VANGUARD REAL ESTATE FUND I /MA/, 10-K, 1994-03-30

VANGUARD REAL ESTATE FUND I /MA/
10-K, 1994-03-30
REAL ESTATE INVESTMENT TRUSTS

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
Annual Report Pursuant To Section 13 or 15 (d) of
The Securities Exchange Act of 1934

For the Fiscal Year Ended Commission File Number
December 31, 1993 0-16785

VANGUARD REAL ESTATE FUND I, A Sales-Commission-Free Income Properties Fund
(Exact Name of Registrant as specified in its charter)

Massachusetts 23-6861048
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

Vanguard Financial Center, Malvern, PA 19355
(Address of principal executive offices) (Zip Code)

610-669-1000
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Shares of
Beneficial
Interest, no
par value

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days YES X NO .

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES X NO .

The aggregate market value of the registrant's outstanding shares of
beneficial interest held by non-affiliates on February 28, 1994 was
$85,404,830 based upon the last sale price of the shares on February 28, 1994.

As of February 28, 1994, 11,019,978 shares of beneficial interest were
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Annual Report to Shareholders for fiscal
year ended December 31, 1993 Part II (Items 6-8)

Portions of the definitive Proxy Statement,
to be filed pursuant to Regulation 14A, to be
issued in connection with the Annual Meeting of
Shareholders to be held on April 22, 1994 Part III (Items 10-13)

<PAGE>

INDEX

ITEM NO. PAGE
NO.

Cover Page . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

PART I

1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . 9

PART II

5. Market for Registrant's Common Equity and Related
Shareholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . .11
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . .11
8. Financial Statements and Supplementary Data . . . . . . . . . . . . . .11
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . .11

PART III

10. Directors and Executive Officers of the Registrant. . . . . . . . . . .11
11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . .11
12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
13. Certain Relationships and Related Transactions. . . . . . . . . . . . .11

PART IV

14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Signatures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Exhibits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36-58

1
<PAGE>
PART I

Item 1. Business
- ----------------

Vanguard Real Estate Fund I, A Sales-Commission-Free Income Properties
Fund (the "Fund"), was organized on September 10, 1986 as a Massachusetts
business trust and intends to continue to qualify as a real estate investment
trust ("REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"). The Fund has a finite life and intends to commence the liquidation
of its remaining real estate investments over the next five years, market
conditions permitting. In addition, the Fund is precluded from making any
additional real estate investments. The Fund has no employees.

Pursuant to a Services Agreement dated December 23, 1986 (the "Services
Agreement") between the Fund and The Vanguard Group, Inc. (the "Sponsor"), the
Sponsor has been retained to provide administrative services for the Fund,
including the maintenance of financial records, oversight of the performance
of outside service providers and the preparation and distribution of
communications to shareholders, etc., and to supervise its day-to-day business
affairs. Pursuant to an Advisory Agreement dated December 23, 1986 (the
"Advisory Agreement") between the Fund and Aldrich, Eastman & Waltch, Inc.
(the "Adviser"), the Adviser has been retained to advise the Fund in
connection with the evaluation, selection, management and disposition of its
real estate investments. For additional information concerning the Sponsor,
the Adviser, the Services Agreement and the Advisory Agreement, see Item 8,
Financial Statements and Supplementary Data - Notes to Financial Statements,
and Item 13, Certain Relationships and Related Transactions.

The Fund's business consists of holding investments primarily in income-
producing real properties and mortgage loans that offer the potential to
achieve the following investment objectives:

(i) to preserve and protect shareholders' capital;
(ii) to provide shareholders with current income in the form of
quarterly cash distributions and to provide growth of income
over the remaining life of the Fund; and
(iii) to provide long-term growth through appreciation in the value
of the Fund's real estate investments.

In order to achieve these objectives, the Fund has invested, through
direct ownership or shared-appreciation mortgages, in five existing income-
producing properties or portfolios of properties, including one portfolio of
three office buildings, two shopping centers, a portfolio of warehouses and
industrial properties, and one apartment complex. The Adviser believes that
the Fund's investments are diversified by both type of investment and
geographic location.

As of February 28, 1994, the Fund had invested approximately $75 million
in real estate assets, of which $44 million (59%) consisted of real estate
owned directly, $29 million (39%) consisted of mortgage loan investments -
including $17 million (23%) considered to be in-substance foreclosed assets
and $2 million (2%) consisted of marketable securities.

The Fund has elected to be treated as a REIT under the Code. The Fund
intends to invest and operate in a manner that will continue to maintain its
qualification as a REIT.

The Fund's real estate investments are subject to competition from
existing commercial, industrial, and residential properties and will be
subject to competition from properties that are developed in the future. The
REIT provisions of the Code impose certain financial, investment and
operational restrictions that are not applicable to competing entities that
are not REITs.

2
<PAGE>
For additional information regarding the Fund's investments, operations,
and other significant events, see Item 2, Properties, Item 7, Management's
Discussion and Analysis of Financial Condition and Results of Operations, and
Item 8, Financial Statements and Supplementary Data.

The following table sets forth the names and positions with the Fund of
the executive officers of the Fund:

NAME AGE POSITIONS
------------------ --- ---------------------------------
John C. Bogle 65 Trustee and Chairman of the Board
John J. Brennan 39 President
Ralph K. Packard 49 Vice President and Controller
Richard F. Hyland 57 Treasurer
Raymond J. Klapinsky 55 Secretary

All executive officers of the Fund also serve as executive officers of
Vanguard Real Estate Fund II, A Sales-Commission-Free Income Properties Fund
("VREFII"). All executive officers of the Fund, with the exceptions of Mr.
Packard, who was elected as an officer of the Fund in May 1988, and Mr.
Klapinsky, who was elected as an officer of the Fund in May 1989, have served
since the Fund's inception. Under the Fund's Declaration of Trust, the
officers of the Fund serve at the pleasure of the Trustees. There are no
family relationships between any Trustee or executive officer.

Mr. Bogle is Chairman and Chief Executive Officer of the Fund, The
Vanguard Group, Inc. (the Sponsor of the Fund) and each of the investment
companies in The Vanguard Group. Mr. Bogle has served in such capacities
during each of the past eight years. Mr. Bogle also serves as a Director of
The Mead Corporation and General Accident Insurance Companies.

Mr. Brennan is President of The Vanguard Group, Inc. and has served in
such capacity since May 1989. Mr. Brennan also serves as a Director (Trustee)
of The Vanguard Group, Inc., and each of the investment companies in The
Vanguard Group. Mr. Brennan served as Executive Vice President and Chief
Financial Officer of The Vanguard Group, Inc. from July 1986 to May 1989. Mr.
Brennan served as Senior Vice President and Chief Financial Officer of The
Vanguard Group, Inc. from July 1985 to July 1986, and as Assistant to the
Chairman of the Board of The Vanguard Group, Inc. from July 1982 to July 1985.

Mr. Packard is Senior Vice President and Chief Financial Officer of The
Vanguard Group, Inc. and has served in such capacity since June 1989. Mr.
Packard served as Vice President and Controller of The Vanguard Group, Inc.
from February 1986 to June 1989. Prior to joining The Vanguard Group, Inc.,
Mr. Packard served as Senior Vice President, Controller, and Deputy Director
of Finance for the Society for Savings Bank, Hartford, Connecticut.

Mr. Hyland is, and has served for each of the past eight years as,
Treasurer of The Vanguard Group, Inc. and each of the investment companies in
The Vanguard Group.

Mr. Klapinsky is, and has served for each of the past eight years as,
Senior Vice President and Secretary of The Vanguard Group, Inc. and each of
the investment companies in The Vanguard Group.

3
<PAGE>

Item 2. Properties
- ------------------

As of December 31, 1993, the Fund held the following real estate investments:

<TABLE>
<CAPTION>
EQUITY INVESTMENTS

Nature of
Title Total Acquisition
to/Interest Date Square Cost
Property & Location in Property Description Acquired Footage (000)
- ------------------- ----------- ----------- -------- ------- -----------

<S> <C> <C> <C> <C> <C>
Durham, North Carolina Direct Community 11-25-87 116,195 $10,592
Oakcreek Village Ownership Shopping
Center
Kent, Washington
Valley Industrial Park Direct Warehouse 1-29-88 951,000 15,749
Ownership and
distribution

Seattle, Washington
Sea-Tac Industrial Park Direct Warehouse, 1-29-88 186,259 6,567
Ownership distribution,
and light
manufacturing

The Minnesota Portfolio:
- ------------------------
Arden Hills, Minnesota
Everest II Direct Office and 2-25-88 73,150 7,438
Ownership research &
development

Roseville, Minnesota
Fairview Industrial Direct Office and 2-25-88 29,412 1,200
Building Ownership warehouse

Shoreview, Minnesota
Shoreview Professional Direct Office 2-25-88 10,627 1,236
Building Ownership -------

Total Equity Investments $42,782
=======

</TABLE>

4
<PAGE>

<TABLE>
<CAPTION>
MORTGAGE INVESTMENTS
Funds
Nature of Total Advanced
Title to/ Square Mortgage and Mortgage
Interest Date Footage/ Receivable Debt Repaid Mortgage Debt
Property and Location Description In Acquired Units (000) (000) (000)
- --------------------- ----------- ----------- -------- -------- ---------- ------------ -------------

<S> <C> <C> <C> <C> <C> <C> <C>
Torrance, California Community Shared- 9-16-87 91,609 $10,646 $ 7,750 $2,477
Plaza del Amo Shopping Appreciation
Center Wraparound
Mortgage

Silver Spring, Apartment Participation 12-8-88 256 (1)17,992 18,000 0
Maryland complex Shared- ------- ------ ------
Sheffield Forest Appreciation
Apartments Mortgage

Total Mortgage $28,638 $25,750 $2,477
Investments

(1) Prior to write-down of $800,000 required to reduce the carrying value of the Sheffield investment to its estimated
fair value less selling costs.

</TABLE>

Set forth below is a summary of the general competitive conditions for those
properties whose book value is ten percent or more of the Fund's total assets
as of December 31, 1993, or whose gross revenues are ten percent or more of
the aggregate gross revenues of the Fund for the year ended December 31, 1993.

Plaza del Amo
- -------------

There are approximately 85,000 households (average household income of $70,000)
and 210,000 people within a three-mile radius of the shopping center. Southern
California's economy and, in particular, the South Bay market, have been
seriously undermined by the recent recession prompted, in part, by difficulties
in the defense and aerospace industries. As a result, the retail property
market has suffered for several years from weak demand growth. Current market
vacancy has remained relatively unchanged at approximately 10-12% and estimated
effective rent at comparable properties is $15-$18 per square foot for shop
space and $5.25-$8.10 for anchor space.

Oakcreek Village
- ----------------

There are approximately 14,500 households (average household income of $57,000)
and 32,000 people within a three-mile radius of the center. Employment in the
Raleigh-Durham metropolitan area grew 2.6% over the 12 month period ended
December 1993. Estimated market rents for comparable properties are
approximately $10-$12 per square foot. Tightening market conditions, however,
have resulted in several significant proposed projects in Oakcreek Village's
trade area. If built, these proposed competitive projects may reduce rent
growth and increase the vacancy rate in the area.

5
<PAGE>

Seattle Industrial Park
- -----------------------

Boeing Company is the region's driving economic force (and the Seattle
Industrial Park's lead tenant). The combination of weak worldwide demand and
the severe oversupply of commercial aircraft has resulted in a significant
contraction at Boeing. Over the past three years the Seattle economy has had to
cope with a transition from a high-growth economy to a little or no-growth
environment. Currently, the market is weak with vacancy rates averaging
approximately 7%. The estimated triple net market rent for comparable
properties is $2.75 per square foot for Valley Industrials and $4-$5 per square
foot for Sea-Tac.

Sheffield Forest Apartments
- ---------------------------

Washington DC's superior growth over the past decade has slowed appreciably to a
rate more in line with the national average. With little near-term stimulus
from the region's traditional growth sectors, government and construction, total
employment growth is expected to be moderate over the next several years.
Estimated market rents for comparable properties stand at $0.70 to $1.10 per
square foot and the estimated vacancy rate for comparable properties is 5-6%.

Minnesota Portfolio
- -------------------

The Twin Cities economy is characterized by a broad economic base. As a result,
employment growth has remained relatively stable over the past decade, and the
region has avoided significant job losses during the latest recession.
Currently, employment is increasing at an annual rate of 2.1%. Vacancy rates
and net market rents for comparable properties are as follows: Shoreview -
rent of $7.50 to $9.00 per square foot and vacancy rate of 11%; Arden Hills -
rent of $6.00 to $12.50 per square foot and vacancy rate of 5%; and Fairview -
rent of $3.25 to $5.00 per square foot and vacancy rate of 13%.

Set forth below is certain operating data for those properties held by the Fund
whose book value is ten percent or more of the Fund's total assets as of
December 31, 1993 or whose gross revenues are ten percent or more of the
aggregate gross revenues of the Fund for the year ended December 31, 1993.

Occupancy Rates:
- ----------------

Plaza Del Oakcreek Seattle Ind. Minnesota Sheffield
Amo Village Park Portfolio Forest Apt.
--- ------- ---- --------- -----------

1993 98% 96% 99% 99% 93%
1992 94% 95% 99% 99% 93%
1991 92% 94% 98% 99% 93%
1990 100% 97% 98% 75% 96%
1989 98% 91% 99% 97% 95%

6
<PAGE>

Avg. Effective
Rental/Sq.Ft/Yr.:
- -----------------

Plaza Del Oakcreek Seattle Ind. Minnesota Sheffield
Amo Village Park Portfolio Forest Apt.*
--- ------- ---- --------- -----------

1993 $13.23 $9.07 $3.00 $8.06 $8,796
1992 $13.06 $9.11 $2.47 $7.95 $8,976
1991 $13.72 $9.47 $1.95 $8.71 $9,240
1990 $13.11 $8.82 $1.96 $7.40 $9,180
1989 $13.15 $9.61 $1.92 $7.74 $8,952

* Annual rent/unit.

