<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
The declining interest rate environment that prevailed for most of fiscal 1995
reversed course during the first six months of our current fiscal year.
Short-term tax-exempt yields, after falling through late February, stabilized
and then abruptly rose to end the six-month period slightly higher than where
they began. Long-term tax-exempt yields also moved lower at the outset of the
period, before creeping higher to end above their starting point. This overall
increase in interest rates resulted in lower prices for municipal bonds.
During the past twelve months, the net asset values of our Insured
Longer-Term Portfolios were negatively impacted by rising rates, but each
Portfolio's income component more than compensated for any decrease in
principal. Our Money Market Portfolios all gave good accounts of themselves,
providing returns that fully reflect the current level of interest rates. The
table on page 3 of this Report provides detailed results for each of our State
Tax-Free Portfolios, including per share net asset values, dividend and capital
gains distributions, and total returns over the past six and twelve months, as
well as current yields. In summary form, here are the Portfolio highlights:
THE STATE MONEY MARKET PORTFOLIOS--provided total returns ranging from +3.4% to
+3.6% for the past year. As expected, net asset values remained at $1.00 per
share. As the following table illustrates, current yields are in the area of
3.4%, moderately lower than they were twelve months ago:
<TABLE>
<CAPTION>
- ---------------------------------------------------------
SEVEN-DAY
ANNUALIZED YIELD
-------------------------------------
MONEY MARKET MAY 31, NOV. 30, MAY 31,
PORTFOLIO 1996 1995 1995
- ---------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA 3.39% 3.61% 3.80%
PENNSYLVANIA 3.44 3.64 3.80
NEW JERSEY 3.30 3.57 3.71
OHIO 3.43 3.71 3.92
- ---------------------------------------------------------
</TABLE>
THE STATE INSURED LONGER-TERM PORTFOLIOS--earned sufficient income to offset
the modest decrease in long-term municipal bond prices, providing total returns
(capital change plus reinvested dividends) ranging from +3.4% to +5.0% for the
twelve months. Despite the swings in interest rates during the period, the
current yields on the Insured Longer-Term Portfolios (roughly 5.2%) are nearly
identical to their levels of twelve months ago.
To provide some perspective on how our Insured Longer-Term Portfolios
performed during the past year, the table below breaks out the two components
of total return--income return and capital return. As you can see, the positive
contribution of each Portfolio's income return was marginally reduced by its
negative capital return.
<TABLE>
<CAPTION>
- -------------------------------------------------------
INVESTMENT RETURNS
-----------------------------------
TWELVE MONTHS ENDED
MAY 31, 1996
-----------------------------------
INSURED LONGER-TERM
PORTFOLIO INCOME CAPITAL TOTAL
- -------------------------------------------------------
<S> <C> <C> <C>
CALIFORNIA
INTERMEDIATE-TERM +5.1% -0.1% +5.0%
CALIFORNIA LONG-TERM +5.5 -1.7 +3.8
NEW YORK +5.4 -1.6 +3.8
PENNSYLVANIA +5.6 -1.3 +4.3
NEW JERSEY +5.3 -1.9 +3.4
OHIO +5.4 -1.6 +3.8
FLORIDA +5.2 -1.4 +3.8
- -------------------------------------------------------
</TABLE>
FIXED-INCOME MARKET REVIEW
Although the Federal Reserve lowered short-term interest rates in December and
January, the bond market fretted over the apparent strength of the U.S. economy
and the possibility of an increase in inflation. During the past six months,
the yield on the long-term U.S. Treasury bond, the benchmark for the bond
market, rose from 6.1% to 6.9%, engendering a price decline of approximately
- -10% (excluding interest income).
The long-term municipal bond market fared much better. On balance for
the six-month period, yields on high-grade municipal bonds increased less
dramatically (5.5% to 5.9%), resulting in a price
1
<PAGE> 2
decline of only -6%. Yields on top-grade (MIG 1) short-term municipal notes
remained essentially unchanged on balance at 3.7%.
Although the future direction of interest rate movements is virtually
impossible to predict with any level of accuracy and consistency, the relative
performance of bond funds with comparable quality and maturity guidelines is
surprisingly predictable. That is to say, bond funds holding similar types of
securities--say, high-quality, long-term municipal bonds--should, on average,
earn roughly equivalent gross returns. What that absolute return will be,
however, is anyone's guess. On the other hand, what can be predicted with some
semblance of accuracy is the relative performance differential due to the
expense ratios of the funds. The average Vanguard Insured Longer-Term
Portfolio, for example, operates with an annual expense ratio of 0.2%, compared
to 0.9% for our average competitor. Therefore, holding all other factors equal,
a typical Vanguard Insured Longer-Term Portfolio begins each year with an
income advantage of +0.7% over a comparable municipal bond fund.
IN SUMMARY
As you may know, one of the benefits of Vanguard's State Insured Longer-Term
Portfolios is their reliance on insured municipal bonds, in which the timely
payment of principal and interest is guaranteed by a private insurer. Such
insurance provides protection against the possibility of deteriorating
creditworthiness, but not against fluctuations in principal value based on
changes in interest rates.
There are, of course, "costs" associated with insuring our Portfolios
against potential default. First, bonds that are issued with insurance
typically offer slightly lower yields than non-insured bonds. A second cost is
the explicit expense of purchasing insurance on non-insured bonds. Despite
these costs, however, our top-quality Portfolios continue to benefit from our
expense ratio advantage and provide yields that are fully competitive with
those of uninsured municipal bond portfolios.
Over time, given our high-quality, low-cost advantage, Vanguard State
Tax-Free Portfolios should remain attractive relative to our competitors'
funds. We look forward to reporting to you in further detail in our 1996 Annual
Report six months hence.
