<PAGE>
[Graphic Omitted] Tax Free
Fund of
Vermont
Vermont Fund Advisors, Inc.
128 Merchants Row
Rutland, Vermont 05701
1-800-675-3333
SEMIANNUAL
REPORT TO
SHAREHOLDERS
June 30, 1997
[Graphic Omitted]
<PAGE>
June 30, 1997
To the Shareholders of
Tax Free Fund of Vermont:
During the first six months of 1997, your Fund once again performed among the
top state tax free bond funds. During this period, interest rates on tax
exempt bonds decreased and municipal bonds accordingly increased in value. The
Fund's excellent performance was achieved principally as a result of the
management of the Fund to realize substantial gains on pre-refunded bond
positions held in the Fund's portfolio. During April, 1997, the Fund sold its
largest position, $1.8 million principal amount of Swanton Village Electric
Department bonds which had been pre-refunded, and realized a gain of over
$100,000 thereon. Your Fund's net asset value, reflecting these circumstances,
increased from $9.97 per share at year end 1996 to $10.09 per share on June
30, 1997.
The Fund has maintained both the diversity and the credit quality of the
bondholdings in the Fund's investment grade portfolio. As of June 30, 1997,
the Fund's portfolio included securities of 21 different tax-exempt issuers.
The credit quality of the Fund's portfolio as of June 30, 1997 was as follows:
RATING PERCENT OF
CATEGORY PORTFOLIO ASSETS
-------- ----------------
AAA 5.0%
AA 7.4%
A 34.2%
BBB or equivalent 53.4%
The Fund paid dividends totalling 21.3 cents per share during the first six
months of 1997.
The Tax Free Fund of Vermont offers Vermont residents a no load tax free
mutual fund that earns income free of both federal and Vermont income taxes.
We encourage you to call us toll-free or visit our office to discuss any
aspect of the Fund's management or operation. In addition, your suggestions,
comments and advice are always welcomed. Thank you again for your confidence,
investment in and support of the Fund.
Yours truly,
/s/ John T. Pearson
John T. Pearson
President
<PAGE>
<TABLE>
TAX FREE FUND OF VERMONT, INC.
PORTFOLIO OF INVESTMENTS
JUNE 30, 1997
UNAUDITED
<CAPTION>
MUNICIPAL BONDS (96.8%) MATURITY PRINCIPAL MARKET
RATE DATE AMOUNT VALUE
---- -------- --------- -----
<S> <C> <C> <C> <C>
VERMONT (85.3%)
Vermont Educational and
Health Buildings Agency
1991 Revenue Bond (FHA Insured)
(Helen Porter Nursing Home Project) ....... 7.1% 02/01/31 $ 275,000 $ 292,531
Vermont Educational and
Health Buildings Financing
Agency 1996 Revenue Bond
(Middlebury College Project) .............. 6.0 11/01/22 145,000 146,812
Vermont Educational and
Health Buildings Financing Agency
1996 Revenue Bond
(Norwich University Project) .............. 6.0 9/01/13 105,000 108,150
Vermont Educational and
Health Buildings Financing Agency
1994 Revenue Bond
(St. Johnsbury Academy Project) ........... 7.15 04/15/14 1,115,000 1,194,444
Vermont Educational and
Health Buildings Financing Agency
1994 Revenue Bond
(St. Johnsbury Academy Project) ........... 7.375 04/15/24 225,000 243,000
Vermont Educational and
Health Buildings Financing Agency
1993 Revenue Bond
(Champlain College Project) ............... 6.0 10/01/13 260,000 267,475
Vermont Educational and
Health Buildings Financing Agency
1994 Revenue Bond
(Landmark College Project) ................ 7.15 11/01/14 500,000 553,125
Vermont Educational and
Health Buildings Financing Agency
1996 Revenue Bond
(Lyndon Institute Project) ................ 6.6 12/01/14 335,000 352,168
Vermont Educational and
Health Buildings Financing Agency
1996 Revenue Bond
(Northwestern Medical Center Project) ..... 6.25 09/01/18 435,000 438,263
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1990 Series 2 ....................... 7.3 05/01/05 285,000 297,113
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1989 Series A ....................... 7.85 12/01/29 265,000 276,263
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1988 Series B ....................... 8.1% 06/01/22 380,000 395,014
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1990 Series 1 ....................... 8.15 05/01/25 175,000 180,906
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1992 Series 4 ....................... 6.4 11/01/25 660,000 691,350
Vermont Housing Finance Agency
Multi-Family Mortgage-Backed
Bond, 1977 Series 1 ....................... 6.5 02/15/17 75,000 75,212
Vermont Housing Finance Agency
Single Family Mortgage-Backed
Bond, 1994 Series 5 ....................... 6.875 11/01/16 100,000 105,750
Champlain Water District,
Vermont General Obligation
Bond, Series 1991 ......................... 7.125 10/01/06 200,000 231,500
Vermont Student Assistance
Corporation, 1992 Series B
Revenue Bond .............................. 6.7 12/15/12 335,000 357,613
----------
Total Vermont Bonds ................... 6,206,689
----------
PUERTO RICO (5.9%)
Puerto Rico Aqueduct & Sewer
Authority, 1995 Series
Revenue Bond .............................. 6.25 07/01/13 160,000 174,800
Puerto Rico Public Building
Authority, 1993 Refunding Series M
Revenue Bond .............................. 5.75 07/01/15 250,000 251,250
----------
Total Puerto Rico Bonds ............... 426,050
----------
U. S. VIRGIN ISLANDS (5.6%)
U. S. Virgin Islands Public Finance
Authority, 1992 Series A
Revenue Bond .............................. 7.25 10/01/18 375,000 408,750
----------
Total U. S. Virgin Islands Bonds .......... 408,750
----------
Total investments in securities
(Cost $6,927,485) (96.8%) (1) ........... 7,041,489
Other assets and liabilities, net (3.2%) .. 231,956
----------
Net assets (100%) ......................... $7,273,445
==========
(1) The cost of investments for federal income tax purposes amounted to
$6,927,485. Gross unrealized appreciation and depreciation of investments
based on identified tax cost at June 30, 1997 are as follows:
Gross unrealized appreciation ...................................................... $ 133,716
Gross unrealized depreciation ...................................................... (19,712)
----------
Net unrealized appreciation ........................................................ $ 114,004
==========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1997
UNAUDITED
<S> <C>
ASSETS
- ------
