VANGUARD FIXED INCOME SECURITIES FUND INC, 497, 1994-09-02

VANGUARD FIXED INCOME SECURITIES FUND INC
497, 1994-09-02

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[LOGO]
A MEMBER OF THE VANGUARD GROUP
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<TABLE>
<S> <C>
PROSPECTUS--MAY 25, 1994; REVISED SEPTEMBER 16, 1994
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT Vanguard Fixed Income Securities Fund, Inc. (the "Fund") is
OBJECTIVE AND an open-end diversified investment company that seeks to
POLICIES provide investors with a high level of current income
consistent with the maintenance of principal and liquidity.
The Fund consists of nine distinct Portfolios, each of which
invests in fixed income securities within prescribed
maturity and credit quality standards. There is no assurance
that any of the Fund's Portfolios will achieve its stated
objective. This prospectus pertains to each of the Fund's
Portfolios, except the High Yield Corporate Portfolio, which
is offered by a separate prospectus.
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OPENING AN ACCOUNT To open a regular (non-retirement) account, please complete
and return the Account Registration Form. If you need
assistance in completing this Form, please call the Investor
Information Department. To open an Individual Retirement
Account (IRA), please use a Vanguard IRA Adoption Agreement.
To obtain a copy of this form, call 1-800-662-7447, Monday
through Friday, from 8:00 a.m. to 9:00 p.m. and Saturday,
from 9:00 a.m. to 4:00 p.m. (Eastern time). The minimum
initial investment is $3,000 per Portfolio ($500 for
Individual Retirement Accounts and Uniform Gifts/ Transfers
to Minors Act accounts). The Fund is offered on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees).
However, the Fund incurs expenses for investment advisory,
management, administrative, and distribution services.
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ABOUT THIS This Prospectus is designed to set forth concisely the
PROSPECTUS information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Fund has been filed with the
Securities and Exchange Commission. This Statement is dated
May 25, 1994; Revised September 16, 1994, and has been
incorporated by reference into this Prospectus. A copy may
be obtained without charge by writing to the Fund or by
calling the Investor Information Department.
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TABLE OF CONTENTS
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PAGE
<S> <C>
Highlights........................ 2
Fund Expenses..................... 5
Financial Highlights.............. 6
Yield and Total Return............ 11
FUND INFORMATION
Investment Objective.............. 11
Investment Policies............... 11
Investment Risks.................. 16

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PAGE
<S> <C>
Who Should Invest................. 18
Implementation of Policies........ 19
Investment Limitations............ 23
Management of the Fund............ 24
Investment Advisers............... 24
Dividends, Capital Gains and
Taxes........................... 27
The Share Price of Each
Portfolio....................... 28
General Information............... 29
<CAPTION>
PAGE
<S> <C>
SHAREHOLDER GUIDE
Opening an Account and Purchasing
Shares.......................... 30
When Your Account Will Be
Credited........................ 33
Selling Your Shares............... 34
Exchanging Your Shares............ 36
Important Information About
Telephone Transactions.......... 38
Transferring Registration......... 38
Other Vanguard Services........... 38
</TABLE>

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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HIGHLIGHTS

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<S> <C>
OBJECTIVE AND The Fund is a no-load, open-end diversified investment
POLICIES company that seeks to provide investors with a high level of
income consistent with the maintenance of principal and
liquidity. The Fund consists of nine distinct Portfolios,
each of which invests in fixed income securities within
prescribed maturity and quality standards. There is no
assurance that the Fund will achieve its stated
objective. PAGE 11
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<TABLE>
<S> <C>
NINE SEPARATE The investment characteristics of each Portfolio are
PORTFOLIOS summarized in the chart below. As illustrated, the Fund
consists of three short-term Portfolios, three intermediate-
term Portfolios, two long-term Portfolios, and a high-risk
Portfolio investing in low-quality bonds. PAGE 11
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<TABLE>
<CAPTION>
PORTFOLIO SUMMARY
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PRIMARY EXPECTED
PORTFOLIO INVESTMENTS AVERAGE MATURITY
<S> <C> <C>
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Short-Term U.S. Treasury U.S. Treasury bonds 1-3 years

Short-Term Federal U.S. Government 1-3 years
agency bonds

Short-Term Corporate Investment grade 1-3 years
corporate bonds
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Intermediate-Term U.S. Treasury U.S. Treasury bonds 5-10 years

GNMA GNMA mortgage Intermediate*
certificates

Intermediate-Term Corporate Investment grade 5-10 years
corporate bonds
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Long-Term U.S. Treasury U.S. Treasury bonds 15-30 years

Long-Term Corporate Investment grade 15-25 years
corporate bonds
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High Yield Corporate** Speculative grade Intermediate*
corporate bonds
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<FN>
*WHILE NEITHER THE GNMA NOR THE HIGH YIELD CORPORATE PORTFOLIOS OBSERVE
SPECIFIC MATURITY GUIDELINES, EACH IS EXPECTED TO MAINTAIN AN
INTERMEDIATE-TERM AVERAGE WEIGHTED MATURITY.
**THE HIGH YIELD CORPORATE PORTFOLIO IS OFFERED BY A SEPARATE PROSPECTUS, WHICH
MAY BE OBTAINED BY CALLING 1-800-662-7447.
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2
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RISK Investors in the Fund are exposed to four types of risk from
CHARACTERISTICS fixed income securities. (1) INTEREST RATE RISK is the
potential for fluctuations in bond prices due to changing
interest rates. (2) INCOME RISK is the potential for a
decline in a Portfolio's income due to falling market
interest rates. (3) CREDIT RISK is the possibility that a
bond issuer will fail to make timely payments of either
interest or principal to a Portfolio. (4) PREPAYMENT RISK
(for mortgage-backed securities) or CALL RISK (for corporate
bonds) is the likelihood that, during periods of falling
interest rates, securities with high stated interest rates
will be prepaid (or "called") prior to maturity, requiring a
Portfolio to invest the proceeds at generally lower interest
rates.

The following chart summarizes interest rate, credit, income
and prepayment/call risks for each of the eight Portfolios
of the Fund offered by this Prospectus. As shown, interest
rate risk should be low for the three short-term Portfolios,
moderate for the three intermediate-term Portfolios, and
high for the two long-term Portfolios. PAGE 16
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RISK SUMMARY

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<CAPTION>
INTEREST INCOME CREDIT PREPAYMENT/
PORTFOLIO RATE RISK RISK RISK CALL RISK
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<S> <C> <C> <C> <C>
Short-Term U.S. Low High Negligible Negligible
Treasury

Short-Term Federal Low High Very Low Low

Short-Term Corpo- Low High Low Negligible
rate
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Intermediate-Term Medium Medium Negligible Negligible
U.S. Treasury

GNMA Medium Medium Negligible High

Intermediate-Term Medium Medium Low Low
Corporate
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Long-Term U.S. High Low Negligible Negligible
Treasury

Long-Term High Low Low Medium
Corporate
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<S> <C>
THE VANGUARD The Fund is a member of The Vanguard Group of Investment
GROUP Companies, a group of 32 investment companies with 78
distinct investment portfolios and total assets in excess of
$120 billion. The Vanguard Group, Inc. ("Vanguard"), a
subsidiary jointly owned by the Vanguard funds, provides all
corporate management, administrative, distribution, and
shareholder accounting services on an at-cost basis to the
funds in the Group. As a result, Vanguard's operating
expenses are substantially lower than those of the mutual
fund industry. PAGE 24
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3
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<S> <C>
INVESTMENT Wellington Management Company serves as investment adviser
ADVISERS to the GNMA and Long-Term Corporate Portfolios. Vanguard's
Fixed Income Group provides investment advisory services on
an at-cost basis to the three Short-Term Portfolios, the two
Intermediate-Term Portfolios and the Long-Term U.S. Treasury
Portfolio. PAGE 24
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DIVIDEND POLICY Each Portfolio declares a dividend each business day based
on its ordinary income. Dividends are paid on the first
business day of each month. Net capital gains (excess of
long-and short-term capital gains over capital losses), if
any, will be distributed annually. Dividend and capital
gains distributions may be received in cash or reinvested in
additional shares. PAGE27
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TAXES Dividends paid by the Fund's Portfolios are generally
subject to federal, state and local income taxes. However,
it is expected that most of the income paid by the
Short-Term, Intermediate-Term, and Long-Term U.S. Treasury
Portfolios, and a meaningful portion of the income from the
Short-Term Federal Portfolio, will be attributable to U.S.
Treasury and other "direct" Government obligations. Such
income may be exempt from state and local taxes, depending
on state and local tax laws. Any capital gains distributions
from a Portfolio are subject to federal income tax, as well
as any applicable state and local taxes. A sale of
shares--whether by outright redemption, checkwriting
redemption or an exchange--is a taxable event and may result
in a capital gain or loss. PAGE27
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PURCHASING SHARES You may purchase shares by mail, wire, or exchange from
another Vanguard Portfolio. The minimum initial investment
is $3,000 per Portfolio ($500 for Individual Retirement
Accounts and Uniform Gifts/Transfers to Minors Act
accounts); the minimum for subsequent investments is $100.
There are no sales commissions or 12b-1 fees. PAGE 30
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SELLING SHARES You may redeem shares of each Portfolio by mail, telephone
or check. Telephone redemption proceeds may be received by
mail or by wire. There is no charge for redemptions, except
for wire withdrawals under $5,000, which are subject to a $5
charge. (Your bank may also impose a fee upon receipt of a
wire.) Each Portfolio's share price is expected to
fluctuate, and at the time of redemption may be more or less
than at the time of initial purchase, resulting in a gain or
loss. PAGE 34
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SERVICES TO The Fund offers free checkwriting services (minimum $250 per
SHAREHOLDERS check) for easy access to your account balance. PAGE 34

The Fund offers other special services, including: Fund
Express, for electronic transfers between the Fund and your
bank account; and Tele-Account, for "round-the-clock"
telephone access to your Fund account. PAGE 39
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SPECIAL (1) Each Portfolio, except the Short-Term Federal Portfolio,
CONSIDERATIONS may invest a portion of its assets in bond (interest rate)
futures contracts and options; each Portfolio may hold
restricted securities. The Short-Term Corporate,
Intermediate-Term Corporate and Long-Term Corporate
Portfolios may invest in securities of foreign
issuers. PAGE 20

(2) Each Portfolio may lend its securities. PAGE 21
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4
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<S> <C>
FUND EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Fund. These expenses
and fees are for the fiscal year ended January 31, 1994,
and, in the case of the Intermediate-Term Corporate
Portfolio are estimates, since that Portfolio commenced
operations on November 1, 1993.
</TABLE>
<TABLE>
<CAPTION>
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
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<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases...... None None None None
Sales Load Imposed on Reinvested
Dividends........................... None None None None
Redemption Fees*..................... None None None None
Exchange Fees........................ None None None None

SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
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<S> <C> <C> <C> <C>
Management & Administrative
Expenses............................ 0.21% 0.20% 0.20% 0.21%
Investment Advisory Fees............. 0.01 0.01 0.01 0.01
12b-1 Fees........................... None None None None
Other Expenses
Distribution Costs................. 0.03% 0.03% 0.03% 0.03%
Miscellaneous Expenses............. 0.01 0.02 0.02 0.01
----- ----- ----- -----
Total Other Expenses................. 0.04 0.05 0.05 0.04
----- ----- ----- -----
TOTAL OPERATING EXPENSES..... 0.26% 0.26% 0.26% 0.26%
----- ----- ----- -----
----- ----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM LONG-TERM
GNMA CORPORATE U.S. TREASURY CORPORATE
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO**
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<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases...... None None None None
Sales Load Imposed on Reinvested
Dividends........................... None None None None
Redemption Fees*..................... None None None None
Exchange Fees........................ None None None None

INTERMEDIATE-TERM LONG-TERM LONG-TERM
GNMA CORPORATE U.S. TREASURY CORPORATE
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO**
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<S> <C> <C> <C> <C>
Management & Administrative
Expenses............................ 0.21% 0.19% 0.20% 0.22%
Investment Advisory Fees............. 0.02 0.01 0.01 0.04
12b-1 Fees........................... None None None None
Other Expenses
Distribution Costs................. 0.03% 0.03% 0.03% 0.02%
Miscellaneous Expenses............. 0.02 0.02 0.02 0.02
----- ----- ----- -----
Total Other Expenses................. 0.05 0.05 0.05 0.04
----- ----- ----- -----
TOTAL OPERATING EXPENSES..... 0.28% 0.25% 0.26% 0.30%
----- ----- ----- -----
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<FN>

*WIRE REDEMPTIONS OF LESS THAN $5,000 ARE SUBJECT TO A $5 PROCESSING FEE.
**FORMERLY THE "INVESTMENT GRADE CORPORATE PORTFOLIO."
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5
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<S> <C>
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Fund.