Sincerely,
/s/ John C. Bogle
- -----------------
John C. Bogle
Chairman of the Board
/s/ John J. Brennan
- -------------------
John J. Brennan
President
June 8, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE INCOME
TOTAL PER SHARE DIVIDENDS TOTAL RETURN
NET ASSETS ----------------- ----------------- ----------------
(MILLIONS) AVERAGE AVERAGE NOV. 30, MAY 31, SIX TWELVE SIX TWELVE CURRENT
PORTFOLIO MAY 31, 1996 MATURITY QUALITY* 1995 1996 MONTHS MONTHS MONTHS MONTHS YIELD**
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA . . . . . $1,276 42 DAYS MIG 1 $ 1.00 $ 1.00 $.017 $.034 +1.7% +3.5% 3.39%
PENNSYLVANIA . . . . 1,306 32 DAYS MIG 1 1.00 1.00 .017 .035 +1.7 +3.5 3.44
NEW JERSEY . . . . . 888 57 DAYS MIG 1 1.00 1.00 .016 .033 +1.6 +3.4 3.30
OHIO . . . . . . . . 199 60 DAYS MIG 1 1.00 1.00 .017 .035 +1.7 +3.6 3.43
- ------------------------------------------------------------------------------------------------------------------------------
INSURED INTERMEDIATE-TERM
CALIFORNIA . . . . . $ 264 7.4 YEARS Aaa $10.44 $10.25 $.254 $.512 +0.6% +5.0% 4.77%
INSURED LONG-TERM
CALIFORNIA . . . . . 978 14.1 YEARS Aaa 11.27 10.87 .299 .600 -0.9 +3.8 5.33
NEW YORK . . . . . . 879 11.7 YEARS Aaa 11.01 10.57 .286 .574 -0.8+ +3.8+ 5.23
PENNSYLVANIA . . . . 1,565 11.4 YEARS Aaa 11.28 10.90 .304 .608 -0.4+ +4.3+ 5.28
NEW JERSEY . . . . . 796 11.9 YEARS Aaa 11.78 11.29 .310 .617 -1.1+ +3.4+ 5.23
OHIO . . . . . . . . 203 10.9 YEARS Aaa 11.63 11.25 .302 .605 -0.7 +3.8 5.29
FLORIDA . . . . . . . 453 14.2 YEARS Aaa 10.94 10.60 .275 .554 -0.6 +3.8 5.22
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*MIG 1 and Aaa are Moody's highest ratings for short-term and long-term
municipal bonds, respectively.
**Money Market Portfolios' yields are 7-day annualized yields; others are
30-day SEC yields.
+Includes capital gains distributions of $.065 for New York, $.037 for
Pennsylvania, and $.058 for New Jersey.
Note: The shares of each of the Vanguard "single-state" Portfolios are
available for purchase solely by residents of the designated states.
3
<PAGE> 4
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELDS QUOTED IN THE MESSAGE TO SHAREHOLDERS ARE CALCULATED IN
ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL RETURNS FOR THE
PORTFOLIOS (PERIODS ENDED MARCH 31, 1996) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
----------------------------------
INCEPTION TOTAL INCOME CAPITAL
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
--------- ------ ------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA INSURED INTERMEDIATE-TERM 3/4/94 +7.60% -- +6.56% +5.08% +1.48%
CALIFORNIA INSURED LONG-TERM 4/7/86 +7.73 +8.17% +7.75 +6.47 +1.28
CALIFORNIA MONEY MARKET 6/1/87 +3.57 +3.12 +4.11 +4.11 0.00
NEW YORK INSURED TAX-FREE 4/7/86 +7.50 +8.37 +7.32 +6.44 +0.88
PENNSYLVANIA INSURED LONG-TERM 4/7/86 +7.15 +8.41 +7.95 +6.64 +1.31
PENNSYLVANIA MONEY MARKET 6/13/88 +3.62 +3.12 +4.11 +4.11 0.00
NEW JERSEY INSURED LONG-TERM 2/3/88 +7.13 +8.10 +8.39 +6.43 +1.96
NEW JERSEY MONEY MARKET 2/3/88 +3.50 +3.08 +4.09 +4.09 0.00
OHIO INSURED LONG-TERM 6/18/90 +7.13 +8.08 +8.50 +5.97 +2.53
OHIO MONEY MARKET 6/18/90 +3.72 +3.17 +3.49 +3.49 0.00
FLORIDA INSURED TAX-FREE 9/1/92 +7.50 -- +7.62 +5.43 +2.19
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' 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
PORTFOLIOS OF VANGUARD STATE TAX-FREE FUNDS, 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.
4
<PAGE> 5
REPORT FROM THE INVESTMENT ADVISER
The two major factors affecting the Longer-Term Insured Portfolios over the
last six months were the sharp rise in interest rates and the relatively better
performance of municipal bonds versus their taxable counterparts. The yield on
the 30-year U.S. Treasury bond increased 0.8 percentage points (from 6.1% to
6.9%). This was a decidedly unpleasant turn of events for bondholders and their
total returns. The increase in interest rates was prompted by signs of an
improving economy and investor concerns about inflation. During the same
period, the yield on high-grade, long-term municipal bonds rose 0.4 percentage
points (from 5.5% to 5.9%). The question of tax reform first raised by Senator
Armey (R-TX) and later championed by Steve Forbes in the Republican
Presidential primaries seemed to have been, at least in part, answered. The
reduced intensity of the rhetoric around the question of tax reform was a
contributing factor in explaining why the municipal market performed better
than the Treasury market.
The Federal Reserve Board's last action on January 31, 1996, was to
reduce the Federal funds rate and the discount rate by 0.25 percentage points.
At that time, the economy appeared to be struggling, a situation further
exacerbated by the severity of the winter. Unfortunately for bond investors,
the release of February's economic statistics showed a much stronger than
anticipated economy. Concurrently, an increase in the prices of oil, gasoline,
wheat, and corn prodded some investors to become concerned about the specter of
higher inflation. The combined effects caused the yield on the 30-year U.S.
Treasury bond to increase sharply. The beginning of the Presidential primary
season added an extra degree of uncertainty to the market.
While bear markets are never pleasant, they often offer market
opportunities that can be exploited to the shareholders' benefit. First, the
Portfolios' dividend distribution can be positively impacted by swapping bonds
with lower yields to maturity for bonds with higher yields to maturity. Second,
capital gains distributions can usually be reduced by realizing offsetting
capital losses. Finally, bear markets are generally the best time to buy bonds
that have superior protection from early redemption. As interest rates rise,
bonds which are noncallable or have long periods before they are callable are
often available at close to the same price as bonds with less desirable
characteristics. When the time comes for interest rates to reverse course and
fall, these bonds will furnish excellent capital returns while providing a more
stable dividend.
The past six months have been a very volatile period of time. The
future remains unknown, but the State Insured Longer-Term Portfolios will
continue to focus on their objectives. It is through this commitment to
high-quality Federal and state tax-exempt municipal bonds and low-cost, prudent
management that superior and durable investment results can be achieved.
MONEY MARKETS
The volatility experienced in the Treasury market over the past six months has
had little impact on yields in the short-term municipal bond market. Yields on
one-year municipal notes ended the period very close to where they began,
despite a 0.3% rise in yields on one-year Treasury bills. Nevertheless, there
were two issues which had a substantial impact on the short-term market.
First, seasonal supply constraints that typically plague the short-term
municipal market in the spring dampened the average weighted maturities of
money market funds. Second, and most notably, the Securities and Exchange
Commission (SEC) announced changes in the regulations governing money market
funds which became effective June 3, 1996.