Investments in securities at market value (identified cost $6,927,485) (Note 1-A) ....... $7,041,489
Cash .................................................................................... 66,468
Interest Receivable ..................................................................... 94,743
Due from Adviser ........................................................................ 1,327
Prepaid Expenses and Other Assets ....................................................... 73,636
----------
TOTAL ASSETS ........................................................................ 7,277,663
----------
LIABILITIES
- -----------
Accrued expenses ........................................................................ 4,218
----------
TOTAL LIABILITIES ................................................................... 4,218
----------
NET ASSETS
- ----------
(Applicable to 721,169 shares outstanding, $.01 par value, 10,000,000 shares
authorized) ............................................................................. $7,273,445
==========
NET ASSET VALUE, OFFERING AND REPURCHASE PRICE PER SHARE
- --------------------------------------------------------
($7,277,663 / 721,169) $10.09
======
NET ASSETS
- ----------
At June 30, 1997, net assets consisted of:
Paid-in capital ....................................................................... $7,121,522
Accumulated net realized loss on investments .......................................... (10,638)
Unrealized appreciation of investments .................................................. 162,561
----------
$7,273,445
==========
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
UNAUDITED
<S> <C>
INVESTMENT INCOME
- -----------------
INCOME
Interest ............................................................................ $213,739
--------
EXPENSES
Investment advisory fees (Note 4) ................................................... 25,166
Audit and legal fees ................................................................ 5,147
Insurance ........................................................................... 4,734
Printing and postage ................................................................ 7,844
Administrative and shareholder services (Note 4) .................................... 4,937
Custody fees ........................................................................ 1,083
Portfolio pricing costs ............................................................. 1,263
Registration fees ................................................................... 503
Directors fees and expenses ......................................................... 3,639
Other ............................................................................... 290
--------
TOTAL EXPENSES ...................................................................... 54,606
--------
NET INVESTMENT INCOME ............................................................. 159,133
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------
Net realized gain on investments sold ............................................... 118,058
Net change in unrealized appreciation ............................................... (28,297)
--------
NET GAIN ON INVESTMENTS ......................................................... 89,761
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................... $248,894
========
See accompanying notes to financial statements.
</TABLE>
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 1997
UNAUDITED
INCREASE IN NET ASSETS FROM OPERATIONS
- --------------------------------------
Net investment income ........................................... $ 159,133
Net realized gain (loss) on investments ......................... 118,058
Net change in unrealized appreciation ........................... (28,297)
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS ................................. 248,894
DISTRIBUTIONS TO SHAREHOLDERS FROM
----------------------------------
Net investment income ......................................... (159,133)
CAPITAL SHARE TRANSACTIONS (Note 3)
-----------------------------------
Decrease in net assets resulting from capital share
transactions ................................................ (35,073)
----------
TOTAL INCREASE IN NET ASSETS ................................ 54,688
NET ASSETS
- ----------
Beginning of period ............................................. 7,218,757
----------
END OF PERIOD ................................................... $7,273,445
==========
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
JANUARY 1, 1997 YEAR ENDED
TO DECEMBER 31,
JUNE 30, 1997 1996
--------------- ------------
NET ASSET VALUE
- ---------------
BEGINNING OF PERIOD ........................... $ 9.97 $ 9.96
INCOME FROM INVESTMENT OPERATIONS
Net investment income ..................... .21 .43
Net gain (loss) on securities (both
realized and unrealized) ...................... .12 .01
----- -----
TOTAL FROM INVESTMENT OPERATIONS .......... .33 .44
----- -----
LESS DISTRIBUTIONS
Dividends from net investment income ...... (.21) (.43)
----- -----
END OF PERIOD ............................... $10.09 $ 9.97
====== ======
TOTAL RETURN .................................. 6.62%(1) 4.56%
- ------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
NET ASSETS AT END OF PERIOD (000'S) ......... $7,273 $7,219
RATIO OF EXPENSES TO AVERAGE NET ASSETS ..... 1.50%(1) 1.55%
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET
ASSETS ........................................ 4.36%(1) 4.41%
PORTFOLIO TURNOVER ............................ 43% 98%
- ------------------
(1)Annualized
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
UNAUDITED
(1) Summary of Significant Accounting Policies
------------------------------------------
The Tax Free Fund of Vermont, Inc. (the "FUND") was incorporated under the
laws of the State of Vermont on May 20, 1991. The Fund is registered under the
Investment Company Act of 1940, as amended, as a non-diversified open-end
investment company. The Fund's investment goal is to seek the highest level of
current income exempt from Federal and Vermont income taxes for shareholders
as is consistent with the prudent investment management of the principal
invested by shareholders.
