VANGUARD FLORIDA INSURED TAX FREE FUND, 485BPOS, 1999-03-23

VANGUARD FLORIDA INSURED TAX FREE FUND
485BPOS, 1999-03-23

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT (NO. 33-48783) UNDER
THE SECURITIES ACT OF 1933

Pre-Effective Amendment No.
Post-Effective Amendment No. 9
and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 10

VANGUARD FLORIDA INSURED
TAX-FREE FUND
(Exact Name of Registrant as Specified in Declaration of Trust)

P.O. Box 2600
Valley Forge, PA 19482
(Address of Principal Executive Office)

Registrant's Telephone Number (610) 669-1000

R. Gregory Barton, Esquire
P.O. Box 876
Valley Forge, PA 19482

It is proposed that the amendment become effective on March 30, 1999,
pursuant to paragraph(b) of Rule 485 of the Securities Act of 1933.

We have elected to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. We filed our Rule
24f-2 Notice for the year ended November 30, 1998 on February 23, 1999.

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VANGUARD FLORIDA INSURED TAX-FREE FUND

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
Form N-1A
Item Number Location in Prospectus
<S> <C> <C>
Item 1. Front and Back Cover Pages ................... Front and Back Cover Pages
Item 2. Risk/Return Summary; Investments, Risks, and
Performance .................................. Fund Profile
Item 3. Risk/Return Summary; Fee Table ............... Fee Table
Item 4. Investment Objectives, Principal Investment
Strategies, and Released Risks ............... A Word About Risk; Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund Performance... Herein incorporated by reference to
Registrant's Annual Report to Shareholders
dated November 30, 1998 filed with the
Securities & Exchange Commission's
EDGAR system on January 19, 1999
Item 6. Management, Organization, and Capital
Structure .................................... The Fund and Vanguard; Investment
Adviser
Item 7. Shareholder Information ...................... Share Price; Dividends, Capital Gains, and
Taxes; Investing with Vanguard
Item 8. Distribution Arrangements .................... Not Applicable
Item 9. Financial Highlights Information ............. Financial Highlights

Form N-1A Location in Statement
Item Number of Additional Information
<S> <C> <C>
Item 10. Cover Page and Table of Contents ............. Cover Page; Table of Contents
Item 11. Fund History ................................. Description of the Trusts
Item 12. Description of the Trust and its Investments
and Risks .................................... Fundamental Investment Limitations;
Investment Policies; Risk Factors;
Description of the Trusts
Item 13. Management of the Fund ....................... Management of the Trusts
Item 14. Control Persons and Principal Holders of
Securities ................................... Management of the Trusts
Item 15. Investment Advisory and Other Services ....... Management of the Trusts
Item 16. Brokerage Allocation and Other Practices ..... Portfolio Transactions
Item 17. Capital Stock and Other Securities ........... Description of the Trusts
Item 18. Purchase, Redemption and Pricing of Shares ... Purchase of Shares; Redemption of Shares;
Share Price
Item 19. Taxation of the Fund ......................... Description of the Trusts
Item 20. Underwriters ................................. Not Applicable
Item 21. Calculation of Performance Data .............. Yield and Total Return; Calculation of Yield
Item 22. Financial Statements ......................... Financial Statements
</TABLE>

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Vanguard Florida Insured Long-Term Tax-Exempt Fund

Prospectus
March 30, 1999

A Federal and Florida State Tax-Exempt Income Mutual Fund

Contents

1 Fund Profile 11 Share Price

3 Additional Information 12 Financial Highlights

3 An Introduction to Tax-Exempt Investing 13 Investing with Vanguard

4 A Word About Risk 13 Services and Account Features

4 Who Should Invest 14 Types of Accounts

5 Primary Investment Strategies 14 Buying Shares

9 The Fund and Vanguard 16 Redeeming Shares

9 Investment Adviser 19 Transferring Registration

10 Year 2000 Challenge 19 Fund and Account Updates

10 Dividends, Capital Gains, and Taxes Glossary (inside back cover)

- --------------------------------------------------------------------------------
Why Reading This Prospectus Is Important

This prospectus explains the objective, risks, and strategies of Vanguard
Florida Insured Long-Term Tax-Exempt Fund. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk(R)"
explanations along the way. Reading the prospectus will help you to decide
whether the Fund is the right investment for you. We suggest that you keep it
for future reference.
- --------------------------------------------------------------------------------

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.

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Fund Profile--Vanguard Florida Insured Long-Term Tax-Exempt Fund

The following profile summarizes key features of Vanguard Florida Insured
Long-Term Tax-Exempt Fund.

INVESTMENT OBJECTIVE
The Fund is a municipal bond fund that seeks to provide current income that is
exempt from both federal income taxes and the Florida intangible personal
property tax. The Fund is intended for Florida residents only.

INVESTMENT STRATEGIES
The Fund invests at least 80% of its assets in long-term Florida municipal bonds
that are covered by insurance guaranteeing the timely payment of principal and
interest. (This insurance applies only to the bonds in the Fund and not to the
Fund's share price or your investment in the Fund.) The remainder of the Fund's
assets may be invested in high-quality Florida municipal securities that are not
insured. Although the Fund has no limitations on the maturity of individual
securities, its dollar-weighted average maturity is expected to be between 15
and 25 years. For more information about insurance, see "Note About Insurance"
under Primary Investment Strategies.

Although the interest and principal payments for at least 80% of the bonds in
the Fund are guaranteed, the value of the bonds themselves is not guaranteed.

PRIMARY RISKS
The Fund is subject to several risks, any of which could cause investors to lose
money. The Fund is considered nondiversified, which means that it may invest a
greater percentage of its assets in the securities of particular issuers as
compared with other mutual funds. Accordingly, the chance exists that the Fund's
performance may be hurt disproportionately by the poor performance of relatively
few securities. The Fund is also subject to:
o State-specific risk, which is the chance that the Fund, because it invests
primarily in securities issued by Florida and its municipalities, is more
vulnerable to unfavorable developments in Florida than funds that invest in
municipal bonds of many states.
o Interest rate risk, which is the chance that bond prices overall will decline
over short or even long periods due to rising interest rates. Interest rate
risk is generally high for long-term bonds.
o Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for long-term bonds.
o Call risk, which is the chance that during periods of falling interest rates,
a bond issuer will OcallONor repayNa high-yielding bond before its maturity
date. Forced to reinvest the unanticipated proceeds at lower interest rates,
the Fund would experience a decline in incomeNand the potential for taxable
capital gains. Call risk is generally high for long-term bonds.
o Credit risk, which is the chance that a bond issuer will fail to pay interest
and principal in a timely manner, reducing the Fund's return. Credit risk
should be very low for the Fund.
o Manager risk, which is the chance that poor security selection will cause the
Fund to underperform other funds with similar investment objectives.

PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one and
five calendar years and since inception compare with those of a broad-based bond
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.

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2
Fund Profile--Vanguard Florida Insured Long-Term Tax-Exempt Fund (continued)

- --------------------------------------------------------------------------------
Annual Total Returns
- --------------------------------------------------------------------------------
13.42% -4.72% 17.72% 4.16% 8.94% 6.69%
- --------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998
- --------------------------------------------------------------------------------

During the period shown in the bar chart, the highest return for a calendar
quarter was 7.56% (quarter ended March 31, 1995) and the lowest return for a
quarter was -D5.75% (quarter ended March 31, 1994).

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Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years Since Inception*
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Vanguard Florida Insured Long-Term
Tax-Exempt Fund 6.69% 6.31% 7.74%
Lehman Municipal Bond Index 6.48 6.23 7.30
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*September 1, 1992.
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FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended November 30, 1998.

Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None

Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.17%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
Total Annual Fund Operating Expenses: 0.20%

PLAIN TALK ABOUT
The Costs of Investing
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in fund expenses can, over time,
have a dramatic effect on a fund's performance.

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3

The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.

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1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$20 $64 $113 $255
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This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.

Additional Information
<S> <C>
Dividends and Capital Gains Suitable for IRAs
Dividends are declared daily and paid on the first business No
day of each month; capital gains, if any, are paid annually
in December Minimum Initial Investment
$3,000; $1,000 for custodial accounts for minors
Investment Adviser
Vanguard Fixed Income Group, Valley Forge, Pa., since Newspaper Abbreviation
inception FLInsLT

Inception Date Vanguard Fund Number
September 1, 1992 018

Net Assets as of November 30, 1998 Cusip Number
$818 million 922033105

Ticker Symbol
VFLTX

</TABLE>

An Introduction to Tax-Exempt Investing

Taxable versus tax-exempt funds
Tax exempt funds provide income that is exempt from federal taxes and, in the
case of state tax-exempt funds, state taxes as well. These funds are usually
best-suited for income-oriented investors in a high tax bracket. You may not
always profit, however, from a tax-exempt investment. That is because the yields
on tax-exempt bonds are typically lower than those on taxable bonds.
To determine whether a state tax-exempt fundNsuch as Vanguard Florida Insured
Long-Term Tax-Exempt FundNis more suitable for you than a taxable fund, you
should compute the tax-exempt fund's taxable equivalent yield. This figure
enables you to compare your potential return on a tax-exempt fund with the
return on a taxable fund.
To compute the taxable equivalent yield, divide the fund's tax-exempt yield
by the total of 100% minus your federal tax bracket. For example, if you are in
the 36% tax bracket, and can earn a tax-exempt yield of 5%, the taxable
equivalent yield would be 7.81% (5% divided by 64% [100%-36%]).
In this example, you would choose the state tax-exempt fund if its taxable
equivalent yield of 7.81% were greater than the yield of a similar, though
taxable, investment.
Remember that we have used an assumed tax bracket in this example. Make sure
to verify your actual tax bracket before calculating taxable equivalent yields
of your own.

There is no guarantee that all of a tax-exempt fund's income will remain
exempt from federal or state income taxation. Income from municipal bonds
purchased by a tax-exempt fund could be declared taxable due to unfavorable
changes in tax laws, adverse IRS interpretations, or certain unanticipated
conduct of the bond beneficiary.

<PAGE>
4

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A Word About Risk

This prospectus describes the risks you would face as an investor in Vanguard
Florida Insured Long-Term Tax-Exempt Fund. It is important to keep in mind one
of the main axioms of investing: The higher the risk of losing money, the higher
the potential reward. The reverse, also, is generally true: The lower the risk,
the lower the potential reward. As you consider an investment in Vanguard
Florida Insured Long-Term Tax-Exempt Fund, you should also take into account
your personal tolerance for the daily fluctuations of the bond market, as well
as your need for current income.
Look for this [FLAG GRAPHIC] symbol throughout the prospectus. It is used to
mark detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================

Who Should Invest

The Fund may be a suitable investment for you if:
o You are a Florida resident in a high tax bracket.
o You wish to add a municipal bond fund to your existing holdings, which could
include other tax-exempt investments as well as taxable bond, money market,
and stock investments.
o You are looking for current income that is exempt from both federal income
taxes and the Florida intangible personal property tax.
o You are not looking for growth of capital over the long-term.
o You are willing to accept significant fluctuations in the Fund's share price.

The Vanguard funds do not permit market timing. Do not invest in this Fund if
you are a market-timer.

The Fund has adopted the following policies, among others, to discourage
short-term trading:
o The Fund reserves the right to reject any purchase requestNincluding
exchanges from other Vanguard fundsNthat it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.
o There is a limit to the number of times you can exchange into and out of the
Fund (see ORedeeming SharesO in the Investing with Vanguard section).
o The Fund reserves the right to stop offering shares at any time.

PLAIN TALK ABOUT
Costs and Market Timing
Some investors try to profit from market-timingNswitching money into investments
when they expect prices to rise, and taking money out when they expect the
market to fall. As money is shifted in and out, a fund incurs expenses for
buying and selling securities. These costs are borne by all fund shareholders,
including the long-term investors who do not generate the costs. Therefore, the
fund discourages short-term trading by, among other things, limiting the number
of exchanges it permits.

<PAGE>
5

PLAIN TALK ABOUT
Intangible Personal Property Tax
While some states, including Florida, do not have a state personal income tax,
they do impose an intangible personal property tax on certain financial assets,
including shares of mutual funds. Unlike other state and local taxes, which are
assessed on income and capital gains from mutual fund shares, the intangible
personal property tax is based on the net asset value of the shares themselves.
In other words, you pay taxes on the shares and not on the income.

Primary Investment Strategies

This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective, a high level of income that is exempt from both federal
income taxes and the Florida intangible personal property tax. In addition, this
section discusses several important risksNincome risk, interest rate risk, call
risk, credit risk, and manager riskNfaced by investors in the Fund. The Fund's
Board of Trustees oversees the management of the Fund, and may change the
investment strategies in the interests of shareholders.

Market Exposure
The Fund invests primarily in Florida state and local municipal bonds that,
depending on their maturity and quality, provide varying amounts of income
exempt from both federal income taxes and the Florida intangible personal
property tax.

[FLAG GRAPHIC]
The Fund is subject to income risk, which is the possibility that a Fund's
dividends (income) will decline due to falling interest rates. Income risk
is generally greatest for short-term bonds and least for long-term bonds.

Changes in interest rates can affect bond prices as well as bond income.

[FLAG GRAPHIC]
The Fund is subject to interest rate risk, which is the possibility that
bond prices overall will decline over short or even long periods due to
rising interest rates. Interest rate risk generally is highest for funds
that invest in longer-term bonds.

In the past, bond investors have seen the value of their investment rise and
fallNsometimes significantlyNwith changes in interest rates. Between December
1976 and September 1981, for instance, rising interest rates caused long-term
bond prices to fall by almost 48%.

Because the Florida Insured Long-Term Tax-Exempt Fund invests mainly in
bonds, changes in interest rates will have a significant impact on the value of
the Fund's assets. To illustrate how much of an impact, the table on the
following page shows the effect of a 1% change and a 2% change (both up and
down) in interest rates on a bond with a face value of $1,000, similar to bonds
held by the Fund on November 30, 1998.

PLAIN TALK ABOUT
Bonds and Interest Rates
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paidNyou would have to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.

<PAGE>
6
PLAIN TALK ABOUT
Bond Maturities
A bond is issued with a specific maturity dateNthe date when the bond issuer, or
seller, must pay back the bond's initial value (known as its Oface valueO). Bond
maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates riseNbut also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.

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How Interest Rate Changes Affect the
Value of a $1,000 Investment
- --------------------------------------------------------------------------------
After a 1% After a 1% After a 2% After a 2%
Yield/Average Maturity Increase Decrease Increase Decrease
- --------------------------------------------------------------------------------
4.33%/9.4 years $910 $1,063 $843 $1,151
- --------------------------------------------------------------------------------

These figures are for illustration only; you should not regard them as an
indication of future returns from the municipal bond market as a whole or the
Fund in particular.
While falling interest rates tend to strengthen bond prices, they can cause
another sort of problem for bond fund investorsNbond calls.

[FLAG GRAPHIC]
The Fund is subject to call risk, which is the possibility that during
periods of falling interest rates a bond issuer will OcallONor repayNa
high-yielding bond before its maturity date. Forced to invest the
unanticipated proceeds at lower interest rates, the Fund would experience a
decline in incomeNand the potential for taxable capital gains.

Longer-term bonds, like those held by the Florida Insured Long-Term
Tax-Exempt Fund, generally have Ocall protection,O which is assurance to
investors that a bond will not be called for a certain length of time.

Security Selection
Vanguard Fixed Income Group, adviser to the Fund, selects municipal bonds issued
by Florida state and local governments, and regional governmental and public
financing authorities (and, possibly, by certain U.S. territories). The adviser
uses a Otop downO investment management approach. The adviser sets, and
continually adjusts, a duration target for the Fund based upon expectations
about the direction of interest rates and other economic factors. The adviser
then buys and sells securities to achieve the greatest relative value within the
Fund's targeted duration. As a matter of fundamental policy, the Fund will
invest at least 80% of its net assets in tax-exempt securities under normal
market conditions. Up to 20% of the Fund's assets may be invested in securities
that are subject to the alternative minimum tax. (See page 7 for a OPlain TalkO
on the alternative minimum tax.)
Normally, a fund that invests in one state would be exposed to considerable
credit risk. To provide a level of credit protection, the Fund invests a
majority of its assets in municipal bonds whose principal and interest payments
are guaranteed by top-rated insurance companies at the time of purchase. For
more information about insurance, see "Note About Insurance" on page 8.