In April, the SEC adopted amendments to rule 2a-7 under the Investment
Company Act of 1940. Section 2a-7 contains regulations that protect the quality
and safety of money market funds. For the most part, the changes emphasize
higher quality and increased diversification. The new guidelines were designed
to tighten the regulations imposed on tax-exempt money market funds and improve
the likelihood that the funds maintain a stable net asset value. Compliance
with the amendments may prove challenging for the industry. Many of our
competitors operate under somewhat lower quality standards and, as a result,
may be forced to significantly restructure their funds in order to meet the
standards.
(continued)
5
<PAGE> 6
In contrast, our Money Market Portfolios have always been managed quite
conservatively with credit quality our most important consideration.
Consequently, we expect the impact of the changes on Vanguard's State Tax-Free
Money Market Portfolios to be minimal.
The scarcity of new issue supply in the short-term municipal market
contributed to the relative stability in yields over the period. The supply of
short-term municipals tends to be quite seasonal, the timing of which depends
upon an issuer's fiscal year. The vast majority of issuers have fiscal years
beginning July 1 and ending June 30, causing new issue supply to decline in the
months leading up to June and increase dramatically in July. This annual event
makes it quite difficult for funds to maneuver their average weighted
maturities and, as a result, average maturities for Vanguard and the industry
drifted lower over the last fiscal period.
Over the last several years, all Pennsylvania money market fund
managers have had to cope with a generalized deterioration in the average
credit quality of Pennsylvania issuers and an associated shortfall in the
number of attractive and creditworthy issuers. Consequently, they have required
that a large percentage of Pennsylvania short-term municipal issuance be
enhanced by letters of credit (LOC). A letter of credit typically is an
unconditional contractual arrangement, whereby a bank guarantees the debt of an
issuer of tax-exempt bonds for a fixed period of time in exchange for an annual
fee. Two institutions, PNC Bank and Morgan Guaranty Bank, have aggressively
pursued new issue business and secured strongholds over most of the
Pennsylvania issues. Unfortunately, at the same time, PNC Bank's credit
quality ratings have deteriorated. In order to recognize these changing credit
conditions and, not coincidentally, improve our safety and diversification, the
Portfolio has decided to purchase securities subject to alternative minimum tax
(AMT). The benefits of purchasing AMT securities are several. We can buy AMT
issues guaranteed by LOCs from Aaa- or Aa-rated banks, a noteworthy improvement
over the status quo. We estimate that only a very small percentage (i.e., less
than 10%) of shareholders will be subject to the AMT. The overwhelming majority
of our shareholders, however, will benefit by our increasing the Portfolio's
diversification and quality, and to a lesser extent, an improved yield.
In conclusion, the months ahead should be challenging for the
industry, with tighter regulations governing tax-free money market funds coming
at a time when short-term issuance is at its peak. Hopefully, the new
amendments adopted by the SEC will "level the playing field," bringing
competitors closer to Vanguard's already conservative style of management,
thereby further enhancing the performance advantage that arises from our "rock
bottom" expense ratios.
Sincerely,
Ian A. MacKinnon David E. Hamlin
Senior Vice President Principal
Pamela W. Tynan Danine A. Mueller
Principal Principal
Reid O. Smith Jerome J. Jacobs
Principal Principal
Vanguard Fixed Income Group
June 18, 1996
6
<PAGE> 7
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
May 31, 1996
<TABLE>
<CAPTION>
Face Market
INSURED Amount Value
LONG-TERM PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (102.4%)
- --------------------------------------------------------------------------------
ISSUER INSURED (93.2%)
Allegheny County PA GO
0.00%, 5/1/03 (2) $ 12,315 $ 8,658
6.00%, 5/1/10 (2) 3,030 3,101
6.00%, 5/1/12 (2) 3,000 3,049
Allegheny County PA Hosp.
Development Auth.
(Magee Women's Hosp.)
6.00%, 10/1/10 (3) 4,235 4,409
(Mercy Hosp.)
6.75%, 4/1/21 (2) 4,500 4,777
(Presbyterian Univ. Health)
6.00%, 11/1/12 (1) 3,000 3,020
7.125%, 7/1/99 (1) (Prere.) 6,835 7,463
7.60%, 3/1/08 (1) 5,000 5,389
Allegheny County PA Port Auth.
4.50%, 3/1/98 (2) 6,000 6,035
Allegheny County PA
Sanitation Auth.
5.50%, 12/1/13 (3) 20,295 19,610
5.50%, 12/1/16 (3) 23,665 22,386
6.25%, 12/1/14 (1) 9,660 9,937
6.50%, 12/1/11 (3) 8,000 8,318
Altoona City PA Auth.
6.50%, 11/1/19 (3) 20,000 20,891
Beaver County PA IDA
(Ohio Edison)
7.00%, 6/1/21 (3) 22,715 24,721
7.10%, 6/1/18 (3) 5,000 5,396
Berks County PA GO
0.00%, 11/15/13 (3) 7,250 2,605
0.00%, 11/15/14 (3) 8,615 2,893
0.00%, 11/15/15 (3) 6,250 1,960
5.75%, 11/15/12 (3) 15,500 15,483
Berks County PA Hosp. Rev.
(Reading Hosp.)
5.70%, 10/1/14 (1) 4,500 4,405
6.10%, 10/1/23 (1) 16,500 16,549
Blair County PA Hosp. Auth.
(Altoona Hosp.)
6.50%, 7/1/22 (2) 8,500 8,813
Boyertown PA Area School Dist.
6.10%, 3/1/15 (2) 6,000 6,027
Butler County PA GO
6.00%, 7/15/12 (3) 5,185 5,248
Center City Philadelphia PA
Business Improvement
5.50%, 12/1/15 (2) 6,955 6,651
Center Township PA Sewer Auth.
5.50%, 4/15/11 (2) 2,375 2,339
Central Dauphin County PA
School Dist. GO
0.00%, 6/1/04 (2) 4,800 3,168
Central Greene PA School Dist.
6.50%, 2/15/24 (1) 5,500 6,026
Chester County PA Hosp. Auth.
(Chester County Hosp.)
7.00%, 7/1/16 (1) 11,000 11,023
Cornwall Lebanon PA Suburban
Joint School Dist.
5.875%, 3/1/14 (3) 5,635 5,552
5.90%, 3/1/11 (3) 3,270 3,323
Corry PA Area School Dist. GO
5.50%, 12/15/10 (1) 4,600 4,555
Dauphin County PA General Auth.
(West Pennsylvania Hosp.)
5.50%, 7/1/13 (1) 5,000 4,730
Dauphin County PA Hosp. Auth.
(Harrisburg Hosp.)
8.125%, 7/1/07 (1) 3,000 3,170
Delaware County PA Auth.
College Rev.
