<PAGE> 1
VANGUARD
PENNSYLVANIA
TAX-FREE FUND
ANNUAL REPORT 1993
[PHOTO]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two decades
composed one of the great cycles in the history of the financial markets, as
reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital change plus
income) of stocks and bonds averaged only about +6% per year; cash reserves
averaged more than +8% annually. However, high inflation rates, averaging 8.7%
annually, devastated these nominal results. Real returns (nominal returns less
the inflation rate) for each of these three major asset classes were actually
negative.
* During the 1983-1992 decade, quite the opposite situation prevailed. Nominal
returns for stocks and bonds were close to their highest levels in history and
forged well into double-digit territory. To make a good investment environment
even better, inflation was tame (averaging 3.8% annually), and real returns
were solidly positive.
[A TALE OF TWO DECADES GRAPH -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that will end
in the year 2002. Some investors will fear a recurrence of the returns of the
first decade, while others will hope for a recurrence of the second; most will
likely anticipate something in between. Whatever the case, there are two
essential elements involved in considering your investment program in the light
of today's circumstances.
First, the yield of each investment class at the start of a decade has
had an important relationship to its future return. Yields were low when
1973 began, high when 1983 began, and are again low today. In fact, current
income yields are remarkably close to the levels of 20 years ago, as shown
in the following table.
<TABLE>
<CAPTION>
INCOME YIELDS (January 1)
--------------------------------------
1973 1983 1993 (11/30)
- --------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
- --------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation. It got
progressively worse during most of the first decade, but got progressively
better in the second.
<TABLE>
<CAPTION>
-----------------------------------
1973 1981 1993 (11/30)
- -------------------------------------------------------
<S> <C> <C> <C>
Inflation 3.4% 12.4% 2.7%
- -------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns are in
prospect for the coming decade than in the 1980s; indeed, returns could
gravitate
(Please turn to inside back cover)
VANGUARD PENNSYLVANIA TAX-FREE FUND OFFERS TWO PORTFOLIOS THAT SEEK TO PROVIDE
A HIGH LEVEL OF INCOME THAT IS EXEMPT FROM FEDERAL AS WELL AS PENNSYLVANIA
STATE PERSONAL INCOME TAXES. THE INSURED LONG-TERM PORTFOLIO INVESTS PRIMARILY
IN INSURED LONG-TERM MUNICIPAL BONDS. THE MONEY MARKET PORTFOLIO SEEKS TO
MAINTAIN A CONSTANT NET ASSET VALUE OF $1.00 PER SHARE ALONG WITH REASONABLE
CURRENT INCOME.
<PAGE> 3
CHAIRMAN'S LETTER
FELLOW SHAREHOLDER:
The decline in interest rates continued--and indeed accelerated--during the
twelve months ended November 30, 1993, the eighth fiscal year of the Vanguard
State Tax-Free Funds. Lower yields pushed the prices of long-term tax-exempt
bonds higher, and the net asset values of our Insured Long-Term Portfolios
benefited accordingly. As rates fell, however, interest income was reduced,
with the most immediate impact felt in our Money Market Portfolios.
Reflecting the low-interest-rate environment that prevailed over the
past twelve months, our Money Market Portfolios provided returns that were
modest in an absolute sense, albeit comfortably above the returns of their
respective competitive benchmarks. The total returns (capital change plus
income) of our Insured Long-Term Portfolios were exemplary, surpassing even the
excellent results that we achieved in our prior fiscal year. It is difficult to
imagine a more beneficial two-year stretch for investors in long-term bonds. In
any event, here are the Portfolio highlights for the past twelve months:
* THE STATE MONEY MARKET PORTFOLIOS--
provided total returns of about +2.4% . . . with declining money market
rates for yet another year, Portfolio yields ended the period at lower levels
than where they began, hovering in the area of 2.3% . . . net asset values, of
course, remained at $1.00 per share.
* THE STATE INSURED LONG-TERM PORTFOLIOS-- enjoyed another outstanding year
"across the board," as each Portfolio turned in a double-digit return ranging
from +12% to +13% . . . current yields are at their lowest levels in our Funds'
(admittedly rather short) history.
The detailed results for each of our State Tax-Free Portfolios,
including per share net asset values, dividends and capital gains distributions
for the fiscal year, as well as current yields are presented at the end of this
letter. The following table summarizes the returns for our State Insured
Long-Term Portfolios:
<TABLE>
<CAPTION>
Investment Returns
Twelve Months Ended
November 30, 1993 % of Total
Insured Long-Term ---------------------- Return From
Portfolio Income Capital Total Capital
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA +5.8% +5.7% +11.5% 49%
NEW YORK +6.0 +6.4 +12.4 52
PENNSYLVANIA +6.1 +5.8 +11.9 49
NEW JERSEY +5.9 +6.6 +12.5 52
OHIO +5.7 +6.3 +12.0 52
FLORIDA +5.5 +6.9 +12.4 56
- ---------------------------------------------------------
</TABLE>
In last year's Annual Report, I called special attention to the substantial
capital component (appreciation in net asset value per share) of the total
returns on our State Insured Long-Term Portfolios. My purpose in doing so at
that time was to advise investors that it seemed unreasonable to expect a
recurrence of these capital returns in fiscal 1993. As shown in the table, this
year the role of capital appreciation in our Portfolios' results turned out to
be even more dramatic, accounting on balance for some 50% of our total returns.
(continued)
1
<PAGE> 4
[MONTH-END YIELDS GRAPH -- See Edgar Appendix]
Although my cautionary words one year ago could hardly have been further
off the mark, I nonetheless would remind shareholders that capital returns of
the magnitude shown in the preceding table simply cannot be taken for granted.
Indeed, with long-term interest rates at their lowest levels in two decades,
now is a perfect opportunity to remind investors that, should rates reverse
direction and move higher "capital reward" will inevitably translate to "capital
penalty" for each of our six Insured Long-Term Portfolios.
The excellent absolute returns for all of our Insured Long-Term
Portfolios in fiscal 1993 come on top of the double-digit returns earned in the
prior fiscal year. The chart at the top of the facing page illustrates the
results of the Pennsylvania Insured Long-Term Portfolio since its inception in
April 1986, compared with the results of the two most appropriate available
benchmarks: the unmanaged Lehman Municipal Bond Index and the average
Pennsylvania insured municipal fund. You can see that our long-term return has
been somewhat better than that of the average competitor, and matched that of
the unmanaged Index. I should also note that the Pennsylvania Money Market
Portfolio has achieved respectable results since its inception in June 1988,
achieving a cumulative return of +27.0% versus +27.2% for its average competitor
(+4.5% versus +4.5% annually).
* THE FISCAL YEAR IN REVIEW
Our 1993 fiscal year was the sixth consecutive year of favorable markets--and
the third consecutive year of double-digit returns--for long-term bonds. Lower
yields drove up the prices of municipal, corporate, and U.S. Treasury bonds
alike. Treasury bonds registered the largest rate declines and garnered the
greatest price appreciation, gaining some +17% for the year. Over the same
period, yields on high- grade, long-term, tax-exempt bonds fell 0.70% (70
"basis points"), from 6.2% to 5.5%, resulting in a price increase of +10%.
Compared to the sharp decline in long-term rates over the past twelve
months, the drop in short-term tax-exempt rates was fairly muted. From the 2.7%
level at the outset of the fiscal year, yields on high-grade (MIG 1) municipal
notes fell to 2.0% in January 1993, climbed to 2.6% at the end of July, and
closed the year at 2.4%.
