<PAGE> 1
VANGUARD
OHIO TAX-FREE
FUND
Annual Report - November 30, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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[PHOTO]
OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 6,000 highly motivated
men and women--who form the cornerstone of our operations. As with any
cornerstone, we could not survive long--let alone prosper--without it. That's
why we chose this fiscal year's annual report to celebrate the spirit,
enthusiasm, and achievements of our crew. (We call those who work at Vanguard
crew members, not employees, because they operate as a team to accomplish our
mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving
you in the years ahead.
[PHOTO] [PHOTO]
John C. Boyle John J. Brennan
Chairman President
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS ...................................... 1
THE MARKETS IN PERSPECTIVE ......................................... 4
REPORT FROM THE ADVISER ............................................ 6
PERFORMANCE SUMMARIES .............................................. 8
PORTFOLIO PROFILES ................................................. 10
FINANCIAL STATEMENTS ............................................... 13
REPORT OF INDEPENDENT ACCOUNTANTS .................................. 24
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
DEAR SHAREHOLDER,
During the twelve months ended November 30, Vanguard Ohio Tax-Free Fund's 1997
fiscal year, the prices of tax-exempt bonds eased upward, reflecting a slight
decline in long-term interest rates in the face of continued mild inflation.
Short-term interest rates, on the other hand, moved slightly higher.
In this environment, the +3.5% return of our Money Market Portfolio and
the +6.3% return of our Insured Long-Term Portfolio exceeded the results of
their peers. The table at right presents each Portfolio's twelve-month return,
as well as its income and capital components.
The total return (capital change plus reinvested dividends) of the
Insured Long-Term Portfolio is based on a change in net asset value from $11.67
per share on November 30, 1996, to $11.72 per share on November 30, 1997,
adjusted for dividends totaling $0.598 per share from net investment income and
distributions totaling $0.060 from net realized capital gains. The Money Market
Portfolio's net asset value remained at $1 per share, as was expected but not
guaranteed. At the end of the fiscal year, the Insured Long-Term Portfolio's
yield stood at 4.70%, the Money Market Portfolio's yield at 3.60%.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
COMPONENTS OF TOTAL RETURNS
FISCAL YEAR ENDED NOVEMBER 30, 1997
------------------------------------
PORTFOLIO INCOME CAPITAL TOTAL
- -----------------------------------------------------------------
<S> <C> <C> <C>
Money Market +3.5% 0.0% +3.5%
Insured Long-Term +5.4 +0.9 +6.3
- -----------------------------------------------------------------
</TABLE>
FISCAL 1997 PERFORMANCE OVERVIEW
Steady economic growth teamed with low inflation to create a near-perfect
environment for investors over the past twelve months. Interest rates began the
period heading higher, a climb that was punctuated in March when the Federal
Reserve Board raised its target for short-term rates by 25 basis points.
However, that small increase was the only Fed action of the year. After peaking
in mid-April, the yield on the benchmark U.S. Treasury long-term bond headed
down to end the twelve months at 6.05%, more than one full percentage point
below its apex of 7.17% on April 14. Yields on high-grade, long-term municipal
bonds ended the period at 5.36%, down from 5.66% at the end of November 1996.
Yields on top-grade short-term (MIG-1) notes rose on balance to 3.80% from 3.55%
a year earlier.
While the economic environment was kind to bonds, it truly worked wonders
for equities. Low inflation, continued strong growth in corporate earnings, and
a record level of consumer confidence combined to drive stocks upward. Despite a
severe shock in late October, the Standard & Poor's 500 Composite Stock Price
Index posted a return of +28.5% for the fiscal year ended November 30.
This year's generally placid interest-rate environment marked the second
straight year of relative tranquillity in the bond market. However, we need not
look far back for evidence that calm is by no means a constant in the bond
market. During fiscal 1995, bond prices soared as interest rates fell sharply.
Just the opposite was true during 1994 when the bond market suffered one of its
worst years ever. For bond fund investors, the important lesson is that
fluctuations in bond (and bond fund) prices, which can have a significant impact
on bond fund returns from year to year, tend to wash away over longer periods,
leaving the rate of interest income--the coupon--as the dominant source of
long-term returns.
The +6.3% annual total return for the Ohio Insured Long-Term Portfolio
was a hair ahead of the +6.2% annual return for the average Ohio municipal bond
fund, but fell
1
<PAGE> 4
behind the +7.2% return of the Lehman Brothers Municipal Bond Index. This
"all-state" Index is a tough standard for any single state tax-free fund,
existing, as it does, outside the real world of operating expenses and
transaction costs. Our total return received a slight boost from the price
increase engendered by the decrease in interest rates, but the lion's share of
our return during the twelve months came from interest income. Our Money Market
Portfolio's +3.5% return, all of which came from interest income, outpaced the
+3.2% return of its average peer.
THE MUNICIPAL BOND TAX ADVANTAGE
For Ohio residents, the income earned by our Portfolios is exempt from state,
local, and federal income taxes. Given these advantages, investors in the Ohio
Insured Long-Term Portfolio who are taxed at the highest combined federal-state
marginal tax rate can earn 59% more after-tax income than they could in a
comparable long-term taxable bond fund. For similarly situated investors in our
Money Market Portfolio, the yield of MIG-1 notes at the end of the fiscal year
was 31% higher than the after-tax yield of three-month U.S. Treasury bills. Put
another way, a yield of 5.4% on a tax-exempt long-term portfolio would be the
equivalent of a 9.6% taxable yield to Ohio taxpayers subject to the highest tax
rates. For a tax-exempt short-term yield of 3.8%, the taxable equivalent would
be 6.8%. These advantages are truly remarkable, as reflected in the table above,
which generally compares the annual net income earned on tax-exempt and taxable
securities as of November 30, 1997, assuming a $100,000 investment.
We emphasize that these examples ignore two important differences in
credit quality between state-specific municipal bond funds and U.S. Treasury
bond funds: (1) Treasuries are backed by the full faith and credit of the U.S.
government; and (2) state-specific municipal bond funds incur a significant risk
by concentrating assets in securities from a particular economic region.
For our Insured Long-Term Portfolio, the added credit risk is
substantially mitigated by private insurance, which, in effect, guarantees the
full payment of annual income and the return of principal at maturity for the
municipal bonds we hold.
Because portfolio insurance is generally not available for short-term
securities, the task of preserving principal in our Money Market Portfolio falls
to our investment adviser, Vanguard Fixed Income Group. This Group carefully
scrutinizes the credit quality of our holdings and has earned Moody's Investors
Service's highest quality rating (or the equivalent) for shorter-term
securities. That said, we point out that money market investments are not
guaranteed by the Federal Deposit Insurance Corporation, which insures bank
accounts and certificates of deposit.
<TABLE>
<CAPTION>
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ILLUSTRATION OF INCOME ON A
HYPOTHETICAL $100,000 INVESTMENT
---------------------------------
SHORT-TERM LONG-TERM
- ---------------------------------------------------------------------
<S> <C> <C>
Taxable gross income $ 5,200 $ 6,100
Less taxes (43.8%) (2,300) (2,700)
Net after-tax income 2,900 3,400
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Tax-exempt income $ 3,800 $ 5,400
- ---------------------------------------------------------------------
Tax-exempt income advantage $ 900 $ 2,000
- ---------------------------------------------------------------------
Percentage advantage 31% 59%
- ---------------------------------------------------------------------
</TABLE>
The illustration assumes current yields (as of November 30, 1997) of 6.1% for
long-term U.S. Treasury bonds, 5.2% for U.S. Treasury bills, 5.4% for long-term
municipals, and 3.8% for short-term municipals. The tax adjustment assumes a
typical itemized return based on a federal tax rate of 39.6% and the top state
tax rate of 7.0%; local taxes are not considered. The illustration is not
intended to represent future results.
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<PAGE> 5
LONG-TERM PERFORMANCE OVERVIEW
The table at right compares the performance of our Portfolios with those of
their average peer mutual funds over the seven-and-a-half years since the Fund's
inception. It also illustrates our performance edge over our competitors--a
difference we call the "Vanguard Advantage."
