VANGUARD FIXED INCOME SECURITIES FUND INC, 497, 1996-05-29

VANGUARD FIXED INCOME SECURITIES FUND INC
497, 1996-05-29

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<PAGE> 1

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT (NO. 2-47371) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 43
AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 44

VANGUARD FIXED INCOME
SECURITIES FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

100 VANGUARD BOULEVARD
MALVERN, PA 19355-0741
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

REGISTRANT'S TELEPHONE NUMBER (610) 669-1000

RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482

IT IS HEREBY REQUESTED THAT THIS FILING BECOME EFFECTIVE:
on May 29, 1996, pursuant to paragraph (b) of Rule 485.

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.

REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24f-2 NOTICE FOR THE YEAR ENDED JANUARY 31, 1996 ON MARCH 14, 1996.

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<PAGE> 2

VANGUARD FIXED INCOME SECURITIES FUND, INC.

CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Fund........................ Directors and Officers; Management of
the Fund
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of Each Portfolio;
Dividends, Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable

<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objective and Policies;
General Information
Item 13. Investment Objective and Policies............. Investment Objective and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund; Investment
Management
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Management
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3

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[VANGUARD FIXED INCOME LOGO] A Member of The Vanguard Group
- --------------------------------------------------------------------------------
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PROSPECTUS -- MAY 29, 1996
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------

SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------

INVESTMENT
OBJECTIVE
AND POLICIES Vanguard Fixed Income Securities Fund, Inc. (the "Fund")
is an open-end diversified investment company that seeks
to 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. This
prospectus pertains to each of the Fund's Portfolios,
except the High Yield Corporate Portfolio, which is
offered in a separate prospectus. There is no assurance
that any of the Fund's Portfolios will achieve their
stated objective. Shares of the Fund are neither insured
nor guaranteed by any agency of the U.S. Government,
including the FDIC.
- --------------------------------------------------------------------------------

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 or $1,000 for 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.
- --------------------------------------------------------------------------------

ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
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 29, 1996, 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

<TABLE>
<CAPTION>
Page Page Page
---- ---- ----
<S> <C> <C> <C> <C> <C>
Highlights......................... 2 Investment Limitations............. 24 SHAREHOLDER GUIDE
Fund Expenses...................... 5 Management of the Fund............. 25 Opening an Account and
Financial Highlights............... 6 Investment Advisers................ 25 Purchasing Shares................ 32
Yield and Total Return............. 11 Dividends, Capital Gains When Your Account Will
FUND INFORMATION and Taxes........................ 29 Be Credited...................... 35
Investment Objective............... 11 The Share Price of Selling Your Shares................ 36
Investment Policies................ 11 Each Portfolio................... 30 Exchanging Your Shares............. 39
Investment Risks................... 16 General Information................ 30 Important Information About
Who Should Invest.................. 19 Telephone Transactions........... 40
Implementation of Policies......... 20 Transferring Registration.......... 41
Other Vanguard Services............ 42
</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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<PAGE> 4

HIGHLIGHTS

OBJECTIVE AND
POLICIES The Fund is a no-load, open-end diversified investment
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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NINE SEPARATE
PORTFOLIOS The investment characteristics of each Portfolio are
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
<TABLE>
<S> <C> <C> <C>
PORTFOLIO SUMMARY
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<CAPTION>
PRIMARY EXPECTED
PORTFOLIO INVESTMENTS AVERAGE MATURITY
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------
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
- ------------------------------------------------------------------------------------
Long-Term U.S. Treasury U.S. Treasury bonds 15-30 years
Long-Term Corporate Investment grade 15-25 years
corporate bonds
- ------------------------------------------------------------------------------------
High Yield Corporate** Speculative grade Intermediate*
corporate bonds
- ------------------------------------------------------------------------------------
</TABLE>

* 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.
- --------------------------------------------------------------------------------

2
<PAGE> 5

RISK
CHARACTERISTICS Investors in the Fund are exposed to four types of risk
from 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
<TABLE>
<CAPTION>
RISK SUMMARY
------------------------------------------------------------------------------

INTEREST INCOME CREDIT PREPAYMENT/
PORTFOLIO RATE RISK RISK RISK CALL RISK
<S> <C> <C> <C> <C>
------------------------------------------------------------------------------
Short-Term U.S. Low High Negligible Negligible
Treasury
Short-Term Federal Low High Very Low Low
Short-Term Corporate Low High Low Negligible
------------------------------------------------------------------------------
Intermediate-Term Medium Medium Negligible Negligible
U.S. Treasury
GNMA Medium Medium Negligible High
Intermediate-Term Medium Medium Low Low
Corporate
------------------------------------------------------------------------------
Long-Term U.S. High Low Negligible Negligible
Treasury
Long-Term Corporate High Low Low Medium
------------------------------------------------------------------------------
</TABLE>

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THE VANGUARD
GROUP The Fund is a member of The Vanguard Group of Investment
Companies, a group of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $190 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 25
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INVESTMENT
ADVISERS Wellington Management Company serves as investment adviser
to the GNMA and Long-Term Corporate Portfolios. Vanguard's
Fixed Income Group provides investment

3
<PAGE> 6

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 25
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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. PAGE 29

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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. PAGE 29

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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 ($1,000 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 32
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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 36
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SERVICES TO
SHAREHOLDERS The Fund offers free checkwriting services (minimum $250
per check) for easy access to your account balance. PAGE
36

The Fund also offers other special services: Fund Express,
for electronic transfers between the Fund and your bank
account; and Tele-Account, for 24-hour telephone access to
your Fund account balance and certain transactions. PAGE
42
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SPECIAL
CONSIDERATIONS (1) Each Portfolio, except the Short-Term Federal
Portfolio, 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 21

(2) Each Portfolio may lend its securities. PAGE 22
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4
<PAGE> 7

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, 1996.

<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
<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
</TABLE>

<TABLE>
<CAPTION>
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Management & Administrative
Expenses............................ 0.22% 0.21% 0.22% 0.23%
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% 0.02%
Miscellaneous Expenses.............. 0.01 0.02 0.01 0.02
--------- ------------ --------- -----------
Total Other Expenses.................. 0.04 0.05 0.04 0.04
--------- ------------ --------- -----------
TOTAL OPERATING EXPENSES..... 0.27% 0.27% 0.27% 0.28%
========== ============= ========== ============
</TABLE>

<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM LONG-TERM
GNMA CORPORATE U.S. TREASURY CORPORATE
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<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
</TABLE>

<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM LONG-TERM
GNMA CORPORATE U.S. TREASURY CORPORATE
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Management & Administrative
Expenses............................ 0.22% 0.23% 0.22% 0.24%
Investment Advisory Fees.............. 0.02 0.01 0.01 0.04
12b-1 Fees............................ None None None None
Other Expenses
Distribution Costs.................. 0.02% 0.02% 0.02% 0.02%
Miscellaneous Expenses.............. 0.03 0.02 0.02 0.01
--------- ------------ --------- -----------
Total Other Expenses.................. 0.05 0.04 0.04 0.03
--------- ------------ --------- -----------
TOTAL OPERATING EXPENSES..... 0.29% 0.28% 0.27% 0.31%
========== ============= ========== ============
</TABLE>

* Wire redemptions of less than $5,000 are subject to a $5 processing fee.

5
<PAGE> 8

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>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
------ ------- ------- --------
Short-Term U.S. Treasury Portfolio...... $3 $ 9 $15 $ 34
Short-Term Federal Portfolio............ $3 $ 9 $15 $ 34
Short-Term Corporate Portfolio.......... $3 $ 9 $15 $ 34
Intermediate-Term U.S. Treasury
Portfolio............................. $3 $ 9 $16 $ 36
Intermediate-Term Corporate Portfolio... $3 $ 9 $16 $ 36
GNMA Portfolio.......................... $3 $ 9 $16 $ 37
Long-Term U.S.Treasury Portfolio........ $3 $ 9 $15 $ 34
Long-Term Corporate Portfolio........... $3 $10 $17 $ 39
</TABLE>

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.
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FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of
the respective periods in the period ended January 31,
1996, have been audited by Price Waterhouse LLP,
independent accountants, whose reports thereon were
unqualified. This information should be read in
conjunction with the Fund's financial statements and notes
thereto, which, together with the remaining portions of
the Fund's 1996 Annual Report to Shareholders, are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the reports of Price Waterhouse LLP, in the
Fund's 1996 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1996 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.

6
<PAGE> 9

<TABLE>
<CAPTION>
------------------------------------------------------
SHORT-TERM U.S. TREASURY
PORTFOLIO
------------------------------------------------------
YEAR ENDED JANUARY 31,
------------------------------------- OCT. 28, 1991,+
1996 1995 1994 1993 TO JAN. 31, 1992
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................ $ 9.89 $10.41 $10.41 $10.12 $10.00
------ ------ ------ ------ -----------
INVESTMENT OPERATIONS
Net Investment Income......................................... .625 .532 .486 .528 .140
Net Realized and Unrealized Gain (Loss) on Investments........ .470 (.500) .079 .332 .120
------ ------ ------ ------ -----------
TOTAL FROM INVESTMENT OPERATIONS............................ 1.095 .032 .565 .860 .260
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.......................... (.625) (.532) (.486) (.528) (.140)
Distributions from Realized Capital Gains..................... -- (.020) (.079) (.042) --
------ ------ ------ ------ -----------
TOTAL DISTRIBUTIONS......................................... (.625) (.552) (.565) (.570) (.140)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................. $10.36 $ 9.89 $10.41 $10.41 $10.12
========================================================================================================================

TOTAL RETURN.................................................... 11.37% 0.40% 5.54% 8.74% 2.60%
========================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............................ $919 $754 $729 $526 $102
Ratio of Expenses to Average Net Assets......................... .27% .28% .26% .26% .26%*
Ratio of Net Investment Income to Average Net Assets............ 6.14% 5.33% 4.64% 5.12% 5.22%*
Portfolio Turnover Rate......................................... 93% 126% 86% 71% 40%
</TABLE>

* Annualized.
+ Commencement of operations.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
SHORT-TERM FEDERAL PORTFOLIO
-----------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
------------------------------------------------------------- DEC. 31, 1987,+
1996 1995 1994 1993 1992 1991 1990 1989 TO JAN. 31, 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD... $9.79 $10.38 $10.38 $10.31 $10.08 $ 9.89 $ 9.78 $10.05 $10.00
------ ------ ------ ------ ------ ------ ------ ------ -----------
INVESTMENT OPERATIONS
Net Investment Income................ .601 .550 .522 .609 .720 .801 .842 .817 .050
Net Realized and Unrealized Gain
(Loss) on Investments.............. .490 (.580) .110 .232 .307 .190 .110 (.270) .050
------ ------ ------ ------ ------ ------ ------ ------ -----------
TOTAL FROM INVESTMENT OPERATIONS... 1.091 (.030) .632 .841 1.027 .991 .952 .547 .100
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................. (.601) (.550) (.522) (.609) (.720) (.801) (.842) (.817) (.050)
Distributions from Realized Capital
Gains.............................. -- (.010) (.110) (.162) (.077) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ -----------
TOTAL DISTRIBUTIONS................ (.601) (.560) (.632) (.771) (.797) (.801) (.842) (.817) (.050)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......... $10.28 $ 9.79 $10.38 $10.38 $10.31 $10.08 $ 9.89 $ 9.78 $10.05
============================================================================================================================

TOTAL RETURN........................... 11.43% (0.21)% 6.23% 8.49% 10.59% 10.46% 10.09% 5.66% 1.01%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)... $1,402 $1,474 $1,936 $1,688 $1,274 $508 $228 $159 $6
Ratio of Expenses to Average Net
Assets............................... .27% .28% .26% .27% .26% .30% .28% .32% --
Ratio of Net Investment Income to
Average Net Assets................... 5.93% 5.53% 4.98% 5.88% 6.98% 8.06% 8.59% 8.50% --
Portfolio Turnover Rate................ 74% 57% 49% 70% 111% 141% 133% 228% --
</TABLE>

+ Commencement of operations.

7
<PAGE> 10

TOTAL RETURN....................... 11.95% 0.60% 6.11% 9.29% 11.70% 10.47% 10.18% 6.31% 5.16% 11.58%
============================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $3,873 $2,924 $3,573 $2,811 $1,911 $829 $597 $493 $429 $401
Ratio of Expenses to Average
Net Assets....................... .27% .28% .26% .27% .26% .31% .28% .34% .33% .38%
Ratio of Net Investment Income to
Average Net Assets............... 6.23% 5.66% 5.48% 6.33% 7.44% 8.48% 8.70% 8.17% 7.36% 7.79%
Portfolio Turnover Rate............ 62% 69% 61% 71% 99% 107% 121% 165% 258% 278%
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
-----------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------- OCT. 28, 1991,+ TO
1996 1995 1994 1993 JAN. 31, 1992
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD....................... $ 9.76 $ 10.82 $ 10.79 $10.19 $10.00
------ ------ ------ ------ ------------
INVESTMENT OPERATIONS
Net Investment Income.................................... .662 .603 .617 .676 .170
Net Realized and Unrealized Gain (Loss) on Investments... 1.140 (1.033) .443 .617 .190
------ ------ ------ ------ ------------
TOTAL FROM INVESTMENT OPERATIONS....................... 1.802 (.430) 1.060 1.293 .360
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..................... (.662) (.603) (.617) (.676) (.170)
Distributions from Realized Capital Gains................ -- (.027) (.413) (.017) --
------ ------ ------ ------ ------------
TOTAL DISTRIBUTIONS.................................... (.662) (.630) (1.030) (.693) (.170)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................. $10.90 $ 9.76 $ 10.82 $10.79 $10.19
========================================================================================================================

TOTAL RETURN............................................... 18.96% (3.90)% 10.09% 13.14% 3.59%
========================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)....................... $1,226 $848 $1,007 $673 $190
Ratio of Expenses to Average Net Assets.................... .28% .28% .26% .26% .26%*
Ratio of Net Investment Income to Average Net Assets....... 6.34% 6.05% 5.55% 6.44% 6.47%*
Portfolio Turnover Rate.................................... 56% 128% 118% 123% 32%
</TABLE>

* Annualized.
+ Commencement of operations.

8
<PAGE> 11

TOTAL RETURN....................... 15.64% 0.36% 5.18% 10.40% 13.00% 12.85% 11.98% 5.80% 5.30% 12.19%
============================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $6,998 $5,851 $7,043 $7,167 $5,207 $2,711 $2,128 $1,907 $1,910 $2,381
Ratio of Expenses to Average
Net Assets....................... .29% .30% .28% .29% .29% .34% .31% .35% .35% .38%
Ratio of Net Investment Income to
Average Net Assets............... 7.22% 7.04% 6.19% 7.38% 8.22% 8.95% 9.25% 9.35% 9.35% 9.41%
Portfolio Turnover Rate............ 7% 35% 2% 7% 1% 1% 9% 8% 22% 28%
</TABLE>

<TABLE>
<CAPTION>
------------------------------------------
INTERMEDIATE-TERM CORPORATE
PORTFOLIO
------------------------------------------
YEAR ENDED JANUARY 31,
--------------------- NOV. 1, 1993,+ TO
1996 1995 JAN. 31, 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................................ $ 9.07 $ 10.04 $ 10.00
------ -------- -----------
INVESTMENT OPERATIONS
Net Investment Income..................................................... .658 .587 .125
Net Realized and Unrealized Gain (Loss) on Investments.................... 1.100 (.970) .040
------ -------- -----------
TOTAL FROM INVESTMENT OPERATIONS........................................ 1.758 (.383) .165
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...................................... (.658) (.587) (.125)
Distributions from Realized Capital Gains................................. -- -- --
------ -------- -----------
TOTAL DISTRIBUTIONS..................................................... (.658) (.587) (.125)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................................. $10.17 $ 9.07 $ 10.04
========================================================================================================================

TOTAL RETURN................................................................ 19.94% (3.73)% 1.66%
========================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................................ $424 $163 $85
Ratio of Expenses to Average Net Assets..................................... .28% .28% .25%*
Ratio of Net Investment Income to Average Net Assets........................ 6.70% 6.46% 5.11%*
Portfolio Turnover Rate..................................................... 78% 97% 74%
</TABLE>

* Annualized.
+ Commencement of operations.

9
<PAGE> 12

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
---------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------- MAY 19, 1986,+ TO
1996 1995 1994 1993 1992 1991 1990 1989 1988 JAN. 31, 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD...................... $ 9.23 $10.75 $10.04 $10.14 $ 9.74 $ 9.53 $ 9.28 $ 9.49 $10.28 $ 10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ -----------
INVESTMENT OPERATIONS
Net Investment Income....... .669 .665 .685 .733 .763 .776 .781 .778 .776 .530
Net Realized and Unrealized
Gain (Loss) on
Investments............... 1.725 (1.401) .886 .600 .400 .210 .250 (.210) (.790) .314
------ ------ ------ ------ ------ ------ ------ ------ ------ -----------
TOTAL FROM INVESTMENT
OPERATIONS.............. 2.394 (.736) 1.571 1.333 1.163 .986 1.031 .568 (.014) .844
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income......... (.669) (.665) (.685) (.733) (.763) (.776) (.781) (.778) (.776) (.530)
Distributions from Realized
Capital Gains............. (.225) (.119) (.176) (.700) -- -- -- -- -- (.034)
------ ------ ------ ------ ------ ------ ------ ------ ------ -----------
TOTAL DISTRIBUTIONS....... (.894) (.784) (.861) (1.433) (.763) (.776) (.781) (.778) (.776) (.564)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD...................... $10.73 $ 9.23 $10.75 $10.04 $10.14 $ 9.74 $ 9.53 $ 9.28 $ 9.49 $ 10.28
============================================================================================================================

TOTAL RETURN.................. 26.72% (6.68)% 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).................. $916 $671 $829 $874 $833 $722 $456 $172 $83 $35
Ratio of Expenses to Average
Net Assets.................. .27% .28% .26% .27% .26% .30% .28% .36% .32% --
Ratio of Net Investment Income
to
Average Net Assets.......... 6.57% 7.02% 6.44% 7.26% 7.72% 8.29% 8.08% 8.46% 8.10% 6.93%*
Portfolio Turnover Rate....... 105% 85% 7% 170% 89% 147% 83% 387% 182% 182%
</TABLE>

* Annualized.
+ Commencement of operations.

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO
----------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
---------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR.............................. $ 8.18 $ 9.36 $ 9.04 $ 8.63 $ 8.02 $ 8.00 $ 7.91 $ 8.11 $ 8.77 $ 8.42
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............. .627 .617 .632 .680 .706 .720 .732 .741 .770 .847
Net Realized and Unrealized Gain
(Loss) on Investments........... 1.250 (1.108) .579 .561 .610 .020 .090 (.200) (.660) .473
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.................... 1.877 (.491) 1.211 1.241 1.316 .740 .822 .541 .110 1.32
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income............... (.627) (.617) (.632) (.680) (.706) (.720) (.732) (.741) (.770) (.847)
Distributions from Realized
Capital Gains................... -- (.072) (.259) (.151) -- -- -- -- -- (.123)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............. (.627) (.689) (.891) (.831) (.706) (.720) (.732) (.741) (.770) (.970)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR........ $ 9.43 $ 8.18 $ 9.36 $ 9.04 $ 8.63 $ 8.02 $ 8.00 $ 7.91 $ 8.11 $ 8.77
=============================================================================================================================

TOTAL RETURN........................ 23.64% (5.12)% 13.83% 15.06% 17.09% 9.81% 10.67% 7.13% 1.76% 16.46%
=============================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)........................ $3,376 $2,607 $3,166 $2,763 $1,992 $1,254 $954 $734 $665 $753
Ratio of Expenses to Average
Net Assets........................ .31% .32% .30% .31% .31% .37% .34% .38% .37% .41%
Ratio of Net Investment Income to
Average Net Assets................ 7.03% 7.37% 6.71% 7.68% 8.46% 9.16% 9.07% 9.40% 9.40% 9.41%
Portfolio Turnover Rate............. 49% 43% 77% 50% 72% 62% 70% 60% 63% 47%
</TABLE>

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

10
<PAGE> 13

YIELD AND
TOTAL RETURN From time to time a Portfolio may advertise its yield and
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.

In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, 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 an
investor's 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
OBJECTIVE

THE FUND SEEKS TO
PROVIDE A HIGH LEVEL
OF CURRENT INCOME The Fund is an open-end diversified investment company.
The 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 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.

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
POLICIES While all of the Fund's Portfolios invest in fixed-income
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

11
<PAGE> 14

Business Administration, the Government 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
below, each of the five Portfolios which 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
INVEST IN SHORT-TERM
BONDS Three Portfolios of the Fund invest in short-term bonds.
The SHORT-TERM U.S. TREASURY PORTFOLIO invests at least
85% of its assets in short-term securities backed by the
full 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. 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;

12
<PAGE> 15

(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-
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 have
speculative characteristics.