(Haverford College)
5.40%, 11/15/13 (1) 1,750 1,669
Delaware County PA Hosp. Auth.
(Crozer Chester Medical Center)
5.30%, 12/15/11 (1) 4,660 4,359
(Delaware County Memorial Hosp.)
4.00%, 8/15/96 (5) 1,180 1,181
5.50%, 8/15/13 (5) 12,000 11,497
5.50%, 8/15/19 (5) 4,000 3,746
7.125%, 8/15/09 (1) 5,160 5,648
7.20%, 8/15/99 (1) (Prere.) 8,000 8,774
Delaware River Joint Toll
Bridge Comm. PA
6.00%, 7/1/18 (3) 3,040 3,032
Delaware River Port Auth. PA
5.50%, 1/1/26 (3) 21,450 20,113
6.50%, 1/1/09 (2) 4,500 4,607
7.375%, 1/1/07 (2) 13,500 14,522
Erie County PA Hosp. Auth.
(St. Vincent Health Care)
6.125%, 7/1/13 (1) 3,900 3,983
Fort LeBoeuf PA School Dist. GO
5.80%, 1/1/13 (1) 5,500 5,496
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
INSURED LONG-TERM Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Garnet Valley PA School Dist. GO
5.70%, 4/1/11 (2) $ 3,000 $ 3,007
Greensburg Salem PA School
Dist. GO
6.45%, 9/15/18 (1) 7,500 7,721
Haverford Township PA School Dist.
6.25%, 6/1/04 (3) (Prere.) 11,500 12,391
Hazleton PA Area School Dist.
5.75%, 3/1/13 (3) 11,875 11,798
Lancaster PA Higher
Education Auth.
(Franklin & Marshall College)
6.60%, 4/15/10 (1) 4,940 5,237
6.70%, 4/15/12 (1) 4,000 4,230
Lehigh County PA GO
5.625%, 7/1/25 (1) 17,500 16,464
5.70%, 7/1/10 (1) 3,905 3,894
6.00%, 10/15/99 (2) (Prere.) 1,000 1,045
7.00%, 7/1/16 (1) 4,415 5,108
Lewisburg PA Area School Dist. GO
6.20%, 6/1/12 (1) 3,500 3,740
6.25%, 6/1/15 (1) 3,685 3,947
Ligonier Valley PA School Dist. GO
6.00%, 3/1/19 (1) 6,000 5,948
Lycoming County PA College
Auth. GO
5.40%, 11/1/08 (2) 6,000 5,940
Lycoming County PA Hosp. Auth.
(Williamsport Hosp.)
5.25%, 11/15/15 (7) 15,525 14,198
5.375%, 11/15/10 (7) 9,820 9,214
6.875%, 11/1/96 (2) (Prere.) 4,450 4,596
7.00%, 11/1/96 (2) (Prere.) 3,000 3,100
Manheim PA Central School
Dist. GO
6.85%, 3/1/08 (3) 2,705 2,909
Mars PA Area School Dist. GO
6.25%, 9/1/19 (3) 4,000 4,317
Montgomery County PA Higher
Education & Health Auth.
(Abington Memorial Hosp.)
6.00%, 6/1/22 (2) 10,160 9,976
6.10%, 6/1/12 (2) 5,000 5,090
Montgomery County PA IDA PCR
(PECO)
6.70%, 12/1/21 (1) 12,000 12,769
Mount Lebanon PA Hosp.
Development Auth.
(St. Clair Memorial Hosp.)
6.25%, 7/1/06 (3) 9,250 9,937
Nazareth PA School Dist.
5.50%, 11/15/15 (2) 1,500 1,450
Neshaminy PA School Dist. GO
6.30%, 2/15/13 (3) 10,000 10,309
North Penn PA Water Auth.
5.75%, 11/1/24 (3) 19,460 18,773
6.125%, 11/1/10 (3) 5,140 5,302
North Wales PA Water Auth.
(Montgomery County)
5.25%, 11/1/19 (3) 12,350 11,265
6.125%, 11/1/12 (3) 3,000 3,053
6.125%, 11/1/22 (3) 8,300 8,358
6.25%, 11/1/14 (3) 2,300 2,356
Northampton County PA Higher
Education Auth.
(Lehigh Univ.)
7.10%, 11/15/09 (1) 7,035 7,626
Northampton County PA
Hosp. Auth.
(Easton Hosp.)
6.25%, 1/1/19 (1) 10,000 10,132
7.875%, 1/1/19 (6) 285 310
Northampton County PA IDA PCR
(Central Metro Edison)
6.10%, 7/15/21 (1) 4,410 4,417
Northumberland County PA
Commonwealth Lease
6.25%, 10/15/01 (1) (Prere.) 13,600 14,100
Penn Hills PA GO
5.80%, 12/1/13 (2) 11,735 12,354
Penn Trafford PA School Dist. GO
5.85%, 5/1/14 (1) 2,435 2,403
Pennsylvania Convention
Center Auth.
0.00%, 9/1/04 (3) 5,000 3,258
6.00%, 9/1/19 (3) 12,600 13,102
6.70%, 9/1/16 (3) 19,150 21,665
Pennsylvania GO
5.00%, 11/15/97 (2) 9,075 9,231
5.25%, 5/15/98 (3) 8,200 8,371
5.375%, 5/15/10 (3)++ 13,800 13,463
5.375%, 5/15/12 (3)++ 16,570 15,976
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Pennsylvania Higher
Education Auth.
(Allegheny Delaware Valley)
5.875%, 11/15/16 (1)++ $ 20,000 $ 19,775
(College and Univ. Rev.)
7.20%, 1/1/04 (2) 2,500 2,519
(Drexel Univ.)
5.625%, 5/1/14 (1) 11,755 11,387
(State System)
5.375%, 6/15/18 (2) 8,845 8,133
(Temple Univ.)
6.50%, 4/1/21 (1) 6,000 6,216
Pennsylvania Intergovernment
Cooperation Auth.
5.00%, 6/15/98 (3) 21,000 21,308
5.40%, 6/15/09 (3) 2,700 2,643
5.50%, 6/15/10 (3) 3,700 3,633
5.625%, 6/15/13 (3) 2,605 2,545
5.625%, 6/15/23 (1) 27,500 26,058
6.75%, 6/15/21 (3) 23,050 25,794
7.00%, 6/15/14 (3) 2,250 2,556
Pennsylvania Turnpike Comm.
5.50%, 12/1/17 (3) 29,000 27,195
5.75%, 12/1/12 (2) 10,000 9,989
6.00%, 6/1/15 (1) 28,800 28,735
6.25%, 6/1/11 (2) 14,390 14,926
Pennsylvania Turnpike Comm.
Oil Franchise Tax Rev.