Real Estate Tax/Fiscal Year:
- ----------------------------
Effective Rate
Per $1000
of Assessed
Value $11.63 $15.34 $14.30 $61.14 $32.92

Annual
Taxes $85,723 $96,141 $239,927 $308,888 $220,639

Tenants Occupying 10% or more of rentable square footage:
- ---------------------------------------------------------

<TABLE>
<CAPTION>
Rental
Property Major Tenants Sq.Ft. Principal Bus. Sq.Ft./Yr. Expiration Date Renewal Options
- -------- ------------- ------ -------------- ---------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Plaza del Albertsons 39,852 Supermarket $6.36 10/29/06 None
Amo Oshman's 9,930 Sporting Goods $9.03 9/23/01 None

Oakcreek T.J. Maxx 31,303 Clothing Retail$7.62 5/31/03 None
Village Durham S.G. 16,034 Sporting Goods $5.00 8/30/97 None

Seattle Boeing Co 502,500 Aerospace $2.82 11/30/97 None
Ind.Park Holman Dist. 448,500 Aerospace $2.52 1/31/97 None

Minnesota Deluxe Ck. Pt. 73,150 Check Print. $9.00 5/31/99 None
Portfolio The Tile Shop 23,122 Tile Retailers $6.43 9/30/98 None

Sheffield N/A N/A N/A N/A N/A N/A
Forest

</TABLE>

7
<PAGE>

Lease Expirations during the next ten years:
- --------------------------------------------

<TABLE>
<CAPTION>
By Square Foot

Total Sq.Ft.
Property Expiring 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 After
- -------- ----------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Plaza del
Amo 89,400 4,320 5,411 3,716 10,913 2,554 0 0 22,634 0 0 39,852

Oakcreek
Village 111,865 8,000 1,600 23,863 24,834 11,760 0 0 0 0 31,303 10,505

Seattle
Ind. Park 1,130,227 34,263 40,448 40,936 1,007,992 6,588 0 0 0 0 0 0

Minnesota
Portfolio 112,289 0 4,069 4,854 7,094 23,122 73,150 0 0 0 0 0

</TABLE>

<TABLE>
<CAPTION>
By Annual Rental

Total
Property Expirations 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 After
- -------- ----------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- -----

Plaza del Amo
# of leases 22 2 4 4 6 1 0 0 4 0 0 1
annual $ 1,186,924 98,011 129,144 90,690 243,617 55,166 0 0 316,792 0 0 253,504
annual % 100.0 8.3 10.9 7.6 20.5 4.7 0 0 26.7 0 0 21.3

Oakcreek Vlg.
# of leases 21 3 1 7 3 4 0 0 0 0 1 2
annual $ 1,090,452 89,760 19,752 262,236 182,268 124,464 0 0 0 0 238,529 173,443
annual % 100.0 8.2 1.8 24.1 16.7 11.4 0 0 0 0 21.9 15.9

Seattle Ind.
# of leases 35 12 9 9 4 1 0 0 0 0 0 0
annual $ 3,388,476 197,220 237,036 154,536 2,764,836 34,848 0 0 0 0 0 0
annual % 100.0 5.8 7.0 4.6 81.6 1.0 0 0 0 0 0 0

Minnesota
Portfolio
# of leases 10 0 3 5 0 1 1 0 0 0 0 0
annual $ 931,451 0 43,132 81,289 0 148,680 658,350 0 0 0 0 0
annual % 100.0 0 4.6 8.7 0 16.0 70.7 0 0 0 0 0

Leases at Sheffield Forest are generally one year or less, and no tenant exceeds 10%
of the units rented.

</TABLE>

A mortgage loan payable, secured by the Plaza del Amo property, is
outstanding at December 31, 1993. Information concerning its principal,
interest rate, amortization and maturity provisions is included in Note H
to the Fund's financial statements, incorporated by reference in Item 8,
Financial Statements and Supplementary Data, and in Schedule XII to Item
14.

Information concerning the interest rates, shared-appreciation features,
and other terms of the Fund's mortgage investments is included in Note F to
the Fund's Financial Statements, included in Item 8, Financial Statements
and Supplementary Data, and in Schedule XII to Item 14.

8
<PAGE>

Excluding the Fund's Sheffield investment, the Fund believes that its direct
ownership properties, and the properties underlying its mortgage investments,
are well maintained, in good repair, suitable for their intended uses and are
adequately covered by insurance. For additional information regarding the
Fund's real estate investments see Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations, Item 8,
Financial Statements and Supplementary Data, and Schedules XI and XII to
Item 14.

With respect to the Sheffield investment, cash flow from the property
has been insufficient to cover debt service obligations owing to the Fund.
As a result, the partnership which owns the property deferred certain
maintenance on the property and subsequently defaulted on the mortgage loan
in January 1994. The Fund is currently negotiating with the partnership,
whose sole asset is the Sheffield property, to obtain title to the property
via a transfer of all of its partnership interests to the Fund in full
satisfaction of the mortgage loan outstanding. Upon gaining ownership of
the property, which the Fund believes to be imminent, the Fund intends to
remedy the deferred maintenance on the property. The cost of such
renovations, expected to be $150,000 - $250,000, will be financed from the
Fund's current operating cash flow. The Fund believes that the Sheffield
property is suitable for its intended use and is adequately covered by
insurance.

Except for Sheffield as discussed above, the Fund has no other
significant renovation, improvement or development plans for its other
properties.

Information concerning the Federal tax basis and depreciation method and
lives of the Fund's properties and components thereof and on which
deprecation is taken is included in Notes A and E to the Fund's Financial
Statements, included in Item 8, Financial Statements and Supplementary
Data, and in Schedule XI to Item 14. All real estate owned is depreciated
over 40 years for both financial and tax reporting purposes on a
straight-line basis except for leasehold improvements which are depreciated
over the term of the respective lease for financial reporting purposes.

Item 3. Legal Proceedings
- -------------------------

None

Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------

None

PART II

Item 5. Market for Registrant's Common Equity and Related Shareholder
Matters
- ---------------------------------------------------------------------

The Fund's shares of beneficial interest ("Shares") are traded on the
American Stock Exchange (AMEX) under the symbol "VRO". The Shares have
been traded on the AMEX since August 20, 1991. From July 24, 1989 to
August 19, 1991, the Fund's shares were traded on the over the counter
market and were quoted by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"). Prior to July 24, 1989, there was
no trading market for the Shares. As of February 28, 1994, there were
approximately 15,554 holders of record of the Fund's Shares.

9
<PAGE>
Set forth below is certain information regarding the Fund's Shares for
each of the eight fiscal quarters in the period ended December 31, 1993:

Year Ended December 31,
-------------------------------------------
1993 1992
Share Prices Share Prices
------------------ ------------------
High Low High Low
-------- -------- -------- --------
For the Quarter Ended:
March 31 $8-1/4 $6-5/8 $7-5/8 $6-5/8
June 30 8 7-1/4 7-3/4 6-5/8
September 30 8-1/4 7-3/8 8 6-5/8
December 31 8-3/4 7-3/8 7-1/4 6-1/4

The tables below indicate the amount of cash dividends per share
declared during the years ended December 31, 1993 and 1992.

Record Distribution
Date Per Share
----------------- --------------
03-31-93 $ .15
06-30-93 .15
09-30-93 .15
12-22-93 1.24
----
Total Distributions - 1993 $1.69

Record Distribution
Date Per Share
----------------- --------------
04-01-92 $ .15
06-30-92 .15
09-30-92 .15
12-22-92 .24
----
Total Distributions - 1992 $ .69

Status of Distributions 1993 1992
----------------------- ---- ----

Ordinary Income $ - $ .57
Return of Capital 1.69 .12
---- ----
Total $1.69 $ .69

Except during its offering period, the Fund has historically paid
dividends on a quarterly basis, and there are currently no contractual
restrictions on the Fund's present or future ability to pay such dividends.

10
<PAGE>

Item 6. Selected Financial Data
- -------------------------------

The information required by this Item is included on page 18 of the
Fund's 1993 Annual Report to Shareholders and is incorporated herein by
reference thereto.

Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- -----------------------------------------------------------------------

The information required by this Item is included on pages 20 through
23 of the Fund's 1993 Annual Report to Shareholders and is incorporated
herein by reference thereto.

Item 8. Financial Statements and Supplementary Data
- ---------------------------------------------------

The Fund's financial statements at December 31, 1993 and 1992, and for
each of the three years in the period ended December 31, 1993 are included
on pages 6-17 of the Fund's 1993 Annual Report to Shareholders and are
incorporated herein by reference thereto.

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- -----------------------------------------------------------------------

None

PART III

Item 10. Directors and Executive Officers of the Registrant
- -----------------------------------------------------------

The information required by this Item with respect to Trustees is
included in the Fund's definitive proxy statement filed with the
Securities and Exchange Commission on March 15, 1994 for its
Annual Meeting of Shareholders to be held on April 22, 1994, which
is incorporated herein by reference thereto. (Information with respect to
executive officers of the Fund is included in Item 1.)

Item 11. Executive Compensation
- -------------------------------

The information required by this Item is included in the Fund's
definitive Proxy Statement filed with the Securities and Exchange
Commission on March 15, 1994 for its Annual Meeting of Shareholders to be held
on April 22, 1994, which is incorporated herein by reference thereto.

Item 12. Security Ownership of Certain Beneficial Owners and Management
- -----------------------------------------------------------------------

Item 13. Certain Relationships and Related Transactions
- -------------------------------------------------------

11
<PAGE>

PART IV

Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- -------------------------------------------------------------------------

(a) 1. Financial Statements:
---------------------

The following financial statements as of, and for the years
ended, December 31, 1993, 1992 and 1991 are incorporated in Item 8
herein by reference from the following pages of the Fund's 1993 Annual
Report to Shareholders, which is filed as an Exhibit hereto.

ANNUAL REPORT
PAGE NO.

Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Statements of Operations. . . . . . . . . . . . . . . . . . . . . . . . . 7
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . 8-9
Statements of Changes in Shareholders' Equity . . . . . . . . . . . . . .10
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 11-17
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . .17

The following financial statements of Lincoln Park Place II, a
Maryland Limited Partnership, as of and for the year ended October 31,
1993 are filed as part of this Report on Form 10-K. Such partnership
owns and operates the property underlying the Fund's Sheffield
investment.
FORM 10-K
PAGE NO.
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . .25
Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . .27
Statement of Changes in Partners' Deficit . . . . . . . . . . . . . . . .28
Statement of Cash Flows 29
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . 30-32

2. Financial Statement Schedules:
------------------------------

The financial statement schedules included in Part IV of this
report should be read in conjunction with the Fund's financial
statements incorporated by reference in Item 8 of this report.
FORM 10-K
SCHEDULE PAGE NO.

I Marketable Securities - Other Investments . . . . . . . . . . .18
X Supplementary Income Statement Information. . . . . . . . . . .19
XI Real Estate and Accumulated Depreciation. . . . . . . . . . 20-21
XII Mortgage Loans on Real Estate . . . . . . . . . . . . . . . 22-23
Report of Independent Accountants . . . . . . . . . . . . . . .33

All other schedules have been omitted since the required
information is presented in the financial statements, the related
notes, or is not applicable.

12
<PAGE>

3. Exhibits:
---------

Exhibit No. Description
----------- -----------

3.1 Amended and Restated Declaration of Trust, dated
December 9, 1986, filed as exhibit 3 to the Fund's
Registration Statement on Form S-11, SEC Registration
#33-8649, and incorporated herein by reference.

3.2 Amendment #1 to Amended and Restated Declaration of
Trust, dated January 10, 1987, filed as exhibit 3(b) to
the Fund's Registration Statement on Form S-11, SEC
Registration #33-15040, and incorporated herein by
reference.

3.3 Amendment #2 to Amended and Restated Declaration of
Trust, dated May 31, 1988, filed as exhibit 3 to the
Fund's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1988, and incorporated herein by
reference.

3.4 By-laws, filed as exhibit 3 to the Fund's Registration
Statement on Form S-11, SEC Registration #33-8649, and
incorporated herein by reference.

10.1 Advisory Agreement between the Fund and Aldrich,
Eastman & Waltch, Inc. dated December 23, 1986, filed
as exhibit 10.1 to the Fund's Annual Report on Form 10-
K for the fiscal year ended December 31, 1987, and
incorporated herein by reference.

10.2 Services Agreement between the Fund and The Vanguard
Group, Inc. dated December 23, 1986, filed as exhibit
10.2 to the Fund's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, and incorporated
herein by reference.

10.3(a) Loan Agreement by and between Plaza Del Amo and
Lawrence W. Doyle, J. Grant Monahon and Richard F.
Burns, Trustees of AEW #82 Trust, established by
Declaration of Trust dated August 14, 1987, dated
September 16, 1987, filed as exhibit 10.3(a) to
the Fund's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, and
incorporated herein by reference.

10.3(b) Declaration of Trust, AEW #82 Trust and Schedule
of Beneficial Interest dated August 14, 1987,
filed as exhibit 10.3(b) to the Fund's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1987, and incorporated herein by
reference.

10.3(c) All-Inclusive Promissory Note from Plaza Del Amo
in favor of Lawrence W. Doyle, J. Grant Monahon
and Richard F. Burns, Trustees of AEW #82,
established by Declaration of Trust dated August
14, 1987, dated September 16, 1987, filed as
exhibit 10.3(c) to the Fund's Annual Report on
Form 10-K for the fiscal year ended December 31,
1987 and incorporated herein by reference.

10.4(a) Purchase and Sale Agreement of Oakcreek Village
Shopping Center, between Pacific Guaranty Retail
Development Corporation and Michael O. Craig,
Richard F. Burns and J. Grant Monahon as Trustees
of AEW #96 Trust, under Declaration of Trust dated
November 6, 1987, dated October 31, 1987, filed as
exhibit 10.4(a) to the Fund's Annual Report on
Form 10-K for the fiscal year ended December 31,
1987, and incorporated herein by reference.

13
<PAGE>

10.4(b) Declaration of Trust, AEW #96 Trust and Schedule
of Beneficial Interest, dated November 6, 1987,
filed as exhibit 10.4(b) to the Fund's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1987, and incorporated herein by
reference.

10.4(c) First Amendment to Purchase and Sale Agreement of
Oakcreek Village Shopping Center between Pacific
Guaranty Retail Development Corporation and
Michael O. Craig, Richard F. Burns and J. Grant
Monahon as Trustees of AEW #96 Trust, under
Declaration of Trust dated November 6, 1987, dated
November 24, 1987, filed as exhibit 10.4(c) to the
Fund's Annual Report on Form 10-K for the fiscal
year ended December 31, 1987, and incorporated
herein by reference.

10.5(a) Purchase and Sale Agreement of Valley Industrial
Park and Sea-Tac Industrial Park between
Prudential Insurance Company of America and Joseph
F. Azrack, Richard F. Burns and J. Grant Monahon
as Trustees of AEW #105 Trust, under Declaration
of Trust dated December 23, 1987, dated January 8,
1988, filed as exhibit 10.5(a) to the Fund's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1987, and incorporated herein
by reference.

10.5(b) Declaration of Trust, AEW #105 Trust and Schedule
of Beneficial Interest, dated December 23, 1987,
filed as exhibit 10.5(b) to the Fund's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1987, and incorporated herein by
reference.