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 a
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
INVEST IN
INTERMEDIATE-TERM
BONDS The INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO invests at
least 85% of its assets in intermediate-term securities
backed by the full 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 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
and real estate mortgage conduits ("REMICs"). See
"Implementation of Policies" for a description of these
investment practices of the Portfolio.

13
<PAGE> 16

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 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.

14
<PAGE> 17

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 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.

TWO PORTFOLIOS INVEST
IN LONG-TERM BONDS The LONG-TERM U.S. TREASURY PORTFOLIO invests at least 85%
of its assets in long-term securities backed by the full
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;

15
<PAGE> 18

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.

The Long-Term Corporate Portfolio may also hold
asset-backed securities, as well as U.S.
dollar-denominated debt securities issued by foreign
governments, their agencies and instrumentalities,
supranational entities and companies located outside the
U.S. 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 Fund is responsible for voting the shares of all
securities it holds.
- --------------------------------------------------------------------------------

INVESTMENT RISKS

THE PORTFOLIOS ARE
SUBJECT PRIMARILY
TO INTEREST RATE,
INCOME, CREDIT AND
MANAGER RISK As mutual funds investing in fixed-income securities, the
Portfolios of the Fund are subject primarily to interest
rate and credit risk. INTEREST RATE RISK is the potential
for a decline in bond prices due to rising interest rates.
In general, bond prices vary inversely with interest
rates. 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.

16
<PAGE> 19

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:

PERCENT CHANGE IN THE PRICE OF A PAR BOND YIELDING 7.5%

<TABLE>
<CAPTION>
1 PERCENTAGE POINT 1 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
<S> <C> <C>
------------------------------- ------------------ ------------------
Short-Term (2.5 years) - 2.2% + 2.3%
Intermediate-Term (10 years) - 6.6% + 7.3%
Long-Term (20 years) - 9.5% +11.1%
</TABLE>

<TABLE>
<CAPTION>
2 PERCENTAGE POINT 2 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
<S> <C> <C>
------------------------------- ------------------ ------------------
Short-Term (2.5 years) - 4.3% + 4.6%
Intermediate-Term (10 years) -12.7% +15.2%
Long-Term (20 years) -17.8% +24.1%
</TABLE>

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.

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 generally 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 Portfolios
according to the traditional methods of "active"
investment management, which involve 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
PORTFOLIOS PROVIDE
MODERATE EXPOSURE TO
INTEREST RATE RISK Interest rate risk for the SHORT-TERM U.S TREASURY
PORTFOLIO, the SHORT-TERM FEDERAL PORTFOLIO, and the
SHORT-TERM CORPORATE PORTFOLIO should be modest. Because
of their short-term average weighted maturities, the three
short-term Portfolios are expected to exhibit low to
moderate price fluctuations as interest rates change.

17
<PAGE> 20

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
FOR THE THREE
INTERMEDIATE-TERM
PORTFOLIOS WILL BE
HIGHER The three intermediate-term Portfolios are exposed to a
higher degree of interest rate risk than the three
short-term Portfolios. The INTERMEDIATE-TERM U.S. TREASURY
PORTFOLIO, the GNMA PORTFOLIO and the INTERMEDIATE-TERM
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.

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.

18
<PAGE> 21

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

INVESTORS SEEKING
CURRENT INCOME The Fund is intended for investors who are seeking a high
level of current income from their investments. The Fund
is 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 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.

19
<PAGE> 22

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 POLICIES

EACH PORTFOLIO MAY
INVEST IN REPURCHASE
AGREEMENTS Each Portfolio of the Fund utilizes a variety of
investment practices in pursuit of its objective.

Each Portfolio of the Fund may invest in repurchase
agreements according to the restrictions and limitations
set forth in "Investment Policies." A repurchase agreement
is a 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
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

20
<PAGE> 23

agreement. While each Portfolio's management acknowledges
these risks, it is expected that they can be controlled
through careful monitoring procedures.

EACH PORTFOLIO MAY
OWN RESTRICTED OR
ILLIQUID SECURITIES Each Portfolio of the Fund may own restricted or illiquid
securities to a limited extent. Restricted or illiquid
securities are securities which 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 or illiquid securities
for which price quotations are not readily available.

THREE PORTFOLIOS MAY
INVEST IN SECURITIES
OF FOREIGN ISSUERS The Short-Term Corporate, Intermediate-Term Corporate and
Long-Term Corporate Portfolios may hold securities of
foreign issuers, but all such securities must be
denominated 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 MAY
INVEST IN FUTURES
CONTRACTS, OPTIONS,
AND OTHER DERIVATIVE
SECURITIES Each Portfolio of the Fund, except for the Short-Term
Federal Portfolio, may invest in futures contracts and
options to a limited extent. Specifically, a Portfolio may
enter into futures contracts provided that not more than
5% of its assets are required as a futures contract margin
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 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
AND OPTIONS POSE
CERTAIN RISKS The primary risks associated with the use of futures
contracts and options are: (i) imperfect correlation
between 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 transactions on a national exchange with an
active and liquid secondary market.

21
<PAGE> 24

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
LEND ITS SECURITIES Each Portfolio of the Fund may lend its investment
securities to qualified institutional investors for either
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.

22
<PAGE> 25

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
consistent 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
experienced 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.

THE GNMA PORTFOLIO
MAY INVEST IN REMICS The GNMA Portfolio may invest in real estate investment
conduits ("REMICs"). A REMIC is a CMO that qualifies for
special tax treatment under the Internal Revenue Code and
invests in certain mortgages principally secured by
interests in real property. Investors may purchase
beneficial interests in REMICs, which are known as
"regular" interests, or "residual" interests. Guaranteed
REMIC pass-through certificates ("REMIC Certificates")
issued by FNMA or FHLMC represent beneficial ownership
interests in a REMIC trust consisting principally of
mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage
pass-through certificates. For

23
<PAGE> 26

FHLMC REMIC Certificates, FHLMC guarantees the timely
payment of interest, and also guarantees the payment of
principal as payments are required to be made on the
underlying mortgage participation certificates. FNMA REMIC
Certificates are issued and guaranteed as to timely
distribution of principal and interest by FNMA.

PORTFOLIO TURNOVER
RATES WILL VARY Although they generally seek to invest for the long term,
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 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
turnover 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.
- --------------------------------------------------------------------------------

INVESTMENT
LIMITATIONS

THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS Each of the Fund's Portfolios has adopted certain
limitations designed to reduce its exposure to specific
situations. Some of these limitations are that a Portfolio
will not:

(a) with respect to 75% of its assets, invest more than 5%
of the value of its assets in the securities of any
single 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; and

24
<PAGE> 27

(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
Information may be changed only with the approval of a
majority of the Fund's shareholders.
- --------------------------------------------------------------------------------

MANAGEMENT OF
THE FUND

VANGUARD ADMINISTERS
AND DISTRIBUTES THE
FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct portfolios and total assets in
excess of $190 billion. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Fund and the other 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 structure, the
Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1995, the average
expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds
amounted to approximately .31% compared to an average of
1.11% 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
ADVISERS

THE FUND EMPLOYS TWO
INVESTMENT ADVISERS The Fund utilizes two investment advisers. Wellington
Management Company serves as investment adviser to the
GNMA and Long-Term Corporate Portfolios; Vanguard's Fixed
Income Group serves as investment adviser to the remaining
Portfolios.

WELLINGTON
MANAGEMENT
COMPANY Under an investment advisory agreement with the Fund dated
May 1, 1996, 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

25
<PAGE> 28

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 more than 10 of the investment companies of The
Vanguard Group. As of December 31, 1995, WMC held
discretionary management authority with respect to more
than $108 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.

Paul D. Kaplan, Senior Vice President of WMC, serves as
the portfolio manager for the GNMA portfolio. Prior to his
appointment in 1994, Mr. Kaplan was assistant portfolio
manager for the GNMA Portfolio. Mr. Kaplan has been
associated with WMC for 18 years and also currently
manages the bond component of Vanguard Utilities Income
Portfolio.

Earl E. McEvoy, Senior Vice President of WMC, serves as
the portfolio manager of the Fund's Long-Term Corporate
Portfolio, a position he has held since 1994. Mr. McEvoy
also 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 18 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:

GNMA PORTFOLIO

<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ -----
<S> <C>
First $3 billion .020%
Next $3 billion .010%
Over $6 billion .008%
</TABLE>

LONG-TERM CORPORATE PORTFOLIO

<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ -----
<S> <C>
First $1 billion .040%
Next $1 billion .030%
Next $1 billion .020%
Over $3 billion .015%
</TABLE>

26
<PAGE> 29

The advisory fee is then apportioned to each Portfolio
based on the relative net assets of each. For the fiscal
year ended January 31, 1996, 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.

VANGUARD FIXED
INCOME GROUP The Short-Term U.S. Treasury, Short-Term Federal, Short-
and 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 provides investment advisory
services to more than 40 Vanguard money market and bond
portfolios, both taxable and tax-exempt. Total assets
under management by Vanguard's Fixed Income Group were $66
billion as of December 31, 1995.

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, a Principal 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, a Principal 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.

27
<PAGE> 30

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.

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
capabilities 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.
- --------------------------------------------------------------------------------

28
<PAGE> 31

DIVIDENDS,
CAPITAL GAINS
AND TAXES

DIVIDENDS ARE PAID ON
THE FIRST BUSINESS DAY
OF EACH MONTH Dividends consisting of virtually all of the ordinary
income of each Portfolio of the Fund are declared daily
and are payable to shareholders of record at the time of
declaration. Such dividends are paid on the first business
day of each month. Net capital gains distributions, if
any, will be made annually.

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-received 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 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 LOSS
MAY BE REALIZED UPON
EXCHANGE OR
REDEMPTION A sale of shares of the Fund is a taxable event and may
result in a capital gain or loss. A capital gain or loss
may be realized from an ordinary redemption of shares, a
checkwriting redemption, or an exchange of shares between
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

29
<PAGE> 32

certifying on your Account Registration Form your proper
Social Security or Employer 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
EACH PORTFOLIO The share price or "net asset value" per share of each
Portfolio is determined by dividing the total market value
of a Portfolio's investments and other assets, 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
quoted bid price, or when stock exchange valuations are
used, at the latest quoted sale price on the date of
valuation. Short-term instruments maturing within 60 days
of the valuation date may be valued at cost, plus or minus
any amortized discount or premium. 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 Vanguard.
- --------------------------------------------------------------------------------

GENERAL
INFORMATION The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 4,550,000,000
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.

30
<PAGE> 33

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.
CoreStates Bank, N.A. Philadelphia, PA, holds daily cash
balances that are used by the Fund's portfolios to invest
in repurchase agreements or securities acquired in these
transactions. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
- --------------------------------------------------------------------------------

31
<PAGE> 34

SHAREHOLDER GUIDE

OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
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 ($1,000 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 $1,000 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.

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).

PURCHASE
RESTRICTIONS 1) 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.

2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to the Vanguard Group.

ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made by
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.
- --------------------------------------------------------------------------------

32
<PAGE> 35

<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
Complete and sign the your initial investment and the include the Invest-by-Mail
enclosed Account Portfolio(s) you have selected remittance form attached to your
Registration Form on the registration form, make Fund confirmation statements.
your check payable to The Please make your check payable
Vanguard Group-- (Portfolio to The Vanguard
Number) (see below for the Group--(Portfolio Number) (see
appropriate Portfolio number), below for the appropriate
and mail to: Portfolio number), write your
account number on your check
VANGUARD FINANCIAL CENTER and, using the return envelope
P.O. BOX 2600 provided, mail to the address
VALLEY FORGE, PA 19482 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
--------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO 0101 9897
ATTN VANGUARD
BEFORE WIRING VANGUARD FIXED INCOME SECURITIES FUND
Please contact NAME OF PORTFOLIO
Client Services ACCOUNT NUMBER
(1-800-662-2739) ACCOUNT REGISTRATION
</TABLE>

33
<PAGE> 36

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.
- --------------------------------------------------------------------------------

PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from an existing Vanguard Fund 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
FUND EXPRESS
Special Purchase and
Automatic Investment The Fund Express Special Purchase option lets you move
money from your bank account to your Vanguard account on
an "as needed" basis. Or, if you choose the Automatic
Investment option, money will be moved automatically from
your bank account to your Vanguard account on the schedule
(monthly, bimonthly [every other 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
DISTRIBUTION
OPTION You must select one of three distribution options:

1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital 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

INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, each Portfolio is required to
distribute net capital gains and dividend income to
Portfolio shareholders. These distributions are made to
all shareholders who own Portfolio shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have significant impact on your tax
liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain, you will be assessed taxes on the amount of
the capital gain

34
<PAGE> 37

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.

Prospective investors should, therefore, inquire about
potential distributions before investing. Each Portfolio
of the Fund normally distributes capital gains 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
INFORMATION

ESTABLISHING
OPTIONAL SERVICES The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD 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 GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature 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
PURCHASES If you purchase shares in Vanguard Funds through a
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 request has
been received.

ELECTRONIC PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------

WHEN YOUR
ACCOUNT WILL
BE CREDITED The trade date is the date on which your account is
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).

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

35
<PAGE> 38

the close of the Exchange, your trade date is the business
day following receipt of your check. 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.)

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.

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
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You generally 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
A CHECK You may withdraw funds from your account by writing 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 any check.
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.
- --------------------------------------------------------------------------------

36
<PAGE> 39

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
ORDER GOOD ORDER means that the request includes the following:

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.
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
TELEPHONE To sell shares by telephone, you or your pre-authorized
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. PLEASE NOTE: As a protection against fraud, your
telephone mail redemption privilege will be suspended for
10 calendar days following any expedited address change to
your account. An expedited address change is one that is
made by telephone, by Vanguard Online or, in writing,
without the signatures of all account owners.

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

37
<PAGE> 40

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
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. To establish
these Fund Express options, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation on your Fund Express service; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------

SELLING BY EXCHANGE You may sell shares of the Fund by making an exchange into
another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
- --------------------------------------------------------------------------------

IMPORTANT
REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
- --------------------------------------------------------------------------------

DELIVERY OF
REDEMPTION PROCEEDS Redemption requests received by telephone prior to the
regular close of the New York Stock Exchange (generally
4:00 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, except as
described above in "Important Redemption Information".

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.
- --------------------------------------------------------------------------------

38
<PAGE> 41

VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
- --------------------------------------------------------------------------------

LOW BALANCE FEE AND
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, each Portfolio will automatically deduct a $10
annual fee from non-retirement accounts with balances
falling below $2,500 ($500 for Uniform Gifts/Transfers to
Minors Act accounts). This fee deduction will occur
mid-year, beginning in 1996. The fee generally will be
waived for investors whose aggregate Vanguard assets
exceed $50,000.

In addition, each Portfolio reserves the right to
liquidate any non-retirement account that is below the
minimum initial investment amount of $3,000. If at any
time your total investment does not have a value of at
least $3,000, you may be notified that 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 registered shareholder.

Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets
(i.e., a decline in a Portfolio's net asset value).
- --------------------------------------------------------------------------------

EXCHANGING YOUR
SHARES

EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) Should your investment goals change, you may exchange your
shares of Vanguard Fixed Income Securities Fund for those
of other available Vanguard Funds.

When exchanging shares by telephone, please have ready the
Portfolio name, account number, Social Security Number or
Employer Identification number listed on the account, and
exact name and address in which the account is registered.
Only the registered shareholder may complete such an
exchange. Requests for telephone exchanges received prior
to the close of trading on the New York Stock Exchange
(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 INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND 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.)
- --------------------------------------------------------------------------------

39
<PAGE> 42

IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
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 or Vanguard/PRIMECAP 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
LIMITATIONS The Fund's exchange privilege is not intended to afford
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.

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
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
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.

40
<PAGE> 43

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
and address used in the registration; and (iv) the
Social Security or Employer 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
REGISTRATION You may transfer the registration of any of your Fund
shares 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).
- --------------------------------------------------------------------------------

STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time
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.

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 along with their Portfolio Summary
Statement. Please call our Client Services Department
(1-800-662-2739) for information.

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

41
<PAGE> 44

OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.

VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government 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
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
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. Please
contact our Client Services Department at 1-800-662-2739
for additional information.

VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between 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.

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
EXPRESS Vanguard's Dividend Express allows you to transfer your
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) system. 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
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
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).
- --------------------------------------------------------------------------------

42
<PAGE> 45

[THIS PAGE INTENTIONALLY LEFT BLANK]

<PAGE> 46

<TABLE>
<S> <C> <C>
P028 [FLAG LOGO]
[VANGUARD FIXED INCOME LOGO] [VANGUARD FIXED INCOME LOGO]
--------------------------- P R O S P E C T U S
THE VANGUARD GROUP
OF INVESTMENT MAY 29, 1996
COMPANIES [VANGUARD LOGO]
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
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)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
</TABLE>

- --------------------------------------------------------------------------------
<PAGE> 47

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[VANGUARD FIXED INCOME SECURTIES & FUND LOGO] A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PROSPECTUS -- MAY 29, 1996
- --------------------------------------------------------------------------------

FUND INFORMATION: PARTICIPANT SERVICES -- 1-800-523-1188
- --------------------------------------------------------------------------------

INVESTMENT
OBJECTIVES
AND POLICIES Vanguard Fixed Income Securities Fund, Inc. (the "Fund")
is an open-end diversified investment company that seeks
to 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. A
majority of the assets of the High Yield Corporate
Portfolio may be rated Ba or B. Securities with such
ratings are commonly referred to as "junk bonds" and are
considered speculative by the major ratings agencies.
Purchasers should carefully assess the risks associated
with an investment in this Portfolio. There is no
assurance that any of the Fund's Portfolios will achieve
its stated objective. Shares of the Fund are neither
insured nor guaranteed by any agency of the U.S.
Government, including the FDIC.
- --------------------------------------------------------------------------------

IMPORTANT NOTE This Prospectus is intended exclusively for participants
in employer-sponsored retirement or savings plans, such as
tax-qualified pension or profit-sharing plans and 401(k)
thrift plans, as well as 403(b) custodial accounts for
non-profit educational and charitable organizations.
Another version of this Prospectus, containing information
on how to open a personal investment account with the
Fund, is available for individual investors. To obtain a
copy of that version of the Prospectus, please call
1-800-662-7447.
- --------------------------------------------------------------------------------

OPENING AN
ACCOUNT One or more of the Portfolios of the Fund is an investment
option under a retirement or savings program sponsored by
your employer. The administrator of your retirement plan
or your employee benefits office can provide you with
detailed information on how to participate in your plan
and how to elect a Portfolio as an investment option(s).
If you have any questions about the Fund, please contact
Participant Services (1-800-523-1188). If you have any
questions about your plan account, contact your plan
administrator or the organization that provides
recordkeeping services for your plan.

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

ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
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 29, 1996, and has been incorporated by reference
into this Prospectus. A copy may be obtained without
charge by writing to the Fund or by calling Participant
Services at 1-800-523-1188.

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

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C> <C> <C> <C>
Highlights......................... 2 Investment Risks................... 18 Dividends, Capital Gains and
Fund Expenses...................... 5 Who Should Invest.................. 22 Taxes............................ 32
Financial Highlights............... 6 Implementation of Policies......... 23 The Share Price of Each
Yield and Total Return............. 11 Investment Limitations............. 27 Portfolio......................... 32
Investment Objective............... 12 Management of the Fund............. 28 General Information................ 33
Investment Policies................ 12 Investment Advisers................ 29 Service Guide...................... 34
</TABLE>

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

- --------------------------------------------------------------------------------
<PAGE> 48

HIGHLIGHTS

OBJECTIVE AND
POLICIES The Fund is a no-load, open-end diversified investment
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 12
- --------------------------------------------------------------------------------

PORTFOLIO SUMMARY
- -------------------------------------------------------------------------------
PRIMARY EXPECTED
PORTFOLIO INVESTMENTS AVERAGE MATURITY
<S> <C> <C>
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------
Long-Term U.S. Treasury U.S. Treasury bonds 15-30 years
Long-Term Corporate Investment grade 15-25 years
corporate bonds
- -------------------------------------------------------------------------------
High Yield Corporate Speculative grade Intermediate*
corporate bonds
- -------------------------------------------------------------------------------
</TABLE>

2
<PAGE> 49

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 nine
Portfolios of the Fund. As shown, interest rate risk
should be low for the three short-term Portfolios,
moderate for the three intermediate-term Portfolios and
the High Yield Portfolio, and high for the two long-term
Portfolios. The High Yield Corporate Portfolio is unique
among the Fund's Portfolios in its substantial exposure to
credit risk. PAGE 18
<TABLE>
<CAPTION>

RISK SUMMARY
----------------------------------------------------------------------------

INTEREST INCOME CREDIT PREPAYMENT/
PORTFOLIO RATE RISK RISK RISK CALL RISK
<S> <C> <C> <C> <C>
----------------------------------------------------------------------------
Short-Term U.S. Treasury Low High Negligible Negligible
Short-Term Federal Low High Very Low Low
Short-Term Corporate Low High Low Negligible
----------------------------------------------------------------------------
Intermediate-Term Medium Medium Negligible Negligible
U.S. Treasury
GNMA Medium Medium Negligible High
Intermediate-Term Corporate Medium Medium Low Low
----------------------------------------------------------------------------
Long-Term U.S. Treasury High Low Negligible Negligible
Long-Term Corporate High Low Low Medium
----------------------------------------------------------------------------
High Yield Corporate Medium Medium Very High Medium
----------------------------------------------------------------------------
</TABLE>

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

THE VANGUARD
GROUP The Fund is a member of The Vanguard Group of Investment
Companies, a group of more than 30 investment companies
with more than 90 distinct investment portfolios and total
assets in excess of $190 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 28
- --------------------------------------------------------------------------------

INVESTMENT
ADVISERS Wellington Management Company serves as investment adviser
to the GNMA, Long-Term Corporate and High Yield 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 29
- --------------------------------------------------------------------------------

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 are automatically reinvested in
additional shares. PAGE 32
- --------------------------------------------------------------------------------

3
<PAGE> 50

SPECIAL
CONSIDERATIONS (1) Each Portfolio, except the Short-Term Federal
Portfolio, 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, Long-Term
Corporate, and High Yield Corporate Portfolios may invest
in securities of foreign issuers. PAGE 24

(2) Each Portfolio may lend its securities. PAGE 25
- --------------------------------------------------------------------------------

4
<PAGE> 51

FUND EXPENSES The following table illustrates ALL expenses and fees that
a shareholder of the Fund would incur. These expenses and
fees are for the fiscal year ended January 31, 1996.

