<PAGE> 1
VANGUARD
OHIO
TAX-FREE FUND
ANNUAL REPORT 1993
[PHOTO]
<PAGE> 2
A BRAVE NEW WORLD FOR INVESTING
With the clarity of hindsight, we can now see that the past two
decades composed one of the great cycles in the history of the
financial markets, as reflected in the chart below.
* During the 1973-1982 decade, the nominal total returns (capital
change plus income) of stocks and bonds averaged only about +6%
per year; cash reserves averaged more than +8% annually.
However, high inflation rates, averaging 8.7% annually,
devastated these nominal results. Real returns (nominal returns
less the inflation rate) for each of these three major asset
classes were actually negative.
* During the 1983-1992 decade, quite the opposite situation
prevailed. Nominal returns for stocks and bonds were close to
their highest levels in history and forged well into double-
digit territory. To make a good investment environment even
better, inflation was tame (averaging 3.8% annually), and real
returns were solidly positive.
[A TALE OF TWO DECADES TABLE -- SEE EDGAR APPENDIX]
This sharp contrast provides us with perspective for the decade that
will end in the year 2002. Some investors will fear a recurrence of the
returns of the first decade, while others will hope for a recurrence of the
second; most will likely anticipate something in between. Whatever the case,
there are two essential elements involved in considering your investment
program in the light of today's circumstances.
First, the yield of each investment class at the start of a decade
has had an important relationship to its future return. Yields were low
when 1973 began, high when 1983 began, and are again low today. In fact,
current income yields are remarkably close to the levels of 20 years ago, as
shown in the following table.
<TABLE>
<CAPTION>
Income Yields (January 1)
--------------------------------------
1973 1983 1993 (11/30)
---------------------------------------------------------
<S> <C> <C> <C>
STOCKS 2.7% 4.9% 2.7%
BONDS 5.8 10.7 6.0
RESERVES 3.8 10.5 3.1
---------------------------------------------------------
</TABLE>
But there is a second important element to consider: inflation.
It got progressively worse during most of the first decade, but
got progressively better in the second.
<TABLE>
<CAPTION> ----------------------------------------
1973 1981 1993 (11/30)
-----------------------------------------------------------
<S> <C> <C> <C>
INFLATION 3.4% 12.4% 2.7%
-----------------------------------------------------------
</TABLE>
Today's low yield levels suggest that more modest nominal returns
are in prospect for the coming decade than in the 1980s; indeed,
returns could gravitate
(Please turn to inside back cover)
VANGUARD OHIO TAX-FREE FUND OFFERS TWO PORTFOLIOS THAT SEEK TO
PROVIDE A HIGH LEVEL OF INCOME THAT IS EXEMPT FROM FEDERAL AS
WELL AS OHIO STATE PERSONAL INCOME TAXES. THE INSURED LONG-TERM
PORTFOLIO INVESTS PRIMARILY IN INSURED LONG-TERM MUNICIPAL BONDS.
THE MONEY MARKET PORTFOLIO SEEKS TO MAINTAIN A CONSTANT NET ASSET
VALUE OF $1.00 PER SHARE ALONG WITH REASONABLE CURRENT INCOME.
<PAGE> 3
CHAIRMAN'S LETTER
DEAR SHAREHOLDER:
The decline in interest rates continued--and indeed accelerated--
during the twelve months ended November 30, 1993, the eighth
fiscal year of the Vanguard State Tax-Free Funds. Lower yields
pushed the prices of long-term tax-exempt bonds higher, and the
net asset values of our Insured Long-Term Portfolios benefited
accordingly. As rates fell, however, interest income was reduced,
with the most immediate impact felt in our Money Market
Portfolios.
Reflecting the low-interest-rate environment that prevailed over
the past twelve months, our Money Market Portfolios provided returns that were
modest in an absolute sense, albeit comfortably above the returns of their
respective competitive benchmarks. The total returns (capital change plus
income) of our Insured Long- Term Portfolios were exemplary, surpassing
even the excellent results that we achieved in our prior fiscal year.
It is difficult to imagine a more beneficial two-year stretch for
investors in long-term bonds. In any event, here are the Portfolio
highlights for the past twelve months:
* THE STATE MONEY MARKET PORTFOLIOS
provided total returns of about +2.4% . . . with declining
money market rates for yet another year, Portfolio yields ended
the period at lower levels than where they began, hovering in
the area of 2.3% . . . net asset values, of course, remained at
$1.00 per share.
* THE STATE INSURED LONG-TERM PORTFOLIOS--
enjoyed another outstanding year "across the board," as each
Portfolio turned in a double-digit return ranging from +12% to +13% .
. current yields are at their lowest levels in our Funds' (admittedly
rather short) history.
[PHOTO]
The detailed results for each of our State Tax-Free Portfolios,
including per share net asset values, dividends and capital gains distributions
for the fiscal year, as well as current yields are presented on page 6 of
this letter. The following table summarizes the returns for our
State Insured Long-Term Portfolios:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
Investment Returns
Twelve Months Ended
November 30, 1993 % of Total
Insured Long-Term ------------------------------------ Return From
Portfolio Income Capital Total Capital
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CALIFORNIA +5.8% +5.7% +11.5% 49%
NEW YORK +6.0 +6.4 +12.4 52
PENNSYLVANIA +6.1 +5.8 +11.9 49
NEW JERSEY +5.9 +6.6 +12.5 52
OHIO +5.7 +6.3 +12.0 52
FLORIDA +5.5 +6.9 +12.4 56
-----------------------------------------------------------------------------------------------
</TABLE>
In last year's Annual Report, I called special attention to the
substantial capital component (appreciation in net asset value
per share) of the total returns on our State Insured Long-Term
Portfolios. My purpose in doing so at that time was to advise
investors that it seemed unreasonable to expect a recurrence of
these capital returns in fiscal 1993. As shown in the table, this
year the role of capital appreciation in our Portfolios' results
turned out to be even more dramatic, accounting on balance for
some 50% of our total returns.
(continued)
1
<PAGE> 4
[MONTH-END YIELDS 1990-1993 CHART -- SEE EDGAR APPENDIX]
Although my cautionary words one year ago could hardly have
been further off the mark, I nonetheless would remind
shareholders that capital returns of the magnitude shown in the
preceding table simply cannot be taken for granted. Indeed, with
long-term interest rates at their lowest levels in two decades,
now is a perfect opportunity to remind investors that, should
rates reverse direction and move higher, "capital reward" will
inevitably translate to "capital penalty" for each of our six
Insured Long-Term Portfolios.
The excellent absolute returns for all of our Insured Long-
Term Portfolios in fiscal 1993 come on top of the double-digit
returns earned in the prior fiscal year. The chart at the top of
the facing page illustrates the results of the Ohio Insured Long-
Term Portfolio since its inception in June 1990, compared with
the results of the two most appropriate available benchmarks: the
unmanaged Lehman Municipal Bond Index and the average Ohio
insured municipal bond fund. You can see that, in our brief
history, our returns have been nicely above those of the average
competitor and the unmanaged Index. I should also note that the
Ohio Money Market Portfolio has enjoyed solid relative results
over the same period, achieving a cumulative return of +13.0%
versus +12.4% for its average competitor (+3.6% versus +3.5%
annually).