6.00%, 12/1/19 (2) 7,450 7,385
Philadelphia PA Airport Rev.
9.875%, 6/15/06 (1) 2,215 2,225
Philadelphia PA Gas Works
6.00%, 5/15/12 (2) 14,250 14,420
6.75%, 1/1/15 (2) 13,930 14,640
7.25%, 1/1/10 (2) 10,085 10,818
Philadelphia PA GO
6.00%, 11/15/10 (3) 2,810 2,889
6.00%, 11/15/11 (3) 3,025 3,112
6.00%, 11/15/12 (3) 3,355 3,394
6.00%, 11/15/13 (3) 1,885 1,905
Philadelphia PA Municipal
Auth. Rev.
5.55%, 11/15/08 (3) 3,040 3,048
5.60%, 11/15/09 (3) 2,100 2,101
5.60%, 11/15/10 (3) 6,755 6,715
5.625%, 11/15/18 (3) 8,750 8,358
7.10%, 11/15/05 (1) 3,000 3,316
Philadelphia PA Parking Auth. Rev.
7.375%, 9/1/18 (2) 12,065 12,976
Philadelphia PA School Dist. GO
0.00%, 7/1/01 (2) 11,750 9,210
5.50%, 9/1/15 (2) 5,000 4,788
5.50%, 9/1/18 (2) 4,000 3,756
5.85%, 7/1/09 (1) 1,500 1,529
Philadelphia PA Water & Waste
Water Rev.
5.50%, 8/1/14 (1) 12,900 12,426
5.60%, 8/1/18 (1) 5,920 5,631
6.25%, 8/1/11 (1) 3,750 3,985
7.00%, 6/15/10 (3) 33,865 38,431
7.00%, 6/15/11 (3) 35,685 40,522
Pittsburgh PA GO
5.20%, 9/1/06 (2) 1,175 1,167
5.30%, 9/1/07 (2) 1,000 994
5.50%, 9/1/14 (2) 9,500 9,181
6.25%, 9/1/16 (1) 11,030 11,182
7.00%, 3/1/06 (3) 18,265 18,937
7.00%, 3/1/07 (3) 2,135 2,214
Pittsburgh PA Public Parking Auth.
5.875%, 12/1/12 (3) 8,200 8,268
Pittsburgh PA Water &
Sewer System
7.25%, 9/1/14 (3) (ETM) 25,210 28,330
7.625%, 9/1/04 (3) (ETM) 5,370 6,132
Pocono Mountain PA School
Dist. GO
5.75%, 10/1/09 (2) 6,000 6,065
Reading PA GO (Berks County)
5.875%, 11/15/12 (2) 18,000 18,119
St. Mary's Hosp. Auth.
Langhorne PA
(Franciscan Health System)
7.00%, 7/1/09 (6) 1,000 1,073
7.00%, 7/1/13 (6) 5,050 5,410
7.00%, 6/15/15 (6) 1,770 1,896
Sayre PA Health Care Facilities Auth.
(Pooled Capital Asset
Financing Program)
VRDO 3.50%, 6/5/96 (2) 36,375 36,375
(Guthrie Health Care System)
7.00%, 3/1/11 (2) 2,000 2,178
Seneca PA Valley School Dist. GO
5.50%, 7/1/14 (3) 9,965 9,589
5.75%, 7/1/10 (3) 4,000 4,030
Souderton PA Area School Dist. GO
7.00%, 9/1/12 (2) 2,200 2,306
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
INSURED LONG-TERM Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
South Fork PA Hosp. Auth.
(Conemaugh Valley Hosp.)
5.625%, 7/1/10 (7) $ 2,300 $ 2,305
5.75%, 7/1/18 (7) 7,000 6,746
Spring-Ford PA Area School
Dist. GO
6.50%, 2/1/18 (2) 8,260 8,647
Univ. of Pittsburgh PA
6.125%, 6/1/21 (1) 36,010 36,315
6.25%, 6/1/12 (1) 4,250 4,412
Washington County PA Hosp. Auth.
(Shadyside Hosp.)
5.875%, 12/15/09 (2) 22,000 22,435
(Washington Hosp.)
6.75%, 7/1/12 (2) 10,000 10,634
Wayne County PA Hosp. &
Health Facility
7.125%, 7/1/96 (1) (Prere.) 1,500 1,504
West Allegheny PA School Dist.
6.25%, 2/1/14 (2) 6,155 6,296
West Jefferson Hills PA School
Dist. GO
5.90%, 8/1/10 (3) 3,160 3,201
5.95%, 8/1/14 (3) 7,180 7,062
West Mifflin PA School Dist. GO
5.35%, 2/15/09 (3) 1,555 1,519
5.625%, 2/15/15 (3) 7,000 6,845
Westmoreland County PA Auth.
6.125%, 7/1/17 (1) (ETM) 8,205 8,426
York County PA Southwestern
School Dist. GO
6.40%, 6/15/12 (3) 3,825 4,185
---------
GROUP TOTAL 1,459,127
---------
- --------------------------------------------------------------------------------
PORTFOLIO INSURED (.9%)
Allegheny County PA Hosp.
Development Auth.
(Mercy Hosp.)
7.375%, 4/1/15 3,650 3,715
(St. Margaret's Hosp.)
9.80%, 7/1/10 1,500 1,535
Pennsylvania Hosp. & Higher
Education Facilities Auth.
(Pennsylvania Hosp.)
7.25%, 7/1/14 8,535 8,575
---------
GROUP TOTAL 13,825
---------
- --------------------------------------------------------------------------------
SECONDARY MARKET INSURED (.1%)
Allegheny County PA Hosp.
Development Auth.
(Mercy Hosp.)
7.375%, 4/1/15 (1) 1,350 1,380
---------
- --------------------------------------------------------------------------------
NON-INSURED (8.2%)
Allegheny County PA Hosp.
Development Auth. VRDO
(Allegheny General Hosp.)
3.60%, 6/5/96 LOC 2,100 2,100
(Presbyterian Univ. Health)
3.75%, 6/6/96 1,800 1,800
(South Hills Health System)
3.55%, 6/5/96 LOC 2,100 2,100
Geisinger Health System Auth. of PA
(Montour County)
VRDO 3.65%, 6/4/96 5,400 5,400
Montgomery County PA Higher
Education & Health Auth.
(Bryn Mawr Hosp. Project)
9.375%, 12/1/97 (Prere.) 5,000 5,485
Pennsylvania GO
4.75%, 6/15/97 1,750 1,768
Pennsylvania Higher Education
Facilities Auth.
(Carnegie Mellon Univ.)
VRDO 3.75%, 6/4/96 29,500 29,500
(Temple Univ.)