The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period.
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
Short-Term U.S. Treasury Portfolio.............. $3 $ 8 $15 $33
Short-Term Federal Portfolio.................... $3 $ 8 $15 $33
Short-Term Corporate Portfolio.................. $3 $ 8 $15 $33
Intermediate-Term U.S. Treasury Portfolio....... $3 $ 8 $15 $33
Intermediate-Term Corporate Portfolio........... $3 $ 8 $14 $32
GNMA Portfolio.................................. $3 $ 9 $16 $36
Long-Term U.S. Treasury Portfolio............... $3 $ 8 $15 $33
Long-Term Corporate Portfolio*.................. $3 $10 $17 $38
<FN>
*FORMERLY THE "INVESTMENT GRADE CORPORATE PORTFOLIO."

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
</TABLE>

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<TABLE>
<S> <C>
FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of
the five years in the period ended January 31, 1994, have
been audited by Price Waterhouse, independent accountants,
whose reports thereon were unqualified. This information
should be read in conjunction with the Fund's financial
statements and notes thereto, which are incorporated by
reference in the Statement of Additional Information and in
this Prospectus, and which appear, along with the reports of
Price Waterhouse, in the Fund's 1994 Annual Report to
Shareholders. For a more complete discussion of the Fund's
performance, please see the Fund's 1994 Annual Report to
Shareholders which may be obtained without charge by writing
to the Fund or by calling our Investor Information
Department at 1-800-662-7447.
</TABLE>

6
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<TABLE>
<CAPTION>
---------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO
---------------------------------------------------
YEAR ENDED
JANUARY 31, OCT. 28, 1991,+
------------------------------- TO JAN. 31,
1994 1993 1992
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<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $10.41 $10.12 $ 10.00
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INVESTMENT OPERATIONS
Net Investment Income........... .486 .528 .140
Net Realized and Unrealized Gain
(Loss) on Investments.......... .079 .332 .120
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TOTAL FROM INVESTMENT
OPERATIONS................... .565 .860 .260
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DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.486) (.528) (.140)
Distributions from Realized
Capital Gains.................. (.079) (.042) --
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TOTAL DISTRIBUTIONS........... (.565) (.570) (.140)
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NET ASSET VALUE, END OF PERIOD.... $10.41 $10.41 $ 10.12
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TOTAL RETURN...................... 5.54% 8.74% 2.60%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)....................... $729 $526 $102
Ratio of Expenses to Average Net
Assets........................... .26% .26% .26%*
Ratio of Net Investment Income to
Average Net Assets............... 4.64% 5.12% 5.22%*
Portfolio Turnover Rate........... 86% 71% 40%

<FN>

*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>

<TABLE>
<CAPTION>
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SHORT-TERM FEDERAL PORTFOLIO
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YEAR ENDED JANUARY 31,
--------------------------------------------------------- DEC. 31, 1987,+
1994 1993 1992 1991 1990 1989 TO JAN. 31, 1988
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<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $10.38 $10.31 $10.08 $ 9.89 $ 9.78 $10.05 $ 10.00
------- ------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income........... .522 .609 .720 .801 .842 .817 .050
Net Realized and Unrealized Gain
(Loss) on Investments.......... .110 .232 .307 .190 .110 (.270) .050
------- ------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT
OPERATIONS................... .632 .841 1.027 .991 .952 .547 .100
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DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.522) (.609) (.720) (.801) (.842) (.817) (.050)
Distributions from Realized
Capital Gains.................. (.110) (.162) (.077) -- -- -- --
------- ------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS........... (.632) (.771) (.797) (.801) (.842) (.817) (.050)
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NET ASSET VALUE, END OF PERIOD.... $10.38 $10.38 $10.31 $10.08 $ 9.89 $ 9.78 $ 10.05
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TOTAL RETURN...................... 6.23% 8.49% 10.59% 10.46% 10.09% 5.66% 1.01%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)....................... $1,936 $1,688 $1,274 $508 $228 $159 $6
Ratio of Expenses to Average Net
Assets........................... .26% .27% .26% .30% .28% .32% --
Ratio of Net Investment Income to
Average Net Assets............... 4.98% 5.88% 6.98% 8.06% 8.59% 8.50% --
Portfolio Turnover Rate........... 49% 70% 111% 141% 133% 228% --
<FN>
+COMMENCEMENT OF OPERATIONS.
</TABLE>

7
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<TABLE>
<CAPTION>
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SHORT-TERM CORPORATE PORTFOLIO
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YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR............................. $10.99 $10.88 $10.50 $10.34 $10.23 $10.43 $10.67 $10.55 $10.17 $9.94
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income........... .605 .695 .804 .876 .895 .833 .761 .877 1.001 1.067
Net Realized and Unrealized Gain
(Loss) on Investments.......... .049 .275 .380 .160 .110 (.200) (.240) .304 .380 .230
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... .654 .970 1.184 1.036 1.005 .633 .521 1.181 1.381 1.297
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.605) (.695) (.804) (.876) (.895) (.833) (.761) (.877) (1.001) (1.067)
Distributions from Realized
Capital Gains.................. (.099) (.165) -- -- -- -- -- (.184) -- --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS........... (.704) (.860) (.804) (.876) (.895) (.833) (.761) (1.061) (1.001) (1.067)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR...... $10.94 $10.99 $10.88 $10.50 $10.34 $10.23 $10.43 $10.67 $10.55 $10.17
- ----------------------------------------------------------------------------------------------------------------------------
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TOTAL RETURN...................... 6.11% 9.29% 11.70% 10.47% 10.18% 6.31% 5.16% 11.58% 14.24% 14.01%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $3,573 $2,811 $1,911 $829 $597 $493 $429 $401 $198 $119
Ratio of Expenses to Average Net
Assets........................... .26% .27% .26% .31% .28% .34% .33% .38% .49% .62%
Ratio of Net Investment Income to
Average Net Assets............... 5.48% 6.33% 7.44% 8.48% 8.70% 8.17% 7.36% 7.79% 9.50% 11.26%
Portfolio Turnover Rate........... 61% 71% 99% 107% 121% 165% 258% 278% 460% 270%
</TABLE>

<TABLE>
<CAPTION>
-------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
-------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------- OCT. 28, 1991,+ TO
1994 1993 JAN. 31, 1992
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $ 10.79 $ 10.19 $ 10.00
------- ------------- -------
INVESTMENT OPERATIONS
Net Investment Income........... .617 .676 .170
Net Realized and Unrealized Gain
(Loss) on Investments.......... .443 .617 .190
------- ------------- -------
TOTAL FROM INVESTMENT
OPERATIONS................... 1.060 1.293 .360
- --------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.617) (.676) (.170)
Distributions from Realized
Capital Gains.................. (.413) (.017) --
------- ------------- -------
TOTAL DISTRIBUTIONS........... (1.030) (.693) (.170)
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.... $ 10.82 $ 10.79 $ 10.19
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
TOTAL RETURN...................... 10.09% 13.14% 3.59%
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)....................... $1,007 $673 $190
Ratio of Expenses to Average Net
Assets........................... .26% .26% .26%*
Ratio of Net Investment Income to
Average Net Assets............... 5.55% 6.44% 6.47%*
Portfolio Turnover Rate........... 118% 123% 32%
<FN>
*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>

8
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<TABLE>
<CAPTION>
---------------------------------------------------------------
GNMA PORTFOLIO
----------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR...... $10.50 $10.25 $9.85 $9.54 $9.34 $9.69 $10.10 $9.92 $9.25 $9.20
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income................. .641 .778 .831 .855 .878 .882 .889 .965 1.04 1.08
Net Realized and Unrealized Gain
(Loss) on Investments................ (.110) .250 .400 .310 .200 (.350) (.410) .186 .67 .05
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS.... .531 1.028 1.231 1.165 1.078 .532 .479 1.151 1.71 1.13
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DISTRIBUTIONS
Dividends from Net Investment
Income............................... (.641) (.778) (.831) (.855) (.878) (.882) (.889) (.965) (1.04) (1.08)
Distributions from Realized Capital
Gains................................ -- -- -- -- -- -- -- (.006) -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS................. (.641) (.778) (.831) (.855) (.878) (.882) (.889) (.971) (1.04) (1.08)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR............ $10.39 $10.50 $10.25 $9.85 $9.54 $9.34 $9.69 $10.10 $9.92 $9.25
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN............................ 5.18% 10.40% 13.00% 12.85% 11.98% 5.80% 5.30% 12.19% 19.58% 13.52%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)...... $7,043 $7,167 $5,207 $2,711 $2,128 $1,907 $1,910 $2,381 $1,262 $299
Ratio of Expenses to Average Net
Assets................................. .28% .29% .29% .34% .31% .35% .35% .38% .50% .58%
Ratio of Net Investment Income to
Average Net Assets..................... 6.19% 7.38% 8.22% 8.95% 9.25% 9.35% 9.35% 9.41% 10.16% 11.90%
Portfolio Turnover Rate................. 2% 7% 1% 1% 9% 8% 22% 28% 32% 23%
</TABLE>

<TABLE>
<CAPTION>
-----------------
INTERMEDIATE-TERM
CORPORATE
PORTFOLIO
-----------------
NOVEMBER 1,
1993,+ TO
JANUARY 31, 1994
- ------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $ 10.00
-------
INVESTMENT OPERATIONS
Net Investment Income................. .125
Net Realized and Unrealized Gain
(Loss) on Investments................ .040
-------
TOTAL FROM INVESTMENT OPERATIONS.... .165
- ------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................... (.125)
Distributions from Realized Capital
Gains................................ --
- ------------------------------------------------------------
TOTAL DISTRIBUTIONS................. (.125)
- ------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......... $ 10.04
- ------------------------------------------------------------
- ------------------------------------------------------------
TOTAL RETURN............................ 1.66%
- ------------------------------------------------------------
- ------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).... $85
Ratio of Expenses to Average Net
Assets................................. .25%*
Ratio of Net Investment Income to
Average Net Assets..................... 5.11%*
Portfolio Turnover Rate................. 74%
- ------------------------------------------------------------

<FN>

*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>

9
<PAGE>

<TABLE>
<CAPTION>
------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
-------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, MAY 19, 1986,+
------------------------------------------------------------------------- TO
1994 1993 1992 1991 1990 1989 1988 JAN. 31, 1987
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD............................. $10.04 $10.14 $9.74 $9.53 $9.28 $9.49 $10.28 $10.00
------------- ------- ------- ------- ------- ------- ------- ------
INVESTMENT OPERATIONS
Net Investment Income............. .685 .733 .763 .776 .781 .778 .776 .530
Net Realized and Unrealized Gain
(Loss) on Investments............ .886 .600 .400 .210 .250 (.210) (.790) .314
------------- ------- ------- ------- ------- ------- ------- ------
TOTAL FROM INVESTMENT
OPERATIONS..................... 1.571 1.333 1.163 .986 1.031 .568 (.014) .844
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income........................... (.685) (.733) (.763) (.776) (.781) (.778) (.776) (.530)
Distributions from Realized
Capital Gains.................... (.176) (.700) -- -- -- -- -- (.034)
------------- ------- ------- ------- ------- ------- ------- ------
TOTAL DISTRIBUTIONS............. (.861) (1.433) (.763) (.776) (.781) (.778) (.776) (.564)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD...... $10.75 $10.04 $10.14 $9.74 $9.53 $9.28 $9.49 $10.28
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................ 16.09% 14.12% 12.44% 11.00% 11.33% 6.43% 0.29% 8.61%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)......................... $829 $874 $833 $722 $456 $172 $83 $35
Ratio of Expenses to Average Net
Assets............................. .26% .27% .26% .30% .28% .36% .32% --
Ratio of Net Investment Income to
Average Net Assets................. 6.44% 7.26% 7.72% 8.29% 8.08% 8.46% 8.10% 6.93%*
Portfolio Turnover Rate............. 7% 170% 89% 147% 83% 387% 182% 182%