* THE FISCAL YEAR IN REVIEW
Our 1993 fiscal year was the sixth consecutive year of favorable
markets--and the third consecutive year of double-digit returns--
for long-term bonds. Lower yields drove up the prices of
municipal, corporate, and U.S. Treasury bonds alike. Treasury
bonds registered the largest rate declines and garnered the
greatest price appreciation, gaining some +17% for the year. Over
the same period, yields on high-grade, long-term, tax-exempt
bonds fell 0.70% (70 "basis points"), from 6.2% to 5.5%,
resulting in a price increase of +10%.
Compared to the sharp decline in long-term rates over the past
twelve months, the drop in short-term tax-exempt rates was fairly
muted. From the 2.7% level at the outset of the fiscal year,
yields on high-grade (MIG 1) municipal notes fell to 2.0% in
January 1993, climbed to 2.6% at the end of July, and closed the
year at 2.4%.
The consensus holds that the rate decline is based on two
fundamental factors. First, the U.S. economy remains sluggish,
unable to provide the typical post-recession snapback that
investors have come to expect. Second, and perhaps more
importantly, there is continuing evidence that inflation remains
well under control. The U.S. consumer price index (CPI) increased
2.7% over the past twelve months, compared to 3.0% during the
prior twelve-month period. As a result, despite the sharp decline
in interest rates, "real" yields (nominal yields less the
inflation rate) on long-term bonds remain at healthy levels.
The chart to the left provides a striking illustration of how
precipitous the decline in interest
2
<PAGE> 5
[CUMULATIVE PERFORMANCE JUNE 30, 1990 TO
NOVEMBER 30, 1993 CHART -- SEE EDGAR APPENDIX]
rates has been over the past four years, with nearly all of the
decline coming during the final three years. The yield on high-
grade, long-term municipal bonds fell from 7.0% on November 30,
1989, to 5.5% on November 30, 1993. For short-term tax-exempt
rates, the decline during the same period was more pronounced,
with the yield on high-grade notes falling on balance from 5.9%
to 2.4%. As a result of this disparity in rate declines, the
"spread" of the long rate over the short rate has widened from
110 basis points at the beginning of the period to 310 basis
points at the end. This widening reflects a very "steep" yield
curve, allowing fixed-income investors to earn a substantial
income premium by extending the maturity of their bond holdings.
It should go without saying that each step out in length of
maturity brings with it additional price volatility.
* THE ADVANTAGE OF TAX-EXEMPT INCOME
In each year's Annual Report, we present our customary table
illustrating the advantage of tax-exempt investments versus
taxable investments, after adjusting for the effect of Federal
taxes at the maximum marginal rate on income payments. Here are
the results of the comparison at the end of fiscal 1993:
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
Illustration of Income on
Hypothetical $100,000 Investment
---------------------------------
Long-Term Short-Term
---------------------------------------------------------------------------
<S> <C> <C>
TAXABLE GROSS INCOME $6,300 $3,200
LESS TAXES (39.6%) (2,500) (1,300)
---------------------------------------------------------------------------
NET AFTER-TAX INCOME $3,800 $1,900
TAX-EXEMPT INCOME 5,500 2,400
---------------------------------------------------------------------------
TAX-EXEMPT ADVANTAGE $1,700 $ 500
---------------------------------------------------------------------------
</TABLE>
Table assumes current yields (as of November 30, 1993) of 6.3%
for U.S. Treasury bonds, 3.2% for Treasury bills, 5.5% for long-
term municipals, and 2.4% for short-term municipals. The
illustration is not intended to represent future results.
The advantage spelled out in the table--a 45% increase in after-
tax income for the long-term investor and a 26% increase for the
short-term investor--strongly suggests that investors who are
taxed at the highest marginal rates should consider tax-exempt
alternatives for the fixed-income
3
<PAGE> 6
portion of their overall investment portfolio. (I should add that
both the interest earned on our State Tax-Free Portfolios and the
interest earned on U.S. Treasury obligations are exempt from
taxes at the state level.)
As I noted earlier, the decline in yields on U.S. Treasury
bonds has been significantly larger than that on tax-exempt
bonds. This divergence is paradoxical considering that it comes
just as the maximum marginal federal tax rate has been raised
from 31% to 39.6%--the highest rate since 1986. This should mean
that the spread between taxable and tax-exempt rates would widen;
instead, it has narrowed for long-term investors and remained
about the same for short-term investors.
To be sure, even the highest quality insured state municipal
bond cannot quite match the creditworthiness of a U.S. Treasury
bond, and long-term municipal bonds are usually callable after 10
years, a disadvantage not shared by Treasury securities. So, the
yield comparison has a moderate structural bias in favor of
municipals. But the yield differential illustrated in the table
is hardly "moderate"--it is more like "day and night." Suffice it
to say that the ability of top-tax-bracket investors to earn
substantially more after-tax income with only a marginal
sacrifice in quality is unlikely to persist indefinitely. It is
probably fair to say that relative values in tax-exempt bonds are
as great as they have been for two decades.
* A PERSPECTIVE ON TODAY'S INTEREST RATE ENVIRONMENT
The aggregate assets of all municipal bond mutual funds now total
some $350 billion, and the funds are now among the largest buyers
and holders of tax-exempt securities. While, like all mutual
funds, our State Insured Tax-Free Portfolios promise "liquidity
on demand" to shareholders, it must be clear that providing this
liquidity depends to a degree on an orderly liquidation pattern
by investors. With the exception of the industry's experience
during 1987's sharp dip in long-term bond prices, resulting from
the upward spikes in interest rates in April and May of that
year, the industry's handling of redemptions has been flawless,
and daily liquidity has been maintained without impacting the
marketplace. (Given the very short maturities of money market
instruments, liquidity is much less of a concern in our State
Money Market Portfolios.)
And yet, with rates having come down so far and so fast, there
is always the risk of a sharp rebound. When that happens,
investors who have purchased municipal bond funds for the long
term should not be concerned. However, there appears to be an
active body of short-term speculators who move their money from
long-term to short-term bonds at the proverbial drop of a hat.
You should know that at Vanguard we do our best to exclude these
speculators from our funds, by rigorously limiting the frequency
of inter-fund exchanges and by refusing to accept business from
known "market timers."
If you are an investor who likes to speculate on interest rate
changes, I urge you to move your assets to one of our many
competent competitors. If you are an investor who will respond
with fright to any kind of reversal of the past five year's rise
in bond prices, I urge you to shorten your maturity profile by,
for example, moving a portion of your assets from the more
volatile Insured Long-Term Portfolio for your state to our
corresponding Money Market Portfolio (available in all states but
New York and Florida, in which case the Money Market Portfolio of
Vanguard Municipal Bond Fund might be selected). If you are a
long-term investor--content that your needs for capital stability
(with commensurate income volatility) in our Money Market
Portfolios and for income stability (with commensurate capital
volatility) in our Insured Long-Term Portfolios are being met--I
urge you, once again, to "stay the course."