VRDO 3.65%, 6/4/96 LOC 1,300 1,300
(University of Pennsylvania)
VRDO 3.60%, 6/5/96 15,000 15,000
5.75%, 1/1/22 12,415 11,871
Pennsylvania Housing Single Family
Mortgage Finance Agency
6.90%, 4/1/17 7,500 7,826
7.55%, 4/1/16 9,670 10,299
Philadelphia PA Hosp. & Higher
Education Facility Auth.
(Children's Hosp.)
VRDO 3.65%, 6/4/96 19,150 19,150
7.00%, 7/1/97 (Prere.) 1,870 1,933
Philadelphia PA IDA VRDO
(Franklin Institute)
3.80%, 6/6/96 LOC 6,700 6,700
Philadelphia PA School
District TRAN
4.50%, 6/28/96 4,000 4,002
Swarthmore Borough PA Auth.
College Rev.
7.375%, 9/15/18 2,200 2,332
---------
GROUP TOTAL 128,566
---------
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $1,554,967) 1,602,898
- --------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
(000)+
- --------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-2.4%)
- --------------------------------------------------------------------------------
Other Assets--Note B $ 29,377
Liabilities (66,869)
----------
(37,492)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 143,641,179 outstanding shares
of beneficial interest (unlimited
authorization--no par value) $1,565,406
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.90
================================================================================
</TABLE>
+See Note A to Financial Statements.
For explanations of abbreviations and other references, see page 13.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MAY 31, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- ------
<S> <C> <C>
PAID IN CAPITAL $1,515,134 $10.55
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET REALIZED
GAINS 3,173 .02
UNREALIZED APPRECIATION
(DEPRECIATION)--NOTE E:
INVESTMENT SECURITIES 47,931 .34
FUTURES CONTRACTS (832) (.01)
- --------------------------------------------------------------------------------
NET ASSETS $1,565,406 $10.90
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face Market
MONEY MARKET Amount Value
PORTFOLIO (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS (99.1%)
- --------------------------------------------------------------------------------
Allegheny County PA GO VRDO
TOB 3.60%, 6/6/96 (2) $ 3,000 $ 3,000
3.75%, 6/6/96 17,900 17,900
Allegheny County PA Higher
Education Auth. VRDO
(Univ. of Pittsburgh)
3.40%-3.45%, 6/6/96 LOC 38,030 38,030
Allegheny County PA Hosp.
Development Auth.
(Allegheny General Hosp.)
VRDO 3.55%-3.60%, 6/5/96 LOC 33,250 33,250
(Children's Hosp.-Pittsburgh)
VRDO 3.45%, 6/6/96 (1) 20,400 20,400
(Health Center Development)
CP 3.70%, 7/9/96 LOC 14,800 14,800
(South Hills Health System)
VRDO 3.55%, 6/5/96 LOC 1,800 1,800
Allegheny County PA PCR CP
(Duquesne Light Co.)
3.50%, 6/6/96 LOC 5,000 5,000
Allegheny County PA Port Auth.
4.00%, 3/1/97 (2) 6,845 6,888
Beaver County PA IDA PCR
(Duquesne Light Co.)
CP 3.20%-3.65%,
7/9/96-8/26/96 LOC 60,045 60,045
VRDO 3.65%, 6/5/96 LOC 15,000 15,000
Berks County PA TRAN
4.50%, 12/31/96 10,850 10,881
Dauphin County PA General Auth.
Hosp. Rev. VRDO
(Reading Hosp. & Medical Center)
3.70%, 6/5/96 10,400 10,400
Delaware County PA IDA Airport
Facilities Rev. VRDO
(United Parcel Service)
3.60%, 6/4/96 64,100 64,100
Delaware County PA IDA PCR
(PECO)
CP 3.25%-3.65%,
7/17/96-8/23/96 (3) 32,980 32,980
VRDO 3.55%, 6/5/96 LOC 24,125 24,125
Delaware County PA IDA
Solid Waste Rev. VRDO
(Scott Paper Co.)
3.50%, 6/5/96 37,200 37,200
Downingtown PA School Dist. GO
4.00%, 3/1/97 1,305 1,308
</TABLE>
11
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
MONEY MARKET Amount Value
PORTFOLIO (continued) (000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Emmaus PA General Auth. Local
Govt. Rev. VRDO
(Allentown)
3.80%, 6/5/96 LOC $ 7,000 $ 7,000
(Altoona Area School Dist.)
3.80%, 6/5/96 LOC 14,400 14,400
(East Penn School Dist.)
3.80%, 6/5/96 LOC 10,000 10,000
(Great Valley School Dist.)
3.90%, 6/5/96 LOC 15,000 15,000
(Hatboro-Horsham School Dist.)
3.80%, 6/5/96 LOC 8,400 8,400
(Highlands School Dist.)
3.80%, 6/5/96 LOC 10,000 10,000
(Lower Dauphin School Dist.)
3.90%, 6/5/96 LOC 5,000 5,000
(Owen J. Roberts School Dist.)
3.80%, 6/5/96 LOC 7,900 7,900
(Pooled Program)
3.80%, 6/5/96 31,000 31,000
(Red Lion School Dist.)
3.90%, 6/5/96 LOC 3,500 3,500
(Southmoreland School Dist.)
3.80%, 6/5/96 LOC 5,200 5,200
(West Chester School Dist.)
3.90%, 6/5/96 LOC 10,000 10,000
Geisinger Health System Auth. of PA
VRDO 3.65%, 6/4/96 33,700 33,700
Lancaster PA Higher
Education Auth. VRDO
(Franklin & Marshall)
3.90%, 6/5/96 2,125 2,125
Lehigh County PA General
Purpose Auth. CP
(Hosp. Central Services)
3.20%, 7/25/96 (1) 10,000 10,000
Lehigh County PA IDA PCR TOB
(Pennsylvania Power & Light)
VRDO 3.60%, 6/6/96 (1) 3,200 3,200
Montgomery County PA IDA PCR CP
(PECO)
3.20%-3.65%,
6/6/96-8/20/96 LOC 33,170 33,170
Northeastern PA Hosp. & Education
Auth. VRDO
(Wyoming Valley Health Care
Obligated Group)
3.75%, 6/5/96 (2) 41,800 41,800
Northeastern PA Hosp. Auth.
Pooled CP
(Hosp. Central Services)
3.25%-3.70%,
7/24/96-8/22/96 (1) 32,940 32,940
Pennsylvania GO
TOB 3.60%, 6/6/96 (2) 9,125 9,125
4.40%-6.00%,
7/1/96-6/15/97 17,535 17,634
6.00%, 11/1/96 (1) 5,000 5,053
Pennsylvania Higher Education
Facilities Auth.
(Carnegie Mellon Univ.)