<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
<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
</TABLE>

<TABLE>
<CAPTION>
SHORT-TERM SHORT-TERM SHORT-TERM INTERMEDIATE-TERM
U.S. TREASURY FEDERAL CORPORATE U.S. TREASURY
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Management & Administrative Expenses..... 0.22% 0.21% 0.22% 0.23%
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% 0.02%
Miscellaneous Expenses................. 0.01 0.02 0.01 0.02
------ ---------- ---------- ------
Total Other Expenses..................... 0.04 0.05 0.04 0.04
------ ---------- ---------- ------
TOTAL OPERATING EXPENSES........ 0.27% 0.27% 0.27% 0.28%
============ ========== ========== ================
</TABLE>

<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM LONG-TERM HIGH YIELD
GNMA CORPORATE U.S. TREASURY CORPORATE CORPORATE
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Sales Load Imposed on Purchases.... None None None None None
Sales Load Imposed on Reinvested
Dividends........................ None None None None None
Redemption Fees*................... None None None None None
Exchange Fees...................... None None None None None
</TABLE>

<TABLE>
<CAPTION>
INTERMEDIATE-TERM LONG-TERM LONG-TERM HIGH YIELD
GNMA CORPORATE U.S. TREASURY CORPORATE CORPORATE
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Management & Administrative
Expenses......................... 0.22% 0.23% 0.22% 0.24% 0.24%
Investment Advisory Fees........... 0.02 0.01 0.01 0.04 0.06
12b-1 Fees......................... None None None None None
Other Expenses
Distribution Costs............... 0.02% 0.02% 0.02% 0.02% 0.02%
Miscellaneous Expenses........... 0.03 0.02 0.02 0.01 0.02
--------- ------ ------ --------- ----------
Total Other Expenses............... 0.05 0.04 0.04 0.03 0.04
--------- ------ ------ --------- ----------
TOTAL OPERATING
EXPENSES................ 0.29% 0.28% 0.27% 0.31% 0.34%
======= ================ ============ ========= =========
</TABLE>

* Wire redemptions of less than $5,000 are subject to a $5 processing fee.

5
<PAGE> 52

The purpose of this table is to assist you in
understanding the various costs and expenses that an
investor would bear directly or indirectly as a
shareholder 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. As noted in the table above,
the Fund charges no redemption fees of any kind.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
------ ------- ------- --------
Short-Term U.S. Treasury Portfolio...... $3 $ 9 $15 $ 34
Short-Term Federal Portfolio............ $3 $ 9 $15 $ 34
Short-Term Corporate Portfolio.......... $3 $ 9 $15 $ 34
Intermediate-Term U.S. Treasury
Portfolio............................. $3 $ 9 $16 $ 36
Intermediate-Term Corporate Portfolio... $3 $ 9 $16 $ 36
GNMA Portfolio.......................... $3 $10 $16 $ 37
Long-Term U.S. Treasury Portfolio....... $3 $ 9 $15 $ 34
Long-Term Corporate Portfolio........... $3 $10 $17 $ 39
High Yield Corporate Portfolio.......... $3 $11 $19 $ 43
</TABLE>

6
<PAGE> 53

<TABLE>
<CAPTION>
------------------------------------------------
SHORT-TERM U.S. TREASURY
PORTFOLIO
------------------------------------------------
YEAR ENDED JANUARY 31,
------------------------------- OCT. 28, 1991,+
1996 1995 1994 1993 TO JAN. 31, 1992
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.................................. $9.89 $10.41 $10.41 $10.12 $10.00
------ ------ ------ ------ ------------
INVESTMENT OPERATIONS
Net Investment Income............................................... .625 .532 .486 .528 .140
Net Realized and Unrealized Gain (Loss) on Investments.............. .470 (.500) .079 .332 .120
------ ------ ------ ------ ------------
TOTAL FROM INVESTMENT OPERATIONS.................................. 1,095 .032 .565 .860 .260
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................................ (.625) (.532) (.486) (.528) (.140)
Distributions from Realized Capital Gains........................... -- (.020) (.079) (.042) --
------ ------ ------ ------ ------------
TOTAL DISTRIBUTIONS............................................... (.625) (.552) (.565) (.570) (.140)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........................................ $10.36 $9.89 $10.41 $10.41 $10.12
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.......................................................... 11.37% 0.40% 5.54% 8.74% 2.60%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).................................. $919 $754 $729 $526 $102
Ratio of Expenses to Average Net Assets............................... .27% .28% .26% .26% .26%*
Ratio of Net Investment Income to Average Net Assets.................. 6.14% 5.33% 4.64% 5.12% 5.22%*
Portfolio Turnover Rate............................................... 93% 126% 86% 71% 40%
</TABLE>

* Annualized.
+ Commencement of operations.

<TABLE>
<CAPTION>
SHORT-TERM FEDERAL PORTFOLIO
---------------------------------------------------------------------------------
-----------------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------------------------------------- DEC. 31, 1987,+
1996 1995 1994 1993 1992 1991 1990 1989 TO JAN. 31, 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD............................. $9.79 $10.38 $10.38 $10.31 $10.08 $9.89 $9.78 $10.05 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------------
INVESTMENT OPERATIONS
Net Investment Income.............. .601 .550 .522 .609 .720 .801 .842 .817 .050
Net Realized and Unrealized Gain
(Loss) on Investments............ .490 (.580) .110 .232 .307 .190 .110 (.270) .050
------ ------ ------ ------ ------ ------ ------ ------ ------------
TOTAL FROM INVESTMENT
OPERATIONS..................... 1.091 (.030) .632 .841 1.027 .991 .952 .547 .100
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income........................... (.601) (.550) (.522) (.609) (.720) (.801) (.842) (.817) (.050)
Distributions from Realized
Capital Gains.................... -- (.010) (.110) (.162) (.077) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------------
TOTAL DISTRIBUTIONS.............. (.601) (.560) (.632) (.771) (.797) (.801) (.842) (.817) (.050)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD....... $10.28 $9.79 $10.38 $10.38 $10.31 $10.08 $9.89 $9.78 $10.05
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN......................... 11.43% (0.21)% 6.23% 8.49% 10.59% 10.46% 10.09% 5.66% 1.01%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)......................... $1,402 $1,474 $1,936 $1,688 $1,274 $508 $228 $159 $6
Ratio of Expenses to Average Net
Assets............................. .27% .28% .26% .27% .26% .30% .28% .32% --
Ratio of Net Investment Income to
Average Net Assets................. 5.93% 5.53% 4.98% 5.88% 6.98% 8.06% 8.59% 8.50% --
Portfolio Turnover Rate.............. 74% 57% 49% 70% 111% 141% 133% 228% --
</TABLE>

+ Commencement of operations.

7
<PAGE> 54

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
SHORT-TERM CORPORATE PORTFOLIO
-----------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR............................. $10.40 $10.94 $10.99 $10.88 $10.50 $10.34 $10.23 $10.43 $10.67 $10.55
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............ .671 .596 .605 .695 .804 .876 .895 .833 .761 .877
Net Realized and Unrealized Gain
(Loss) on Investments.......... .540 (.540) .049 .275 .380 .160 .110 (.200) (.240) .304
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... 1.211 .056 .654 .970 1.184 1.036 1.005 .633 .521 1.181
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.671) (.596) (.605) (.695) (.804) (.876) (.895) (.833) (.761) (.877)
Distributions from Realized
Capital Gains.................. -- -- (.099) (.165) -- -- -- -- -- (.184)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............ (.671) (.596) (.704) (.860) (.804) (.876) (.895) (.833) (.761) (1.061)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....... $10.94 $10.40 $10.94 $10.99 $10.88 $10.50 $10.34 $10.23 $10.43 $10.67
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN....................... 11.95% 0.60% 6.11% 9.29% 11.70% 10.47% 10.18% 6.31% 5.16% 11.58%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $3,873 $2,924 $3,573 $2,811 $1,911 $829 $597 $493 $429 $401
Ratio of Expenses to Average Net
Assets........................... .27% .28% .26% .27% .26% .31% .28% .34% .33% .38%
Ratio of Net Investment Income to
Average Net Assets............... 6.23% 5.66% 5.48% 6.33% 7.44% 8.48% 8.70% 8.17% 7.36% 7.79%
Portfolio Turnover Rate............ 62% 69% 61% 71% 99% 107% 121% 165% 258% 278%
</TABLE>

<TABLE>
<CAPTION>
--------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY
PORTFOLIO
--------------------------------------------------------
YEAR ENDED JANUARY 31,
----------------------------------- OCT. 28, 1991,+ TO
1996 1995 1994 1993 JAN. 31, 1992
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $9.76 $10.82 $10.79 $10.19 $10.00
----- ------ ------ ------ ------------
INVESTMENT OPERATIONS
Net Investment Income....................................... .662 .603 .617 .676 .170
Net Realized and Unrealized Gain (Loss) on Investments...... 1,140 (1.033) .443 .617 .190
------ ------ ------ ------ ------------
TOTAL FROM INVESTMENT OPERATIONS.......................... 1.802 (.430) 1.060 1.293 .360
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........................ (.662) (.603) (.617) (.676) (.170)
Distributions from Realized Capital Gains................... -- (.027) (.413) (.017) --
------ ------ ------ ------ ------------
TOTAL DISTRIBUTIONS....................................... (.662) (.630) (1.030) (.693) (.170)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................ $10.90 $9.76 $10.82 $10.79 $10.19
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................................................. 18.96% (3.90)% 10.09% 13.14% 3.59%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).......................... $1,226 $848 $1,007 $673 $190
Ratio of Expenses to Average Net Assets....................... .28% .28% .26% .26% .26%*
Ratio of Net Investment Income to Average Net Assets.......... 6.34% 6.05% 5.55% 6.44% 6.47%*
Portfolio Turnover Rate....................................... 56% 128% 118% 123% 32%
</TABLE>

* Annualized.
+ Commencement of operations.

8
<PAGE> 55

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
GNMA PORTFOLIO
-----------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR............................. $9.71 $10.39 $10.50 $10.25 $9.85 $9.54 $9.34 $9.69 $10.10 $9.92
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............ .734 .693 .641 .778 .831 .855 .878 .882 .889 .965
Net Realized and Unrealized Gain
(Loss) on Investments.......... .790 (.673) (.110) .250 .400 .310 .200 (.350) (.410) .186
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... 1.474 .020 .531 1.028 1.231 1.165 1.078 .532 .479 1.151
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.734) (.693) (.641) (.778) (.831) (.855) (.878) (.882) (.889) (.965)
Distributions from Realized
Capital Gains.................. -- (.007) -- -- -- -- -- -- -- (.006)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............ (.734) (.700) (.641) (.778) (.831) (.855) (.878) (.882) (.889) (.971)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....... $10.45 $9.71 $10.39 $10.50 $10.25 $9.85 $9.54 $9.34 $9.69 $10.10
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN....................... 15.64% 0.36% 5.18% 10.40% 13.00% 12.85% 11.98% 5.80% 5.30% 12.19%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $6,998 $5,851 $7,043 $7,167 $5,207 $2,711 $2,128 $1,907 $1,910 $2,381
Ratio of Expenses to Average
Net Assets....................... .29% .30% .28% .29% .29% .34% .31% .35% .35% .38%
Ratio of Net Investment Income to
Average Net Assets............... 7.22% 7.04% 6.19% 7.38% 8.22% 8.95% 9.25% 9.35% 9.35% 9.41%
Portfolio Turnover Rate............ 7% 35% 2% 7% 1% 1% 9% 8% 22% 28%
</TABLE>

<TABLE>
<CAPTION>
----------------------------------------
INTERMEDIATE-TERM
CORPORATE PORTFOLIO
----------------------------------------
NOV. 1,
YEAR ENDED 1993+, TO
1996 JANUARY 31, 1995 JAN. 31, 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD......................................... $9.07 $10.04 $10.00
------ ------------ ----------
INVESTMENT OPERATIONS
Net Investment Income...................................................... .658 .587 .125
Net Realized and Unrealized Gain (Loss) on Investments..................... 1.100 (.970) .040
------ ----------- ---------
TOTAL FROM INVESTMENT OPERATIONS......................................... 1.758 (.383) .165
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income....................................... (.658) (.587) (.125)
Distributions from Realized Capital Gains.................................. -- -- --
------ ----------- ---------
TOTAL DISTRIBUTIONS...................................................... (.658) (.587) (.125)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................................... $10.17 $9.07 $10.04
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN................................................................. 19.94% (3.73)% 1.66%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)......................................... $424 $163 $85
Ratio of Expenses to Average Net Assets...................................... .28% .28% .25%*
Ratio of Net Investment Income to Average Net Assets......................... 6.70% 6.46% 5.11%*
Portfolio Turnover Rate...................................................... 78% 97% 74%
</TABLE>

* Annualized.
+ Commencement of operations.

9
<PAGE> 56

<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
----------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------- MAY 19, 1986,+ TO
1996 1995 1994 1993 1992 1991 1990 1989 1988 JAN. 31, 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD................... $9.23 $10.75 $10.04 $10.14 $9.74 $9.53 $9.28 $9.49 $10.28 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ ------------
INVESTMENT OPERATIONS
Net Investment Income....... .669 .665 .685 .733 .763 .776 .781 .778 .776 .530
Net Realized and Unrealized
Gain (Loss) on
Investments............... 1.725 (1.401) .886 .600 .400 .210 .250 (.210) (.790) .314
------ ------ ------ ------ ------ ------ ------ ------ ------ -----------
TOTAL FROM INVESTMENT
OPERATIONS.............. 2.394 (.736) 1.571 1.333 1.163 .986 1.031 .568 (.014) .844
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income......... (.669) (.665) (.685) (.733) (.763) (.776) (.781) (.778) (.776) (.530)
Distributions from Realized
Capital Gains............. (.225) (.119) (.176) (.700) -- -- -- -- -- (.034)
------ ------ ------ ------ ------ ------ ------ ------ ------ -----------
TOTAL DISTRIBUTIONS....... (.894) (.784) (.861) (1.433) (.763) (.776) (.781) (.778) (.776) (.564)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD...................... $10.73 $9.23 $10.75 $10.04 $10.14 $9.74 $9.53 $9.28 $9.49 $10.28
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN.................. 26.72% (6.68)% 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).................. $916 $671 $829 $874 $833 $722 $456 $172 $83 $35
Ratio of Expenses to Average
Net Assets.................. .27% .28% .26% .27% .26% .30% .28% .36% .32% --
Ratio of Net Investment Income
to Average Net Assets....... 6.57% 7.02% 6.44% 7.26% 7.72% 8.29% 8.08% 8.46% 8.10% 6.93%*
Portfolio Turnover Rate....... 105% 85% 7% 170% 89% 147% 83% 387% 182% 182%
</TABLE>

* Annualized.
+ Commencement of operations.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
LONG-TERM CORPORATE PORTFOLIO+
-----------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR............................. $8.18 $9.36 $9.04 $8.63 $8.02 $8.00 $7.91 $8.11 $8.77 $8.42
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............ .627 .617 .632 .680 .706 .720 .732 .741 .770 .847
Net Realized and Unrealized Gain
(Loss) on Investments.......... 1.250 (1.108) .579 .561 .610 .020 .090 (.200) (.660) .473
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................... 1.877 (.491) 1.211 1.241 1.316 .740 .822 .541 .110 1.32
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.627) (.617) (.632) (.680) (.706) (.720) (.732) (.741) (.770) (.847)
Distributions from Realized
Capital Gains.................. -- (.072) (.259) (.151) -- -- -- -- -- (.123)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS............ (.627) (.689) (.891) (.831) (.706) (.720) (.732) (.741) (.770) (.970)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....... $9.43 $8.18 $9.36 $9.04 $8.63 $8.02 $8.00 $7.91 $8.11 $8.77
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN....................... 23.64% (5.12)% 13.83% 15.06% 17.09% 9.81% 10.67% 7.13% 1.76% 16.46%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $3,376 $2,607 $3,166 $2,763 $1,992 $1,254 $954 $734 $665 $753
Ratio of Expenses to Average
Net Assets....................... .31% .32% .30% .31% .31% .37% .34% .38% .37% .41%
Ratio of Net Investment Income to
Average Net Assets............... 7.03% 7.37% 6.71% 7.68% 8.46% 9.16% 9.07% 9.40% 9.40% 9.41%
Portfolio Turnover Rate............ 49% 43% 77% 50% 72% 62% 70% 60% 63% 47%
</TABLE>

+ Formerly the "Investment Grade Corporate Portfolio."

10
<PAGE> 57

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO
-----------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR............................. $7.24 $ 8.14 $7.56 $7.27 $6.19 $7.31 $8.44 $8.53 $9.33 $8.84
----- ----- ----- ----- ----- ------- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income............ .678 .679 .695 .727 .770 .904 1.004 1.016 1.006 1.091
Net Realized and Unrealized Gain
(Loss) on Investments.......... .650 (.900) .580 .290 1.080 (1.120) (1.130) (.090) (.800) .598
----- ----- ----- ----- ----- ------ ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS................... 1.328 (.221) 1.275 1.017 1.850 (.216) (.126) .926 .206 1.689
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.678) (.679) (.695) (.727) (.770) (.904) (1.004) (1.016) (1.006) (1.081)
Distributions from Realized
Capital Gains.................. -- -- -- -- -- -- -- -- (.118) --
----- ----- ----- ----- ----- ------ ----- ----- ----- -----
TOTAL DISTRIBUTIONS............ (.678) (.679) (.695) (.727) (.770) (.904) (1.004) (1.016) (1.006) (1.199)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....... $7.89 $ 7.24 $8.14 $7.56 $7.27 $6.19 $7.31 $8.44 $8.53 $9.33
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*...................... 19.01% (2.52)% 17.54% 14.68% 31.27% (3.21)% (1.84)% 11.41% 2.54% 20.12%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)....................... $3,007 $2,162 $2,625 $2,184 $1,593 $699 $828 $1,234 $933 $1,370
Ratio of Expenses to Average Net
Assets........................... .34% .34% .32% .34% .34% .40% .38% .41% .41% .45%
Ratio of Net Investment Income to
Average Net Assets............... 8.85% 9.13% 8.81% 9.82% 11.13% 13.35% 12.56% 12.07% 11.47% 11.43%
Portfolio Turnover Rate............ 38% 33% 51% 83% 44% 61% 41% 48% 82% 67%
</TABLE>

* Returns exclude 1% fee applied to shares redeemed or exchanged within one year
of purchase.
- --------------------------------------------------------------------------------

YIELD AND TOTAL
RETURN From time to time a Portfolio may advertise its yield and
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.

11
<PAGE> 58

INVESTMENT
OBJECTIVE
THE FUND SEEKS TO
PROVIDE A HIGH LEVEL
OF CURRENT INCOME The Fund is an open-end diversified investment company.
The objective of the Fund is to provide investors with a
high level of current income consistent with the
maintenance of principal and liquidity.

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
Government 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 below, each of the five
Portfolios which 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
INVEST IN SHORT-TERM
BONDS Three Portfolios of the Fund invest in short-term bonds.
THE SHORT-TERM U.S. TREASURY PORTFOLIO invests at least
85% of its assets in short-term securities backed by the
full 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. 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.

12
<PAGE> 59

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 one
and three years. See "Implementation of Policies" for a
description of these and other 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 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- 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 have
speculative characteristics.