* IN SUMMARY
As I write this letter, the combined assets of the ten Vanguard
State Tax-Free Portfolios are approaching the $8 billion mark, up
some 30% in just one year. This staggering growth is a testament,
we believe, to an ever-increasing understanding among investors
4
<PAGE> 7
that, all else being equal, costs will "carry the day." With the
yield on the average state tax-exempt bond fund at 4.3%, and with
102 of 137 state tax-exempt money market funds now yielding less
than 2.0%, costs will be an even more critical determinant of the
top-performing funds.
This is precisely the kind of environment in which the
Vanguard State Tax-Free Portfolios should thrive. While the
average competitive state tax-free portfolio charges annual fees
at the rate of 0.68% of average net assets, the expense ratio for
our Portfolios, at 0.21%, is just a fraction of this amount. For
a money market portfolio with a gross yield of 2.0%, the expenses
of the average competitor would consume nearly 35% of its
interest income; Vanguard's expenses would consume but 11%. It is
hard to imagine that intelligent investors could be attracted to
a fund with such a built-in yield disadvantage.
In closing, we believe that, whatever the future course of
interest rates, our State Tax-Free Portfolios will provide
returns that generally exceed those of their respective
competitors.
Sincerely,
/s/ JOHN C. BOGLE
- ---------------------
John C. Bogle
Chairman of the Board
December 13, 1993
Note: Mutual fund data from Lipper Analytical Services, Inc.
A WORD ABOUT CAPITAL GAINS DISTRIBUTIONS
You may recall that, during the rising bond markets of each of
the past three years, some of our Insured Long-Term Portfolios
realized modest capital gains. And, it will probably not surprise
you to know that each Portfolio realized capital gains in 1993.
These amounts must, under Federal tax regulations, be distributed
to shareholders of our Portfolios as taxable capital gains.
I want to emphasize that it is not our objective to realize
capital gains; rather, these gains are a by-product of a number
of factors, including, most importantly, sharply rising municipal
bond prices, bonds that are called or refunded, and limited
portfolio strategy shifts to capitalize on the relative
valuations of different market sectors.
5
<PAGE> 8
AVERAGE ANNUAL TOTAL RETURNS
THE CURRENT YIELDS NOTED IN THE CHAIRMAN'S LETTER ARE CALCULATED
IN ACCORDANCE WITH SEC GUIDELINES. THE AVERAGE ANNUAL TOTAL
RETURNS FOR THE PORTFOLIOS (PERIODS ENDED SEPTEMBER 30, 1993) ARE
AS FOLLOWS:
<TABLE>
<CAPTION>
PORTFOLIO (INCEPTION DATE) 1 YEAR 5 YEARS SINCE INCEPTION
--------------------------------------- -------- -------- ---------------
<S> <C> <C> <C>
CALIFORNIA INSURED LONG-TERM (4/7/86) +14.53% +10.62% + 8.97%
CALIFORNIA MONEY MARKET (6/1/87) + 2.42 + 4.42 + 4.49
NEW YORK INSURED TAX-FREE (4/7/86) +14.83 +10.78 + 8.41
PENNSYLVANIA INSURED LONG-TERM (4/7/86) +14.32 +10.91 + 9.23
PENNSYLVANIA MONEY MARKET (6/13/88) + 2.41 + 4.53 + 4.58
NEW JERSEY INSURED LONG-TERM (2/3/88) +15.16 +10.78 +10.39
NEW JERSEY MONEY MARKET (2/3/88) + 2.37 + 4.50 + 4.56
OHIO INSURED LONG-TERM (6/18/90) +14.76 -- +12.12
OHIO MONEY MARKET (6/18/90) + 2.38 -- + 3.72
FLORIDA INSURED TAX-FREE (9/1/92) +15.18 -- +15.03
</TABLE>
THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT AN
INVESTOR'S SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN
THEIR ORIGINAL COST.
PLEASE NOTE THAT AN INVESTMENT IN A MONEY MARKET FUND, SUCH AS
THE MONEY MARKET PORTFOLIO OF VANGUARD OHIO TAX-FREE FUND, IS
NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND THERE
IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE
NET ASSET VALUE OF $1.00 PER SHARE.
<TABLE>
<CAPTION>
Net Asset Value
Total Per Share
Net Assets ------------------ Twelve Months
(millions) Average Average Nov. 30, Nov. 30, ----------------------- Current
Portfolio Nov. 30, 1993 Maturity Quality* 1992 1993 Dividends Total Return Yield**
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET
CALIFORNIA $1,006 73 days MIG 1 $ 1.00 $ 1.00 $.024 +2.4% 2.32%
PENNSYLVANIA 935 71 days MIG 1 1.00 1.00 .024 +2.4 2.25
NEW JERSEY 724 58 days MIG 1 1.00 1.00 .023 +2.3 2.23
OHIO 132 74 days MIG 1 1.00 1.00 .023 +2.4 2.36
----------------------------------------------------------------------------------------------------------------------------
INSURED LONG-TERM
CALIFORNIA $1,074 11.3 years Aaa $10.89 $11.30 $.803+ +11.5% 4.89%
NEW YORK 807 9.9 years Aaa 10.45 10.97 .739+ +12.4 4.73
PENNSYLVANIA 1,496 8.4 years Aaa 10.96 11.36 .855+ +11.9 4.83
NEW JERSEY 748 9.5 years Aaa 11.18 11.77 .772+ +12.5 4.76
OHIO 166 8.9 years Aaa 11.07 11.61 .753+ +12.0 4.77
FLORIDA 269 10.7 years Aaa 10.16 10.86 .537 +12.4 4.88
----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* MIG 1 and Aaa are Moody's highest ratings for respectively,
short-term and long-term municipal bonds.
** Money Market Portfolios' yields are 7-day annualized yields; others
are 30-day SEC yields.
+ Include capital gains distributions of $.199 for California, $.145
for New York, $.224 for Pennsylvania, $.135 for New Jersey, and
$.145 for Ohio. The shares of each of the Vanguard "single
state" Portfolios are available for purchase solely by residents of
the designated states.
6
<PAGE> 9
REPORT FROM THE INVESTMENT ADVISER
STATE INSURED
LONG-TERM PORTFOLIOS
* TIME FOR CHANGE?
Just one year ago, President Clinton was elected on a platform of
change. Since that time, the restrictive economic impact of higher
taxes has overshadowed the relatively quiet role played by Federal
Reserve policy, and long-term interest rates have declined
precipitously. For the fiscal year ended November 30, 1993, the yield
on the 30-year U.S. Treasury Bond fell 1.2 percentage points (from
7.5% to 6.3%). During the same period, high-grade, long-term municipal
yields fell nearly three-quarters of a percentage point, from 6.2% to
5.5%.
The net result was another year of good performance both for the
State Insured Long-Term Portfolios and the bond market as a whole. In
light of the many successive years of above-average returns by
longer-maturity fixed-income investments, one has to wonder how much
longer the rally can last.
* MUNICIPAL BONDS ARE ATTRACTIVE VERSUS TAXABLE BONDS
While municipal bond prices have risen sharply, taxable bond prices
have rallied even more. High-grade tax-exempt bonds currently
provide 86% of the yield on the 30-year U.S. Treasury bond, up
from 82% at the beginning of the year. This "cheapening" has been due
primarily to a huge increase in the pace of municipal bond issuance.