Our expense-ratio advantage over our typical competitor plays a key role
in our performance advantage. Our Portfolios maintain expense ratios (annual
expenses as a percentage of average net assets) of about 0.20%, compared with
the 1.04% charged by the average competitive long-term state tax-free fund, and
0.60% for the average state tax-free money market fund. This cost savings, which
flows directly to our shareholders, has been available year after year, and we
expect it to continue to aid us in our goal of providing returns that exceed
those of our competitive norms. Vanguard Fixed Income Group plays a key role
too, managing the portfolio ably and maintaining a level of investment quality
that we believe is without peer in the industry.
Over the past several years--indeed, on balance for more than 15
years--bond investors have benefited from returns that have been above
longer-term averages. Because long-term yields are at lower levels today than
for most of the recent past, it is virtually certain that returns for the next
decade will not match those of the past decade.
<TABLE>
<CAPTION>
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TOTAL RETURNS
JUNE 18, 1990, TO NOVEMBER 30, 1997
---------------------------------------------------------
AVERAGE FINAL VALUE OF A
ANNUAL RATE $10,000 INITIAL INVESTMENT*
---------------------- --------------------------------
AVERAGE AVERAGE
VANGUARD COMPETING VANGUARD COMPETING VANGUARD
PORTFOLIO PORTFOLIO FUND PORTFOLIO FUND ADVANTAGE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Money Market +3.5% +3.2% $12,903 $12,690 $213
Insured Long-Term +8.3 +7.6 18,119 17,210 909
- --------------------------------------------------------------------------------
</TABLE>
*Assuming reinvestment of all income dividends and capital gains distributions.
IN SUMMARY
Bond investors have enjoyed a long period of generally declining interest rates,
while stock investors have experienced a stretch that is nothing short of
remarkable. But a sensible investor understands that the financial markets are
not a one-way street. Risk is an ever-present element of investing, even when
the markets are providing generous rewards.
That said, the greatest risk is not investing in the first place. We
believe that a sound method for dealing with risk is to construct a balanced
investment program of stock funds, bond funds, and reserves, one that is suited
to your objectives, financial situation, tolerance for risk, and time horizon.
If you have such a program in place, you should be prepared to "stay the course"
toward your investment goals, no matter what lies ahead.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
December 17, 1997
3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
Year Ended November 30, 1997
U.S. EQUITY MARKETS
The fiscal year ended November 30 tested investors' mettle on a number of
occasions, but most ended on a positive note. The increasingly global nature of
investing has rarely been more in evidence than it was over the period. Turmoil
in Southeast Asia raised serious questions about future growth in the region
and, significantly, called into question the earnings outlook for U.S. companies
with exposure there.
Over the 12 months, large-capitalization stocks continued their advance,
propelling the S&P 500 Index to a 28.5% gain. Small-cap stocks also fared well,
as illustrated by the 23.4% increase of the Russell 2000 Index. These gains
withstood a rocky October, when the sharp declines in Asian markets led many
investors to question their expectations regarding U.S. equities. Although the
domestic market dropped substantially--the Dow Jones Industrial Average fell 554
points, or 7.2%, on October 27--it then rebounded smartly over the next few
days.
Among large-cap stocks, the financial services sector was again one of
the best performers, with an increase of 34.8% in fiscal 1997. Also noteworthy
was a November surge in utility stocks, which brought that sector's 12-month
return up to 34.5%. Utilities, those seemingly perennial cellar-dwellers, were
boosted by a drop in interest rates and by a general consensus that their
valuations at last adequately reflected the risks associated with the new
competitive landscape. In the final quarter of the fiscal year, utility stocks
jumped 23.6%, roughly three times the return generated by the S&P 500 Index
(6.7%). In sharp contrast were a number of market sectors that felt the brunt
of the disarray in Asian economies and--while showing positive gains for the
year--turned in negative fourth fiscal quarters. As the fiscal year ended,
there were growing indications from technology and manufacturing companies that
the economic distress in Southeast Asia would likely reduce their current and
future earnings.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED NOVEMBER 30, 1997
-----------------------------------
1 YEAR 3 YEARS 5 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 28.5% 31.1% 20.2%
Russell 2000 Index 23.4 22.7 16.8
MSCI EAFE Index -0.1 6.5 11.6
- --------------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 7.6% 10.3% 7.6%
Lehman 10-Year Municipal Bond Index 7.1 10.3 7.5
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.2 5.4 4.7
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.8% 2.6% 2.6%
- --------------------------------------------------------------------------------
</TABLE>
While small-company stocks failed to match the outsized advance of the
S&P 500 Index, their performance grew notably stronger in the second half of the
fiscal year. For the year, the Russell 2000 Index gained 23.4%. During the
second six months, the Russell 2000's 13.8% essentially matched the S&P 500's
13.6%. The improved performance of smaller companies cannot be attributed to any
single factor, but is, rather, due to a combination of attractive valuations and
good earnings.
4
<PAGE> 7
U.S. FIXED-INCOME MARKETS
Bonds were overshadowed by stocks for much of the year. Investors' returns from
bonds, however, were quite respectable. As the year progressed, investors grew
more confident that four seemingly strange bedfellows--strong economic growth,
reasonable inflation, low unemployment, and stable wage growth--would continue
to coexist peacefully. As a result, when interest rates dipped noticeably toward
the fiscal year's end, they fell furthest for issues with the longest
maturities. The yield on the 30-year U.S. Treasury bond closed the fiscal year
at 6.05%, compared to 6.35% on November 30, 1996. Falling rates flattened the
yield curve considerably: Only 0.85% separated the yield on Treasury bills from
the yield on the 30-year issue, down from a spread of 1.22% at the previous
fiscal year-end.
The positive effect of the yield drop on bond prices was apparent in the
7.6% return of the Lehman Aggregate Bond Index, the broadest measure of
investment-grade issues. Investors in lower-quality securities fared even
better, as shown by the 12.6% gain of the Lehman High Yield Bond Index. The
strength of the economy, together with the lack of inflationary pressure,
produced an ideal environment for junk bonds.
INTERNATIONAL EQUITY MARKETS
Arguably, investors' greatest disappointments were in international
markets--and, of course, Asian markets in particular. During the fiscal year,
the Morgan Stanley Capital International (MSCI) Pacific Index declined by 26.3%
in U.S. dollar terms; the index fell 17.3% in the fourth quarter alone. Among
individual markets, the fiscal year saw sharp declines (in U.S. dollar terms) in
Japan, down 24.5%, including a 16.1% drop in the fourth quarter; Hong Kong, down
25%; Malaysia, down 68%; and Singapore, down 23%. The general slump in Asian
markets began in midsummer with currency devaluations by a number of countries.
Because the values of many of these currencies had been linked to the U.S.
dollar, their fall caused it to appreciate greatly--so much so that Asian
businesses soon found it difficult to purchase American-made products and to
repay dollar-denominated loans. This situation raised questions about how the
region's economic growth would be affected. Related worries focused on imprudent
aspects of various countries' financial systems and the probability of corporate
bankruptcies. In short, there was no place to hide.
By contrast, the European markets continued to provide U.S. investors
with solid returns, although they, too, stumbled in late October and recovered
in November. The MSCI Europe Index posted a gain of 21.8% for the 12 months. The
robust character of the European markets reflects strong corporate earnings and
optimism that the European Monetary Union will provide a solid framework for
future fiscal responsibility and economic growth.
5
<PAGE> 8
REPORT FROM THE ADVISER
Long-term tax-exempt bonds enjoyed a light tailwind in the 12-month period ended
November 30, 1997, the fiscal year for Vanguard Ohio Tax-Free Fund. A slight
decline in bond yields raised the prices of existing bonds, augmenting returns
from interest income. Yields on short-term tax-exempt securities rose slightly
on balance over the year.
THE INSURED LONG-TERM PORTFOLIO
For the Insured Long-Term Portfolio, fiscal 1997 was another period of positive
performance. As in the previous fiscal year, most of our return represented
coupon income derived from Portfolio holdings. Because of Vanguard's
characteristically low expense ratio--0.17% of average net assets in fiscal
1997--the vast majority of the gross interest collected by the Portfolio flows
through to shareholders.