PLAIN TALK ABOUT
Callable Bonds
Although bonds are issued with clearly defined maturities, a bond issuer may be
able to redeem, or call, a bond earlier than its maturity date. The bondholder
must now replace the called bond with a bond that may have a lower yield than
the original. One way for bond investors to protect themselves against call risk
is to purchase a bond early in its lifetime, when it is less likely to be
called. Another way is to buy bonds with call protectionNthat is, assurance that
a bond will not be called for a specific time period, such as ten years.

<PAGE>
7

PLAIN TALK ABOUT
Credit Quality of Bonds
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade."

The Fund seeks to invest substantially all of its assets in insured Florida
municipal obligations. However, up to 20% of the Fund's assets may be invested
in either:
o Uninsured Florida municipal securities with credit quality equivalent to that
of securities rated AA or better by a Nationally Recognized Statistical
Rating Organization (NRSRO), or
o Uninsured, high-quality, short-term Florida municipal securities.

The Fund has no limitations as to the maturities of the securities in which
it invests. However, the Fund is expected to maintain an average nominal
maturity of between 15 and 25 years.

Under unusual circumstances, such as a national financial emergency or a
temporary decline in the availability of Florida obligations, up to 20% of the
Fund may be invested in securities that generate income subject to the Florida
intangible personal property tax or federal personal income taxes. These
securities may include short-term municipal securities issued outside of Florida
or certain taxable fixed-income securities.
As a tax-advantaged investment, the Fund is particularly vulnerable to
federal and Florida state tax law changes (for instance, if the Internal Revenue
Service ruled that the income from certain types of state-issued bonds could no
longer be considered tax-exempt).

[FLAG GRAPHIC]
The Fund is subject to credit risk, which is the possibility that a bond
issuer will fail to pay interest and principal in a timely manner.

The Fund invests primarily in bonds insured by top-rated insurance companies
against possible default of an issuer. Therefore, credit risk should very low
for the Fund. The dollar-weighted average quality of the Fund as rated by
Moody's on November 30, 1998, was Aaa.

The Fund tries to minimize credit risk by purchasing a wide selection of
Florida municipal securities. As a result, there is less chance that the Fund
will be hurt significantly by a particular bond issuer's failure to repay either
principal or interest.

[FLAG GRAPHIC]
The Fund is subject to manager risk, which is the possibility that the
adviser will do a poor job of selecting securities.

[FLAG GRAPHIC]
Because the Fund is nondiversified (which means it may invest a greater
percentage of its assets in the securities of particular issuers as
compared with other mutual funds) the Fund is subject to the risk that its
performance may be hurt disproportionately by the poor performance of
relatively few securities.

PLAIN TALK ABOUT
Alternative Minimum Tax
Certain tax-exempt bonds whose proceeds are used to fund private, for-profit
organizations subject to the alternative minimum tax (AMT)--a special tax system
designed to ensure that individuals pay at least some federal taxes. Although
AMT bond income is exempt from federal income tax, a very limited number of
taxpayers who have many tax deductions may have to pay alternativeminimum tax on
the income from bonds considered "tax-preference items."

<PAGE>
8
PLAIN TALK ABOUT
Derivatives
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.

A Note About Insurance
At least 80% of the Fund's assets is invested in municipal bonds whose principal
and interest payments are guaranteed by a top-rated private insurance company at
the time of purchase. This insurance coverage may take one of several forms:

o A new-issue insurance policy, which is purchased by a bond issuer at the time
the security is issued. This insurance is likely to increase the credit
rating of the security, as well as its purchase price and resale value.
o A mutual fund insurance policy, which is used to guarantee specific bonds
only while held by a mutual fund. For the Florida Insured Long-Term
Tax-Exempt Fund (which has obtained a policy from Financial Guaranty
Insurance Company), the annual premiums for the policy may reduce the Fund's
current yield.
o A secondary market insurance policy, which is purchased by an investor (such
as the Fund) after a bond has been issued and insures the bond until its
maturity date.
Typically, an insured municipal bond in the Fund will be covered by only one
of the three types of policies. For instance, if a bond is covered by a
new-issue insurance policy or a secondary market insurance policy, the security
will probably not be insured under the Fund's mutual fund insurance policy.

Turnover Rate
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
Longer-term bonds will mature--and need to be replaced--less frequently than
shorter-term bonds. As a result, longer-term bond funds tend to have lower
turnover rates than shorter-term bond funds.

Other Investment Policies and Risks
Besides investing in Florida-issued bonds, the Fund may make certain other kinds
of investments to achieve its objective.

[FLAG GRAPHIC]
The Fund may invest, to a limited extent, in derivatives.

The Fund may invest in bond (interest rate) futures and options contracts and
other types of derivatives. Losses (or gains) involving futures can sometimes be
substantial--in part because a relatively small price movement in a futures
contract may result in an immediate and substantial loss (or gain) for a fund.
The Fund will not use futures for speculative purposes or as leveraged
investments that magnify the gains or losses of an investment. The value of all
futures and options contracts in which the Fund acquires an interest cannot
exceed 20% of the Fund's total assets.
The reasons for which the Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds.

PLAIN TALK ABOUT
Turnover Rate
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for actively managed tax-exempt bond
funds (excluding money market funds) is approximately 42%, according to
Morningstar, Inc.

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9

PLAIN TALK ABOUT
Vanguard's Unique Corporate Structure
The Vanguard Group is truly a mutual mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.

o To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
In addition, the Fund may purchase tax-exempt securities on a "when-issued"
basis. With "when-issued" securities, the Fund agrees to buy the securities at a
certain price, even if the market price of the securities at the time of
delivery is higher or lower than the agreed-upon purchase price.
The Fund may, from time to time, take temporary defensive measures--such as
holding cash reserves without limit--that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, the Fund may not
achieve its investment objective.

The Fund and Vanguard

Vanguard Florida Insured Long-Term Tax-Exempt Fund is a member of The Vanguard
Group, a family of more than 35 investment companies with more than 100 distinct
investment portfolios holding assets worth more than $450 billion. All of the
Vanguard funds share in the expenses associated with business operations, such
as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.

Investment Adviser

Vanguard Fixed Income Group (the "Group"), P.O. Box 2600, Valley Forge, PA
19482, provides advisory services on an at-cost basis to the Vanguard Florida
Insured Long-Term Tax-Exempt Fund. For the fiscal year ended November 30, 1998,
the investment advisory expenses represented an effective annual rate of 0.01%
of the Fund's average net assets.

The Fund has authorized the Group to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Fund may direct the Group to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Fund. When the Fund purchases a newly-issued security at a fixed
price, the Group may designate certain members of the underwriting syndicate to
receive compensation associated with that transaction. Certain dealers have
agreed to rebate a portion of their compensation directly to the Fund to offset
its management expenses.

PLAIN TALK ABOUT
The Fund's Adviser
Vanguard Fixed Income Group provides investment advisory services to many
Vanguard funds; as of November 30, 1998, the Group managed more than $125
billion in total assets. The individuals responsible for overseeing the Florida
Insured Long-Term Tax-Exempt Fund's investments are:
Ian A. MacKinnon, Managing Director of Vanguard; has worked in investment
management since 1974; primary responsibility for Vanguard's internal
fixed-income policy and strategy since 1981; B.A., Lafayette College; M.B.A.,
Pennsylvania State University.
Reid O. Smith, CFA, Principal of Vanguard and (since 1992) Fund Manager of
the Florida Insured Long-Term Tax-Exempt Fund; has worked in investment
management since 1984; has managed portfolio investments since 19__; B.A. and
M.B.A., University of Hawaii.
Mr. Smith manages the Fund on a day-to-day basis. Mr. MacKinnon is
responsible for setting the Fund's broad investment policies and for overseeing
the Fund Manager.

<PAGE>
10

PLAIN TALK ABOUT
Distributions
As a shareholder, you are entitled to your share of the fund's income from
interest, and gains from the sale of investments. You receive such earnings as
either an income dividend or a capital gains distribution. Income dividends come
from interest the fund earns from its money market and bond investments. The
portion of such dividends that are exempt from federal income tax will be
designated as "exempt-interest dividends." Capital gains are realized whenever
the fund sells securities for higher prices than it paid for them. These capital
gains are either short-term or long-term depending on whether the fund held the
securities for less than or more than one year.

Year 2000 Challenge

The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.

Dividends, Capital Gains, and Taxes

As a shareholder, you are entitled to your share of the Fund's net tax-exempt
income (interest less expenses). The Fund's income dividends
accrue daily, and are distributed monthly on the first business day of each
month. Capital gains distributions, if any, generally occur in December. You can
receive distributions of income or capital gains in cash, or you can have them
automatically invested in more shares of the Fund.
The income dividends you receive from the Fund are expected to be
exempt from federal personal income taxes, and the shares themselves are
expected to be free from the Florida intangible personal property tax. Income
dividends designated as exempt-interest dividends are taken into account in
determining the taxable portion of social security or railroad retirement
benefits. Income paid from tax-exempt bonds whose proceeds are used to fund
private, for-profit organizations may be subject to the federal alternative
minimum tax. Distributions of capital gains are taxable to most shareholders
regardless of whether they are reinvested or paid in cash. It is important to
note that distributions of capital gains (but not income dividends designated as
exempt-interest dividends) that are declared in December--if paid to you by the
end of January--are taxed as if they had been paid to you in December.

<PAGE>

If you have chosen to receive dividend and/or capital gains distributions in
cash, and the postal or other delivery service is unable to deliver checks to
your address of record, we will change the distribution option so that all
dividends and other distributions are automatically invested in additional
shares. We will not pay interest on uncashed distribution checks.
Vanguard will send you a statement each year showing the tax status of all
your distributions.

o Any short-term capital gains that you receive are taxable to you as ordinary
dividend income for federal income tax purposes.
o Any distributions of net long-term capital gains by a Fund are taxable to you
as long-term capital gains for federal income tax purposes, no matter how
long you'e owned shares in the Fund.
o Although the Fund does not seek to realize capital gains, such gains are
realized from time to time as by-products of the ordinary investment
activities of the Fund. Keep in mind, however, that capital gains are not
expected to be a significant part of the Fund's investment return.
o If you sell or exchange shares, any gain or loss you have is a taxable event.
This means that you may have a capital gain to report as income, or a capital
loss to report as a deduction, when you complete your federal income tax
return.
o Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Fund shares, may be subject to state and local
income taxes as well. For example, if you move from Florida to another state,
income from your Fund shares may become fully taxable.
The tax information in this prospectus is provided as general information.
You should consult your tax adviser about the tax consequences of an investment
in the Fund.
Important Note: By law, the Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.

Share Price

The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of trading on the New York Stock Exchange (the NAV
is not calculated on holidays or other days the Exchange is closed). Net asset
value per share is computed by adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing by the number of Fund shares outstanding:

Total Assets - Liabilities
Net Asset Value = ----------------------------
Number of Shares Outstanding

Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is FLInsLT.

<PAGE>

PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Fund began fiscal 1998 with a net asset value (price) of $11.21 per share.
During the year, the Fund earned $.551 per share from investment income
(interest and dividends) and $.330 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $.551 per share in the form of dividend and capital
gains distributions. A portion of each year's distribution may come from the
prior year's income or capital gains.
The earnings ($.881 per share) minus the distributions ($.551 per share)
resulted in a share price of $11.54 at the end of the year. This was an increase
of $.33 per share (from $11.21 at the beginning of the year to $11.54 at the end
of the year). For a shareholder who reinvested the distributions in the purchase
of more shares, the total return from the Fund was 8.03% for the year.
As of November 30, 1998, the Fund had $818 million in net assets. For the
year, its expense ratio was 0.20% ($2.00 per $1,000 of net assets); and its net
investment income amounted to 4.83% of its average net assets. It sold and
replaced securities valued at 21% of its net assets.

Financial Highlights

The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statementsNis included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Vanguard Florida Insured Long-Term
Tax-Exempt Fund
Year Ended November 30,
----------------------------------------------------
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $11.21 $11.07 $10.94 $ 9.61 $10.86
- --------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .551 .561 .550 .560 .550
Net Realized and Unrealized Gain (Loss)
on Investments .330 .140 .130 1.330 (1.180)
----------------------------------------------------
Total from Investment Operations .881 .701 .680 1.890 (.630)
----------------------------------------------------
Distributions
Dividends from Net Investment Income (.551) (.561) (.550) (.560) (.550)
Distributions from Realized Capital Gains -- -- -- -- (.070)
----------------------------------------------------
Total Distributions (.551) (.561) (.550) (.560) (.620)
- --------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $11.54 $11.21 $11.07 $10.94 $ 9.61
==================================================================================================

Total Return 8.03% 6.54% 6.45% 20.05% -6.08%
==================================================================================================

Ratios/Supplemental Data
Net Assets, End of Year (Millions) $818 $617 $515 $423 $284
Ratio of Total Expenses to
Average Net Assets 0.20% 0.19% 0.19% 0.21% 0.22%
Ratio of Net Investment Income to
Average Net Assets 4.83% 5.10% 5.09% 5.33% 5.31%
Turnover Rate 21% 13% 19% 20% 43%
==================================================================================================
</TABLE>

From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.

"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500," are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>

Investing with Vanguard
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child?
Vanguard can help. Our goal is to make easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer. Booklets providing detailed information are available on the services
marked with a [BOOK GRAPHIC]. Please call us to request copies.

Services and Account Features

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
Telephone Redemptions (Sales and Exchanges)
Automatically set up for the Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
Checkwriting [CHECKBOOK GRAPHIC]
Method for drawing money from your account by writing a check for $250 or more.
- --------------------------------------------------------------------------------
Vanguard Direct Deposit Service(TM) [BOOK GRAPHIC]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
Vanguard Automatic Exchange Service(TM) [BOOK GRAPHIC]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
Vanguard Fund Express(R) [BOOK GRAPHIC]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
Vanguard Dividend Express(TM) [BOOK GRAPHIC]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
Vanguard Tele-Account(R) 1-800-662-6273 (on-board) [BOOK GRAPHIC]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.
- --------------------------------------------------------------------------------
Access Vanguard(TM) www.vanguard.com [COMPUTER GRAPHIC]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
o Open a new account.*
o Buy, sell, or exchange shares of most funds.
o Change your name/address.
o Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
Investor Information Department: 1-800-662-7447 (SHIP) Text Telephone:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
Client Services Department: 1-800-662-2739 (CREW) Text Telephone: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------

<PAGE>

14
Services and Account Features (contined)

- --------------------------------------------------------------------------------
Services for Clients of Vanguard's Institutional Division: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------

Types of Accounts

Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
For One or More People
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
For Holding Personal Trust Assets [BOOK GRAPHIC]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
For an Organization [BOOK GRAPHIC]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
A Note on Investing with Vanguard Through Other Firms
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------

Buying Shares

If Vanguard receives your check (or electronic transfer) before the close of
trading on the New York Stock Exchange (generally 4 p.m. Eastern time) on a
regular business day, your investment in the Florida Insured Long-Term
Tax-Exempt Fund will be converted to federal funds and credited to your account
at that day's closing price, the next-determined net asset value. You will begin
earning dividends on your investment the following calendar day. (Federal funds
are Federal Reserve deposits that banks and other financial institutions
"borrow" from one another to meet short-term cash needs; fund advisers must use
federal funds to pay for the securities they buy.)
The Fund is offered on a no-load basis, meaning that you do not pay sales
commissions or 12b-1 distribution fees.

- --------------------------------------------------------------------------------
Minimum Investment to . . .
open a new account
$3,000.

add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A Note on Low Balances
The Fund reserves the right to close any account whose balance falls below the
minimum initial investment. The Fund will deduct a $10 annual fee in June if
your account balance falls below $2,500. The fee is waived if your total
Vanguard account assets are $50,000 or more.
- --------------------------------------------------------------------------------
By Mail to . . . [ENVELOPE GRAPHIC]
open a new account
Complete and sign the application form and enclose your check.

add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.