The consensus holds that the rate decline is based on two fundamental
factors. First, the U.S. economy remains sluggish, unable to provide the typical
post- recession snapback that investors have come to expect. Second, and perhaps
more importantly, there is continuing evidence that inflation remains well under
control. The U.S. consumer price index (CPI) increased 2.7% over the past
twelve months, compared to 3.0% during the prior twelve-month period. As a
result, despite the sharp decline in interest rates, "real" yields (nominal
yields less the inflation rate) on long-term bonds remain at healthy levels. The
chart to the left provides a striking illustration of how precipitous the
decline in interest
2
<PAGE> 5
[CUMULATIVE PERFORMANCE GRAPH -- SEE EDGAR APPENDIX]
rates has been over the past four years, with nearly all of the decline coming
during the final three years. The yield on high-grade, long-term municipal
bonds fell from 7.0% on November 30, 1989, to 5.5% on November 30, 1993. For
short-term tax-exempt rates, the decline during the same period was more
pronounced, with the yield on high-grade notes falling on balance from 5.9% to
2.4%. As a result of this disparity in rate declines, the "spread" of the long
rate over the short rate has widened from 110 basis points at the beginning of
the period to 310 basis points at the end. This widening reflects a very
"steep" yield curve, allowing fixed-income investors to earn a substantial
income premium by extending the maturity of their bond holdings. It should go
without saying that each step out in length of maturity brings with it
additional price volatility.
* THE ADVANTAGE OF TAX-EXEMPT INCOME
In each year's Annual Report, we present our customary table illustrating the
advantage of tax-exempt investments versus taxable investments, after adjusting
for the effect of Federal taxes at the maximum marginal rate on income
payments. Here are the results of the comparison at the end of fiscal 1993:
<TABLE>
<CAPTION>
- ------------------------------------------------------
Illustration of Income on
Hypothetical $100,000 Investment
---------------------------------
Long-Term Short-Term
- ------------------------------------------------------
<S> <C> <C>
TAXABLE GROSS INCOME $6,300 $3,200
LESS TAXES (39.6%) (2,500) (1,300)
- -----------------------------------------------------
NET AFTER-TAX INCOME $3,800 $1,900
TAX-EXEMPT INCOME 5,500 2,400
- -----------------------------------------------------
TAX-EXEMPT ADVANTAGE $1,700 $ 500
- -----------------------------------------------------
</TABLE>
Table assumes current yields (as of November 30, 1993) of 6.3% for U.S.
Treasury bonds, 3.2% for Treasury bills, 5.5% for long-term municipals, and
2.4% for short-term municipals. The illustration is not intended to represent
future results.
The advantage spelled out in the table--a 45% increase in after-tax income for
the long-term investor and a 26% increase for the short-term investor--strongly
suggests that investors who are taxed at the highest marginal rates should
consider tax- exempt alternatives for the fixed-income
3
<PAGE> 6
portion of their overall investment portfolio. (I should add that both the
interest earned on our State Tax-Free Portfolios and the interest earned on
U.S. Treasury obligations are exempt from taxes at the state level.)
As I noted earlier, the decline in yields on U.S. Treasury bonds has
been significantly larger than that on tax-exempt bonds. This divergence is
paradoxical considering that it comes just as the maximum marginal federal tax
rate has been raised from 31% to 39.6%--the highest rate since 1986. This
should mean that the spread between taxable and tax-exempt rates would widen;
instead, it has narrowed for long-term investors and remained about the same for
short-term investors.
To be sure, even the highest quality insured state municipal bond cannot
quite match the creditworthiness of a U.S. Treasury bond, and long-term
municipal bonds are usually callable after 10 years, a disadvantage not shared
by Treasury securities. So, the yield comparison has a moderate structural bias
in favor of municipals. But the yield differential illustrated in the table is
hardly "moderate"--it is more like "day and night." Suffice it to say that the
ability of top-tax-bracket investors to earn substantially more after-tax income
with only a marginal sacrifice in quality is unlikely to persist indefinitely.
It is probably fair to say that relative values in tax-exempt bonds are as great
on a sustained basis as they have been for two decades.
* A PERSPECTIVE ON TODAY'S INTEREST RATE ENVIRONMENT
The aggregate assets of all municipal bond mutual funds now total some $350
billion, and the funds are now among the largest buyers and holders of
tax-exempt securities. While, like all mutual funds, our State Insured
Tax-Free Portfolios promise "liquidity on demand" to shareholders, it must be
clear that providing this liquidity depends to a degree on an orderly
liquidation pattern by investors. With the exception of the industry's
experience during 1987's sharp dip in long-term bond prices, resulting from the
upward spikes in interest rates in April and May of that year, the industry's
handling of redemptions has been flawless, and daily liquidity has been
maintained without impacting the marketplace. (Given the very short maturities
of money market instruments, liquidity is much less of a concern in our State
Money Market Portfolios.)
And yet, with rates having come down so far and so fast, there is always
the risk of a sharp rebound. When that happens, investors who have purchased
municipal bond funds for the long term should not be concerned. However, there
appears to be an active body of short-term speculators who move their money from
long-term to short- term bonds at the proverbial drop of a hat. You should know
that at Vanguard we do our best to exclude these speculators from our funds, by
rigorously limiting the frequency of inter-fund exchanges and by refusing to
accept business from known "market timers."
If you are an investor who likes to speculate on interest rate changes,
I urge you to move your assets to one of our many competent competitors. If you
are an investor who will respond with fright to any kind of reversal of the past
five year's rise in bond prices, I urge you to shorten your maturity profile by,
for example, moving a portion of your assets from the more volatile Insured
Long-Term Portfolio for your state to our corresponding Money Market Portfolio
(available in all states but New York and Florida, in which case the Money
Market Portfolio of Vanguard Municipal Bond Fund might be selected). If you are
a long-term investor--content that your needs for capital stability (with
commensurate income volatility) in our Money Market Portfolios and for income
stability (with commensurate capital volatility) in our Insured Long-Term
Portfolios are being met--I urge you, once again, to "stay the course."
* IN SUMMARY
As I write this letter, the combined assets of the ten Vanguard State Tax-Free
Portfolios are approaching the $8 billion mark, up some 30% in just one year.
This staggering growth is a testament, we believe, to an ever-increasing
understanding among investors
4
<PAGE> 7
that, all else being equal, costs will "carry the day." With the yield on the
average state tax-exempt bond fund at 4.3%, and with 102 of 137 state
tax-exempt money market funds now yielding less than 2.0%, costs will be an
even more critical determinant of the top-performing funds.
This is precisely the kind of environment in which the Vanguard State
Tax-Free Portfolios should thrive. While the average competitive state tax-free
portfolio charges annual fees at the rate of 0.68% of average net assets, the
expense ratio for our Portfolios, at 0.21%, is just a fraction of this amount.
For a money market portfolio with a gross yield of 2.0%, the expenses of the
average competitor would consume nearly 35% of its interest income; Vanguard's
expenses would consume but 11%. It is hard to imagine that intelligent investors
could be attracted to a fund with such a built-in yield disadvantage.
In closing, we believe that, whatever the future course of interest
rates, our State Tax-Free Portfolios will provide returns that generally exceed
those of their respective competitors.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
December 13, 1993
Note: Mutual fund data from Lipper Analytical Services, Inc.
A WORD ABOUT CAPITAL GAINS DISTRIBUTIONS
You may recall that, during the rising bond markets of each of the past three
years, some of our Insured Long-Term Portfolios realized modest capital gains.
And, it will probably not surprise you to know that each Portfolio realized
capital gains in 1993. These amounts must, under Federal tax regulations, be
distributed to shareholders of our Portfolios as taxable capital gains.