During the fiscal year, yields on 30-year high-quality municipal
securities fell 0.20 percentage point, from 5.45% to 5.25%. In comparison, the
yield on the 30-year U.S. Treasury bond declined 0.30 percentage point, from
6.35% to 6.05%. Despite the relatively narrow difference between yields at the
beginning and end of the year, the path was far from direct.
During the first half of the year, robust expansion of the U.S. economy
and steady job growth caused concern among fixed-income investors that inflation
would accelerate. Yields rose, and in April the yield on the 30-year Treasury
bond peaked at 7.17%. However, inflation remained in check, and investors came
to welcome the economy's steady growth as sustainable without upward price
pressure. This led to a rally in bond prices after midyear. Later, the bond
market got an additional boost from a dramatic meltdown in Asian currency and
equity markets. This instability triggered a "flight to quality" in which many
investors bought U.S. Treasury securities, pushing yields even lower. (A "flight
to quality" is a movement of capital to the safest investments as people seek to
protect themselves from loss during an unsettling period in a market.)
Two factors in the tax-exempt bond market have led to tightened yield
differentials between bond sectors. First, the current environment of low
interest rates has prompted many fixed-income investors to stretch for
additional yield by purchasing low-quality securities. This additional demand
has reduced the interest-rate premium that investors normally require before
they will buy bonds with poorer credit quality. Second, the increased use of
municipal bond insurance by issuers to boost the credit quality of their
securities reduced the availability of low-investment-grade securities. Today,
approximately 50% of all new municipal bond issues are insured and carry an AAA
rating.
The combination of increased demand for and diminished supply of
lower-quality securities has caused a dramatic decline in the yield spreads
between tax-exempt bonds of higher and lower credit quality. For example, at
the beginning of fiscal 1997, an investor could receive 0.75 percentage point of
additional income for purchasing the lowest-quality investment-grade municipal
6
<PAGE> 9
bond rather than the highest-quality bond. By November 30, that spread had
fallen to only 0.35 percentage point. We do not expect a continued tightening of
quality spreads, but we cannot predict when spreads might widen. In the
meantime, shareholders in the Insured Long-Term Portfolio are getting the
highest credit quality while giving up very little in incremental yield.
Vanguard's low-cost structure proved its value during the fiscal year as
investors tended to stretch further for yield and reduced their credit
protection. The powerful advantage of our low expense ratio--0.17% versus 1.04%
for the average long-term state tax-free fund--allows more tax-exempt investment
income to flow directly to shareholders without requiring us to incur higher
credit risk. Cost has been especially important in recent years, when income,
not capital change, has accounted for the majority of return for fixed-income
investments. Over the long-term, low expenses correlate directly with superior
portfolio performance.
In summary, we think that the current environment bodes well for
tax-exempt investors. With moderate economic growth and subdued inflation,
fixed-income investments offer a consistent, durable return, which provides an
important anchor to windward in a diversified portfolio. In this realm, the
Insured Long-Term Portfolio offers the advantages of low expenses, high credit
quality, and income that is exempt from both state and federal taxes. It is a
combination difficult to surpass.
THE MONEY MARKET PORTFOLIO
Yields on one-year, tax-exempt money market instruments remained essentially
unchanged during the second half of the fiscal year, despite the onset of
summer's busy municipal borrowing season. The benchmark one-year MIG-1 note
closed the fiscal year with a yield of 3.80%, up 0.25 percentage point from the
yield at the start of the period. By way of comparison, we note that the yield
on one-year U.S. Treasury bills rose only 0.14 percentage point on balance over
the fiscal year, finishing with a yield of 5.49%. This increase was marginal
despite an increase of 0.25 percentage point in the federal funds rate
engineered in March by the Federal Reserve Board's Open Market Committee. The
net result of these market movements was a more favorable environment for
municipal money market investors, as the ratio of one-year MIG-1 note yields to
yields on one-year Treasuries rose from 66.4% at the start of the fiscal year to
69.2% at its end.
The Money Market Portfolio is positioned neutrally as we begin the new
fiscal year. This strategy affords the Portfolio maximum flexibility in the face
of uncertainty, as the financial markets weigh the strength demonstrated by the
U.S. economy against the potential impact of continued economic turmoil in Asia.
What is certain, however, is that Vanguard Ohio Tax-Free Fund will continue to
be managed conservatively with an emphasis on high quality. This will allow the
consistency and durability of Vanguard's low expenses to work on behalf of our
shareholders.
Ian A. MacKinnon, Managing Director
Pamela Wisehaupt Tynan, Principal
Reid O. Smith, Principal
John M. Carbone, Principal
Danine A. Mueller, Principal
Christopher M. Ryon, Principal
Vanguard Fixed Income Group
December 15, 1997
INVESTMENT PHILOSOPHY
The adviser believes that each Portfolio, while operating within stated maturity
2and stringent quality targets, can achieve a high level of current income that
is exempt from federal and Ohio income taxes by investing in insured and
high-quality uninsured securities issued by Ohio state, county, and municipal
governments.
7
<PAGE> 10
PERFORMANCE SUMMARY
Money Market Portfolio
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
returns can fluctuate widely. An investment in a money market fund is neither
insured nor guaranteed by the U.S. government, and there is no assurance that
the fund will be able to maintain a stable net asset value of $1 per share.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JUNE 18, 1990-NOVEMBER 30, 1997
- ----------------------------------------------------------
MONEY MARKET PORTFOLIO AVERAGE
FUND*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1990 0.0% 2.6% 2.6% 2.5%
1991 0.0 4.7 4.7 4.5
1992 0.0 3.0 3.0 2.9
1993 0.0 2.4 2.4 2.2
1994 0.0 2.6 2.6 2.4
1995 0.0 3.8 3.8 3.5
1996 0.0 3.4 3.4 3.1
1997 0.0 3.5 3.5 3.2
- ----------------------------------------------------------
</TABLE>
*Average Ohio Tax-Exempt Money Market Fund.
See Financial Highlights table on page 21 for dividend information for the past
five years.
CUMULATIVE PERFORMANCE: JUNE 18, 1990-NOVEMBER 30, 1997
- --------------------------------------------------------
<TABLE>
<CAPTION>
Money Market Average Ohio Tax-Exempt
Portfolio Money Market Fund
------------ -----------------------
<S> <C> <C>
Jun 18, 1990 10000 10000
1990 08 10115 10107
1990 11 10259 10246
1991 02 10394 10375
1991 05 10515 10489
1991 08 10626 10604
1991 11 10736 10709
1992 02 10831 10798
1992 05 10920 10885
1992 08 10990 10952
1992 11 11061 11017
1993 02 11129 11078
1993 05 11194 11139
1993 08 11257 11198
1993 11 11324 11254
1994 02 11386 11308
1994 05 11454 11371
1994 08 11526 11443
1994 11 11616 11520
1995 02 11721 11613
1995 05 11839 11722
1995 08 11946 11826
1995 11 12056 11921
1996 02 12162 12015
1996 05 12265 12109
1996 08 12365 12207
1996 11 12468 12294
1997 02 12570 12383
1997 05 12680 12486
1997 08 12791 12594
1997 11 12903 12690
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED NOVEMBER 30, 1997
----------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market Portfolio 3.49% 3.13% 3.48% $12,903
Average Ohio Tax-Exempt Money Market Fund 3.22 2.87 3.25 12,690
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997*
- -------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ---------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market Portfolio 6/18/1990 3.45% 3.09% 0.00% 3.48% 3.48%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
8
<PAGE> 11
PERFORMANCE SUMMARY
Insured Long-Term Portfolio
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolio. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JUNE 18, 1990-NOVEMBER 30, 1997
- ----------------------------------------------------------
INSURED LONG-TERM PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1990 3.0% 3.0% 6.0% 4.9%
1991 2.9 6.6 9.5 10.3
1992 4.5 6.2 10.7 10.0
1993 6.3 5.7 12.0 11.1
1994 -11.2 4.9 -6.3 -5.2
1995 13.1 6.4 19.5 18.9
1996 0.3 5.4 5.7 5.9
1997 0.9 5.4 6.3 7.2
- ----------------------------------------------------------
</TABLE>
*Lehman Municipal Bond Index.