<FN>

*ANNUALIZED.
+COMMENCEMENT OF OPERATIONS.
</TABLE>

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO+
----------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR...... $9.04 $8.63 $8.02 $8.00 $7.91 $8.11 $8.77 $8.42 $7.84 $7.84
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income................. .632 .680 .706 .720 .732 .741 .770 .847 .92 .96
Net Realized and Unrealized Gain
(Loss) on Investments................ .579 .561 .610 .020 .090 (.200) (.660) .473 .58 --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS.... 1.211 1.241 1.316 .740 .822 .541 .110 1.32 1.50 .96
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.. (.632) (.680) (.706) (.720) (.732) (.741) (.770) (.847) (.92) (.96)
Distributions from Realized Capital
Gains................................ (.259) (.151) -- -- -- -- -- (.123) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS................. (.891) (.831) (.706) (.720) (.732) (.741) (.770) (.970) (.92) (.96)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR............ $9.36 $9.04 $8.63 $8.02 $8.00 $7.91 $8.11 $8.77 $8.42 $7.84
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN............................ 13.83% 15.06% 17.09% 9.81% 10.67% 7.13% 1.76% 16.46% 20.31% 13.45%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions)...... $3,166 $2,763 $1,992 $1,254 $954 $734 $665 $753 $318 $107
Ratio of Expenses to Average Net
Assets................................. .30% .31% .31% .37% .34% .38% .37% .41% .55% .62%
Ratio of Net Investment Income to Aver-
age Net Assets......................... 6.71% 7.68% 8.46% 9.16% 9.07% 9.40% 9.40% 9.41% 10.78% 12.50%
Portfolio Turnover Rate................. 77% 50% 72% 62% 70% 60% 63% 47% 56% 55%
<FN>
+FORMERLY THE "INVESTMENT GRADE CORPORATE PORTFOLIO."
</TABLE>

10
<PAGE>

<TABLE>
<S> <C>
YIELD AND TOTAL From time to time a Portfolio may advertise its yield and
RETURN total return. BOTH YIELD AND TOTAL RETURN FIGURES ARE BASED
ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The "total return" of a Portfolio refers
to the average annual compounded rates of return over one-,
five-and ten-year periods or for the life of the Portfolio
(as stated in the advertisement) that would equate an
initial amount invested at the beginning of a stated period
to the ending redeemable value of the investment, assuming
the reinvestment of all dividend and capital gains
distributions.

The "30-day yield" of a Portfolio is calculated by dividing
net investment income per share earned during a 30-day
period by the net asset value per share on the last day of
the period. Net investment income includes interest and
dividend income earned on the Portfolio's securities; it is
net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder accounts.
The yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months and
then annualized. Methods used to calculate advertised yields
are standardized for all stock and bond mutual funds.
However, these methods differ from the accounting methods
used by a Portfolio to maintain its books and records, and
so the advertised 30-day yield may not fully reflect the
income paid to your own account or the yield reported in the
Portfolio's Reports to Shareholders.

Additionally, a Portfolio may compare its performance to
that of the Lehman Aggregate Bond Index, and may advertise
its duration, a measure of a Portfolio's sensitivity to
interest rate changes.
- --------------------------------------------------------------------------------
INVESTMENT The Fund is an open-end diversified investment company. The
OBJECTIVE objective of the Fund is to provide investors with a high
level of current income consistent with the maintenance of
principal and liquidity.
THE FUND SEEKS TO
PROVIDE A HIGH The Fund consists of nine distinct Portfolios, each of which
LEVEL invests in fixed income securities within prescribed
OF CURRENT INCOME maturity and quality standards. There is no assurance that
the Fund will achieve its stated objective.

The investment objective for the Fund is not fundamental and
so may be changed by the Board of Directors without
shareholder approval. Any such change could result in the
Fund having investment objectives different from the
objectives which a shareholder considered appropriate at the
time of investment in the Fund. However, shareholders would
be notified prior to any material change in the Fund's
objective.
- --------------------------------------------------------------------------------
INVESTMENT While all of the Fund's Portfolios invest in fixed income
POLICIES securities, the individual Portfolios vary substantially in
terms of the type, credit quality, and average maturity of
the securities in which they invest. The Fund is managed
without regard to tax ramifications.
IMPORTANT NOTE: Five of the Portfolios invest in U.S.
Treasury or U.S. Government agency securities to minimize
credit risk. Examples of the Government agencies and
instrumentalities whose securities may be purchased by these
Portfolios include the Federal Home Loan Mortgage
Corporation, the Small Business Administration, the Gov-
ernment Export Trust and the Overseas Private Investment
Corporation. Government securities may be backed by (i) the
full faith and credit of the United States; (ii) the
particular Government agency's ability to borrow directly
from the Treasury; (iii) some other type of United States
support; or (iv) the credit of the issuing agency, only. As
described in the investment policies set forth below, each
of the five Portfolios which
</TABLE>

11
<PAGE>
<TABLE>
<S> <C>
invests in U.S. Treasury or U.S. Government agency
securities is required to invest a specified percentage of
its assets in securities backed by the full faith and credit
of the United States. WHILE U.S. TREASURY OR GOVERNMENT
AGENCY SECURITIES PROVIDE SUBSTANTIAL PROTECTION AGAINST
CREDIT RISK, THEY DO NOT PROTECT INVESTORS AGAINST PRICE
CHANGES DUE TO CHANGING INTEREST RATES. THE MARKET VALUES OF
GOVERNMENT SECURITIES ARE NOT GUARANTEED AND WILL FLUCTUATE.
See "Investment Risks" for additional information on these
and other important risks.

THREE PORTFOLIOS Three Portfolios of the Fund invest in short-term bonds. The
INVEST IN SHORT-TERM U.S. TREASURY PORTFOLIO invests at least 85% of
SHORT-TERM its assets in short-term securities backed by the full faith
BONDS and credit of the U.S. Government. Also, at least 65% of the
Portfolio's assets will be invested in U.S. Treasury bills,
notes and bonds. In an effort to minimize fluctuations in
market value, the Short-Term U.S. Treasury Portfolio is
expected to maintain a dollar-weighted average maturity
between one and three years.
The balance of the Short-Term U.S. Treasury Portfolio's
assets may be invested in U.S. Treasury or U.S. Government
agency securities, as well as in repurchase agreements
collateralized by such securities. The Portfolio may also
invest in bond (interest rate) futures and options to a
limited extent. See "Implementation of Policies" for a
description of these investment practices of the Portfolio.
The SHORT-TERM FEDERAL PORTFOLIO invests primarily in U.S.
Government agency securities, which are debt obligations
issued or guaranteed by agencies or instrumentalities of the
U.S. Government. Such "agency" securities may not be backed
by the "full faith and credit" of the U.S. Government. The
Portfolio may also invest in U.S. Treasury securities, as
well as in repurchase agreements collateralized by U.S.
Treasury or U.S. Government agency securities. In an effort
to minimize fluctuations in market value, the Short-Term
Federal Portfolio is expected to maintain a dollar
weighted-average maturity between 1 and 3 years. See
"Implementation of Policies" for a description of these
investment practices of the Portfolio.
The SHORT-TERM CORPORATE PORTFOLIO invests in the following
investment grade fixed income securities:
(1) Short-term and intermediate-term corporate debt
securities;
(2) U.S. Treasury and U.S. Government agency obligations;
(3) Obligations issued by state and municipal governments
and their agencies and instrumentalities;
(4) Bank obligations, including certificates of deposit and
bankers acceptances;
(5) Commercial paper; and
(6) Repurchase agreements collateralized by these
securities.
Investment grade corporate debt securities are those rated a
minimum of Baa3 by Moody's Investors Service, Inc.
("Moody's") or BBB- by Standard & Poor's Corporation
("Standard & Poor's"). Investment grade commercial paper is
rated A-1 or better by Standard & Poor's or Prime-1 by
Moody's, or, if unrated, issued by a corporation having an
outstanding unsecured debt issue rated A or better by
Moody's or Standard & Poor's. At least 70% of the Short-Term
Corporate Portfolio's assets will be invested in debt
securities rated a minimum of A3 by Moody's or A-
</TABLE>

12
<PAGE>
<TABLE>
<S> <C>
by Standard & Poor's, and not more than 30% of the
Portfolio's assets may be invested in debt securities rated
Baa by Moody's or BBB by Standard & Poor's. Securities rated
Baa or BBB are considered medium grade obligations. Interest
payments and principal are regarded as adequate for the
present, but certain protective elements found in higher
rated bonds may be lacking. Such bonds lack outstanding
investment characteristics and, in fact, have speculative
characteristics as well.

In the event that a security held by the Portfolio is
downgraded, the Portfolio may continue to hold such security
until such time as the adviser deems it advantageous to
dispose of the security.

In an effort to minimize fluctuations in market value, the
Short-Term Corporate Portfolio is expected to maintain an
dollar-weighted average maturity between 1 and 3 years. The
Short-Term Corporate Portfolio may also hold securities of
foreign issuers provided such securities are denominated in
U.S. dollars, and may invest in bond (interest rate) futures
and options to a limited extent. See "Implementation of
Policies" for a description of these investment practices of
the Portfolio.

THREE PORTFOLIOS The INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO invests at
INVEST IN least 85% of its assets in intermediate-term securities
INTERMEDIATE-TERM backed by the full faith and credit of the U.S. Government.
BONDS Also, at least 65% of the Portfolio's assets will be
invested in U.S. Treasury bills, notes and bonds. The
dollar-weighted average maturity of the Portfolio is
expected to range from 5 to 10 years.

The balance of the Portfolio's assets may be invested in
U.S. Treasury or U.S. Government agency securities, as well
as in repurchase agreements collateralized by such
securities. The Portfolio may also invest in bond (interest
rate) futures and options to a limited extent. See
"Implementation of Policies" for a description of these
investment practices of the Portfolio.

The GNMA PORTFOLIO invests at least 80% of its assets in
Government National Mortgage Association ("GNMA" or "Ginnie
Mae") pass-through certificates. The balance of the
Portfolio's assets may be invested in other U.S. Treasury or
U.S. Government agency securities, as well as in repurchase
agreements collateralized by such securities. The Portfolio
may also invest in bond (interest rate) futures and options
to a limited extent. See "Implementation of Policies" for a
description of these investment practices of the Portfolio.

GNMA pass-through certificates are mortgage-backed
securities representing part ownership of a pool of mortgage
loans. Monthly mortgage payments of both interest and
principal "pass through" from homeowners to certificate
investors, such as the GNMA Portfolio. The GNMA Portfolio
reinvests the principal portion in additional securities and
distributes the interest portion as income to the
Portfolio's shareholders. Under normal circumstances, GNMA
certificates are expected to provide higher yields than U.S.
Treasury securities of comparable maturity.

The mortgage loans underlying GNMA certificates--issued by
lenders such as mortgage bankers, commercial banks, and
savings and loan associations-are either insured by the
Federal Housing Administration (FHA) or guaranteed by the
Veterans Administration (VA). Each pool of mortgage loans
must also be approved by GNMA, a U.S. Government corporation
within the U.S. Department of Housing and Urban
</TABLE>

13
<PAGE>
<TABLE>
<S> <C>
Development. Once GNMA approval is obtained, the timely
payment of interest and principal on each underlying
mortgage loan is guaranteed by the "full faith and credit"
of the U.S. Government.

Although stated maturities on GNMA certificates generally
range from 25 to 30 years, effective maturities are usually
much shorter due to the prepayment of the underlying
mortgages by homeowners. On average, GNMA certificates are
repaid within 12 years and so are classified as
intermediate-term securities.

