 + -- This desig-
nation indicates the degree of safety regarding timely payment is overwhelm-
ing. A-1--This designation indicates the degree of safety regarding timely
payment is very strong.
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<PAGE>
APPENDIX B--MUNICIPAL LEASE OBLIGATIONS
Each Portfolio may invest in municipal lease obligations. Such securities
will be treated as liquid under the following guidelines have been established
by the Board of Trustees:
1. The obligation has been rated "investment grade" by at least one NRSRO
and is considered to be investment grade by the investment adviser.
2. The obligation is secured by payments from a governmental lessee which
is generally recognized and has debt obligations which are actively traded
by a minimum of five broker/dealers.
3. At least $25 million of the lessee debt is outstanding either in a
single transaction or on parity, and owned by a minimum of five institu-
tional investors.
4. The investment adviser has determined that the obligation, or a compa-
rable lessee security, trades in the institutional marketplace at least pe-
riodically, with a bid/offer spread of 20 basis points or less.
5. The governmental lessee has a full faith and credit general obligation
rating of at least "A-" as published by at least one NRSRO or as determined
by the investment adviser. If the lessee is a state government, the general
obligation rating must be at least BAA1, BBB+, or equivalent, as determined
above.
6. The projects to be financed by the obligation are determined to be
critical to the lessee's ability to deliver essential services.
7. Specific legal features such as covenants to maintain the tax-exempt
status of the obligation, covenants to make lease payments without the
right of offset or counterclaim, covenants to return leased property to the
lessor in the event of non-appropriation, insurance policies, debt service
reserve fund, are present.
8. The lease must be "triple net" (i.e.--lease payments are net of prop-
erty maintenance, taxes and insurance).
9. If the lessor is a private entity, there must be a sale and absolute
assignment of rental payments to the trustee, accompanied by a legal opin-
ion from recognized bond counsel that lease payments would not be consid-
ered property of the lessor's estate in the event of lessor's bankruptcy.
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