Indeed, 1993 municipal supply set an all-time record of some $290
billion--fully 25% above the previous record set just last year, and
easily twice the volume of a typical year's issuance.
Municipalities of all types have flooded the marketplace to
refinance higher cost debt at today's lower yield levels. We believe
this process has run full course, and suggest that municipal bonds
are extremely attractive when compared to their taxable brethren. The
case for municipal bonds is even more compelling in light of recently
increased marginal tax rates.
* INVESTMENT STRATEGY
Given the current environment, the State Insured Long-Term Bond
Portfolios are pursuing the following investment strategies:
* CALL PROTECTION. We continue to emphasize call protection in all
of our longer bond portfolios. This strategy has produced
greater price appreciation as yields have declined. Importantly,
it also will insulate future dividends from an abrupt decline due to
bond calls.
* MUNICIPAL VERSUS TREASURY. We have positioned the Portfolios to
take advantage of the exceptionally cheap relationship of municipal
bonds versus Treasury bonds. This positioning has been
accomplished by simultaneously establishing long positions in
municipal bond futures contracts and short positions in Treasury
bond futures contracts. Although this strategy has slightly
detracted from annual performance thus far, we believe it will
produce positive results in 1994.
* "LONG AND RIGHT." Over the past few years, the State Insured
Long-Term Portfolios have maintained a longer maturity structure
and consequently a higher sensitivity to changes in interest
rates than our competitors. This strategy has served us well and
produced good longer-term results in a substantial bull market for
fixed-income securities. During the course of the past year, we
reduced somewhat our longer maturity structure to match that of our
competitors, thereby "locking in" gains earned to date.
In conclusion, the past twelve months has been an exciting period for
bond fund shareholders. Plummeting interest rates have translated into
attractive performance returns on long-term, tax-exempt fixed-income
investments. To be sure, this will be a tough standard to surpass.
(continued)
7
<PAGE> 10
STATE MONEY MARKET PORTFOLIOS
Over the past twelve months, moderate economic expansion and low
inflation enabled the Federal Reserve Board to hold key interest rates
steady. The last policy action taken by the Fed occurred in early
September 1992, when it lowered the Federal funds rate to 3%.
Despite the overall stability in short-term rates, yields on
tax-exempt money market funds continued to decline. Plagued by a
combination of sporadic supply and strong investor demand, yields on
state-specific money funds deteriorated 30 basis points, from 2.2% to
1.9%. Notwithstanding this yield decline, assets grew at a robust 14%
rate. Strong performance versus the competition, due primarily to
Vanguard's expense ratio advantage, enabled our money market funds to
capture a large percentage of these assets.
The volume of new issue supply differed greatly among the various
state-specific funds. Recessionary and fiscal stress, which has
persisted in California, forced many of its municipalities to finance
their cash needs with short-term debt. As a result, July and August
brought a flood of supply in California tax-exempt paper. At the
opposite end of the spectrum was New Jersey, where diminished supply was
attributable primarily to relatively low long-term interest rates. The
many municipalities that previously issued short-term notes took
advantage of these low rates by issuing long-term bonds instead.
Looking forward, net new issuance in the first quarter of fiscal year
1994 is expected to remain light. Poised for this anticipated drought
in supply, the Vanguard State Tax-Free Money Market Portfolios are
currently targeting a minimum average weighted maturity of 75 days.
Beyond the first quarter we will proceed with caution, as any signs of
increased inflation may prompt the Federal Reserve Board to raise
short-term interest rates.
Sincerely,
Ian A. MacKinnon
Senior Vice President
Jerome J. Jacobs
Vice President
Pamela E. Wisehaupt
Vice President
David E. Hamlin
Assistant Vice President
Danine A. Mueller
Portfolio Manager
Reid O. Smith
Assistant Vice President
Vanguard Fixed Income Group
December 7, 1993
8
<PAGE> 11
STATEMENT OF NET ASSETS FINANCIAL STATEMENTS
November 30, 1993
<TABLE>
<CAPTION>
Face Market
Amount Value
INSURED LONG-TERM PORTFOLIO (000) (000)+
-----------------------------------------------------------
MUNICIPAL BONDS (97.7%)
-----------------------------------------------------------
<S> <C> <C>
ISSUER INSURED (85.0%)
Akron Bath & Copley Joint Township
(Childrens Hosp. Medical Center)
7.25%, 11/15/00 (2) (Prere.) $2,275 $2,685
5.5%, 1/1/08 (2) 1,000 1,023
Big Walnut Local School Dist. GO
7.3%, 6/1/01 (2) (Prere.) 1,000 1,189
5.7%, 6/1/14 (2) 1,000 1,024
Butler County Sewer System
6.25%, 12/1/12 (2) 2,925 3,132
City of Canton GO
5.375%, 12/1/07 (2) 1,000 1,030
Chillicothe GO
6.05%, 12/1/12 (2) 675 720
Clermont County
(Mercy Health System)
5.4%, 9/1/05 (2) 2,500 2,570
5.5%, 9/1/06 (2) 2,500 2,567
Cleveland GO
5.3%, 9/1/08 (2) 4,500 4,569
5.375%, 9/1/09 (2) 2,000 2,026
5.375%, 9/1/10 (2) 1,000 1,015
5.375%, 9/1/12 (2) 1,000 1,010
Cleveland Airport System Rev.
7.25%, 1/1/20 (1) 750 858
Cleveland School Dist. GO
0.0%, 12/1/05 (3) 700 373
0.0%, 12/1/06 (3) 700 350
0.0%, 12/1/07 (3) 500 235
0.0%, 12/1/08 (3) 400 176
5.875%, 12/1/11 (3) 1,500 1,557
Cleveland School Dist. RAN
9.0%, 6/1/94 (2) 2,000 2,070
Cleveland Water Works Rev.
5.5%, 1/1/13 (1) 2,125 2,170
6.25%, 1/1/15 (2) 4,500 4,801
5.5%, 1/1/21 (1) 1,500 1,527
Columbus City School Dist.
7.05%, 12/1/99 (2) (Prere.) 1,000 1,154
7.0%, 12/1/00 (3) (Prere.) 1,750 2,036
Cuyahoga County Hosp. Rev.
(Metro Health System)
6.0%, 2/15/19 (1) 3,600 3,699
(Univ. Hosp. Health System)
6.875%, 1/15/19 (6) 1,825 2,007
Dayton Water System Rev.
6.75%, 12/1/10 (1) 1,000 1,091
Delaware Ohio Sewer System
5.95%, 11/15/12 (2) 1,500 1,578
Dublin School Dist. GO
0.0%, 12/1/05 (3) $1,220 $ 651
0.0%, 12/1/06 (3) 1,220 613
Fairfield County Hosp.
5.375%, 6/15/15 (1) 3,000 2,953
5.5%, 6/15/21 (1) 1,000 997
Franklin County Convention
Center Rev.
7.0%, 12/1/00 (1) (Prere.) 675 789
0.0%, 12/1/07 (1) 4,355 2,057
Franklin County Hosp. Facilities Rev.