<PAGE>

15
Make your check payable to: The Vanguard Group-D18

All purchases must be made in U.S. dollars, and checks must be drawn on
U.S. banks.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
By Telephone to . . . [TELEPHONE GRAPHIC]
open a new account
Call Vanguard Tele-Account* 24 hours a day-or Client Services during business
hours-to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type).

add to an existing account
Call Vanguard Tele-Account* 24 hours a day-or Client Services during business
hours-to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). Use Vanguard
Fund Express (see "Services and Account Features") to transfer assets from your
bank account. Call Client Services before your first use to verify that this
option is in place.

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
- --------------------------------------------------------------------------------
By Wire to Open a New Account or Add to an Existing Account [WIRE GRAPHIC]
Call Client Services to arrange your wire transaction.

Wire to:
FRB ABA 021001088
Marine Midland Bank, New York

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard Florida Insured Long-Term Tax-Exempt Fund-D18
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------

<PAGE>

16
Buying Shares (continued)

- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.

- --------------------------------------------------------------------------------
A Note on Large Purchases
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------

Redeeming Shares

This section describes how you can redeemNthat is, sell or exchangeNthe Fund's
shares.

When Selling Shares:
o Vanguard sends the redemption proceeds to you or a designated third party.*
o You can sell all or part of your Fund shares at any time.

*May require a signature guarantee; see footnote on page 18.

When Exchanging Shares:
o The redemption proceeds are used to purchase shares of a different Vanguard
fund.
o You must meet the receiving fund's minimum investment requirements.
o Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.

In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
- --------------------------------------------------------------------------------
Note: Once a redemption is processed and a confirmation number given, the
transaction cannot be canceled.
- --------------------------------------------------------------------------------

HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail. You can also sell shares by check.
- --------------------------------------------------------------------------------
Online Requests [COMPUTER GRAPHIC]
Access Vanguard at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
Note: The Vanguard funds whose shares you cannot exchange online or by
telephone are Vanguard U.S. Stock Index Funds, Vanguard Balanced Index Fund,
Vanguard International Stock Index Funds, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.
- --------------------------------------------------------------------------------

<PAGE>
17
- --------------------------------------------------------------------------------

Telephone Requests [TELEPHONE GRAPHIC]
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
Special information: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable
to provide:
x The ten-digit account number.
x The name and address exactly as registered on the account.
x The primary Social Security or employer identification number as
registered on the account.
x The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses due
to telephone fraud, so long as we have taken reasonable
steps to verify the caller's identity. If you wish to remove the telephone
redemption feature from your account, please notify us in writing.
- --------------------------------------------------------------------------------

A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.

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

Mail Requests [ENVELOPE GRAPHIC]
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.

Depending on your account registration type, additional documentation may be
required.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1120 455 Devon Park Drive
Valley Forge, PA 19482-1120 Wayne, PA 19087-1815

For clients of Vanguard's Institutional DivisionE

18
Redeeming Shares (continued)

- --------------------------------------------------------------------------------
Check Requests [CHECKBOOK GRAPHIC]
You can sell shares by writing a check for $250 or more.
- --------------------------------------------------------------------------------
A Note on Large Redemptions
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------

OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, wire
(money market funds and other daily dividend funds only), or exchange to another
Vanguard fund.
- --------------------------------------------------------------------------------
Check Redemptions
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
Wire Redemptions [WIRE GRAPHIC]
The wire redemption option is not automatic; you must establish it by completing
a special form or the appropriate section of your account application. Wire
redemptions can be initiated by mail or by telephone during Vanguard's business
hours, but not online.

For Money Market Funds:
For telephone requests made by 10:30 a.m. EST, the wire will arrive at your bank
by the close of business that same day. Requests made by 4 p.m. EST will arrive
at your bank by the close of business on the following business day.

For Other Daily Dividend Funds:
For telephone requests made by 4 p.m. EST, the wire will arrive at your bank by
the close of business on the following business day.
- --------------------------------------------------------------------------------
Exchange Redemptions
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------

FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:

Request in "Good Order"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
x The Fund name and account number.
x The amount of the transaction (in dollars or shares).
x Signatures of all owners exactly as registered on the account (for mail
requests).
x Signature guarantees (if required).*
x Any supporting legal documentation that may be required.
x Any outstanding certificates representing shares to be redeemed.

*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most banks, credit unions,
and licensed brokers.

Transactions are processed at the next-determined share price after Vanguard has
received all required information.
- --------------------------------------------------------------------------------

<PAGE>

19
- --------------------------------------------------------------------------------
Limits on Account Activity
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
o You may make no more than two substantive "round trips" through the Fund
during any 12-month period.
o Your round trips through the Fund must be at least 30 days apart.
o The Fund may refuse a share purchase at any time, for any reason.
o Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.

A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect management of the
Fund.
- --------------------------------------------------------------------------------
Return Your Share Certificates
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:

The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
All Trades Final
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------

Transferring Registration

You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

Fund and Account Updates

STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, and the Fund's financial statements which include a listing
of the Fund's holdings.

<PAGE>

20
Fund and Account Updates (continued)

To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that addressNinstead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Investor Information Department at 1-800-662-7447.
- --------------------------------------------------------------------------------
Confirmation Statement
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
Portfolio Summary [BOOK GRAPHIC]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
Fund Financial Reports
Mailed in January and July for the Fund.
- --------------------------------------------------------------------------------
Tax Statements
Generally mailed in January; report previous year's taxable dividend
distributions, capital gains distributions, and proceeds from the sale of
shares.
- --------------------------------------------------------------------------------
Average Cost Review Statement [BOOK GRAPHIC]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
Checkwriting Statement
Sent monthly to shareholders using Vanguard's checkwriting option. Our statement
provides images of the front and back of each checkwriting draft paid in the
previous month. This consolidated statement is sent instead of the original
canceled drafts, which will not be returned.
- --------------------------------------------------------------------------------
<PAGE>

Glossary of Investment Terms

Alternative Minimum Tax (AMT)
A measure designed to assure that individuals pay at least a minimum amount of
federal income taxes. Certain securities used to fund private, for-profit
activities are subject to AMT.

Bond
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and make regular interest payments until
that date.

Capital Gains Distribution
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.

Cash Reserves
Cash deposits, short-term bank deposits, and money market instruments, which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.

Dividend Income
Payment to shareholders of income from interest or dividends generated by a
fund's investments.

Duration
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose one percentage point. On the other
hand, the bond's price would rise by about 2% when interest rates fell by one
percentage point.

Expense Ratio
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.

Face Value
The amount to be paid at maturity of a bond; also known as the par value or
principal.

Fixed-Income Securities
Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.

<PAGE>

Insured Bonds
Bonds whose payments of both principal and interest are guaranteed. The
insurance does not guarantee the current market value of the bonds, only that
bond payments will be made in a timely fashion and that principal will be repaid
when the bond reaches maturity.

Investment Adviser
An organization that makes the day-to-day decisions regarding a fund's
investments.

Investment Grade
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances.

Maturity
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.

Municipal Bond
A bond issued by a state or local government. Interest income from municipal
bonds, and therefore interest income from municipal bond funds, is generally
free from federal income taxes, as well as taxes in the state in which the bonds
were issued.

Net Asset Value (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.

Total Return
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.

Volatility
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.

Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.

<PAGE>

THEVanguardGROUP
Post Office Box 2600
Valley Forge, PA 19482-2600

For More Information
If you'd like more information about Vanguard Florida Insured Long-Term
Tax-Exempt Fund, the following documents are available free upon request:

Annual/Semiannual Report to Shareholders
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.

Statement of Additional Information (SAI)
The SAI provides more detailed information about the Fund.

The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or
the SAI, or to request additional information about the Fund or other Vanguard
funds, please contact us as follows:

The Vanguard Group
Investor Information
Department
P.O. Box 2600
Valley Forge, PA 19482-2600

Telephone:
1-800-662-7447 (SHIP)

Text Telephone:
1-800-952-3335

World Wide Web:
www.vanguard.com

If you are a current Fund shareholder and would like information about your
account, account transactions, and/or account statements, please call:

Client Services Department
Telephone:
1-800-662-2739 (CREW)

Text Telephone:
1-800-662-2738

Information provided by the Securities and Exchange Commission (SEC)
You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.

Fund's Investment Company Act
file number: 811-6709

P018N-03/30/1999

<PAGE>

PART B
VANGUARD CALIFORNIA TAX-FREE FUNDS
VANGUARD FLORIDA INSURED TAX-FREE FUND
VANGUARD NEW JERSEY TAX-FREE FUNDS
VANGUARD NEW YORK TAX-FREE FUNDS
VANGUARD OHIO TAX-FREE FUNDS
VANGUARD PENNSYLVANIA TAX-FREE FUNDS

(COLLECTIVELY THE "Trusts" and Individually the "Trust")

March 30, 1999

This Statement of Additional Information is not a prospectus but should be
read in conjunction with the appropriate Trust's current Prospectus dated March
30, 1999. To obtain the Prospectus or an additional Annual Report to
Shareholders, which contains the Trust's Financial Statements as hereby
incorporated by reference, please call:

Vanguard's Investor Information Department
1-800-662-7447

TABLE OF CONTENTS

Page
-----
<S> <C>
Description of the Trusts .............................................. B-2
Fundamental Investment Limitations ..................................... B-4
Investment Policies .................................................... B-5
State Risk Factors ..................................................... B-10
Florida Intangible Personal Property Tax ............................... B-21
Yield and Total Return ................................................. B-21
Calculation of Yield ................................................... B-24
Performance Measures ................................................... B-27
Investment Management .................................................. B-30
Portfolio Transactions ................................................. B-30
Purchase of Shares ..................................................... B-31
Redemption of Shares ................................................... B-31
Share Price ............................................................ B-31
Management of the Trust ................................................ B-32
Financial Statements ................................................... B-42
Appendix A - Description of Municipal Bonds and their Ratings .......... B-43
</TABLE>

Throughout this Statement of Additional Information, "the Trust" is
intended to refer to each Trust listed on the cover page, and "the Fund" is
intended to refer to each Fund of each Trust, unless otherwise indicated.

B-1
<PAGE>
DESCRIPTION OF THE TRUSTS

Organization

Vanguard California Tax-Free Funds was organized as a Pennsylvania
business trust in 1985, and was reorganized as a Delaware business trust in
July, 1998. Vanguard Florida Insured Long-Term Tax-Free Fund was organized as a
Pennsylvania business trust in 1992, and was reorgznized as a Delaware business
trust in July, 1998. Vanguard New Jersey Tax-Free Funds was organized as a
Pennsylvania business trust in 1987, and was reorganized as a Delaware business
trust in July, 1998. Vanguard New York Tax-Free Funds was organized as a
Pennsylvania business trust in 1985, and was reorganized as a Delaware business
trust in July, 1998. Vanguard Ohio Tax-Free Funds was organized as a
Pennsylvania business trust in 1990, and was reorganized as a Delaware business
trust in July, 1998. Vanguard Pennsylvania Tax-Free Funds was organized as a
Pennsylvania business trust in 1986, and was reorganized as a Delaware business
trust in July, 1998 (collectively, the "Trusts"). Prior to their reorganization
as Delaware business trusts, the Trusts were known as Vanguard California
Tax-Free Fund, Vanguard Florida Insured Tax-Free Fund, Vanguard New Jersey
Tax-Free Fund, Vanguard New York Tax-Free Fund, Vanguard Ohio Tax-Free Fund,
and Vanguard Pennsylvania Tax-Free Fund, respectively. Each Trust is registered
with the United States Securities and Exchange Commission under the Investment
Company Act of 1940 (the "1940 Act") as an open-end non-diversified management
investment company. The Trusts currently offer the following funds (all
Investor Share Class):
<TABLE>
<CAPTION>

<S> <C>
Vanguard California Tax-Free Funds Vanguard Florida Insured Tax-Free Fund
California Tax-Exempt Money Market Fund Florida Insured Long-Term Tax-Exempt Fund
California Insured Intermediate-Term Tax-Exempt Fund Vanguard New Jersey Tax-Free Funds
California Insured Long-Term Tax-Exempt Fund New Jersey Tax-Exempt Money Market Fund
Vanguard New York Tax-Free Funds New Jersey Insured Long-Term Tax-Exempt Fund
New York Tax-Exempt Money Market Fund Vanguard Ohio Tax-Free Funds
New York Insured Long-Term Tax-Exempt Fund Ohio Tax-Exempt Money Market Fund
Ohio Insured Long-Term Tax-Exempt Fund

</TABLE>

Vanguard Pennsylvania Tax-Free Funds
Pennsylvania Tax-Exempt Money Market Fund
Pennsylvania Insured Long-Term Tax-Exempt Fund

Each Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trusts
may issue for a single fund or class of shares.

Service Providers

Custodian. First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, Pennsylvania 19106 serves as the Funds' custodian. The custodian
is responsible for maintaining the Funds' assets and keeping all necessary
accounts and records.

Independent Accountants. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Funds' independent public
accountants. The accountants audit the Trusts' financial statements and provide
other related services.

B-2
<PAGE>

Transfer and Dividend-Paying Agent. The Funds' transfer agent and
dividend-paying agent is the Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.

Characteristics of the Trusts' Shares

Restrictions on Holding or Disposing of Shares. There are no restrictions
on the right of shareholders to retain or dispose of the Trusts' shares, other
than the possible future termination of any of the Trusts or any of their
Fund(s). Each Trust or fund may be terminated by reorganization into another
mutual fund or by liquidation and distribution of the assets of the affected
fund. Unless terminated by reorganization or liquidation, each Trust and its
fund(s) will continue indefinitely.

Shareholder Liability. Each Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of each Trust
will not be personally liable for payment of the Trust's debts except by reason
of his or her own conduct or acts. In addition, a shareholder could incur a
financial loss on account of a Trust obligation only if the Trust itself had no
remaining assets with which to meet such obligation. We believe that the
possibility of such a situation arising is extremely remote.

Dividend Rights. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have
priority or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will
be paid ratably to all shareholders of the fund (or class) according to the
number of shares of such fund (or class) held by shareholders on the record
date. The amount of income dividends per share may vary between separate share
classes of the same fund based upon differences in the way that expenses are
allocated between share classes pursuant to a multiple class plan.

Voting Rights. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a
shareholder vote. The 1940 Act requires a shareholder vote under various
circumstances, including to elect or remove Trustees upon the written request
of shareholders representing 10% or more of a Trust's net assets, and to change
any fundamental policy of the Trust. Shareholders of each Fund receive one vote
for each dollar of net asset value owned on the record date, and a fractional
vote for each fractional dollar of net asset value owned on the record date.
However, only the shares of the fund(s) affected by a particular matter are
entitled to vote on that matter. Voting rights are non-cumulative and cannot be
modified without a majority vote.

Liquidation Rights. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of applicable funds of
the Trusts.

Preemptive Rights. There are no preemptive rights associated with shares
of the Trusts.

Conversion Rights. There are no conversion rights associated with shares
of the Trusts.

Redemption Provisions. The Trusts' redemption provisions are described in
their current prospectuses and elsewhere in this Statement of Additional
Information.

Sinking Fund Provisions. The Trusts have no sinking fund provisions.

B-3
<PAGE>

Calls or Assessment. The Trusts' shares, when issued, are fully paid and
non-assessable.

Tax Status of the Trusts

Each Fund of each Trust qualifies as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. This special tax status means
that a fund will not be liable for federal tax on income and capital gains
distributed to shareholders. In order to preserve its tax status, each Fund of
each Trust must comply with certain requirements. If a fund fails to meet these
requirements in any taxable year, it will be subject to tax on its taxable
income at corporate rates, and all distributions from earnings and profits,
including any distributions of net tax-exempt income and net long-term capital
gains, will be taxable to shareholders as ordinary income. In addition, the
Fund could be required to recognize unrealized gains, pay substantial taxes and
interest, and make substantial distributions before regaining its tax status as
a regulated investment company.

FUNDAMENTAL INVESTMENT LIMITATIONS

Each Fund is subject to the following fundamental investment limitations,
which cannot be changed in any material way without the approval of the holders
of a majority of the affected Funds' shares. For these purposes, a "majority"
of shares means shares representing the lesser of (i) 67% or more of the votes
cast to approve a change, so long as shares representing more than 50% of the
Funds' net asset value are present or represented by proxy; or (ii) more than
50% of the Funds' net asset value.