THE INTERMEDIATE-TERM CORPORATE PORTFOLIO invests in a
diversified portfolio of investment grade corporate and
Government bonds. Under normal circumstances, at least 65%
of the Portfolio's assets are invested in straight debt
corporate bonds rated a minimum of Baa3 by Moody's or BBB-
by Standard & Poor's at the time of purchase. Additionally,
at least 80% of the Portfolio's assets will normally be
invested in a combination of investment grade corporate
bonds and securities of the U.S. Government and its agencies
and instrumentalities. The Intermediate-Term Corporate
Portfolio is expected to maintain a dollar-weighted average
maturity between 5 and 10 years.

The preponderance of the Portfolio's holdings will be
classified in the top three credit-rating categories.
Specifically, at least 70% of the Portfolio's assets will be
invested in the following securities:

(1) Short-term and intermediate-term corporate debt
securities which at the time of purchase are rated a minimum
of A3 by Moody's or A- by Standard & Poor's;

(2) Securities issued by the U.S. Government, state and
municipal governments or their agencies and
instrumentalities;

(3) Commercial paper of companies having, at the time of
purchase, outstanding debt securities rated as described in
(1) or commercial paper rated P-1 or P-2 by Moody's or
rated A-1 or A-2 by Standard & Poor's; and

(4) Short-term fixed income securities held as cash
reserves, including U.S. Treasury or U.S. Government agency
securities, certificates of deposit, bankers'
acceptances, or repurchase agreements collateralized by
these securities.

Up to 30% of the Intermediate-Term Corporate Portfolio's
assets may be invested in straight debt securities rated Baa
by Moody's or BBB by Standard & Poor's (see page 13 for a
description of these ratings), and in preferred stocks and
convertible securities. In addition, not more than 25% of
the Portfolio's assets may be invested in GNMA certificates
or other mortgage-backed securities. Mortgage-backed securi-
ties are subject to risks which are in addition to and
distinct from the risks inherent in investments in corporate
bonds. For a discussion of these special risks, see
"Investment Risks." In the event that a security held by the
Portfolio is downgraded, the Portfolio may continue to hold
such security until such time as the adviser deems it to be
advantageous to dispose of the security.

The Intermediate-Term Corporate Portfolio may also hold
securities of foreign issuers provided such securities are
denominated in U.S. dollars. The Portfolio may also invest
in bond (interest rate) futures and options to a limited
extent. See "Implementation of Policies" for a description
of these investment practices of the Portfolio.
</TABLE>

14
<PAGE>
<TABLE>
<S> <C>
TWO PORTFOLIOS The LONG-TERM U.S. TREASURY PORTFOLIO invests at least 85%
INVEST IN of its assets in long-term securities backed by the full
LONG-TERM BONDS faith and credit of the U.S. Government. Also, at least 65%
of the Portfolio's assets will be invested in U.S. Treasury
bills, notes and bonds. The dollar-weighted average maturity
of the Portfolio is expected to range from 15 to 30 years.

The LONG-TERM CORPORATE PORTFOLIO (formerly the "Investment
Grade Corporate Portfolio") invests in a diversified
portfolio of investment grade corporate and Government
bonds. Under normal circumstances, at least 65% of the
Portfolio's assets are invested in straight debt corporate
bonds rated a minimum of Baa3 by Moody's or BBB- by Standard
& Poor's at the time of purchase. Additionally, at least 80%
of the Portfolio's assets will normally be invested in a
combination of investment grade corporate bonds and
securities of the U.S. Government and its agencies and
instrumentalities. The average dollar-weighted maturity of
the Portfolio is expected to range from 15 to 25 years.

(1) Straight debt corporate securities which at the time of
purchase are rated a minimum of A3 by Moody's or A- by
Standard & Poor's;

(2) Securities issued by the U.S. Government or its agencies
and instrumentalities;

Up to 30% of the Long-Term Corporate Portfolio's assets may
be invested in straight debt securities rated Baa by Moody's
or BBB by Standard & Poor's (see page 13 for a description
of these ratings), and in preferred stocks and convertible
securities. In addition, not more than 25% of the
Portfolio's assets may be invested in GNMA certificates or
other mortgage-backed securities. In the event that a
security held by the Portfolio is downgraded, the Portfolio
may continue to hold such security until such time as the
adviser deems it to be advantageous to dispose of the
security.
</TABLE>

15
<PAGE>
<TABLE>
<S> <C>
The Long-Term Corporate Portfolio may also hold securities
of foreign issuers provided such securities are denominated
in U.S. dollars. The Portfolio may also invest in bond
(interest rate) futures and options to a limited extent. See
"Implementation of Policies" for a description of these
investment practices of the Portfolio.

* * *
The investment policies for the Fund are not fundamental and
so may be changed by the Board of Directors without
shareholder approval. However, shareholders would be
notified prior to any material change in the Fund's
investment policies.
- --------------------------------------------------------------------------------
INVESTMENT RISKS As mutual funds investing in fixed income securities, the
THE PORTFOLIOS ARE Portfolios of the Fund are subject primarily to interest
SUBJECT PRIMARILY rate and credit risk. INTEREST RATE RISK is the potential
TO INTEREST RATE, for a decline in bond prices due to rising interest rates.
INCOME, CREDIT AND In general, bond prices vary inversely with interest rates.
MANAGER RISK When interest rates RISE, bond prices generally FALL.
Conversely, when interest rates FALL, bond prices generally
RISE. The change in price depends on several factors,
including the bond's maturity date. In general, bonds with
longer maturities are more sensitive to changes in interest
rates than bonds with shorter maturities.

These principles of interest rate risk also apply to U.S.
Treasury and U.S. Government agency securities. As with
other bond investments, U.S. Government securities will rise
and fall in value as interest rates change. A SECURITY
BACKED BY THE U.S. TREASURY OR THE FULL FAITH AND CREDIT OF
THE UNITED STATES IS GUARANTEED ONLY AS TO THE TIMELY
PAYMENT OF INTEREST AND PRINCIPAL WHEN HELD TO MATURITY. THE
CURRENT MARKET PRICES FOR SUCH SECURITIES ARE NOT GUARANTEED
AND WILL FLUCTUATE.

As an illustration of interest rate risk, the charts below
depict the effect of a one and two percentage point change
in interest rates on three bonds of varying maturities:
</TABLE>

<TABLE>
<CAPTION>
PERCENT CHANGE IN THE PRICE OF A PAR BOND YIELDING 5.5%
1 PERCENTAGE 1 PERCENTAGE
POINT POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
- ---------------------------------------- ----------------- -----------------
<S> <C> <C>
Short-Term (2.5 years) - 2.3% + 2.3%
Intermediate-Term (10 years) - 7.3% + 8.0%
Long-Term (20 years) - 11.1% + 13.1%
</TABLE>

<TABLE>
<CAPTION>
2 PERCENTAGE 2 PERCENTAGE
POINT POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
- ---------------------------------------- ----------------- -----------------
<S> <C> <C>
Short-Term (2.5 years) - 4.5% + 4.7%
Intermediate-Term (10 years) - 13.9% + 16.7%
Long-Term (20 years) - 20.5% + 28.6%
</TABLE>

<TABLE>
<S> <C>
These charts are intended to provide you with guidelines for
determining the degree of interest rate risk you may be
willing to assume. The yield and price changes shown should
not be taken as representative of a Portfolio's current or
future yield or expected changes in a Portfolio's share
price.
</TABLE>

16
<PAGE>

<TABLE>
<S> <C>
INCOME RISK is the potential for a decline in a Portfolio's
income due to falling market interest rates. In relative
terms, income risk will be higher for the Fund's
shorter-term Portfolios and lower for the Fund's longer-term
Portfolios.

Each Portfolio of the Fund is also subject to credit risk.
CREDIT RISK, also known as default risk, is the possibility
that a bond issuer will fail to make timely payments of
interest or principal to a Portfolio. The credit risk of a
Portfolio depends on the quality of its investments.
Reflecting their higher risks, lower-quality bonds gener-
ally offer higher yields (all other factors being equal).

Besides interest rate risk and credit risk, investors are
exposed to PREPAYMENT RISK in the GNMA Portfolio and CALL
RISK in the Long-Term Corporate Portfolio.

Finally, the investment advisers manage the Fund's
Portfolios according to the traditional methods of "active"
investment management, which involves the buying and selling
of securities based upon economic, financial and market
analysis and investment judgement. MANAGER RISK refers to
the possibility that a Portfolio's investment adviser may
fail to execute the Portfolio's investment strategy
effectively. As a result, a Portfolio may fail to achieve
its stated objective.

THREE SHORT-TERM Interest rate risk for the SHORT-TERM U.S TREASURY
PORTFOLIOS PROVIDE PORTFOLIO, the SHORT-TERM FEDERAL PORTFOLIO, and the
MODERATE EXPOSURE SHORT-TERM CORPORATE PORTFOLIO should be modest. Because of
TO INTEREST RATE their short-term average weighted maturities, the three
RISK short-term Portfolios are expected to exhibit LOW TO
MODERATE price fluctuations as interest rates change.

The three Portfolios differ principally in terms of credit
quality and potential yield. For the Short-Term U.S.
Treasury Portfolio, credit risk should be negligible. In
relative terms, credit risk will be slightly higher for the
Short-Term Federal Portfolio because of its holdings of U.S.
Government agency securities. (Even though they carry top
(Aaa) credit ratings, "agency" obligations are not
explicitly guaranteed by the U.S. Government and so are
perceived as somewhat riskier than comparable Treasury
bonds.)

With its corporate bond holdings, the Short-Term Corporate
Portfolio offers the highest exposure to credit risk of the
three short-term Portfolios. However, because of the
Portfolio's well-diversified holdings and emphasis on
high-quality bonds, overall credit risk should still be
quite low.

INTEREST RATE RISK The three intermediate-term Portfolios are exposed to a
FOR THE THREE higher degree of interest rate risk than the three
INTERMEDIATE-TERM short-term Portfolios. The INTERMEDIATE-TERM U.S. TREASURY
PORTFOLIOS WILL BE PORTFOLIO, the GNMA PORTFOLIO and the INTERMEDIATE-TERM
HIGHER CORPORATE PORTFOLIO are expected to exhibit MODERATE TO HIGH
price fluctuations as interest rates change. Credit risk,
however, should be minimal for the Intermediate-Term U.S.
Treasury and the GNMA Portfolios, as both Portfolios invest
primarily in "full faith and credit" securities of the U.S.
Government.

Due to its investments in corporate securities, credit risk
associated with the Intermediate-Term Corporate Portfolio
will be higher than for the other two intermediate-term
Portfolios. However, the Intermediate-Term Corporate
Portfolio's diversification and quality of investments
should help limit credit risk.
</TABLE>

17
<PAGE>
<TABLE>
<S> <C>
The GNMA Portfolio is unique among the Fund's Portfolios in
its exposure to prepayment risk. Prepayment risk is the
possibility that, as interest rates fall, homeowners are
more likely to refinance their home mortgages. When home
mortgages are refinanced, the principal on GNMA certificates
held by the Portfolio is "prepaid" earlier than expected.
The GNMA Portfolio must then reinvest the unanticipated
principal in new GNMA certificates, just at a time when
interest rates on new mortgage investments are falling.

Prepayment risk has two important effects on the GNMA
Portfolio:

- When interest rates fall and additional mortgage
prepayments must be reinvested at lower interest rates,
the income of the GNMA Portfolio will be reduced.

- When interest rates fall, prices on GNMA securities will
not rise as much as comparable Treasury bonds, as bond
market investors anticipate an increase in mortgage
prepayments and a likely decline in income.

In part to compensate for this risk, the GNMA Portfolio will
generally offer higher yields than a bond portfolio of
comparable quality--such as the Intermediate-Term U.S.
Treasury Portfolio.

FOR THE TWO The two long-term Portfolios are exposed to substantial
LONG-TERM interest rate risk. The LONG-TERM U.S. TREASURY PORTFOLIO
PORTFOLIOS, and the LONG-TERM CORPORATE PORTFOLIO, both of which
INTEREST RATE RISK maintain average maturities in excess of 15 years, may
MAY BE SUBSTANTIAL exhibit HIGH TO VERY HIGH price fluctuations due to changing
interest rates.