I want to emphasize that it is not our objective to realize capital
gains; rather, these gains are a by-product of a number of factors, including,
most importantly, sharply rising municipal bond prices, bonds that are called or
refunded, and limited portfolio strategy shifts to capitalize on the relative
valuations of different market sectors.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
The current yields noted in the Chairman's letter are calculated in accordance
with SEC guidelines. The average annual total returns for the Portfolios
(periods ended September 30, 1993) are as follows:
<TABLE>
<CAPTION>
PORTFOLIO (INCEPTION DATE) 1 YEAR 5 YEARS SINCE INCEPTION
- --------------------------------------- ------ ------- ---------------
<S> <C> <C> <C>
CALIFORNIA INSURED LONG-TERM (4/7/86) +14.53% +10.62% + 8.97%
CALIFORNIA MONEY MARKET (6/1/87) + 2.42 + 4.42 + 4.49
NEW YORK INSURED TAX-FREE (4/7/86) +14.83 +10.78 + 8.41
PENNSYLVANIA INSURED LONG-TERM (4/7/86) +14.32 +10.91 + 9.23
PENNSYLVANIA MONEY MARKEt (6/13/88) + 2.41 + 4.53 + 4.58
NEW JERSEY INSURED LONG-TERM (2/3/88) +15.16 +10.78 +10.39
NEW JERSEY MONEY MARKET (2/3/88) + 2.37 + 4.50 + 4.56
OHIO INSURED LONG-TERM (6/18/90) +14.76 -- +12.12
OHIO MONEY MARKET (6/18/90) + 2.38 -- + 3.72
FLORIDA INSURED TAX-FREE (9/1/92) +15.18 -- +15.03
</TABLE>
These data represent past performance. The investment return and principal
value of an investment will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Please note that an investment in a money market fund, such as the Money Market
Portfolio of Vanguard Pennsylvania Tax-Free 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 $1.00 per share.
<TABLE>
<CAPTION>
Net Asset Value
Total Per Share
Net Assets ------------------ Twelve Months
(millions) Average Average Nov. 30, Nov. 30, ------------------------ Current
Portfolio Nov. 30, 1993 Maturity Quality* 1992 1993 Dividends Total Return Yield**
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Money Market
California $1,006 73 days MIG 1 $ 1.00 $ 1.00 $.024 + 2.4% 2.32%
Pennsylvania 935 71 days MIG 1 1.00 1.00 .024 + 2.4 2.25
New Jersey 724 58 days MIG 1 1.00 1.00 .023 + 2.3 2.23
Ohio 132 74 days MIG 1 1.00 1.00 .023 + 2.4 2.36
- ----------------------------------------------------------------------------------------------------------------
Insured Long-Term
California $1,074 11.3 years Aaa $10.89 $11.30 $.803 +11.5% 4.89%
New York 807 9.9 years Aaa 10.45 10.97 .739 +12.4 4.73
Pennsylvania 1,496 8.4 years Aaa 10.96 11.36 .855 +11.9 4.83
New Jersey 748 9.5 years Aaa 11.18 11.77 .772 +12.5 4.76
Ohio 166 8.9 years Aaa 11.07 11.61 .753 +12.0 4.77
Florida 269 10.7 years Aaa 10.16 10.86 .537 +12.4 4.88
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* MIG 1 and Aaa are Moody's highest ratings for respectively, short-term and
long-term municipal bonds.
** Money Market Portfolios' yields are 7-day annualized yields; others are
30-day SEC yields.
+ Include capital gains distributions of $.199 for California, $.145 for
New York, $.224 for Pennsylvania, $.135 for New Jersey, and $.145 for
Ohio. The shares of each of the Vanguard "single state" Portfolios are
available for purchase solely by residents of the designated states.
6
<PAGE> 9
REPORT FROM THE INVESTMENT ADVISER
STATE INSURED LONG-TERM PORTFOLIOS
* TIME FOR CHANGE?
Just one year ago, President Clinton was elected on a platform of change. Since
that time, the restrictive economic impact of higher taxes has overshadowed the
relatively quiet role played by Federal Reserve policy, and long-term interest
rates have declined precipitously. For the fiscal year ended November 30, 1993,
the yield on the 30-year U.S. Treasury Bond fell 1.2 percentage points (from
7.5% to 6.3%). During the same period, high-grade, long-term municipal yields
fell nearly three- quarters of a percentage point, from 6.2% to 5.5%.
The net result was another year of good performance both for the State
Insured Long- Term Portfolios and the bond market as a whole. In light of the
many successive years of above-average returns by longer-maturity fixed-income
investments, one has to wonder how much longer the rally can last.
* MUNICIPAL BONDS ARE ATTRACTIVE VERSUS TAXABLE BONDS
While municipal bond prices have risen sharply, taxable bond prices have
rallied even more. High-grade tax-exempt bonds currently provide 86% of the
yield on the 30- year U.S. Treasury bond, up from 82% at the beginning of the
year. This "cheapening" has been due primarily to a huge increase in the pace
of municipal bond issuance. Indeed, 1993 municipal supply set an all-time
record of some $290 billion--fully 25% above the previous record set just last
year, and easily twice the volume of a typical year's issuance.
Municipalities of all types have flooded the marketplace to refinance
higher cost debt at today's lower yield levels. We believe this process has run
full course, and suggest that municipal bonds are extremely attractive when
compared to their taxable brethren. The case for municipal bonds is even more
compelling in light of recently increased marginal tax rates.
* INVESTMENT STRATEGY
Given the current environment, the State Insured Long-Term Bond Portfolios are
pursuing the following investment strategies:
* CALL PROTECTION. We continue to emphasize call protection in all of our
longer bond portfolios. This strategy has produced greater price appreciation
as yields have declined. Importantly, it also will insulate future dividends
from an abrupt decline due to bond calls.
* MUNICIPAL VERSUS TREASURY. We have positioned the Portfolios to take
advantage of the exceptionally cheap relationship of municipal bonds versus
Treasury bonds. This positioning has been accomplished by simultaneously
establishing long positions in municipal bond futures contracts and short
positions in Treasury bond futures contracts. Although this strategy has
slightly detracted from annual performance thus far, we believe it will produce
positive results in 1994.
* "LONG AND RIGHT." Over the past few years, the State Insured Long-Term
Portfolios have maintained a longer maturity structure and consequently a
higher sensitivity to changes in interest rates than our competitors. This
strategy has served us well and produced good longer-term results in a
substantial bull market for fixed-income securities. During the course of the
past year, we reduced somewhat our longer maturity structure to match that of
our competitors, thereby "locking in" gains earned to date.
In conclusion, the past twelve months has been an exciting period for
bond fund shareholders. Plummeting interest rates have translated into
attractive performance returns on long-term, tax-exempt fixed-income
investments. To be sure, this will be a tough standard to surpass.
(continued)
7
<PAGE> 10
STATE MONEY MARKET PORTFOLIOS
Over the past twelve months, moderate economic expansion and low inflation
enabled the Federal Reserve Board to hold key interest rates steady. The last
policy action taken by the Fed occurred in early September 1992, when it
lowered the Federal funds rate to 3%.
Despite the overall stability in short-term rates, yields on tax-exempt
money market funds continued to decline. Plagued by a combination of sporadic
supply and strong investor demand, yields on state-specific money funds
deteriorated 30 basis points, from 2.2% to 1.9%. Notwithstanding this yield
decline, assets grew at a robust 14% rate. Strong performance versus the
competition, due primarily to Vanguard's expense ratio advantage, enabled our
money market funds to capture a large percentage of these assets.
The volume of new issue supply differed greatly among the various
state-specific funds. Recessionary and fiscal stress, which has persisted in
California, forced many of its municipalities to finance their cash needs with
short-term debt. As a result, July and August brought a flood of supply in
California tax-exempt paper. At the opposite end of the spectrum was New Jersey,
where diminished supply was attributable primarily to relatively low long-term
interest rates. The many municipalities that previously issued short-term notes
took advantage of these low rates by issuing long-term bonds instead.
Looking forward, net new issuance in the first quarter of fiscal year
1994 is expected to remain light. Poised for this anticipated drought in supply,
the Vanguard State Tax-Free Money Market Portfolios are currently targeting a
minimum average weighted maturity of 75 days. Beyond the first quarter we will
proceed with caution, as any signs of increased inflation may prompt the Federal
Reserve Board to raise short-term interest rates.