(Riverside United Methodist)
7.25%, 5/15/20 (1) 750 861
Hamilton County
(Children's Hosp.)
5.2%, 5/15/09 (1) 2,000 1,992
Hamilton County Sewer System
5.4%, 12/1/08 (3) 5,700 5,842
5.45%, 12/1/09 (3) 3,250 3,330
5.25%, 12/1/16 (3) 2,000 1,948
Hamilton Gas System Rev.
5.15%, 10/15/13 (1) 2,750 2,670
Hamilton Water System Rev.
6.3%, 10/15/21 (1) 2,000 2,159
Hilliard County School Dist. GO
6.55%, 12/1/05 (3) 500 566
Lima Sewer Rev.
6.3%, 12/1/12 (2) 5,000 5,443
Lima Water Rev.
6.3%, 12/1/12 (2) 3,400 3,701
Lisbon School Dist.
6.25%, 12/1/17 (2) 1,500 1,612
Lucas County GO
6.95%, 12/1/11 (1) 1,800 2,028
Mahoning County Hosp.
Improvement Project (YHA Inc.)
6.5%, 10/15/14 (1) 2,500 2,704
Marietta City School Dist.
5.75%, 12/1/07 (2) 1,500 1,583
Marysville GO
5.55%, 12/1/13 (2) 1,400 1,417
Marysville Water System
7.05%, 12/1/21 (1) 1,250 1,435
Medina City School Dist. GO
6.2%, 12/1/18 (3) 2,100 2,252
Montgomery County
(Sisters of Charity)
6.625%, 5/15/21 (1) 1,500 1,649
Montgomery County Sewer System
5.6%, 9/1/11 (3) 1,000 1,015
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
-----------------------------------------------------------
<S> <C> <C>
Mount Vernon Sewer System
6.0%, 12/1/12 (2) $ 750 $ 792
New Philadelphia City School Dist.
6.25%, 12/1/17 (2) 2,400 2,571
Newark Water System GO
6.0%, 12/1/18 (2) 1,250 1,325
Northeast Ohio Sewer Dist.
6.5%, 11/15/16 (2) 2,500 2,721
Ohio Air Quality Development Auth.
PCR (Ohio Edison)
7.45%, 3/1/16 (3) 500 577
7.1%, 6/1/18 (3) 1,000 1,140
Ohio Building Auth.
(Transportation Facilities)
7.0%, 9/1/07 (1) 850 967
Ohio Higher Education Facilities
(Univ. of Dayton)
6.75%, 12/1/15 (3) 1,000 1,131
6.6%, 12/1/17 (3) 1,000 1,110
Ohio Water Development Auth.
5.5%, 12/1/11 (2) 1,000 1,008
Olentangy School Dist. GO
6.35%, 12/1/17 (1) 500 539
Omega Municipal Electric
5.375%, 2/15/13 (2) 2,000 1,977
Ottowa GO
7.0%, 9/1/11 (2) 1,500 1,727
Oxford Water Supply System
6.0%, 12/1/14 (2) 1,000 1,055
Pickerington Local School Dist.
3.2%, 12/1/94 (2) 780 783
7.0%, 12/1/00 (2) (Prere.) 1,500 1,754
Revere School Dist. GO
6.0%, 12/1/16 (2) 1,600 1,694
Reynoldsburg School Dist. GO
6.55%, 12/1/17 (3) 1,600 1,773
Springfield GO
6.875%, 9/1/10 (2) 1,000 1,124
Summit County GO
6.9%, 8/1/12 (2) 2,500 2,816
Trumbull County
(Trumbull Memorial Hosp.)
6.25%, 11/15/12 (3) 2,000 2,158
Univ. of Cincinnati COP
2.7%, 6/1/94 (1) 845 845
Univ. of Toledo
5.75%, 12/1/12 (3) 1,000 1,027
Wilmington School Dist. GO
6.3%, 12/1/14 (3) 500 538
Wood County Justice Center GO
5.95%, 12/1/07 (2) 1,750 1,888
Wooster City School Dist. GO
6.5%, 12/1/17 (2) $3,000 $ 3,299
OUTSIDE OHIO:
Puerto Rico Public Building
Auth. Rev.
0.0%, 7/1/01 (3) 850 595
---------
GROUP TOTAL 141,443
---------
-----------------------------------------------------------
SECONDARY MARKET INSURED (1.3%)
Franklin (Mount Carmel Health)
6.75%, 6/1/19 (1) 2,000 2,244
---------
-----------------------------------------------------------
NON-INSURED (11.4%)
Cincinnati GO
6.7%, 12/1/94 400 416
Columbus Sewer System VRDO
2.25%, 12/2/93 1,900 1,900
Cuyahoga County GO
2.75%, 10/1/94 2,040 2,040
Cuyahoga Hosp. Improvement Rev.
VRDO (St. Luke's Hosp.)
2.35%, 12/1/93 2,990 2,990
Ohio GO
7.625%, 8/1/10 3,510 4,511
Ohio Air Quality
Development Auth. VRDO
(Cincinnati G & E)
1.8%, 12/1/93 1,600 1,600
Ohio Higher Education
Facilities Auth.
(Case Western Reserve Univ.)
6.5%, 10/1/20 250 281
(Oberlin College)
5.375%, 10/1/15 1,500 1,456
Ohio Public Facilities Auth.
4.5%, 12/1/93 500 500
Ohio State Univ. VRDO
2.25%, 12/1/93 300 300
Ohio Student Loan VRDO
2.35%, 1/1/94 200 200
Ohio Water Development
Auth. VRDO
(Timpkin Co.)
2.15%, 12/1/93 2,500 2,500
Scioto County VRDO
(Norfolk Southern Corp.)
2.4%, 12/1/93 300 300
---------
GROUP TOTAL 18,994
---------
-----------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $152,188) 162,681
-----------------------------------------------------------
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
(000)+
-----------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.3%)
-----------------------------------------------------------------------
<S> <C> <C>
Other Assets-- Note B $4,360
Liabilities (565)
------
3,795
-----------------------------------------------------------------------
NET ASSETS (100%)
-----------------------------------------------------------------------
Applicable to 14,340,614 outstanding shares
of beneficial interest
(unlimited authorization--no par value) $166,476
-----------------------------------------------------------------------
NET ASSET VALUE PER SHARE $11.61
=======================================================================
+ See Note A to Financial Statements.
For explanations of abbreviations and other
references, see page 12.