Borrowing. Each Fund may not borrow money, except for temporary or
emergency purposes in an amount not exceeding 15% of the Fund's net assets. The
Fund will repay all borrowings before making additional investments. Interest
paid on such borrowings will reduce income. The Fund may borrow money through
banks or Vanguard's interfund lending program only, and must comply with all
applicable regulatory conditions.

Commodities. Each Fund will not purchase or sell commodities, except that
the California Insured Intermediate-Term, California Insured Long-Term, New
Jersey Insured Long-Term, New York Insured Long-Term, Ohio Insured Long-Term,
Pennsylvania Insured Long-Term, and the Florida Insured Long-Term Tax-Exempt
Funds may invest in fixed income futures contracts, fixed income options and
options on fixed income futures contracts. No more than 5% of a Fund's total
assets may be used as initial margin deposit for futures contracts, and (with
the exception of the Florida Insured Tax-Free Fund) no more than 20% of a
Fund's total assets may be invested in futures contracts or options at any
time.

Diversification. Each Fund will limit the aggregate value of all holdings
(except U.S. Government and cash items) as defined under subchapter M of the
Internal Revenue Code (the "Code"), each of which exceeds 5% of the Fund's
total assets, to an aggregate of 50% of such assets. Additionally, each Fund
will limit the aggregate value of holdings of a single issuer (except U.S.
Government and cash items, as defined in the Code) to a maximum of 25% of the
Fund's total assets.

Illiquid. Each Fund may not acquire any security if, as a result, more
than 15% of its net assets (10% for the Money Market Funds) would be invested
in securities that are illiquid.

Industry Concentration. Each Fund may not invest more than 25% of its
assets in any one industry.

B-4
<PAGE>

Investment Companies. Each Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.

Loans. Each Fund may not lend money to any person except by the purchase
of bonds, debentures or similar obligations, that are publicly distributed or
customarily purchased by institutional investors or through Vanguard's
interfund lending program.

Margin. Each Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.

Oil, gas, minerals. Each Fund may not invest in interests in oil, gas or
other mineral exploration or development programs, although it can invest in
bonds and money market instruments secured by interests in these programs.

Puts, calls, straddles. Each Fund may not invest in put, call, straddle
or spread options except as permitted by the Fund's investment policies
relating to commodities.

Pledging assets. Each Fund may not pledge, mortgage or hypothecate more
than 15% of its net assets.

Real Estate. Each Fund may not invest directly in real estate, although it
may invest in municipal bonds secured by real estate or interests therein.

Senior securities. Each Fund may not issue senior securities, except in
compliance with the 1940 Act.

Underwriting. Each Fund may not engage in the business of underwriting
securities issued by other persons. Each Fund will not be considered an
underwriter when disposing of its investment securities.

The investment limitations set forth above are considered at the time that
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restrictions.

None of these limitations prevents the Funds from participating in The
Vanguard Group ("Vanguard"). Because the Trusts are members of the Group, the
Funds may own securities issued by Vanguard, make loans to Vanguard, and
contribute to Vanguard's costs or other financial requirements. See Management
of the Trusts for more information.

INVESTMENT POLICIES

The following policies supplement the Trusts' Investment objectives and
policies set forth in each Trust's Prospectus.

General

As a matter of fundamental policy, each Fund will invest at least 80% of
its net assets in tax-exempt securities under normal market conditions.

B-5
<PAGE>

Repurchase Agreements. Each Fund along with other members of the Vanguard
Group may invest in repurchase agreements with commercial banks, brokers or
dealers either for defensive purposes due to market conditions or to generate
income from its excess cash balances. A repurchase agreement is an agreement
under which the Fund acquires a money market instrument (generally a security
issued by the U.S. Government or an agency thereof, a banker's acceptance or a
certificate of deposit) from a commercial bank, broker or dealer, subject to
resale to the seller at an agreed upon price and date (normally, the next
business day). A repurchase agreement may be considered a loan collateralized
by securities. The resale price reflects an agreed upon interest rate effective
for the period the instrument is held by the Fund and is unrelated to the
interest rate on the underlying instrument. In these transactions, the
securities acquired by the Fund (including accrued interest earned thereon)
must have a total value in excess of the value of the repurchase agreement and
are held by a custodian bank until repurchased. In addition, the Trust's Board
of Trustees monitors repurchase agreement transactions generally and has
established guidelines and standards for review by the investment adviser of
the creditworthiness of any bank, broker or dealer party to a repurchase
agreement.

Futures Contracts

Each Fund (except the Money Market Funds) may enter into futures
contracts, options, and options on futures contracts for several reasons: to
simulate full investment in the underlying securities while retaining a cash
balance, to facilitate trading, to reduce transaction costs, or to seek higher
investment returns from intermarket arbitrage opportunities when a futures
contract is mispriced relative to the underlying security or index. Futures
contracts provide for the future sale by one party and purchase by another
party of a specified amount of a specific security at a specified future time
and at a specified price. Futures contracts which are standardized as to
maturity date and underlying financial instrument are traded on national
futures exchanges. Futures exchanges and trading are regulated under the
Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"), a
U.S. Government agency. Assets committed to futures contracts will be
segregated to the extent required by law.

Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery.
Closing out an open futures position is done by taking an opposite position
("buying" a contract which has previously been "sold," or "selling" a contract
previously purchased) in an identical contract to terminate the position.
Brokerage commissions are incurred when a futures contract is bought or sold.

Futures traders are required to make a good faith margin deposit in cash
or securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
The Funds expect to earn interest income on their initial margin deposit.

After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes, to the extent
that the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, changes in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder.

Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities

B-6
<PAGE>

underlying the futures contracts which they trade, and use futures contracts
with the expectation of realizing profits from fluctuations in the prices of
underlying securities. Under CFTC regulations, the Funds may use futures
transactions for bona fide hedging purposes only, except that a Fund may
establish non-hedging futures positions if the aggregate initial margin and
premiums for such positions do not exceed 5% of the value of the Fund's assets.

Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure.

Restrictions on the Use of Futures Contracts

A Fund will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of its total assets. In addition, a
Fund will not enter into futures contracts to the extent that its outstanding
obligations to purchase securities under these contracts would exceed 20% of
its total assets.

Risk Factors in Futures Transactions

Positions in futures contracts may be closed out only on an Exchange which
provides a secondary market for such futures. However, there can be no
assurance that a liquid secondary market will exist for any particular futures
contract at any specific time. Thus, it may not be possible to close a futures
position. In the event of adverse price movements, a Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make
delivery of the instruments underlying futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge.

The Funds will minimize the risk that they will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the initial margin requirement for the contract. However, because the
futures strategies of the Funds are engaged in only for hedging purposes, the
Adviser does not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. The Funds would presumably
have sustained comparable losses if, instead of the futures contract, they had
invested in the underlying financial instrument and sold it after the decline.

Utilization of futures transactions by the Funds does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities or other characteristics than the portfolio

B-7
<PAGE>

securities being hedged. It is also possible that the Funds could both lose
money on futures contracts and also experience a decline in value of their
portfolio securities. There is also the risk of loss by a Fund of margin
deposits in the event of bankruptcy of a broker with whom the Fund has an open
position in a futures contract or related option.

Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of future positions and
subjecting some futures traders to substantial losses.

Other Types of Derivatives

In addition to futures and options, each Fund may invest in other types of
derivatives, including warrants, swap agreements and partnerships or grantor
trust derivative products. Derivatives are instruments whose value is linked to
or derived from an underlying security. Derivatives may be traded separately on
exchanges or in the over-the-counter market, or they may be imbedded in
securities. The most common imbedded derivative is the call option attached to
or imbedded in a callable bond. The owner of a traditional callable bond holds
a combination of a long position in a non-callable bond and a short position in
a call option on that bond.

Derivative instruments may be used individually or in combination to hedge
against unfavorable changes in interest rates, or to take advantage of
anticipated changes in interest rates. Derivatives may be structured with no or
a high degree of leverage. When derivatives are used as hedges, the risk
incurred is that the derivative instrument's value may change differently than
the value of the security being hedged. This "basis risk" is generally lower
than the risk associated with an unhedged position in the security being
hedged. Some derivatives may entail liquidity risk, i.e., the risk that the
instrument cannot be sold at a reasonable price in highly volatile markets.
Leveraged derivatives used for speculation are very volatile, and therefore,
very risky. However, the Funds will only utilize derivatives for hedging or
arbitrage purposes, and not for speculative purposes. Over-the-counter
derivatives involve a counterparty risk, i.e., the risk that the individual or
institution on the other side of the agreement will not or cannot meet its
obligations under the derivative agreement.

Federal Tax Treatment of Futures Contracts

Except for transactions they have identified as hedging transactions, the
Funds are required for Federal income tax purposes to recognize as income for
each taxable year their net unrealized gains and losses on certain futures
contracts held as of the end of the year as well as those actually realized
during the year. In most cases, any gain or loss recognized with respect to a
futures contract is considered to be 60% long-term capital gain or loss and 40%
short-term capital gain or loss, without regard to the holding period of the
contract. Furthermore, sales of futures contracts which are intended to hedge
against a change in the value of securities held by the Funds may affect the
holding period of such securities and, consequently, the nature of the gain or
loss on such securities upon disposition. A Fund may be required to defer the
recognition of losses on futures contracts to the extent of any unrecognized
gains on related positions held by the Fund.

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In order for each Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or foreign currencies or other income derived with respect to the
Fund's business of investing in securities. It is anticipated that any net gain
realized from the closing out of futures contracts will be considered
qualifying income for purposes of the 90% requirement.

Each Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes (including
unrealized gains at the end of the Fund's fiscal year) on futures transactions.
Such distributions will be combined with distributions of capital gains
realized on the Fund's other investments and shareholders will be advised on
the nature of the transactions.

Municipal Lease Obligations

Each Fund of the Trusts may invest in municipal lease obligations. These
securities are sometimes considered illiquid because of the inefficiency and
thinness of the market in which they are traded. Under the supervision of the
Trust's Board of Trustees, the Fixed Income Group may determine to treat
certain municipal lease obligations as liquid, and therefore not subject to the
Funds' 15% limit on illiquid securities (10% for the Money Market Funds). The
factors that the Group may consider in making these liquidity determinations
include: (1) the frequency of trades and quotations for the security; (2) the
number of dealers willing to purchase or sell the security and the number of
other potential buyers; (3) the willingness of dealers to underwrite and make a
market in the security; (4) the nature of the marketplace trades, including the
time needed to dispose of the security, the method of soliciting offers, and
the mechanics of transfer; and (5) factors unique to a particular security,
including general credit worthiness of the issuer, the importance to the issuer
of the property covered by the lease and the likelihood that the marketability
of the securities will be maintained throughout the time the security is held
by the Funds.

Illiquid Securities. Each Fund may invest up to 15% of its net assets (10%
with respect to the Money Market Funds) in illiquid securities. Illiquid
securities are securities that may not be sold or disposed of in the ordinary
course of business within seven business days at approximately the value at
which they are being carried on the Fund's books.

Each Fund may invest in restricted, privately placed securities that,
under SEC rules, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers, they may
be considered illiquid securities -- meaning that they could be difficult for a
Fund to convert to cash if needed.

If a substantial market develops for a restricted security held by a Fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Funds' Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the 1933 Act. While the Funds'
investment adviser determines the liquidity of restricted securities on a daily
basis, the Board oversees and retains ultimate responsibility for the advisers'
decisions. Several factors the Board considers in monitoring these decisions
include the valuation of a security, the availability of qualified
institutional buyers, and the availability of information about the security's
issuer.

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Vanguard Interfund Lending Program. The Commission has issued an exemptive
order permitting the Funds to participate in Vanguard's interfund lending
program. This program allows the Vanguard funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions, including the requirement that no fund may borrow or
lend money through the program unless it receives a more favorable interest
rate than is available from a typical bank for a comparable transaction. In
addition, a fund may participate in the program only if and to the extent that
such participation is consistent with the fund's investment objective and other
investment policies. The Boards of Trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the Commission's exemptive order.

Temporary Investments. The Funds may take temporary defensive measures
that are inconsistent with the Funds' normal investment strategies in response
to adverse market, economic, political or other conditions. Such measures could
include investments in (a) highly liquid short-term fixed income securities
issued by or on behalf of municipal or corporate issuers, obligations of the
U.S. Government and its agencies, commercial paper, and bank certificates of
deposit; (b) shares of other investment companies which have investment
objectives consistent with those of the Fund; (c) repurchase agreements
involving any such securities; and (d) other money market instruments. There is
no limit on the extent to which the Funds may take temporary defensive
measures. In taking such measures, the Funds may fail to achieve their
investment objective.

STATE RISK FACTORS

Following is a brief summary of select state factors affecting each Fund.
It does not represent a complete analysis of every material fact effecting each
state's debt obligations. The summary is based on a sampling of offering
statements for the debt of each state's issuers, data from independent rating
agencies, and/or data reported in other public sources. The Funds have not
independently verified this information, and will not update it during the
year.

California Risk Factors

The Vanguard California Tax-Free Funds invest primarily in the obligations
of California State and various local governments, including counties, cities,
special districts, agencies and authorities. In general, the credit quality and
credit risk of any issuer's debt depend on the state and local economy, the
health of the issuer's finances, the amount of the issuer's debt, the quality
of management, and the strength of legal provisions in debt documents that
protect debt holders. Credit risk is usually lower wherever the economy is
strong, growing and diversified; financial operations are sound; and the debt
burden is reasonable.

The credit risk associated with direct obligations of the State of
California and State agencies, including general obligation and revenue bonds,
lease debt, and notes, is now average. For most of the last two decades, the
State's general obligation bonds had enjoyed the highest rating by either
Moody's Investors Service, Inc. or Standard & Poor's Corporation. California's
high credit quality reflected the growth of its strong and diversified economy,
a low debt position, wealth levels higher than the national average, and a
generally sound and stable financial position. However, California's credit
quality declined after the onset of the national recession in 1990.

California's economy, largest among the states, is also one of the largest
in the world. The State's population of over 33 million has doubled since 1960
and constitutes over 12% of the U.S. total. Rapid growth

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is continuing, although it slowed to the rate of the U.S. average between
1993-1996. Personal income growth has lagged behind U.S. growth since the
1980s. Per capita income was 10% above the national average in 1990 but fell to
4% above the U.S. in 1997. A growing, young population, a strong higher
education system, and excellent ports continue to bolster California's economic
prospects. Employment and income are not concentrated in any one sector. In
fact, California's economy closely mirrors that of the U.S. with slightly less
manufacturing concentration in California than the U.S., and slightly more
services.

The State economy and State financial operations are exposed to the risk
of cyclical national recessions. In a recession, credit quality can drop if
debt issuers do not maintain a balance between revenues and expenditures. This
occurred in the early 1980s when Moody's and Standard & Poor's downgraded the
State. Subsequently, State finances were restored to sound levels, and credit
ratings were upgraded. California was especially hard hit by the national
recession of the early 1990s and experienced three credit-rating downgrades by
each of the two major rating agencies. The effects of recession were not
strongly felt in California until 1991. Led by declines in defense-related
activities and construction (especially commercial real estate), the State lost
over 700,000 jobs between 1990-1993, or about 5% of non-agricultural
employment. The recession resulted in a failure by State government to realize
revenue and spending targets. The State budget was chronically imbalanced in
1991 and 1992. State aid was reduced, spreading fiscal stress to local
governments, including schools.

More recently, the State emerged from the recession, recovered the jobs
lost earlier in the decade, and has seen a resumption of strong employment
growth. Job growth has been prevalent in the high technology, entertainment,
and foreign trade sectors. Despite the recent economic expansion, both State
and local governments continue to be vulnerable to fiscal stress.

Despite the overall strength of California credit quality, there are a
number of additional risks. The adoption by voters of revenue and expenditure
limitations, commencing with Articles XIIIA and XIIIB of the California
Constitution in the late 1970s and Articles XIIIC and XIIID in 1996, have
placed many local governments under a degree of fiscal stress which continues.
Court decisions and the adoption of subsequent propositions has softened many
of the effects of these limitations. However, it should be noted that
California voters have demonstrated a willingness to utilize the statutory
initiative process to curtail the financial operations of state and local
government, as well as to increase public debt. This willingness is a
continuing risk to debt holders.