Sincerely,
Ian A. MacKinnon
Senior Vice President
Jerome J. Jacobs
Vice President
Pamela E. Wisehaupt
Vice President
David E. Hamlin
Assistant Vice President
Danine A. Mueller
Portfolio Manager
Reid O. Smith
Assistant Vice President
Vanguard Fixed Income Group
December 7, 1993
8
<PAGE> 11
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
November 30, 1993
<TABLE>
<CAPTION>
Face Market
Amount Value
Insured Long-Term Portfolio (000) (000)+
- ----------------------------------------------------------------------------------
MUNICIPAL BONDS (99.8%)
- ----------------------------------------------------------------------------------
<S> <C> <C>
ISSUER INSURED (90.8%)
Allegheny County GO
0.0%, 5/1/03 (2) $13,315 $ 7,579
6.0%, 5/1/10 (2) 3,030 3,203
6.0%, 5/1/12 (2) 3,000 3,156
Allegheny County Hosp.
Development Auth.
(Children's Hosp. Pittsburgh)
VRDO 2.3%, 1/1/94 (1) 1,800 1,800
(Magee Women's Hosp.)
6.0%, 10/1/10 (3) 4,235 4,572
(Mercy Hosp.)
6.75%, 4/1/21 (2) 4,500 4,947
(Presbyterian Univ. Hosp.)
VRDO 2.2%, 12/1/93 (1) 3,450 3,450
7.6%, 3/1/08 (1) 5,000 5,680
6.0%, 11/1/12 (1) 3,000 3,098
7.125%, 7/1/19 (1) 6,835 7,750
Allegheny County Sanitation Auth.
6.5%, 12/1/11 (3) 8,000 8,566
5.5%, 12/1/13 (3) 20,295 20,716
5.5%, 12/1/16 (3) 23,665 23,634
Beaver County Industrial
Development Auth.
(Ohio Edison)
7.1%, 6/1/18 (3) 5,000 5,629
7.0%, 6/1/21 (3) 22,715 25,190
Berks County Hosp. Rev.
(Reading Hosp.)
5.7%, 10/1/14 (1) 4,500 4,639
Berks County GO
5.5%, 11/15/06 (3) 3,525 3,630
5.6%, 11/15/07 (3) 2,925 3,014
5.6%, 11/15/08 (3) 2,900 2,968
5.75%, 11/15/12 (3) 15,500 15,716
0.0%, 11/15/13 (3) 7,250 2,280
0.0%, 11/15/14 (3) 8,615 2,552
0.0%, 11/15/15 (3) 6,250 1,740
Bethlehem Water Rev.
6.0%, 11/15/12 (1) 6,000 6,214
6.25%, 11/15/21 (1) 10,775 11,297
Blair County Hosp. Auth.
(Altoona Hosp.)
6.5%, 7/1/22 (2) 8,500 9,243
Boyertown Area School Dist.
6.1%, 3/1/15 (2) 6,000 6,255
Bucks County Water & Sewer Auth.
9.1%, 12/1/95 (3) (Prere.) 1,200 1,335
9.2%, 12/1/95 (3) (Prere.) 1,200 1,337
Butler County GO
6.0%, 7/15/12 (3) 5,185 5,382
Center Township Sewer Auth.
5.5%, 4/15/11 (2) $ 2,375 $ 2,393
Central Dauphin County School
Dist. GO
0.0%, 6/1/04 (2) 4,800 2,737
Chester County Hosp. Auth.
(Chester County Hosp.)
7.0%, 7/1/16 (1) 13,500 14,454
Coatesville Area School Dist.
7.25%, 5/1/00 (2) (Prere.) 2,200 2,569
Conestoga Valley School Dist.
7.1%, 5/1/01 (3) (Prere.) 6,400 7,339
Corry Area School Dist. GO
5.5%, 12/15/10 (1) 4,600 4,636
Dauphin County General Auth.
(West Pennsylvania Hosp.)
5.5%, 7/1/13 (1) 5,000 4,982
5.5%, 7/1/23 (1) 7,500 7,381
Dauphin County Hosp. Auth.
(Harrisburg Hosp.)
8.125%, 7/1/07 (1) 3,000 3,425
Delaware County Auth.
College Rev.
(Haverford College)
5.4%, 11/15/13 (1) 1,750 1,725
Delaware County Hosp. Auth.
(Delaware County Memorial
Hosp.)
7.125%, 8/15/09 (1) 5,160 5,859
7.2%, 8/15/19 (1) 8,000 9,109
Delaware River Joint Toll
Bridge Comm.
6.0%, 7/1/18 (3) 3,040 3,189
Delaware River Port Auth.
7.375%, 1/1/07 (2) 13,500 15,349
6.5%, 1/1/09 (2) 4,500 4,766
Doylestown Hosp. Auth.
6.9%, 7/1/19 (2) 10,000 11,026
Erie County GO
5.25%, 9/1/12 (3) 2,875 2,821
Erie County Hosp. Auth.
(St. Vincent Health Care)
6.125%, 7/1/13 (1) 3,900 4,113
Erie County Prison Auth.
Commonwealth Lease
6.25%, 11/1/01 (1) 25,140 27,919
Fort LeBoeuf School Dist. GO
5.8%, 1/1/13 (1) 5,500 5,628
Garnet Valley School Dist. GO
5.7%, 4/1/11 (2) 3,000 3,059
Governor Mifflin School Dist. GO
6.5%, 2/1/02 (2) (Prere.) 7,330 8,221
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------------------------
<S> <C> <C>
Greensburg Salem School Dist.
6.45%, 9/15/18 (1) $ 7,500 $ 8,077
Hampden Township Water &
Sewer Auth.
8.875%, 10/1/05 (1) 500 545
9.0%, 4/1/11 (1) 500 546
Harrisburg Water Auth.
5.7%, 7/15/08 (3) 3,930 4,072
Hempfield School Dist. GO
6.0%, 8/15/09 (3) 6,000 6,251
Lancaster Higher Education Auth.
(Franklin & Marshall College)
6.6%, 4/15/10 (1) 4,940 5,411
6.7%, 4/15/12 (1) 4,000 4,411
Lehigh County GO
7.25%, 1/1/98 (3) (Prere.) 3,000 3,385
6.0%, 10/15/99 (2) (Prere.) 2,000 2,166
6.9%, 8/1/00 (3) (Prere.) 8,500 9,784
Lewisburg Area School Dist.
6.2%, 6/1/12 (1) 3,500 3,672
6.25%, 6/1/15 (1) 3,685 3,878
Lycoming County College Auth.
(Pennsylvania Inst. of Technology)
5.4%, 11/1/08 (2) 6,000 6,160
Lycoming County Hosp. Auth.
(Williamsport Hosp.)
6.875%, 11/1/04 (2) 4,450 4,873
7.0%, 11/1/15 (2) 5,000 5,479
Manheim Central School Dist. GO
6.85%, 3/1/08 (3) 2,705 3,011
Meadville Area Water Auth.
6.0%, 7/1/22 (4) 3,750 3,879
Monroe County Hosp. Auth.
(Pocono Hosp.)
7.0%, 7/1/15 (2) 3,700 4,034
Montgomery County Higher
Education & Health Auth.
(Abington Memorial Hosp.)
6.1%, 6/1/12 (2) 5,000 5,297
6.0%, 6/1/22 (2) 10,360 10,815
(Sacred Heart Hosp.)
6.8%, 2/1/13 (6) 5,000 5,403
Montgomery County Industrial
Development Auth. PCR
(Philadelphia Electric Co.)
6.7%, 12/1/21 (1) 10,000 11,077
Mount Lebanon Hosp.
Development Auth.
(St. Clair Memorial Hosp.)
6.25%, 7/1/06 (3) 9,250 10,301
Neshaminy School Dist. GO
6.3%, 2/15/13 (3) 10,000 10,539
Northampton County Higher
Education Auth.
(Lehigh Univ.)
7.1%, 11/15/09 (1) $ 7,035 $ 7,986
Northampton County Hosp. Auth.
(Easton Hosp.)
6.25%, 1/1/19 (1) 10,000 10,720
7.875%, 1/1/19 (6) 285 330
North Penn Water Auth.
6.125%, 11/1/10 (3) 5,140 5,542
Northumberland County
Commonwealth Lease
6.25%, 10/15/01 (1) (Prere.) 13,600 15,096
North Wales Water Auth.