10.6(a) Purchase and Sale Agreement of Vita-Fresh Vitamin
Facility, dated January 10, 1988, between Vita-
Fresh Vitamin Company, Inc. and Lawrence W. Doyle,
Richard F. Burns and J. Grant Monahon as Trustees
of AEW #113 Trust, under Declaration of Trust
dated January 10, 1988, filed as exhibit 10.6(a)
to the Fund's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, and
incorporated herein by reference.

10.6(b) Declaration of Trust, AEW #113 Trust and Schedule
of Beneficial Interest, dated January 19, 1988,
filed as exhibit 10.6(b) to the Fund's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1987, and incorporated herein by
reference.

10.7(a) Purchase and Sale Agreement of Everest I, Everest
II, Fairview Industrial Building and Shoreview
Professional Building between Everest Development
ltd. and Michael O. Craig, Richard F. Burns and J.
Grant Monahon as Trustees of AEW #106 Trust, under
Declaration of Trust dated December 17, 1987,
dated February 8, 1988, filed as exhibit 10.7(a)
to the Fund's Annual Report on Form 10-K for the
fiscal year ended December 31, 1987, and
incorporated herein by reference.

10.7(b) Declaration of Trust, AEW #106 Trust and Schedule
of Beneficial Interest, dated December 17, 1987,
filed as exhibit 10.7(b) to the Fund's Annual
Report on Form 10-K for the fiscal year ended
December 31, 1987, and incorporated herein by
reference.

14
<PAGE>

10.8 All-Inclusive Promissory Note (Wraparound note) dated
May 11, 1988, Escrow Agreement dated May 27, 1988 and
Option Agreement dated May 11, 1988, all relating to
the Fund's mortgage investment in the Carmel Executive
Park, filed as exhibit 10 to the Fund's Quarterly
Report on Form 10-Q Report for the quarter ended June
30, 1988, and incorporated herein by reference.

10.9(a) Purchase and Sale Agreement of Citadel II office
building, between Crow Vista #1 and Aldrich, Eastman &
Waltch, Inc., a Massachusetts Corporation acting as
agent for the Fund, filed as exhibit 10(a) to the
Fund's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1988, and incorporated herein by
reference.

10.9(b) Citadel II Escrow Agreement, filed as exhibit 10(b) to
the Fund's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1988, and incorporated
herein by reference.

10.10(a) Loan Agreement for Sheffield Forest Apartments by and
between Lincoln Park Place II Limited Partnership and
J. Grant Monahon, Richard F. Burns and Marvin M.
Franklin, Trustees of AEW #145 Trust, established by
Declaration of Trust dated October 14, 1988, dated
December 7, 1988, filed as exhibit 10.10(a) to the
Fund's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988, and incorporated herein by
reference.

10.10(b) Second Amended and Restated Promissory Note for
Sheffield Forest Apartments from Lincoln Park Place II
Limited Partnership in favor of J. Grant Monahon,
Richard F. Burns and Marvin M. Franklin, Trustees of
AEW #145 Trust, established by Declaration of Trust
dated October 14, 1988, dated December 7, 1988, filed
as exhibit 10.10(b) to the Fund's Annual Report on Form
10-K for the fiscal year ended December 31, 1988 and
incorporated herein by reference.

10.10(c) Amended and Restated Deed of Trust for Sheffield Forest
Apartments by and between Lincoln Park Place II Limited
Partnership and J. Grant Monahon, Richard F. Burns and
Marvin M. Franklin, Trustees of AEW #145 Trust,
established by Declaration of Trust dated October 14,
1988, dated December 7, 1988, filed as exhibit 10.10(c)
to the Fund's Annual Report on Form 10-K for the fiscal
year ended December 31, 1988, and incorporated herein
by reference.

10.10(d) Declaration of Trust, AEW #145 Trust and Schedule of
Beneficial Interest dated October 14, 1988, filed as
exhibit 10.10(d) to the Fund's Annual Report on Form
10-K for the fiscal year ended December 31, 1988, and
incorporated herein by reference.

10.11(a) Promissory note of Citadel II by and between the
Variable Annuity Life Insurance Company and J. Grant
Monahon, Richard F. Burns, and Lee H. Sandwen, Trustees
of AEW #131 Trust, established by Declaration of Trust
dated June 7, 1988, dated October 9, 1990, filed as
exhibit 10.1(a) to the Fund's Quarterly Report on Form
10-Q for the quarter ended September 30, 1990, and
incorporated herein by reference.

15
<PAGE>

10.11(b) Mortgage and Security Agreement of Citadel II by and
between the Variable Annuity Life Insurance Company and
J. Grant Monahon, Richard F. Burns, and Lee H. Sandwen,
Trustees of AEW #131 Trust, established by Declaration
of Trust dated June 7, 1988, dated October 9, 1990,
filed as exhibit 10.1(b) to the Fund's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1990,
and incorporated herein by reference.

10.11(c) Assignment of Lessor's Interest in Leases of Citadel II
by and between the Variable Annuity Life Insurance
Company and J. Grant Monahon, Richard F. Burns, and Lee
H. Sandwen, Trustees of AEW #131 Trust, established by
Declaration of Trust dated June 7, 1988, dated October
9, 1990, filed as exhibit 10.1(c) to the Fund's
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1990, and incorporated herein by
reference.

10.12 Standard Offer, Agreement and Escrow Instructions
for Purchase of Real Estate by and between the
Fujita Corporation USA, a California Corporation,
and Richard F. Burns, J. Grant Monahon, Lawrence
W. Doyle, Trustees of AEW #113 Trust, established
by Declaration of Trust dated January 19, 1988,
filed as exhibit 10.12 to the Fund's Annual Report
on Form 10-K for the fiscal year ended December
31, 1990 and incorporated herein by reference.

10.13 Purchase and Sale Agreement of the Everest I
("Zycad") Building by and between Richard F Burns,
J. Grant Monahon, and Bruce H. Freedman as
Trustees of AEW #106, under Declaration of Trust
dated December 17, 1987 and JLS and L.P., dated
April 23, 1991, filed as exhibit 10.13 to the
Fund's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1991 and incorporated
herein by reference.

10.14 Settlement Agreement and Mutual Release from
mortgage by and among J. Grant Monahon, Richard F
Burns and Lee. H. Sandwen, Trustees of AEW #155
Trust under Declaration of Trust dated January 11,
1989, Mark C. Dickinson, Dickinson Development
Corp. and Citadel III Partners, Ltd., a Florida
limited partnership, dated December 30, 1991,
filed as exhibit 10.14 to the Fund's Annual Report
on Form 10-K for the fiscal year ended December
31, 1991 and incorporated herein by reference.

10.15 First Amendment to Second Amended and Restated
Promissory Note by and between Lincoln Park Place
II Limited Partnership, a Maryland limited
partnership and J. Grant Monahon, Richard F. Burns
and Devin McCall, Trustees of AEW #145 Trust under
Declaration of Trust dated October 14, 1988 dated
April 30, 1992, filed as exhibit 10.15 to the
Fund's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1992 and incorporated
herein by reference.

10.16 Amendment No.1 to Loan Agreement by and between
Lincoln Park Place II Limited Partnership, a
Maryland limited partnership and J. Grant Monahon,
Richard F. Burns and Kevin McCall, Trustees of AEW
#145 Trust under Declaration of Trust dated
October 14, 1988, dated April 30. 1992, filed as
exhibit 10.16 to the Fund's Quarterly Report on
Form 10-Q for the quarter ended March 31, 1992 and
incorporated herein by reference.

16
<PAGE>

10.17 Amendment No.1 to All-Inclusive Promissory Note by
and between Piazzagalli Development Company, a
Vermont General Partnership and J. Grant Monahon,
Richard F. Burns and Lee H. Andwen, Trustees of
AEW #127 Trust, under Declaration of Trust dated
May 3, 1988, dated December 23, 1991 for purposes
of reference, filed as exhibit 10.17 to the Fund's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1992 and incorporated herein by
reference.

10.18 Amendment No.1 to Loan Agreement by and between
Piazzagalli Development Company, a Vermont General
Partnerhip and J. Grant Monahon, Richard F. Burns
and Lee H. Sandwen, Trustees of AEW #127 Trust,
under Declaration of Trust dated May 3, 1988,
dated December 23, 199 for purposes of reference,
filed as exhibit 10.18 to the Fund's Quarterly
Report on Form 10-Q for the quarter ended March
31, 1992 and incorporated herein by reference.

13 1993 Annual Report to Shareholders. (With the
exception of the information and data incorporated by
reference in Items 6, 7, and 8 of this Annual Report on
Form 10-K, no other information or data appearing in
the 1993 Annual Report to Shareholders is to be deemed
filed as part of this report.)

(b) Reports on Form 8-K

The Fund has filed no reports on Form 8-K during the fourth
quarter ended December 31, 1993.

17
<PAGE>

SCHEDULE I

VANGUARD REAL ESTATE FUND I,
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
MARKETABLE SECURITIES - OTHER INVESTMENTS
December 31, 1993

Number of Shares or Units -- Cost and
Name of Issuer and Principal Amount of Market Value
Title of Issue Bonds and Notes (000)
- ------------------ ------------------------- ------------

Vanguard Money Market Reserves:
Prime Portfolio $2,482,738 $2,483
------

TOTAL $2,483
======

Temporary Cash Investments:
Certificates of Deposit

Commerz Bank $2,000,007 $2,000
3.35% 1/4/94

Canadian Imperial Bank 2,000,000 2,000
of Commerce
3.25% 1/5/94

Westdeutsch Landes Bank 2,000,000 2,000
3.18% 1/6/94 ------

TOTAL $6,000
======

18
<PAGE>

SCHEDULE X

VANGUARD REAL ESTATE FUND I
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
SUPPLEMENTARY INCOME STATEMENT INFORMATION

Year Ended December 31,
-------------------------------------------------

1993 1992 1991
(000) (000) (000)
----- ----- -----
1. Maintenance and repairs $ 275 $ 374 $ 448

2. Depreciation and
amortization 1,503 1,610 1,519

3. Real estate taxes 823 887 897

19
<PAGE>

Schedule XI

VANGUARD REAL ESTATE FUND I,
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1993
(000)

Property Description
--------------------
Seattle
Oakcreek Industrial Minnesota
Village, Parks, Two Portfolio,
Shopping Industrial Three Office
Center, Parks, Buildings,
Durham, NC Seattle, WA Roseville, MN TOTALS
------------ ------------ ------------- -------

Encumbrances None None None

Initial Cost to Fund

Land $ 3,100 $ 8,250 $ 1,725 $13,075

Building and
Improvements $ 7,492 $14,066 $10,043 $31,601

Total $10,592 $22,316 $11,768(d) $44,676

Cost capitalized
subsequent
to acquisition

Improvements $ 606 $ 778 $ 341 $ 1,725

Gross amount at which
carried at close of
period (a)

Land $ 3,100 $ 8,250 $ 1,440 $12,790

Building and
Improvements $ 8,098 $14,844 $ 8,490 $31,432

Total (b) $11,198 $23,094 $ 9,930 $44,222

Accumulated
Depreciation (c) $ 1,304 $ 2,232 $ 1,253 $ 4,789

Date of 1967 and 1978 and
Construction 1986 1979 1986

Date
Acquired 11/87 1/88 2/88

Depreciable
Life 40 years 40 years 40 years

20
PAGE
<PAGE>
SCHEDULE XI (Continued)
<TABLE>
<CAPTION>

(a) The aggregate cost of real estate for federal income tax purposes at December 31, 1993 was $44,222,000.

(b) The activity in real estate is summarized as follows:

Year ended December 31,
-----------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
(000) (000) (000) (000) (000) (000) (000)
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $63,622 $63,192 $71,561 $71,304 $71,422 $10,574 $ 0
Additions during the year:
Property purchases 0 0 0 0 0 61,108 10,574
Property improvements 360 430 613 257 160 60 0
Deletions during the year:
Sales of properties (19,704) 0 (8,962) 0 0 0 0
Citadel II contingent purchase price refund* 0 0 (20) 0 (278) (320) 0
Write-off of tenant improvements (56) 0 0 0 0 0 0
------- ------- -------- ------- ------- ------- -------
Balance at end of year $44,222 $63,622 $63,192 $71,561 $71,304 $71,422 $10,574

* The Fund purchased the Citadel II office building ("Citadel II") for a contract price of $19,500,000.
Included in the contract price was a $1,000,000 contingent purchase price payment placed in escrow for the
Fund, of which an aggregate of $618,000 was returned to the Fund by the seller at the expiration of the
escrow period pursuant to the terms of the purchase and sale agreement.

</TABLE>
<TABLE>
<CAPTION>

Year ended December 31,
----------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987
(000) (000) (000) (000) (000) (000) (000)
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $5,862 $4,557 $3,792 $2,413 $1,087 $ 23 $ 0
Add:
Depreciation for the year 1,217 1,305 1,231 1,379 1,326 1,064 23
Deduct:
Accumulated depreciation of real estate sold (2,234) 0 (466) 0 0 0 0
Write-off of tenant improvements (56) 0 0 0 0 0 $ 23
------ ------ ------ ------ ------ ------ ------
Balance at end of year $4,789 $5,862 $4,557 $3,792 $2,413 $1,087
====== ====== ====== ====== ====== ====== ======
</TABLE>

(d) Zycad Building sold in 1991 with a land and building cost of $1,894,000.

21
<PAGE>

Schedule XII

VANGUARD REAL ESTATE FUND I,
A SALES-COMMISSION-FREE INCOME PROPERTIES FUND
MORTGAGE LOANS ON REAL ESTATE (e)
DECEMBER 31, 1993

Wraparound Mortgages Senior Mortgage
-------------------- ---------------

Plaza del Amo Sheffield Forest
Shopping Center, Apartments,
Torrance, CA (a) Silver Spring, MD (b)
-------------------- ---------------------
Effective
Rate 10.3% 9.3%

Pay
Rate 9.7%-10.8% 8.5%-9%

Maturity
Date 1997 1998

Call
Date 1994 1995

Periodic Interest only, Interest only,
Payment principal due principal due
Terms upon maturity upon maturity
or call date. or call date.

Prior
Liens (a) None

Face
Amount of Totals
Mortgages -------
(000) $10,646 $17,992 $28,638

Carrying
Amount of
Mortgages
(000) (c)(d) $10,646 $17,192 $27,838

Principal Amount
of Loans Subject to
Delinquent Principal
or Interest None None

(a) The Fund advanced $7,750,000 to enter into a shared-appreciation,
wraparound, mortgage loan secured by the Plaza del Amo Shopping Center
("Plaza"). In addition, Plaza secures two existing senior mortgage
loans, which at the time of investment had an aggregate outstanding
balance of $2,896,000. The funds advanced plus these two existing
senior mortgages resulted in a total wraparound loan of $10,646,000.
Upon repayment of the loan, the Fund is entitled to a share of Plaza's
appreciation, if any, equal to 50% of Plaza's fair market value in
excess of the original balance of the wraparound loan.