-----------------------------------------------------------------------
AT NOVEMBER 30, 1993, NET ASSETS CONSISTED OF:
-----------------------------------------------------------------------
Amount Per
(000) Share
------- ------
Paid in Capital 156,099 $10.89
Undistributed Net Investment
Income -- --
Overdistributed Net Realized Gains (255) (.02)
Unrealized Appreciation of
Investments 10,632 .74
-----------------------------------------------------------------------
NET ASSETS 166,476 $11.61
-----------------------------------------------------------------------
Face Market
Amount Value
MONEY MARKET PORTFOLIO (000) (000)+
-----------------------------------------------------------------------
MUNICIPAL BONDS (97.8%)
-----------------------------------------------------------------------
City of Canton GO
2.5%, 12/1/93 (2) $ 400 $ 400
Cincinnati GO
6.75%, 12/1/93 1,060 1,060
Cleveland--Cuyahoga County Port
Auth. VRDO
(Rock & Roll Hall of Fame)
2.6%, 12/1/93 5,000 5,000
Cleveland Waterworks
Improvement TOB VRDO
2.45%, 1/1/94 (1) 2,000 2,000
Columbus Electric VRDO
2.7%, 12/1/93 6,840 6,840
Columbus Sewer System VRDO
2.25%, 12/2/93 2,100 2,100
Cuyahoga County Hosp. Improvement
Rev. VRDO
(St. Luke's Hosp.)
2.35%, 12/1/93 5,310 5,310
Dublin City BAN
3.0%, 3/29/94 4,285 4,288
Dublin City School Dist. GO
2.4%, 12/1/93 (2) 250 250
Euclid City BAN
2.76%, 5/6/94 2,500 2,502
Franklin County BAN
3.0%, 8/30/94 5,000 5,015
(Exhibition Hall)
2.85%, 12/1/93 1,650 1,650
(Solid Waste)
2.85%, 12/1/93 5,000 5,000
Hamilton County BAN
(Equipment Acquisition)
2.76%, 1/20/94 2,075 2,076
Hamilton County Sewer Rev.
2.45%, 12/1/93 (3) 1,275 1,275
Hamilton County Sewer TOB VRDO
2.45%, 12/1/93 (3) 3,000 3,000
Lake County Water & Sewer BAN
2.93%, 10/13/94 1,700 1,702
Lyndhurst BAN
2.8%, 3/24/94 1,000 1,001
Montgomery County BAN
2.75%, 4/28/94 12,230 12,231
(Justice Information System)
2.75%, 4/28/94 1,000 1,000
(Solid Waste Management)
2.75%, 4/28/94 2,335 2,336
Ohio GO
6.5%, 8/1/94 1,580 1,619
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
------------------------------------------------------------
<S> <C> <C>
Ohio Air Quality Development Auth.
(Cincinnati G&E)
PCR CP 2.45%, 12/17/93 $13,000 $13,000
(Mead Corp.)
VRDO 1.8%, 12/1/93 200 200
Ohio State Univ.
Ohio Higher Education Facilities
VRDO 2.25%, 12/1/93 (2) 4,100 4,100
TOB VRDO 2.5%, 5/1/94 (2) 700 700
6.6%, 5/1/94 (1) 2,000 2,032
Ohio State Highway
5.0%, 5/15/94 1,500 1,516
Ohio State Hosp. Facilities
(Dayton Osteopathic Hosp.)
10.125%, 12/1/93 (Prere.) 3,810 3,886
Ohio Student Loan VRDO
2.35%, 1/1/94 5,400 5,400
Ohio Water Development
Auth. TOB VRDO
2.45%, 12/1/93 (2) 6,000 6,000
Pickerington Local School Dist. GO
2.5%, 12/1/93 (2) 845 845
Rocky River BAN
3.25%, 12/17/93 1,075 1,075
Rocky River Recreational
Facilities BAN
2.46%, 12/17/93 2,422 2,422
Scioto County VRDO
(Norfolk Southern Corp.)
2.4%, 12/1/93 5,900 5,900
Shaker Heights GO BAN
2.46%, 1/21/94 4,120 4,120
Univ. of Cincinnati BAN
2.81%, 3/23/94 2,300 2,302
3.02%, 9/1/94 6,800 6,810
Warren County Sewer System BAN
2.8%, 3/23/94 350 350
Warren County Water System BAN
2.8%, 3/23/94 400 400
-----------------------------------------------------------
TOTAL MUNICIPAL BONDS
(Cost $128,713) 128,713
-----------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.2%)
-----------------------------------------------------------
Market
Value
(000)+
------
Other Assets--Note B $3,323
Liabilities (434)
2,889
-----------------------------------------------------------
NET ASSETS (100%)
-----------------------------------------------------------
Applicable to 131,601,390 outstanding
shares of beneficial interest
(unlimited authorization -- no
par value) $131,602
-----------------------------------------------------------
NET ASSET VALUE PER SHARE $1.00
===========================================================
+ See Note A to Financial Statements.
AT NOVEMBER 30, 1993, NET ASSETS
CONSISTED OF:
-----------------------------------------------------------
Amount Per
(000) Share
-------- -----
Paid in Capital $131,605 $1.00
Undistributed Net Investment
Income -- --
Accumulated Net Realized Losses (3) --
Unrealized Appreciation of
Investments -- --
-----------------------------------------------------------
NET ASSETS $131,602 $1.00
-----------------------------------------------------------
</TABLE>
(1) MBIA (Municipal Bond Insurance Association)
(2) AMBAC (AMBAC Indemnity Corporation)
(3) FGIC (Financial Guaranty Insurance Company)
(4) FSA (Financial Security Assurance)
(5) CGI (Capital Guaranty Insurance)
(6) BIGI (Bond Investors Guaranty Insurance Company)
(7) Connie Lee Inc.
(8) FHA (Federal Housing Authority)
BAN--Bond Anticipation Note
COP--Certificate of Participation
CP--Commercial Paper
GO--General Obligation
PCR--Pollution Control Rev.