Another risk resulting from Article XIIIA concerns the security provisions
for debt repayment. Since 1986, general obligation debt issued by local
governments has required voter approval by a two-thirds majority. As a result,
much of tax-backed debt now issued by California local governments is not
general obligation debt, does not have "full faith and credit" backing, and has
higher credit risk and more limited bondholder rights.

Some risks in California apply more to local issuers than to state
government. In areas of very rapid population growth, the costs of building
public infrastructure are very high, large amounts of municipal bonds are being
sold, and debt burden is increasing. In some parts of southern California,
there is also a fear that population growth may possibly limit future economic
growth due to transportation and air pollution problems.

Finally, California is subject to unique natural hazard risks. Earthquakes
and wildfires can cause localized economic harm which could limit the ability
of governments to repay debt cycles of drought and flooding are also concerns
insofar as they affect agricultural production, power generation, and the
supply of drinking water. In addition, drought can limit the ability of certain
public utilities to repay debt.

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Florida Risk Factors

Vanguard Florida Insured Tax-Free Fund invests primarily in the debt
obligations of the Florida State government, the State's agencies and
authorities, and various local governments, including counties, cities, towns,
special districts, and authorities. In general, the credit quality and credit
risk of any issuer's debt depend on the state and local economy, the health of
the issuer's finances, the amount of the issuer's debt, the quality of
management, and the strength of legal provisions in debt documents that protect
debt holders. Credit risk is usually lower wherever the economy is strong,
growing and diversified, financial operations are sound, and the debt burden is
reasonable.

The average credit rating among American states for full "faith and
credit" state debt is "Aa" as determined by Moody's Investors Service, Inc. and
"AA" as determined by Standard & Poor's Corporation. Against this measure and
the criteria listed above, the credit risk associated with direct obligations
of the State of Florida and the State's agencies and authorities, including
general obligation and revenue bonds, lease debt, and notes, is comparable with
the average for U.S. states. Florida's general obligation bonds have been rated
in the AA category by both rating agencies for over two decades, during which
period the State's obligations could be characterized as providing high-grade
security with a very strong capacity for timely repayment of debt. In 1997,
Standard & Poor's upgraded the State of Florida's rating to AA+ reflecting
healthy finances and a strong economy.

The State of Florida's economy is characterized by a large service sector,
a dependence on the tourism and construction industries, and a large retirement
population. The management of rapid growth has been the major challenge facing
state and local governments. While attracting many senior citizens, Florida
also offers a favorable business environment and growing employment
opportunities that have continued to generate working-age population
in-migration. As this growth continues, particularly within the retirement
population, the demand for both public and private services will increase,
which may strain the service sector's capacity and impede the State's budget
balancing efforts.

During the 1980s, Florida outperformed the nation as measured by such
economic indicators as employment growth and income levels. Florida's job
creation rate in the non-agriculture sector was the highest of the eleven most
populous states. Fueling this growth in jobs were the continued boom in the
tourism industry and related service sectors and a dynamic construction and
construction-related manufacturing sector. Florida's economy did not suffer the
dislocation and restructuring of the more manufacturing-based economies of the
Midwest and the North during the 1980s and was less exposed to the decline of
the textile industry besieging much of the Southeast.

The primary vulnerability in the Florida economy is exposure to the
business cycle affecting both the tourism and construction industries. Gasoline
prices and supply can impact tourism. An economic recession reached Florida in
1991 and impacted the service sector considerably, causing the State to
experience an actual job loss for the first time in decades. While Florida's
aerospace and defense contracting industries are now in decline, the State's
manufacturing economy has diversified into high-tech and electronic equipment
and has been strengthened by a growth in exports. Furthermore, construction
jobs as a percent of total jobs in the State have declined during the late
'80s, reducing cyclical risk. The outlook for the Florida economy at the end of
the 1990's is continued expansion fueled by population growth, a diversifying
services and manufacturing economy, and a robust tourism sector.

Personal income levels in Florida are greater than the U.S. average and
continue to grow at a faster rate. These levels in Florida are also less
sensitive to economic downturns than in the U.S., as a whole, since Florida is
home to a greater concentration of senior citizens who rely on dividends,
interest, Social Security, and pension benefits, which fluctuate less with the
business cycle than does employment income.

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Debt levels in the State of Florida are moderate to high, reflecting the
tremendous capital demands associated with rapid population growth. Florida is
unusual among states in that all general obligation "full faith and credit"
debt issues of municipalities must be approved by public referendum and are,
therefore, relatively rare. Most debt instruments issued by local
municipalities and authorities have a more narrow pledge of security, such as a
sales tax stream, special assessment revenue, user fees, utility taxes, or fuel
taxes. Credit quality of such debt instruments tends to be somewhat lower than
that of general obligation debt. The State of Florida issues general obligation
debt for a variety of purposes; however, the State constitution requires a
specific revenue stream to be pledged to State general obligation bonds as
well.

The market for Florida bonds secured by municipal leases suffered for a
period in the early 1990's due to the default of the State of Florida on a
private placement lease financing of an office building in 1989 and several
episodes of public consideration (although never carried out) by Brevard County
to not appropriate funds to meet its obligation under a tax-exempt lease
financing. More recently the Florida municipal lease market has performed well
with strong liquidity. Municipal lease financings utilizing master lease
structures are well accepted in the marketplace and have become the primary
vehicle used by Florida school districts to finance capital projects. Recently,
the state has developed a new means by which to add debt capacity for school
building needs. In May, 1998, the first series of Lottery Revenue bonds were
issued from a total authorization of $2.5 billion, providing a new dedicated
revenue source to address educational capital needs.

The State of Florida generated steadily increasing fund balances during
the 1980s as the State experienced record growth. However, the State
experienced budget strain during the early 1990s due to an economic recession.
The State's dependence on the sales tax as a primary source of revenue
compounded the recession's impact. State officials acted quickly and
responsibly to maintain a balanced budget by revising revenue projections and
controlling spending. Such responsible fiscal management enhances overall
credit quality in the State of Florida.

During the mid to late 1990's State finances have been particularly strong
with large surpluses and strong reserves. State officials, however, still face
tremendous capital and operating pressures due to the growth that will continue
to strain the State's narrow revenue base. Future budgets may require a wider
revenue base to meet such demands; the most likely candidate for such revenue
enhancement is a tax on consumer services. The creation of a Florida personal
income tax is a very remote possibility, since it would require an amendment to
the State's Constitution and a higher level of political support than has
currently been generated.

Florida economic expansion has continued at a healthy pace since 1991,
with most recent economic forecasts expecting modest growth through 1999 that
outpaces national averages. The economic strength has produced solid budget
surpluses, which may in turn generate proposals to cut taxes through various
channels. Florida has a long history of strong budget control, along with a
sizable budget stabilization reserve that together provide significant
flexibility to manage the state's financial position in the future.

New Jersey Risk Factors

The Vanguard New Jersey Tax-Free Funds invest primarily in the obligations
of New Jersey State government and various local governments, including
counties, cities, special districts, agencies and authorities. In general, the
credit quality and credit risk of any issuer's debt depend on the state and
local economy, the health of the issuer's finances, the amount of the issuer's
debt, the quality of management, and the strength of legal provisions in debt
documents that protect debt holders. Credit risk is usually lower wherever the
economy is strong, growing and diversified; financial operations are sound; and
the debt burden is reasonable.

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The average rating among American states for full faith and credit state
debt is "Aa2" and "AA" by Moody's Investors Service, Inc. and Standard & Poor's
Corporation, respectively. Against this measure and the criteria listed above,
the credit risk associated with direct obligations of the State of New Jersey
and state agencies, including general obligation and revenue bonds, and lease
debt, compares very favorably. For most of the last two decades, the State's
general obligation bonds have enjoyed the highest rating by either Moody's
Investors Service, Inc. or Standard & Poor's. In the early 1990s, however, both
Moody's and Standard & Poor's both slightly downgraded the State's credit
rating to the high "AA" level due to an economy and state finances weakened by
recession. In general, New Jersey's high credit quality over time reflects the
strong growth and diversification of its economy, a moderate debt position,
wealth levels much higher than the national average, and a historically sound
and stable financial position.

New Jersey's economy continues to gradually emerge from the depths of the
1990-92 national recession. Between 1989 and 1992, the State lost 6.5% of its
employment total. Significant job losses occurred in the construction,
manufacturing, wholesale and retail trades, and in financial and real estate
services. The only sectors to experience growth during the period were the
healthcare and government sectors. Unemployment rates exceeded the national
averages and reached a high of 9.8% in July of 1992. The strong U.S. economy of
recent years has also been evident in New Jersey. Employment lost during the
recession was regained by late 1997 and is currently at record levels, though
growing somewhat more slowly than the overall U.S. economy.

The most recent cyclical weakening of the New Jersey economy follows an
unprecedented period of diversification and growth for the State in the 1980s.
Like many other northeastern and "rust-belt" states, New Jersey's economy
declined during the 1970s. This set the stage for a remarkable period of
transformation in the 1980s. The State economy changed from a
manufacturing-dominated base to an economy balanced among manufacturing, trade
and services, closely mirroring the U.S. economy. Population growth exceeded
the regional average during this time, and growth in employment and income
outpaced the U.S. average. This growth occurred not only in the developed
northeastern and Delaware River Valley areas, but also in central New Jersey
around Princeton and the Atlantic coastal region. New Jersey remains a wealthy
state, and continues to be the second wealthiest after Connecticut. Per capita
state income is 28% higher than the U.S. average.

The State's debt burden is moderate in relation to the State's wealth and
resources, but has increased significantly since 1991 as the State has financed
capital outlays previously funded out of current revenues such as
transportation improvements and pension liabilities. Tax-supported debt as
measured against income and population is now among the highest in the U.S.
However, debt retirement is rapid even though debt service has a modest claim
on State revenues. New debt issuance is expected to be manageable.

After a decade of sound financial operations in the 1980s, characterized
by robust increases in revenues and fund balances, the State faced several
years of budgetary distress in the early 1990s. Declining tax revenues and
swelling expenditures for Medicaid, public assistance, and corrections
generated repeated budget gaps that the State was able to close only by
utilizing non-recurring revenue sources. Most recently an improving state and
national economy has resulted in increased revenues and some moderation in
budget strain despite significant tax cuts. Continued high credit quality will
depend on the resolve of State leaders and taxpayers to maintain fiscal
balance.

A positive credit factor for local government in New Jersey is the strong
State oversight of local government operations. The State can and has seized
control of mismanaged jurisdictions. In general, the high level

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of wealth and the strong economic base in the State have resulted in credit
quality for local government that is among the highest in the U.S. In addition,
the State guarantees the debt service of many local government bond issues such
as those for school districts.

Despite the strengths of New Jersey credit quality, there are risks. New
Jersey has a number of older urban centers, including Newark and Camden, that
present a continuing vulnerability with respect to economic and social
problems. The cost and financing solid waste management continues to be a
challenge to local government. The State so far has successfully faced
court-mandated educational finance reforms, but the impact on State finances
may yet to be felt. There is pressure for property tax reform, and this too
could adversely affect State finances in the future.

New York Risk Factors

The Vanguard New York Tax-Free Funds invest primarily in the obligations
of New York State government, State agencies, State authorities and various
local governments, including counties, cities, towns, special districts, and
authorities. In general, the credit quality and credit risk of any issuer's
debt depend on the state and local economy, the health of the issuer's
finances, the amount of the issuer's debt, the quality of management, and the
strength of legal provisions in debt documents that protect debt holders.
Credit risk is usually lower wherever the economy is strong, growing and
diversified; financial operations are sound; and the debt burden is reasonable.

The average rating among American states for full faith and credit state
debt is "Aa" and "AA" by Moody's Investors Service, Inc. and Standard & Poor's
Corporation, respectively. Against this measure and the criteria listed above,
the credit risk associated with direct obligations of the State of New York and
State agencies and authorities, including general obligation and revenue bonds,
"moral obligation" bonds, lease debt, appropriation debt, and notes, compares
somewhat unfavorably. During most of the last two decades, the State's general
obligation bonds have been rated just below this average by both rating
agencies. Additionally, the State's credit quality could be characterized as
more volatile than that of other states, since the State's credit rating has
been upgraded and downgraded much more often than usual. This rating has
fluctuated between "Aa" and "A" since the early 1970s. Nonetheless, during this
period the State's obligations could still be characterized as providing upper
medium grade security, with a strong capacity for timely repayment of debt.

The wealth of New York State, as well as the size and diversity of its
economy, serve to limit the credit risk of its securities. New York ranks third
among the states in per capita personal income, which is 19% above the U.S.
average. During most of the 1980s, economic indicators for New York, including
income and employment growth and unemployment rates, outperformed the nation as
a whole. The engine of growth for the State in the past decade was the surge in
financial and other services, especially in New York City. Manufacturing
centers in upstate New York, which more closely parallel the Midwestern
economy, suffered during the 1970s and early 1980s. The upstate economy
continues to be characterized by cities with aging populations and aging
manufacturing plants.

Credit risk in New York State is heightened by a large and increasing debt
burden, historically marginal financial operations, limited revenue-raising
flexibility, and the uncertainty of the future credit quality of New York City,
which comprises 40% of the State's population and economy. Combined state and
local debt per capita is about 50% above the U.S. average, and debt service
expenditures have been growing as a claim on the State and City budget. New
York's debt structure is also complicated. To circumvent voter approval, most
state debt is issued by agencies, is not backed by the State's full faith and
credit and therefore has lower credit ratings. In the past, the State had to
rely on short-term borrowing to meet its obligations, but this practice has
ended.

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Buoyed by rapid economic growth in the mid-1980s, the State's financial
operations generated surpluses. Beginning in 1988, however, unforeseen
consequences of federal tax reform, combined with a weakening economy, resulted
in a series of state budget deficits. New York's heavy commitment to local aid
and social welfare programs allowed expenditure growth to exceed available
revenues. This lack of budgetary discipline caused the State's credit ratings
to fall. Moreover, New York's ability to raise revenues is limited, since
combined state and local taxes are among the highest in the nation as a percent
of personal income. Recent state budgets have been balanced, and consistent
operating surpluses have been recorded. State personal income tax cuts have
been offset by strong revenue performance emanating from Wall Street and by
solid expenditure restraint.

New York State's future credit quality will be heavily influenced by the
future of New York City. New York City's economic and financial performance in
recent years has been strong due to high levels of Wall Street profitability
and tourism. The City faces daunting challenges in combating deteriorating
infrastructure and serious social problems of housing, health, education and
public safety. So far, City government has demonstrated an ability to keep
abreast of these problems, but the City's and the State's ability to meet these
challenges will be a continuing risk factor. Buoyed by Wall Street, the
addition of 140,000 private sector jobs over the 1994-97 period and public
sector workforce attrition, the City has posted large recurring operating
surpluses. The largest, $2 billion, occurred in fiscal 1998. The City has
created a new vehicle to access the debt markets, called the Transitional
Finance Authority, as G.O. capacity is limited due to archaic statutory issuing
formulas.

Major areas of credit strength continue to exist in localities in Long
Island, and north of New York City where affluent population bases continue to
exist.

Ohio Risk Factors

The Ohio Tax-Free Funds will invest most of their net assets in securities
issued by or on behalf of (or in certificates of participation in
lease-purchase obligations of) the State of Ohio, political subdivisions of the
State, or agencies or instrumentalities of the State or its political
subdivisions (Ohio Obligations). The Funds are therefore susceptible to general
or particular political, economic or regulatory factors that may affect issuers
of Ohio Obligations. The following information constitutes only a brief summary
of some of the many complex factors that may affect the Funds. The information
does not apply to "conduit" obligations on which the public issuer itself has
no financial responsibility. This information is derived from official
statements of certain Ohio issuers published in connection with their issuance
of securities and from other publicly available documents, and is believed to
be accurate. No independent verification has been made of any of the following
information.

Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.

The timely payment of principal and interest on Ohio Obligations has been
guaranteed by bond insurance purchased by the issuers, the Funds or other
parties. The timely payment of debt service on Ohio Obligations that are so
insured may not be subject to the factors referred to in this section of the
Statement of Additional Information.