22
<PAGE>
Schedule XII (Continued)

<TABLE>
<CAPTION>
(b) Sheffield Forest is a participating, shared-appreciation, senior mortgage loan secured by the Sheffield
Forest Apartments("Sheffield"). Upon repayment of the loan, the Fund is entitled to a share of Sheffield's
appreciation, if any, equal to the greater of (i) an amount sufficient to generate an 11.5% internal rate
of return (as defined in the loan documents) on the loan or (ii) 50% of Sheffield's fair market value in
excess of the mortgage loan.

1993 1992 1991 1990 1989 1988 1987
(000) (000) (000) (000) (000) (000) (000)
----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
(c) Balance at beginning of year $42,032 $45,046 $45,046 $45,046 $45,046 $10,646 $ 0
Additions during the year:
New mortgage loans 90 76 0 0 0 34,400 10,646

Deductions during the year:
Pay-off of Carmel loan(f) (14,284) 0 0 0 0 0 0
Collections of principal 0 (90) 0 0 0 0 0
Write-down of in-substance
foreclosed assets (g) 0 (3,000) 0 0 0 0 0
------- ------- ------- ------- ------- ------- -------
Balance at end of year $27,838 $42,032 $45,046 $45,046 $45,046 $45,046 $10,646
======= ======= ======= ======= ======= ======= =======

(d) The aggregate cost of the Fund's mortgage loan investments for federal income tax purposes at December 31, 1993
was $28,638,000.
(e) Includes loans considered to be in-substance foreclosed assets for financial reporting purposes.
(f) On July 30, 1993, the Fund accepted a discounted payoff of $13,500,000 on its mortgage loan secured by Carmel.
For further information, see Note F to the Fund's Financial Statements, included in Item 8, Financial Statements
and Supplementary Data.
(g) Consists of: Carmel - $2,200 ; Sheffield - $800.

</TABLE>
23

<PAGE>

Deloitte &
Touche
- ----------

- -------------------------------------------------------------------------

LINCOLN PARK PLACE II,
A MARYLAND LIMITED PARTNERSHIP
------------------------------

Financial Statements for the
Year Eanded October 31, 1993, and
Independent Auditors' Report

- -------------------------------------------------------------------------

24
<PAGE>

INDEPENDENT AUDITORS' REPORT

General Partners of Lincoln Park Place II,
A Maryland Limited Partnership

We have audited the accompanying balance sheet of Lincoln Park Place II, A
Maryland Limited Partnership (the Partnership) as of October 31, 1993, and
the related statements of operations, changes in partners' deficit and cash
flows for the year then ended. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Partnership as of October 31, 1993,
and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.

The accompanying financial statements have been prepared assuming that the
Partnership will continue as a going concern. As discussed in Note 5 to
the financial statements, conditions exist which raise substantial doubt
about the ability of the Partnership to continue as a going concern.
Management's plans in regard to these matters are also described in Note 5.
The financial statements do not include any adjustment that might result
from the outcome of this uncertainty.

Deloitte & Touche
Dallas, Texas 75201-6778
November 20, 1993

25
<PAGE>

LINCOLN PARK PLACE II, A MARYLAND LIMITED PARTNERSHIP

BALANCE SHEET
OCTOBER 31, 1993

ASSETS

INVESTMENT IN REAL ESTATE, AT COST:
Land $ 2,600,376
Buildings and improvements 10,796,809
Less accumulated depreciation (2,782,304)
-------------

10,614,881

DUE FROM AFFILIATE 1,788,684

DEFERRED FINANCING COSTS, NET OF ACCUMULATED
AMORTIZATION OF $97,299 142,345

CASH 97,439

ESCROW DEPOSITS 26,436

OTHER ASSETS 167,035
-----------

TOTAL $ 12,836,820
=============

LIABILITIES AND PARTNERS' DEFICIT

MORTGAGE PAYABLE $ 18,620,029

ACCOUNTS PAYABLE AND ACCRUED LIABILITIES 303,079

TENANT SECURITY DEPOSITS 75,629

Total liabilities 18,998,737

PARTNERS' DEFICIT (6,161,917)
-------------

TOTAL $ 12,836,820
=============

See notes to financial statements.

<PAGE>

LINCOLN PARK PLACE II, A MARYLAND LIMITED PARTNERSHIP
- -----------------------------------------------------

STATEMENT OF OPERATIONS
YEAR ENDED OCTOBER 31, 1993
- ---------------------------------------------------------------------------

REVENUES:
Rental $ 1,982,340
Other 33,795
---------

2,016,135

EXPENSES:
Interest 1,668,949
Depreciation and amortization 447,027
Operating 589,773
Real estate taxes 225,065
---------
2,930,814
---------

NET LOSS $ (914,679)
=========

See notes to financial statements.

27
<PAGE>

LINCOLN PARK PLACE II, A MARYLAND LIMITED PARTNERSHIP

STATEMENT OF CHANGES IN PARTNERS' DEFICIT
YEAR ENDED OCTOBER 31, 1993

Managing
General Partner,Limited Partner,
Lincoln PropertyAmerican Financial
Company No. 1288 Realty, Inc. Total

PARTNERS' DEFICIT,
NOVEMBER 1, 1992 $(5,247,738) $500 $(5,247,238)

Net loss (914,679) (914,679)
----------- ----- -----------

PARTNERS' DEFICIT,
OCTOBER 31, 1993 $(6,162,417) $500 $(6,161,917)
=========== ==== ===========

See notes to financial statements.

28
<PAGE>

LINCOLN PARK PLACE II, A MARYLAND LIMITED PARTNERSHIP

STATEMENT OF CASH FLOWS
YEAR ENDED OCTOBER 31, 1993

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(914,679)
Depreciation and amortization 447,027
Changes in assets and liabilities:
Decrease in deposits 1,898
Decrease in other assets 7,721
Increase in accounts payable 117,064
Increase in tenant security deposits 11,938
--------

Net cash used in operating activities (329,031)

CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to buildings and improvements (24,129)

CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in due from affiliate 227,614
Increase in mortgage payable 141,450
Decrease in deferred financing costs 384
---------

Net cash provided by financing activities 369,448
---------

NET INCREASE IN CASH 16,288

CASH, BEGINNING OF YEAR 81,151
---------

CASH, END OF YEAR $ 97,439
=========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $1,530,388
==========

See notes to financial statements.

29
<PAGE>

LINCOLN PARK PLACE II, A MARYLAND LIMITED PARTNERSHIP
- -----------------------------------------------------

NOTES TO FINANCIAL STATEMENTS
YEAR ENDED OCTOBER 31, 1993
- ---------------------------------------------------------------------------

1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Organization - Lincoln Park Place II, A Maryland Limited Partnership (the
Partnership) was formed December 1, 1985, for the purpose of owning,
developing and operating a 256-unit garden apartment project in Montgomery
County, Maryland. Lincoln Property Company No. 1288, A Maryland Limited
Partnership is the managing general partner, and American Financial Realty,
Inc. (AFR) is the limited partner. The project was started in November
1986 and completed in December 1987 and had an occupancy rate of 97% at
October 31, 1993.

Basis of Accounting - The accounts of the Partnership are maintained on the
basis of accounting used for federal income tax reporting purposes.
Memorandum entries have been made to present the accompanying financial
statements in accordance with generally accepted accounting principles.

Depreciation and Amortization - Buildings and improvements are stated at
cost and are depreciated or amortized using the straight-line method over
useful lives ranging from 5 to 30 years.

Deferred Financing Costs - Financing costs incurred in connection with
obtaining and closing the mortgage payable have been capitalized and are
being amortized over the term of the note.

Other Assets - Other assets consist primarily of prepaid real estate taxes
and insurance and deferred expenses.

Federal Income Taxes - The financial statements include only those assets,
liabilities and results of operations which relate to the business of the
Partnership. The financial statements do not include any assets,
liabilities, revenues or expenses attributable to the partners' individual
activities. No federal or state income taxes are payable by the
Partnership, and none have been provided in the accompanying financial
statements. The partners are to include their respective share of
partnership profits or losses in their individual tax returns.

Net income or loss determined under generally accepted accounting
principles is allocated among the partners based upon provisions in the
partnership agreement even though actual partnership allocations are made
on an income tax basis. Consequently, the amounts so allocated will not
agree to the allocations on the income tax returns.

30
<PAGE>

2. TRANSACTIONS WITH AFFILIATES

Certain of the Partnership's expenses and other disbursements are paid from
a central operating account of a general partnership affiliated with the
managing general partner in the normal course of business. The Partnership
reimburses the affiliate on a regular basis for disbursements made on its
behalf. All disbursements are identified by partnership, and the
disbursements and reimbursements are accounted for by the Partnership as
due to or from the affiliate.

The Partnership has entered into an agreement with Lincoln Property Company
N.C., Inc., an affiliate of the managing general partner, which provides
for management of the property. For its services, Lincoln Property Company
N.C., Inc. is entitled to receive a fee of 5% of monthly rents, as defined,
amounting to $101,804 for the fiscal year.

3. MORTGAGE PAYABLE

The permanent financing was obtained from Aldrich, Eastman & Waltch #145
Trust in the amount of $18,000,000, evidenced by the second amended and
restated promissory note. The note accrues interest at the base rate of
9.0% and requires monthly payments in arrears at the current pay rate of
8.5%. The pay rate increases 0.5% on December 7, 1993, and remains at the
rate of 9.0% thereafter. Accrued but unpaid interest is added to the
outstanding principal balance monthly and bears interest at the base rate
of 9.0%. Participation interest based on adjusted gross revenue, as
defined, may become due and payable quarterly (no participation interest
was paid during the fiscal year ended October 31, 1993). Upon the
occurrence of certain events, appreciation interest, as defined, becomes
due. The note matures December 7, 1998, at which time all principal and
deferred interest become due. The note may be prepaid after December 7,
1995, and the lender has the right to call the note, making it fully due
and payable any time following December 7, 1994, provided six months'
notice of such intention is given. The land, building and improvements
serve as collateral for the note which is nonrecourse to the partners of
the Partnership. However, certain partners of the managing general partner
have guaranteed the payment of this indebtedness under certain conditions
in an amount not to exceed $2,000,000. The note payable has an outstanding
balance of $18,000,000 and deferred interest of $620,029 at October 31,
1993.

4. PARTNERS' DEFICIT

Capital Contributions - In accordance with the partnership agreement, no
additional contributions are required from partners to provide funds for
the Partnership.

Allocation of Profits and Losses - The net profits, net gains and net
losses from operations of the Partnership and capital transactions shall be
allocated 100% to the managing general partner, and the limited partner
shall have no interest in such net profits, gains or losses.

31
<PAGE>

5. CASH DEFICITS

During the year ended October 31, 1993, the Partnership incurred cash
deficits from operations. Management anticipates that the Partnership will
continue to incur cash deficits from operations. There can be no assurance
that the Partnership will be able to obtain loans to fund such deficits.
Management intends to continue operating the Partnership in its present
form while investigating options to improve operations of the Partnership.
However, there is no assurance management will be successful in its
efforts. This uncertainty raises substantial doubt about the Partnership's
ability to continue as a going concern.

* * * * * *

32
<PAGE>

REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES

To the Board of Trustees of
Vanguard Real Estate Fund I,
A Sales-Commission-Free Income
Properties Fund

Our audits of the financial statements referred to in our report dated
January 27, 1994 appearing on page 17 of the 1993 Annual Report to
Shareholders of Vanguard Real Estate Fund I, A Sales-Commission-Free Income
Properties Fund, (which report and financial statements are incorporated
by reference in this Annual Report on Form 10-K) also included audits of
the Financial Statement Schedules listed in Item 14(a) of this Form 10-K.
In our opinion, these Financial Statement Schedules present fairly, in all
material respects, the information set forth therein when read in conjunction
with the related financial statements.

PRICE WATERHOUSE
Philadelphia, Pennsylvania
January 27, 1994

33
<PAGE>

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.

VANGUARD REAL ESTATE FUND I,
A Sales-Commission-Free Income Properties Fund

3/30/94 /s/ John J. Brennan
_________________ _________________________________
DATE John J. Brennan
President

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities on the dates indicated.

3/30/94 /s/ J. Mahlon Buck, Jr.
_________________ _________________________________
DATE J. Mahlon Buck, Jr.
Trustee

3/30/94 /s/ William S. Cashel, Jr.
_________________ _________________________________
DATE William S. Cashel, Jr.
Trustee

3/30/94 /s/ David C. Melnicoff
_________________ _________________________________
DATE David C. Melnicoff
Trustee

3/30/94 /s/ J. Lawrence Wilson
_________________ _________________________________
DATE J. Lawrence Wilson
Trustee

3/30/94 /s/ Ralph K. Packard
_________________ _________________________________
DATE Ralph K. Packard
Vice President & Controller

34
<PAGE>

EXHIBIT INDEX

EXHIBIT NO. DESCRIPTION PAGE NO.

13 1993 Annual Report to Shareholders . . . . . . . . . . . .36

35
<PAGE>

<PAGE>

VANGUARD
REAL ESTATE FUND I

ANNUAL REPORT 1993

[PHOTO -- SEE EDGAR APPENDIX]

0<PAGE>
CHAIRMAN'S LETTER

[PHOTO OF JOHN C. BOGLE -- SEE EDGAR APPENDIX]

FELLOW SHAREHOLDER:

Amid some encouraging signs of improvement in the nation's real estate
markets, Vanguard Real Estate Fund I enjoyed a year of relative stability in
1993. The cash flow on the Fund's holdings held up, and in fact increased
modestly, and the appraised valuations of our overall portfolio remained
steady. As a result, the Fund provided a reasonable return to shareholders
during the year. The Fund also made a special return of capital distribution at
year-end in the amount of $1.00 per share, signaling the commencement of the
liquidation phase of the Fund's life cycle, as planned at the time of our
original offering.

FINANCIAL RESULTS

The Fund's net income amounted to $.30 per share in 1993, which compares
favorably to $.12 per share in 1992 when we had a higher provision for possible
losses.
Funds from operations--which adds back to net income amortization,
depreciation and provisions for losses--gives a better indication of the cash
actually generated by our property portfolio. This measure was $.69 per share
in 1993, slightly improved over the $.67 per share of 1992.
During December 1993, the Fund made its fourth distribution of the
year, in the amount of $1.24 per share. This payment consisted of three
distinct pieces: (1) the regular quarterly $.15 distribution; (2) a year-end
"extra" of $.09; and (3) a special return of capital distribution of $1.00.
This special distribution of $1.00 per share--representing most of the proceeds
from the liquidation of our Carmel investment--has the effect of lowering our
book value per share, and our estimated fair value per share. It will also
reduce our ability to earn as high a level of income during 1994 and subsequent
years. All of the Fund's distributions for 1993--totaling $1.69 per
share--qualify as a non-taxable return of capital (accordingly, taxable
shareholders should reduce their cost basis in the Fund's shares by the total
amount of the distributions).