See Financial Highlights table on page 21 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JUNE 18, 1990-NOVEMBER 30, 1997
- ---------------------------------------------------------------------------------------------------
Insured Long-Term Average Ohio Lehman Municipal
Portfolio Municipal Fund Bond Index
<S> <C> <C> <C>
Jun 18, 1990 10000 10000 10000
1990 08 10079 10055 10091
1990 11 10604 10449 10487
1991 02 10836 10677 10767
1991 05 11132 10941 11011
1991 08 11341 11153 11281
1991 11 11611 11404 11563
1992 02 11902 11683 11842
1992 05 12182 11927 12092
1992 08 12662 12335 12540
1992 11 12853 12485 12722
1993 02 13727 13244 13471
1993 05 13814 13329 13539
1993 08 14327 13804 14070
1993 11 14400 13933 14132
1994 02 14456 13987 14216
1994 05 14142 13601 13873
1994 08 14334 13711 14095
1994 11 13495 13026 13394
1995 02 14872 14142 14490
1995 05 15427 14712 15142
1995 08 15499 14715 15345
1995 11 16119 15444 15926
1996 02 16314 15486 16091
1996 05 16007 15203 15834
1996 08 16352 15423 16149
1996 11 17045 16199 16862
1997 02 17133 16209 16977
1997 05 17272 16347 17145
1997 08 17725 16688 17643
1997 11 18119 17210 18072
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED NOVEMBER 30, 1997
------------------------------------
SINCE FINAL VALUE OF A
1 YEAR 5 YEARS INCEPTION $10,000 INVESTMENT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Insured Long-Term Portfolio 6.30% 7.11% 8.30% $18,119
Average Ohio Municipal Fund 6.24 6.63 7.56 17,210
Lehman Municipal Bond Index 7.17 7.27 8.26 18,072
- ------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED SEPTEMBER 30, 1997*
- ---------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ---------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Insured Long-Term Portfolio 6/18/1990 8.45% 7.19% 2.49% 5.87% 8.36%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
<PAGE> 12
PORTFOLIO PROFILE
Money Market Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
November 30, 1997. Key elements of this Profile are defined on page 11.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ------------------------------------
<S> <C>
Yield 3.6%
Average Maturity 60 days
Average Quality MIG-1
Expense Ratio 0.19%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
MIG-1/SP-1+ 66.0%
A-1/P-1 7.3
AAA/AA 21.2
A 5.5
- -------------------------------------------------------
Total 100.0%
</TABLE>
10
<PAGE> 13
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by one percentage point, the share price of a portfolio with an
average duration of five years would decline by about 5%. If rates decrease by a
percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a portfolio's share price will fluctuate in response
to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating agencies.
The agencies make their judgment after appraising an issuer's ability to meet
its obligations. Quality is graded on a scale, with Aaa or AAA indicating the
most creditworthy bond issuers and SP-1 or MIG-1 indicating the most
creditworthy issuers of money market securities.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate bond
investment.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's share
price will fluctuate in response to changes in interest rates.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: average maturity (short, medium, or long) and average credit quality
(high, medium, or low).
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from the
problems of a particular issue.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
YIELD. A snapshot of a portfolio's interest income. The yield, expressed as a
percentage of the portfolio's net asset value, is based on income earned over
the past 30 days (7 days for money market funds) and is annualized, or projected
forward for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
11
<PAGE> 14
PORTFOLIO PROFILE
Insured Long-Term Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
November 30, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on page 11.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -------------------------------------
<S> <C>
Number of Issues 126
Yield 4.7%
Yield to Maturity 4.7%
Average Coupon 5.5%
Average Maturity 8.7 years
Average Quality AAA
Average Duration 6.6 years
Expense Ratio 0.17%
Cash Reserves 0.3%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
INSURED LONG-TERM LEHMAN
PORTFOLIO INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.96 1.00
Beta 1.12 1.00
</TABLE>
*Lehman Municipal Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 5.4%
1-5 Years 14.6
5-10 Years 31.6
10-20 Years 45.8
20-30 Years 2.6
Over 30 Years 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- -------------------------------------
[GRAPH]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
AAA 98.1%
AA 1.9
A 0.0
BBB 0.0
BB 0.0
B 0.0
- --------------------------------------------------------
Total 100.0%
</TABLE>
12
<PAGE> 15
FINANCIAL STATEMENTS
November 30, 1997
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's municipal bond
holdings, including each security's market value on the last day of the
reporting period and information on credit enhancements (insurance or letters of
credit). Securities are grouped and subtotaled according to their insured or
noninsured status. Other assets are added to, and liabilities are subtracted
from, the value of Total Municipal Bonds to calculate the Portfolio's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the
Portfolio to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table
displaying the composition of the Portfolio's net assets on both a dollar and
per-share basis. Undistributed Net Investment Income is usually zero because the
Portfolio distributes its net income to shareholders as a dividend each day. Any
realized gains must be distributed annually, so the bulk of net assets consists
of Paid in Capital (money invested by shareholders). The balance shown for
Accumulated Net Realized Gains usually approximates the amount available to
distribute to shareholders as taxable capital gains as of the statement date,
but may differ because certain investments or transactions may be treated
differently for financial statement and tax purposes. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net realized
gains, will appear as negative balances. Unrealized Appreciation (Depreciation)
is the difference between the value of the Portfolio's investments and their
cost, and reflects the gains (losses) that would be realized if the Portfolio
were to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (100.3%)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
American Muni. Power OH BAN (Bowling Green Project) 4.10% 12/4/1998 ++ $ 3,185 $ 3,185