The main difference between the two Portfolios is credit
risk. The Long-Term U.S. Treasury Portfolio invests
primarily in "full faith and credit" U.S. Treasury bonds for
maximum credit protection, while the Long-Term Corporate
Portfolio invests in investment grade corporate bonds for
higher yields. Although credit risk for the Long-Term
Corporate Portfolio will be somewhat higher, overall credit
risk should still be low because of the Portfolio's
well-diversified holdings and its emphasis on high-quality
bonds.

An additional risk associated with the Long-Term Corporate
Portfolio is call risk. Call risk is the possibility that
corporate bonds held by the Portfolio will be repaid prior
to maturity. Call provisions, common in many corporate bonds
held by the Portfolio, allow bond issuers to redeem bonds
prior to maturity (at a specified price). When interest
rates are falling, bond issuers often exercise these call
provisions, paying off bonds that carry high stated interest
rates and often issuing new bonds at lower rates. For the
Portfolio, the result would be that bonds with high interest
rates are "called" and must be replaced with lower-yielding
instruments. In these circumstances, the income of the
Portfolio would decline.

Reflecting these additional credit and call risks, the
Long-Term Corporate Portfolio will generally offer higher
yields than the Long-Term U.S. Treasury Portfolio.
- --------------------------------------------------------------------------------
WHO SHOULD INVEST The Fund is intended for investors who are seeking a high
INVESTORS SEEKING level of current income from their investments. The Fund is
CURRENT INCOME also suitable for investors with common stock holdings who
are seeking a complementary fixed income investment to
create a more diversified and balanced investment mix.
Because of potential fluctuations in
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the share price of the Fund's Portfolios, the Fund may be
inappropriate for short-term investors who require maximum
stability of principal. Because of the risks associated with
bond investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term bond market
movements.

Investors who engage in excessive account activity generate
additional costs which are borne by all of the Fund's
shareholders. In order to minimize such costs the Fund has
adopted the following policies. The Fund reserves the right
to reject any purchase request (including exchange purchases
from other Vanguard portfolios) that is reasonably deemed to
be disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Fund
has adopted exchange privilege limitations as described in
the section "Exchange Privilege Limitations." Finally, the
Fund reserves the right to suspend the offering of its
shares.

You should base your selection of a Portfolio (or
Portfolios) of the Fund on your own objectives, risk
preferences, and time horizon.

Three short-term Portfolios--the SHORT-TERM U.S. TREASURY
PORTFOLIO, SHORT-TERM FEDERAL PORTFOLIO, and SHORT-TERM
CORPORATE PORTFOLIO--are designed for investors who are
seeking yields that are more durable and usually higher than
those available from money market funds, and who can
tolerate modest fluctuations in the value of their
investment. The choice among the three is one of credit
quality--U.S. Treasury, U.S. Government agency, or
corporate.

The three intermediate-term Portfolios--the
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO, the GNMA
PORTFOLIO and the INTERMEDIATE-TERM CORPORATE PORTFOLIO--
offer high credit quality, higher yields and a steadier
income than available from the three short-term Portfolios.
Price swings, however, can be substantial. The choice
between the three is again one of credit quality--U.S.
Treasury, U.S. Government Agency, or corporate--as well as
one of prepayment risk (i.e., whether you are willing to
take on the prepayment risk of the GNMA Portfolio in
exchange for generally higher yields).

The two long-term Portfolios, the LONG-TERM U.S. TREASURY
PORTFOLIO and the LONG-TERM CORPORATE PORTFOLIO, are
designed for investors seeking high credit quality and
steady levels of income, and who can withstand potentially
large fluctuations in the market value of their investment.
The choice between the two is one of credit quality and call
risk. The Long-Term Corporate Portfolio generally offers
higher yields than the Long-Term U.S. Treasury Portfolio in
exchange for higher credit and call risks.
- --------------------------------------------------------------------------------
IMPLEMENTATION OF Each Portfolio of the Fund utilizes a variety of investment
POLICIES practices in pursuit of its objective.

EACH PORTFOLIO MAY Each Portfolio of the Fund may invest in repurchase
INVEST IN agreements according to the restrictions and limitations set
REPURCHASE forth in "Investment Policies." A repurchase agreement is a
AGREEMENTS means of investing monies for a short period. In a
repurchase agreement, a seller--a U.S. commercial bank or
recognized U.S. securities dealer--sells securities
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to a Portfolio and agrees to repurchase the securities at
the Portfolio's cost plus interest within a specified period
(normally one day). In these transactions, the securities
purchased by the Portfolio will have a total value equal to
or in excess of the value of the repurchase agreement, and
will be held by the Fund's Custodian Bank until repurchased.

The use of repurchase agreements involves certain risks. For
example, if the other party to the agreement defaults on its
obligation to repurchase the underlying security at a time
when the value of the security has declined, the Portfolio
may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the Bankruptcy Code
or other laws, a court may determine that the underlying
security is collateral for a loan by the Portfolio and not
within the control of the Portfolio. As a result, the
Portfolio's ability to realize on such collateral may be
automatically stayed. Finally, it is possible that the
Portfolio may not be able to substantiate its interest in
the underlying security and may be deemed an unsecured
creditor of the other party to the agreement. While each
Portfolio's management acknowledges these risks, it is
expected that they can be controlled through careful
monitoring procedures.

EACH PORTFOLIO MAY Each Portfolio of the Fund may own restricted securities to
OWN RESTRICTED a limited extent. Restricted securities are securities which
SECURITIES are not freely marketable or which are subject to
restrictions upon sale under the Securities Act of 1933.
Each Portfolio may invest up to 15% of its net assets in
restricted securities. (Included within this limit are
restricted securities and, other securities for which price
quotations are not readily available.)

THREE PORTFOLIOS The Short-Term Corporate, Intermediate-Term Corporate and
MAY INVEST IN Long-Term Corporate Portfolios may hold securities of
SECURITIES OF foreign issuers, but all such securities must be denominated
FOREIGN ISSUERS in U.S. dollars. Securities of foreign issuers may trade in
U.S. or foreign securities markets. Securities of foreign
issuers may involve investment risks that are different from
those of domestic issuers. Such risks include the effect of
foreign economic policies and conditions, future political
and economic developments, and the possible imposition of
exchange controls or other foreign governmental restrictions
on foreign debt issuers. There may also be less publicly
available information about a foreign issuer than a domestic
issuer of securities. Foreign issuers are generally not
subject to the uniform accounting, auditing and financial
reporting standards that apply to domestic issuers. Also,
foreign debt markets may be characterized by lower
liquidity, greater price volatility, and higher transactions
costs. Additionally, it may be difficult to obtain or
enforce a legal judgement in a foreign court.

MOST PORTFOLIOS Each Portfolio of the Fund, except for the Short-Term
MAY INVEST IN Federal Portfolio, may invest in futures contracts and
FUTURES CONTRACTS, options to a limited extent. Specifically, a Portfolio may
OPTIONS, AND OTHER enter into futures contracts provided that not more than 5%
DERIVATIVE of its assets are required as a futures contract margin
SECURITIES deposit; in addition, a Portfolio may enter into futures
contracts and options transactions only to the extent that
obligations under such contracts or transactions represent
not more than 20% of the Portfolio's assets.

Futures contracts and options may be used for several
reasons: to maintain cash reserves while simulating full
investment, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a specific
futures contract is
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20
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priced more attractively than other futures contracts or the
underlying security or index. The Portfolios intend to use
futures contracts only for bona fide hedging purposes and
will not use futures contracts or options for speculative
purposes.

FUTURES CONTRACTS The primary risks associated with the use of futures
AND OPTIONS POSE contracts and options are: (i) imperfect correlation between
CERTAIN RISKS the change in market value of the bonds held by a Portfolio
and the prices of futures contracts and options; and (ii)
possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those
contracts whose price fluctuations are expected to resemble
those of the Portfolio's underlying securities. The risk
that a Portfolio will be unable to close out a futures
position will be minimized by entering into such transac-
tions on a national exchange with an active and 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 (or gain) to the investor. When
investing in futures contracts, a Portfolio will segregate
cash or cash equivalents in the amount of the underlying
obligation.

Derivatives are instruments whose value is linked to or
derived from an underlying security. The most common are
futures and options which are described above. Other
derivatives include swaps, inverse floaters, IO's (interest
only), and PO's (principal only). Derivatives may be traded
separately on exchanges or in the over-the-counter market,
or they may be imbedded in other securities. The most common
imbedded derivative is the call option attached to or
imbedded in a callable government or callable corporate
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, i.e. the bond
issuer has the right to call the bond away from the holder
of the bond. Any of these instruments may also be used
individually or in combination to hedge against unfavorable
changes in interest rates, or to speculate on 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 Fund's
Portfolios 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 their
obligations under the derivative agreement.

EACH PORTFOLIO MAY Each Portfolio of the Fund may lend its investment
LEND ITS securities to qualified institutional investors for either
SECURITIES short-term or long-term purposes of realizing additional
income. Loans of securities by a Portfolio will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its agencies.
The collateral will equal at least 100% of the current
market value of the loaned securities, and such loans may
not exceed 33 1/3% of the value of the Portfolio's
securities.
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21
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MOST PORTFOLIOS The Short-Term Federal, Short-and Intermediate-Term
MAY INVEST IN CMOS Corporate and the Short-, Intermediate-and Long-Term U.S.
Treasury Portfolios may invest in collateralized mortgage
obligations (CMOs), bonds that are collateralized by whole
loan mortgages or mortgage pass-through securities. In the
case of the Short-Term Federal and the Short-, Intermediate-
and Long-Term U.S. Treasury Portfolios, only CMOs issued by
agencies or instrumentalities of the U.S. Government will be
purchased. However, the Short-and Intermediate-Term
Corporate Portfolios may also purchase privately-issued CMOs
carrying investment grade ratings. The bonds issued under a
CMO structure are divided into groups with varying
maturities, and the cash flows generated by the mortgages or
mortgage pass-through securities in the collateral pool are
used to first pay interest and then pay principal to the CMO
bondholders. Under the CMO structure, the repayment of
principal among the different groups is prioritized in
accordance with the terms of the particular CMO issuance.
The "fastest-pay" group of bonds, as specified in the
prospectus for the issuance, would initially receive all
principal payments. When that group of bonds is retired, the
next group or groups, in the sequence, as specified in the
prospectus, receive all of the principal payments until all
of the groups are retired. Aside from market risk, the
primary risk involved in any mortgage security, such as a
CMO issuance, is its exposure to prepayment risk. To the
extent a particular group of bonds is exposed to this risk,
the bondholder is generally compensated in the form of
higher yield (see "Investment Risks"). In order to provide
security, in addition to the underlying collateral, many CMO
issues also include minimum reinvestment rate and minimum
sinking-fund guarantees. Typically, the Portfolios will
invest in those CMOs that most appropriately reflect their
average maturities and market risk profiles. Consequently,
the Short-Term Portfolios invest only in CMOs with highly
predictable short-term average maturities. Similarly, the
Intermediate-Term Portfolios will invest in those CMOs that
carry market risks and expected average maturities consis-
tent with intermediate-term bonds, and the Long-Term U.S.
Treasury Portfolio will invest in those CMO's that carry
market risks and expected average maturities consistent with
long-term bonds.

The maturity of some classes of CMOs may be very difficult
to predict because any such predictions are highly dependent
upon assumptions regarding the prepayments which CMOs may
experience. Deviations in the actual prepayments experi-
enced may significantly affect the ultimate maturity of
CMOs, and in such an event, the maturity and risk
characteristics of CMOs purchased by the Portfolios may be
significantly greater or less than intended. The possibility
that rising interest rates may cause prepayments to occur at
a slower than expected rate is known as extension risk. This
particular risk may effectively change a CMO which was
considered short-or intermediate-term at the time of
purchase into a long-term security. Alternatively, there are
certain classes of CMOs that are by design constructed to
have highly predictable average maturities. Such CMOs will
retain their relative predictability over a broad range of
prepayment experience. The Portfolios expect to control
extension risk by purchasing these specific classes of CMOs
which, in the advisers' opinions, are reasonably
predictable.