PORTFOLIO ACTIVITY

The Fund benefited during the year from high occupancy in most of its
properties, and from higher rental rates on our Seattle Industrial Properties.
The Fund's occupancy level is now 99% on its commercial properties and 93% on
its one apartment complex. The table on page 4 provides a summary of the Fund's
holdings.
As noted above, the Fund's Adviser, Aldrich, Eastman & Waltch, L.P.
(AEW), completed important dispositions of two problem properties during the
year. In the case of Citadel II, our office building in the Orlando, Florida
area, the value of the property had fallen well below the amount owed on the
mortgage on the property and the property did not generate enough cash flow to
meet the payments on the mortgage. As a result, AEW recommended that it was in
the best interests of the

<PAGE>
Fund to liquidate its holding by transferring title to the mortgage lender. In
all frankness, this investment, made in 1988, proved to be a very poor one for
the Fund. The growth prospects for the Orlando airport area did not materialize
as AEW had expected, and we incurred a capital loss of $6.4 million over our
holding period.
The second disposition was the settlement of our loan on the Carmel
Office Park in North Carolina at a discount to our original loan amount. The
loss of approximately $3.4 million on this property investment was a bitter
pill to swallow, but conditions in the market had deteriorated to the point
that AEW believed the settlement offer, at a level above AEW's estimate of the
property's value, was the best course of action. In spite of the capital loss,
the Fund earned a moderate positive return on this investment as income over
the holding period exceeded the capital decline.
Having dealt with the most difficult issues, the portfolio of
investments that remains appears to be in reasonable shape. During 1994, AEW
expects to resolve some issues with our Sheffield Forest apartment complex
mortgage loan by taking control of the property and concentrating on improving
its rental income stream. We do not anticipate significant change in the other
properties during 1994. The portfolio is discussed in more detail in the
Adviser's report beginning on page 4.

MEASURES OF VALUE

At the end of each year, we obtain independent appraisals of the value of each
of our properties. We then report to you an appraised value per share figure
that reflects the lower of the appraiser's and AEW's estimates. On this basis,
the estimated fair value per share at the end of 1993 was $7.15, or about one
percent less than the comparable level of $7.23 ($8.23 less the $1.00 special
return of capital) reported last year.
For the first time, there is a substantive difference in the opinions
of AEW and the appraisers, with AEW's estimate stated approximately 8% lower
than the appraisers'. This discrepancy illustrates that valuations are only
estimates of worth; the only true test of value is eventual sale of the
properties. (Please note that these valuations are quoted before the deduction
of the costs that may be incurred in the disposition of the properties.)
The Fund's share price on the American Stock Exchange showed
substantial improvement over the course of the year. The last trade of 1993 was
completed at $7.38 per share, a level equivalent to $8.38 per share after
adjusting for 1993's year-end $1.00 return of capital distribution. This
adjusted figure compares to $6.38 per share at year-end 1992. The increase in
the Fund's share price of +31% (excluding dividends) was consistent with the
rally in REIT stock prices during the past year. The NAREIT Index increased
10.6% in 1993. Since the secondary market share price is approximately equal to
the Fund's appraised market value, we have discontinued the share repurchase
program for the time being.

LONGER-TERM PERFORMANCE

The Fund has now completed six and a half years of operations. The chart at the
top of the next page shows the Fund's total return (dividend income plus change
in appraised value per share) compared to the total return of the
Russell-NCREIF Index, the most widely used measure of real estate performance,
for each of the six full years of our operations. As the chart shows, it has
been a period of low returns for real estate as an asset class. In particular,
the years from 1990 to 1993 have been very difficult. The Fund has not been
exempt from "slings and arrows" of the worst real estate markets since the
1930s, but has in most years outperformed the Index. This result is even more
significant when you consider that the Fund's return is computed net of all
expenses, while the return for the Index is calculated prior to deducting
managers' fees.

<PAGE>
[TOTAL RETURN BAR CHART -- SEE EDGAR APPENDIX]

LOOKING AHEAD

As discussed in our Adviser's report in more detail, there are some positive
indicators in the nation's real estate markets. Economic growth has picked up
somewhat (real GDP growth of 2.8% in 1993), increasing the level of employment.
With new commercial construction declining dramatically over the last several
years, vacancy rates have inched down, but remain near historically high
levels.
Reflecting, at least in part, growing optimism about real estate, REIT
prices rallied and record numbers of newly established REITs were offered
during the past year. The primary appeal of real estate to most investors today
is the high yield offered relative to competing asset classes, such as stocks,
bonds, and money market investments. As you know, yields on each of these
securities markets investments have declined to low levels not seen since the
1960s (2.7% for stocks, 6.3% for long-term U.S. Treasury bonds, and 3.2% for
short-term U.S. Treasury bills). By contrast, the yield of the average REIT is
7.3%. The valuations for the Fund's properties are estimated on average "cap"
rates (essentially current yields before Fund expenses) of approximately 10%.
Of course, the risk in real estate today is that the income stream on
which the yield is quoted may be jeopardized by the ongoing problem of excess
supply of available space. Some markets continue to face downward rental
pressures, while other markets have seen some firming in rental rates.
Our Portfolio remains well leased, and our exposure to lease rollover
is quite modest during 1994, so we would expect the income from our remaining
properties to be steady. However, due to the return to shareholders of a
significant amount of our capital (17%), the Fund's operating cash flow is
expected to be reduced from 1993's level.
As you recall, Vanguard Real Estate Fund I was designed to be
liquidated between the seventh and twelfth years of operation. This liquidation
process effectively began in 1993 with the disposition of two property
investments. As a result, our portfolio is now more concentrated, comprising
just five properties. Our challenge is to manage these properties effectively
to maximize income while also seeking, in the years ahead, the best
opportunities to liquidate the Fund's investments and return capital to
investors. We will keep you informed of our progress in this endeavor.

Sincerely,

/S/ JOHN C. BOGLE
- -----------------------
John C. Bogle
Chairman of the Board

January 14, 1994

<PAGE>
REPORT FROM THE INVESTMENT ADVISER

REAL ESTATE MARKET OVERVIEW

Evidence continues to mount that the worst of the current downturn in
commercial real estate is over. However, while economic fundamentals are slowly
improving, the basic problem confronting real estate investors persists:
significant over-supply with little or no demand growth. Our analysis suggests
that average building net operating income (NOI) continues to deteriorate or
remain flat, reflecting both continued high vacancy and lease rollover. In our
view, there can be no overall improvement in property values until NOI begins
to rise, and NOI will not improve until the current tenant turnover cycle has
been completed. Despite the prolonged downturn in the nation's real estate
markets, many tenants are still re-leasing, albeit at lower rates, as their
current leases come due.
Nonetheless, there are signs of improvement. Aggregate new
construction remains significantly below levels recorded over the past twenty
years, permitting limited absorption of existing space and some reduction in
vacancy rates, particularly in the office and industrial sectors. Job growth
should bring additional improvement in many markets.

PORTFOLIO OVERVIEW

One of our key objectives during 1993 has been to maintain high occupancy
throughout the portfolio, and we have been largely successful in this area.
Relative to year-end 1992, occupancy has improved at Plaza del Amo (from 94% to
98%) and Oakcreek Village (from 95% to 96%) and remained stable at Seattle
Industrials and Minnesota Portfolio (both at 99%) and at Sheffield Forest
(93%). Occupancy at all properties is equal to or above market averages. Net
operating income was substantially in line with our 1993 budget projections at
all properties except Sheffield Forest, which suffered from lower-than-expected
rents and higher-than-expected tenant turnover.

VALUATION

Partially as a result of continued strong occupancy, the value of the Fund's
assets remained stable during the year. As is our practice, AEW completed a
thorough review of the valuation of each asset during the third quarter of the
year, and independent appraisals were completed prior to year-end. The
appraisal results reflected increases of 1% to 4% in the value of four of the
Fund's five assets. Nonetheless, based on AEW's analyses, we have not reflected
these increases in our estimates of value pending further stabilization of
market conditions. With regard to Sheffield Forest, both AEW's analysis and
that of the independent appraiser reflected a decline of approximately 10% in
the property's fair market value. This is attributable to continued declines in
rent levels in this highly competitive market.

===============================================================================================================
PROPERTY DECEMBER 31, 1993 DECEMBER 31, 1992
PROPERTY TYPE INVESTMENT TYPE OCCUPANCY RATE OCCUPANCY RATE
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. PLAZA DEL AMO Retail Shared-Appreciation 98% 94%
Wraparound Mortgage
- --------------------------------------------------------------------------------------------------------------

2. OAKCREEK VILLAGE Retail Direct Ownership 96% 95%
- --------------------------------------------------------------------------------------------------------------

3. SEATTLE INDUSTRIAL Industrial Direct Ownership 99% 99%
PARKS
- --------------------------------------------------------------------------------------------------------------

4. MINNESOTA PORTFOLIO Office Direct Ownership 99% 99%
- --------------------------------------------------------------------------------------------------------------

5. SHEFFIELD FOREST Residential Participating Shared- 93% 93%
APARTMENTS Appreciation Mortgage
==============================================================================================================

</TABLE>

<PAGE>
PROPERTY HIGHLIGHTS

The Fund's fee-owned properties continued to generate a strong level of current
income during the year. At Oakcreek Village (Durham, North Carolina), year-end
occupancy was 96%. The 7,500-square-foot expansion of the center's anchor
tenant opened in October, and initial sales results are encouraging. Seattle
Industrials and the Minnesota Portfolio were 99% leased throughout the year.
Lease rollover exposure is very limited at all three of these properties
during 1994.
The borrower at Plaza del Amo (Torrance, California) continued to meet
all debt service obligations to the Fund during 1993. Despite the continuing
recession in southern California, the borrower has been very effective in
keeping the center well-leased, and year-end occupancy was 98%. Competition for
tenants has continued to push down rent levels, however, resulting in an
operating deficit over the past twelve months. Because the borrower has
considerable equity to protect in the property, we anticipate the borrower will
continue to fund these deficits while seeking an appropriate buyer for the
center.
The performance of Sheffield Forest (Silver Spring, Maryland) did not
meet our expectations during the year, as the property continued to operate at
a loss. We are currently negotiating with the borrower to take title to the
property early in 1994. The borrower has lacked the capital to maintain the
property adequately or to sustain an aggressive marketing campaign. While
market conditions are competitive, we are confident that stronger management
will have a substantial positive effect on operating performance.

Sincerely,

Aldrich, Eastman & Waltch, L.P.

January 14, 1994

<PAGE>
BALANCE SHEETS

<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
ASSETS (000) (000)*
------------ ------------
<S> <C> <C>
Investments in Real Estate:--
Direct Ownership Investments:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,790 $ 16,090
Buildings and Improvements . . . . . . . . . . . . . . . . . . . . . . 31,432 47,532
------------ ------------
44,222 63,622
Less--Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . 4,789 5,862
------------ ------------
39,433 57,760
Mortgage Loans Receivable . . . . . . . . . . . . . . . . . . . . . . . . 10,646 10,646
In-Substance Foreclosed Assets . . . . . . . . . . . . . . . . . . . . . . 17,192 31,386
------------ ------------
67,271 99,792
Less: Allowance for Possible Losses . . . . . . . . . . . . . . . . . . . 2,410 7,248
------------ ------------
Net Investment Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . 64,861 92,544
Marketable Securities--REMICs . . . . . . . . . . . . . . . . . . . . . . . . 1,684 --
Short-Term Investments:
Vanguard Money Market Reserves-Prime Portfolio
(2,482,738 and 2,362,508 shares, respectively . . . . . . . . . . . . . 2,483 2,363
Temporary Cash Investments . . . . . . . . . . . . . . . . . . . . . . . 6,000 6,003
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,897 3,949
------------ ------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $76,925 $104,859
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY
Mortgage Loans (including current portion of $93 and $170,
respectively) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,477 $ 14,404
Due to Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 285
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 558 628
------------ ------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,184 15,317
------------ ------------
Shares of Beneficial Interest, without par value, unlimited shares
authorized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80,608 99,747
Accumulated Distributions in Excess of Net Income . . . . . . . . . . . . . (6,867) (10,205)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . 73,741 89,542
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . $76,925 $104,859
============ ============
</TABLE>

The accompanying notes are an integral part of these statements.

*Certain amounts have been reclassified to comform to current year
presentation.

<PAGE>
STATEMENTS OF OPERATION

<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
REAL ESTATE INCOME (000) (000) (000)
---------- ---------- ----------
<S> <C> <C> <C>
Rental Income . . . . . . . . . . . . . . . . . . . . . . $7,517 $7,588 $7,560
Mortgage Interest Income . . . . . . . . . . . . . . . . . 1,279 1,106 2,170
Net Income from In-Substance Foreclosed Assets . . . . . . 2,499 3,137 2,119
---------- ---------- ----------
11,295 11,831 11,849
---------- ---------- ----------
REAL ESTATE EXPENSES
Mortgage Interest Expense . . . . . . . . . . . . . . . . 1,030 1,433 1,674
Real Estate Taxes . . . . . . . . . . . . . . . . . . . . 823 887 897
Property Operating Expenses . . . . . . . . . . . . . . . 1,042 1,244 1,380
Depreciation and Amortization . . . . . . . . . . . . . . 1,503 1,610 1,519
Provision for Possible Losses . . . . . . . . . . . . . . 2,798 4,501 6,600
---------- ---------- ----------
7,196 9,675 12,070
---------- ---------- ----------
INCOME (LOSS) FROM REAL ESTATE . . . . . . . . . . . . . . 4,099 2,156 (221)
INVESTMENT INCOME FROM SHORT-TERM
INVESTMENTS . . . . . . . . . . . . . . . . . . . . . 367 444 1,052
---------- ---------- ----------
4,466 2,600 831
---------- ---------- ----------
ADMINISTRATIVE EXPENSES
Investment Advisory Fee . . . . . . . . . . . . . . . . . 421 470 489
Administrative Fee . . . . . . . . . . . . . . . . . . . . 350 380 398
Other Administrative Expenses . . . . . . . . . . . . . . 357 405 432
---------- ---------- ----------
1,128 1,255 1,319
---------- ---------- ----------
INCOME (LOSS) BEFORE NET GAIN ON SALES . . . . . . . . . .
OF INVESTMENTS . . . . . . . . . . . . . . . . . . . . 3,338 1,345 (488)
Net Gain on Sales of Investments . . . . . . . . . . . . . -- -- 882
---------- ---------- ----------
NET INCOME . . . . . . . . . . . . . . . . . . . . . . . . $3,338 $1,345 $394
========== ========== ==========
Weighted Average Number of Shares Outstanding . . . . . . 11,039,590 11,176,864 11,339,668
========== ========== ==========
Net Income Per Share:
Income (Loss) Before Net Gain on Sales of Investments . $.30 $.12 $(.04)
Net Gain on Sales of Investments . . . . . . . . . . . -- -- .07
---------- ---------- ----------
Net Income Per Share . . . . . . . . . . . . . . . . . . . $.30 $.12 $(.03)
========== ========== ==========
Ordinary Income Distributions Per Share . . . . . . . . . -- $.57 $(.29)
Return of Capital Distributions Per Share . . . . . . . . $1.69 .12 .40
---------- ---------- ----------
Total Distributions Per Share . . . . . . . . . . . . . . $1.69 $.69 $(.69)
========== ========== ==========

The accompanying notes are an integral part of these statements.