RAN--Revenue Anticipation Note
TOB--Tender Option Bond
VRDO--Variable Rate Demand Obligation
(Prere.)--Prerefunded
12
<PAGE> 15
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
INSURED MONEY
LONG-TERM PORTFOLIO MARKET PORTFOLIO
------------------------------------------------------------------------------------------
Year Ended Year Ended
November 30, 1993 November 30, 1993
(000) (000)
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Interest $7,605 $2,778
------------------------------------------------------------------------------------------
Total Income 7,605 2,778
------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services $ 12 $ 10
Management and Administrative 211 160
Marketing and Distribution 38 261 35 205
----- -----
Auditing Fees 7 7
Shareholders' Reports 17 11
Annual Meeting and Proxy Costs 1 4
------------------------------------------------------------------------------------------
Total Expenses 286 227
------------------------------------------------------------------------------------------
Net Investment Income 7,319 2,551
------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)--Note C
Investment Securities Sold 910 (3)
Futures Contracts (992) --
------------------------------------------------------------------------------------------
Realized Net Loss (82) (3)
------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)--Notes C and D
Investment Securities 7,296 --
Futures Contracts (31) --
------------------------------------------------------------------------------------------
Change in Unrealized Appre-
ciation (Depreciation) 7,265 --
------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $14,502 $2,548
===========================================================================================
</TABLE>
13
<PAGE> 16
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
INSURED MONEY
LONG TERM PORTFOLIO MARKET PORTFOLIO
YEAR ENDED Year Ended YEAR ENDED Year Ended
NOVEMBER 30, November 30, NOVEMBER 30 November 30,
1993 1992 1993 1992
(000) (000) (000) (000)
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 7,319 $ 4,592 $ 2,551 $ 2,522
Realized Net Gain (Loss)--Note C (82) 1,164 (3) --
Change in Unrealized Appreciation
(Depreciation)--Notes C and D 7,265 1,974 -- --
-----------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 14,502 7,730 2,548 2,522
-----------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income (7,319) (4,592) (2,551) (2,522)
Realized Net Gain (1,350) (22) -- --
-----------------------------------------------------------------------------------------------------------
Total Distributions (8,669) (4,614) (2,551) (2,522)
-----------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular 66,822 43,020 106,837 73,871
-- In Lieu of
Cash Distributions 6,863 3,594 2,389 2,328
-- Exchange 22,533 20,434 30,312 29,215
Redeemed -- Regular (17,048) (10,977) (68,436) (60,662)
-- Exchange (19,131) (19,187) (31,681) (31,182)
-----------------------------------------------------------------------------------------------------------
Net Increase from
Capital Share Transactions 60,039 36,884 39,421 13,570
-----------------------------------------------------------------------------------------------------------
Total Increase 65,872 40,000 39,418 13,570
-----------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 100,604 60,604 92,184 78,614
-----------------------------------------------------------------------------------------------------------
End of Year $166,476 $ 100,604 $131,602 $92,184
===========================================================================================================
(1) Distributions Per Share
Net Investment Income $ .608 $ .630 $ .023 $ .030
Realized Net Gain $ .145 $ .004 -- --
-----------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued 7,799 5,809 $ 137,149 103,086
Issued in Lieu of Cash Distributions 601 330 2,389 2,328
Redeemed (3,149) (2,766) (100,117) (91,844)
-----------------------------------------------------------------------------------------------------------
5,251 3,373 39,421 13,570
-----------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
INSURED LONG TERM PORTFOLIO
-------------------------------------------------------------------------------------------------------
Year Ended November 30, June 18 to
---------------------------- Nov. 30,
For a Share Outstanding Throughout Each Period 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIO $11.07 $10.60 $10.30 $10.00
INVESTMENT OPERATIONS
Net Investment Income .608 .630 .650 .295
Net Realized and Unrealized Gain (Loss) on Investments .685 .474 .300 .300
----- ----- ---- ----
TOTAL FROM INVESTMENT OPERATIONS 1.293 1.104 .950 .595
-------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.608) (.630) (.650) (.295)
Distributions from Realized Capital Gains (.145) (.004) -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS (.753) (.634) (.650) (.295)
-------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.61 $11.07 $10.60 $10.30
=======================================================================================================
TOTAL RETURN +12.03% +10.69% +9.50% +6.04%
-------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $166 $101 $61 $17
Ratio of Expenses to Average Net Assets .21% .31% .27% .22%*
Ratio of Net Investment Income to Average Net Assets 5.29% 5.77% 6.20% 6.55%*
Portfolio Turnover Rate 10% 27% 20% 2%
-------------------------------------------------------------------------------------------------------
</TABLE>
* Annualized
15
<PAGE> 18
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
MONEY MARKET PORTFOLIO
-------------------------------------------------------------------------------------------------------
Year Ended November 30, June 18 to
---------------------------- Nov. 30,
For a Share Outstanding Throughout Each Period 1993 1992 1991 1990
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income .023 .030 .045 .027
Net Realized and Unrealized
Gain (Loss) on Investments -- -- -- --
----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS .023 .030 .045 .027
-------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment In (.023) (.030) (.045) (.027)
Distributions from Realized
Capital Gains -- -- -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS (.023) (.030) (.045) (.027)
-------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
=======================================================================================================
TOTAL RETURN +2.37% +3.01% +4.64% +2.59%
-------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $132 $92 $79 $37
Ratio of Expenses to Average Net Assets .21% .31% .26% .23%*
Ratio of Net Investment Income to Average Net Assets 2.34% 2.95% 4.45% 5.65%*
Portfolio Turnover Rate N/A N/A N/A N/A
-------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard Ohio Tax-Free Fund is registered under the Investment Company
Act of 1940 as an open-end investment company and consists of the
Insured Long-Term and Money Market Portfolios. Each Portfolio invests in
debt instruments of municipal issuers whose ability to meet their
obligations may be affected by economic and political developments in
the State of Ohio.
* A. The following significant accounting policies are in conformity
with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in
the preparation of financial statements.
1. SECURITY VALUATION: Money Market Portfolio: investment securities
are valued at amortized cost which approximates market value.
Insured Long-Term Portfolio: municipal bonds are valued utilizing
primarily the latest bid prices or, if bid prices are not
available, on the basis of valuations based on a matrix system
(which considers such factors as security prices, yields,
maturities and ratings), both as furnished by an independent
pricing service.
2. FEDERAL INCOME TAXES: Each Portfolio of the Fund intends to
continue to qualify as a regulated investment company and
distribute all of its income. Accordingly, no provision for
Federal income taxes is required in the financial statements.
3. FUTURES: The Insured Long-Term Portfolio may utilize futures
contracts to a limited extent. The primary risks associated with
the use of futures contracts are imperfect correlation between the
change in market value of the bonds held by the Portfolio and the
prices of futures contracts, and the possibility of an illiquid
market. Futures contracts are valued based upon their quoted daily
settlement prices. Fluctuations in the value of futures contracts
are recorded as unrealized appreciation (depreciation) until
terminated at which time realized gains (losses) are recognized.
Unrealized appreciation (depreciation) related to open futures
contracts is required to be treated as realized gain (loss) for
Federal income tax purposes.
4. DISTRIBUTIONS: Distributions from net investment income are
declared on a daily basis payable on the first business day of the
following month. Annual distributions from realized gains, if any,
are recorded on the ex-dividend date. Capital gain distributions
are determined on a tax basis and may differ from realized capital
gains for financial reporting purposes due to differences in the
timing of realization of gains.
5. OTHER: Security transactions are accounted for on the date the
securities are purchased or sold. Costs used in determining
realized gains and losses on the sale of investment securities are
those of specific securities sold. Premiums and original issue
discounts are amortized and accreted, respectively, to interest
income over the lives of the respective securities.
* B. The Vanguard Group, Inc. furnishes at cost investment
advisory, corporate management, administrative, marketing and
distribution services. The costs of such services are allocated to
the Fund under methods approved by the Board of Trustees. The Fund
has contributed capital of $48,000 to Vanguard (included in Other
Assets), representing .2% of Vanguard's capitalization. The Fund's
officers and trustees are also officers and directors of Vanguard.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
* C. During the year ended November 30, 1993, the Insured
Long-Term Portfolio made purchases of $70,217,000 and sales of
$13,075,000 of investment securities other than temporary cash
investments.
At November 30, 1993, unrealized appreciation of investment
securities of the Insured Long-Term Portfolio for financial
reporting and Federal income tax purposes aggregated $10,493,000,
of which $10,671,000 related to appreciated securities and $178,000
related to depreciated securities.
* D. At November 30, 1993, the Insured Long-Term Portfolio had
long positions in Municipal Bond Index futures contracts expiring
through March 1994, with an aggregate settlement value and net
unrealized depreciation of $3,041,000 and $19,000, respectively.