PORTFOLIO TURNOVER Although they generally seek to invest for the long term,
RATES WILL VARY the Portfolios of the Fund retain the right to sell
securities regardless of how long they have been held. It is
anticipated that the annual portfolio turnover rate for the
GNMA and Long-Term
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Corporate Portfolios will not exceed 100%. A 100% turnover
rate would occur, for example, if all of the securities in a
Portfolio were replaced within one year. For the
Intermediate-Term and Long-Term U.S. Treasury and the
Intermediate-Term Corporate Portfolios, portfolio turnover
rates will generally not exceed 200%. For the Short-Term
U.S. Treasury, Short-Term Federal, and Short-Term Corporate
Portfolios, portfolio turnover rates will be higher due to
the short-term maturities of the securities purchased, but
are not expected to exceed 300%. A higher Portfolio turno-
ver rate will cause a Portfolio to incur additional
brokerage costs and may cause a Portfolio to realize a
higher level of capital gains or losses.
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INVESTMENT Each of the Fund's Portfolios has adopted certain
LIMITATIONS limitations designed to reduce its exposure to specific
situations. Some of these limitations are that a Portfolio
will not:
THE FUND HAS
ADOPTED
CERTAIN (a) with respect to 75% of its assets, invest more than 5%
FUNDAMENTAL of the value of its assets in the securities of any single
LIMITATIONS company;
(b) with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer;

(c) invest more than 5% of its assets in the securities of
companies that have a continuous operating history of less
than three years;

(d) invest more than 25% of its assets in any one industry,
provided that: (i) this limitation does not apply to
obligations issued or guaranteed by the U.S. Government
or its agencies or instrumentalities; (ii) utility
companies will be divided according to their services.
For example, gas, gas transmission, electric, electric
and gas, and telephone will each be considered a
separate industry; and (iii) financial service companies
will be classified according to the end users of their
services. For example, automobile finance, bank finance,
and diversified finance will be considered as separate
industries;

(e) borrow money, except that the Portfolio may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the value
of the Portfolio's net assets (including the amount
borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of the
Portfolio's net assets, the Portfolio will not make any
additional investments.

(f) pledge, mortgage or hypothecate its assets to an extent
greater than 5% of the value of its total assets.

These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional Informa-
tion may be changed only with the approval of a majority of
the Fund's shareholders.
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23
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MANAGEMENT OF THE The Fund is a member of The Vanguard Group of Investment
FUND Companies, a family of 32 investment companies with 78
VANGUARD distinct portfolios and total assets in excess of $120
ADMINISTERS AND billion. Through their jointly owned subsidiary, The
DISTRIBUTES THE Vanguard Group, Inc. ("Vanguard"), the Fund and the other
FUND funds in the Group obtain at cost virtually all of their
corporate management, administrative, shareholder accounting
and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate struc-
ture, the Vanguard funds have costs substantially lower than
those of most competing mutual funds. In 1993, the average
expense ratio (annual costs including advisory fees divided
by total net assets) for the Vanguard funds amounted to
approximately .30% compared to an average of 1.02% for the
mutual fund industry (data provided by Lipper Analytical
Services).

The Officers of the Fund oversee its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.

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

Vanguard also provides distribution and marketing services
to the Vanguard funds. The funds are available on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT The Fund utilizes two investment advisers. Wellington
ADVISERS Management Company serves as investment adviser to the GNMA
THE FUND EMPLOYS and Long-Term Corporate Portfolios; Vanguard's Fixed Income
TWO INVESTMENT Group serves as investment adviser to the Short-Term U.S.
ADVISERS Treasury, Short-Term Federal, Short-Term Corporate,
Intermediate-Term U.S. Treasury, Intermediate-Term Corporate
and Long-Term U.S. Treasury Portfolios.

WELLINGTON Under an investment advisory agreement with the Fund dated
MANAGEMENT COMPANY May 31, 1993, Wellington Management Company ("WMC"), 75
State Street, Boston, MA 02109, manages the investment and
reinvestment of assets in the GNMA and Long-Term Corporate
Portfolios, and continuously reviews, supervises and
administers the investment program of these two Portfolios.
WMC discharges its responsibilities subject to the control
of the Officers and Directors of the Fund.

WMC is a professional investment counseling firm which
globally provides investment services to investment
companies, institutions and individuals. Among the clients
of WMC are 12 of the 32 investment companies of The Vanguard
Group. As of December 31, 1993, WMC held discretionary
management authority with respect to approximately $82.8
billion of assets. WMC and its predecessor organizations
have provided investment advisory services to investment
companies since 1933 and to investment counseling clients
since 1960.
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As of March 31, 1994, Paul D. Kaplan, Senior Vice President
of WMC, assumed the duties of portfolio manager for the GNMA
portfolio. Prior to this change, Mr. Kaplan was assistant
portfolio manager for the GNMA Portfolio. Mr. Kaplan has
been associated with WMC for 16 years and also currently
manages the bond component of Vanguard Utilities Income
Portfolio.

Also as of March 31, 1994, Earl E. McEvoy, Senior Vice
President of WMC, assumed responsibility for the management
of the Fund's Long-Term Corporate Portfolio. Mr. McEvoy
currently manages the Fund's High Yield Corporate Portfolio
as well as Vanguard Preferred Stock Fund and the bond
component of Vanguard/Wellesley Income Fund, Inc. Mr. McEvoy
has also been associated with Wellington Management Company
for 16 years.

Mr. Kaplan and Mr. McEvoy are supported by research and
other investment services provided by the professional staff
of WMC.

Under the Fund's investment advisory agreement, the fee paid
to WMC is based on the total assets of the GNMA Portfolio,
the Long-Term Corporate Portfolio, and the total assets of
the High Yield Corporate Portfolio of Vanguard Fixed Income
Securities Fund which is not included in this Prospectus.
The three Portfolios pay WMC an aggregate fee at the end of
each fiscal quarter, calculated by applying a quarterly rate
based on the following annual percentage rates, to the
aggregate average month-end net assets of the three
Portfolios:
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<CAPTION>
NET ASSETS RATE
-------------------- -----
<S> <C> <C>
First $2.5 billion .125%
Next $2.5 billion .100%
Next $2.5 billion .075%
Over $7.5 billion .050%
</TABLE>

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<S> <C>
The advisory fee is then apportioned to each Portfolio based
on the relative net assets of each; provided, however, that
following such an allocation, the fee to be paid by the GNMA
Portfolio is reduced by 75%, and the fee paid by the
Long-Term Corporate Portfolio is reduced by 50%. For the
fiscal year ended January 31, 1994, the GNMA and Long-Term
Corporate Portfolios paid annual advisory fees to WMC equal
to, respectively, .02 of 1%, and .04 of 1% of average net
assets. These fees were paid pursuant to a previous advisory
agreement that called for a higher rate of fees.

The investment advisory agreement authorizes WMC to select
brokers or dealers to execute purchases and sales of each
Portfolio's securities, and directs WMC to use its best
efforts to obtain the best available price and most
favorable execution with respect to all transactions. The
full range and quality of brokerage services are considered
in making these determinations.

The Fund has authorized WMC to pay higher commissions in
recognition of brokerage services felt necessary for the
achievement of better execution, provided the adviser
believes this to be in the best interest of the Fund.
Although the Fund does not market its shares through
intermediary brokers or dealers, WMC may place orders with
qualified broker-dealers who recommend the Fund to clients
if the Officers of the Fund believe that the quality of the
transaction and the commission are comparable to what they
would be with other qualified brokerage firms.
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VANGUARD FIXED The Short-Term U.S. Treasury, Short-Term Federal, Short and
INCOME GROUP Intermediate-Term Corporate, and Intermediate-and Long-Term
U.S. Treasury Portfolios receive all investment advisory
services on an at-cost basis from Vanguard's Fixed Income
Group. The Group also provides investment advisory services
to several other Vanguard money market and bond portfolios,
both taxable and tax-exempt. Total assets under management
by Vanguard's Fixed Income Group were $52 billion as of
December 31, 1993.

Ian A. MacKinnon, Senior Vice President of Vanguard, has
been in charge of the Fixed Income Group since its inception
in 1981. Mr. MacKinnon is responsible for setting the broad
investment strategies employed by the Fund, and for
overseeing the portfolio managers who implement those
strategies on a day-to-day basis. The Fund's portfolio
managers are as follows:

- Robert F. Auwaerter, Vice President of Vanguard, serves as
portfolio manager of the Short-Term Federal, Long-Term
U.S. Treasury Portfolio, Short-Term Corporate,
Intermediate-Term U.S. Treasury, and Intermediate-Term
Corporate Portfolios. Associated with the Fixed Income
Group since 1981, Mr. Auwaerter has managed the Short-Term
Corporate Portfolio since 1983, the Long-Term U.S.
Treasury Portfolio since 1994 and each of these other
Portfolios since their respective inceptions. (Previously,
the Long-Term U.S. Treasury Portfolio was managed by
Anthony Jiorle.)

- John Hollyer, Assistant Vice President of Vanguard, serves
as portfolio manager of the Short-Term U.S. Treasury
Portfolio. Associated with the Fixed Income Group since
1989, Mr. Hollyer began managing the Portfolio in 1993.
(Previously, the Portfolio was managed by Mr. Auwaerter.)
For two years prior to joining Vanguard, Mr. Hollyer
traded U.S. Government bonds for an international
investment bank.

The Fixed Income Group manages the investment and
reinvestment of the assets of these six Portfolios and
continuously reviews, supervises and administers each
Portfolio's investment program, subject to the maturity and
quality standards specified in this Prospectus and
supplemental guidelines approved by the Fund's Board of
Directors. The Fixed Income Group's selection of investments
for the Portfolios is based on: (a) continuing credit
analysis of those instruments held in the Portfolios and
those being considered for inclusion therein; (b) possible
disparities in yield relationships between different money
market instruments; and (c) actual or anticipated movements
in the general level of interest rates.

Vanguard's Fixed Income Group is also responsible for the
placement of portfolio transactions and the negotiation of
commissions for the six Portfolios. The purchase and sale of
investment securities will ordinarily be principal
transactions. Portfolio securities will normally be
purchased directly from the issuer or from an underwriter or
market maker for the securities. There usually will be no
brokerage commissions paid by a Portfolio for securities
purchased from an issuer. Purchases from underwriters of
securities will include a commission or concession paid by
the issuer to the underwriter, and purchases from dealers
serving as market makers will include a dealer's mark-up.
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26
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<S> <C>
In purchasing and selling securities for each of the six
Portfolios, it is the Fund's policy to seek to obtain
quality execution at the most favorable prices, through
responsible broker-dealers. In selecting broker-dealers to
execute the securities transactions for the Portfolios,
consideration will be given to such factors as the price of
the security; the rate of the commission; the size and
difficulty of the order; the reliability, integrity,
financial condition, general execution and operational ca-
pabilities of the competing broker-dealer; and the brokerage
and research services provided to the Fund.

Vanguard's Fixed Income Group may occasionally make
recommendations to other Vanguard Funds or clients which
result in their purchasing or selling securities
simultaneously with a Portfolio of the Fund. As a result,
the demand for securities being purchased or the supply of
securities being sold may increase, and this could have an
adverse effect on the price of those securities. It is the
policy of the Fixed Income Group not to favor one client
over another in making recommendations or placing an order.
If two or more clients are purchasing a given security on
the same day from the same broker-dealer, such transactions
may be averaged as to price.

Although the Fund does not market its shares through brokers
or dealers, the Fixed Income Group may place orders with
qualified broker-dealers who recommend the Fund to clients
if the Fund's Officers believe that the quality of the
transaction and the commission are comparable to what they
would be with other qualified brokerage firms.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL Dividends consisting of virtually all of the ordinary income
GAINS AND TAXES of each Portfolio of the Fund are declared daily and are
DIVIDENDS ARE PAID payable to shareholders of record at the time of
ON declaration. Such dividends are paid on the first business
THE FIRST BUSINESS day of each month. Net capital gains distributions, if any,
DAY will be made annually.
OF EACH MONTH The Fund's dividend and capital gains distributions may be
reinvested in additional shares or received in cash. See
"Choosing a Distribution Option" for a description of these
distribution methods.