</TABLE>

<PAGE>
STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
CASH FLOWS FROM OPERATING ACTIVITIES (000) (000) (000)
-------- -------- --------
<S> <C> <C> <C>
Real Estate Investments:
Rental Income . . . . . . . . . . . . . . . . . . . . $ 7,564 $ 7,695 $ 7,500
Mortgage Interest Income . . . . . . . . . . . . . . . 3,896 4,221 4,184
Mortgage Interest Payments . . . . . . . . . . . . . . (609) (1,433) (1,705)
Operating Expense Payments . . . . . . . . . . . . . . (1,780) (2,545) (2,267)
-------- -------- --------
Net Cash Provided by Real Estate
Investments . . . . . . . . . . . . . . . . . . . 9,071 7,938 7,712
Interest from Short-Term Investments . . . . . . . . . . . 367 560 1,106
Administrative Expenses . . . . . . . . . . . . . . . . . (1,180) (1,247) (1,284)
-------- -------- --------
Net Cash Provided by Operating Activities . . . . . 8,258 7,251 7,534
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investments in Real Estate:
Citadel II Purchase Price Adjustment . . . . . . . . . -- -- 20
Citadel III Partnership . . . . . . . . . . . . . . . . -- -- (3,235)
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . -- (76) --
Principal Repayments . . . . . . . . . . . . . . . . . . -- 90 --
Building Improvements . . . . . . . . . . . . . . . . . (360) (430) (613)
Payoff from In-Substance Foreclosed Asset . . . . . . . 13,500 -- --
Transaction Fees . . . . . . . . . . . . . . . . . . . (270) -- --
Sales of Investments . . . . . . . . . . . . . . . . . -- -- 8,789
Marketable Securities Acquired . . . . . . . . . . . . . (15,846) -- --
Marketable Securities Sold . . . . . . . . . . . . . . . 13,713 -- --
Principal Repayments on Marketable Securities . . . . . 423 -- --
-------- -------- --------
Net Cash Provided by (Used In) Investing Activities 11,160 (416) 4,961
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Mortgage Principal Payments . . . . . . . . . . . . . . (85) (154) (139)
Investment Financing Fees and Costs . . . . . . . . . . -- -- (8)
Repayment of Mortgage Loan . . . . . . . . . . . . . . -- -- (4,200)
Distributions Paid . . . . . . . . . . . . . . . . . . (18,629) (7,694) (7,805)
Shares Repurchased . . . . . . . . . . . . . . . . . . . (587) (1,263) (1,262)
-------- -------- --------
Net Cash Used in Financing Activities . . . . . . . (19,301) (9,111) (13,414)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS . . . . . . . . . . . . . . . . 117 (2,276) (919)
CASH AND CASH EQUIVALENTS--BEGINNING
OF YEAR . . . . . . . . . . . . . . . . . . . . . 8,366 10,642 11,561
-------- -------- --------
CASH AND CASH EQUIVALENTS--END OF YEAR . . . . . . . . $ 8,483 $ 8,366 $10,642
======== ======== ========
</TABLE>

(continued on next page)

<PAGE>
STATEMENTS OF CASH FLOWS (continued)

<TABLE>
<CAPTION>
Year Ended December 31,
1993 1992 1991
(000) (000) (000)
------ ------ ------
<S> <C> <C> <C>
RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
Net Income . . . . . . . . . . . . . . . . . . . . . . $3,338 $1,345 $3,394
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Property Depreciation and Amortization . . . . . . 1,503 1,610 1,519
Provision for Possible Losses . . . . . . . . . . . 2,798 4,501 6,600
Decrease in Deferred Rent Receivable . . . . . . . -- 106 66
Increase in Deferred Mortgage Interest Receivable . -- (27) (128)
Net Gain on Sales of Investments . . . . . . . . . . -- -- (882)
Interest Payable Satisfied . . . . . . . . . . . . . 421 -- --
Changes in Other Assets and Liabilities . . . . . . 198 (284) (35)
------ ------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES . . . . . . . . $8,258 $7,251 $7,534
====== ====== ======

</TABLE>

SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:

On September 1, 1993, the Fund ceded title to its Citadel II investment to the
lender in full satisfaction of amounts due under the non- recourse mortgage
loan secured by Citadel II. The excess of recorded assets over liabilities
related to the investment were written off against the allowance for possible
losses as follows (amounts in 000's):

<TABLE>
<S> <C>
Land $ 3,300
Building and Improvements (net of accumulated
depreciation of $2,234) 14,170
Other Assets 1,337
--------
Total Assets 18,807
--------
Write-off to Allowance (6,398)
--------
Mortgage Loans 11,842
Interest Payable 421
Other Liabilities 146
--------
Liabilities Satisfied $12,409
========
</TABLE>

On July 30, 1993, the Fund accepted a discounted payoff on its mortgage loan
secured by Carmel Executive Park. The excess of recorded assets over the payoff
amount were written off against the allowance for possible losses as follows
(amounts in 000's):

<TABLE>
<S> <C>
In-Substance Foreclosed Asset $14,284
Other Assets 184
Write-off to Allowance (1,238)
========
Payoff Amount, Net of Transaction Fee $13,230
========
</TABLE>

During the year, the Fund wrote-off fully depreciated tenant improvements of
$56,000 related to its Seattle Industrial Park investment.

The accompanying notes are an integral part of these statements.

<PAGE>
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

<TABLE>
<CAPTION>
Undistributed
(Accumulated
Shares of Distributions
Beneficial Interest in Excess of) Total Shareholders'
Number Amount Net Income Equity
(000) (000) (000)
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance: January 1, 1991 . . . . . . . . . 11,426,803 $108,183 $(2,307) $105,876
Net Income for the Year . . . . . . . . . 394 394
Less Distributions:
Ordinary Income . . . . . . . . . . . . (3,307) (3,307)
Return of Capital . . . . . . . . . . . (4,498) (4,498)
Shares Repurchased . . . . . . . . . . . . (179,825) (1,447) (1,447)
-----------------------------------------------------------------
Balance: December 31, 1991 . . . . . . . . 11,246,978 102,238 (5,220) 97,018
Net Income for the Year . . . . . . . . . 1,345 1,345
Less Distributions:
Ordinary Income . . . . . . . . . . . . (6,330) (6,330)
Return of Capital . . . . . . . . . . . (1,364) (1,364)
Shares Repurchased . . . . . . . . . . . . (159,100) (1,127) (1,127)
-----------------------------------------------------------------
Balance: December 31, 1992 . . . . . . . . 11,087,878 99,747 (10,205) 89,542
Net Income for the Year . . . . . . . . . 3,338 3,338
Less Distributions:
Return of Capital . . . . . . . . . . . (18,629) (18,629)
Shares Repurchased . . . . . . . . . . . . (67,900) (510) (510)
-----------------------------------------------------------------
Balance: December 31, 1993 . . . . . . . . 11,019,978 $ 80,608 $(6,867) $ 73,741
=================================================================
</TABLE>

The accompanying notes are an integral part of these statements.

<PAGE>
NOTES TO FINANCIAL STATEMENTS

A. GENERAL DESCRIPTION: The Fund, a finite-life real estate investment trust,
was organized on September 10, 1986, as a Massachusetts business trust that
intends to continue to qualify as a real estate investment trust under the
Internal Revenue Code of 1986. In accordance with the Fund's Declaration of
Trust, the Fund: (i) is precluded from making any additional real estate
investments after December 31, 1993; (ii) must distribute to shareholders
proceeds received from sales of real estate investments after December 31,
1993; and (iii) intends to complete liquidation of real estate investments
between 1994 and 1999.

B. The following significant accounting policies are in conformity with
generally accepted accounting principles for real estate investment trusts.
Such policies are consistently followed by the Fund in the preparation of
financial statements. Certain prior year amounts have been reclassified to
conform to current year presentation.

1. ORGANIZATION COSTS: Costs incurred in conjunction with the organization of
the Fund were deferred and were amortized on a straight-line basis over a
60-month period from the date the Fund commenced operations.

2. INVESTMENTS IN REAL ESTATE: Real estate directly owned by the Fund is
carried at cost. Major renovations are capitalized, and routine maintenance
and repairs are charged to expense as incurred.
The Fund holds a mortgage loan receivable accounted for as an
in-substance foreclosure. In general, property is deemed to be an in-
substance foreclosure when a debtor has little or no equity in the
collateral and proceeds for repayment of the loan can be expected to come
only from the sale or operation of the collateral. Although legal title to
such property has not been obtained, the Fund is considered to have
substantially the same risks and rewards as a mortgagee.

3. REVENUE RECOGNITION: Rental income is accrued as rents are due. For those
operating leases that provide for rental concessions or fixed escalation
increases, rental income is recognized on a straight-line basis over the
term of the lease. For those operating leases that provide for
reimbursement of expenses for real estate taxes, common area maintenance,
utilities and insurance, income is recognized in the period in which the
expenses are incurred.
Mortgage interest income is recorded based on the annual effective
yield of the respective loans. For mortgage loans treated for accounting
purposes as in-substance foreclosures, revenue is recognized only to the
extent of cash receipts.

4. ALLOWANCE FOR POSSIBLE LOSSES: An allowance for possible losses is provided
for estimated losses based upon management's regular evaluation of the
recoverability of each investment in the portfolio. Management's evaluation
includes consideration of each investment's estimated remaining holding
period. The allowance includes a provision to reduce the carrying value of
a mortgage loan receivable, which has been determined to be an in-substance
foreclosure for accounting purposes, to its estimated fair value minus
selling costs.

5. DEPRECIATION: Depreciation on real estate owned is computed using the
straight-line method over 40 years for buildings.

6. ACQUISITION COSTS: Costs incurred in conjunction with the acquisition of
real estate investments are deferred and are amortized on a straight-line
basis over the life of the loan for mortgage loan investments and the life
of the property for equity investments.

7. SHORT-TERM AND MARKETABLE SECURITIES INVESTMENTS: Investments in marketable
securities, including Vanguard Money Market Reserves-Prime Portfolio, are
carried at the lower of cost or market. Temporary cash investments are
carried at amortized cost, which approximates market value. The Fund's
temporary cash investments are comprised of certificates of deposit at
December 31, 1993.

8. CASH EQUIVALENTS: For purposes of the Statements of Cash Flows, the Fund
considers all highly liquid short-term investments with original maturities
of less than three months to be cash equivalents.

<PAGE>
9. FEDERAL INCOME TAXES: It is the Fund's intention to continue to qualify as
a real estate investment trust and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the
financial statements. Differences between net income determined in
accordance with generally accepted accounting principles and taxable income
before dividend distributions result primarily from timing differences
relating to the accounting for the provision for possible losses, equity in
net losses of joint venture, depreciation on tenant improvements, and
certain rental income.
10. PER SHARE AMOUNTS: The calculation of the Fund's net income per share is
based upon the weighted average number of shares outstanding during the
year. Income and return of capital distributions per share represent actual
distributions made during the year.

C. Under the terms of a contract expiring December 31, 1994, the Fund pays
Aldrich, Eastman and Waltch, L.P. (the "Adviser") an annual investment advisory
fee equal to .5% of the average fair market value of the Fund's real estate
investments. The Fund also pays the Adviser investment transaction fees
generally equal to 2% of the purchase price of, or the proceeds from, its real
estate investment. The Fund incurred real estate investment transaction fees of
$270,000 and $171,000 for the years ended December 31, 1993 and 1991,
respectively. The Fund did not incur real estate investment transaction fees
during the year ended December 31, 1992.

D. Under the terms of a contract expiring December 31, 1993, the Fund pays The
Vanguard Group, Inc. (the "Sponsor") an administrative fee calculated at an
annual percentage rate of the average fair market value of the Fund's real
estate investments and temporary cash investments (excluding investments in
Vanguard Money Market Reserves-Prime Portfolio). The administrative fee
represents an effective annual rate of .4% for the years ended December 31,
1993, 1992, and 1991.