6.0%, 11/1/10 (3) 2,400 2,534
6.125%, 11/1/12 (3) 3,000 3,135
5.5%, 11/1/16 (3) 6,130 6,082
6.125%, 11/1/22 (3) 8,300 8,673
Penn Hills GO
5.8%, 12/1/13 (2) 11,735 11,990
Pennsylvania Convention
Center Auth.
6.25%, 9/1/95 (3) 3,000 3,146
6.7%, 9/1/16 (3) 19,150 22,165
6.0%, 9/1/19 (3) 12,600 13,497
Pennsylvania GO
5.0%, 4/15/09 (2) 9,985 9,816
Pennsylvania Higher Education Auth.
(Bryn Mawr College)
6.5%, 12/1/09 (3) 2,930 3,183
(College and Univ. Rev.)
7.2%, 1/1/04 (2) 2,500 2,612
(Drexel Univ.)
5.625%, 5/1/14 (1) 11,755 11,848
(State System)
4.0%, 6/15/95 (2) 1,250 1,265
5.375%, 6/15/18 (2) 8,845 8,662
(Temple Univ.)
6.5%, 4/1/21 (1) 6,000 6,522
5.75%, 4/1/31 (1) 18,750 18,904
Pennsylvania Intergovernmental
Cooperation Auth.
5.0%, 6/15/22 (1) 10,200 9,456
5.625%, 6/15/23 (1) 26,625 26,653
Pennsylvania Turnpike Comm.
5.8%, 12/1/07 (3) 7,500 7,880
6.25%, 6/1/11 (2) 10,000 10,772
5.75%, 12/1/12 (2) 10,000 10,213
6.0%, 6/1/15 (1) 28,800 30,180
5.5%, 12/1/17 (3) 29,000 28,733
Philadelphia Airport Rev.
9.875%, 6/15/06 (1) 2,215 2,339
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------------------------
<S> <C> <C>
Philadelphia Gas Works
7.25%, 1/1/10 (2) $12,700 $14,356
6.0%, 5/15/12 (2) 14,250 14,775
6.75%, 1/1/15 (2) 17,500 19,041
Philadelphia GO TOB VRDO
2.4%, 5/15/94 (3) 15,000 15,000
Philadelphia Municipal Auth. Rev.
7.1%, 11/15/05 (1) 3,000 3,491
5.55%, 11/15/08 (3) 3,040 3,112
5.6%, 11/15/09 (3) 2,100 2,148
5.6%, 11/15/10 (3) 6,755 6,873
5.625%, 11/15/18 (3) 8,750 8,709
Philadelphia Parking
Auth. Rev.
7.375%, 9/1/18 (2) 12,065 13,723
Philadelphia School Dist. GO
0.0%, 7/1/01 (2) 11,750 8,066
5.3%, 7/1/04 (2) 3,500 3,591
5.375%, 7/1/05 (2) 7,500 7,692
Philadelphia Water & Sewer
Auth. Rev.
7.0%, 6/15/10 (3) 33,865 40,195
7.0%, 6/15/11 (3) 35,685 42,421
Pittsburgh GO
7.0%, 3/1/06 (3) 18,265 20,093
5.2%, 9/1/06 (2) 1,175 1,194
7.0%, 3/1/07 (3) 2,135 2,349
5.3%, 9/1/07 (2) 1,000 1,017
6.0%, 3/1/14 (2) 3,515 3,580
5.5%, 9/1/14 (2) 9,500 9,605
6.25%, 9/1/16 (1) 11,030 11,784
Pittsburgh Public Parking Auth.
5.875%, 12/1/12 (3) 7,550 7,806
Pittsburgh School Dist.
6.75%, 8/1/01 (2) (Prere.) 3,250 3,713
Pittsburgh Water & Sewer System
6.0%, 9/1/01 (3) (Prere.) 18,575 20,291
7.625%, 9/1/04 (3) (ETM) 5,370 6,496
6.5%, 9/1/13 (3) 22,000 24,972
7.25%, 9/1/14 (3) (ETM) 25,175 30,762
Pocono Mountain School Dist. GO
5.75%, 10/1/09 (2) 6,000 6,163
Reading GO
5.875%, 11/15/12 (2) 18,000 18,549
6.0%, 11/15/22 (2) 6,000 6,223
Rose Tree Media School Dist.
5.5%, 2/15/14 (3) 3,000 3,000
St. Mary's Hosp. Auth.
(Franciscan Health System)
7.0%, 7/1/09 (6) 1,000 1,128
7.0%, 7/1/13 (6) 5,050 5,695
7.0%, 7/1/14 (6) 4,000 4,511
9.4%, 7/1/14 (6) 2,125 2,356
7.0%, 6/15/15 (6) 1,770 1,995
Sayre Health Care Facilities Auth.
Pooled Loan VRDO
2.2%, 12/1/93 (2) $ 2,300 $ 2,300
(Guthrie Health Care System)
7.0%, 3/1/11 (2) 2,000 2,279
6.0%, 3/1/21 (2) 10,710 10,974
Seneca Valley School Dist. GO
5.75%, 7/1/10 (3) 6,000 6,151
5.5%, 7/1/14 (3) 9,965 9,978
Souderton Area School Dist.
7.0%, 9/1/12 (2) 2,200 2,436
South Fork Hosp. Auth.
(Conemaugh Valley Hosp.)
5.625%, 7/1/10 (7) 2,300 2,348
5.75%, 7/1/18 (7) 7,000 7,224
Trinity Area School Dist. GO
6.625%, 11/1/01 (3) (Prere.) 9,000 10,191
Univ. of Pittsburgh
6.125%, 6/1/21 (1) 21,760 22,940
Washington County Auth.
5.625%, 6/1/22 (3) 2,650 2,674
Washington County Hosp. Auth.
(Shadyside Hosp.)
5.875%, 12/15/09 (2) 22,000 22,897
(Washington Hosp.)
6.75%, 7/1/12 (2) 10,000 10,979
Wayne County Hosp. &
Health Facility
7.125%, 7/1/96 (1) (Prere.) 1,500 1,630
West Allegheny School Dist.
6.25%, 8/1/14 (2) 6,155 6,504
West Jefferson Hills School Dist.
5.9%, 8/1/10 (3) 3,160 3,270
5.95%, 8/1/14 (3) 7,180 7,400
Westmoreland County Auth.
6.125%, 7/1/17 (1) 8,205 8,563
Westview Municipal Auth.
Water Rev.
7.5%, 11/15/17 (3) 2,860 3,086
Wyoming Valley Sanitary Auth.
6.75%, 11/15/10 (6) 7,245 7,987
York County Hosp. Auth.
(York Hosp.)
7.0%, 7/1/01 (2) (Prere.) 11,500 13,311
York County Southwestern
School Dist. GO
6.4%, 6/15/12 (3) 3,825 4,130
----------
GROUP TOTAL 1,357,999
- ---------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------------------------
<S> <C>
PORTFOLIO INSURED (1.0%)
Allegheny County Hosp.
Development Auth.
(Mercy Hosp.)
7.375%, 4/1/15 $ 3,650 $ 3,970
(St. Margaret's Hosp.)
9.8%, 7/1/10 1,500 1,662
Pennsylvania Hosp. & Higher
Education Facilities Auth.
(Pennsylvania Hosp.)
7.25%, 7/1/14 8,535 9,169
-----------
GROUP TOTAL 14,801
-----------
SECONDARY MARKET INSURED (1.2%)
Allegheny County Hosp.
Development Auth.
(Mercy Hosp.)
7.375%, 4/1/15 (1) 1,350 1,475
Pennsylvania GO TOB VRDO
2.5%, 3/1/94 (3) 11,025 11,025
Pennsylvania State Univ.
5.55%, 8/15/06 (2) 5,245 5,420
-----------
GROUP TOTAL 17,920
-----------
- ----------------------------------------------------------------------------------
NON-INSURED (6.8%)
Allegheny County Higher Education
Auth. VRDO
(Univ. of Pittsburgh)
2.3%, 1/1/94 2,650 2,650
Allegheny County Hosp.
