<PAGE>
[Logo] Tax Free
Fund of
Vermont
Vermont Fund Advisors, Inc.
128 Merchants Row
Rutland, Vermont 05701
1-800-675-3333
SEMI-ANNUAL
REPORT TO
SHAREHOLDERS
June 30, 1998
[Graphic Omitted]
<PAGE>
June 30, 1998
To the Shareholders of
Tax Free Fund of Vermont:
During the first six months of 1998, your Fund continued its excellent
performance in a period of increasing uncertainty in the equity markets.
During this period, interest rates on tax exempt bonds decreased slightly
while the bonds increased in value. Principal contributors to the Fund's
excellent performance included a reduction of the Fund's expense ratio as well
as the judicious management of the portfolio to improve performance. These
efforts were rewarded as investors increased the Fund from $7.9 million to
$9.0 million during the first half of 1998. The Fund's net asset value
remained very stable during this period, changing from $10.29 on December 31,
1997 to $10.27 on June 30, 1998.
The Fund has increased the diversity of its holdings and maintained the credit
quality of the bonds in the Fund's investment grade portfolio. As of June 30,
1998, the Fund's portfolio included securities of 26 different tax-exempt
issuers. The credit quality of the Fund's portfolio as of June 30, 1998 was as
follows:
Rating Percent of
Category Portfolio Assets
-------- ----------------
AAA 5.0%
AA 5.4%
A 34.2%
BBB or equivalent 55.4%
The Fund paid dividends totalling 23.0 cents per share during the first six
months of 1998.
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
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<TABLE>
TAX FREE FUND OF VERMONT, INC.
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998
UNAUDITED
<CAPTION>
MUNICIPAL BONDS (93.1%) MATURITY PRINCIPAL MARKET
RATE DATE AMOUNT VALUE
---- -------- --------- ----------
<S> <C> <C> <C> <C>
VERMONT (80.1%)
Vermont Municipal Bond Bank 1996 Series 1
(Insured) ................................ 6.0% 12/01/26 $100,000 $ 108,000
Vermont Municipal Bond Bank 1995 Series 2
Refunding (Insured) ...................... 5.5% 12/01/22 100,000 102,265
Vermont Educational and Health Buildings
Agency 1991 Revenue Bond (FHA Insured)
(Helen Porter Nursing Home Project) 7.1% 02/01/31 275,000 294,594
Vermont Educational and Health Buildings
Financing Agency 1996 Revenue Bond (St.
Michael's College Project) ............... 5.9% 04/01/11 150,000 160,875
Vermont Educational and Health Buildings
Financing Agency 1993 Revenue Bond
(Medical Center Hospital Project) ........ 6.0% 09/01/22 550,000 590,562
Vermont Educational and Health Buildings
Financing Agency 1992 Revenue Bond
(Middlebury College Project) ............. 6.0% 11/01/22 100,000 107,375
Vermont Educational and Health Buildings
Financing Agency 1996 Revenue Bond
(Middlebury College Project) ............. 5.375% 11/01/26 100,000 101,375
Vermont Educational and Health Buildings
Financing Agency 1996 Revenue Bond
(Norwich University Project) ............. 6.0% 09/01/13 105,000 110,119
Vermont Educational and Health Buildings
Financing Agency 1998 Revenue Bond
(Norwich University Project) ............. 5.5% 07/01/21 110,000 110,000
Vermont Educational and Health Buildings
Financing Agency 1994 Revenue Bond (St.
Johnsbury Academy Project) ............... 7.15% 04/15/14 1,145,000 1,238,031
Vermont Educational and Health Buildings
Financing Agency 1994 Revenue Bond (St.