Butler County OH BAN 4.10% 3/20/1998 1,750 1,752
Butler County OH BAN 4.11% 1/23/1998 1,000 1,001
Butler County OH BAN 4.25% 10/22/1998 6,390 6,412
Butler County OH Transp. Improvement Rev. 6.00% 4/1/1998 (4) 3,000 3,022
Cincinnati OH GO 4.75% 12/1/1998 5,700 5,750
Cincinnati OH School Dist. TAN 5.00% 12/1/1998 (2) 1,880 1,902
Cincinnati OH Student Loan Funding Corp. Student Loan Rev. VRDO 3.85% 12/3/1997 27,300 27,300
Clermont County OH Hosp. Rev. VRDO (Mercy Health System) 3.85% 12/3/1997 6,100 6,100
Columbus OH Electric System Rev. VRDO 3.60% 1/2/1998 LOC 14,445 14,445
Columbus OH GO VRDO 3.80% 12/4/1997 10,900 10,900
Columbus OH Sewer Rev. VRDO 3.80% 12/4/1997 3,100 3,100
Cuyahoga County OH Hosp. Rev. Improvement VRDO
(Cleveland Clinic Foundation) 3.80% 12/3/1997 LOC 4,570 4,570
Cuyahoga County OH Hosp. Rev. Improvement VRDO
(Cleveland Clinic Foundation) 3.85% 12/3/1997 LOC 13,900 13,900
Dublin OH BAN 4.00% 3/17/1998 8,900 8,907
Fairfield County OH BAN 4.25% 9/1/1998 1,080 1,082
Franklin County OH Hosp. Rev. VRDO (Holy Cross Health System) 3.90% 12/4/1997 3,800 3,800
Franklin County OH Hosp. Rev. VRDO (US Health Corp.) 3.90% 12/4/1997 LOC 13,200 13,200
Hamilton County OH BAN (Water West III) 4.50% 12/31/1997 1,375 1,376
Hamilton County OH Hosp. Fac. Rev. VRDO (Bethesda Hosp.) 3.80% 12/4/1997 LOC 21,700 21,700
Hamilton County OH Hosp. Fac. Rev. VRDO
(Health Alliance of Greater Cincinnati) 3.85% 12/3/1997 6,700 6,700
Hamilton County OH Hosp. Fac. Rev. VRDO
(Health Alliance of Greater Cincinnati) 3.95% 12/3/1997 1,000 1,000
Lorain County OH Hosp. Fac. Rev. CP
(Catholic Healthcare Partners) 3.90% 12/1/1997 5,000 5,000
Lorain County OH Hosp. Fac. Rev. CP
(Catholic Healthcare Partners) 4.25% 9/1/1998 1,750 1,755
Lorain County OH TAN (Community College Dist.) 6.00% 12/1/1997 (2) 610 610
Mentor OH BAN 4.25% 7/23/1998 2,260 2,266
</TABLE>
13
<PAGE> 16
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
MONEY MARKET PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Montgomery County OH Rev. CP (Miami Valley Hosp.) 3.65% 12/16/1997 $ 6,700 $ 6,700
Montgomery County OH Rev. CP (Miami Valley Hosp.) 3.70% 2/23/1998 6,800 6,800
Montgomery County OH Rev. CP (Miami Valley Hosp.) 3.70% 2/27/1998 4,000 4,000
Montgomery County OH Rev. CP (Miami Valley Hosp.) 3.85% 12/4/1997 3,400 3,400
Montgomery County OH Rev. VRDO (Catholic Health Initiatives) 4.00% 12/3/1998 10,000 10,000
Montgomery County OH Rev. VRDO (Sisters of Charity) 3.90% 12/4/1997 2,400 2,400
Ohio Air Quality Dev. Auth. VRDO (Cincinnati Gas & Electric Co.) 3.90% 12/2/1997 LOC 4,300 4,300
Ohio Air Quality Dev. Auth. VRDO (Cincinnati Gas & Electric Co.) 4.00% 12/2/1997 LOC 3,200 3,200
Ohio Air Quality Dev. Auth. VRDO (Mead Corp.) 3.80% 12/2/1997 LOC 5,400 5,400
Ohio Building Auth. (State Correctional Fac.) 8.00% 2/1/1998 (Prere.) 1,000 1,027
Ohio GO (Highway Obligation) 4.50% 5/15/1998 11,400 11,438
Ohio Higher Educ. Fac. (Case Western Reserve) 4.25% 7/1/1998 2,560 2,567
Ohio Higher Educ. Fac. (Case Western Reserve) 4.25% 10/1/1998 1,000 1,003
Ohio Higher Educ. Fac. VRDO (Mount Union College Project) 4.00% 12/4/1997 LOC 1,650 1,650
Ohio PCR VRDO (British Petroleum) 3.80% 12/2/1997 2,500 2,500
Ohio Public Fac. Comm. (Higher Educ.) 4.60% 6/1/1998 1,050 1,054
Ohio Public Fac. Comm. (Higher Educ.) 4.625% 12/1/1997 5,250 5,250
Ohio Public Fac. Comm. (Higher Educ.) 5.30% 12/1/1997 (4) 695 695
Ohio Public Fac. Comm. (Mental Health) 7.00% 12/1/1997 2,000 2,000
Ohio School Dist. COP TAN 4.47% 12/31/1997 1,000 1,001
Ohio State Univ. VRDO 3.90% 12/4/1997 4,350 4,350
Ohio Turnpike Comm. Rev. 4.125% 2/15/1998 4,170 4,172
Ohio Water Dev. Auth. 5.00% 6/1/1998 1,750 1,760
Ohio Water Dev. Auth. VRDO (Timken Co. Project) 3.90% 12/3/1997 LOC 5,000 5,000
Rocky River OH BAN 4.125% 9/4/1998 2,103 2,108
Ross County OH Hosp. Rev. VRDO
(Medical Center Hosp. Project) 4.00% 12/4/1997 LOC 4,160 4,160
Shaker Heights OH BAN 4.125% 7/15/1998 3,065 3,072
Sylvania OH 4.09% 10/6/1998 2,695 2,700
Sylvania OH School Dist. 6.35% 12/1/1997 (3) 1,000 1,000
Toledo OH Special Services Assessment VRDO 3.90% 12/4/1997 LOC 12,100 12,100
Univ. of Cincinnati OH GO BAN 4.04% 3/19/1998 2,000 2,002
Univ. of Cincinnati OH GO BAN 4.25% 3/19/1998 4,000 4,007
Upper Arlington OH BAN 4.00% 12/19/1997 2,500 2,501
Upper Arlington OH Street Light Notes 4.00% 3/19/1998 2,300 2,302
Wooster City OH School Dist. 3.80% 12/1/1998 (4)++ 1,090 1,090
- -------------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $299,444) 299,444
- -------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.3%)
- -------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 4,023
Liabilities (5,036)
---------
(1,013)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------
Applicable to 298,431,660 outstanding shares of beneficial interest
(unlimited authorization--no par value) $298,431
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
=========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
For explanations of abbreviations and other references, see page 18.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT NOVEMBER 30, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $298,435 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (4) --
Unrealized Appreciation -- --
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $298,431 $1.00
=========================================================================================================================
</TABLE>
14
<PAGE> 17
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INSURED LONG-TERM PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
MUNICIPAL BONDS (99.7%)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ISSUER INSURED (92.5%)
Adams County OH School Dist. GO 5.55% 12/1/2009 (1) $1,000 $ 1,059
Akron Bath & Copley OH Joint Township
(Akron Medical Center Project) 5.375% 1/1/2017 (2) 3,000 3,019
Akron Bath & Copley OH Joint Township
(Akron Medical Center Project) 5.50% 1/1/2008 (2) 1,000 1,045
Aurora County OH School Dist. 5.80% 12/1/2016 (3) 3,000 3,150
Bedford Heights OH GO 5.65% 12/1/2014 (2) 500 535
Butler County OH Sewer System Rev. 6.25% 12/1/2012 (2) 2,925 3,163
Butler County OH Transp. Improvement Dist. Rev. 6.00% 4/1/2011 (4) 4,000 4,357
Butler County OH Water Works 5.125% 12/1/2021 (2) 500 492
City of Canton OH GO 5.375% 12/1/2007 (2) 1,000 1,049
City of Canton OH GO (Water Works System) 5.75% 12/1/2010 (2) 1,000 1,068
City of Canton OH GO (Water Works System) 5.85% 12/1/2015 (2) 1,000 1,058
Clermont County OH (Mercy Health System) 5.40% 9/1/2005 (2) 2,500 2,647
Clermont County OH (Mercy Health System) 5.50% 9/1/2006 (2) 2,500 2,652
Cleveland-Cuyahoga County OH Port Auth. Rev.