Development Auth. VRDO
(Allegheny Hosp.)
2.4%, 12/1/93 400 400
Cambria County Hosp. Auth.
(Conemaugh Valley Hosp.)
10.125%, 7/1/95 (Prere.) 2,000 2,245
Delaware County Industrial
Development Auth. VRDO
(United Parcel Service)
1.8%, 12/1/93 4,000 4,000
Emmaus General Auth. Pooled
Local Govt. VRDO
2.15%, 12/1/93 400 400
Pennsylvania COP
3.5%, 6/1/94 5,230 5,233
Pennsylvania GO
3.8%, 4/15/95 13,035 13,139
Pennsylvania Higher Education
Facilities Auth. VRDO
(Carnegie Mellon Univ.)
2.2%, 12/1/93 9,000 9,000
Pennsylvania Housing Finance
Agency
7.55%, 4/1/16 $ 9,670 $10,475
6.9%, 4/1/17 7,500 7,966
Pennsylvania TAN
3.25%, 6/30/94 11,700 11,754
Philadelphia Auth. for Industrial
Development VRDO
(Institute for Cancer Research)
1.9%, 12/1/93 300 300
Philadelphia Hosp. & Higher
Education Facilities Auth.
(Albert Einstein Medical Center)
10.0%, 4/1/95 (Prere.) 1,000 1,108
(Children's Hosp.) VRDO
1.9%, 12/1/93 6,200 6,200
Philadelphia TRAN
3.25%, 6/15/94 24,500 24,599
Swarthmore Borough Auth.
College Rev.
(Swarthmore College)
7.375%, 9/15/18 2,200 2,464
GROUP TOTAL 101,933
------------
- ----------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $1,380,766) 1,492,653
- ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.2%)
- ----------------------------------------------------------------------------------
Other Assets--Note B 37,526
Liabilities (33,822)
------------
3,704
- ----------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------
Applicable to 131,703,960 outstanding shares
of beneficial interest
(unlimited authorization--no par value) $1,496,357
- ----------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.36
==================================================================================
+ See Note A to Financial Statements.
For explanations of abbreviations and other references, see page 14.
- ----------------------------------------------------------------------------------
At NOVEMBER 30, 1993, NET ASSETS
CONSISTED OF:
- ----------------------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
Paid in Capital $1,376,458 $10.45
Undistributed Net
Investment Income -- --
Accumulated Net Realized
Gains 6,188 .05
Unrealized Appreciation
of Investments 113,711 .86
NET ASSETS $1,496,357 $11.36
- ----------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
- ----------------------------------------------------------------------------------
MUNICIPAL BONDS (97.6%)
- ----------------------------------------------------------------------------------
<S> <C> <C>
Allegheny County GO VRDO
2.2%, 12/1/93 $24,400 $24,400
Allegheny County Higher Education
Building Auth. VRDO
(Univ. of Pittsburgh)
2.35%, 12/1/93 6,740 6,740
2.3%, 1/1/94 18,970 18,970
Allegheny County Hosp.
Development Auth. CP
(Health Center Development)
2.65%, 1/31/94 20,600 20,600
Allegheny County Hosp.
Development Auth. VRDO
(Allegheny Hosp.)
2.4%, 12/1/93 9,700 9,700
(Children's Hosp.--Pittsburgh)
2.3%, 1/1/94 (1) 12,700 12,700
(Magee Women's Hosp.)
TOB 2.45%, 4/1/94 (3) 7,250 7,250
(Presbyterian Univ. Health)
2.2%, 12/1/93 (1) 1,600 1,600
(South Hills Health System)
2.25%, 12/1/93 10,650 10,650
Allegheny County Industrial
Development Auth. PCR CP
(Duquesne Light & Power Co.)
2.75%, 10/20/94 2,000 2,000
2.8%, 10/20/94 8,000 8,000
Beaver County Industrial
Development Auth. PCR CP
(Duquesne Light & Power Co.)
2.6%, 12/10/93 5,000 5,000
2.8%, 1/14/94 2,500 2,500
Chester County GO
2.35%, 12/15/93 1,820 1,820
Delaware County Industrial
Development Auth. VRDO
(Philadelphia Electric Co.)
2.35%, 12/1/93 8,000 8,000
(United Parcel Service)
1.8%, 12/1/93 26,000 26,000
Delaware County PCR CP (3)
(Philadelphia Electric Co.)
2.35%, 12/9/93 13,380 13,380
2.7%, 1/20/94 6,800 6,800
2.7%, 1/25/94 3,400 3,400
2.5%, 2/7/94 18,000 18,000
2.65%, 2/8/94 2,200 2,200
2.5%, 2/15/94 2,000 2,000
2.55%, 2/22/94 10,600 10,600
Emmaus General Auth. Pooled
Local Govt. VRDO
2.15%, 12/1/93 $49,600 $49,600
Erie County GO TOB VRDO
2.3%, 3/1/94 (3) (Prere.) 6,955 6,955
Geisinger Health Systems VRDO
(Montour County)
1.9%, 12/1/93 19,300 19,300
Lehigh County General Purpose
Auth. CP
(Hosp. Central Services)
2.45%, 12/7/93 (1) 10,000 10,000
2.6%, 12/10/93 (1) 3,700 3,700
2.7%, 1/25/94 (1) 7,500 7,500
Northeastern Pennsylvania Hosp.
Auth. CP
(Hosp. Central Services)
2.45%, 12/7/93 (1) 19,950 19,950
2.5%, 12/14/93 (1) 6,060 6,060
2.7%, 1/25/94 (1) 9,700 9,700
Pennsylvania COP
3.25%, 7/1/94 (2) 4,775 4,788
Pennsylvania GO
3.5%, 12/1/93 1,000 1,000
9.25%, 12/15/93 2,000 2,005
6.1%, 1/1/94 (1) 1,900 1,906
3.8%, 4/15/94 6,030 6,058
6.0%, 5/1/94 (1) 3,900 3,954
4.4%, 9/1/94 7,460 7,543
6.0%, 11/1/94 (1) 1,000 1,029
Pennsylvania TAN
3.25%, 6/30/94 40,000 40,125
Pennsylvania Higher Education
Assistance Agency Student
Loan Rev.VRDO
2.3%, 12/1/93 6,900 6,900
Pennsylvania Higher Education
Facilities Auth.
(Carnegie Mellon Univ.)
VRDO 2.2%, 12/1/93 55,600 55,600
2.55%, 5/1/94* 3,000 3,000
(Medical College of Philadelphia)
12.0%, 3/1/94 (Prere.) 1,000 1,053
(Pooled Finance)
VRDO 2.55%, 12/1/93 16,800 16,800
(Thomas Jefferson Univ.)
2.7%, 6/1/94* 15,000 15,002
(Univ. of Pennsylvania)
VRDO 2.3%, 12/1/93 17,300 17,300
Pennsylvania Infrastructure
Investment Auth.
2.75%, 3/2/94* 30,000 30,007
</TABLE>
13
<PAGE> 16
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- ----------------------------------------------------------------------------------
<S> <C>
Pennsylvania State Univ. Rev.
2.6%, 2/1/94 $29,305 $29,305
2.5%, 3/1/94 500 500
3.0%, 5/26/94 5,800 5,810
3.0%, 12/5/94 10,000 10,026
Pennsylvania Turnpike Auth. TOB
VRDO 2.3%, 12/1/93 (Prere.) 10,200 10,200
2.7%, 4/4/94* (Prere.) 12,000 12,000
Philadelphia Auth. for
Industrial Development VRDO
(Franklin Institute)
2.55%, 12/1/93 11,725 11,725
(Institute for Cancer Research)
1.9%, 12/1/93 4,500 4,500
Philadelphia Gas Works CP
2.4%, 12/17/93 8,000 8,000
Philadelphia Hosp. & Higher
Education Facilities Auth.
(Children's Hosp.)
VRDO 1.9%, 12/1/93 14,050 14,050
TOB VRDO 2.4%, 2/15/94 8,200 8,200
(Pennsylvania Hosp.)