In order to satisfy certain requirements of the Tax Reform
Act of 1986, the Fund may declare year-end dividend and
capital gains distributions during December. Such
distributions, if received by shareholders by January 31,
are deemed to have been paid by the Fund and received by
shareholders on December 31 of the prior year.

Each Portfolio of the Fund intends to continue to qualify
for taxation as a "regulated investment company" under the
Internal Revenue Code so that none of the Portfolios will be
subject to federal income tax to the extent its income is
distributed to shareholders. Dividends paid by the Fund from
net investment income, whether received in cash or
reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate investors,
dividends paid by the Fund from net investment income will
generally not qualify for the intercorporate dividends-re-
ceived deduction.

Distributions paid by the Fund from long-term capital gains,
whether received in cash or reinvested in additional shares,
are taxable as long-term capital gains, regardless of the
length of time you have owned shares in the Fund. Capital
gains
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27
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distributions are made when the Fund realizes net capital
gains on sales of portfolio securities during the year. For
the Fund, realized capital gains are not expected to be a
significant or predictable part of investment return.

The Fund will notify you annually as to the tax status of
dividend and capital gains distributions paid by the Fund.
The Fund is managed without regard to tax ramifications.

A CAPITAL GAIN OR A sale of shares of the Fund is a taxable event and may
LOSS MAY BE result in a capital gain or loss. A capital gain or loss may
REALIZED UPON be realized from an ordinary redemption of shares, a
EXCHANGE OR check-writing redemption, or an exchange of shares between
REDEMPTION two mutual funds (or two portfolios of a mutual fund).

Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes. However, depending on
provisions of your state's tax law, the portion of a
Portfolio's income derived from "full faith and credit" U.S.
Treasury obligations may be exempt from state and local
taxes. The Fund will indicate each year the portion of a
Portfolio's income, if any, that may qualify for this
exemption.

The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. You may avoid this withholding
requirement by certifying on your Account Registration Form
your proper Social Security or Taxpayer Identification
Number and by certifying that you are not subject to backup
withholding.

The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that state. In the
opinion of counsel, the shares of the Fund are exempt from
Pennsylvania personal property taxes.

The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an
investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE OF The share price or "net asset value" per share of each
EACH PORTFOLIO Portfolio is computed daily by dividing the total value of
the investments and other assets of each Portfolio, less any
liabilities, by the total outstanding shares of such
Portfolio. The net asset value per share of each Portfolio
is determined as of the regular close of the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on each day the
Exchange is open for trading. Securities which are traded
over-the-counter and on a stock exchange will be valued
according to the broadest and most representative market,
and it is expected that for bonds and other fixed income
securities this ordinarily will be the over-the-counter
market.

However, 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 but take into account institutional size trading in
similar groups of securities and any developments related to
specific securities. Securities not priced in this manner
are valued at the most recent
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28
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quoted bid price, or when stock exchange valuations are
used, at the latest quoted sale price on the date of
valuation. Short-term instruments are valued at cost, which
approximates market value. Other assets and securities for
which no quotations are readily available will be valued in
good faith at fair market value using methods determined by
the Board of Directors.

Each Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of The Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL The Fund is a Maryland corporation. The Articles of
INFORMATION Incorporation permit the Directors to issue 3,500,000,000
shares of common stock, with a $.001 par value. The Board of
Directors has the power to designate one or more classes
("Portfolios") of shares of common stock and to classify or
reclassify any unissued shares with respect to such classes.
Currently the Fund is offering shares of nine Portfolios.

The shares of each Portfolio are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and have
no pre-emptive rights. Such shares have non-cumulative
voting rights, meaning that the holders of more than 50% of
the shares voting for the election of Directors can elect
100% of the Directors if they so choose.

Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10% of
the outstanding shares of the Fund.

All securities and cash for the GNMA and Long-Term Corporate
Portfolios are held by Morgan Guaranty Trust Company, New
York, NY. For the Short-Term Federal, Short-Term Corporate,
and Long-Term U.S. Treasury Portfolios, all securities and
cash are held by CoreStates Bank, N.A., Philadelphia, PA.
For the Short-Term and Intermediate-Term U.S. Treasury and
the Intermediate Term Corporate Portfolios, all securities
and cash are held by State Street Bank and Trust Company,
Boston, MA. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing Agent.
Price Waterhouse serves as independent accountants for the
Fund and will audit its financial statements annually. The
Fund is not involved in any litigation.
- --------------------------------------------------------------------------------
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29
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SHAREHOLDER GUIDE

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OPENING AN ACCOUNT You may open a regular (non-retirement) account, either by
AND PURCHASING mail or wire. Simply complete and return an Account
SHARES Registration Form, and any required legal documentation,
indicating the Portfolio you have chosen and the amount you
wish to invest. Your purchase must be equal to or greater
than the $3,000 minimum initial investment requirement for a
Portfolio ($500 for Individual Retirement Accounts and
Uniform Gifts/Transfers to Minors Act accounts). You must
open a new Individual Retirement Account by mail (IRAs may
not be opened by wire) using a Vanguard IRA Adoption
Agreement. Your purchase must be equal to or greater than
the $500 minimum initial investment requirement, but no more
than $2,000 if you are making a regular IRA Contribution.
Rollover contributions are generally limited to the amount
withdrawn within the past 60 days from an IRA or other
qualified retirement plan. If you need assistance with the
forms or have any questions, please call our Investor
Information Department (1-800-662-7447). Note: For other
types of account registrations (e.g., corporations,
associations, other organizations, trusts or powers of
attorney), please call us to determine which additional
forms you may need.

Because of the risks associated with bond investments, the
Fund is intended to be a long term investment vehicle and is
not designed to provide investors with a means of
speculating on short-term market movements. Consequently,
the Fund reserves the right to reject any specific purchase
(and exchange purchase) request. The Fund also reserves the
right to suspend the offering of shares for a period of
time.

The Fund's shares are purchased at the next-determined net
asset value after your investment has been received in the
form of Federal Funds. See "When Your Account Will Be
Credited." The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees).

ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($100 minimum per Portfolio), wire ($1,000 minimum per
Portfolio), exchange from another Vanguard Fund account, or
Vanguard Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some
instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
------------------------------------------------------------
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30
<PAGE>

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<CAPTION>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS

<S> <C> <C>
PURCHASING BY Please include the amount of Additional investments should
MAIL your initial investment and include the Invest-by-Mail
Complete and the Portfolio(s) you have remit-
sign the selected on the registration tance form attached to your
enclosed Account form, make your check payable Fund confirmation statements.
Registration to THE VANGUARD GROUP--(PORT- Please make your check payable
Form FOLIO NUMBER) (SEE BELOW FOR to THE VANGUARD
THE APPROPRIATE PORTFOLIO GROUP--(PORTFOLIO NUMBER) (SEE
NUMBER), and mail to: BELOW FOR THE APPROPRIATE
VANGUARD FINANCIAL CENTER PORTFOLIO NUMBER), write your
P.O. BOX 2600 account number on your check
VALLEY FORGE, PA 19482 and, using the return envelope
provided, mail to the address
indicated on the
Invest-by-Mail Form.

For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.

VANGUARD FIXED INCOME SECURITIES FUND PORTFOLIO NUMBERS:
SHORT-TERM U.S. TREASURY--32
SHORT-TERM FEDERAL--49
SHORT-TERM CORPORATE--39
INTERMEDIATE-TERM U.S. TREASURY--35
GNMA--36
INTERMEDIATE-TERM CORPORATE--71
LONG-TERM U.S. TREASURY--83
LONG-TERM CORPORATE--28
--------------------------------------------------------------
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PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO 0101 9897
ATTN VANGUARD
VANGUARD FIXED INCOME SECURITIES FUND
NAME OF PORTFOLIO
ACCOUNT NUMBER
ACCOUNT REGISTRATION

BEFORE WIRING To assure proper receipt, please be sure your bank includes
Please contact the Portfolio name, the account number Vanguard has assigned
Client Services to you and the eight-digit CoreStates number. If you are
(1-800-662-2739) opening a new account, you must contact our Client Services
Department (1-800-662-2739) before wiring funds.
Additionally, complete the Account Registration Form and
mail it to the "New Account" address above after completing
your wire arrangement. NOTE: Federal Funds wire purchase
orders will be accepted only when the Fund and Custodian
Bank are open for business.
------------------------------------------------------------
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31
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PURCHASING BY You may open an account or purchase additional shares by
EXCHANGE (from a making an exchange from an existing Vanguard Fund account.
Vanguard account) However, the Fund reserves the right to refuse any exchange
purchase request. Call our Client Services Department
(1-800-662-2739) for assistance. The new account will have
the same registration as the existing account.
------------------------------------------------------------
PURCHASING BY The Fund Express SPECIAL PURCHASE option lets you move money
FUND EXPRESS from your bank account to your Vanguard account at your
Special Purchase request. Or, if you choose the AUTOMATIC INVESTMENT option,
and money will be moved from your bank account to your Vanguard
Automatic account on the schedule (monthly, bimonthly [every other
Investment month], quarterly or yearly) you select. To establish these
Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express enrollment; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION 1. AUTOMATIC REINVESTMENT OPTION--Both dividends and capital
OPTION gains distributions will be reinvested in additional
Portfolio shares. This option will be selected for you
automatically unless you specify one of the other
options.

2. CASH DIVIDEND OPTION--Your dividends will be paid in cash
and your capital gains will be reinvested in additional
Portfolio shares.

3. ALL CASH OPTION--Both dividend and capital gains
distributions will be paid in cash.

You may change your option by calling our Client Services
Department (1-800-662-2739).

In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department
(1-800-662-2739) for information. You may also elect
Vanguard Dividend Express which allows you to transfer your
cash dividends and/or capital gains distributions
automatically to your bank account. Please see "Other
Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, each Portfolio is required to
INVESTORS SHOULD distribute net capital gains and dividend income to
ASK Portfolio shareholders. These distributions are made to all
ABOUT THE TIMING shareholders who own Portfolio shares as of the
OF distribution's record date, regardless of how long the
CAPITAL GAINS AND shares have been owned. Purchasing shares just prior to the
DIVIDEND record date could have significant impact on your tax
DISTRIBUTIONS liability for the year. For example, if you purchase shares
BEFORE INVESTING immediately prior to the record date of a sizable capital
gain, you will be assessed taxes on the amount of the
capital gain distribution even though you owned the
Portfolio shares for just a short period of time. (Taxes are
due on the distributions even if the dividend or gain is
reinvested in additional Portfolio shares.) While the total
value of your investment will be the same after the capital
gain distribution--the amount of the capital gain
distribution will offset the drop in the net asset value of
the shares--you should be aware of the tax implications the
timing of your purchase may have.
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32
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Prospective investors should, therefore, inquire about
potential distributions before investing. Each Portfolio of
the Fund's annual capital gains distribution normally occurs
in December, while income dividends are generally paid on
the first business day of each month. For additional
information on distributions and taxes, see the section
titled "Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
ESTABLISHING complete your Account Registration Form. IF YOU WISH TO ADD
OPTIONAL SERVICES OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD WITH
ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR
FURTHER ASSISTANCE.

SIGNATURE For our mutual protection, we may require a signature
GUARANTEES guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your signa-
ture and may be obtained from banks, brokers and any other
guarantor that Vanguard deems acceptable. A SIGNATURE
GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.

CERTIFICATES Share certificates will be issued upon request for all
Portfolios except the Short and Intermediate-Term U.S.
Treasury and Intermediate-Term Corporate Portfolios. If a
certificate is lost, you may incur an expense to replace it.

BROKER-DEALER If you purchase shares in Vanguard Funds through a
PURCHASES registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.

CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade has been
received.
- --------------------------------------------------------------------------------
WHEN YOUR ACCOUNT The TRADE DATE is the date on which your account is
WILL BE CREDITED credited. It is generally the day on which the Fund receives
your investment in the form of Federal Funds (monies
credited to the Fund's Custodian Bank by a Federal Reserve
Bank). Your trade date varies according to your method of
payment for your shares.