(Rock & Roll Hall of Fame) 5.40% 12/1/2015 (2) 2,000 2,035
Cleveland OH Airport System Rev. 0.00% 1/1/2005 (1) 3,975 2,881
Cleveland OH Airport System Rev. 7.25% 1/1/2020 (1) 800 858
Cleveland OH GO 5.50% 8/1/2009 (1) 4,500 4,762
Cleveland OH GO 5.375% 9/1/2010 (2) 1,000 1,047
Cleveland OH GO 5.375% 9/1/2012 (2) 1,000 1,042
Cleveland OH GO 6.25% 10/1/2001 (1)(Prere.) 2,500 2,722
Cleveland OH Public Power System Rev. 5.25% 11/15/2016 (1) 9,000 9,052
Cleveland OH Public Power System Rev. 7.00% 11/15/2024 (1) 2,750 3,208
Cleveland OH School Dist. GO 0.00% 12/1/2005 (3) 700 487
Cleveland OH School Dist. GO 0.00% 12/1/2006 (3) 700 461
Cleveland OH School Dist. GO 0.00% 12/1/2007 (3) 500 312
Cleveland OH School Dist. GO 0.00% 12/1/2008 (3) 400 236
Cleveland OH School Dist. GO 5.875% 12/1/2011 (3) 1,500 1,574
Cleveland OH Water Works Rev. 5.50% 1/1/2013 (1) 3,125 3,282
Cleveland OH Water Works Rev. 5.50% 1/1/2021 (1)+ 2,500 2,617
Cleveland OH Water Works Rev. 6.25% 1/1/2015 (2) 4,500 4,852
Columbus City OH School Dist. GO 7.00% 12/1/2000 (3)(Prere.) 1,750 1,924
Cuyahoga County OH Hosp. Rev. (Metro Health System) 6.00% 2/15/1998 (1)(Prere.) 1,000 1,024
Cuyahoga County OH Hosp. Rev. (Univ. Hosp. Health System) 5.50% 1/15/2019 (1) 7,545 7,626
Cuyahoga County OH Hosp. Rev. (Univ. Hosp. Health System) 6.875% 1/15/1999 (5)(Prere.) 1,825 1,919
Dayton OH Water System Rev. 6.75% 12/1/2010 (1) 1,000 1,022
Delaware OH Sewer System Rev. 5.95% 11/15/2012 (2) 1,500 1,573
Dublin OH School Dist. GO 0.00% 12/1/2005 (3) 1,220 848
Dublin OH School Dist. GO 0.00% 12/1/2006 (3) 1,220 804
Fairfield County OH Hosp. Rev. (Lancaster-Fairfield Hosp.) 5.375% 6/15/2015 (1) 3,000 3,098
Forest Hills OH School Dist. GO 6.00% 12/1/2007 (1) 750 833
Franklin County OH Convention Center Rev. 0.00% 12/1/2007 (1) 4,355 2,717
Franklin County OH Convention Center Rev. 7.00% 12/1/2000 (1)(Prere.) 675 742
Franklin County OH Hosp. Fac. Rev. (Riverside United Methodist) 7.25% 5/15/2000 (1)(Prere.) 2,800 3,053
Greater Cleveland OH Regional Transp. Auth. 5.60% 12/1/2011 (3) 5,505 5,790
Hamilton County OH Rev. (Children's Hosp.) 5.20% 5/15/2009 (1) 2,000 2,077
Hamilton County OH Sewer System Rev. 5.40% 12/1/2008 (3) 5,700 6,055
Hamilton County OH Sewer System Rev. 5.45% 12/1/2009 (3) 3,250 3,453
Hamilton OH Water System Rev. 6.30% 10/15/2021 (1) 2,000 2,166
Hilliard County OH School Dist. GO 5.75% 12/1/2019 (3) 2,000 2,085
Hilliard County OH School Dist. GO 6.55% 12/1/2005 (3) 500 569
Lisbon OH School Dist. GO 6.25% 12/1/2017 (2) 1,000 1,089
Lorain County OH Hosp. Rev. (Catholic Healthcare Partners) 5.50% 9/1/2027 (1) 2,215 2,236
Lorain County OH Hosp. Rev. (Catholic Healthcare Partners) 5.625% 9/1/2014 (1) 2,290 2,383
Lorain County OH Hosp. Rev. (Catholic Healthcare Partners) 6.00% 9/1/2006 (1) 1,500 1,652
Lorain County OH Hosp. Rev. (Catholic Healthcare Partners) 6.00% 9/1/2008 (1) 1,250 1,380
Lucas County OH GO 6.95% 12/1/2000 (1)(Prere.) 2,700 2,964
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INSURED LONG-TERM PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lucas County OH Hosp. Rev. (Promedica Health Care) 5.75% 11/15/2009 (1) $3,000 $ 3,222
Lucas County OH Hosp. Rev. (Promedica Health Care) 5.75% 11/15/2014 (1) 6,000 6,288
Marietta City OH School Dist. 5.75% 12/1/2007 (2) 1,500 1,606
Marysville OH Water System Rev. 7.05% 12/1/2001 (1)(Prere.) 1,250 1,390
Medina City OH School Dist. GO 6.20% 12/1/2018 (3) 2,100 2,277
Mount Vernon OH Sewer System Rev. 6.00% 12/1/2012 (2) 750 790
New Philadelphia City OH School Dist. 6.25% 12/1/2017 (2) 2,300 2,490
North Canton OH GO 5.90% 12/1/2014 (2) 2,000 2,118
Northeast OH Regional Sewer Dist. Rev. 5.60% 11/15/2013 (2) 1,880 1,960
Northeast OH Regional Sewer Dist. Rev. 5.60% 11/15/2014 (2) 1,500 1,553
Northeast OH Regional Sewer Dist. Rev. 6.50% 11/15/2001 (2)(Prere.) 2,500 2,728
Oak Hills OH Local School Dist. GO 7.20% 12/1/2009 (1) 1,625 1,981
Ohio Air Quality Dev. Auth. PCR (Ohio Edison) 7.10% 6/1/2018 (3) 1,000 1,079
Ohio Air Quality Dev. Auth. PCR (Ohio Edison) 7.45% 3/1/2016 (3) 500 541
Ohio Building Auth. (Adult Correctional Fac.) 5.50% 4/1/2016 (2) 4,965 5,071
Ohio Building Auth. (Adult Correctional Fac.) 5.95% 10/1/2013 (1) 3,000 3,174
Ohio Building Auth. (Transp. Fac.) 7.00% 9/1/2007 (1) 2,270 2,471
Ohio Higher Educ. Fac. Rev. (Univ. of Dayton) 6.60% 12/1/2017 (3) 2,200 2,454
Ohio Higher Educ. Fac. Rev. (Univ. of Dayton) 6.75% 12/1/2015 (3) 1,000 1,112
Ohio Higher Educ. Fac. Rev. (Xavier Univ.) 5.375% 5/15/2022 (1) 3,000 2,998
Ohio Higher Educ. Fac. Rev. (Xavier Univ.) 6.00% 5/15/2011 (1) 2,000 2,169
Ohio Public Fac. Comm. (Community Mental Health) 4.50% 12/1/1997 (1) 2,000 2,000
Ohio Turnpike Comm. Rev. 5.70% 2/15/2017 (1) 1,000 1,037
Ohio Water Dev. Auth. 5.50% 6/1/2011 (1) 2,300 2,409
Ohio Water Dev. Auth. 5.50% 12/1/2011 (2) 1,000 1,031
Ohio Water Dev. Auth. 5.50% 12/1/2014 (1) 1,595 1,639
Ohio Water Dev. Auth. 5.90% 12/1/2015 (2) 3,250 3,435
Ohio Water Dev. Auth. 6.00% 12/1/2007 (2) 2,000 2,216
Ohio Water Dev. Auth. 7.00% 12/1/2009 (2)(ETM) 1,500 1,739
Olmsted Falls City OH School Dist. GO 5.85% 12/15/2017 (3) 2,000 2,095
Olmsted Falls City OH School Dist. GO 6.85% 12/15/2004 (3)(Prere.) 565 655
Ottowa County OH GO 7.00% 9/1/2011 (2) 500 552
Pickerington OH GO 5.80% 12/1/2009 (3) 500 547
Revere OH School Dist. GO 6.00% 12/1/2016 (2) 3,850 4,107
Reynoldsburg City OH School Dist. GO 0.00% 12/1/2009 (3) 1,465 812
Reynoldsburg City OH School Dist. GO 0.00% 12/1/2010 (3) 1,465 764
Reynoldsburg City OH School Dist. GO 6.55% 12/1/2002 (3)(Prere.) 3,600 4,021
Richland County OH GO 5.40% 12/1/2015 (2) 1,120 1,142
Richland County OH GO 6.95% 12/1/2011 (2) 450 521
Springboro Community City OH School Dist. GO 5.25% 12/1/2016 (2) 4,000 4,022
Summit County OH GO 6.90% 8/1/2002 (2)(Prere.) 175 194
Summit County OH GO 6.90% 8/1/2003 (2)(Prere.) 2,425 2,728
Summit County OH GO 6.90% 8/1/2012 (2) 2,650 2,913
Trumbull County OH Hosp. Rev. (Trumbull Memorial Hosp.) 6.25% 11/15/2012 (3) 2,000 2,155
Univ. of Akron OH General Receipts 6.00% 1/1/2006 (2) 1,495 1,637
Wood County OH Justice Center GO 5.95% 12/1/2007 (2) 1,750 1,882
Woodridge OH School Dist. GO 6.00% 12/1/2019 (2) 1,000 1,068
Woodridge OH School Dist. GO 6.80% 12/1/2014 (2) 2,000 2,396
Wooster City OH School Dist. GO 0.00% 12/1/2009 (4)++ 2,195 1,203
Wooster City OH School Dist. GO 0.00% 12/1/2010 (4)++ 2,265 1,166
Wooster City OH School Dist. GO 0.00% 12/1/2011 (4)++ 2,315 1,125
Wooster City OH School Dist. GO 6.50% 12/1/2017 (2) 2,500 2,787
OUTSIDE OHIO:
Puerto Rico Public Building Auth. Rev. 0.00% 7/1/2001 (3) 850 736
--------
234,010
--------
SECONDARY MARKET INSURED (0.8%)
Franklin OH Hosp. Rev. (Mount Carmel Health-Holy Cross
Health System) 6.75% 6/1/2019 (1) 2,000 2,199
--------
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NONINSURED (6.4%)
Cincinnati OH Student Loan Funding Corp. Student Loan Rev. VRDO 3.85% 12/3/1997 $ 200 $ 200
Columbus OH Electric VRDO 3.60% 1/2/1998 LOC 1,480 1,480
Columbus OH GO VRDO 3.80% 12/4/1997 1,000 1,000
Columbus OH Sewer Rev. VRDO 3.80% 12/4/1997 200 200
Cuyahoga County OH Hosp. VRDO (Cleveland Clinic Foundation) 3.80% 12/3/1997 LOC 100 100
Hamilton County OH Hosp. Fac. Rev. VRDO (Bethesda Hosp.) 3.80% 12/4/1997 LOC 1,600 1,600
Ohio Air Quality Dev. Auth. VRDO (Cincinnati Gas & Electric Co.) 3.90% 12/2/1997 LOC 1,700 1,700
Ohio Air Quality Dev. Auth. VRDO (Cincinnati Gas & Electric Co.) 4.00% 12/2/1997 LOC 1,700 1,700
Ohio GO 7.625% 8/1/2010 3,510 4,428
Ohio GO (Highway Obligation) 4.50% 5/15/1998 1,100 1,104
Ohio Higher Educ. Fac. Auth. Rev. 5.875% 12/1/1997 1,000 1,000
Ohio Higher Educ. Fac. Auth. Rev. (Case Western Reserve Univ.) 6.50% 10/1/2020 250 294
Ohio State Univ. VRDO 3.90% 12/4/1997 100 100
OUTSIDE OHIO:
Puerto Rico Govt. Dev. Bank VRDO 3.80% 12/3/1997 LOC 1,200 1,200
--------
16,106
--------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(COST $239,106) 252,315
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.3%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 4,655
Liabilities (3,967)
--------
688
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 21,591,752 outstanding shares of beneficial interest
(unlimited authorization--no par value) $253,003
==========================================================================================================================
NET ASSET VALUE PER SHARE $11.72
==========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
+Securities with a value of $523,000 have been segregated as initial margin for
open futures contracts.
For explanations of abbreviations and other references, see page 18.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT NOVEMBER 30, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $240,452 $11.14