E. The Fund's wholly owned direct real estate investments consisted of the
following:

<TABLE>
<CAPTION>
December 31, 1993 December 31, 1992
(In thousands) (In thousands)

---------------------------- -----------------------------
ACCUMULATED ACCUMULATED
DESCRIPTION COST DEPRECIATION NET COST DEPRECIATION NET
- -------------- ---------------------------- -----------------------------

SHOPPING CENTER
<S> <C> <C> <C> <C> <C> <C>
Land $ 3,100 $ -- $ 3,100 $ 3,100 $ -- $ 3,100
Buildings and
Improvements 8,098 (1,304) 6,794 7,804 (1,059) 6,745
------- -------- ------- ------- -------- -------
11,198 (1,304) 9,894 10,904 (1,059) 9,845
------- -------- ------- ------- -------- -------
INDUSTRIAL PARKS
Land 8,250 -- 8,250 8,250 -- 8,250
Buildings and
Improvements 14,844 (2,232) 12,612 14,887 (1,874) 13,013
------- -------- ------- ------- -------- -------
23,094 (2,232) 20,862 23,137 (1,874) 21,263
------- -------- ------- ------- -------- -------
OFFICE BUILDINGS
Land 1,440 -- 1,440 4,740 -- 4,740
Buildings and
Improvements 8,490 (1,253) 7,237 24,841 (2,929) 21,912
------- -------- ------- ------- -------- -------
9,930 (1,253) 8,677 29,581 (2,929) 26,652
------- -------- ------- ------- -------- -------
TOTAL $44,222 $(4,789) $39,433 $63,622 $(5,862) $57,760
======= ======== ======= ======= ======== =======

</TABLE>

<PAGE>
F. The Fund's mortgage loans receivable and in-substance foreclosures
consisted of the following:

<TABLE>
<CAPTION>
(In thousands)
-------------------------------------------------------------------------

MATURITY CALL EFFECTIVE PAY DECEMBER 31,

DESCRIPTION DATE DATE RATE RATE 1993 1992
- ---------------------------------------------------------------------------------------------------
PLAZA DEL AMO:
<S> <C> <C> <C> <C> <C> <C>
shared-appreciation wrap-
around mortgage loan 1997 1994 10.3% 9.7%-10.8% $10,646 $10,646
CARMEL EXECUTIVE PARK:
participating mortgage
loan with purchase option 1998 1996 9.558% 9.558% -- 14,239(1)

SHEFFIELD FOREST APARTMENTS:
participating shared-
appreciation mortgage loan 1998 1994 n/a 8%-9% 17,192(1) 17,147(1)
------- -------
TOTAL $27,838 $42,032
======= =======

</TABLE>

Upon repayment of the Plaza del Amo loan, the Fund is entitled to a share
of the property's appreciation, if any, equal to 50% of Plaza del Amo's fair
market value in excess of the original wraparound mortgage loan balance of
$10.6 million.
On July 30,1993, the Fund accepted a discounted payoff of $13,500,000 on
its mortgage loan secured by Carmel. The loss resulting from this payoff was
charged to the allowance for possible losses.
The partnership that owns and operates Sheffield Forest Apartments funded,
pursuant to a guarantee which expired on December 7, 1993, interest on the
mortgage loan secured by the Sheffield property in excess of cash flow
generated by the property during 1993. The Fund and the borrower have been
unable to reach satisfactory restructuring terms on the loan, and the borrower
has defaulted on the loan in January 1994 by making only a partial payment of
its then-due interest installment. Accordingly, the Fund is presently pursuing
foreclosure to take title to the property. A provision to reduce the carrying
value of the Sheffield investment to its estimated fair value minus selling
costs is included in the allowance for possible losses at December 31, 1993.
In 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for
the Impairment of a Loan." Adoption of SFAS 114 is required for the year
beginning January 1, 1995. It requires that loans, such as the Fund's mortgage
loan receivable classified as an in-substance foreclosed asset, if impaired, be
measured based on the present value of expected future cash flows discounted at
the loan's effective interest rate, or as a practical expedient, at the loan's
observable market price or the fair value of the collateral. In 1992, the
American Institute of Certified Public Accountants issued Statement of Position
92-3 (SOP 92-3), "Accounting for Foreclosed Assets," which requires that
in-substance foreclosed assets be carried at the lower of estimated fair value
minus selling costs or cost. Because the Fund already recognizes such
reductions of value, if present, through its provision for possible losses,
adoption of SOP 92-3 and SFAS 114 has not had, and is not expected to have,
respectively, a significant effect on the Fund's financial position or results
of operations.

(1) Classified as in-substance foreclosed assets.

<PAGE>
G. Activity relating to the allowance for possible losses on real estate is as
follows:

<TABLE>
<CAPTION>
(In thousands)
--------------------------------------------------------------------------
DECEMBER 31, 1993 DECEMBER 31, 1992 DECEMBER 31, 1991
--------------------------------------------------------------------------
<S> <C> <C> <C>
Balance--Beginning of Year $ 7,248 $ 5,755 $ 2,500
Provision for Losses 3,500 4,501 6,600
Amounts Charged Off (702) (8) (3,345)
Write-down of In-Substance Foreclosed Assets -- (3,000) --
Write-off--Carmel Executive Park (1,238) -- --
Write-off--Citadel II (6,398) -- --
-------- -------- --------
Balance--End of Year $ 2,410 $ 7,248 $ 5,755
======== ======== ========

</TABLE>

Upon adoption of SOP 92-3, the Fund reclassified the amounts provided in
the allowance for possible losses to reduce the carrying value of its
in-substance foreclosed assets to their fair value minus selling costs from the
allowance and recorded such amounts as a direct write-down of each of the
in-substance foreclosed asset investments.

H. The Fund's mortgage loans payable consisted of the following:

<TABLE>
<CAPTION>
(In thousands)
---------------------------------
DECEMBER 31, DECEMBER 31,
DESCRIPTION 1993 1992
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
PLAZA DEL AMO:
senior mortgage loans, secured by the shopping center, principal and
interest payable over term
10%, matures June, 2007 $2,324 $ 2,403
9.5%, matures June, 2007 153 158
CITADEL II OFFICE BUILDING:
senior mortgage loan, secured by the office building, principal and
interest payable over term
9.875%, matures November, 1997 -- 11,843
------ -------
TOTAL $2,477 $14,404
====== =======
</TABLE>

Scheduled principal payments for each of the next five years and thereafter
are as follows:

<TABLE>
<CAPTION>
Year Ending December 31, (In thousands)
---------------
<S> <C>
1994 $ 93
1995 102
1996 113
1997 125
1998 139
Thereafter 1,905
-----------
TOTAL PRINCIPAL PAYMENTS $2,477
===========

</TABLE>

<PAGE>
I. In the first quarter of 1993, the Fund defaulted on its mortgage loan
obligation secured by the Citadel II investment in Orlando, Florida. During
the period of default, the net cash flow generated from the property's
operations were remitted to the lender on a monthly basis, under terms of a
cash flow agreement. Accordingly, the Fund did not realize any net income or
receive any cash flow from the property during the default period. The Fund's
Adviser had previously approached the lender in an effort to restructure the
loan; however, a restructuring satisfactory to both the Fund and the lender
could not be achieved. Accordingly, on September 1, 1993, the Fund ceded title
of the property to the lender in full satisfaction of amounts due under the
non-recourse mortgage loan obligation. Since the Citadel II investment had
previously been written down to the remaining principal balance of the loan, no
loss on this transaction was recognized in the year ended December 31, 1993.

J. For the Fund's wholly owned direct real estate investments, annual minimum
future rentals to be received under operating leases in effect at December 31,
1993, are as follows:

<TABLE>
<CAPTION>
Year Ending December 31, (In thousands)
-----------
<S> <C>
1994 $ 5,789
1995 5,473
1996 5,076
1997 3,270
1998 1,572
Thereafter 2,711
-----------
TOTAL MINIMUM FUTURE RENTALS $23,891
===========
</TABLE>

Total minimum future rentals do not include contingent rentals under
certain leases based upon lessees' sales volumes. Contingent rentals
aggregating $37,000, $30,000, and $32,000 were received during 1993, 1992, and
1991, respectively. Certain leases also require lessees to pay all or a portion
of real estate taxes and operating costs.

K. The following is a summary of the net assets and liabilities, and results
of operations of Sheffield Forest Apartments, the property which underlies the
Sheffield mortgage loan investment, in which the Fund has invested more than
10% of its net offering proceeds:

SHEFFIELD FOREST APARTMENTS

<TABLE>
<CAPTION>
(In thousands)
BALANCE SHEETS OCTOBER 31, 1993 OCTOBER 31, 1992
- ---------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Property and Equipment $ 10,615 $11,016
Due from Affiliate 1,789 2,016
Other Assets 433 448
--------- ---------
12,837 13,480
--------- ---------
LIABILITIES
Mortgage Payable 18,620 18,479
Accounts Payable 303 --
Other Liabilities 76 250
--------- ---------
18,999 18,729
--------- ---------
NET LIABILITIES $(6,162) $(5,249)
========= =========

</TABLE>

<PAGE>
K. (continued)

<TABLE>
<CAPTION>
(In thousands)
FISCAL YEAR ENDED
STATEMENTS OF OPERATIONS OCTOBER 31, 1993 OCTOBER 31, 1992
- ---------------------------------------------------------------------------------
REVENUE
<S> <C> <C>
Rental Income $ 2,016 $ 2,141
-------- --------
EXPENSES
Mortgage Interest 1,669 1,661
Operating 815 663
Depreciation and Amortization 447 546
-------- --------
2,931 2,870
-------- --------
NET LOSS $ (915) $ (729)
======== ========
</TABLE>

Property and equipment are carried at cost at the date of acquisition by
the mortgagor, net of accumulated depreciation. In addition, mortgage interest
expense is determined based on the effective interest rate of the mortgage loan
which exceeds the current cash payments by $92,000 for both 1993 and 1992,
respectively.

L. During the fourth quarter of 1990, the Fund's Board of Trustees authorized
the Fund to repurchase in the open market from time to time up to 500,000 of
the Fund's outstanding shares. As of December 31, 1993, 413,725 shares have
been repurchased at an aggregate cost of $3,134,000.

M. The Fund's investment in marketable securities consisted of the following:

<TABLE>
<CAPTION>
(In thousands)
--------------------------------
DESCRIPTION (COST IN THOUSANDS) STANDARD & POOR'S RATING DECEMBER 31, DECEMBER 31,
(UNAUDITED) 1993 1992
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Resolution Trust Corporation (RTC) AA $1,684 --
Series 1992-C5, Class B REMIC
6.9%, cost $1,698
</TABLE>

A valuation allowance of $14,000 was established, with a corresponding
charge to net income, to reduce the carrying value of the security to its
market value at December 31, 1993. During 1993, four other RTC REMIC securities
were purchased and subsequently sold at a realized gain of $8,000. Such gain,
determined based on the cost of the specific securities sold, is included in
mortgage interest income for the year ended December 31, 1993.
Statement of Financial Accounting Standards No. 115 (SFAS 115), Accounting
for Certain Investments in Debt and Equity Securities, was issued by the
Financial Accounting Standards Board in May 1993. SFAS 115, which addresses the
accounting and reporting for investments in equity securities that have readily
determinable fair values and all debt securities, must be adopted for the year
beginning January 1, 1994. Adoption of SFAS 115 is not currently expected to
materially affect the Fund's financial position or results of operations.

<PAGE>
N. The unaudited quarterly results of operations for the years ended December
31, 1993, and 1992, are as follows:

<TABLE>
<CAPTION>
Quarter Ended Quarter Ended
(amounts in thousands, Mar. 31, Jun. 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
except per share data) 1993 1993 1993 1993 1992 1992 1992 1991
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate and Short-
term Investment
Income $3,140 $ 3,228 $2,861 $2,433 $3,012 $3,171 $ 3,052 $3,040
======= ======= ======= ======= ======= ======= ======= =======
Net Income (Loss) $1,783 $ (239) $ 81 $1,713 $1,202 $1,384 $(2,646) $1,405
Per Share ======= ======= ======= ======= ======= ======= ======= =======
Net Income (Loss) $ .16 $ (.02) $ .01 $ .15 $ .11 $ .12 $ (.24) $ .13
======= ======= ======= ======= ======= ======= ======= =======

</TABLE>

REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Trustees of
Vanguard Real Estate Fund I

In our opinion, the accompanying balance sheets and the related statements of
operations, changes in shareholders' equity and cash flows present fairly, in
all material respects, the financial position of Vanguard Real Estate Fund I at
December 31, 1993 and 1992, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Fund's management; our responsibility
is to express an opinion on these 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 provide a reasonable basis for the opinion expressed above.

PRICE WATERHOUSE Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 27, 1994

<PAGE>
SELECTED FINANCIAL DATA
(amounts in thousands, except per share data)

The following table sets forth selected financial data for the Fund and should
be read in conjunction with the financial statements included elsewhere herein.

<TABLE>
<CAPTION>
Year Ended December 31,
RESULTS OF OPERATIONS:
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Real estate and short-term
investment income . . . . . . $ 11,662 $ 12,275 $ 12,901 $ 13,343 $013,489
Income (loss) from real estate 4,099 2,156 (221) 4,943 8,056
Funds from operations (a) . . 7,639 7,456 7,631 8,201 8,631
Net income . . . . . . . . . . 3,338 1,345 394 3,973 7,123
PER SHARE (b):
Net income . . . . . . . . . . $ .30 $ .12 $ .03 $ .35 $ .62
Income distributions . . . . . .00 .57 .29 .62 .60
Return of capital distributions 1.69 .12 .40 .07 .08
Total distributions . . . . . 1.69 .69 .69 .69 .68
FINANCIAL POSITION:
Real estate investments (c) . . $ 64,989 $ 92,940 $ 98,464 $112,914 $114,952
Total assets . . . . . . . . . 76,925 104,859 112,606 128,430 122,476
Long-term obligations . . . . 2,384 14,234 14,404 16,834 6,908
Total liabilities . . . . . . 3,184 15,317 15,588 22,554 12,635
Total shareholders' equity . . 73,741 89,542 97,018 105,876 109,841

</TABLE>
(a) Funds from operations is calculated by adding back depreciation,
amortization, and the Fund's provision for possible losses to income (loss)
before net gain on sales of investments. Funds from operations should not
be considered as an alternative to net income as an indicator of the Fund's
operating performance or to cash flows as a measure of liquidity.
(b) Net income per share is calculated based upon the weighted average number
of shares outstanding during the year. Income and return of capital
distributions per share designations are made based on their treatment for
Federal Income Tax purposes and represent actual distributions made during
the year.
(c) Net of accumulated depreciation and the allowance for possible losses.

<PAGE>
MARKET AND DISTRIBUTION INFORMATION

The Fund's Shares of Beneficial Interest ("Shares") are traded on the American
Stock Exchange under the symbol "VRO." As of December 31, 1993, there were
approximately 16,014 shareholders of record of the Fund's Shares.

<TABLE>
<CAPTION>
Year Ended December 31, 1993
---------------------------------------------------------------------
Share Prices Distributions Declared
High Low Income Return of Capital
---------------------- ------------------------------
For the Quarter Ended:
<S> <C> <C> <C> <C>
March 31, 1993 . . . . . . . . $8 1/4 $6 5/8 $.00 $1.15
June 30, 1993 . . . . . . . . . 8 7 1/4 .00 .15
September 30, 1993 . . . . . . . 8 1/4 7 3/8 .00 .15
December 31, 1993 . . . . . . . 8 3/4 7 3/8 .00 1.24
====================== ==============================

</TABLE>

<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Vanguard Real Estate Fund I, A Sales-Commission-Free Income Properties
Fund (the "Fund"), is a Massachusetts business trust that intends to continue
to qualify as a real estate investment trust ("REIT") under the Internal
Revenue Code. The Fund's investments include both direct ownership and shared
appreciation mortgages consisting of four income-producing commercial
properties (composed of one office building, two shopping centers and one
industrial park) and one income-producing apartment complex. Geographically,
the Fund's investments are located in various regions of the United States with
two properties located in the Mideast, and one property located in each of the
North Central, Pacific Northwest and Pacific Southwest regions. In accordance
with the Fund's Declaration of Trust, net proceeds from sale or repayment may
not be reinvested in real estate investments after December 31, 1993. The Fund
presently intends to liquidate all investments between 1994 and 1999.