Ohio is the seventh most populous state. Its 1990 Census count of
10,847,000 indicated a 0.5% population increase from 1980. Its current
population is 11.1 million.

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While diversifying more into the service and other non-manufacturing
areas, the Ohio economy continues to rely in part on durable goods
manufacturing largely concentrated in motor vehicles and equipment, steel,
rubber products and household appliances. As a result, general economic
activity, as in many other industrially-developed states, tends to be more
cyclical than in some other states and in the nation as a whole. Agriculture is
an important segment of the economy, with over half the State's area devoted to
farming and approximately 15% of total employment in agribusiness. The State's
economy has also benefited by improved manufacturing productivity and a strong
export position which helped shield the State's economy from domestic recession
in the early 1990s.

There can be no assurance that future national, regional or statewide
economic difficulties, and the resulting impact on state or local government
finances generally, will not adversely affect the market value of Ohio
Obligations held in the Funds or the ability of particular obligors to make
timely payments of debt service on (or lease payments relating to) those
Obligations.

Ohio's debt burden is moderate, and the State and most local governments
observe prudent debt management practices. The State government maintained
positive year-end balances in its general revenue account during the 1980s,
achieved through timely revisions in tax and spending plans. During the
economic recovery of the mid-1980s, the State accumulated sizable fund balances
in its general revenue fund and maintained a healthy budget stabilization (or
"rainy day") fund. This strong financial position provided the State with far
more flexibility than most states to weather the revenue shortfalls and
increased human services expenditures generated by the most recent recession.
The State's finances remain sound and poised to generate enhanced balances as
the national economy affects a sustained recovery from the recession of the
early 1990s. Current cash and fund balance levels are exceptionally strong
today. The State ended fiscal year 1998 with a GAAP fund balance of $198
million and over $900 million in its Budget Reserve Fund.

The State operates on the basis of a fiscal biennium for its
appropriations and expenditures, and is precluded by law from ending its July 1
to June 30 fiscal year ("FY") or fiscal biennium in a deficit position. Most
State operations are financed through the General Revenue Fund ("GRF"), for
which personal income and sales-use taxes are the major sources. Growth and
depletion of GRF ending fund balances show a consistent pattern related to
national economic conditions, with the ending FY balance reduced during less
favorable and increased during more favorable economic periods. The State has
well-established procedures for, and has timely taken, necessary actions to
ensure resource/expenditure balances during less favorable economic periods.
These procedures include general and selected reductions in appropriations
spending.

The State's incurrence or assumption of debt without a vote of the people
is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. (An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection, or defend
the State in war.)

The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Such State obligations are generally secured
by biennial appropriation lease agreements with the State.

State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional

B-17
<PAGE>

provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are dependent upon
appropriations being made available for the subsequent fiscal period.

Local school districts in Ohio receive a major portion (on a statewide
basis, approximately 50%) of their operating moneys from State subsidies, but
are dependent on local property taxes, and in 119 districts (as of February 3,
1999) from voter-authorized income taxes, for significant portions of their
budgets. Litigation, similar to that in other states, has been pending
questioning the constitutionality of Ohio's system of school funding. The Ohio
Supreme Court has concluded that aspects of the system (including basic
operating assistance and the loan program referred to below) are
unconstitutional, and ordered the State to provide for and fund a system
complying with the Ohio Constitution, staying its order to permit time for
responsive corrective actions. The trial court has decided that steps taken to
date by the State to enhance school funding have not met the requirements of
the Supreme Court decision; State officials have announced an intent to appeal
to the Supreme Court. A small number of the State's 612 local school districts
have in any year required special assistance to avoid year-end deficits. A
program has provided for school district cash need borrowing directly from
commercial lenders, with diversion of State subsidy distributions to repayment
if needed. Recent borrowings under this program totalled $71.1 million for 29
districts in FY 1995 (including $29.5 million for one), $87.2 million for 20
districts in FY 1996 (including $42.1 million for one), $113.2 million for 12
districts in FY 1997 (including $90 million to one for restructuring its prior
loans), and $23.4 million for 10 districts in FY 1998.

Ohio's 943 incorporated cities and villages rely primarily on property and
municipal income taxes for their operations, and, with other local governments,
receive local government support and property tax relief moneys distributed by
the State. For those few municipalities that on occasion have faced significant
financial problems, there are statutory procedures for a joint state/local
commission to monitor the municipality's fiscal affairs and for development of
a financial plan to eliminate deficits and cure any defaults. Since inception
in 1979, these procedures have been applied to 12 cities and 14 villages; for
19 of them the fiscal situation was resolved and the procedures terminated.

At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions
and other local taxing districts. The Constitution has since 1934 limited the
amount of the aggregate levy (including a levy for un-voted general
obligations) of property taxes by all overlapping subdivisions, without a vote
of the electors or a municipal charter provision, to 1% of true value in money,
and statutes limit the amount of that aggregate levy to 10 mills per $1 of
assessed valuation (commonly referred to as the "ten-mill limitation"). Voted
general obligations of subdivisions are payable from property taxes that are
unlimited as to amount or rate.

Pennsylvania Risk Factors

Vanguard Pennsylvania Tax-Free Funds invest primarily in the obligations
of Pennsylvania State government, State agencies and various local governments,
including counties, cities, townships, special districts, and authorities. In
general, the credit quality and credit risk of any issuer's debt depend on the
state and local economy, the health of the issuer's finances, the amount of the
issuer's debt, the quality of management, and the strength of legal provisions
in debt documents that protect debt holders. Credit risk is usually lower
wherever the economy is strong, growing and diversified; financial operations
are sound; and the debt burden is reasonable.

B-18
<PAGE>

The average rating among American states for full faith and credit state
debt is "Aa" and "AA" by Moody's Investors Service, Inc. and Standard & Poor's
Corporation, respectively. Against this measure and the criteria listed above,
the credit risk associated with direct obligations of Pennsylvania and state
agencies, including general obligation and revenue bonds, lease debt, and
notes, compares slightly unfavorably. During most of the last two decades,
Pennsylvania's general obligation bonds have been rated just below this average
by both rating agencies. Nonetheless, during this period Pennsylvania's
obligations could still be characterized as providing upper medium grade
security, with a strong capacity for timely repayment of debt. Recently, the
State's ratings were upgraded by both Moody's Investors Service and by Standard
& Poor's. The State now has ratings of "Aa3"/"AA".

Factors contributing positively to credit quality in Pennsylvania include
a favorable debt structure, a diversifying economic base, and conservatively
managed financial operations on the part of state government. Tax-supported
debt is only slightly above average state levels on a per capita basis and as a
percent of state personal income. Over the past two decades, this debt burden
has improved considerably in Pennsylvania, and debt continues to be rapidly
retired, while state borrowing plans are modest.

In the past twenty years, Pennsylvania's economy has undergone a healthy,
though traumatic, transformation. Manufacturing employment has declined from
35% of total state employment in 1970 to 17% of total employment in 1997, only
slightly above the U.S. average. Growth in service sector jobs offset the loss
of manufacturing jobs, and Pennsylvania's economy is now much more closely
aligned with the national economy. In the future, economic booms and busts
should be milder than in the past and more closely follow national averages.
The positive change in the economy has not been without costs. Growth levels in
employment, population and personal income lagged behind U.S. averages in the
1980s. During this period, per capita personal income slipped to about the U.S.
average. Many communities dominated by a single industry were particularly
hurt, and recent growth in the state economy has bypassed much of the state
outside of the immediate Philadelphia and Pittsburgh metropolitan areas. As a
result, the credit quality of these areas is often marginal.

During the 1991-1992 national economic recession, Pennsylvania fared a bit
worse than the U.S. average, but better than many neighboring Northeastern and
Mid-Atlantic states. Led by continuing declines in manufacturing, employment
decreased about 4%, or double the U.S. loss rate. Pennsylvania has subsequently
experienced economic recovery in line with the U.S. More recently, the State's
economy has shown some growth with current unemployment rates approximating
those of the nation.

Fiscally, Pennsylvania has historically maintained balanced budgets, a
result of sound and conservative budgeting policies. During the period of
economic growth in the late 1980s, operating surpluses were recorded, and a
"rainy day" fund was established. That recession of the early 1990's tested
these policies, but the Commonwealth emerged from the recession with its
finances and credit quality intact. In 1990 and 1991, as the recession
worsened, budget balances were eliminated, and the Commonwealth ended fiscal
1991 in a deficit position. However, a combination of expenditure restraint and
broad-based tax increases enabled the Commonwealth to end 1992 with a surplus.

The period from fiscal year 1993 through fiscal 1997 was a time of steady,
modest economic growth and low rates of inflation. These economic conditions,
together with tax reductions in the several years following the tax rate
increases and tax base expansions enacted in fiscal 1991 for the General Fund,
produced tax revenue gains averaging 4.1% per year during the period. Total
revenues during the same period increased at a 4.7% average rate.
Intergovernmental revenue recorded the largest percentage gain during this
period,

B-19
<PAGE>

averaging 8.1% (due, in part, to an accounting change). Expenditures and other
uses during the fiscal 1993 through fiscal 1997 period rose at a 3.8% rate, led
by and average 13.8% annual increase for protection of persons and property
program costs. This high rate of increase reflects the costs to acquire, staff,
and operate expanded prison facilities to house a larger prison population.
Public health and welfare program costs expanded an average 5.4% annually
during this period, the second largest rate of increase for program categories.

Operations during the 1998 fiscal year increased the unappropriated
balance of Commonwealth revenues during that period by $86.4 million to $488.7
million at June 30, 1998 (prior to reserves for transfer to the Tax
Stabilization Reserve Fund). Higher than estimated revenues, offset in part by
increased reserves for tax refunds, and slightly lower expenditures than
budgeted were responsible for the increase. Transfers to the Tax Stabilization
Reserve Fund for fiscal 1998 operations will total $223.3 million consisting of
$73.3 million representing the required transfer of fifteen percent of the
ending unappropriated surplus balance, plus an additional $150 million
authorized by the General Assembly when it enacted the fiscal 1999 budget. With
these transfers, the balance in the Tax Stabilization Reserve Fund will exceed
$664 million and represent 3.7% of fiscal 1998 revenues.

Commonwealth revenues (prior to tax refunds) during the fiscal year
totaled $18,123.2 million, $676.1 million (3.9%) above the estimate made at the
time the budget was enacted. Tax revenue received in fiscal 1998 grew 4.8% over
tax revenues received during fiscal 1997. This rate of increase includes the
effect of legislated tax reductions that affected receipts during both fiscal
years and therefore understates the actual underlying rate of growth of tax
revenue during fiscal 1998. Receipts from the personal income tax produced the
largest single component of higher revenues during fiscal 1998.

Expenditures from all fiscal 1998 appropriations of Commonwealth revenues
totaled $17,229.8 million (excluding pooled financing expenditures and net of
current year lapses). This amount represents an increase of 4.5% over fiscal
1997 appropriation expenditures. Lapses of appropriation authority during the
fiscal year totaled $161.8 million including $58.8 million from fiscal 1998
appropriations. These appropriation lapses were used to fund $120.5 million of
supplemental fiscal 1998 appropriations.

Finances are now stable and healthy, and the State has a comfortable
accumulated surplus. Due to this improvement, cash flow borrowing has been
substantially reduced. Tax revenue is coming in above forecasted levels.

The budget for fiscal 1999 was enacted in April 1998 at which time the
official revenue estimate for the 1999 fiscal year was established at $18,456.6
million. The estimate was reduced by 1.1 million in November 1998 due to
passage of tax legislation. Only Commonwealth funds are included in the
official revenue estimate. The official revenue estimate is based on an
economic forecast for national gross domestic product, on a year-over-year
basis, to slow from an estimated annualized 3.9% rate in the fourth quarter of
1997 to a projected 1.8% annualized growth rate by the second quarter of 1999.
The forecast of slowing economic activity is based on the expectation that
consumers will reduce their pace of spending, particularly on motor vehicles,
housing, and other durable goods. Business is also expected to trim its
spending on fixed investments. Foreign demand for domestic goods is expected to
decline in reaction to economic difficulties in Asia and Latin America, while
an economic recovery in Europe is expected to proceed slowly. The underlying
growth rate, excluding any effect of scheduled or proposed tax changes, for the
General Fund fiscal 1999 official revenue estimate is 3.0% over actual fiscal
1998 revenues. When adjusted to include the estimated effect of enacted tax
changes, fiscal 1999 Commonwealth revenues are projected to increase by 1.66%
over actual Commonwealth revenues for fiscal 1998.

B-20
<PAGE>

On February 2, 1999, Pennsylvania Governor Ridge presented a proposed
$18.6 billion General Fund budget which includes, among other things, proposed
tax reductions (relating principally to business taxes) totalling an estimated
$273 million.

Pennsylvania has historically been identified as a heavy industry state
although that reputation has changed over the last thirty years as the coal,
steel, and railroad industries declined and the Commonwealth's business
environment readjusted to reflect a more diversified industrial base. This
economic readjustment was a direct result of a long-term shift in jobs,
investment, and workers away from the northeast part of the nation. Currently,
the major sources of growth in Pennsylvania are in the service sector,
including trade, medical and the health services, education, and financial
institutions.

Nonagricultural employment in Pennsylvania over the ten year period that
ended in 1997 increased at an annual rate of 0.76%. This compares to a 0.17%
rate for the Middle Atlantic region and a 1.69% rate for the United States as a
whole during the period 1988 through 1997. For the five years ended with 1997,
employment in the Commonwealth has increased 5.4%. The growth in employment
during this period is higher than the 4.8% growth in the Middle Atlantic
region. The unemployment rate in Pennsylvania for October 1998 stood at a
seasonably adjusted rate of 4.7%. The seasonably adjusted national unemployment
rate for October 1998 was 4.6%.

There is various litigation pending against the Commonwealth, its
officers, and employees. In 1978, the Pennsylvania General Assembly approved a
limited waiver of sovereign immunity. Damages for any loss are limited to
$250,000 for each person and $1 million for each accident. The Supreme Court
held that this limitation is constitutional. Approximately 3,500 suits against
the Commonwealth are pending.

The risk factors in Pennsylvania's credit quality may be summarized as
slow growth, an aging population, average income, and a continuing challenge to
maintain balanced budgets. In addition, a number of local governments in the
Commonwealth, most notably Philadelphia, face continuing fiscal stress, and
were unable to address serious economic, social and healthcare problems within
revenue constraints. Philadelphia's credit prospects have recently
significantly improved but remain a challenge to the credit quality of
Pennsylvania, longer term.

FLORIDA INTANGIBLE PERSONAL PROPERTY TAX

Although Florida does not have a state personal income tax, it does impose
an intangible personal property tax on certain financial assets, including
mutual fund shares. The most common examples of personal property subject to
the tax are shares of stock issued by corporations, bonds issued by
corporations or state, county or municipal governments outside the State of
Florida, and shares of ownership in mutual funds. Unlike most state and local
taxes which are assessed on ordinary income and capital gains derived from
mutual fund shares, the Florida intangible tax is based on the net asset value
of these shares. Under Florida law, shares of a mutual fund will be exempt from
the intangibles tax to the extent that, on the annual assessment date (January
1), its assets are solely invested in exempt Florida securities, exempt U.S.
government securities, or other exempt securities. If, on the annual assessment
date, Vanguard Florida Insured Tax-Free Fund's assets are invested in both
exempt and non-exempt securities, only that portion of a share's net asset
value represented by U.S. government securities (including qualifying
obligations of U.S. territories and possessions) will be exempt from the
intangibles tax. Under this rule, shares of the Vanguard Florida Insured
Tax-Free Fund are expected to be exempt from the Florida intangible personal
property tax.

YIELD AND TOTAL RETURN

From time to time, quotations of each Fund's performance may be included
in advertisements, sales literature or reports to shareholders or prospective
investors. These performance figures may be calculated in the following manner:

B-21
<PAGE>

Average Annual Total Return

Average annual total return is the average annual compounded rate of
return for the periods of one year, five years, ten years or the life of the
Funds, all ended on the last day of a recent month. Average annual total return
quotations will reflect changes in the price of each Fund's shares and assume
that all dividends and capital gains distributions during the respective
periods were reinvested in each Fund's shares. Average annual total return is
calculated by finding the average annual compounded rates of return of a
hypothetical investment over such periods according to the following formula
(average annual total return is then expressed as a percentage):

T = (ERV/P)1/n-1

Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.