2.7%, 7/1/94* 18,575 18,575
Philadelphia School Dist.
3.0%, 7/1/94 (2) 13,305 13,316
Philadelphia TRAN
3.25%, 6/15/94 25,000 25,072
Pittsburgh Water & Sewer Rev.
3.5%, 9/1/94 (3) 8,495 8,545
Red Lion Area School Dist. TRAN
2.78%, 6/30/94 2,500 2,501
St. Mary's Hosp. Auth. Langhorne
(Franciscan Health System)
VRDO 1.8%, 12/1/93 25,200 25,200
11.75%, 7/1/94 (Prere.) 12,495 13,385
Sayre Health Care Facilities
Auth. VRDO
2.2%, 12/1/93 (2) 29,045 29,045
Scranton Lackawanna Health &
Welfare Auth.
(Univ. of Scranton)
2.8%, 5/1/94* 5,440 5,440
Somerset County General Auth.
TOB VRDO
2.3%, 4/15/94 (Prere.) 15,540 15,540
Temple Univ. Notes
2.75%, 5/27/94 32,500 32,533
Univ. of Pittsburgh VRDO
2.2%, 1/1/94 20,500 20,500
York County Industrial
Development Auth. PCR VRDO
(Philadelphia Electric Co.)
2.35%, 12/1/93 9,440 9,440
OUTSIDE PENNSYLVANIA
Puerto Rico Industrial, Medical, &
Environmental Finance Auth.
(American Home Products)
3.35%, 12/1/93* $10,000 $10,000
- ----------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS (Cost $912,553) 912,553
- ----------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.4%)
- ----------------------------------------------------------------------------------
Other Assets--Note B 35,993
Liabilities (13,273)
-----------
22,720
- ----------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------
Applicable to 935,291,195 outstanding shares
of beneficial interest
(unlimited authorization--no par value) $935,273
- ----------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
==================================================================================
+ See Note A to Financial Statements.
- ----------------------------------------------------------------------------------
At NOVEMBER 30, 1993, NET ASSETS
CONSISTED OF:
- ----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Amount Per
(000) Share
-------- ------
<S> <C> <C>
Paid in Capital $935,290 $1.00
Undistributed Net
Investment Income -- --
Accumulated Net
Realized Losses (17) --
Unrealized Appreciation
of Investments -- --
- ----------------------------------------------------------------------------------
NET ASSETS $935,273 $1.00
- ----------------------------------------------------------------------------------
</TABLE>
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC Indemnity Corporation)
(3) FGIC (Financial Guaranty Insurance Company)
(4) FSA (Financial Security Assurance)
(5) CGI (Capital Guaranty Insurance)
(6) BIGI (Bond Investors Guaranty Insurance Company)
(7) Connie Lee Inc.
(8) FHA (Federal Housing Authority)
CP--Commercial Paper
COP--Certificate of Participation
GO--General Obligation
IDR--Industrial Development Revenue
PCR--Pollution Control Revenue
TAN--Tax Anticipation Note
TOB--Tender Option Bond
TRAN--Tax Revenue Anticipation Note
VRDO--Variable Rate Demand Obligation
(ETM)--Escrowed to Maturity
(Prere.)--Prerefunded
*Put Option Obligation
14
<PAGE> 17
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INSURED LONG-TERM MONEY MARKET
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------
Year Ended Year Ended
November 30, 1993 November 30, 1993
(000) (000)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $78,779 $21,386
- -----------------------------------------------------------------------------------------------------------
Total income 78,779 21,386
- -----------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services $ 124 $ 80
Management and Administrative 2,133 1,237
Marketing and Distribution 327 2,584 287 1,604
------ ------
Insurance Expense 43 --
Auditing Fees 8 7
Shareholders' Reports 47 27
Annual Meeting and Proxy Costs 9 5
Trustees' Fees and Expenses 5 3
- -----------------------------------------------------------------------------------------------------------
Total Expenses 2,696 1,646
- -----------------------------------------------------------------------------------------------------------
Net Investment Income 76,083 19,740
- -----------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)--NOTE C
Investment Securities Sold 17,735 (1)
Futures Contracts (9,757) --
- -----------------------------------------------------------------------------------------------------------
Realized Net Gain (Loss) 7,978 (1)
- -----------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)--Notes C and D
Investment Securities 63,048 --
Futures Contracts 33 --
- -----------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation(Depreciation) 63,080 --
- -----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $147,141 $19,739
- -----------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
INSURED LONG-TERM PORTFOLIO MONEY MARKET PORTFOLIO
- --------------------------------------------------------------------------------------------------------------
Year Ended Year Ended Year Ended Year Ended
November 30, November 30, November 30, November 30,
1993 1992 1993 1992
(000) (000) (000) (000)
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $76,083 $60,645 $19,740 $22,909
Realized Net Gain (Loss)--Note CV 7,978 21,414 (1) --
Change in Unrealized Appreciation
(Depreciation)--Notes C and D 63,080 24,886 -- --
- --------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Opetations 147,141 106,945 19,739 22,909
- --------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income (76,083) (60,645) (19,740) (22,909)
Realized Net Gain (23,306) (2,465) -- --
- --------------------------------------------------------------------------------------------------------------
Total Distributions (99,389) (63,110) (19,740) (22,909)
- --------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(2)
Issued -- Regular 395,311 323,310 789,488 630,809
-- In Lieu of Cash Distributions 74,696 45,755 18,282 20,889
-- Exchange 157,533 124,505 258,067 196,642
Redeemed -- Regular (176,200) (120,825) (674,563) (628,427)
-- Exchange (132,803) (114,508) (238,098) (255,561)
- --------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 318,537 258,237 153,176 (39,648)
- --------------------------------------------------------------------------------------------------------------
Total Increase(Decrease) 366,289 302,072 153,175 (35,648)
- --------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 1,130,068 827,996 782,098 817,746
- --------------------------------------------------------------------------------------------------------------
End of Year $1,496,357 $1,130,068 $935,273 $782,098
==============================================================================================================
(1) Distributions Per Share
Net Investment income $.632 $.664 $.021 $.029
Realized Net Gain $.224 $.030 -- --
- --------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued 49,414 41,725 1,047,555 827,451
Issued in Lieu of Cash Distributions 6,721 4,260 18,282 20,889
Redeemed (27,522) (21,960) (912,661) (883,988)
- --------------------------------------------------------------------------------------------------------------
28,613 24,025 153,176 (35,048)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
INSURED LONG TERM PORTFOLIO
------------------------------------------
Year Ended November 30,
------------------------------------------
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $10.96 $10.47 $10.19 $10.16 $9.70
------ ------ ------- ------ ------
INVESTMENT OPERATIONS
Net Investment Income .631 .664 .667 .679 .687
Net Realized and Unrealized Gain (Loss)
on Investments .624 .520 .286 .030 .460
------ ------ ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS 1.255 1.184 .953 .709 1.147
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.631) (.664) (.667) (.679) (.687)
Distributions from Realized Capital Gains (.224) (.030) (.006) -- --
------ ------ ------- ------ ------
TOTAL DISTRIBUTIONS (.855) (.694) (.673) (.679) (.687)
- -------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $11.36 $10.96 $10.47 $10.19 $10.16
=======================================================================================================
TOTAL RETURN +11.90% +11.65% +9.65% +7.27% +12.16%
- -------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------
Net Assets, End of Year (Millions) $1,496 $1,130 $828 $556 $416
Ratio of Expenses to Average Net Assets .20% .24%+ .25%+ .25%+ .26%+
Ratio of Net Investment Income to Average Net Assets 5.61% 6.17% 6.46% 6.77% 6.87%
Portfolio Turnover Rate 14% 17% 9% 9% 8%
- -------------------------------------------------------------------------------------------------------
</TABLE>
+ Insurance expense represents .01%, .01%, .02% and .03%.