VRDO 3.65%, 6/4/96 53,300 53,300
(Temple Univ.)
VRDO 3.65%, 6/4/96 LOC 34,700 34,700
(Thomas Jefferson Univ.)
PUT 3.30%, 8/26/96 8,100 8,100
(Univ. of PA Health System
Obligated Group)
VRDO 3.60%-3.65%, 6/5/96 91,000 91,000
Pennsylvania Higher Education
Univ. Funding (Temple Univ.)
4.625%, 5/20/97 17,000 17,147
Pennsylvania Infrastructure
Investment Auth.
(Pennvest Loan Pooled Project)
VRDO 3.85%-4.25%, 6/5/96 30,800 30,800
Pennsylvania Intergovernmental
Cooperative Auth.
5.00%-5.20%,
6/15/96-6/15/97 (3) 13,150 13,219
Pennsylvania State Univ. Notes
4.25%, 4/4/97 3,250 3,270
Pennsylvania TAN
4.50%, 6/28/96 56,000 56,038
Pennsylvania Turnpike Rev.
TOB VRDO 3.60%,
6/6/96 (Prere.) 12,000 12,000
7.875%, 12/1/96 (Prere.) 14,505 15,091
Philadelphia PA Hosp. & Higher
Education Facilities Auth.
(Children's Hosp.)
VRDO 3.65%, 6/4/96 3,400 3,400
(Pennsylvania Hosp.)
VRDO 3.50%, 6/5/96 (3) 30,000 30,000
PUT 3.85%, 7/1/96 (3) 30,000 29,994
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------
<S> <C> <C>
Philadelphia PA IDA VRDO
(Fox Chase Institute for
Cancer Research)
3.65%, 6/4/96 LOC $ 4,500 $ 4,500
Philadelphia PA School Dist. TRAN
4.50%, 6/28/96 21,000 21,011
Philadelphia PA Water &
Waste Water Rev.
4.50%, 6/15/97 (1) 5,000 5,037
St. Mary's Hosp. Auth.
Langhorne PA
(Franciscan Health System)
3.60%, 6/4/96 LOC 18,230 18,230
Sayre PA Health Care
Facilities Auth. VRDO
(Pooled Capital Asset
Financing Program)
3.50%, 6/5/96 (2) 56,245 56,245
Univ. of Pittsburgh PA
Higher Education VRDO
3.40%, 6/6/96 LOC 37,000 37,000
York County PA IDA PCR VRDO
(PECO)
3.55%, 6/5/96 LOC 15,440 15,440
(Public Service Electric & Gas)
3.45%, 6/5/96 (1) 5,200 5,200
OUTSIDE PENNSYLVANIA:
Puerto Rico Govt. Development Bank
VRDO 3.25%, 6/5/96 LOC 21,000 21,000
- --------------------------------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $1,294,976) 1,294,976
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (.9%)
- --------------------------------------------------------------------------------
Other Assets--Note B 17,623
Liabilities (6,324)
----------
11,299
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 1,306,325,010 outstanding
shares of beneficial interest
(unlimited authorization--no par value) $1,306,275
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
================================================================================
</TABLE>
+See Note A to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
AT MAY 31, 1996, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- -----
<S> <C> <C>
PAID IN CAPITAL $1,306,323 $1.00
UNDISTRIBUTED NET
INVESTMENT INCOME -- --
ACCUMULATED NET
REALIZED LOSSES (48) --
UNREALIZED APPRECIATION
OF INVESTMENTS -- --
- --------------------------------------------------------------------------------
NET ASSETS $1,306,275 $1.00
- --------------------------------------------------------------------------------
</TABLE>
BAN=Bond Anticipation Note
COP=Certificate of Participation
CP=Commercial Paper
GO=General Obligation Bond
IDA=Industrial Development Authority Bond
IDR=Industrial Development Revenue Bond
PCR=Pollution Control Revenue Bond
PUT=Put Option Obligation
Rev.=Revenue Bond
TAN=Tax Anticipation Note
TAW=Tax Anticipation Warrant
TOB=Tender Option Bond
TRAN=Tax Revenue Anticipation Note
VRDO=Variable Rate Demand Obligation
(ETM)=Escrowed to Maturity
(Prere.)=Prerefunded
++Security purchased on a when-issued or delayed delivery basis for which the
Fund has not taken delivery as of May 31, 1996.
Scheduled principal and interest payments are guaranteed by:
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC Indemnity Corporation)
(3) FGIC (Financial Guaranty Insurance Company)
(4) FSA (Financial Security Assurance)
(5) CGI (Capital Guaranty Insurance)
(6) BIGI (Bond Investors Guaranty Insurance)
(7) Connie Lee Inc.
(8) FHA (Federal Housing Authority)
The insurance does not guarantee the market value of the municipal bonds.
LOC=Scheduled principal and interest payments are guaranteed by bank letter of
credit.