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.

13
<PAGE> 60

bond (interest rate) futures and options to a limited
extent. See "Implementation of Policies" for a description
of these and other investment practices of the Portfolio.

THREE PORTFOLIOS
INVEST IN
INTERMEDIATE-TERM
GOVERNMENT SECURITIES THE INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO invests at
least 85% of its assets in intermediate-term and
short-term securities backed by the full 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 5 to
10 years.

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
and real estate mortgage conduits ("REMICs"). See
"Implementation of Policies" for a description of these
investment practices of the Portfolio.

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 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.

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

14
<PAGE> 61

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 or instrumentalities. The
Intermediate-Term Corporate Portfolio is expected to
maintain a dollar-weighted average maturity between 5 and
10 years.

(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 or
instrumentalities;

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 12
for a description of these ratings), and in preferred
stocks and convertible 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.

TWO PORTFOLIOS INVEST
IN LONG-TERM BONDS THE LONG-TERM U.S. TREASURY PORTFOLIO invests at least 85%
of its assets in long-term securities backed by the full
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

15
<PAGE> 62

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 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 their
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 12 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.

ONE PORTFOLIO INVESTS
IN LOW-QUALITY,
HIGH-RISK BONDS THE HIGH YIELD CORPORATE PORTFOLIO invests in a
diversified portfolio of high-yielding corporate debt
securities (so-called "junk bonds"). Under normal
circumstances, at least 80% of the Portfolio's assets will
be invested in high-yield corporate debt obligations rated
B or better by Moody's or Standard & Poor's. Not more than
20% of the High Yield Corporate Portfolio's assets may be
invested in debt securities which are rated less than B or
unrated, and convertible securities and preferred stocks.
The Portfolio may invest up to 25% of its assets in cash
reserves and U.S. Government securities under unusual
market conditions for temporary defensive measures.

16
<PAGE> 63

The High Yield Corporate Portfolio will not invest in
securities that, at the time of initial investment, are
rated less than Caa by Moody's or CCC by Standard &
Poor's. Securities that are subsequently downgraded in
quality below Caa or CCC may continue to be held by the
Portfolio, and will be sold only if the Portfolio's
adviser believes it would be advantageous to do so. In
addition, the credit quality of unrated securities
purchased by the Portfolio must be, in the opinion of the
Portfolio's adviser, at least equivalent to a Caa rating
by Moody's or a CCC rating by Standard & Poor's.

Securities rated less than Baa by Moody's or BBB by
Standard & Poor's are classified as non-investment grade
securities. Such securities carry a high degree of risk
and are considered speculative by the major credit rating
agencies. The following are excerpts from the Moody's and
Standard & Poor's definitions for speculative grade debt
obligations:

Moody's: Ba-rated bonds have "speculative elements,"
their future "cannot be considered assured," and
protection of principal and interest is "moderate" and
"not well safeguarded." B-rated bonds "lack
characteristics of a desirable investment" and the
assurance of interest or principal payments "may be
small." Caa-rated bonds are "of poor standing" and "may
be in default" or may have "elements of danger with
respect to principal or interest."

Standard & Poor's: BB-rated bonds have "less near-term
vulnerability to default" than B- or CCC-rated
securities but face "major ongoing
uncertainties . . . which may lead to inadequate
capacity" to pay interest or principal. B-rated bonds
have a "greater vulnerability to default" than BB-rated
bonds and the ability to pay interest or principal will
likely be impaired by adverse business conditions.
CCC-rated bonds have a "currently identifiable
vulnerability to default" and, without favorable
business conditions, will be unable to repay interest
and principal.

Credit quality in the high-yield bond market can change
suddenly and unexpectedly, and even recently-issued credit
ratings may not fully reflect the actual risks posed by a
particular high-yield security. For these reasons, it is
the High Yield Corporate Portfolio's policy not to rely
primarily on ratings issued by established credit rating
agencies, but to utilize such ratings in conjunction with
the adviser's own independent and ongoing review of credit
quality.

In the past, the High Yield Corporate Portfolio has not
invested in non-income-producing high-yield
securities -- such as zero coupon bonds, which pay
interest only at maturity, or payment-in-kind bonds, which
pay interest in the form of additional securities.
Although it has no present plans to do so, the Portfolio
may invest up to 5% of its assets in such securities in
the future.

The High Yield 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.

17
<PAGE> 64

See "Implementation of Policies" for a description of
these investment practices of the Portfolio.

* * *

The Fund is responsible for voting the shares of all
securities it holds.

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

INVESTMENT RISKS
THE PORTFOLIOS ARE
SUBJECT PRIMARILY
TO INTEREST RATE,
INCOME, CREDIT AND
MANAGER RISK As mutual funds investing in fixed-income securities, the
Portfolios of the Fund are subject primarily to interest
rate and credit risk. INTEREST RATE RISK is the potential
for a decline in bond prices due to rising interest rates.
In general, bond prices vary inversely with interest
rates. 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.

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:

PERCENT CHANGE IN THE PRICE OF A PAR BOND YIELDING 7.5%

<TABLE>
<CAPTION>
1 PERCENTAGE POINT 1 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
<S> <C> <C>
------------------------------- ------------------ ------------------
Short-Term (2.5 years)......... -2.2% + 2.3%
Intermediate-Term (10 years)... -6.6% + 7.3%
Long-Term (20 years)........... -9.5% +11.1%
</TABLE>

<TABLE>
<CAPTION>
2 PERCENTAGE POINT 2 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
<S> <C> <C>
------------------------------- ------------------ ------------------
Short-Term (2.5 years)......... - 4.3% + 4.6%
Intermediate-Term (10 years)... -12.7% +15.2%
Long-Term (20 years)........... -17.8% +24.1%
</TABLE>

18
<PAGE> 65

Note: Unlike other Portfolios of the Fund, the High Yield
Corporate Portfolio holds speculative-grade investments
that pose substantial risks. Potential investors should
review the risk discussion below and the special risk
section on the High Yield Corporate Portfolio.

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.

19
<PAGE> 66

U.S. Treasury and the GNMA Portfolios, as both Portfolios
invest primarily in "full faith and credit" securities of
the U.S. Government.

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.

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.

20
<PAGE> 67

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.

THE HIGH YIELD
CORPORATE PORTFOLIO
POSES SUBSTANTIAL
RISKS The HIGH YIELD CORPORATE PORTFOLIO is unique among the
Portfolios of the Fund in its exposure to a substantial
degree of credit risk. The medium- and low-grade bonds
held by the Portfolio are considered speculative by
traditional investment standards. High-yield bonds may be
issued as a consequence of corporate restructurings, such
as leveraged buyouts, mergers, acquisitions, debt
recapitalizations, or similar events. Also, high-yield
bonds are often issued by smaller, less creditworthy
companies or by highly leveraged (indebted) firms, which
are generally less able than more financially stable firms
to make scheduled payments of interest and principal. The
risks posed by bonds issued under such circumstances are
substantial.

In an effort to minimize credit risk, the High Yield
Corporate Portfolio diversifies its holdings widely among
many issuers. As of January 31, 1996, the Portfolio held
securities of 158 corporate issuers, and the Portfolio's
holdings had the following credit quality characteristics:

<TABLE>
<CAPTION>
PERCENT OF
INVESTMENT NET ASSETS
---------------------- ----------
<S> <C>
U.S. Treasury
Securities 11%
Cash Reserves 1
Corporate Bonds
A 0
Baa/BBB 3
Ba/BB 36
B 49
Caa/CC 0
Nonrated 0
----------
100%
==========
</TABLE>

In the past, the high yields from a portfolio of low-grade
bonds have more than compensated for the higher default
rates on such securities. However, there can be no
assurance that diversification will protect the Portfolio
from widespread bond defaults brought about by a sustained
economic downturn, or that yields will continue to offset
default rates on high-yield bonds in the future. A
long-term track record on bond default rates, such as that
for investment grade corporate bonds, does not exist for
the high-yield market. It may be that future default rates
on high-yield bonds will be more widespread and higher
than in the past, especially during periods of
deteriorating economic conditions.

21
<PAGE> 68

ing, low- and medium-rated bonds may decline in market
value due to investors' heightened concern over credit
quality, regardless of prevailing interest rates.

Especially at such times, trading in the secondary market
for high-yield bonds may become thin and market liquidity
may be significantly reduced. Even under normal
conditions, the market for high-yield bonds may be less
liquid than the market for investment grade corporate
bonds. There are fewer securities dealers in the high-
yield market, and purchasers of high-yield bonds are
concentrated among a smaller group of securities dealers
and institutional investors.

In periods of reduced market liquidity, high-yield bond
prices may become more volatile, and both the high-yield
market and the Portfolio may experience sudden and
substantial price declines. Also, there may be significant
disparities in the prices quoted for high-yield securities
by various dealers. Under such conditions, the Portfolio
may find it difficult to value its securities accurately.
The Portfolio may also be forced to sell securities at a
significant loss in order to meet shareholder redemptions.

Under unusual circumstances, the Portfolio may hold a
significant portion of its assets in U.S. Government
obligations and cash reserves for temporary defensive
purposes. As of January 31, 1996, for example, such
securities represented approximately 12% of the
Portfolio's assets.

Besides credit and liquidity concerns, prices for
high-yield bonds may be affected by legislative and
regulatory developments. For example, from time to time,
Congress has considered legislation to restrict or
eliminate the corporate tax deduction for interest
payments or to regulate corporate restructurings such as
takeovers or mergers. Such legislation may significantly
depress the prices of outstanding high-yield bonds.

Overall, investors should expect that the High Yield
Corporate Portfolio may fluctuate in price independently
of the broad bond market and prevailing interest rate
trends, and that price volatility at times may be very
high, especially as a result of credit concerns, market
liquidity, and anticipated or actual legislative and
regulatory changes.
- --------------------------------------------------------------------------------

WHO SHOULD
INVEST
INVESTORS SEEKING
CURRENT INCOME The Fund is intended for investors who are seeking a high
level of current income from their investments. The Fund
is 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 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.

22
<PAGE> 69

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 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.

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 higher 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.

Finally, the HIGH YIELD CORPORATE PORTFOLIO is designed
for aggressive investors willing to take substantial risks
in pursuit of potentially higher rewards. Since the High
Yield Corporate Portfolio invests in securities that are
considered speculative by traditional investment
standards, an investment in the Portfolio should represent
only a limited portion of a balanced investment program
for most investors.
- --------------------------------------------------------------------------------

IMPLEMENTATION
OF POLICIES
EACH PORTFOLIO MAY
INVEST IN REPURCHASE
AGREEMENTS Each Portfolio of the Fund utilizes a variety of
investment practices in pursuit of its objective.

23
<PAGE> 70

to or in excess of the value of the repurchase agreement,
and will be held by the Fund's Custodian bank until
repurchased.

FOUR PORTFOLIOS MAY
INVEST IN SECURITIES OF
FOREIGN ISSUERS The Short-Term Corporate, Intermediate-Term Corporate,
Long-Term Corporate, and High Yield Corporate Portfolios
may hold securities of foreign issuers, but all such
securities must be denominated 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.

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 priced more attractively than
other futures contracts or the underlying security or
index.

24
<PAGE> 71

The Portfolios intend to use futures contracts only for
bona fide hedging purposes and will not use futures
contracts or options for speculative purposes.

25
<PAGE> 72

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.

MOST PORTFOLIOS MAY
INVEST IN CMOS The Short-Term Federal, Short- and Intermediate-Term
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- and
Intermediate-Term U.S. Treasury Portfolios, only CMOs
issued by agencies or instrumentalities of the U.S.
Government will be purchased. However, the Short-,
Intermediate- and Long-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- Portfolios will invest in those CMOs that
carry market risks and expected average maturities
consistent with intermediate term bonds, and the Long-Term
U.S. Treasury Portfolio will invest in those CMOs that
carry market risks and expected average maturities
consistent with long-term bonds.

26
<PAGE> 73

Portfolios expect to control extension risk by purchasing
these specific classes of CMOs which, in the advisers'
opinions, are reasonably predictable.

THE GNMA PORTFOLIO
MAY INVEST IN REMICs The GNMA Portfolio may invest in real estate investment
conduits ("REMICs"). A REMIC is a CMO that qualifies for
special tax treatment under the Internal Revenue Code and
invests in certain mortgages principally secured by
interests in real property. Investors may purchase
beneficial interests in REMICs, which are known as
"regular" interests, or "residual" interests. Guaranteed
REMIC pass-through certificates ("REMIC Certificates")
issued by FNMA or FHLMC represent beneficial ownership
interests in a REMIC trust consisting principally of
mortgage loans or FNMA, FHLMC or GNMA-guaranteed mortgage
pass-through certificates. For FHLMC REMIC Certificates,
FHLMC guarantees the timely payment of interest, and also
guarantees the payment of principal as payments are
required to be made on the underlying mortgage
participation certificates. FNMA REMIC Certificates are
issued and guaranteed as to timely distribution of
principal and interest by FNMA.

PORTFOLIO TURNOVER
RATES WILL VARY Although they generally seek to invest for the long term,
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, Long-Term Corporate and High Yield 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 turnover 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.
- --------------------------------------------------------------------------------

INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS Each of the Fund's Portfolios has adopted certain
limitations designed to reduce its exposure to specific
situations. Some of these limitations are that a Portfolio
will not:

(a) with respect to 75% of its assets, invest more than 5%
of the value of its assets in the securities of any
single 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

27
<PAGE> 74

of their services (for example, automobile finance, bank
finance, and diversified finance will be considered as
separate industries);

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

MANAGEMENT
OF THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES THE
FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct portfolios and total assets in
excess of $190 billion. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Fund and the other 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 structure, the
Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1995, the average
expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds
amounted to approximately .31% compared to an average of
1.11% for the mutual fund industry (data provided by
Lipper Analytical Services).

28
<PAGE> 75

INVESTMENT
ADVISERS
THE FUND EMPLOYS TWO
INVESTMENT ADVISERS The Fund utilizes two investment advisers. Wellington
Management Company serves as investment adviser to the
GNMA, Long-Term Corporate and High Yield Corporate
Portfolios; Vanguard's Fixed Income Group serves as
investment adviser to the remaining Portfolios.

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

Paul D. Kaplan, Senior Vice President of WMC serves as the
portfolio manager for the GNMA Portfolio. Prior to his
appointment in 1994, Mr. Kaplan was assistant portfolio
manager for the GNMA Portfolio. Mr. Kaplan has been
associated with WMC for 18 years and also currently
manages the bond component of Vanguard Utilities Income
Portfolio.

Earl E. McEvoy, Senior Vice President of WMC serves as the
portfolio manager of the Fund's Long-Term Corporate
Portfolio, a position he has held since 1994. Mr. McEvoy
also 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 18 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 High
Yield Corporate Portfolio of Vanguard Fixed Income
Securities Fund. The three Portfolios pay WMC an aggregate
fee at the end of each fiscal quarter, calculated by

29
<PAGE> 76

applying a quarterly rate based on the following annual
percentage rates, to the aggregate average month-end net
assets of the three Portfolios for the quarter:

GNMA PORTFOLIO

<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ -----
<S> <C>
First $3 billion .020%
Next $3 billion .010%
Over $6 billion .008%
</TABLE>

LONG-TERM CORPORATE PORTFOLIO

<TABLE>
<CAPTION>
NET ASSETS RATE
------------------ -----
<S> <C>
First $1 billion .040%
Next $1 billion .030%
Next $1 billion .020%
Over $3 billion .015%
</TABLE>

The advisory fee is then apportioned to each Portfolio
based on the relative net assets of each. For the fiscal
year ended January 31, 1996, the GNMA, Long-Term Corporate
and High Yield Corporate Portfolios paid annual advisory
fees to WMC equal to, respectively, .02 of 1%, and .04 of
1%, and .06 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 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.

VANGUARD FIXED
INCOME GROUP The Short-Term U.S. Treasury, Short-Term Federal, Short-
and Intermediate-Term Corporate, and Intermediate-Term 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 provides investment advisory
services to more than 40 Vanguard money market and bond
portfolios, both taxable and tax-exempt. Total assets
under management by Vanguard's Fixed Income Group were $66
billion as of December 31, 1995.

30
<PAGE> 77

The Fixed Income Group manages the investment and
reinvestment of the assets of the 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.

31
<PAGE> 78

capabilities of the competing broker-dealer; and the
brokerage and research services provided to the Fund.

DIVIDENDS,
CAPITAL GAINS
AND TAXES
DIVIDENDS ARE PAID ON
THE FIRST BUSINESS DAY
OF EACH MONTH Dividends consisting of virtually all of the ordinary
income of each Portfolio of the Fund are declared daily
and are payable to shareholders of record at the time of
declaration. Such dividends are paid on the first business
day of each month. Net capital gains distributions, if
any, will be made annually. Each Portfolio's dividends and
capital gains distributions are automatically reinvested
in additional shares. The Fund is managed without regard
to tax ramifications.

If you utilize the Fund as an investment option in an
employer-sponsored retirement or savings plan, dividend
distributions from the Fund will generally not be subject
to current taxation, but will accumulate on a tax-deferred
basis. In general, employer-sponsored retirement and
savings plans are governed by complex tax rules. If you
participate in such a plan, consult your plan
administrator, your plan's Summary Plan Description, or a
professional tax adviser regarding the tax consequences of
your participation in the plan and of any plan
contributions or withdrawals.
- --------------------------------------------------------------------------------

THE SHARE
PRICE OF EACH
PORTFOLIO The share price or "net asset value" per share of each
Portfolio is determined by dividing the total market value
of a Portfolio's investments and other assets, 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.

32
<PAGE> 79

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
quoted bid price, or when stock exchange valuations are
used, at the latest quoted sale price on the date of
valuation. Short-term instruments maturing within 60 days
of the valuation date may be valued at cost, plus or minus
any amortized discount or premium. 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.

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.

All securities and cash for the GNMA, Long-Term Corporate
and High Yield 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.
CoreStates Bank, N.A., Philadelphia, PA, holds daily cash
balances that are used by the Fund's Portfolios to invest
in repurchase agreements or securities acquired in these
transactions. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
- --------------------------------------------------------------------------------

33
<PAGE> 80

SERVICE GUIDE

PARTICIPATING IN
YOUR PLAN One or more of the Portfolios of the Fund is available as
an investment option in your retirement or savings plan.
The administrator of your plan or your employee benefits
office can provide you with detailed information on how to
participate in your plan and how to elect a Portfolio of
the Fund as an investment option.

If you have any questions about a Portfolio, including the
Portfolio's investment objective, policies, risk
characteristics or historical performance, please contact
Vanguard's Participant Services (1-800-523-1188). Please
have your Social Security Number available when you call.

If you have questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------

INVESTMENT OPTIONS
AND ALLOCATIONS You may be permitted to elect different investment
options, alter the amounts contributed to your plan, or
change how contributions are allocated among your
investment options in accordance with your plan's specific
provisions. See your plan administrator or employee
benefits office for more details.
- --------------------------------------------------------------------------------

TRANSACTIONS IN FUND
SHARES Contributions, exchanges or redemptions of a Portfolio's
shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the purchase, exchange or redemption and the appropriate
monies have been received by Vanguard.
- --------------------------------------------------------------------------------

MAKING EXCHANGES Your plan may allow you to exchange monies from one
investment option to another. However, the Fund reserves
the right to refuse any exchange purchase request. Check
with your plan administrator for details on the rules
governing exchanges in your plan. Certain investment
options, particularly company stock or investment
contracts (ICs), may be subject to unique restrictions.

Before making an exchange, you should consider the
following:

- If you are making an exchange to another Vanguard Fund
option, please read the Fund's prospectus. Contact
Participant Services (1-800-523-1188) for a copy.

- Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
- --------------------------------------------------------------------------------

34
<PAGE> 81

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<PAGE> 82

<TABLE>
<S> <C> <C> <C>
[VANGUARD FIXED INCOME
SECURITIES FUND LOGO] [VANGUARD FLAG LOGO]
--------------------------- [VANGUARD FIXED INCOME SECURITIES FUND LOGO]
THE VANGUARD GROUP I N S T I T U T I O N A L
OF INVESTMENT P R O S P E C T U S
COMPANIES MAY 29, 1996
Vanguard Financial Center [VANGUARD GROUP LOGO]
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
I028
</TABLE>

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<PAGE> 83

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

[VANGUARD FIXED INCOME SECURITIES FUND LOGO]
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

PROSPECTUS -- MAY 29, 1996
- --------------------------------------------------------------------------------

NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------

SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------

INVESTMENT
OBJECTIVE AND
POLICIES Vanguard Fixed Income Securities Fund, Inc. (the "Fund")
is an open-end diversified investment company which
consists of nine Portfolios. This prospectus relates only
to the High Yield Corporate Portfolio (the "Portfolio").
The objective of the Portfolio is to provide investors
with a high level of current income. A MAJORITY OF THE
ASSETS OF THE HIGH YIELD CORPORATE PORTFOLIO MAY BE RATED
BA OR B. SECURITIES WITH SUCH RATINGS ARE COMMONLY
REFERRED TO AS "JUNK BONDS" AND ARE CONSIDERED SPECULATIVE
BY THE MAJOR RATINGS AGENCIES. INVESTORS SHOULD CAREFULLY
ASSESS THE RISKS ASSOCIATED WITH AN INVESTMENT IN THIS
PORTFOLIO BEFORE PURCHASING SHARES. There is no assurance
that the Portfolio will achieve its stated objective.
Shares of the Fund are neither insured nor guaranteed by
any agency of the U.S. Government, including the FDIC.
- --------------------------------------------------------------------------------

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
or $1,000 for Uniform Gifts/Transfers to Minors Act
accounts. The Portfolio is offered on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, the Portfolio incurs expenses for investment
advisory, management, administrative and distribution
services. If shares of this Portfolio are redeemed or
exchanged prior to being held for one year they will be
subject to a 1% redemption fee. See "Fund Expenses".
- --------------------------------------------------------------------------------

ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Portfolio before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Portfolio has been filed
with the Securities and Exchange Commission. This
Statement is dated May 29, 1996, and has been incorporated
by reference into this Prospectus. A copy may be obtained
without charge by writing to the Portfolio or by calling
the Investor Information Department.
- --------------------------------------------------------------------------------

TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C> <C> <C> <C>
Portfolio Expenses.................. 2 Investment Limitations............ 11 SHAREHOLDER GUIDE
Financial Highlights................ 3 Management of the Portfolio....... 12 Opening an Account and
Yield and Total Return.............. 3 Investment Adviser................ 12 Purchasing Shares.................... 17
FUND INFORMATION Dividends, Capital Gains When Your Account Will
Investment Objective................ 4 and Taxes....................... 14 Be Credited.......................... 20
Investment Policies................. 4 The Share Price of Selling Your Shares.................... 21
Investment Risks.................... 6 the Portfolio................... 15 Exchanging Your Shares................. 23
Who Should Invest................... 8 General Information............... 15 Important Information About
Implementation of Policies.......... 9 Telephone Transactions............... 25
Transferring Registration.............. 25
Other Vanguard Services................ 26
</TABLE>

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

- --------------------------------------------------------------------------------
<PAGE> 84

PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Portfolio. The
expenses set forth below are for the fiscal year ended
January 31, 1996.

<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES
----------------------------------------------------------------------------------
<S> <C> <C>
Sales Load Imposed on Purchases..................................... None
Sales Load Imposed on Reinvested Dividends.......................... None
Redemption Fees*+................................................... 1%
Exchange Fees....................................................... None
ANNUAL FUND OPERATING EXPENSES
----------------------------------------------------------------------------------
Management & Administrative Expenses................................ 0.24%
Investment Advisory Fees............................................ 0.06
12b-1 Fees.......................................................... None
Other Expenses
Distribution Costs................................................ 0.02%
Miscellaneous Expenses............................................ 0.02
----
Total Other Expenses................................................ 0.04
-----
TOTAL OPERATING EXPENSES................................... 0.34%
-----
-----
* Wire redemptions of less than $5,000 are subject to a $5 processing fee.
+ The 1% fee withheld from redemption proceeds is paid to the Portfolio.
</TABLE>

1% REDEMPTION FEE The High Yield Corporate Portfolio is intended for
long-term investors who can withstand substantial price
fluctuation. For this reason, the Portfolio will assess a
1% redemption fee on shares that are redeemed or exchanged
out before they have been held for one year. Solely for
purposes of calculating the one-year holding period, the
Portfolio will use the "first-in, first-out" (FIFO)
method. That is, the date of the redemption or exchange
will be compared to the earliest purchase date. If this
holding period is less than one year, the fee will be
assessed. The fee will be prorated if a portion of the
shares being redeemed or exchanged has been held for more
than one year. This fee will not apply to dividend or
capital gain reinvestments and it is paid directly to the
Portfolio.

The purpose of the above table is to assist you in
understanding the various expenses that you would bear
directly or indirectly as an investor in the Portfolio.
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>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ 3 $ 11 $ 19 $ 43
</TABLE>

2
<PAGE> 85

FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of
the respective periods in the period ended January 31,
1996, have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was
unqualified. This information should be read in
conjunction with the Portfolio's financial statements and
notes thereto, which, together with the remaining portions
of the Fund's 1996 Annual Report to Shareholders, are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the report of Price Waterhouse LLP, in the
Fund's 1996 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1996 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>
<CAPTION>

--------------------------------------------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO
--------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR.............. $7.24 $8.14 $7.56 $7.27 $6.19 $7.31 $8.44 $8.53
----- ----- ----- ----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income.......... .678 .679 .695 .727 .770 .904 1.004 1.016
Net Realized and Unrealized
Gain (Loss) on Investments... .650 (.900) .580 .290 1.080 (1.120) (1.130) (.090)
----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS................. 1.328 (.221) 1.275 1.017 1.850 (.216) (.126) .926
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income............ (.678) (.679) (.695) (.727) (.770) (.904) (1.004) (1.016)
Distributions from Realized
Capital Gains................ -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS.......... (.678) (.679) (.695) (.727) (.770) (.904) (1.004) (1.016)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR..... $7.89 $7.24 $8.14 $7.56 $7.27 $6.19 $7.31 $8.44
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*.................... 19.01% (2.52)% 17.54% 14.68% 31.27% (3.21)% (1.84)% 11.41%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)..................... $3,007 $2,162 $2,625 $2,184 $1,593 $699 $828 $1,234
Ratio of Expenses to Average
Net Assets..................... .34% .34% .32% .34% .34% .40% .38% .41%
Ratio of Net Investment Income
to Average Net Assets.......... 8.85% 9.13% 8.81% 9.82% 11.13% 13.35% 12.56% 12.07%
Portfolio Turnover Rate.......... 38% 33% 51% 83% 44% 61% 41% 48%
* Returns exclude 1% fee applied to shares redeemed or exchanged within one year of purchase.
- ------------------------------------------------------------------------------------------------------------------------

<CAPTION>
- -----------------------------------------------------
HIGH YIELD CORPORATE PORTFOLIO
- -----------------------------------------------------
YEAR ENDED JANUARY 31,
- -----------------------------------------------------

1988 1987
- ----------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR.............. $9.33 $8.84
----- ------
INVESTMENT OPERATIONS
Net Investment Income.......... 1.006 1.091
Net Realized and Unrealized
Gain (Loss) on Investments... (.800) .598
----- ------
TOTAL FROM INVESTMENT
OPERATIONS................. .206 1.689
- ----------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income............ (1.006) (1.081)
Distributions from Realized
Capital Gains................ -- (.118)
----- ------
TOTAL DISTRIBUTIONS.......... (1.006) (1.199)
- ----------------------------------------------------
NET ASSET VALUE, END OF YEAR..... $8.53 $9.33
- ----------------------------------------------------
- ----------------------------------------------------
TOTAL RETURN*.................... 2.54% 20.12%
- ----------------------------------------------------
- ----------------------------------------------------
RATIO/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)..................... $933 $1,370
Ratio of Expenses to Average
Net Assets..................... .41% .45%
Ratio of Net Investment Income
to Average Net Assets.......... 11.47% 11.43%
Portfolio Turnover Rate.......... 82% 67%
* Returns exclude 1% fee applied
to shares redeemed or exchanged
within one year of purchase.
- -----------------------------------------------------
</TABLE>

YIELD AND
TOTAL RETURN From time to time the Portfolio may advertise its yield
and 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 the
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.

In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Portfolio is calculated by dividing

3
<PAGE> 86

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 the Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to an
investor's account or the yield reported in the
Portfolio's Reports to Shareholders.

Additionally, the Portfolio may compare its performance to
that of the Lehman Aggregate Bond Index and may advertise
its duration, a measure of the Portfolio's sensitivity to
interest rate changes.
- --------------------------------------------------------------------------------

INVESTMENT
OBJECTIVE The objective of the Portfolio is to provide investors
with a high level of current income. There is no assurance
that the Portfolio will achieve its stated objective. The
investment objective of the Portfolio is not fundamental
and so may be changed by the Board of Directors without
shareholder approval. Any such change could result in the
Portfolio having an investment objective different from
the objective which a shareholder considered appropriate
at the time of investment in the Portfolio. However,
shareholders would be notified prior to any material
change in the Portfolio's objective.
- --------------------------------------------------------------------------------

INVESTMENT
POLICIES
THE PORTFOLIO INVESTS
IN LOW-QUALITY,
HIGH-RISK BONDS The High Yield Corporate Portfolio invests in a
diversified portfolio of high-yielding corporate debt
securities (so-called "junk bonds"). Under normal
circumstances, at least 80% of the Portfolio's assets will
be invested in high-yield corporate debt obligations rated
at least B by Moody's or Standard & Poor's or if unrated,
of comparable quality as determined by the Portfolio's
adviser. Not more than 20% of the High Yield Corporate
Portfolio's assets may be invested in debt securities
which are rated less than B or unrated, and convertible
securities and preferred stocks. The Portfolio may invest
up to 25% of its assets in cash reserves and U.S.
Government securities, repurchase agreements
collateralized by U.S. Treasury or U.S. Government agency
securities under unusual market conditions for temporary
defensive measures. The Portfolio is managed without
regard to tax ramifications.

Securities rated less than Baa by Moody's or BBB by
Standard & Poor's are classified as non-investment grade
securities. Such securities carry a high degree of

4
<PAGE> 87

risk and are considered speculative by the major credit
rating agencies. The following are excerpts from the
Moody's and Standard & Poor's definitions for speculative
grade debt obligations:

Standard & Poor's: BB-rated bonds have "less near-term
vulnerability to default" than B- or CCC-rated
securities but face "major ongoing uncertainties . . .
which may lead to inadequate capacity" to pay interest
or principal. B-rated bonds have a "greater
vulnerability to default" than BB-rated bonds and the
ability to pay interest or principal will likely be
impaired by adverse business conditions. CCC-rated
bonds have a "currently identifiable vulnerability to
default" and, without favorable business conditions,
will be unable to repay interest and principal.

Credit quality in the high-yield bond market can change
suddenly and unexpectedly, and even recently-issued credit
ratings may not fully reflect the actual risks posed by a
particular high-yield security. For these reasons, it is
the High Yield Corporate Portfolio's policy not to rely
primarily on ratings issued by established credit rating
agencies, but to utilize such ratings in conjunction with
the Portfolio adviser's own independent and ongoing review
of credit quality.

The High Yield Corporate Portfolio may also hold
asset-backed securities, as well as U.S.
dollar-denominated debt securities issued by foreign
governments, their agencies and instrumentalities,
supranational entities and companies located outside the
U.S. 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 Portfolio is responsible for voting the shares of all
securities it holds.

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

5
<PAGE> 88

INVESTMENT RISKS
THE PORTFOLIO IS
SUBJECT TO INTEREST
RATE, INCOME, CREDIT
AND MANAGER RISK As a mutual fund investing in fixed-income securities, the
Portfolio is subject primarily to interest rate, income
and credit risk. INTEREST RATE RISK is the potential for a
decline in bond prices due to rising interest rates. In
general, bond prices vary inversely with interest rates.
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
interest rates than bonds with shorter maturities.

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:

PERCENT CHANGE IN THE PRICE OF A PAR BOND YIELDING 7.5%

<TABLE>
<CAPTION>
1 PERCENTAGE POINT 1 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
--------------------------------------- ------------------ ------------------
<S> <C> <C>
Short-Term (2.5 years) - 2.2% + 2.3%
Intermediate-Term (10 years) - 6.6% + 7.3%
Long-Term (20 years) - 9.5% +11.1%
</TABLE>

<TABLE>
<CAPTION>
2 PERCENTAGE POINT 2 PERCENTAGE POINT
INCREASE IN DECREASE IN
STATED MATURITY INTEREST RATES INTEREST RATES
--------------------------------------- ------------------ ------------------
<S> <C> <C>
Short-Term (2.5 years) - 4.3% + 4.6%
Intermediate-Term (10 years) -12.7% +15.2%
Long-Term (20 years) -17.8% +24.1%
</TABLE>

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 the Portfolio's
current or future yield or expected changes in the
Portfolio's share price.

The Portfolio is also subject to INCOME RISK which is the
potential for a decline in the Portfolio's income due to
falling market interest rates.

In addition to interest rate and income risks, the
Portfolio is 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 the Portfolio. The credit risk of the
Portfolio depends on the quality of its investments.
Reflecting their higher risks, lower-quality bonds
generally offer higher yields (all other factors being
equal).

Finally, the investment adviser manages the Portfolio
according to the traditional methods of "active"
investment management, which involve 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.

6
<PAGE> 89

THE PORTFOLIO POSES
SUBSTANTIAL RISKS
The High Yield Corporate Portfolio is exposed to a
substantial degree of credit risk. The medium- and
low-grade bonds held by the Portfolio are considered
speculative by traditional investment standards.
High-yield bonds may be issued as a consequence of
corporate restructurings, such as leveraged buyouts,
mergers, acquisitions, debt recapitalizations, or similar
events. Also, high-yield bonds are often issued by
smaller, less creditworthy companies or by highly
leveraged (indebted) firms, which are generally less able
than more financially stable firms to make scheduled
payments of interest and principal. The risks posed by
bonds issued under such circumstances are substantial.

<TABLE>
<CAPTION>
PERCENT OF
INVESTMENT NET ASSETS
----------------------- ------------
<S> <C>
U.S. Treasury
Securities 11%
Cash Reserves 1
Corporate Bonds
A 0
Baa/BBB 3
Ba/BB 36
B 49
Caa/CC 0
Nonrated 0
------------
100%
</TABLE>

The share price of the High Yield Corporate Portfolio will
be influenced not only by changing interest rates, but
also by the bond market's perception of credit quality and
the outlook for economic growth. When economic conditions
appear to be deteriorating, low- and medium-rated bonds
may decline in market value due to investors' heightened
concern over credit quality, regardless of prevailing
interest rates.

7
<PAGE> 90

yield market, and purchasers of high-yield bonds are
concentrated among a smaller group of securities dealers
and institutional investors.

WHO SHOULD
INVEST
The High Yield Corporate Portfolio is designed for
aggressive investors willing to take substantial risks in
pursuit of potentially higher rewards. Since the High
Yield Corporate Portfolio invests in securities that are
considered speculative by traditional investment
standards, an investment in the Portfolio should represent
only a limited portion of a balanced investment program
for most investors. Because of the risks associated with
bond investments, the Portfolio 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
Portfolio's shareholders. In order to minimize such costs
the Portfolio has adopted the following policies. The
Portfolio 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 Portfolio has adopted
exchange privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Portfolio
reserves the right to suspend the offering of its shares.
- --------------------------------------------------------------------------------

8
<PAGE> 91

IMPLEMENTATION
OF POLICIES
THE PORTFOLIO MAY
INVEST IN REPURCHASE
AGREEMENTS The Portfolio utilizes a variety of investment practices
in pursuit of its objective.

The Portfolio may invest in repurchase agreements
according to the restrictions and limitations set forth in
"Investment Limitations." A repurchase agreement is a
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
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 PORTFOLIO MAY OWN
RESTRICTED OR ILLIQUID
SECURITIES
The Portfolio may own restricted or illiquid securities to
a limited extent. Restricted or illiquid securities are
securities which are not freely marketable or which are
subject to restrictions upon sale under the Securities Act
of 1933. The Portfolio may invest up to 15% of its net
assets in restricted or illiquid securities for which
price quotations are not readily available.

THE PORTFOLIO MAY
INVEST IN SECURITIES OF
FOREIGN ISSUERS
The Portfolio may hold securities of foreign issuers, but
all such securities must be denominated 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 judgment in a foreign court.

9
<PAGE> 92

THE PORTFOLIO MAY
INVEST IN FUTURES
CONTRACTS, OPTIONS,
AND OTHER DERIVATIVE
SECURITIES
The Portfolio may invest in futures contracts and options
to a limited extent. Specifically, the Portfolio may enter
into futures contracts provided that not more than 5% of
its assets are required as a futures contract margin
deposit; in addition, the 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 simulate full investment in the underlying
securities while retaining a cash balance for Portfolio
management purposes, to facilitate trading, to reduce
transaction costs, or to seek higher investment returns
when a futures contract is priced more attractively than
the underlying equity security or index.

FUTURES CONTRACTS
AND OPTIONS POSE
CERTAIN RISK
The risk of loss in trading futures contracts in some
strategies can be substantial, due both to the low margin
deposits required, and the extremely high degree of
leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract may
result in immediate and substantial loss (as well as gain)
to the investor. However, the Portfolio will not use
futures contracts or options for speculative purposes.
Accordingly, the primary risks associated with the use of
futures contracts and options are: (i) imperfect
correlation between the change in market value of the
bonds held by the 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 the
Portfolio will be unable to close out a futures position
will be minimized by entering into such transactions on a
national exchange with an active and liquid secondary
market.

10
<PAGE> 93

tion 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.

THE PORTFOLIO MAY LEND
ITS SECURITIES
The Portfolio may lend its investment securities to
qualified institutional investors for either 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.

PORTFOLIO TURNOVER
IS NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Portfolio retains the right to sell securities
regardless of how long they have been held. It is
anticipated that the annual portfolio turnover rate for
the Portfolio will not exceed 100%. A 100% turnover rate
would occur, for example, if all of the securities in the
Portfolio were replaced within one year.
- --------------------------------------------------------------------------------

INVESTMENT
LIMITATIONS
THE PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS
The Portfolio has adopted certain limitations designed to
reduce its exposure to specific situations. Some of these
limitations are that the Portfolio will not:

(a) with respect to 75% of its assets, invest more than 5%
of the value of its assets in the securities of any
single 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);

11
<PAGE> 94

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

MANAGEMENT OF
THE PORTFOLIO
VANGUARD ADMINISTERS
AND DISTRIBUTES THE
PORTFOLIO
The Portfolio is one of nine Portfolios of Vanguard Fixed
Income Securities Fund ("the Fund"), a member of The
Vanguard Group of Investment Companies, a family of more
than 30 investment companies with more than 90 distinct
portfolios and total assets in excess of $190 billion.
Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Portfolio and the other
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 structure, the Vanguard funds have costs
substantially lower than those of most competing mutual
funds. In 1995, the average expense ratio (annual costs
including advisory fees divided by total net assets) for
the Vanguard funds amounted to approximately .31% compared
to an average of 1.11% for the mutual fund industry (data
provided by Lipper Analytical Services).

The Officers of the Portfolio manage its day-to-day
operations and are responsible to the Portfolio's Board of
Directors. The Directors set broad policies for the
Portfolio 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 also provides distribution and marketing services
to the Vanguard funds. The funds are available to
investors 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
ADVISER
WELLINGTON
MANAGEMENT
COMPANY MANAGES
INVESTMENTS FOR THE
PORTFOLIO
Under an investment advisory agreement with the Fund dated
May 1, 1996, Wellington Management Company ("WMC"), 75
State Street, Boston, MA 02109, manages the investment and
reinvestment of assets in the High Yield Corporate
Portfolio, and continuously reviews, supervises and
administers the investment program of the Portfolio. 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

12
<PAGE> 95

clients of WMC are more than 10 of the investment
companies of The Vanguard Group. As of December 31, 1995,
WMC held discretionary management authority with respect
to more than $108 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.

Earl E. McEvoy, Senior Vice President of WMC, serves as
portfolio manager of the High Yield Corporate Portfolio, a
position he has held since 1984. Mr. McEvoy is 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 High Yield
Corporate Portfolio and the total assets of two other
Portfolios of Vanguard Fixed Income Securities Fund,
managed by WMC (GNMA and Long-Term Corporate Portfolios).
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:

<TABLE>
<CAPTION>
NET ASSETS RATE
<S> <C>
---------------- -----
First $1 billion .060%
Next $1 billion .040%
Next $1 billion .030%
Over $3 billion .025%
</TABLE>

The advisory fee is then apportioned to each Portfolio
based on the relative net assets of each. For the fiscal
year ended January 31, 1996, the High Yield Corporate
Portfolio paid annual advisory fees to WMC equal to .06 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 the
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 Portfolio 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 Portfolio.
Although the Portfolio does not market its shares through
intermediary brokers or dealers, WMC may place orders with
qualified broker-dealers who recommend the Portfolio 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.
- --------------------------------------------------------------------------------

13
<PAGE> 96

DIVIDENDS, CAPITAL
GAINS AND TAXES
DIVIDENDS ARE PAID ON
THE FIRST BUSINESS DAY
OF EACH MONTH Dividends consisting of virtually all of the ordinary
income of the Portfolio are declared daily and are payable
to shareholders of record at the time of declaration. Such
dividends are paid on the first business day of each
month. Net capital gains distributions, if any, will be
made annually.

The Portfolio'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 Portfolio 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 Portfolio and received
by shareholders on December 31 of the prior year.