Johnsbury Academy Project) ............... 7.375% 04/15/24 325,000 353,844
Vermont Educational and Health Buildings
Financing Agency 1993 Revenue Bond
(Champlain College Project) .............. 6.0% 10/01/13 260,000 273,975
Vermont Educational and Health Buildings
Financing Agency 1994 Revenue Bond
(Landmark College Project) ............... 7.15% 11/01/14 500,000 565,000
Vermont Educational and Health Buildings
Financing Agency 1996 Revenue Bond (Lyndon
Institute Project) ....................... 6.6% 12/01/14 335,000 364,731
Vermont Educational and Health Buildings
Financing Agency 1996 Revenue Bond
(Northwestern Medical Center Project) .... 6.25% 09/01/18 530,000 557,825
Vermont Housing Finance Agency Single Family
Mortgage-Backed Bond, 1990 Series 2 ...... 7.3% 05/01/05 285,000 299,963
Vermont Housing Finance Agency Single Family
Mortgage-Backed Bond, 1989 Series A ...... 7.85% 12/01/29 265,000 274,103
Vermont Housing Finance Agency Single Family
Mortgage-Backed Bond, 1990 Series 1 ...... 8.15% 05/01/25 185,000 192,631
Vermont Housing Finance Agency Single Family
Mortgage-Backed Bond, 1992 Series 4 ...... 6.4% 11/01/25 670,000 715,225
Vermont Housing Finance Agency Multi-Family
Mortgage-Backed Bond, 1995 Multi Family .. 6.15% 02/15/14 100,000 107,875
Vermont Housing Finance Agency Multi-Family
Mortgage-Backed Bond, 1977 Series 1 ...... 6.5% 02/15/17 70,000 70,350
Vermont Housing Finance Agency Single Family
Mortgage-Backed Bond, 1994 Series 5 ...... 6.875% 11/01/16 100,000 108,875
Vermont Student Assistance Corporation, 1992
Series B Revenue Bond .................... 6.7% 12/15/12 395,000 429,563
----------
TOTAL VERMONT BONDS ...................... 7,237,515
----------
PUERTO RICO (7.7%)
Puerto Rico Electric Power Authority, 1998
Series Revenue Bond ...................... 4.5% 07/01/18 250,000 233,438
Puerto Rico Industrial, Medical and
Environmental Authority, 1997 (Ryder
Hospital Series) Revenue Bond ............ 6.6% 05/01/14 425,000 462,188
----------
TOTAL PUERTO RICO BONDS .................. 695,625
----------
U. S. VIRGIN ISLANDS (5.3%)
U.S. Virgin Islands Public Finance Authority,
1992 Series A Revenue Bond ............... 7.25% 10/01/18 425,000 485,031
----------
TOTAL U. S. VIRGIN ISLANDS BONDS ........ 485,031
----------
TOTAL INVESTMENTS IN SECURITIES
(COST $8,181,547) (93.1%) (1) .......... 8,418,172
OTHER ASSETS AND LIABILITIES, NET (6.9%) . 621,348
----------
NET ASSETS - 100% ........................ $9,039,520
==========
(1) The cost of investments for federal income tax purposes amounted to
$8,134,711. Gross unrealized appreciation and depreciation of investments
based on identified tax cost at June 30, 1998 are as follows:
Gross unrealized appreciation ...................................................... $ 297,384
Gross unrealized depreciation ...................................................... (13,923)
----------
Net unrealized appreciation ........................................................ $ 283,461
==========
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
UNAUDITED
<S> <C>
ASSETS
- ------
Investments in securities at market value (identified cost $8,181,547) (Note 1-A) ....... $8,418,172
Cash .................................................................................... 67,789
Interest Receivable ..................................................................... 107,357
Bonds Sold Receivable ................................................................... 385,415
Prepaid Expenses and Other Assets ....................................................... 59,844
----------
TOTAL ASSETS ........................................................................ 9,038,577
---------
LIABILITIES
- -----------
Accrued expenses ........................................................................ (943)
----------
TOTAL LIABILITIES ................................................................... (943)
----------
NET ASSETS
- ----------
(Applicable to 879,827 shares outstanding, $.01 par value, 10,000,000 shares
authorized) ......................................................................... $9,039,520
==========
NET ASSET VALUE, OFFERING AND REPURCHASE PRICE PER SHARE
- --------------------------------------------------------
($9,039,520 / 879,827) ................................................................ $10.27
======
NET ASSETS
- ----------
At June 30, 1998, net assets consisted of:
Paid-in capital ....................................................................... $8,749,946
Accumulated net realized gain on investments .......................................... 6,113
Unrealized appreciation of investments ................................................ 283,461
----------
$9,039,520
==========
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
UNAUDITED
<S> <C>
INVESTMENT INCOME
- -----------------
INCOME
Interest ............................................................................ $243,857
--------
EXPENSES
Investment advisory fees (Note 4) ................................................... 29,272