RESULTS OF OPERATION

1993 as compared to 1992
For the year ended December 31, 1993, the Fund earned net income
of $3,338,000, or $.30 per share, compared to net income for the year ended
December 31, 1992, of $1,345,000, or $.12 per share. As more fully described
below, this increase in net income reflects: (i) a 1993 provision for possible
losses of $2,798,000 as compared to $4,501,000 in 1992; (ii) an increase in net
rental income and mortgage interest income; (iii) a decrease in mortgage
interest expense; and (iv) a decrease in investment income from short-term
investments and net income from in-substance foreclosed assets, in each case as
compared to such items in 1992.
The 1993 provision for possible losses in the amount of $2,798,000
($3,500,000 net of charge-offs of $702,000 recorded during 1993) was recorded
to write-down the carrying value of two of the Fund's in-substance foreclosed
assets, Sheffield and Carmel. Both the owner of the property underlying the
Fund's Sheffield investment and the owner of the property underlying the Carmel
investment approached the Fund in an effort to restructure their respective
loans. With respect to Carmel, in July 1993 the Fund accepted a discounted
payoff in the amount of $13,500,000 on its then-outstanding mortgage loan
balance. Due to continued weak market conditions which prompted the borrower to
request restructuring of the loan, the Fund had provided an additional
provision for possible losses in the second quarter of 1993. The difference
between the carrying value of the mortgage loan, net of the allowance for
possible losses associated with Carmel, and the payoff amount was charged to
the Fund's allowance for possible losses. With respect to Sheffield, cash flow
from the property has been insufficient to cover debt service obligations owing
to the Fund. As a result, the property's owner, which was funding the
shortfalls pursuant to a guarantee which expired on December 7, 1993,
approached the Fund in an effort to restructure the loan. Accordingly, a
provision for possible losses was added to reflect the effect on the net
realizable value of the loan due to the deteriorating conditions in the market
in which the Sheffield Apartment complex is located and the continuing debt
service deficits. At present, the Fund and the borrower have been unable to
reach satisfactory restructuring terms and the borrower has defaulted on the
loan in January 1994 by making only a partial payment of the then-due interest
installment. As a result, the Fund is pursuing foreclosure to take title to the
property.
The provision for possible losses is based upon management's
regular evaluation of the recoverability of each investment in the portfolio.
While management of the Fund believes the resultant allowance for possible
losses, aggregating $2,410,000 at December 31, 1993, and write-down in the
carrying value of its in-substance foreclosed asset investment, is adequate at
December 31, 1993, based upon (i) the Adviser's analysis of current property
values (adjusted for estimated selling costs), (ii) independent appraisals and
(iii) management's estimate of each investment's remaining holding period, the
allowance is based on estimates, and actual results may vary from current
estimates.
Net rental income (rental income less real estate taxes and
property operating expenses) increased by $195,000, or 4%, from $5,457,000 for
the year ended December 31, 1992, to $5,652,000 for the year ended December 31,
1993. This increase in net rental income was attributable primarily to an
increase of $538,000, or 20%, in the net rental income from the Fund's direct
investment in the Seattle Industrial Parks

<PAGE>
("Seattle") which increased from $2,634,000 for the year ended December 31,
1992, to $3,172,000 for the comparable period of 1993. This increase was due to
a 57% increase in the rental rates on one of the major leases (502,500 square
feet), which was renewed in the fourth quarter of 1992 for a term of five
years.
In addition, net rental income at the Fund's Oakcreek investment
increased by $95,000, or 11%, from $875,000 for the year ended December 31,
1992, to $970,000 for the comparable period of 1993.
Increases in the net rental income of Seattle and Oakcreek were
offset by a decrease of $442,000 in net rental income from the Fund's direct
investment in Citadel II--an office building in Orlando, Florida with
approximately 139,000 square feet of rentable office space. In consideration
of several factors resulting from weak local market conditions in the Orlando
Airport area, including; (i) insufficient net rental income in 1992 to cover
debt service on the non-recourse mortgage loan secured by Citadel II; (ii) the
expected continuation of such debt service deficits over the next several
years; and (iii) a decline in the independent appraised value of the property
to a point below the outstanding principal balance of the loan at December 31,
1992, the Fund defaulted on the mortgage loan obligation secured by Citadel II
in the first quarter of 1993. During the period of default, the net cash flow
generated from the property's operations were remitted to the lender on a
monthly basis under terms of a cash flow agreement. Accordingly, the Fund did
not realize any net income or receive any cash flow from the property during
the default period. The Fund's Adviser had previously approached the lender in
an effort to restructure the loan; however, a restructuring satisfactory to
both the Fund and the lender could not be achieved. Accordingly, on September
1, 1993, the Fund ceded title of the property to the lender in full
satisfaction of amounts due under the non-recourse mortgage loan obligation.
Since the Citadel II investment had previously been written down to the
remaining principal balance of the loan, no loss on this transaction was
recognized in the year ended December 31, 1993. Net rental income at Citadel II
decreased from $1,105,000 for the year ended December 31, 1992, to $663,000 for
the comparable period of 1993, reflecting the disposition of the property on
September 1, 1993, and, to a lesser extent, the lower average occupancy rate
and lower rental rates on lease renewals during the eight-month period ended
August 31, 1993, as compared to the comparable period of 1992.
At December 31, 1993, and 1992, the overall occupancy rate of the
Fund's remaining three direct ownership investments was 99% and 98%,
respectively. The overall occupancy rate of the properties underlying the
Fund's remaining two mortgage loan investments, including one investment
treated for accounting purposes as an in-substance foreclosure, was 96% at
December 31, 1993, as compared to 94% at December 31, 1992. Leases for 3% of
the rentable space of the properties directly owned by the Fund and for 5% at
the property underlying the Fund's Plaza del Amo mortgage investment expire
during 1994, respectively. Leases for units at the property underlying the
Fund's Sheffield mortgage loan investment are for one-year terms as is
customary for apartment leases. The Fund's Adviser is currently working to
renew leases and to identify new tenants for space covered by leases that have
expired or are expiring. However, there is no assurance that the Fund will be
able to maintain its current occupancy rate and level of income.
Mortgage interest income increased by $173,000, or 16%, from
$1,106,000 in the year ended December 31, 1992, to $1,279,000 in the year ended
December 31, 1993. In early June 1993, the Fund began acquiring RTC-issued
mortgage-backed securities as an additional temporary investment vehicle for
excess working capital reserve balances. The Fund acquired five such
securities, four of which were sold prior to September 30, 1993. All such
securities purchased were rated AA or better by Standard and Poor's. Income of
$174,000 earned on these investments during the year ended December 31, 1993,
is included in Mortgage Interest Income.
Net income from in-substance foreclosed assets decreased by
$638,000, or 20%, primarily as a result of the discounted payoff in late July
1993, of the Carmel mortgage loan investment, which had been classified as an
in-substance foreclosed asset in 1991.
Investment income from short-term and other investments decreased
by $77,000, or 17%, as compared to such income in the comparable period of
1992, primarily as a result of a decrease in the average amount of short-term
investments for the year ended December 31, 1993, as compared to such
investments during the same period of 1992.

<PAGE>
Mortgage interest expense decreased by $403,000, or 28%, primarily
as a result of the Fund's ceding title to its Citadel II investment on
September 1, 1993, in full satisfaction of the non-recourse mortgage loan
obligation secured by the Citadel II property.

1992 as compared to 1991
For the year ended December 31, 1992, the Fund had net income of
$1,345,000, or $.12 per share, compared to net income for the year ended
December 31, 1991, of $394,000 or $.03 per share. Net income for the year ended
December 31, 1991 also included a net gain on sales of investments of $882,000
realized from the Fund's sale of two of its income-producing property
investments. The increase in net income was primarily attributable to the
provision for possible losses of $4,501,000 recorded during 1992 compared to a
similar provision for possible losses of $6,600,000 in 1991. The provision for
possible losses recorded in 1992 reduced the carrying value of the Fund's
Citadel II investment to its estimated recoverable amount.
Net rental income increased by $175,000, or 3%, from $5,282,000
for the year ended December 31, 1991, to $5,457,000 for the year ended December
31, 1992. This increase in net rental income was attributable primarily to an
increase in net rental income from the Fund's Seattle investment of $637,000,
resulting from increased rental rates on the renewal of two significant leases
with the property's major tenant in December 1991 and 1992 and from the
recovery of legal expenses incurred by the Fund prior to 1992 in connection
with a lawsuit with a former tenant; offset by a decrease in net rental income
of $408,000 from the Fund's direct investment in Citadel II, attributable to a
decrease in occupancy and lower rental rates on lease renewals and leases with
new tenants.
Mortgage interest expense decreased $241,000, or 14%, as compared
to such expense in 1991, as a result of the decline in the Fund's average
mortgage loan payable balance for 1992 as compared to 1991. This decline was
attributable to the payoff in October 1991, of the $4.2 million senior mortgage
loan secured by the Fund's investment in Carmel.
Investment income from short-term investments decreased by
$608,000, or 58%, as compared to such income in 1991, as a result of both a
decline in prevailing money market interest rates, which averaged 3.7% in 1992
as compared to 5.9% in the corresponding period of 1991, and a decrease of
approximately $5.3 million in average short-term investments in 1992 as
compared to average short-term investments in 1991.
Inflation has not had a material impact in the Fund's operations to date.

Distributions
The Fund's policy is to distribute, at a minimum, all of its
taxable income to shareholders. In establishing distribution rates, the Fund's
Trustees also consider the operating performance of the Fund and the Fund's
cash position. Total distributions declared by the Fund during 1993 aggregated
$18,629,000, or $1.69 per share, compared to such distributions in the amount
of $7,694,000, or $.69 per share, and $7,805,000, or $.69 per share, made in
1992 and 1991, respectively. Distributions to shareholders in 1993 included a
special $11,020,000, or $1.00 per share, return of capital distribution. This
special distribution resulted primarily from the $13,500,000 payoff of the
Fund's Carmel mortgage loan investment in July 1993. The Fund's Board of
Trustees reviewed opportunities to invest these funds in additional property
investments; however, since the Fund's liquidation period begins in 1994, and
was originally projected to be completed by 1999, the Board decided not to
proceed with additional investments due to the short amount of time available
to earn a satisfactory return for shareholders. Accordingly, the Board
believed it was in the best interests of shareholders to return the majority of
its cash to shareholders with the year- end distribution.
All, or a portion of, the past three years' distributions
represented a non-taxable return of share- holders' capital. Non-taxable return
of capital distributions aggregated $18,629,000, or $1.69 per share,
$1,364,000, or $.12 per share, and $4,498,000, or $.40 per share, for 1993,
1992, and 1991, respectively.

<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the past three years, the cumulative amount of
distributions (excluding the special $1.00 per share distribution described
above) to shareholders in the amount of $23,108,000 exceeded by approximately
$380,000 the aggregate funds from operations for the three-year period. Funds
from operations are generated from the ongoing operations of direct real estate
investments and interest income on short-term investments and mortgage loans.
Accordingly, unfavorable economic conditions, vacancies, environmental
requirements, reductions in prevailing short-term interest rates or increases
in major expenses such as energy, insurance and real estate taxes could have an
adverse impact upon the Fund's future funds from operations and distributions
to shareholders.
As a matter of policy, the Fund seeks to maintain working capital
reserves in an amount not less than $2,300,000, which constitutes 2% of the
gross proceeds of the Fund's initial public offering. Working capital reserves
is defined as cash and cash equivalents and other assets expected to be
realized over the next year less liabilities expected to be paid over the next
year. Working capital reserves at December 31, 1993, after payment of the
special $1.00 per share distribution discussed above, aggregated approximately
$8.5 million, representing 7.4% of the Fund's initial offering proceeds,
compared to working capital reserves of $8.7 million at December 31, 1992,
which represented 7.7% of the Fund's initial offering proceeds. The Fund's
present working capital reserves balance is based, in large part, on the
Trustees' desire to maintain a reasonable degree of liquidity in the current
real estate environment.
During the fourth quarter of 1990, the Fund instituted a share
repurchase program. Under the program, the Fund is authorized to repurchase in
the open market from time to time up to 500,000 of the Fund's outstanding
shares. During 1993, the Fund repurchased 67,900 shares at an aggregate cost of
$510,000, and as of December 31, 1993, an aggregate 413,725 shares have been
repurchased under the program at an aggregate cost of $3,134,000. No shares
have been repurchased subsequent to December 31, 1993.
The Fund intends to continue to qualify as a real estate
investment trust under the Internal Revenue Code and distribute all of its
taxable income. The Fund's management considers the Fund's liquidity, as well
as its ability to generate cash, as adequate to meet its presently foreseeable
operating and shareholder distribution requirements and to fund both its share
repurchase program and capital improvements. However, if additional funds are
required, the Fund may borrow to meet its distribution requirements, subject to
the availability of financing in the marketplace. At December 31, 1993, the
Fund's debt-to-equity ratio was .03 to 1.

<PAGE>
TRUSTEES & OFFICERS

JOHN C. BOGLE, Chairman
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and each of the investment companies in The Vanguard Group.

J. MAHLON BUCK, JR.
Chairman and President of TDH Capital Corporation; Director, Alco Standard
Corporation.

WILLIAM S. CASHEL, JR.
Private Investor; formerly Vice Chairman, American Telephone & Telegraph, Inc.

DAVID C. MELNICOFF
Adjunct Professor of Finance, Temple University; Director, Seamens' Capital
Corporation; Director, Cortland Trust; President, Samuel F. Fels Fund; formerly
Executive Vice President of Meritor Financial Group.

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 OFFICERS

JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.

RALPH K. PACKARD, Vice President and Controller
Senior Vice President and Chief Financial Officer of The Vanguard Group, Inc.

RAYMOND J. KLAPINSKY, Secretary
Senior Vice President and Secretary of The Vanguard Group, Inc., and Secretary
of each of the investment companies in The Vanguard Group.

RICHARD F. HYLAND, Treasurer
Treasurer of The Vanguard Group, Inc., and each of the investment companies in
The Vanguard Group.

<PAGE>
[VANGUARD LOGO]

Vanguard Real Estate Fund I * Valley Forge, Pennsylvania 19482

Investor Information: 1 (800) 662-7447

Real Estate Shareholder Account Service: 1 (800) 662-2739

A copy of the Fund's Annual Report on Form 10-K
filed with the Securities and Exchange Commission
may be obtained by shareholders without charge
by calling 1-800-662-7447 or by writing the Fund's
Investor Relations office at P.O. Box 2600,
V35, Valley Forge, PA 19482.

<PAGE>
EDGAR Appendix

This appendix dexcribes 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 photograph of John C. Bogle appears at the upper-right of page one.

A bar chart of the Total Return, Vanguard Real Estate Fund I vs.
Russell-NCREIF Index, for the years 1988 - 1993 appears at the upper-left
of page 3.