The Portfolio intends to continue to qualify for taxation
as a "regulated investment company" under the Internal
Revenue Code so that it will not be subject to federal
income tax to the extent its income is distributed to
shareholders. Dividends paid by the Portfolio 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 Portfolio from net investment income will generally
not qualify for the intercorporate dividends-received
deduction.

Distributions paid by the Portfolio 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 Portfolio. Capital gains distributions are made when
the Portfolio realizes net capital gains on sales of
portfolio securities during the year. For the Portfolio,
realized capital gains are not expected to be a
significant or predictable part of investment return.

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

A CAPITAL GAIN OR LOSS
MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of the Portfolio is a taxable event and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of shares
or an exchange of shares between 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.

The Portfolio 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 Employer
Identification number and by certifying that you are not
subject to backup withholding.

The Portfolio has obtained a Certificate of Authority to
do business as a foreign corporation in Pennsylvania and
does business and maintains an office in that

14
<PAGE> 97

state. In the opinion of counsel, the shares of the
Portfolio 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 Portfolio.
- --------------------------------------------------------------------------------

THE SHARE PRICE
OF THE PORTFOLIO The share price or "net asset value" per share of the
Portfolio is determined by dividing the total market value
of the Portfolio's investments and other assets, less any
liabilities, by the total outstanding shares of the
Portfolio. The net asset value per share of the 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
quoted bid price, or when stock exchange valuations are
used, at the latest quoted sale price on the date of
valuation. Short-term instruments maturing within 60 days
of the valuation date may be valued at cost, plus or minus
any amortized discount or premium. 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.

The Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------

GENERAL
INFORMATION The Portfolio is one of nine Portfolios of Vanguard Fixed
Income Securities Fund (the "Fund"). The Fund is a
Maryland corporation. The Articles of Incorporation permit
the Directors to issue 4,550,000,000 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 nine classes of shares.

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

15
<PAGE> 98

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 High Yield Corporate
Portfolio are held by Morgan Guaranty Trust Company, New
York, NY. CoreStates Bank, N.A., Philadelphia, PA holds
daily cash balances that are used by the Fund's Portfolios
to invest in repurchase agreements or securities acquired
in these transactions. The Vanguard Group, Inc., Valley
Forge, PA, serves as the Fund's Transfer and Dividend
Disbursing Agent. Price Waterhouse LLP serves as
independent accountants for the Fund and will audit its
financial statements annually. The Fund is not involved in
any litigation.
- --------------------------------------------------------------------------------

16
<PAGE> 99

SHAREHOLDER GUIDE

OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form, and any required legal documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($1,000 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 $1,000 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.

The Portfolio'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 Portfolio is offered on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees).

PURCHASE RESTRICTIONS 1) Because of the risks associated with bond investments,
the Portfolio 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 Portfolio reserves the right to
reject any specific purchase (and exchange purchase)
request. The Portfolio also reserves the right to
suspend the offering of shares for a period of time.

2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check
is made payable to the Vanguard Group.

IMPORTANT NOTE Potential investors should note that a 1% fee is charged
on redemptions or exchanges out of this Portfolio of
shares held for less than one year. Please see "Portfolio
Expenses" for more information.

17
<PAGE> 100

<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment on the include the Invest-by-Mail
Complete and sign the registration form, make your remittance form attached to your
enclosed Account check payable to The Vanguard Portfolio confirmation
Registration Form Group-29, and mail to: statements. Please make your
check payable to The Vanguard
VANGUARD FINANCIAL CENTER Group-29, write your account
P.O. BOX 2600 number on your check and, using
VALLEY FORGE, PA 19482 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.
--------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO 0101 9897
wired to: ATTN VANGUARD
VANGUARD FIXED INCOME SECURITIES FUND
BEFORE WIRING HIGH YIELD CORPORATE PORTFOLIO
ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client Services
(1-800-662-2739)
</TABLE>

To assure proper receipt, please be sure your bank
includes the Portfolio name, the account number Vanguard
has assigned to you and the eight-digit CoreStates number.
If you are 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.
- --------------------------------------------------------------------------------

PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from an existing Vanguard Fund account.
However, the Portfolio 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.
- --------------------------------------------------------------------------------

18
<PAGE> 101

CHOOSING A
DISTRIBUTION
OPTION
You must select one of three distribution options:

1. AUTOMATIC REINVESTMENT OPTION--Both dividends and
capital gains distribution 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).

TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING.
Under Federal tax laws, the Portfolio is required to
distribute net capital gains and dividend income to
Portfolio shareholders. These distributions are made to
all shareholders who own Portfolio shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain distribution, you will be assessed taxes on
the amount of the capital gain distribution later paid
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.

Prospective investors should, therefore, inquire about
potential distributions before investing. The Portfolio's
annual capital gains distribution normally occurs in
December, while income dividends are generally paid on the
first business day of

19
<PAGE> 102

each month. For additional information on distributions
and taxes, see the section titled "Dividends, Capital
Gains and Taxes."
- --------------------------------------------------------------------------------

IMPORTANT
INFORMATION
ESTABLISHING
OPTIONAL SERVICES The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD 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
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature 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. If a
certificate is lost, you may incur an expense to replace
it.

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

ELECTRONIC
PROSPECTUS
DELIVERY
If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------

WHEN YOUR
ACCOUNT WILL
BE CREDITED The trade date is the date on which your account is
credited. It is generally the day on which the Portfolio
receives your investment in the form of Federal Funds
(monies credited to the Portfolio'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 second
business day following receipt of your check. 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.)

For purchases by Federal Funds wire or exchange, the
Portfolio 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.

20
<PAGE> 103

IMPORTANT NOTE A redemption fee of 1% of the value of shares redeemed
will be deducted from the redemption proceeds of any
shares held for less than one year. This fee is paid
directly to Portfolio.

DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the following:

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.
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.

SELLING BY TELEPHONE To sell shares by telephone, you or your pre-authorized
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."

21
<PAGE> 104

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
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option lets you move money from your Vanguard account to
your bank account on an "as needed" basis. 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 service; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------

SELLING BY EXCHANGE You may sell shares of the Portfolio by making an exchange
into another Vanguard Fund account. Please see "Exchanging
Your Shares" for details.
- --------------------------------------------------------------------------------

IMPORTANT REDEMPTION
INFORMATION
Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
- --------------------------------------------------------------------------------

DELIVERY OF
REDEMPTION
PROCEEDS
Redemption requests received by telephone prior to the
regular close of the New York Stock Exchange (generally
4:00 p.m. Eastern time) are processed on the day of
receipt and the redemption proceeds are normally sent on
the following business day.

Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as
described above in "Important Redemption Information."

22
<PAGE> 105

LOW BALANCE FEE
AND MINIMUM
ACCOUNT BALANCE
REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Portfolio will automatically deduct a $10
annual fee from non-retirement accounts with balances
falling below $2,500 ($500 for Uniform Gifts/Transfers to
Minors Act account). This fee deduction will occur
mid-year, beginning in 1996. The fee generally will be
waived for investors whose aggregate Vanguard assets
exceed $50,000.

In addition, the Portfolio reserves the right to liquidate
any non-retirement account that is below the minimum
initial investment amount of $3,000. If at any time your
total investment does not have a value of at least $3,000,
you may be notified that your account is below the
Portfolio'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 registered shareholder.

Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets,
(i.e., a decline in a Portfolio's net asset value).
- --------------------------------------------------------------------------------

EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange your
shares of Vanguard Fixed Income Securities Fund for those
of other available Vanguard Funds.

IMPORTANT NOTE A redemption fee of 1% of the value of shares exchanged
out will be deducted from the exchange proceeds if shares
held for less than one year are exchanged. This fee is
paid directly to the Portfolio.

EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) When exchanging shares by telephone, please have ready the
Portfolio name, account number, Social Security Number or
Employer Identification number listed on the account, and
exact name and address in which the account is registered.
Only the registered shareholder may complete such an
exchange. Requests for telephone exchanges received prior
to the close of trading on the New York Stock Exchange
(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 INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND, AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or

23
<PAGE> 106

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.
- --------------------------------------------------------------------------------

IMPORTANT EXCHANGE
INFORMATION
Before you make an exchange, you should consider the
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 or Vanguard/PRIMECAP 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.

EXCHANGE
PRIVILEGE
LIMITATIONS The Portfolio's exchange privilege is not intended to
afford 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.

24
<PAGE> 107

purchase request (including exchange purchases from other
Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------

IMPORTANT
INFORMATION ABOUT
TELEPHONE
TRANSACTIONS The ability to initiate share redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in writing
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:

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 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.
- --------------------------------------------------------------------------------

25
<PAGE> 108

Summary Statement. Please call our Client Services
Department (1-800-662-2739) for information.

Financial reports on the Portfolio will be mailed to you
semiannually, according to the Portfolio's fiscal
year-end.
- --------------------------------------------------------------------------------

OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.

VANGUARD DIRECT
DEPOSIT SERVICE
With Vanguard's Direct Deposit Service, most U.S.
Government 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 FUND
EXPRESS
Vanguard's Fund Express allows you to transfer money
between 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.

VANGUARD DIVIDEND
EXPRESS
Vanguard's Dividend Express allows you to transfer your
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) system. 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
TELE-ACCOUNT Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchToneTM
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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<PAGE> 110

<TABLE>
<S> <C> <C>
[VANGUARD FLAG LOGO]
[LOGO VANGUARD FIXED INCOME
SECURITIES FUND] [VANGUARD FIXED INCOME SECURITIES FUND LOGO]
--------------------------- P R O S P E C T U S
THE VANGUARD GROUP
OF INVESTMENT MAY 29, 1996
COMPANIES [VANGUARD GROUP LOGO]
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
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)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482

P028
</TABLE>

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<PAGE> 111

PART B

VANGUARD FIXED INCOME SECURITIES FUND, INC.

STATEMENT OF ADDITIONAL INFORMATION

MAY 29, 1996

This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated May 29, 1996. To obtain this Prospectus,
please call the Investor Information Department:

1-800-662-7447

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Fund.................................................................................. 1
Investment Objective and Policies......................................................... 1
Purchase of Shares........................................................................ 5
Redemption of Shares...................................................................... 5
Shareholder Services...................................................................... 6
Investment Limitations.................................................................... 7
Management of the Fund.................................................................... 9
Investment Advisory Services.............................................................. 12
Portfolio Transactions.................................................................... 14
Yield and Total Return.................................................................... 15
Financial Statements...................................................................... 16
Performance Measures...................................................................... 16
Other Definitions......................................................................... 17
Appendix -- Description of Securities and Ratings......................................... 18
</TABLE>

THE FUND

Vanguard Fixed Income Securities Fund, Inc. (the "Fund") is an open-end,
diversified, management investment company whose shares are currently offered in
nine distinct Portfolios. Each Portfolio of the Fund in effect represents a
separate mutual fund with its own investment objective and policies.

INVESTMENT OBJECTIVE AND POLICIES

The following policies supplement the investment objective and policies set
forth in the Fund's Prospectus:

REPURCHASE AGREEMENTS Each Portfolio may invest in repurchase agreements
with commercial banks, brokers or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Portfolio acquires a money
market instrument (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
commercial bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan collateralized by securities. The resale price reflects
an agreed upon interest rate effective for the period the instrument is held by
the Portfolio and is unrelated to the interest rate on the underlying
instrument. In these transactions, the securities acquired by the Portfolio
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by a custodian bank until
repurchased. In addition, the Fund's Board of Directors will monitor a
Portfolio's repurchase agreement transactions generally and will establish
guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker or dealer party to a repurchase agreement
with the Portfolio. No more than an aggregate of 15% of a Portfolio's assets, at
the time of investment, will be invested in repurchase agreements having
maturities longer than seven days and securities subject to legal or contractual
restrictions

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on resale for which there are no readily available market quotations. From time
to time, the Fund's Board of Directors may determine that certain restricted
securities known as Rule 144A securities are liquid and not subject to the 15%
limitation described above.

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 not within the
control of the Portfolio and therefore the realization by the Portfolio 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.

LENDING OF SECURITIES Each Portfolio of the Fund may lend its investment
securities to qualified brokers, dealers, banks or other financial institutions,
so long as the terms and the structure of such loans are not inconsistent with
the Investment Company Act of 1940, as amended, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission thereunder, which
currently require that (a) the borrower pledge and maintain with the Portfolio
collateral consisting of cash, and irrevocable letter of credit or securities
issued or guaranteed by the United States Government having a value at all times
not less than 100 percent of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the Portfolio at any time and (d) the
Portfolio receive reasonable interest on the loan (which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments), and distributions on the loaned securities and any increase in
their market value. Each Portfolio of the Fund will not lend securities if, as a
result, the aggregate of such loans exceeds 33 1/3% of the value of the
Portfolio's total assets. Loan arrangements made by the Fund will comply with
all other applicable regulatory requirements, including the rules of the New
York Stock Exchange, which rules presently require the borrower, after notice,
to redeliver the securities within the normal settlement time of three business
days.

RESTRICTED SECURITIES Each Portfolio may invest in restricted securities
(privately placed debt securities) and other securities which are not readily
marketable, but will not acquire such securities if as a result they, together
with the aggregate of other securities for which no quotations are readily
available, would comprise more than 15% of the value of the Portfolio's net
assets. Pursuant to Section 4(2) of the Securities Act of 1933 and Rule 144A
under the Securities Act of 1933, as amended, if a substantial market among
qualified institutional buyers develops for restricted securities held by any
Portfolio, the Fund intends to treat such securities as liquid securities, in
accordance with procedures approved by the Fund's Board of Directors.

Restricted securities may be sold only in privately negotiated transactions
or in a public offering with respect to which a registration statement is in
effect under the Securities Act of 1933. Where registration is required, a
Portfolio may be obligated to pay all or part of the registration expenses and a
considerable period may elapse between the time of the decision to sell and the
time the Portfolio may be permitted to sell a security under an effective
registration statement. If, during such a period, adverse market conditions were
to develop, the Portfolio might obtain a less favorable price than prevailed
when it decided to sell. Restricted securities will be priced at fair value as
determined in good faith by the Board of Directors. If through the appreciation
of restricted securities or the depreciation of unrestricted securities, a
Portfolio should be in a position where more than 15% of the value of its net
assets are invested in illiquid assets, including restricted securities, the
Portfolio will take appropriate steps to protect liquidity.

FUTURES CONTRACTS AND OPTIONS Each Portfolio except the Short-Term Federal
Portfolio may enter into futures contracts, options, and options on futures
contracts for several reasons: to simulate full investment in the underlying
securities while retaining a cash balance for Fund management purposes, to
facilitate trading, to reduce transaction costs, or to seek higher investment
returns when a futures contract is priced more attractively than the underlying
equity security or index. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific security
at a specified future time and at a

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<PAGE> 113

specified price. Futures contracts which are standardized as to maturity date
and underlying financial instrument are traded on national futures exchanges.
Futures exchanges and trading are regulated under the Commodity Exchange Act by
the Commodity Futures Trading Commission ("CFTC"), a U.S. Government Agency.
Assets committed to futures contracts will be segregated at the Fund's custodian
bank to the extent required by law.

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

Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin
deposits which may range upward from less than 5% of the value of the contract
being traded.

After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Portfolios
expect to earn interest income on its margin deposits.

Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Portfolios intend to use futures
contracts only for bona fide hedging purposes.

Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. A Portfolio will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase.

Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.

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

RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Portfolio would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Portfolio has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition, the
Portfolio may be required to make delivery of the

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<PAGE> 114

instruments underlying futures contracts it holds. The inability to close
options and futures positions also could have an adverse impact on the ability
to effectively hedge it.

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

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

Utilization of futures transactions by the Portfolio does involve the risk
of imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Portfolio could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Portfolio of margin deposits in the event of bankruptcy of a
broker with whom the Portfolio has an open position in a futures contract or
related option.

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

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

In order for the Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities or currencies. In addition,
gains realized on the sale or other disposition of securities held for less than
three months must be limited to less than 30% of the Portfolio's annual gross
income. It is anticipated that any net gain realized from the closing out of
futures contracts will be considered gain from the sale of securities and
therefore be qualifying income for purposes of the 90% requirement. In order to
avoid realizing excessive gains on securities held less than three months, the
Portfolio may be required to defer the closing out of futures

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<PAGE> 115

contracts beyond the time when it would otherwise be advantageous to do so. It
is anticipated that unrealized gains on futures contracts, which have been open
for less than three months as of the end of the Portfolio's fiscal year and
which are recognized for tax purposes, will not be considered gains on sales of
securities held less than three months for the purpose of the 30% test.

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

PURCHASE OF SHARES

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

REDEMPTION OF SHARES

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

The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in readily marketable investment securities or in
cash, as the Directors may deem advisable; however, payment will be made wholly
in cash unless the Directors believe that economic or market conditions exist
which would make such a practice detrimental to the best interests of the Fund.
If redemptions are paid in investment securities, such securities will be valued
as set forth in the Prospectus under "The Share Price of Each Portfolio" and a
redeeming shareholder would normally incur brokerage expenses if he converted
these securities to cash.

No charge is made by a Portfolio for redemptions. Any redemption may be
more or less than the shareholder's cost depending on the market value of the
securities held by the Portfolio.

SIGNATURE GUARANTEES

To protect your account, the Fund and Vanguard from fraud, signature
guarantees are required for certain redemptions. Signature guarantees enable the
Fund to verify the identity of the person who has authorized a redemption from
your account. Signature guarantees are required in connection with: (1) all
redemptions, regardless of the amount involved, when the proceeds are to be paid
to someone other than the registered owner(s), and/or to an address other than
the address of record; and (2) share transfer requests. These requirements are
not applicable to redemptions in Vanguard's prototype retirement plans, except
in connection with: (1) distributions made when the proceeds are to be paid to
someone other than the plan participant; (2) certain authorizations to effect
exchanges by telephone; and (3) when proceeds are to be wired. These
requirements may be waived by the Fund in certain instances.

A guarantor must be a bank, broker or any other guarantor that Vanguard
deems acceptable. Notaries public are not acceptable guarantors.

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

SHAREHOLDER SERVICES

EXCHANGE PRIVILEGE

Each Portfolio's shares may be exchanged without cost for shares of any
other Portfolio, or for the shares of any open-end Fund currently offering its
shares to new investors in The Vanguard Group ("Vanguard"). A shareholder of any
other open-end Fund in Vanguard may likewise exchange his shares for shares of
any of the Fund's Portfolios. Exchange requests may be made either by mail,
telephone or telegraph.

Telephone and telegraph exchanges (referred to as "expedited exchanges")
will be accepted only if the account of the shareholder and the registration of
the two accounts is identical. Requests for expedited exchanges received prior
to the close of the New York Stock Exchange (generally 4:00 p.m. Eastern time)
will be processed at the next determined net asset value after such request is
received. Requests received after the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) will be processed on the next business day.
No expedited exchanges will be accepted into, or from, Vanguard Balanced Index
Fund, Vanguard Index Trust Fund, Vanguard International Equity Index Fund and
Vanguard Quantitative Portfolios. Neither the Fund nor Vanguard will be
responsible for the authenticity of exchange instructions received by telephone
or telegraph, provided that reasonable security procedures are observed.
Expedited exchanges may also be subject to limitations as to amounts and
frequency, and to other restrictions established by the Board of Directors to
assure that such exchanges do not disadvantage the Fund and its shareholders.
Shareholders may obtain the terms of these limitations, which may be revised at
any time, from Vanguard.

Any such exchange will be based on the respective net asset values of the
shares involved. There are no sales commissions or charges of any kind. Before
making an exchange, a shareholder should consider the investment objectives and
policies of the Portfolio or fund to be purchased, and other relevant
information (including the minimum initial investment), which can be found in
the prospectus relating to that particular Portfolio or fund. A prospectus for
any of the Vanguard funds or Portfolios may be obtained from Vanguard.

For Federal income tax purposes an exchange between funds or Portfolios is
a taxable event and, accordingly, a capital gain or loss may be realized. The
exchange privilege may be modified or terminated at any time, and any of the
Portfolios or Vanguard funds may limit or discontinue the offering of its shares
without notice to shareholders.

TRANSFER OF SHARES

Fund shares may be transferred to another person by sending appropriate
written instructions to Vanguard. The account must be clearly identified and
include the number of shares to be transferred and the signatures of all
registered owners. The signature on the letter of instructions or any stock
power must be guaranteed. As in the case of withdrawals, the written request
must be received in "Good Order" before any transfer can be made.

INFORMATION FOR SHAREHOLDERS

Following any purchase or redemption, a shareholder will receive a
statement which reflects all activity during the current calendar year. Each
shareholder will also receive a quarterly statement, which includes valuation as
of the day the statement is prepared.

Shareholders will receive semiannual financial statements audited at least
annually by independent accountants whose selection is ratified by shareholders.