Cumulative Total Return

Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of each Fund's shares and assume that
all dividends and capital gains distributions during the period were reinvested
in each Fund's shares. Cumulative total return is calculated by finding the
cumulative rates of a return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed
as a percentage):

C = (ERV/P)-1

Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.

SEC Yields

Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to
the following formula:

YIELD = 2[((a-b)/cd+1)6-1]

Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.

B-22
<PAGE>

California Tax-Free Funds

The yields of the California Insured Long-Term Tax-Exempt Fund, and the
California Insured Intermediate-Term Tax-Exempt Fund for the 30-day period
ending November 30, 1998 were 4.33%, and 3.87%, respectively.

The average annual total returns of the California Insured Long-Term
Tax-Exempt Fund for the one-, five-, and ten-year periods ended November 30,
1998, were 8.31%, 6.88% and 8.44%, respectively. The average annual total
returns of the California Insured Intermediate-Term Tax-Exempt Fund for the
one-year period and the period from inception (March 4, 1994) to November 30,
1998 were 7.47% and 6.97%, respectively. The average annual total returns of
the California Tax-Exempt Money Market Fund for the one-, five-, and ten-year
periods ended November 30, 1998, were 3.10%, 3.22% and 3.77%, respectively.
Total return is computed by finding the average compounded rates of return over
the period set forth above that would equate an initial amount invested at the
beginning of the period to the ending redeemable value of the investment.

Florida Insured Tax-Free Fund

The yield of the Florida Insured Long-Term Tax-Exempt Fund for the 30-day
period ended November 30, 1998 was 4.33%.

The average annual total returns of Florida Insured Long-Term Tax-Exempt
Fund for the one- and five-year periods ended November 30, 1998 were 8.03% and
6.68%, respectively. The average annual total return for the Fund since its
inception on September 1, 1992 was 7.78%.

New Jersey Tax-Free Funds

The yield of the New Jersey Insured Long-Term Tax-Exempt Fund for the
30-day period ended November 30, 1998 was 4.26%.

The average annual total returns of the New Jersey Insured Long-Term
Tax-Exempt Fund for the one-, five- and ten-year periods ended November 30,
1998, were 7.59%, 6.15% and 8.20%, respectively. The average annual total
return of the New Jersey Tax-Exempt Money Market Fund for the one-, five- and
ten-year periods ended November 30, 1998, were 3.18%, 3.16% and 3.78%,
respectively. Total return is computed by finding the average compounded rates
of return over the period set forth above that would equate an initial amount
invested at the beginning of the period to the ending redeemable value of the
investment.

New York Tax-Free Funds

The yield of the New York Insured Long-Term Tax-Exempt Fund for the 30-day
period ended November 30, 1998 was 4.41%.

The average annual total returns of the New York Insured Long-Term
Tax-Exempt Fund for the one-, five-, and ten-year periods ended November 30,
1998 were 7.69%, 6.36% and 8.37%, respectively. The average annual total return
of the New York Tax-Exempt Money Market Fund for the one-year period ended
November 30, 1998, and, since its inception on September 3, 1997 was 3.27% and
3.32%, respectively. Total return is computed by finding the average compounded
rates of return over the period set forth above that would equate an initial
amount invested at the beginning of the period to the ending redeemable value
of the investment.

B-23
<PAGE>

Ohio Tax-Free Funds

The yield of the Ohio Insured Long-Term Tax-Exempt Fund for the 30-day
period ended November 30, 1998 was 4.28%.

The average annual total returns of the Ohio Insured Long-Term Tax-Exempt
Fund for the one- and five-year periods ended November 30, 1998, and since its
inception on June 18, 1990, were 7.78%, 6.28% and 8.24%, respectively. The
average annual total returns of the Ohio Tax-Exempt Money Market Fund for the
one- and five-year periods ended November 30, 1998, and since its inception on
June 18, 1990, were 3.37%, 3.33% and 3.47%, respectively.

Pennsylvania Tax-Free Funds

The yield of the Pennsylvania Insured Long-Term Tax-Exempt Fund for the
30-day period ended November 30, 1998 was 4.31%.

The average annual total returns of the Pennsylvania Insured Long-Term
Tax-Exempt Fund for the one-, five-, and ten-year periods ended November 30,
1998 were 7.60%, 6.25% and 8.36%, respectively. The average total returns of
the Pennsylvania Tax-Exempt Money Market Fund for the one-, five- and ten-year
periods ended November 30, 1998, were 3.33%, 3.29% and 3.86%, respectively.
Total return is computed by determining the average compounded rates of return
over the period set forth above that would equate an initial amount invested at
the beginning of the period to the ending redeemable value of the investment.

CALCULATION OF YIELD

The current yield of the Money Market Fund of each Trust is calculated
daily on a base period return of a hypothetical account having a beginning
balance of one share for a particular period of time (generally 7 days). The
return is determined by dividing the net change (exclusive of any capital
changes) in such account by its average net asset value for the period, and
then multiplying it by 365/7 to get annualized current yield. The calculation
of net change reflects the value of additional shares purchased with the
dividends by the Fund, including dividends on both the original share and on
such additional shares. An effective yield, which reflects the effects of
compounding and represents an annualization of the current yield with all
dividends reinvested, may also be calculated for the Fund by adding 1 to the
net change, raising the sum to the 365/7 power, and subtracting 1 from the
result.

B-24
<PAGE>

Set forth below is an example, for purposes of illustration only, of the
current and effective yield calculations for the Money Market Fund of each
applicable Fund for the 7-day base period ended November 30, 1998:

<TABLE>
<CAPTION>
California Tax-Exempt
Money Market Fund
----------------------
11/30/1998
----------------------
<S> <C>
Value of account at beginning of period ................. $1.00000
Value of same account at end of period* ................. $1.00052
--------
Net Change in account value ............................. $ .00052
Annualized Current Net Yield
(Net Change x 365/7) / average net asset value ......... 2.74%
Effective Yield
[(Net Change) + 1]365/7 - 1 ............................ 2.77%
Average Weighted Maturity of Investments ................ 66 days
</TABLE>

* Exclusive of any capital changes.
<TABLE>
<CAPTION>
New Jersey Tax-Exempt
Money Market Fund
----------------------
11/30/1998
----------------------
<S> <C>
Value of account at beginning of period ................. $1.00000
Value of same account at end of period* ................. 1.00056
--------
Net Change in account value ............................. $ .00056
Annualized Current Net Yield
(Net Change x 365/7) / average net asset value ......... 2.92%
Effective Yield
[(Net Change) + 1]365/7 - 1 ............................ 2.96%
Average Weighted Maturity of Investments ................ 64 days
</TABLE>

* Exclusive of any capital changes

<TABLE>
<CAPTION>
New York Tax-Exempt
Money Market Fund
--------------------
11/30/1998
--------------------
<S> <C>
Value of account at beginning of period ................. $1.00000
Value of same account at end of period* ................. $1.00057
--------
Net Change in account value ............................. $ .00057
Annualized Current Net Yield
(Net Change x 365/7) / average net asset value ......... 2.97%
Effective Yield
[(Net Change) + 1]365/7 - 1 ............................ 3.01%
Average Weighted Maturity of Investments ................ 64 days
</TABLE>

* Exclusive of any capital changes.

B-25
<PAGE>

Ohio Tax-Exempt
Money Market Fund
-------------------
11/30/1998
-------------------
<S> <C>
Value of account at beginning of period ................. $1.00000
Value of same account at end of period* ................. $1.00059
--------
Net Change in account value ............................. $ .00059
Annualized Current Net Yield
(Net Change x 365/7) / average net asset value ......... 3.05%
Effective Yield
[(Net Change) + 1]365/7 - 1 ........................... 3.10%
Average Weighted Maturity of Investments ................ 70 days
</TABLE>

* Exclusive of any capital changes.

<TABLE>
<CAPTION>
Pennsylvania
Tax-Exempt
Money Market Fund
-------------------
11/30/1998
-------------------
<S> <C>
Value of account at beginning of period ................. $1.00000
Value of same account at end of period* ................. $1.00058
--------
Net Change in account value ............................. $ .00058
Annualized Current Net Yield
(Net Change x 365/7) / average net asset value ......... 3.04%
Effective Yield
[(Net Change) + 1]365/7 - 1 ............................ 3.08%
Average Weighted Maturity of Investments ................ 34 days
</TABLE>

* Exclusive of any capital changes.

Each Money Market Fund seeks to maintain, but does not guarantee, a
constant net asset value of $1.00 per share. The yield of the Fund will
fluctuate. Although the Money Market Funds invest in high-quality instruments,
the shares of the Funds are not insured or guaranteed by the U.S. Government.
Each Trust has obtained private insurance that partially protects its Money
Market Fund against default of principal or interest payments on some of the
instruments it holds, and against bankruptcy by issuers and credit enhancers of
these instruments. Treasury and other U.S. Government securities held by the
Funds are excluded from this coverage. The annualization of a week's dividend
is not a representation by the Fund as to what an investment in the Fund will
actually yield in the future. Actual yields will depend on such variables as
investment quality, average maturity, the type of instruments the Fund invests
in, changes in interest rates on instruments, changes in the expenses of the
Fund and other factors. Yields are one basis investors may use to analyze the
Funds of the Trusts, and other investment vehicles; however, yields of other
investment vehicles may not be comparable because of the factors set forth in
the preceding sentence, differences in the time periods compared, and
differences in the methods used in valuing portfolio instruments, computing net
asset value and calculating yield.

B-26
<PAGE>
PERFORMANCE MEASURES

Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member Trusts of The Vanguard Group of Investment Companies.

The Funds may use one or more of the following unmanaged indexes for
comparative performance purposes.

Standard and Poor's 500 Composite Stock Price Index--includes stocks selected
by Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.

Standard & Poor's MidCap 400 Index--is composed of 400 medium sized domestic
stocks.

Standard & Poor's SmallCap 600/BARRA Value Index--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.

Standard & Poor's SmallCap 600/BARRA Growth Index--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.

Russell 1000 Value Index--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.

Wilshire 5000 Equity Index--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.

Wilshire 4500 Equity Index--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.

Russell 3000 Stock Index--a diversified portfolio of approximately 3,000 common
stocks accounting for over 90% of the market value of publicly traded stocks in
the U.S.

Russell 2000 Stock Index--a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000; a widely-used benchmark for small
capitalization common stocks.

Morgan Stanley Capital International EAFE Index--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.

Goldman Sachs 100 Convertible Bond Index--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.

Salomon Brothers GNMA Index--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.

Salomon Brothers High-Grade Corporate Bond Index--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.

Salomon Brothers Broad Investment-Grade Bond Index--is a market-weighted index
that contains over 4,800 individually priced investment-grade corporate bonds
rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.

B-27
<PAGE>

Lehman Long-Term Treasury Bond Index--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.

Merrill Lynch Corporate & Government Bond Index--consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.

Lehman Corporate (Baa) Bond Index--all publicly offered fixed-rate,
non-convertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.

Lehman Brothers Long-Term Corporate Bond Index--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed rate,
non-convertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.

Bond Buyer Municipal Bond Index--is a yield index on current coupon high-grade
general obligation municipal bonds.

Standard & Poor's Preferred Index--is a yield index based upon the average
yield of four high-grade, non-callable preferred stock issues.

NASDAQ Industrial Index--is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.

Composite Index--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.

Composite Index--65% Standard & Poor's 500 index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.

Composite Index--65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5 % Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).

Lehman Long-Term Corporate AA or Better Bond Index--consists of all publicly
issued, fixed rate, non-convertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.

Lehman Brothers Aggregate Bond Index--is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.

Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.6 trillion.

Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate Index-- is
a market-weighted index that contains individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities between 5
and 10 years. The index has a market value of over $700 billion.

Lehman Brothers Long (10+) Government/Corporate Index--is a market weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The
index has a market value of over $900 billion.

B-28
<PAGE>

Lipper Small Company Growth Fund Average--the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average
performance and/or the average expense ratio of the small company growth funds.
(This fund category was first established in 1982. For years prior to 1982, the
results of the Lipper Small Company Growth category were estimated using the
returns of the Funds that constituted the Group at its inception.)

Lipper Balanced Fund Average--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper, Inc.

Lipper Non-Government Money Market Fund Average--an industry benchmark of
average non-government money market funds with similar investment objectives
and policies, as measured by Lipper, Inc.

Lipper Government Money Market Fund Average--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper, Inc.

Lipper General Equity Fund Average--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper, Inc.

Lipper Fixed Income Fund Average--an industry benchmark of average fixed income
funds with similar investment objectives and policies, as measured by Lipper,
Inc.

B-29
<PAGE>

INVESTMENT MANAGEMENT

The Trusts receive all investment advisory services on an "internalized,"
at-cost basis from an experienced investment management staff employed directly
by The Vanguard Group, Inc. ("Vanguard"), a subsidiary jointly owned by the
Trusts and the other Trusts in The Vanguard Group of Investment Companies. The
investment management staff is supervised by the Senior Officers of the Trust.

The investment management staff is responsible for: maintaining the
specified standards; making changes in specific issues in light of changes in
the fundamental basis for purchasing such securities; and adjusting the Fund to
meet cash inflow (or outflow), which reflects net purchases and exchanges of
shares by investors (or net redemptions of shares) and reinvestment of the
Fund's income.

A change in securities held by the Fund is known as "turnover rate" and
may involve the payment by the Fund of dealer mark-ups, underwriting
commissions and other transaction costs on the sales of securities as well as
on the reinvestment of the proceeds in other securities. The annual turnover
rate for each of the Trust's Funds is set forth under the heading "More on the
Funds" in the Fund's Prospectus. The turnover rate is not a limiting factor
when management deems it desirable to sell or purchase securities. It is
impossible to predict whether or not the turnover rate in future years will
vary significantly from the rates in recent years.

PORTFOLIO TRANSACTIONS

How Transactions Are Effected

The types of securities in which the Funds invest are generally purchased
and sold through principal transactions, meaning that the Funds normally
purchase securities directly from the issuer or a primary market-maker acting
as principal for the securities on a net basis. Brokerage commissions are not
paid on these transactions, although the purchase price for securities usually
includes an undisclosed compensation. Purchases from underwriters of securities
typically include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers serving as market makers typically
include a dealer's mark-up (i.e., a spread between the bid and the asked
prices). During the fiscal years ended November 30, 1996, 1997 and 1998, the
Funds did not pay any brokerage commissions.

How Brokers and Dealers are Selected

Vanguard's Fixed Income Group (the "Group") chooses brokers or dealers to
handle the purchase and sale of the Funds' securities, and is responsible for
getting the best available price and most favorable execution for all
transactions. When the Funds purchase a newly issued security at a fixed price,
the Group may designate certain members of the underwriting syndicate to
receive compensation associated with that transaction. Certain dealers have
agreed to rebate a portion of such compensation directly to the Funds to offset
their management expenses. The Group is required to seek best execution of all
transactions and is not authorized to pay a brokerage commission in excess of
that which another broker might have charged for effecting the same transaction
solely on account of the receipt of research or other services.

How the Reasonableness of Brokerage Commissions is Evaluated

As previously explained, the types of securities that the Funds purchase
do not normally involve the payment of brokerage commissions. If any brokerage
commissions are paid, however, the Fixed Income Group will evaluate their
reasonableness by considering: (a) historical commission rates; (b) rates which

B-30
<PAGE>

other institutional investors are paying, based upon publicly available
information; (c) rates quoted by brokers and dealers; (d) the size of a
particular transaction, in terms of the number of shares, dollar amount, and
number of clients involved; (e) the complexity of a particular transaction in
terms of both execution and settlement; (f) the level and type of business done
with a particular firm over a period of time; and (g) the extent to which the
broker or dealer has capital at risk in the transaction.

PURCHASE OF SHARES

Each Trust reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Trust, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments under circumstances where certain economies can be
achieved in sales of the Trust's shares.

REDEMPTION OF SHARES

Each Trust may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an
emergency exists as defined by the rules of the Commission as a result of which
it is not reasonably practicable for a Fund to dispose of securities owned by
it, or fairly to determine the value of its assets, and (iii) for such other
periods as the Commission may permit.