Purchases by check will receive a trade date the day the
funds are received in good order by Vanguard. Thus, if your
purchase by check is received by the close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time), your
trade date is the business day your check is received in
good order. If your purchase is received after the close of
the Exchange, your trade date is the business day following
receipt of your check.

For purchases by Federal Funds wire or exchange, the Fund is
credited immediately with Federal Funds. Thus, if your
purchase by Federal Funds wire or exchange is received by
the close of the Exchange, your trade date is the day of
receipt. If your purchase is received after the close of the
Exchange, your trade date is the business day following
receipt of your wire or exchange.

Your shares are purchased at the next determined net asset
value after your investment has been received in the form of
Federal Funds. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.)
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33
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In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent
bank. The name of the U.S. correspondent bank must be
printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account by
SHARES redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are
normally mailed, credited or wired--depending upon the
method of withdrawal you have previously chosen--within two
business days after the receipt of the request in Good
Order.

SELLING BY WRITING You may withdraw funds from your account by writing a check
A CHECK payable in the amount of $250 or more. When a check is
presented for payment to the Fund's agent, CoreStates Bank,
N.A., the Fund will redeem sufficient shares in your account
at the next determined net asset value to cover the amount
of the check.

In order to establish the checkwriting option on your
account, all registered shareholders must sign a signature
card. After your completed signature card is received by the
Fund, an initial supply of checks will be mailed within 10
business days. There is no charge for checks or for their
clearance. CORPORATIONS, TRUSTS AND OTHER ORGANIZATIONS
SHOULD CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739)
BEFORE SUBMITTING SIGNATURE CARDS, AS ADDITIONAL DOCUMENTS
MAY BE REQUIRED TO ESTABLISH THE CHECKWRITING SERVICE.

Before establishing the checkwriting option, you should be
aware that:

1. Writing a check (a redemption of shares) is a taxable
event.

2. The Fund does not allow an account to be closed through
the checkwriting option.

3. Vanguard cannot guarantee a stop payment on the
checkwriting option. If you wish to reverse a stop payment
order, you must do so in writing.

4. Shares held in certificate form cannot be redeemed using
the checkwriting option.

5. The Fund reserves the right to terminate or alter this
service at any time.
------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD FIXED INCOME SECURITIES FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Fixed Income
Securities Fund, 455 Devon Park Drive, Wayne, PA 19087.)

The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
------------------------------------------------------------
DEFINITION OF GOOD GOOD ORDER means that the request includes the following:
ORDER 1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
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34
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5. Any other supporting legal documentation that might be
required in the case of estates, corporations, trusts and
certain other accounts.
6. Any certificates that you hold for the account.

IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739).
------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized
TELEPHONE representative may call our Client Services Department at
1-800-662-2739. For telephone redemptions, you may have the
proceeds sent to you by mail or by wire. In addition to the
details below, please see "Important Information About
Telephone Transactions."

BY MAIL: Telephone mail redemption is automatically
established on your account unless you indicate otherwise on
your Account Registration Form. You may redeem any amount by
calling Vanguard. The proceeds will be paid to the
registered shareholders and mailed to the address of record.

BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account
Registration Form. If you do not presently have telephone
wire redemption and wish to establish it, please contact our
Client Services Department.

With the wire redemption option, you may withdraw a minimum
of $1,000 and have the amount wired directly to your bank
account. Wire redemptions less than $5,000 are subject to a
$5 charge deducted by Vanguard. There is no Vanguard charge
for wire redemptions of $5,000 or more. However, your bank
may assess a separate fee to accept incoming wires.

A request to change the bank associated with your wire
redemption option must be received in writing, signed by
each registered shareholder, and accompanied by a voided
check or preprinted deposit slip. A signature guarantee is
required if your bank registration is not identical to your
Vanguard Fund account registration.
------------------------------------------------------------
SELLING BY FUND If you select the Fund Express AUTOMATIC WITHDRAWAL option,
EXPRESS money will be automatically moved from your Vanguard Fund
Automatic account to your bank account according to the schedule you
Withdrawal & have selected. The SPECIAL REDEMPTION option lets you move
Special Redemption money from your Vanguard account to your bank account on
your request. You may elect Fund Express on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Fund Express application.
------------------------------------------------------------
SELLING BY You may sell shares of the Fund by making an exchange into
EXCHANGE another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
------------------------------------------------------------
IMPORTANT Shares purchased by check or Fund Express may not be
REDEMPTION redeemed until payment for the purchase is collected, which
INFORMATION may take up to ten calendar days. Your money is invested
during the holding period.
------------------------------------------------------------
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35
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<S> <C>
DELIVERY OF Redemption requests received by telephone prior to the
REDEMPTION regular close of the New York Stock Exchange (generally 4:00
PROCEEDS p.m. Eastern time) are processed on the day of receipt and
the redemption proceeds are normally sent on the following
business day.

Redemption requests received by telephone after the regular
close of the New York Stock Exchange are processed on the
business day following receipt and the proceeds are normally
sent on the second business day following receipt.

Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.

If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset value
next determined after your request has been received by
Vanguard in Good Order. The Fund reserves the right to
revise or terminate the telephone redemption privilege at
any time.

The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the
United States Securities and Exchange Commission.

If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds of amounts in excess of $250,000 in
whole or in part by a distribution in kind of readily
marketable securities.
------------------------------------------------------------
VANGUARD'S AVERAGE If you make a redemption from a qualifying account, Vanguard
COST STATEMENT will send you an Average Cost Statement which provides you
with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
------------------------------------------------------------
MINIMUM ACCOUNT Due to the relatively high cost of maintaining smaller
BALANCE accounts, each Portfolio reserves the right to redeem shares
REQUIREMENT in any account that is below the minimum initial investment
amount of $3,000. In addition, if at any time your total
investment in a Portfolio does not have a value of at least
$1,000, you may be notified that the value of your account
is below the Fund's minimum account balance requirement. You
would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds would
be promptly paid to the shareholder. This minimum
requirement does not apply to IRAs, other Vanguard
retirement accounts, and Uniform Gifts/Transfers to Minors
Act accounts.
- --------------------------------------------------------------------------------

EXCHANGING YOUR Should your investment goals change, you may exchange your
SHARES shares of Vanguard Fixed Income Securities Fund for those of
EXCHANGING BY other available Vanguard Funds.
TELEPHONE In addition to the details below, please see "Important
Call Client Information About Telephone Transactions."
Services When exchanging shares by telephone, please have ready the
(1-800-662-2739) Portfolio name, account number, Social Security Number or
Taxpayer Identification Number listed on the account, and
exact name in which the account is registered. Requests for
telephone exchanges received prior to the close of the New
York Stock Exchange
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36
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(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after the
close of the Exchange are processed the next business day.
TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM VANGUARD
BALANCED INDEX FUND, VANGUARD EXPLORER FUND, VANGUARD INDEX
TRUST, VANGUARD INTERNATIONAL EQUITY INDEX FUND--EUROPEAN,
PACIFIC AND EMERGING MARKETS PORTFOLIOS, AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or express mail, and it will be implemented
at the closing net asset value on the date received by
Vanguard, provided the request is received in Good Order.

EXCHANGING BY MAIL Please be sure to include on your exchange request the name
and account number of your current Portfolio, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD FIXED INCOME SECURITIES FUND, P.O. BOX 1120, VALLEY
FORGE, PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Fixed Income
Securities Fund, 455 Devon Park Drive, Wayne, PA 19087.)
------------------------------------------------------------
IMPORTANT EXCHANGE Before you make an exchange, you should consider the
INFORMATION following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department
(1-800-662-7447).

- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.

- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.

- New accounts are not currently accepted in
Vanguard/Windsor Fund.

- The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has
received all required documentation in Good Order.

- When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.

Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise or
terminate its provisions, limit the amount of or reject any
exchange, as deemed necessary, at any time.

The exchange privilege is only available in states in which
the shares of the Fund are registered for sale. The Fund's
shares are currently registered for sale in all 50 states
and the Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE PRIVILEGE The Fund's exchange privilege is not intended to afford
LIMITATIONS shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive exchange
activity.
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37
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Exchange activity will not be deemed excessive if limited to
TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30 DAYS
APART) from a Portfolio during any twelve month period.
Notwithstanding these limitations, the Fund reserves the
right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is reasonably
deemed to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire
INFORMATION ABOUT redemptions) and exchanges by telephone is automatically
TELEPHONE established on your account unless you request in writing
TRANSACTIONS that telephone transactions on your account not be
permitted. The ability to initiate wire redemptions by
telephone will be established on your account only if you
specifically elect this option in writing.

To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:

1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio; (ii) the
10-digit account number; (iii) the exact name in which
the account is registered; and (iv) the Social Security
or Taxpayer Identification number listed on the account.

2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record, only. In the case of
a telephone redemption by wire, the wire transfer will be
made only in accordance with the shareowner's prior
written instructions.

Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures have
been followed. Vanguard believes that the security
procedures described above ARE reasonable and that if such
procedures are followed, YOU WILL BEAR THE RISK OF ANY
LOSSES RESULTING FROM UNAUTHORIZED OR FRAUDULENT TELEPHONE
TRANSACTIONS ON YOUR ACCOUNT. If Vanguard fails to follow
reasonable security procedures, it may be liable for any
losses resulting from unauthorized or fraudulent telephone
transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING You may transfer the registration of any of your Fund shares
REGISTRATION to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY
FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT. The request
must be in Good Order. To receive a transfer form and full
instructions, please call our Client Services Department
(1-800-662-2739).
- --------------------------------------------------------------------------------
OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Information Department at 1-800-662-7447.

STATEMENTS AND Vanguard will send you a confirmation statement each time
REPORTS you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
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38
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Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using the
average cost single category method. This service is
available for most taxable accounts opened since January 1,
1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement in February of the following year.
Please call our Client Services Department (1-800-662-2739)
for information.

Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.

VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S. Government
DEPOSIT SERVICE checks (including Social Security and military pension
checks) and private payroll checks may be automatically
deposited into your Vanguard Fund account. Separate
brochures and forms are available for direct deposit of U.S.
Government and private payroll checks.

VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move
EXCHANGE SERVICE money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan.

VANGUARD FUND Vanguard's Fund Express allows you to transfer money between
EXPRESS your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a Fund
Express application.

The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.

Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.

VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your
EXPRESS dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this
service on the Account Registration Form or call the
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.

VANGUARD Vanguard's Tele-Account is a convenient, automated service
TELE-ACCOUNT that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone-TM- telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent
dividend or capital gains payment. To contact Vanguard's
Tele-Account service, dial 1-800-ON-BOARD (1-800-662-6273).
A brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
- --------------------------------------------------------------------------------
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39
<PAGE>

[LOGO] [LOGO]
- --------------------------- P R O S P E C T U S
THE VANGUARD GROUP MAY 25, 1994;
OF INVESTMENT REVISED SEPTEMBER
COMPANIES 16, 1994
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482 [LOGO]
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATIONS SERVICE FOR
THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
<PAGE>
VANGUARD FIXED INCOME SECURITIES FUND, INC.
PROSPECTUS SUPPLEMENT

SEPTEMBER 9, 1994

The Short-Term Corporate and Intermediate-Term Corporate Portfolios of
Vanguard Fixed Income Securities Fund, Inc. (the "Fund") may invest in
investment grade fixed income securities issued by state and municipal
governments and their agencies and instrumentalities. See the section entitled
"Investment Policies" in the Fund's prospectus for a list of each Portfolios
permitted investments.

PS28
<PAGE>
VANGUARD FIXED INCOME SECURITIES FUND
HIGH YIELD CORPORATE PORTFOLIO
PROSPECTUS SUPPLEMENT

SEPTEMBER 9, 1994

Effective September 16, 1994, check purchases into all Vanguard bond
portfolios will receive a trade date the day the funds are received in good
order by Vanguard. (See "Shareholder Guide" for definition of good order). This
represents a change from our previous policy to hold purchases until the next
business day, pending Federal Funds conversion.

PS29