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INVESTMENT LIMITATIONS

The Fund is subject to the following limitations which may not be changed
with respect to a particular Portfolio without the approval of at least a
majority of the outstanding voting securities (as defined in the Investment
Company Act of 1940) of that Portfolio. A Portfolio will not:

1) Invest in commodities or commodity contracts or purchase or sell real
estate, although it may purchase and sell marketable securities of
companies which deal in real estate or interests therein; except that
each Portfolio except the Short-Term Federal Portfolio may invest in
bond futures contracts, bond options and options on bond futures
contracts to the extent that not more than 5% of its assets are
required as deposit margin for futures contracts and not more than 20%
of its assets are invested in such instruments at any time;

2) Write, purchase or sell warrants, put or call options, or combinations
thereof, except as specified above in (1);

3) Invest in interests in oil, gas, or other mineral exploration or
development programs;

4) Make loans to other persons (except by (i) the purchase of the debt
obligations in which the Portfolio is authorized to invest in
accordance with its investment policies, and (ii) as provided under
"Lending of Securities");

5) Purchase securities on margin or sell securities short, except as
specified above in (1);

6) With respect to 75% of assets, purchase for the Portfolio more than 10%
of the outstanding voting securities of any issuer, except securities
issued or guaranteed by the U.S. Government or any of its agencies or
instrumentalities;

7) With respect to 75% of assets, purchase securities of any issuer
(except obligations of the U.S. Government and its agencies and
instrumentalities) if as a result more than 5% of the value of the
Portfolio's total assets would be invested in the securities of such
issuer;

8) 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;

9) Pledge, mortgage or hypothecate the Portfolio's assets to an extent
greater than 5% of the value of its total assets;

10) Purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(included in this limitation is the Fund's investment in The Vanguard
Group, Inc.);

11) Invest for the purpose of controlling management of any company;

12) Invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
or otherwise to the extent permitted by Section 12 of the Investment
Company Act of 1940. The Portfolio will invest only in investment
companies which have investment objectives and investment policies
consistent with those of the Portfolio;

13) Invest more than 5% of the value of the Portfolio's total assets in
securities of companies which have (with predecessors) a record of less
than three years' continuous operation, except investments in
obligations guaranteed by the U.S. Government, or issued by its
agencies or instrumentalities;

14) Concentrate its investments in a particular industry, although it may
invest up to 25% of the Portfolio's total assets (taken at value) in
the securities of issuers, all of which conduct their

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principal business activities in the same industry, provided that (i)
this limitation does not apply to obligations issued or guaranteed by
the U.S. Government, or its agencies or instrumentalities, and (ii)
utility companies will be divided according to their services; for
example, gas, gas transmission, electric and gas, electric, 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, as follows: Finance-Automobiles,
Finance-Banks, Finance-Consumers and Finance-Diversified; and

15) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be deemed
to be an underwriter under the Securities Act of 1933, as amended, in
disposing of investment securities.

The above-referenced investment limitations are considered at the time that
portfolio securities are purchased. Notwithstanding these limitations, the Fund
may own all or any portion of the securities of, or make loans to, or contribute
to the costs or other financial requirements of any company which will be wholly
owned by the Fund and one or more other investment companies and is primarily
engaged in the business of providing, at cost, management, administrative or
related services to the Fund and other investment companies. See "MANAGEMENT OF
THE FUND." As a non-fundamental policy each Portfolio may not purchase or retain
securities of an issuer if an officer or director of such issuer is an officer
or Director of the Fund or its investment adviser and one or more of such
officers or Directors of the Fund or its investment adviser owns beneficially
more than 1/2% of the shares or securities of such issuer and all such
directors and officers owning more than 1/2% of such shares or securities
together own more than 5% of such shares or securities.

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MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS

The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is 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. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.

<TABLE>
<S> <C>
JOHN C. BOGLE, Chairman and Director ALFRED M. RANKIN, JR., Director
Chairman and Director of The Vanguard Group, Chairman, President, and Chief Executive
Inc., and of each of the investment Officer of NACCO Industries, Inc.; Director of
companies in The Vanguard Group; Director of The BFGoodrich Company, and The Standard
The Mead Corporation and General Accident Products Company.
Insurance. JOHN C. SAWHILL, Director
JOHN J. BRENNAN, President, Chief Executive President and Chief Executive Officer, The
Officer and Director* Nature Conservancy; formerly, Director and
President, Chief Executive Officer and Senior Partner, McKinsey & Co.; President,
Director of The Vanguard Group, Inc., and of New York University; Director of Pacific Gas
each of the other investment companies in and Electric Company and NACCO Industries.
The Vanguard Group. JAMES O. WELCH, JR., Director
ROBERT E. CAWTHORN, Director Retired Chairman of Nabisco Brands, Inc.,
Chairman of Rhone-Poulenc Rorer, Inc.; retired Vice Chairman and Director of RJR
Director of Sun Company, Inc. Nabisco; Director of TECO Energy, Inc.; and
BARBARA BARNES HAUPTFUHRER, Director Director of Kmart Corporation.
Director of The Great Atlantic and Pacific J. LAWRENCE WILSON, Director
Tea Company, ALCO Standard Corp., Raytheon Chairman and Chief Executive Officer of Rohm &
Company, Knight-Ridder, Inc. and Haas Company; Director of Cummins Engine
Massachusetts Mutual Life Insurance Co. and Company; and Trustee of Vanderbilt
Trustee Emerita of Wellesley College. University.
BRUCE K. MACLAURY, Director RAYMOND J. KLAPINSKY, Secretary*
President, The Brookings Institution; Senior Vice President and Secretary of The
Director of American Express Bank, Ltd., The Vanguard Group, Inc.; Secretary of each of the
St. Paul Companies, Inc. and Scott Paper investment companies in The Vanguard Group.
Company. RICHARD F. HYLAND, Treasurer*
BURTON G. MALKIEL, Director Treasurer of The Vanguard Group, Inc. and of
Chemical Bank Chairman's Professor of each of the investment companies in The
Economics, Princeton University; Director of Vanguard Group.
Prudential Insurance Co. of America, Amdahl
Corporation, Baker Fentress & Co., The KAREN E. WEST, Controller*
Jeffrey Co. and Southern New England Vice President of The Vanguard Group, Inc.;
Communications Company. Controller of each of the investment companies
in The Vanguard Group.
---------------
*Officers of the Fund are "interested persons"
as defined in the Investment Company Act of
1940.
</TABLE>

THE VANGUARD GROUP Vanguard Fixed Income Securities Fund is a member of
The Vanguard Group of Investment Companies. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Fund and the other funds
in the Group obtain at cost virtually all of their corporate management,
administrative and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain of the Vanguard funds.

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.

The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions.

9
<PAGE> 120

However, such transactions are subject to procedures and guidelines
substantially similar to those recommended by the mutual fund industry and
approved by the U.S. Securities and Exchange Commission.

The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds has invested are adjusted from time to time in
order to maintain the proportionate relationship between each Fund's relative
net assets and its contribution to Vanguard's capital. At January 31, 1996, the
Fund had contributed capital of $2,499,000 to Vanguard, representing 12.5% of
Vanguard's capitalization. The Funds' Service Agreement provides for the
following arrangement: (1) each Vanguard Fund may invest a maximum of 0.40% of
its assets in Vanguard and (2) there is no restriction on the maximum cash
investment that the Vanguard Funds may make in Vanguard.

MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended January 31, 1996, the Fund's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $44,869,000.

DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for shares of the
Funds, in connection with any sales made directly to investors in the states of
Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.

The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.

One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for the Group, and
that no Fund shall incur annual distribution expenses in excess of 20/100 of 1%
of its average month-end net assets. During the fiscal year ended January 31,
1996, the Fund paid approximately $4,146,000 of the Group's distribution and
marketing expenses, which represented an effective annual rate of .02% of 1% of
the Fund's average net assets.

INVESTMENT ADVISORY SERVICES Vanguard also provides investment advisory
services to the Short-Term Corporate, Short-Term Federal, Short-Term U.S.
Treasury, Intermediate-Term Corporate, Intermediate-Term U.S. Treasury and
Long-Term U.S. Treasury Portfolios of the Fund, Vanguard Money Market Reserves,
Vanguard Admiral Funds, Vanguard Institutional Index Fund, Vanguard Index Trust,
Vanguard International Equity Index Fund, Vanguard Balanced Index Fund, Vanguard
Tax-Managed Fund, the Aggressive Growth Portfolio of Vanguard Horizon Fund,
Vanguard Bond Index Fund, Vanguard Municipal Bond Fund, Vanguard Florida Insured
Tax-Free Fund, Vanguard California Tax-Free Fund, Vanguard New Jersey Tax-Free
Fund, Vanguard New York Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund,
Vanguard Pennsylvania Tax-Free Fund, several Portfolios of Vanguard Variable
Insurance Fund, a portion of Vanguard/Windsor II, a portion of Vanguard/Morgan
Growth Fund as well as several indexed separate accounts. These services are
provided on an at-cost basis from a money management staff employed directly by
Vanguard. The compensation and other expenses of this staff are paid by the
Funds utilizing these services.

REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's Officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund, and each other Fund in the Group, for
its proportionate share of Officers' and employees' salaries and retirement
benefits.

10
<PAGE> 121

The following information is furnished with respect to the Directors and
Officers of the Fund for whom the Fund's proportionate shares of remuneration
exceeded $60,000 for the fiscal year ended January 31, 1996 and for all
Directors and Officers as a group:

<TABLE>
<CAPTION>
DIRECT
NAMES OF CAPACITIES IN WHICH REMUNERATION WAS RECEIVED REMUNERATION(1)
-------------------------------------------------------------------------- ---------------
<S> <C>
John C. Bogle, Chairman................................................... $ 411,115
John J. Brennan, President and Chief Executive Officer.................... $ 204,104
Raymond J. Klapinsky, Secretary........................................... $ 61,511
All Directors and Officers as a group..................................... $ 739,603(1)
</TABLE>

- ---------------
(1) Includes, in the aggregate, $73,000 of fees and expenses paid by the Fund,
to its "non-interested" Directors, and the Fund's proportionate share of
remuneration paid by Vanguard to all Officers of the Fund, as a group.

VANGUARD FIXED INCOME SECURITIES FUND
COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(3)
- --------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1),(2) $ -- $ -- -- --
John J. Brennan(2) $ -- $ -- -- --
Barbara Barnes Hauptfuhrer $7,900 $ 1,351 $15,000 $59,000
Robert E. Cawthorn $7,900 $ 1,126 $13,000 $59,000
Bruce K. MacLaury $8,711 $ 1,332 $12,000 $55,000
Burton G. Malkiel $8,034 $ 901 $15,000 $60,000
Alfred M. Rankin, Jr. $8,034 $ 711 $15,000 $60,000
John C. Sawhill $8,034 $ 844 $15,000 $60,000
James O. Welch, Jr. $7,900 $ 1,039 $15,000 $59,000
J. Lawrence Wilson $8,034 $ 751 $15,000 $60,000
</TABLE>

- ---------------
(1) For the period reported in this table, Mr. Bogle was the Fund's Chief
Executive Officer, and therefore an "Interested Director."
(2) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service. Compensation amounts reported for Messrs. Bogle and
Brennan relate to their respective positions as Chief Executive Officer and
President of the Fund.
(3) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard Funds
(27 in the case of Mr. MacLaury).

Directors who are not Officers are paid an annual fee based on the number
of years of service on the Board, up to fifteen years of service, upon
retirement. The fee is equal to $1,000 for each year of service and each
investment company member of The Vanguard Group contributes a proportionate
amount to this fee based on its relative net assets. This fee is paid,
subsequent to a Director's retirement, for a period of ten years or until the
death of a retired Director. Under its retirement plan, Vanguard contributes
annually an amount equal to 10% of each officer's annual compensation plus 5.7%
of that part of the Officer's compensation during the year that exceeds the
Social Security Taxable Wage Base then in effect. The Fund's proportionate share
of retirement contributions made by Vanguard under its Retirement and Thrift
Plans on behalf of all eligible Officers of the Fund, as a group, during the
fiscal year ended January 31, 1996 was approximately $18,750.

11
<PAGE> 122

INVESTMENT ADVISORY SERVICES
GNMA, LONG-TERM CORPORATE AND HIGH YIELD CORPORATE PORTFOLIOS

The Fund employs Wellington Management Company (the "Adviser") under an
investment advisory agreement dated May 1, 1996 to manage the investment and
reinvestment of the assets of the Fund's GNMA, Long-Term Corporate and High
Yield Corporate Portfolios and to continuously review, supervise and administer
the investment program for each such Portfolio. The Adviser discharges its
responsibilities subject to the control of the officers and Directors of the
Fund.

The GNMA, Long-Term Corporate, and High Yield Corporate Portfolios pay the
Adviser 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 for the
quarter:

GNMA PORTFOLIO

<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------------------------------------- ------
<S> <C>
First $3 billion................................................................. .020%
Next $3 billion.................................................................. .010%
Over $6 billion.................................................................. .008%
</TABLE>

LONG-TERM CORPORATE PORTFOLIO

<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------------------------------------- ------
<S> <C>
First $1 billion................................................................. .040%
Next $1 billion.................................................................. .030%
Next $1 billion.................................................................. .020%
Over $3 billion.................................................................. .015%
</TABLE>

HIGH-YIELD CORPORATE PORTFOLIO

<TABLE>
<CAPTION>
NET ASSETS RATE
--------------------------------------------------------------------------------- ------
<S> <C>
First $1 billion................................................................. .060%
Next $1 billion.................................................................. .040%
Next $1 billion.................................................................. .030%
Over $3 billion.................................................................. .025%
</TABLE>

The fee, as determined above, is allocated to each Portfolio based on the
relative net assets of each.

During the fiscal years ended January 30, 1994, 1995 and 1996, the three
Portfolios paid the following advisory fees to WMC:

<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31,
--------------------------------------
PORTFOLIO 1994 1995 1996
---------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
GNMA................................................ $1,454,000 $1,286,000 $1,181,000
Long-Term Corporate................................. 1,252,000 $1,131,000 $1,118,000
High Yield Corporate................................ 1,455,000 $1,389,000 $1,444,000
</TABLE>

The fees set forth above were paid under the terms of a previous advisory
agreement that called for a higher rate of fees. The present agreement continues
until April 30, 1998, and may be continued thereafter for successive one-year
periods, as long as such continuance is specifically approved at least annually
(a) by a vote of a majority of those members of the Board of Directors of the
Fund who are not parties to the agreement or interested persons of any such
party, cast in person at a meeting called for the purpose of voting such
approval, and (b) by the Board of Directors of the Fund or by vote of a majority
of the outstanding shares of each of the GNMA, Long-Term Corporate and High
Yield Corporate Portfolios. Provided, however, that if the holders of any one of
these Portfolios fail to approve the agreement, the Adviser may continue to
serve as investment adviser to the Portfolio which approved the agreement, and
to the Portfolio which did not approve the agreement until new arrangements have
been made. The agreement may be terminated by any Portfolio at any time, without
penalty, by vote of the Board of Directors of the Fund or by vote of a majority
of the

12
<PAGE> 123

outstanding shares of the Portfolio on 60 days' written notice to the Adviser,
or by the Adviser on 90 days' written notice to the Fund. The agreement will
automatically terminate in the event of its assignment.

The Fund's Board of Directors may, without the approval of shareholders,
provide for:

A. The employment of a new investment adviser pursuant to the terms of
a new advisory agreement, either as a replacement for an existing
adviser or as an additional adviser.

B. A change in the terms of an advisory agreement.

C. The continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned because
of a change in control of the adviser.

Any such change will only be made upon not less than 30 days' prior written
notice to shareholders, which shall include the information concerning the
adviser that would have normally been included in a proxy statement.

Because the Adviser provides only investment advisory services to the Fund
and has no control over the Fund's expenses, the Adviser has not undertaken to
guarantee expenses of the Fund. The Officers of the Fund have worked out
alternative arrangements with state authorities which require an expense
guarantee.

DESCRIPTION OF THE ADVISER Wellington Management Company, 75 State Street,
Boston, MA 02109, is a Massachusetts general partnership, of which the following
persons are managing partners: Robert W. Doran, Duncan M. McFarland, and John R.
Ryan.

SHORT-TERM CORPORATE, SHORT-TERM FEDERAL,
SHORT-TERM U.S. TREASURY, INTERMEDIATE-TERM CORPORATE,
INTERMEDIATE-TERM U.S. TREASURY AND LONG-TERM U.S. TREASURY PORTFOLIOS

The Short-Term Corporate, Short-Term Federal, Short-Term U.S. Treasury,
Intermediate-Term Corporate, Intermediate-Term U.S. Treasury and Long-Term U.S.
Treasury Portfolios receive all investment advisory services on an
"internalized," at-cost, basis from an experienced investment management staff
employed directly by Vanguard. This staff also provides investment advisory
services to Vanguard Money Market Reserves, Vanguard Institutional Money Market
Portfolio, Vanguard Bond Index Fund, Vanguard Municipal Bond Fund, Vanguard
Balanced Index Fund, Vanguard Admiral Funds, the Balanced Portfolio of Vanguard
Tax-Managed Fund, Vanguard California Tax-Free Fund, Vanguard Florida Insured
Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, Vanguard Ohio Tax-Free Fund,
Vanguard New York Insured Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund and
the Money Market and High-Grade Bond Portfolios of Vanguard Variable Insurance
Fund. The compensation and other expenses of the staff are allocated among the
Portfolios of the Fund and the other Funds listed above. During the fiscal years
ended January 31, 1994, 1995 and 1996, the Short-Term Corporate Portfolio's
share of these expenses totaled approximately $298,000, $391,000 and $408,000,
respectively. During the fiscal years ended January 31, 1994, 1995 and 1996, the
Long-Term U.S. Treasury Portfolio's share of these expenses totaled
approximately $84,000, $82,000 and $94,000 respectively. During the fiscal years
ended January 31, 1994, 1995 and 1996, the Short-Term Federal Portfolio's shares
of these expenses totaled approximately $173,000, $204,000 and $193,000
respectively. During the fiscal years ended January 31, 1994, 1995 and 1996 the
Short-Term and Intermediate-Term U.S. Treasury Portfolio's share of these
expenses each totaled approximately $79,000, $186,000 and $230,000 respectively.

The investment management staff is supervised by the senior Officers of the
Fund. The senior Officers, who are also Officers of Vanguard, Vanguard Money
Market Reserves, Vanguard Institutional Portfolios, Vanguard Bond Index Fund,
Vanguard Municipal Bond Fund, Vanguard State Tax-Exempt Funds, and Vanguard
Variable Insurance Fund, are directly responsible to the Board of Directors of
the Fund. The Board of Directors, elected annually by shareholders, sets broad
policies for the Fund and chooses its Officers.

13
<PAGE> 124

PORTFOLIO TRANSACTIONS
GNMA, LONG-TERM CORPORATE AND HIGH YIELD CORPORATE PORTFOLIOS

The investment advisory agreement authorizes Wellington Management Company
(the "Adviser") (with the approval of the Fund's Board of Directors) to select
the brokers or dealers that will execute the purchases and sales of portfolio
securities for the Fund and directs the Adviser to use its best efforts to
obtain the best available price and most favorable execution as to all
transactions for the Fund. The Adviser has undertaken to execute each investment
transaction at a price and commission which provides the most favorable total
cost or proceeds reasonably obtainable under the circumstances.

In placing portfolio transactions, the Adviser will use its best judgment
to choose the broker most capable of providing the brokerage services necessary
to obtain best available price and most favorable execution. The full range and
quality of brokerage services available will be considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the Fund and/or the
Adviser. The Adviser considers such information useful in the performance of its
obligations under the agreement but is unable to determine the amount by which
such services may reduce its expenses.

The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Directors, the Adviser may cause the Fund to pay
a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the Adviser to the Fund and the other Funds in the Group.

Currently, it is the Fund's policy that the Adviser may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Adviser will only pay such higher
commissions if it believes this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Adviser and/or the Fund. However, the
Adviser has informed the Fund that it will not pay higher commission rates
specifically for the purpose of obtaining research services.

Some securities considered for investment by the Fund may also be
appropriate for other Funds and/or clients served by the Adviser. If purchase or
sale of securities consistent with the investment policies of the Fund and one
or more of these other Funds or clients served by the Adviser are considered at
or about the same time, transactions in such securities will be allocated among
the several Funds and clients in a manner deemed equitable by the Adviser.

SHORT-TERM CORPORATE, SHORT-TERM FEDERAL,
SHORT-TERM U.S. TREASURY, INTERMEDIATE-TERM CORPORATE,
INTERMEDIATE-TERM U.S. TREASURY, AND LONG-TERM U.S. TREASURY PORTFOLIO

Brokers or dealers who execute transactions for the Short-Term Corporate,
Short-Term Federal, Short-Term U.S. Treasury, Intermediate-Term Corporate,
Intermediate-Term U.S. Treasury, and Long-Term U.S. Treasury Portfolios are
selected by Vanguard's investment management staff, which is responsible for
using its best efforts to obtain the best available price and most favorable
execution for each transaction. Principal transactions are made directly with
issuers, underwriters and market makers and usually do not involve brokerage
commissions, although underwriting commissions and dealer mark-ups may be
involved. Brokerage transactions are placed with brokers deemed most capable of
providing favorable terms; where more than one broker can offer such terms,
consideration may be given to brokers who provide the staff with research and
statistical information.