If the Board of Trustees determines that it would be detrimental to the
best interests of the remaining shareholders of a Fund to make payment wholly
or partly in cash, a Fund may pay the redemption price in whole or in part by a
distribution in kind of securities held by a Fund in lieu of cash in conformity
with applicable rules of the Commission. Investors may incur brokerage charges
on the sale of such securities so received in payment of redemptions.

No charge is made by a Fund for redemptions except for wire redemptions of
under $5,000 which may be charged a maximum fee of $5.00. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by a Fund.

Signature Guarantees. To protect your account, a Fund, and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable a Fund to verify the identity of the person who has
authorized a redemption from your account. Signature guarantees are required in
connection with: (1) all redemptions, regardless of the amount involved, when
the proceeds are to be paid to someone other than the registered owners; and
(2) share transfer requests.

A signature guarantee may be obtained from banks, brokers and any other
guarantor institution that Vanguard deems acceptable.

The signature guarantees must appear either: (1) on the written request
for redemption, (2) on a separate instrument for assignment ("stock power")
which should specify the total number of shares to be redeemed, or (3) on all
stock certificates tendered for redemption and, if shares held by the Fund are
also being redeemed, on the letter or stock power.

SHARE PRICE

Each Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total
number of shares outstanding. The net asset value is determined as of the close
of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on each day
that the Exchange is open for trading.

B-31
<PAGE>

Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific
securities.

Short term instruments (those with remaining maturities of 60 days or
less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.

Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as
the Board of Trustees deems in good faith to reflect fair value.

It is the policy of each Money Market Fund to attempt to maintain a net
asset value of $1.00 per share for sales and redemptions. The instruments held
by each Money Market Fund are valued on the basis of amortized cost, which does
not take into account unrealized capital gains or losses. This involves valuing
an instrument at its cost and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. While this method
provides certainty in valuation, it may result in periods during which value,
as determined by amortized cost, is higher or lower than the price which each
Money Market Fund would receive it if sold the instrument. Such procedures will
include a review of the Funds' holdings by the Trustees, at such intervals as
they may deem appropriate, to determine whether the Funds' net asset value
calculated by using available market quotations deviates from $1.00 per share
based on amortized cost. The extent of any deviation will be examined by the
Trustees. If such deviation exceeds 1/2 of 1%, the Trustees will promptly
consider what action, if any, will be initiated. In the event the Trustees
determine that a deviation exists which may result in material dilution or
other unfair results to investors or existing shareholders, they have agreed to
take such corrective action as they regard as necessary and appropriate,
including the sale of fund instruments prior to maturity to realize capital
gains or losses or to shorten average fund maturity; withholding dividends;
making a special capital distribution; redemptions of shares in kind; or
establishing a net asset value per share by using available market quotations.

The use of amortized cost and the maintenance of each Money Market Fund's
net asset value at $1.00 is based on its election to operate under Rule 2a-7
under the Investment Company Act of 1940. As a condition of operating under
that rule, each Money Market Fund must maintain a dollar-weighted average
portfolio maturity of 90 days or less, purchase only instruments having
remaining maturities of 397 days or less, and invest only in securities that
are determined by methods approved by the Trustees to present minimal credit
risks and that are of high quality as determined by the requisite rating
services, or in the case of an instrument not so rated, determined by methods
approved by the Trustees to be of comparable quality.

The share price for each Fund can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Funds.

B-32
<PAGE>

MANAGEMENT OF THE TRUST

Officers and Trustees

The Officers of each Trust manage its day-to-day operations and are
responsible to the Trusts' Boards of Trustees. The Trustees set broad policies
for each of the Trusts and choose their Officers. The following is a list of
the Trustees and Officers of the Trusts and a statement of their present
positions and principal occupations during the past five years. As a group, the
Trusts' Trustees and Officers own less than 1% of the outstanding shares of
each Fund of each Trust. Each Trustee also serves as a Director of The Vanguard
Group, Inc., and as a Trustee of each of the 36 investment companies
administered by Vanguard (35 in the case of Mr. Malkiel). The mailing address
of the Trustees and Officers of the Trusts is Post Office Box 876, Valley
Forge, PA 19482.

JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*
Senior Chairman and Director of The Vanguard Group, Inc., and Trustee of each
of the investment companies in The Vanguard Group; Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).

JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.

JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive
Committee of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director
of Johnson & Johnson* MERCK Consumer Pharmaceuticals Co., Women First
HealthCare, Inc. (Research and Education Institution), Recording for the Blind
and Dyslexic, The Medical Center at Princeton, and Women's Research and
Education Institute.

BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress
& Co. (Investment Management), The Jeffrey Co. (Holding Company), and Southern
New England Telecommunications Co.

ALFRED M. RANKIN, Jr., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/Coal/Appliances): Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber
Products Company).

JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co. Procter and
Gamble Co., NACCO Industries (Machinery/Coal/Appliances), and Newfield
Exploration Co. (Energy); Director and Senior Partner of McKinsey & Co., and
President of New York University.

JAMES O. WELCH, Jr., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.

B-33
<PAGE>

J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director
of Cummins Engine Co., (Diesel Engine Company), and The Mead Corp. (Paper
Products); and Trustee of Vanderbilt University.

RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.

THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.

ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.

- ------------
* Officers of the Trust are "interested persons" as defined in the Investment
Company Act of 1940.

The Vanguard Group

Each Trust is a member of The Vanguard Group of Investment Companies,
which consists of more than 35 investment companies (the "Trusts"). Through
their jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Trusts obtain at-cost virtually all of their corporate management,
administrative, and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to several of the Vanguard Trusts,
including these Trusts.

Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Trusts and also
furnishes the Trusts with necessary office space, furnishings and equipment.
Each Trust pays its share of Vanguard's total expenses which are allocated
among the Trusts under methods approved by the Board of Trustees of each Trust.
In addition, each Vanguard Trust bears its own direct expenses such as legal,
auditing and custodian fees.

The Officers of the Trusts are also Officers and employees of Vanguard. No
Officer or employee owns, or is permitted to own, any securities of any
external adviser for the Vanguard Trusts.

Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines similar to, and in many
cases more restrictive than, those recommended by a blue ribbon panel of mutual
fund industry executives.

Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the
Vanguard Trusts. The Amended and Restated Funds' Service Agreement provides for
the following arrangement: (a) each Vanguard Trust may invest up to 0.40% of
its current assets in Vanguard, and (b) there is no restriction on the maximum
aggregate cash investment that the Vanguard Trusts may make in Vanguard. The
amounts which each of the Vanguard Trusts has invested are adjusted from time
to time in order to maintain the proportionate relationship between each
Trust's relative net assets and its contribution to Vanguard's capital.

B-34
<PAGE>

At November 30, 1998, each Fund of Vanguard California Tax-Free Funds had
contributed capital to Vanguard representing 0.02% of each Fund's net assets.
The total amount contributed by the Trust was $819,000, which represented 1.2%
of Vanguard's capitalization.

At November 30, 1998, Vanguard Florida Insured Tax-Free Fund had
contributed capital to Vanguard representing 0.02% of the Fund's net assets.
The total amount contributed by the Trust was $147,000, which represented 0.2%
of Vanguard's capitalization.

At November 30, 1998, each Fund of Vanguard New Jersey Tax-Free Funds had
contributed capital to Vanguard representing 0.02% of each Fund's net assets.
The total amount contributed by the Trust was $420,000, which represented 0.6%
of Vanguard's capitalization.

At November 30, 1998, each Fund of Vanguard New York Tax-Free Funds had
contributed capital to Vanguard representing 0.02% of each Fund's net assets.
The total amount contributed by the Trust was $343,000, which represented 0.49%
of Vanguard's capitalization.

At November 30, 1998, each Fund of Vanguard Ohio Tax-Free Funds had
contributed capital to Vanguard representing 0.02% of each Fund's net assets.
The total amount contributed by the Trust was $119,000, which represented 0.17%
of Vanguard's capitalization.

At November 30, 1998, Vanguard Pennsylvania Tax-Free Funds had contributed
capital to Vanguard representing 0.02% of each Fund's net assets. The total
amount contributed by the Trust was $707,000, which represented 1.0% of
Vanguard's capitalization.

Management. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Vanguard Trusts by third parties.

Distribution. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities
for the Trusts in the Group. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of The
Vanguard Group. The Trustees and Officers of Vanguard determine the amount to
be spent annually on distribution activities, the manner and amount to be spent
on each Trust, and whether to organize new investment companies.

One half of the distribution expenses of a marketing and promotional
nature is allocated among the Trusts based upon their relative net assets. The
remaining one half of these expenses is allocated among the Trusts based upon
each Trust's sales for the preceding 24 months relative to the total sales of
the Trusts as a Group, provided, however, that no Trust's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of the average distribution expense rate for The
Vanguard Group, and that no Trust shall incur annual distribution expenses in
excess of 20/100 of 1% of its average month-end net assets.

B-35
<PAGE>

During the last three fiscal years, each Fund of the Trusts incurred the
following approximate amounts of The Vanguard Group's management (including
transfer agency), distribution, and marketing expenses.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Fiscal year Fiscal year Fiscal year
ended ended ended
Fund 11/30/1996 11/30/1997 11/30/1998
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard California Tax-Exempt Money
Market Fund $2,180,000 $2,646,000 $3,501,000
- --------------------------------------------------------------------------------------
Vanguard California Insured Intermediate-
Term Tax-Exempt Fund $ 447,000 $ 768,000 $1,349,000
- --------------------------------------------------------------------------------------
Vanguard California Insured Long-Term
Tax-Exempt Fund $1,654,000 $1,558,000 $2,274,000
- --------------------------------------------------------------------------------------
Vanguard Florida Insured Long-Term Tax-
Exempt Fund $ 796,000 $ 922,000 $1,316,000
- --------------------------------------------------------------------------------------
Vanguard New Jersey Tax-Exempt Money
Market Fund $1,562,000 $1,713,000 $2,062,000
- --------------------------------------------------------------------------------------
Vanguard New Jersey Insured Long-Term
Tax-Exempt Fund $1,418,000 $1,376,000 $1,892,000
- --------------------------------------------------------------------------------------
Vanguard New York Tax-Exempt Money
Market Fund N/A $ 35,000 $ 587,000
- --------------------------------------------------------------------------------------
Vanguard New York Insured Long-Term
Tax-Exempt Fund $1,616,000 $1,799,000 $2,447,000
- --------------------------------------------------------------------------------------
Vanguard Ohio Tax-Exempt Money Market
Fund $ 362,000 $ 479,000 $ 562,000
- --------------------------------------------------------------------------------------
Vanguard Ohio Insured Long-Term Tax-
Exempt Fund $ 359,000 $ 339,000 $ 512,000
- --------------------------------------------------------------------------------------
Vanguard Pennsylvania Tax-Exempt
Money Market Fund $2,229,000 $2,589,000 $3,221,000
- --------------------------------------------------------------------------------------
Vanguard Pennsylvania Insured Long-
Term Tax-Exempt Fund $2,734,000 $2,619,000 $3,447,000
- --------------------------------------------------------------------------------------
</TABLE>

Investment Advisory Services. Vanguard provides investment advisory
services to Vanguard Florida Insured Tax-Free Fund; Vanguard New Jersey
Tax-Free Funds; Vanguard New York Tax-Free Funds; Vanguard Ohio Tax-Free Funds;
Vanguard Pennsylvania Tax-Free Funds; and Vanguard California Tax-Free Funds.
These services are provided on an at-cost basis from a money management staff
employed directly by Vanguard. The compensation and other expenses of this
staff are paid by the Trusts utilizing these services.

B-36
<PAGE>

During the last three fiscal years, each Fund of the Trusts incurred the
following approximate amounts of Vanguard's expenses relating to investment
advisory expenses.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Fiscal year Fiscal year Fiscal year
ended ended ended
Fund 11/30/1996 11/30/1997 11/30/1998
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard California Tax-Exempt Money
Market Fund $159,000 $239,000 $246,000
- --------------------------------------------------------------------------------------
Vanguard California Insured Intermediate-
Term Tax-Exempt Fund $ 30,000 $ 66,000 $ 95,000
- --------------------------------------------------------------------------------------
Vanguard California Insured Long-Term
Tax-Exempt Fund $124,000 $165,000 $167,000
- --------------------------------------------------------------------------------------
Vanguard Florida Insured Long-Term Tax-
Exempt Fund $ 58,000 $ 82,000 $ 89,000
- --------------------------------------------------------------------------------------
Vanguard New Jersey Tax-Exempt Money
Market Fund $110,000 $144,000 $139,000
- --------------------------------------------------------------------------------------
Vanguard New Jersey Insured Long-Term
Tax-Exempt Fund $101,000 $130,000 $129,000
- --------------------------------------------------------------------------------------
Vanguard New York Tax-Exempt Money
Market Fund N/A N/A $ 36,000
- --------------------------------------------------------------------------------------
Vanguard New York Insured Long-Term
Tax-Exempt Fund $110,000 $150,000 $160,000
- --------------------------------------------------------------------------------------
Vanguard Ohio Tax-Exempt Money Market
Fund $ 24,000 $ 43,000 $ 39,000
- --------------------------------------------------------------------------------------
Vanguard Ohio Insured Long-Term Tax-
Exempt Fund $ 25,000 $ 34,000 $ 36,000
- --------------------------------------------------------------------------------------
Vanguard Pennsylvania Tax-Exempt
Money Market Fund $159,000 $216,000 $216,000
- --------------------------------------------------------------------------------------
Vanguard Pennsylvania Insured Long-
Term Tax-Exempt Fund $198,000 $250,000 $236,000
- --------------------------------------------------------------------------------------
</TABLE>

Trustee Compensation

The individuals in the following tables serve as Trustees of all Vanguard
Trusts, and each Trust pays a proportionate share of the Trustees'
compensation. The Trusts employ their officers on a shared basis, as well.
However, officers are compensated by The Vanguard Group, Inc., not the Trusts.

Independent Trustees. The Trusts compensate their independent
Trustees--that is, the ones who are not also officers of the Trust--in three
ways:

o The independent Trustees receive an annual fee for their service to the
Trusts, which is subject to reduction based on absences from scheduled Board
meetings.

B-37
<PAGE>

o The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.

o Upon retirement, the independent Trustees receive an aggregate annual fee of
$1,000 for each year served on the Board, up to fifteen years of service.
This annual fee is paid for ten years following retirement, or until each
Trustee's death.

"Interested" Trustees. The Trusts' interested Trustees--Messrs. Bogle and
Brennan--receive no compensation for their service in that capacity. However,
they are paid in their role as officers of The Vanguard Group, Inc.

Compensation Table. The following tables provide compensation details for
each of the Trustees. For the Trusts, we list the amount paid as compensation
and accrued as retirement benefits by the Trust for each Trustee. In addition,
the tables show the total amount of benefits that we expect each Trustee to
receive from all Vanguard Trusts upon retirement, and the total amount of
compensation paid to each Trustee by all Vanguard Trusts. All information shown
is for the fiscal year ended November 30, 1998.

B-38
<PAGE>

VANGUARD CALIFORNIA TAX-FREE FUNDS
COMPENSATION TABLE

Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued as Annual Benefits From All Vanguard Trusts
Name of Trustees From Trust Part of Trust Expenses Upon Retirement Paid to Trustees (1)
- ---------------- ------------ ---------------------- --------------- ------------------------
<S> <C> <C> <C> <C>
John C. Bogle .................. None None None None
John J. Brennan ................ None None None None
Barbara Barnes Hauptfuhrer(2). $861 $116 $15,000 $75,000
Robert E. Cawthorn(2) .......... $430 $ 78 $ 6,000 $37,500
JoAnn Heffernan Heisen ......... $359 $ 51 $15,000 $31,250
Burton G. Malkiel .............. $865 $ 83 $15,000 $75,000
Alfred M. Rankin, Jr. .......... $861 $ 61 $15,000 $75,000
John C. Sawhill ................ $861 $ 78 $15,000 $75,000
James O. Welch, Jr. ............ $861 $ 89 $15,000 $75,000
J. Lawrence Wilson ............. $861 $ 65 $15,000 $75,000
</TABLE>