Audit and legal fees ................................................................ 5,489
Insurance ........................................................................... 4,409
Printing and postage ................................................................ 8,074
Administrative and shareholder services (Note 4) .................................... 4,324
Custody fees ........................................................................ 1,327
Portfolio pricing costs ............................................................. 1,616
Registration fees ................................................................... 519
Directors fees and expenses ......................................................... 84
Other ............................................................................... 289
--------
TOTAL EXPENSES ...................................................................... 54,403
--------
NET INVESTMENT INCOME ............................................................. 188,454
--------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
- --------------------------------------------------
Net realized loss on investments sold ............................................... (12,985)
Net change in unrealized appreciation ............................................... (2,325)
--------
NET LOSS ON INVESTMENTS ......................................................... (15,310)
--------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .......................... $173,144
========
See accompanying notes to financial statements.
</TABLE>
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<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 1998
UNAUDITED
<S> <C>
INCREASE IN NET ASSETS FROM OPERATIONS
- --------------------------------------
Net investment income ................................................................. $ 188,454
Net realized gain (loss) on investments ............................................... (12,985)
Net change in unrealized appreciation ................................................. (2,325)
----------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .............................. 173,144
DISTRIBUTIONS TO SHAREHOLDERS FROM
----------------------------------
Net investment income ............................................................... (188,454)
CAPITAL SHARE TRANSACTIONS (Note 3)
-----------------------------------
Increase in net assets resulting from capital share transactions .................... 1,175,668
----------
Total increase in net assets ...................................................... 1,160,358
NET ASSETS
- ----------
Beginning of period ................................................................... 7,879,162
----------
End of period ......................................................................... $9,039,520
==========
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD)
JANUARY 1, 1998 YEAR ENDED
TO DECEMBER 31,
JUNE 30, 1998 1997
------------- ------------
<S> <C> <C>
NET ASSET VALUE
BEGINNING OF PERIOD ............................................... $10.29 $ 9.97
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income ......................................... .23 .43
Net gain (loss) on securities (both realized and unrealized) .. (.02) .32
------ ------
TOTAL FROM INVESTMENT OPERATIONS .............................. .21 .75
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income .......................... (.23) (.43)
------ ------
END OF PERIOD ................................................... $10.27 $10.29
====== ======
TOTAL RETURN ...................................................... 4.09%(1) 7.74%
- ------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
NET ASSETS AT END OF PERIOD (000'S) ............................. $9,040 $7,879
RATIO OF EXPENSES TO AVERAGE NET ASSETS ......................... 1.31%(1) 1.72%
RATIO OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS ............ 4.46%(1) 4.26%
PORTFOLIO TURNOVER ................................................ 17% 60%
- ------------------
(1) Annualized
See accompanying notes to financial statements.
</TABLE>
<PAGE>
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
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
affect 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 ....................................... 125,605 $1,292,625
Shares issued in reinvestment of dividends ........ 13,034 133,970
Shares redeemed ................................... (24,484) (251,818)
------- ----------
NET INCREASE ...................................... 114,155 $1,119,184
======= ==========
(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, 1998.
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, 1998, administrative services fees paid by the Fund
totaled $3,345.
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 $700
in fees for the six months ended June 30, 1998.
(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.