The aggregate settlement value and net unrealized appreciation
related to short positions in U.S. Treasury Bond and U.S. Treasury
Note futures contracts expiring through March 1994, were
$16,563,000 and $158,000, respectively. The market value of
securities deposited as initial margin for open futures contracts
was $563,000.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Ohio Tax-Free Fund
In our opinion, the accompanying statements of net assets and the
related statements of operations and of changes in net assets and the
financial highlights present fairly, in all material respects, the
financial position of the Insured Long-Term Portfolio and the Money
Market Portfolio (constituting the Vanguard Ohio Tax-Free Fund,
hereafter referred to as the "Fund") at November 30, 1993, the results
of each of their operations, the changes in each of their net assets and
the financial highlights for each of the respective periods presented,
in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management;
our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included
confirmation of securities by correspondence with the custodian and
brokers and the application of alternative auditing procedures where
confirmations from brokers were not received, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
December 27, 1993
19
<PAGE> 22
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer Chairman and
Director of The Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman and Chief Executive Officer of
Rhone-Poulenc Rorer Inc.; Director of Sun Company, Inc. and Immune
Response Corporation; Trustee of the Universal Health Realty Income
Trust.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific
Tea Company, Alco Standard Corp., Raytheon Company, Knight-Ridder, Inc.,
and Massachusetts Mutual Life Insurance Co.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America,
Amdahl Corporation, Baker Fentress & Co., and The Southern New England
Telephone Company.
ALFRED M. RANKIN, JR., President and Chief Executive Officer of NACCO
Industries, Inc.; Director of NACCO Industries, The BFGoodrich Company,
and The Standard Products Company.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric
Company and NACCO Industries.
JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired
Vice Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Chairman and Director of Rohm & Haas Company;
Director of Cummins Engine Company; Trustee of Vanderbilt University and
the Culver Educational Foundation.
OTHER FUND OFFICERS
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and
of each of the investment companies in The Vanguard Group.
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of
The Vanguard Group, Inc.; Secretary of each of the investment companies
in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
JEREMY G. DUFFIELD
Senior Vice President
Planning & Development
JAMES H. GATELY
Senior Vice President
Institutional
IAN A. MACKINNON
Senior Vice President
Fixed Income Group
VINCENT S. MCCORMACK
Senior Vice President
Operations
RALPH K. PACKARD
Senior Vice President
Chief Financial Officer
20
<PAGE> 23
(continued inside front cover)
toward those of the 1970s. However, the current level of inflation
suggests that future real returns may prove to be satisfactory. Looking
forward, the main risks to the investor are two: (1) that yields on
financial assets will rise sharply, reducing the prices of stocks and
bonds alike; and (2) that inflation, presently at moderate levels, will
accelerate.
SOME COURSES OF ACTION
What, if any, present action should be taken by investors to deal with
these two major risks? Should your allocation of assets among stock
funds, bond funds, and money market funds be adjusted? Here are some
reasonable courses of action to consider:
* For long-term investors who have built a substantial balanced
portfolio of stock, bond, and money market funds, stay the course.
Even if withdrawing from the stock market proves to be justified,
the next decision--when to return--will one day be required.
"Being right twice" is no mean challenge.
* For long-term investors gradually accumulating assets for, say,
retirement, stay your present course. Continue to invest regularly.
By doing so, you buy more shares of a mutual fund when its price
falls, and fewer shares when its price rises, virtually assuring a
reasonable average cost.
* For risk-averse investors who are highly confident that stock prices
are "too high," make only marginal-- not "all or nothing"--changes
in your portfolio balance. Given the perils of predicting the
future, any changes should be limited to, say, 15 percentage
points. That is, if your normal portfolio allocation is 60% in
stock funds, it might be reduced to 45%; if 85%, to 70%.
* For investors who simply must have more income, never lose sight of
the added principal risk involved in shifting from money market
funds to bond funds. Long-term bond funds provide a generous and
durable income stream, but their prices are highly volatile.
Short-term and intermediate-term bond funds offer a "middle way"
of increasing income with more modest risk to principal.
* For investors who are tempted to find an "easy way" to higher
returns, never forget that risk and reward go hand in hand.
Precipitously replacing certificates of deposit with broad-based
common stock funds verges on the irrational. Funds investing in
other securities markets--emerging nations, international stocks
and bonds, and small U.S. companies--carry their own special risks.
Generally, limit such alternative investments to, say, 20% of your
total portfolio.
For all investors, be prepared for sharp interim swings in stock and
bond prices. The central tenet of investing is "prices fluctuate," and
sensible long-term investors simply must take such fluctuations in their
stride. Successful investing is as much a function of your own
discipline and equanimity as it is of the returns available in the
securities markets.
THREE ESSENTIAL PRINCIPLES
As we confront the brave new world of investing that may well lie ahead
in the coming decade--and it is important to think in decade-length
terms--we would underscore three caveats:
1. Have "rational expectations" for future returns. At prices
prevailing today, it seems highly unlikely that the returns enjoyed
by investors in the past decade will be repeated in the coming
decade.
2. Maintain a balanced portfolio consisting of stock, bond, and money
market funds. Each asset class has its own risk and reward
characteristics. By allocating your resources among the three asset
classes according to your own requirements, you can build a
portfolio providing appropriate elements of capital appreciation,
capital conservation, and current income.
3. In balancing risk against reward, be sure to consider cost. Many
mutual funds carry hefty sales charges or high expense ratios, or
both. Other factors held equal, expenses reduce returns, dollar for
dollar. Put another way, high-cost funds must select investments
with higher prospective gross returns-- whichentail higher
risks--to match the net returns earned by low-cost funds.
This brief Annual Report essay can provide only an elementary look at
the challenges investors face today. History can give us perspective,
but it cannot give us performance. Famed British economist Lord Keynes
had it right when he said, "the inevitable never happens. It is the
unexpected always."
<PAGE> 24
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Long-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Small Capitalization Stock Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
THE VANGUARD GROUP OF INVESTMENT COMPANIES
Vanguard Financial Center * Valley Forge, Pennsylvania 19482
<TABLE>
<S> <C>
New Account Information 1-(800) 662-7447 Shareholder Account Services: 1-(800) 662-2739
</TABLE>
This Report has been prepared for shareholders and may be distributed to
others only if preceded or accompanied by a current prospectus. All
Funds in the Vanguard Family are offered by prospectus only.
Q960-11/93
<PAGE> 25
EDGAR Appendix
This appendix describes components of the printed version of this
report that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features the flags of
The United States of America and Vanguard flying from a halyard.
A bar chart called "A Tale of Two Decades" appears on the inside front
cover. This chart illustrates Average Annual Total Return, in nominal and real
terms, of Stocks, Bonds and Reserves (U.S. Treasury bills) for the two decades
since 1973.
A running head featuring the Vanguard flag logo appears at the top of
pages one through 24.
A photograph of John C. Bogle appears at the upper-right of page one.
A line chart of Month-End Yields shows the Vanguard Ohio fund compared
to the Lehman Municpal bond index. For the fiscal years 1990-1993.
Line charts illustrating cumulative performance of the Vanguard
Ohio fund shows the comparison against the average Ca Municpal fund and to the
Lehman Municpal bond index for the fiscal years 1990-1993.