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
-------------------------------------------
Year Ended November 30,
-------------------------------------------
For a Share Outstanding Throughout Each Year 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------------------------------
<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 .024 .029 .045 .057 .062
Net Realized and Unrealized Gain (Loss)
on Investments -- -- -- -- --
------ ------ ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS .021 .029 .045 .057 .062
- --------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.024) (.029) (.045) (.057) (.062)
Distributions from Realized Capital Gains -- -- -- -- --
------ ------ ------- ------ ------
TOTAL DISTRIBUTIONS (.024) (.029) (.045) (.057) (.062)
- --------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00
========================================================================================================
TOTAL RETURN +2.38% +2.96% +4.59% +5.85% + 6.38%
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) $935 $782 $818 $730 $448
Ratio of Expenses to Average Net Assets .20% .24% .24% .23% .23%
Ratio of Net Investment Income to Average Net Assets 2.35% 2.93% 4.48% 5.68% 6.19%
Portfolio Turnover Rate N/A N/A N/A N/A N/A
- --------------------------------------------------------------------------------------------------------
</TABLE>
19
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS
Vanguard Pennsylvania Tax-Free Fund is registered under the Investment Company
Act of 1940 as an open-end investment company and consists of the Insured
Long-Term and Money Market 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 Commonwealth of
Pennsylvania.
* A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Money Market Portfolio: investment securities are
stated at amortized cost which approximates market value. Insured Long-Term
Portfolio: municipal bonds are valued utilizing primarily the latest bid prices
or, if bid prices are not available, on the basis of valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities and ratings), both as furnished by an independent pricing service.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund 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: The Insured Long-Term Portfolio may utilize futures contracts to a
limited extent. The primary risks associated with the use of futures contracts
are imperfect correlation between the change in market value of the 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. Fluctuations in the value of futures contracts are recorded
as unrealized appreciation (depreciation) until terminated at which time
realized gains (losses) are recognized. Unrealized appreciation (depreciation)
related to open futures contracts is required to be treated as realized gain
(loss) for Federal income tax purposes.
4. DISTRIBUTIONS: Distributions from net investment income are declared on a
daily basis payable on the first business day of the following month. Annual
distributions from realized gains, if any, are recorded on the ex-dividend
date. 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.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses on
the sale of investment securities are those of 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, Inc. 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. The Fund has contributed capital aggregating $394,000 to Vanguard
(included in Other Assets), representing 2.0% of Vanguard's capitalization. The
Fund's officers and trustees are also officers and directors of Vanguard.
18
<PAGE> 21
* C. During the year ended November 30, 1993, the Insured Long-Term Portfolio
made purchases of $473,310,000 and sales of $173,694,000 of investment
securities other than temporary cash investments.
At November 30, 1993, unrealized appreciation of investment securities of the
Insured Long-Term Portfolio for financial reporting and Federal income tax
purposes aggregated $111,887,000 of which $112,275,000 related to appreciated
securities and $388,000 related to depreciated securities.
* D. At November 30, 1993, the Insured Long-Term Portfolio had long positions in
Municipal Bond Index futures contracts expiring through March, 1994, with an
aggregate settlement value and net unrealized depreciation of $28,937,000 and
$320,000, respectively. The aggregate settlement value and net unrealized
appreciation related to short positions in U.S. Treasury Bond and U.S. Treasury
Note futures contracts expiring through March, 1994, were $179,563,000 and
$2,144,000, respectively. The market value of securities deposited as initial
margin for open futures contracts was $2,544,000.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Pennsylvania 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
the Insured Long-Term Portfolio and the Money Market Portfolio (constituting
the Vanguard Pennsylvania Tax-Free Fund, hereafter referred to as the "Fund")
at November 30, 1993, the results of each of their operations, the changes in
each of their net assets and the financial highlights for each of the
respective periods presented, 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 by correspondence with the custodian and brokers and
the application of alternative auditing procedures where confirmations from
brokers were not received, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 27, 1993
19
<PAGE> 22
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and Director of
The Vanguard Group, Inc., and of each of the investment companies in The
Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of Rhone-Poulenc Rorer
Inc.; Director of Sun Company, Inc. and Immune Response Corporation; Trustee of
the Universal Health Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea
Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corporation,
Baker Fentress & Co., and The Southern New England Telephone Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company, and The
Standard Products Company.
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 Company
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.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
20
<PAGE> 23
(Continued from inside front cover)
toward those of the 1970s. However, the current level of inflation suggests
that future real returns may prove to be satisfactory. Looking forward, the
main risks to the investor are two: (1) that yields on financial assets will
rise sharply, reducing the prices of stocks and bonds alike; and (2) that
inflation, presently at moderate levels, will accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with
these two major risks? Should your allocation of assets among stock funds, bond
funds, and money market funds be adjusted? Here are some reasonable courses of
action to consider:
* For long-term investors who have built a substantial balanced
portfolio of stock, bond, and money market funds, stay the course. Even if
withdrawing from the stock market proves to be justified, the next
decision--when to return--will one day be required. "Being right twice" is
no mean challenge.
* For long-term investors gradually accumulating assets for, say,
retirement, stay your present course. Continue to invest regularly. By
doing so, you buy more shares of a mutual fund when its price falls, and
fewer shares when its price rises, virtually assuring a reasonable average
cost.
* For risk-averse investors who are highly confident that stock prices are
"too high," make only marginal--not "all or nothing"--changes in
your portfolio balance. Given the perils of predicting the future, any
changes should be limited to, say, 15 percentage points. That is, if your
normal portfolio allocation is 60% in stock funds, it might be reduced to
45%; if 85%, to 70%.
* For investors who simply must have more income, never lose sight of
the added principal risk involved in shifting from money market funds to
bond funds. Long-term bond funds provide a generous and durable income
stream, but their prices are highly volatile. Short-term and
intermediate-term bond funds offer a "middle way" of increasing income with
more modest risk to principal.
* For investors who are tempted to find an "easy way" to higher returns,
never forget that risk and reward go hand in hand. Precipitously
replacing certificates of deposit with broad-based common stock funds
verges on the irrational. Funds investing in other securities
markets--emerging nations, international stocks and bonds, and small U.S.
companies--carry their own special risks. Generally, limit such alternative
investments to, say, 20% of your total portfolio.
For all investors, be prepared for sharp interim swings in stock and
bond prices. The central tenet of investing is "prices fluctuate," and
sensible long-term investors simply must take such fluctuations in their
stride. Successful investing is as much a function of your own discipline and
equanimity as it is of the returns available in the securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead in the
coming decade--and it is important to think in decade-length terms--we would
underscore three caveats:
1. Have "rational expectations" for future returns. At prices
prevailing today, it seems highly unlikely that the returns enjoyed by
investors in the past decade will be repeated in the coming decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money
market funds. Each asset class has its own risk and reward
characteristics. By allocating your resources among the three asset classes
according to your own requirements, you can build a portfolio providing
appropriate elements of capital appreciation, capital conservation, and
current income.
3. In balancing risk against reward, be sure to consider cost. Many mutual
funds carry hefty sales charges or high expense ratios, or both. Other
factors held equal, expenses reduce returns, dollar for dollar. Put another
way, high-cost funds must select investments with higher prospective gross
returns--which entail higher risks- -to match the net returns earned by
low-cost funds.
This brief Annual Report essay can provide only an elementary look at the
challenges investors face today. History can give us perspective, but it cannot
give us performance. Famed British economist Lord Keynes had it right when he
said, "the inevitable never happens. It is the unexpected always."
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
[VANGUARD LOGO]
Vanguard Financial Center * Valley Forge, Pennsylvania 19482
New Account Information 1-(800)662-7447 Shareholder Account Services:
1-(800)662-2739
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only
Q770 11/93
<PAGE> 25
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 24.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of the Month-End Yields for the Vanguard Pennsylvania fund
compares with 30 year prime municpal bond of the Lehman municpal bond fund for
the periods 1990-1993, which is shown on upper left of 2.
Line charts illustrating cumulative performance of the Vanguard
Pennsylvania fund compares with the Average Pa municpal fund and to the Lehmam
municpal bond index for the fiscal years 1986-1993 shown on page 3.