13
<PAGE> 14
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INSURED LONG-TERM MONEY MARKET
PORTFOLIO PORTFOLIO
- --------------------------------------------------------------------------------------------------------------------
Six Months Ended Six Months Ended
May 31, 1996 May 31, 1996
(000) (000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . $ 44,655 $22,410
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . 44,655 22,410
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services . . . . . . . . . . $ 92 $ 72
Management and Administrative . . . . . . . . . . 1,267 959
Marketing and Distribution . . . . . . . . . . . . 168 1,527 189 1,220
------ ----
Insurance Expense . . . . . . . . . . . . . . . . . . 22 --
Custodian Fees . . . . . . . . . . . . . . . . . . . 19 18
Auditing Fees . . . . . . . . . . . . . . . . . . . 4 4
Shareholders' Reports . . . . . . . . . . . . . . . . 24 17
Annual Meeting and Proxy Costs . . . . . . . . . . . 5 4
Trustees' Fees and Expenses . . . . . . . . . . . . . 2 2
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . 1,603 1,265
Expenses Paid Indirectly--Note C . . . . . . (19) (18)
- --------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . 1,584 1,247
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . 43,071 21,163
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold . . . . . . . . . . . . . 5,788 --
Futures Contracts . . . . . . . . . . . . . . . . . . (1,297) --
- --------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . 4,491 --
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . (54,489) --
Futures Contracts . . . . . . . . . . . . . . . . . . 826 --
- --------------------------------------------------------------------------------------------------------------------
Change in Unrealized
Appreciation (Depreciation) . . . . . (53,663) --
- --------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . $ (6,101) $21,163
====================================================================================================================
</TABLE>
14
<PAGE> 15
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INSURED LONG-TERM MONEY MARKET
PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED Year Ended SIX MONTHS ENDED Year Ended
MAY 31, November 30, MAY 31, November 30,
1996 1995 1996 1995
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . $ 43,071 $ 81,331 $ 21,163 $ 41,411
Realized Net Gain (Loss) . . . . . . . . . . . . . . . 4,491 3,960 -- (9)
Change in Unrealized Appreciation
(Depreciation) . . . . . . . . . . . . . . . . . . . (53,663) 154,719 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations . . . . . . . . . . . . (6,101) 240,010 21,163 41,402
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . (43,071) (81,331) (21,163) (41,411)
Realized Net Gain . . . . . . . . . . . . . . . . . . . (5,205) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . (48,276) (81,331) (21,163) (41,411)
- -----------------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . 161,312 321,317 840,110 1,325,637
Issued in Lieu of Cash Distributions . . . . . . . . . . 34,112 56,112 19,459 38,465
Redeemed . . . . . . . . . . . . . . . . . . . . . . . (144,679) (265,925) (752,978) (1,269,390)
- -----------------------------------------------------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions . . . . . . . . . . . . . . . . 50,745 111,504 106,591 94,712
- -----------------------------------------------------------------------------------------------------------------------------
Total Increase (Decrease) . . . . . . . . . . . . . . (3,632) 270,183 106,591 94,703
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . 1,569,038 1,298,855 1,199,684 1,104,981
- -----------------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . $1,565,406 $1,569,038 $1,306,275 $ 1,199,684
=============================================================================================================================
(1)Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . 14,485 29,723 840,110 1,325,637
Issued in Lieu of Cash Distributions . . . . . . . . 3,063 5,152 19,459 38,465
Redeemed . . . . . . . . . . . . . . . . . . . . . . (13,023) (24,765) (752,978) (1,269,390)
- -----------------------------------------------------------------------------------------------------------------------------
4,525 10,110 106,591 94,712
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 16
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INSURED LONG-TERM PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
Year Ended November 30,
SIX MONTHS ENDED ----------------------------------------------
For a Share Outstanding Throughout Each Period MAY 31, 1996 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $11.28 $10.07 $11.36 $10.96 $10.47 $10.19
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .304 .612 .625 .631 .664 .667
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . (.343) 1.210 (1.211) .624 .520 .286
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS . . . . (.039) 1.822 (.586) 1.255 1.184 .953
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.304) (.612) (.625) (.631) (.664) (.667)
Distributions from Realized Capital Gains . . (.037) -- (.079) (.224) (.030) (.006)
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS . . . . . . . . . . (.341) (.612) (.704) (.855) (.694) (.673)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $10.90 $11.28 $10.07 $11.36 $10.96 $10.47
===============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . -0.36% +18.48% -5.44% +11.90% +11.65% +9.65%
- ---------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- -------------------------
Net Assets, End of Period (Millions) . . . . . . $1,565 $1,569 $1,299 $1,496 $1,130 $828
Ratio of Total Expenses to Average Net Assets . . .20%* .20% .20% .20% .24%+ .25%+
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 5.45%* 5.63% 5.76% 5.61% 6.17% 6.46%
Portfolio Turnover Rate . . . . . . . . . . . . . 12%* 12% 16% 14% 17% 2%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Insurance expense represents .01% and .01%.
16
<PAGE> 17
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------
Year Ended November 30,
SIX MONTHS ENDED ----------------------------------------------
For a Share Outstanding Throughout Each Period MAY 31, 1996 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
----- ----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .017 .036 .025 .024 .029 .045
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . -- -- -- -- -- --
----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS . . . . .017 .036 .025 .024 .029 .045
- ---------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . (.017) (.036) (.025) (.024) (.029) (.045)
Distributions from Realized Capital Gains . . -- -- -- -- -- --
----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS . . . . . . . . . . (.017) (.036) (.025) (.024) (.029) (.045)
- ---------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
===============================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +1.70% +3.69% +2.57% +2.38% +2.96% +4.59%
- ---------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . $1,306 $1,200 $1,105 $935 $782 $818
Ratio of Total Expenses to Average Net Assets . . .20%* .20% .20% .20% .24% .24%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . 3.35%* 3.62% 2.55% 2.35% 2.93% 4.48%
Portfolio Turnover Rate . . . . . . . . . . . . . N/A N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
17
<PAGE> 18
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 utilizes Municipal Bond Index, U.S.
Treasury Bond, and U.S. Treasury Note futures contracts to a limited extent,
with the objectives of enhancing returns, managing interest rate risk,
maintaining liquidity, diversifying credit risk, and minimizing transaction
costs. The Portfolio may purchase futures contracts instead of municipal
bonds when futures contracts are believed to be priced more attractively
than municipal bonds. The Portfolio may also seek to take advantage of price
differences among bond market sectors by simultaneously buying futures (or
bonds) of one market sector and selling futures (or bonds) of another
sector. Futures contracts may also be used to simulate a fully invested
position in the underlying bonds while maintaining a cash balance for
liquidity.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of bonds held by the Portfolio
and the prices of futures contracts, and the possibility of an illiquid
market. Futures contracts are valued based upon their quoted daily
settlement prices. Fluctuations in the values 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 furnishes at cost investment advisory, corporate
management, administrative, marketing, and distribution services. The costs of
such services are allocated to the Fund under methods approved by the Board of
Trustees. At May 31, 1996, the Fund had contributed capital
18
<PAGE> 19
aggregating $296,000 to Vanguard (included in Other Assets), representing 1.5%
of Vanguard's capitalization. The Fund's officers and trustees are also
officers and directors of Vanguard.
C. The Fund's custodian bank has agreed to reduce its fees when the Fund
maintains cash on deposit in the non-interest bearing custodian account. For
the six months ended May 31, 1996, custodian fee offset arrangements reduced
expenses of the Insured Long- Term and Money Market Portfolios by $19,000 and
$18,000, respectively.
D. During the six months ended May 31, 1996, the Insured Long-Term Portfolio
made purchases of $139,767,000 and sales of $87,411,000 of investment
securities other than temporary cash investments.
E. At May 31, 1996, unrealized appreciation of investment securities of the
Insured Long-Term Portfolio for financial reporting and Federal income tax
purposes aggregated $47,931,000, of which $53,189,000 related to appreciated
securities and $5,258,000 related to depreciated securities.
At May 31,1996, the Insured Long-Term Portfolio had long positions in U.S.
Treasury Bond futures contracts expiring in September 1996, with an aggregate
settlement value and net unrealized depreciation of $53,766,000 and $832,000,
respectively. The market value of securities deposited as initial margin for
open futures contracts was $3,833,000.
19
<PAGE> 20
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
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 Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Funds
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP(R) LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 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.
Q772-5/96
VANGUARD
PENNSYLVANIA
TAX-FREE FUND
SEMI-ANNUAL REPORT
MAY 31, 1996