Undistributed Net Investment Income -- --
Overdistributed Net Realized Gains--Note E (652) (.03)
Unrealized Appreciation (Depreciation)--Note F
Investment Securities 13,209 .61
Futures Contracts (6) --
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $253,003 $11.72
==========================================================================================================================
</TABLE>
17
<PAGE> 20
KEY TO ABBREVIATIONS
BAN--Bond Anticipation Note.
COP--Certificate of Participation.
CP--Commercial Paper.
GO--General Obligation Bond.
PCR--Pollution Control Revenue Bond.
TAN--Tax Anticipation Note.
VRDO--Variable Rate Demand Obligation.
(ETM)--Escrowed to Maturity.
(Prere.)--Prerefunded.
++Security purchased on a when-issued or delayed delivery basis for which the
Portfolio has not taken delivery as of November 30, 1997.
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association).
(2) AMBAC (AMBAC Indemnity Corporation).
(3) FGIC (Financial Guaranty Insurance Company).
(4) FSA (Financial Security Assurance).
(5) BIGI (Bond Investors Guaranty Insurance).
The insurance does not guarantee the market value of the municipal bonds.
LOC--Scheduled principal and interest payments are guaranteed by bank letter of
credit.
18
<PAGE> 21
STATEMENT OF OPERATIONS
This Statement shows interest earned by each Portfolio during the reporting
period, and details the operating expenses charged to the Portfolio. These
expenses directly reduce the amount of investment income available to pay to
shareholders as tax-exempt income dividends. This Statement also shows any Net
Gain (Loss) realized on the sale of investments, and the increase or decrease in
the Unrealized Appreciation (Depreciation) on investments during the period. If
a Portfolio invested in futures contracts during the period, the results of
these investments are shown separately.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
MONEY INSURED
MARKET LONG-TERM
PORTFOLIO PORTFOLIO
-----------------------------
YEAR ENDED NOVEMBER 30, 1997
-----------------------------
(000) (000)
- --------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Interest $10,458 $ 12,217
-------------------------
Total Income 10,458 12,217
-------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 43 34
Management and Administrative 389 287
Marketing and Distribution 90 52
Custodian Fees 7 5
Auditing Fees 7 7
Shareholders' Reports 4 3
Annual Meeting and Proxy Costs 1 1
Trustees' Fees and Expenses 1 --
-------------------------
Total Expenses 542 389
Expenses Paid Indirectly--Note C (7) (5)
-------------------------
Net Expenses 535 384
- -------------------------------------------------------------------------------
NET INVESTMENT INCOME 9,923 11,833
- -------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 4 167
Futures Contracts -- (402)
- -------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 4 (235)
- -------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities -- 2,595
Futures Contracts -- (28)
- -------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) -- 2,567
- -------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 9,927 $14,165
===============================================================================
</TABLE>
19
<PAGE> 22
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. Because the Portfolio
distributes its income to shareholders each day, the amounts of
Distributions--Net Investment Income generally equal the net income earned as
shown under the Operations section. The amounts of Distributions--Realized
Capital Gain may not match the capital gains shown in the Operations section,
because distributions are determined on a tax basis and may be made in a period
different from the one in which the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount shareholders
invested in the Portfolio, either by purchasing shares or by reinvesting
distributions, and the amounts redeemed. The corresponding numbers of Shares
Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
MONEY MARKET INSURED LONG-TERM
PORTFOLIO PORTFOLIO
------------------------ ---------------------
YEAR ENDED NOVEMBER 30,
------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 9,923 $ 6,844 $ 11,833 $ 10,760
Realized Net Gain (Loss) 4 -- (235) 1,004
Change in Unrealized Appreciation
(Depreciation) -- -- 2,567 (118)
------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 9,927 6,844 14,165 11,646
------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (9,923) (6,844) (11,833) (10,760)
Realized Capital Gain -- -- (1,114) --
------------------------------------------------------
Total Distributions (9,923) (6,844) (12,947) (10,760)
------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 307,260 247,383 60,331 45,385
Issued in Lieu of Cash Distributions 8,528 6,250 9,339 7,733
Redeemed (271,321) (177,257) (34,336) (34,509)
------------------------------------------------------
Net Increase from
Capital Share Transactions 44,467 76,376 35,334 18,609
- -----------------------------------------------------------------------------------------------------
Total Increase 44,471 76,376 36,552 19,495
- -----------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 253,960 177,584 216,451 196,956
------------------------------------------------------
End of Year $ 298,431 $ 253,960 $ 253,003 $ 216,451
=====================================================================================================
(1)Shares Issued (Redeemed)
Issued 307,260 247,383 5,219 3,954
Issued in Lieu of Cash Distributions 8,528 6,250 808 674
Redeemed (271,321) (177,257) (2,978) (3,016)
------------------------------------------------------
Net Increase in Shares Outstanding 44,467 76,376 3,049 1,612
=====================================================================================================
</TABLE>
20
<PAGE> 23
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's Total Return
and shows net investment income and expenses as percentages of average net
assets. These data will help you assess: the variability of the Portfolio's net
income and total returns from year to year; the relative contributions of net
income and capital gains to the Portfolio's total return; how much it costs to
operate the Portfolio; and the extent to which the Portfolio tends to distribute
capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in the
Portfolio for one year. Money market portfolios are not required to report a
Portfolio Turnover Rate.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
MONEY MARKET PORTFOLIO
YEAR ENDED NOVEMBER 30,
----------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .034 .034 .037 .026 .023
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
----------------------------------------------------------
Total from Investment Operations .034 .034 .037 .026 .023
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.034) (.034) (.037) (.026) (.023)
Distributions from Realized Capital Gains -- -- -- -- --
----------------------------------------------------------
Total Distributions (.034) (.034) (.037) (.026) (.023)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
========================================================================================================================
TOTAL RETURN 3.49% 3.42% 3.78% 2.58% 2.37%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $298 $254 $178 $147 $132
Ratio of Total Expenses to Average Net Assets 0.19% 0.20% 0.21% 0.23% 0.21%
Ratio of Net Investment Income to Average Net Assets 3.43% 3.36% 3.71% 2.56% 2.34%
Portfolio Turnover Rate N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
INSURED LONG-TERM PORTFOLIO
YEAR ENDED NOVEMBER 30,
-------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.67 $11.63 $10.28 $11.61 $11.07
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .598 .603 .610 .599 .608
Net Realized and Unrealized Gain (Loss) on Investments .110 .040 1.350 (1.298) .685
--------------------------------------------------------------
Total from Investment Operations .708 .643 1.960 (.699) 1.293
------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.598) (.603) (.610) (.599) (.608)
Distributions from Realized Capital Gains (.060) -- -- (.032) (.145)
--------------------------------------------------------------
Total Distributions (.658) (.603) (.610) (.631) (.753)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $11.72 $11.67 $11.63 $10.28 $11.61
========================================================================================================================
TOTAL RETURN 6.30% 5.75% 19.45% -6.29% 12.03%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $253 $216 $197 $149 $166
Ratio of Total Expenses to Average Net Assets 0.17% 0.20% 0.21% 0.23% 0.21%