The following is a summary of the significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
policies are in conformity with generally accepted accounting principles.
(A) Security Valuation
------------------
Portfolio securities are valued by an independent pricing service using
market quotations, prices provided by market makers, or estimates of market
values obtained from yield data relating to instruments or securities with
similar characteristics, in accordance with procedures established in good
faith by the Board of Directors.
(B) Security Transactions and Investment Income
-------------------------------------------
Security transactions are accounted for on the trade date. Interest income
is accrued on a daily basis. Bond premiums and discounts are amortized/
accreted as required by the Internal Revenue Code.
(C) Income Taxes
------------
It is the Fund's policy to qualify as a regulated investment company by
complying with the requirements of the Internal Revenue Code applicable to
regulated investment companies, including the distribution of all taxable
income to the Fund's shareholders. Therefore, no Federal income tax
provision is required. By qualifying as a "REGULATED INVESTMENT COMPANY"
for Federal income tax purposes, the Fund is not subject to Vermont income
taxes on net income and net capital gains, if any, that are distributed to
the Fund's shareholders. Dividends paid by the Fund to share-holders which
qualify as "EXEMPT INTEREST DIVIDENDS" for Federal income tax purposes are
also excludable from shareholders' gross income for Vermont state income
tax purposes so long as the total assets of the Fund are invested in
Vermont Municipal Bonds and Other Municipal Bonds as defined in the
prospectus. The Fund intends to avoid excise tax liability by making the
required distributions under the Internal Revenue Code.
(D) Distributions to Shareholders
-----------------------------
The Fund intends to declare daily and distribute monthly to its
shareholders dividends from net investment income and to declare and
distribute annually net realized long-term capital gains, if any. Each
distribution will be made in shares or, at the option of the shareholder,
in cash.
(E) Use of Estimates
----------------
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that
affest the reported amounts of assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
(2) Purchases and Sales of Securities
---------------------------------
Realized gains and losses are recorded on the specific identification method.
Costs of purchases and proceeds from sales of securities for the Fund for the
six months ended June 30, 1997 aggregated $2,867,020 and $2,971,488,
respectively.
(3) Capital Share Transactions
--------------------------
Transactions in shares of the Fund for the six months ended June 30, 1996 were
as follows:
SHARES AMOUNT
----- ------
Shares sold ....................................... 65,686 $654,178
Shares issued in reinvestment of dividends ........ 11,004 109,793
Shares redeemed ................................... (79,814) (799,044)
------ --------
NET DECREASE ...................................... (3,126) $(35,073)
====== ========
(4) Investment Advisory Fee and Other Transactions with Affiliates
--------------------------------------------------------------
As compensation for its management services, the Fund has agreed to pay
Vermont Fund Advisors, Inc. (the "Advisor") a fee computed at the annual rate
of .7% (seven-tenths of 1 percent) of average daily net asset value. However,
the Advisor may voluntarily waive or refund investment advisory fees payable
to it under the Advisory Agreement and assume and pay or otherwise reimburse
the Fund for other operating expenses to whatever extent deemed necessary and
appropriate. There was no reimbursement made by the Advisor for the six months
ended June 30, 1997.
In addition, the Fund has entered into an Administrative Services Agreement
with the Advisor. The Agreement provides for a fee computed at a rate of .08%
(eight-one hundredths of 1 percent) on the average daily net asset value of
the Fund to be paid for administrative services received by the Fund. For the
six months ended June 30, 1997, administrative services fees paid by the Fund
totaled $2,986.
The president, director and sole shareholder of the Advisor also serves as
president and as a director of the Fund. Officers of the Fund receive no
compensation directly from the Fund. The directors of the Fund were paid
$1,400 in fees for the six months ended June 30, 1997.
(5) Concentration of Credit Risk
----------------------------
The Fund invests a substantial portion of its investments in debt obligations
issued by the State of Vermont and its political sub-divisions, agencies and
public authorities to obtain funds for various public purposes. The Fund is
more susceptible to factors adversely affecting issuers of Vermont municipal
securities than is a fund that is not concentrated in these issuers to the
same extent.