Ratio of Net Investment Income to Average Net Assets 5.17% 5.26% 5.45% 5.38% 5.29%
Portfolio Turnover Rate 14% 17% 7% 16% 10%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
NOTES TO FINANCIAL STATEMENTS
Vanguard Ohio Tax-Free Fund is registered under the Investment Company Act of
1940 as an open-end investment company, or mutual fund, and comprises the Money
Market and Insured Long-Term Portfolios. Each Portfolio invests in debt
instruments of municipal issuers whose ability to meet their obligations may be
affected by economic and political developments in the state of Ohio.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Money Market Portfolio: Investment securities are
valued at amortized cost, which approximates market value. Insured Long-Term
Portfolio: Bonds, and temporary cash investments acquired more than 60 days to
maturity, are valued using the latest bid prices or using valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities, and credit ratings), both as furnished by independent pricing
services. Other temporary cash investments are valued at amortized cost, which
approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio intends to continue to qualify as a
regulated investment company and distribute all of its income. Accordingly, no
provision for federal income taxes is required in the financial statements.
3. FUTURES CONTRACTS: The Insured Long-Term Portfolio may use Municipal Bond
Index, U.S. Treasury Bond, and U.S. Treasury Note futures contracts, with the
objectives of enhancing returns, managing interest rate risk, maintaining
liquidity, diversifying credit risk, and minimizing transaction costs. The
Portfolio may purchase or sell futures contracts instead of bonds to take
advantage of pricing differentials between the futures contracts and the
underlying bonds. The Portfolio may also seek to take advantage of price
differences among bond market sectors by simultaneously buying futures (or
bonds) of one market sector and selling futures (or bonds) of another sector.
Futures contracts may also be used to simulate a fully invested position in the
underlying bonds while maintaining a cash balance for liquidity. The primary
risks associated with the use of futures contracts are imperfect correlation
between changes in market values of bonds held by the Portfolio and the prices
of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued based upon their quoted daily settlement prices.
The aggregate principal amounts of the contracts are not recorded in the
financial statements. Fluctuations in the value of the contracts are recorded in
the Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
4. DISTRIBUTIONS: Distributions from net investment income are declared daily
and paid on the first business day of the following month. Annual distributions
from realized capital gains, if any, are recorded on the ex-dividend date.
5. OTHER: Security transactions are accounted for on the date securities are
bought or sold. Costs used to determine realized gains (losses) on the sale of
investment securities are those of the specific securities sold. Premiums and
original issue discounts are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
B. The Vanguard Group furnishes at cost investment advisory, corporate
management, administrative, marketing, and distribution services. The costs of
such services are allocated to the Fund under methods approved by the Board of
Trustees. At November 30, 1997, the Fund had contributed capital aggregating
$37,000 to Vanguard (included in Other Assets), representing 0.2% of Vanguard's
capitalization. The Fund's Trustees and officers are also Directors and officers
of Vanguard.
C. The Fund's custodian bank has agreed to reduce its fees when the Fund
maintains cash on deposit in the non-interest-bearing custody account. For the
year ended November 30, 1997, custodian fee offset arrangements reduced expenses
of the Money Market and Insured Long-Term Portfolios by $7,000 and $5,000,
respectively.
22
<PAGE> 25
D. During the year ended November 30, 1997, the Insured Long-Term Portfolio
purchased $71,646,000 of investment securities and sold $31,342,000 of
investment securities, other than temporary cash investments.
E. Capital gain distributions are determined on a tax basis and may differ from
realized capital gains for financial reporting purposes due to differences in
the timing of realization of gains. For federal income tax purposes, the
Portfolios had the following capital losses available at November 30, 1997, to
offset future capital gains:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
CAPITAL LOSS
----------------------------------------
EXPIRATION
AMOUNT FISCAL YEAR(S)ENDING
PORTFOLIO (000) NOVEMBER 30,
- -------------------------------------------------------------------
<S> <C> <C>
Money Market $ (4) 2002-2004
Insured Long-Term (157) 2005
- -------------------------------------------------------------------
</TABLE>
F. At November 30, 1997, net unrealized appreciation of Insured Long-Term
Portfolio investment securities for financial reporting and federal income tax
purposes was $13,209,000, consisting of unrealized gains of $13,224,000 on
securities that had risen in value since their purchase and $15,000 in
unrealized losses on securities that had fallen in value since their purchase.
At November 30, 1997, the aggregate settlement value of open futures
contracts expiring in March 1998 and the related unrealized depreciation were:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
(000)
----------------------------
NUMBER OF AGGREGATE
SHORT SETTLEMENT UNREALIZED
PORTFOLIO/FUTURES CONTRACTS CONTRACTS VALUE DEPRECIATION
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Insured Long-Term/
U.S. Treasury Bond 25 $2,976 $(6)
- ---------------------------------------------------------------------------
</TABLE>
23
<PAGE> 26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Trustees of
Vanguard Ohio Tax-Free Fund
In our opinion, the accompanying statements of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Money Market Portfolio and Insured Long-Term Portfolio (constituting Vanguard
Ohio Tax-Free Fund, hereafter referred to as the "Fund") at November 30, 1997,
the results of each of their operations for the year then ended, the changes in
each of their net assets for each of the two years in the period then ended and
the financial highlights for each of the five years in the period then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at November 30, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where securities purchased had not been settled, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 6, 1998
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD OHIO TAX-FREE FUND
This information for the fiscal year ended November 30, 1997, is included
pursuant to provisions of the Internal Revenue Code.
Each Portfolio designates 100% of its income dividends as exempt-interest
dividends.
24
<PAGE> 27
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Chairman of the Board and Director of The Vanguard Group, Inc., and of each of
the investment companies in The Vanguard Group.
JOHN J. BRENNAN
President, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
BURTON G. MALKIEL
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Amdahl Corp., Baker Fentress & Co., The
Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co., and
NACCO Industries.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell Company is
the owner of trademarks and copyrights relating to the Russell Indexes.
"Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire Associates.
<PAGE> 28
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Small Capitalization Stock
Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees'Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
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BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
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Treasury Portfolio
Long-Term Corporate
Portfolio
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Portfolio
Short-Term Corporate
Portfolio
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Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
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Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
Treasury Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Q960-11/97
(C) 1998 Vanguard Marketing
Corporation, Distributor
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, Pennsylvania 19482
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
www.vanguard.com
[email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