14
<PAGE> 125

Vanguard's investment management staff may occasionally make
recommendations to other Vanguard Funds or clients which result in their
purchasing or selling securities simultaneously with the Portfolios. 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 staff's policy 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.

ALL PORTFOLIOS

Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified brokers or
dealers who recommend the shares of the Fund to their clients and may, when a
number of brokers and dealers can provide comparable best price and execution on
a particular transaction, consider the sale of shares by a broker or dealer in
selecting among qualified brokers or dealers.

The Fund did not incur any brokerage commissions in the 1993, 1994 and 1995
fiscal years. The total brokerage commission paid by the Fund for the fiscal
year ended January 31, 1996 was $4,500.

YIELD AND TOTAL RETURN

The yield* of each portfolio of the Fund for the 30-day period ended
January 31, 1996 is set forth below:

<TABLE>
<S> <C>
Short-Term U.S. Treasury Portfolio.............................................. 5.08%
Short-Term Federal Portfolio.................................................... 5.37%
Short-Term Corporate Portfolio.................................................. 5.58%
Intermediate-Term U.S. Treasury Portfolio....................................... 5.48%
GNMA Portfolio.................................................................. 6.86%
Long-Term U.S. Treasury Portfolio............................................... 5.92%
Long-Term Corporate Portfolio................................................... 6.43%
High Yield Corporate Portfolio.................................................. 8.32%(1)
Intermediate-Term Corporate..................................................... 6.01%
</TABLE>

- ---------------
* The yield for each portfolio of the Fund is calculated daily. Further,
in calculating the yield, the premiums and discounts on asset-backed
securities are not amortized.

(1) Yield for the High Yield Corporate Portfolio reflects a premium based
on the possibility that interest payments on some bonds may be reduced
or eliminated. Also, since bonds with higher interest coupons may be
replaced by bonds with lower coupons, income dividends are subject to
reduction.

The average annual total return of each Portfolio of the Fund for the one-,
five- and ten-year periods ending January 31, 1996 is set forth below:

<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
1/31/96 1/31/96 1/31/96
------------ ------------- --------------
<S> <C> <C> <C>
Short-Term U.S. Treasury Portfolio.............. 11.37% + 6.67%* N/A
Short-Term Federal Portfolio.................... +11.43% + 7.23% + 7.83%*
Short-Term Corporate Portfolio.................. 11.95% + 7.85% + 8.23%
GNMA Portfolio.................................. 15.64% + 8.78% + 9.17%
Intermediate-Term U.S. Treasury Portfolio....... +18.96% + 9.56%* N/A
Intermediate-Term Corporate Portfolio........... +19.94% + 7.39%* N/A
Long-Term U.S. Treasury Portfolio............... +26.72% +11.99% +10.01%*
Long-Term Corporate Portfolio................... +23.64% +12.46% +10.75%
High Yield Corporate Portfolio.................. +19.01% +15.47% +10.35%
</TABLE>

- ---------------
* Since inception: Short-Term Federal Portfolio -- December 31, 1987
Long-Term U.S. Treasury Portfolio -- May 19, 1986
Short-Term U.S. Treasury and Intermediate-Term U.S. Treasury
Portfolios -- began operations October 28, 1991
Intermediate-Term Corporate -- November 1, 1993

15
<PAGE> 126

FINANCIAL STATEMENTS

The Fund's financial statements for the fiscal year ended January 31, 1996,
including the financial highlights for each of the five years in the period
ended January 31, 1996, appearing in the Fund's 1996 Annual Report to
Shareholders, and the reports thereon of Price Waterhouse LLP, independent
accountants, also appearing in the Annual Report, are incorporated by reference
in this Statement of Additional Information.

PERFORMANCE MEASURES

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

Each of the investment company members of the Vanguard Group, including
each Portfolio of Vanguard Fixed Income Securities, Inc., may, from time to
time, use one or more of the following unmanaged indices for comparative
performance purposes.

STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.

WILSHIRE 5000 EQUITY INDEX -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.

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

MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.

GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.

SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.

SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.

SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND -- is a market-weighted index that
contains approximately 4700 individually priced investment-grade corporate bonds
rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.

LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.

MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.

LEHMAN CORPORATE (Baa) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.

LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.

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BOND BUYER MUNICIPAL INDEX (20 YEAR) BOND -- is a yield index on current coupon
high-grade general obligation municipal bonds.

STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, non-callable preferred stock issues.

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

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

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

COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index).

LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.

LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$4 trillion.

LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.

LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.

LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.

LEHMAN BROTHERS INTERMEDIATE-TERM CORPORATE BOND INDEX -- consists of all
investment grade corporate debt with maturities of 5 to 10 years.

LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.

LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.

OTHER DEFINITIONS

Marketing literature for the Portfolios of Vanguard Fixed Income Securities
Fund, Inc., may from time to time refer to or discuss a Portfolio's DURATION.
Duration is the weighted average life of a Portfolio's debt instruments measured
on a present-value basis; it is generally superior to average weighted maturity
as a measure of a Portfolio's potential volatility due to changes in interest
rates.

Unlike a Portfolio's average weighted maturity, which takes into account
only the stated maturity date of the Portfolio's debt instruments, duration
represents a weighted average of both interest and principal payments,
discounted by the current yield-to-maturity of the securities held. For example,
a four-year, zero-coupon bond, which pays interest only upon maturity (along
with principal), has both a maturity and duration of 4 years. However, a
four-year bond priced at par with an 8% coupon has a maturity of 4 years but a
duration of 3.6 years (at an 8% yield), reflecting the bond's earlier payment of
interest.

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In general, a bond with a longer duration will fluctuate more in price than
a bond with a shorter duration. Also, for small changes in interest rates,
duration serves to approximate the resulting change in a bond's price. For
example, a 1% change in interest rates will cause roughly a 4% move in the price
of a zero-coupon bond with a 4-year duration, while an 8% coupon bond (with a
3.6 year duration) will change by approximately 3.6%.

APPENDIX -- DESCRIPTION OF SECURITIES AND RATINGS

I. DESCRIPTION OF BOND RATINGS

Excerpts from Moody's Investors Service, Inc., ("Moody's") description of
its four highest bond ratings: Aaa -- judged to be the best quality. They carry
the smallest degree of investment risk; Aa -- judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds; A -- possess many favorable investment attributes and
are to be considered as "upper medium grade obligations"; Baa -- considered as
medium grade obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Ba -- judged to
have speculative elements; their future cannot be considered as well assured;
B -- generally lack characteristics of the desirable investment; Caa -- are of
poor standing. Such issues may be in default or there may be present elements of
danger with respect to principal or interest; Ca -- speculative in a high
degree; often in default; C -- lowest rated class of bonds; regarded as having
extremely poor prospects.

Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and 3 indicates a
ranking toward the lower end of the category.

Excerpts from Standard & Poor's Corporation ("S&P") description of its five
highest bond ratings: AAA -- highest grade obligations. Capacity to pay interest
and repay principal is extremely strong; AA -- also qualify as high grade
obligations. A very strong capacity to pay interest and repay principal and
differs from AAA issues only in small degree; A -- regarded as upper medium
grade. They have a strong capacity to pay interest and repay principal although
it is somewhat susceptible to the adverse effects of changes in circumstances
and economic conditions than debt in higher rated categories; BBB -- regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment. BB, B, CCC, CC -- predominately speculative with respect to capacity
to pay interest and repay principal in accordance with terms of the obligation;
BB indicates the lowest degree of speculation and CC the highest.

S&P applies indicators "+," no character, and "-" to its rating categories.
The indicators show relative standing within the major rating categories.

II. DESCRIPTION OF GNMA MORTGAGE-BACKED CERTIFICATES

GNMA (Government National Mortgage Association) Certificates are
mortgage-backed securities. The Certificates evidence part ownership of a pool
of mortgage loans. The Certificates which the GNMA Portfolio will purchase are
of the "modified pass-through" type. "Modified pass-through" Certificates
entitle the holder to receive all interest and principal payments owed on the
mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether
or not the mortgagor actually makes the payment.

THE GNMA GUARANTEE The National Housing Act authorizes GNMA to guarantee
the timely payment of principal of and interest on securities backed by a group
(or pool) of mortgages insured by FHA or FHMA, or guaranteed by VA. The GNMA
guarantee is backed by the full faith and credit of the U.S. Government. GNMA is
also empowered to borrow without limitation from the U.S. Treasury if necessary
to make any payments required under its guarantee.

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THE LIFE OF GNMA CERTIFICATES The average life of GNMA Certificates is
likely to be substantially less than the original maturity of the mortgage pools
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greatest part of principal
invested well before the maturity of the mortgages in the pool. (Note: Due to
the GNMA guarantee, foreclosures impose no risk to principal investment.) As
prepayment rates of individual mortgage pools will vary widely, it is not
possible to accurately predict the average life of a particular issue of GNMA
Certificates. However, statistics published by the FHA are normally used as an
indicator of the expected average life of GNMA Certificates. These statistics
indicate that the average life of single-family dwelling mortgages with 25-30
year maturities, the type of mortgages backing the vast majority of GNMA
Certificates, is approximately 12 years. For this reason, it is standard
practice to treat GNMA Certificates as 30-year mortgage-backed securities which
prepay fully in the twelfth year.

YIELD CHARACTERISTICS OF GNMA CERTIFICATES The coupon rate of interest of
GNMA Certificates is lower than the interest rate paid on the VA-guaranteed or
FHA-insured mortgages underlying the Certificates, but only by the amount of the
fees paid to GNMA and the issuer. For the most common type of mortgage pool,
containing single-family dwelling mortgages. GNMA receives an annual fee of 0.06
of 1% of the outstanding principal for providing its guarantee, and the issuer
is paid an annual fee of 0.44 of 1% for assembling the mortgage pool and for
passing through monthly payments of interest and principal to Certificate
holders.

The coupon rate by itself, however, does not indicate the yield which will
be earned on the Certificates for the following reasons:

1. Certificates may be issued at a premium or discount, rather than at par.

2. After issuance, Certificates may trade in the secondary market at a
premium or discount.

3. Interest is earned monthly, rather than semiannually as for traditional
bonds. Monthly compounding has the effect of raising the effective yield
earned on GNMA Certificates.

4. The actual yield of each GNMA Certificate is influenced by the
prepayment experience of the mortgage pool underlying the Certificate.
That is, if mortgagors pay off their mortgages early, the principal
returned to Certificate holders may be reinvested at more or less
favorable rates.

In quoting yields for GNMA Certificates, the standard practice is to assume
that the Certificates will have a 12-year life. Compared on this basis, GNMA
Certificates have historically yielded roughly .25 of 1% more than high-grade
corporate bonds and .50 of 1% more than U.S. Government and U.S. Government
Agency bonds. As the life of individual pools may vary widely, however, the
actual yield earned on any issue of GNMA Certificates may differ significantly
from the yield estimated on the assumption of a 12-year life.

MARKET FOR GNMA CERTIFICATES Since the inception of the GNMA
Mortgage-Backed Securities program in 1970, the amount of GNMA Certificates
outstanding has grown rapidly. The size of the market and the active
participation in the secondary market by securities dealers and many types of
investors make the GNMA Certificates a highly liquid instrument. Prices of GNMA
Certificates are readily available from securities dealers and depend on, among
other things, the level of market rates, the Certificate's coupon rate and the
prepayment experience of the pool of mortgages backing each Certificate.

"WHEN ISSUED" SECURITIES GNMA securities may be purchased and sold on a
when issued and delayed delivery basis. Delayed delivery or when issued
transactions arise when securities are purchased or sold by a Portfolio with
payment and delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the Portfolio at the time of
entering into the transaction. When the Portfolio engages in "when issued" and
delayed delivery transactions, the Portfolio relies on the buyer or seller, as
the case may be, to consummate the sale. Failure to do so may result in the
Portfolio missing the opportunity of obtaining a price or yield considered to be
advantageous. When issued and delayed delivery transactions may be expected to
occur a month or more before delivery is due. However, no payment or delivery is
made by the Portfolio until it receives payment or delivery from the other party
to the transaction. A separate account of liquid assets equal to the value of
such purchase commitments will be maintained until payment is made. To the
extent the Portfolio engages in "when issued" and delayed delivery transactions,
it will do so for the

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purpose of acquiring securities consistent with its investment objective and
policies and not for the purpose of investment leverage.

III. COMMERCIAL PAPER

A Portfolio may invest in commercial paper (including variable amount
master demand notes) 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 by Standard & Poor's. Commercial
paper refers to short-term, unsecured promissory notes issued by corporations to
finance short-term credit needs. Commercial paper is usually sold on a discount
basis and has a maturity at the time of issuance not exceeding nine months.
Variable amount master demand notes are demand obligations that permit the
investment of fluctuating amounts at varying market rates of interest pursuant
to arrangement between the issuer and a commercial bank acting as agent for the
payees of such notes, whereby both parties have the right to vary the amount of
the outstanding indebtedness on the notes. Because variable amount master demand
notes are direct lending arrangements between a lender and a borrower, it is not
generally contemplated that such instruments will be traded, and there is no
secondary market for these notes, although they are redeemable (and thus
immediately repayable by the borrower) at face value, plus accrued interest, at
any time. In connection with the Portfolio's investment in variable amount
master demand notes, Vanguard's investment management staff will monitor, on an
ongoing basis, the earning power, cash flow and other liquidity ratios of the
issuer, and the borrower's ability to pay principal and interest on demand.

Commercial paper rated A-1 by Standard & Poor's has the following
characteristics: (1) liquidity ratios are adequate to meet cash requirements;
(2) long-term senior debt is rated "A" or better; (3) the issuer has access to
at least two additional channels of borrowing; (4) basic earnings and cash flow
have an upward trend with allowance made for unusual circumstances; (5)
typically, the issuer's industry is well established and the issuer has a strong
position within the industry; (6) the reliability and quality of management are
unquestioned. Relative strength or weakness of the above factors determine
whether the issuer's commercial paper is A-1, A-2 or A-3. The rating Prime-1 is
the highest commercial paper rating assigned by Moody's. Among the factors
considered by Moody's in assigning ratings are the following: (1) evaluation of
the management of the issuer; (2) economic evaluation of the issuer's industry
or industries and the appraisal of speculative-type risks which may be inherent
in certain areas; (3) evaluation of the issuer's products in relation to
completion and customer acceptance; (4) liquidity; (5) amount and quality of
long-term debt; (6) trend of earnings over a period of ten years; (7) financial
strength of a parent company and the relationships which exist with the issuer,
and (8) recognition by the management of obligations which may be present or may
arise as a result of public interest questions and preparations to meet such
obligations.

IV. U.S. GOVERNMENT SECURITIES

The term "U.S. Government securities" refers to a variety of securities
which are issued or guaranteed by the United States Treasury, by various
agencies of the United States Government, and by various instrumentalities which
have been established or sponsored by the United States Government. The term
also refers to "repurchase agreements" collateralized by such securities.

U.S. Treasury securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government-sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.

Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and The Tennessee Valley Authority.

An instrumentality of the U.S. Government is a government agency organized
under Federal charter with government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal

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Home Loan Banks, the Federal Land Banks, Central Bank for Cooperatives, Federal
Intermediate Credit Banks, and the Federal National Mortgage Association.

V. BANK OBLIGATIONS

Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate.
Certificates of deposit are negotiable short-term obligations of commercial
banks. Variable rate certificates of deposit are certificates of deposit on
which the interest rate is periodically adjusted prior to their stated maturity
based upon a specified market rate. As a result of these adjustments, the
interest rate on these obligations may be increased or decreased periodically.
Frequently, dealers selling variable rate certificates of deposit to a Portfolio
will agree to repurchase such instruments, at the Portfolio's option, at par on
or near the coupon dates. The dealers' obligations to repurchase these
instruments are subject to conditions imposed by various dealers; such
conditions typically are the continued credit standing of the issuer and the
existence of reasonably orderly market conditions. The Portfolio is also able to
sell variable rate certificates of deposit in the secondary market. Variable
rate certificates of deposit normally carry a higher interest rate than
comparable fixed-rate certificates of deposit. A bankers' acceptance is a time
draft drawn on a commercial bank by a borrower usually in connection with an
international commercial transaction (to finance the import, export, transfer or
storage of goods). The borrower is liable for payment as well as the bank, which
unconditionally guarantees to pay the draft at its face amount on the maturity
date. Most acceptances have maturities of six months or less and are traded in
the secondary markets prior to maturity.

VI. SHORT AND INTERMEDIATE TERM CORPORATE DEBT SECURITIES

Outstanding non-convertible corporate debt securities (e.g. bonds and
debentures) which are rated Baa3 or better either by Moody's Investors Service,
Inc. ("Moody's") or BBB or better by Standard & Poor's Corporation ("Standard &
Poor's") are considered investment grade.

VII. FOREIGN INVESTMENTS

The Short-Term Corporate, Intermediate-Term Corporate, High Yield Corporate
and Long-Term Corporate Portfolios may invest in the securities (payable in U.S.
dollars) of foreign issues and in the securities of foreign branches of U.S.
banks such as negotiable certificates of deposit (Eurodollars). Because the
Portfolios invest in such securities, investment in the Portfolios involves
investment risks that are different in some respects from an investment in a
fund which invests only in debt obligations of U.S. issuers. Such risks may
include future political and economic developments, the possible imposition of
withholding taxes on interest income payable on the securities held, possible
seizure or nationalization of foreign deposits, the possible establishment of
exchange controls or the adoption of other restrictions by foreign governments
which may adversely affect the payment of principal and interest on securities
held by the Portfolios, difficulty in obtaining and enforcing court judgements
abroad, the possibility of restrictions on investments in other jurisdictions,
reduced levels of government regulation of securities markets in foreign
countries, and difficulties in effecting the repatriation of capital invested
abroad. The Short-Term Corporate and Intermediate-Term Corporate Portfolios will
not purchase any such foreign security if, as a result, more than 20% of the
value of the Portfolio's total assets would be invested in such securities.

VIII. ZERO COUPON TREASURY BONDS

The Short-Term Federal, Intermediate-Term U.S. Treasury, Short-Term U.S.
Treasury and Long-Term U.S. Treasury Portfolios may invest in zero coupon
Treasury bonds, a term used to describe U.S. Treasury notes and bonds which have
been stripped of their unmatured interest coupons, or the coupons themselves,
and also receipts or certificates representing interest in such stripped debt
obligations and coupons. The timely payment of coupon interest and principal on
these instruments remains guaranteed by the "full faith and credit" of the
United States Government.

A zero coupon bond does not pay interest. Instead, it is issued at a
substantial discount to its "face value" -- what it will be worth at maturity.
The difference between a security's issue or purchase price and its

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face value represents the imputed interest an investor will earn if the security
is held until maturity. For tax purposes, a portion of this imputed interest is
deemed as income received by zero coupon bondholders each year. The Fund, which
expects to qualify as a regulated investment company, intends to pass along such
interest as a component of a Portfolio's distributions of net investment income.

Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest is
returned to the investor.

IX. COLLATERALIZED MORTGAGE OBLIGATIONS

The Short-Term Federal, Short-Term Corporate, Intermediate-Term 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. The bonds issued in a
CMO deal are divided into groups, and each group of bonds is referred to as a
"tranche". Under the CMO structure, 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. The bonds issued under a
CMO structure are retired sequentially as opposed to the pro rata return of
principal found in traditional pass-through obligations. Subject to the various
provisions of individual CMO issues, the cash flow generated by the underlying
collateral (to the extent it exceeds the amount required to pay the stated
interest) is used to retire the bonds. Under the CMO structure, the repayment of
principal among the different tranches is prioritized in accordance with the
terms of the particular CMO issuance. The "fastest-pay" tranche of bonds, as
specified in the prospectus for the issuance, would initially receive all
principal payments. When that tranche of bonds is retired, the next tranche, or
tranches, in the sequence, as specified in the prospectus, receive all of the
principal payments until they are retired. The sequential retirement of bond
groups continues until the last tranche, or group of bonds, is retired.
Accordingly, the CMO structure allows the issuer to use cash flows of long
maturity, monthly-pay collateral to formulate securities with short,
intermediate and long final maturities and expected average lives. The primary
risks involved in any mortgage security, such as a CMO issuance, is its exposure
to prepayment risk. To the extent a particular tranche is exposed to this risk,
the bondholder is generally compensated in the form of higher yield. 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- and Long-Term Treasury
Portfolios will invest in those CMOs that carry market risks consistent with
intermediate- and long-term bonds.

X. REAL ESTATE

REMICs, which were authorized under the Tax Reform Act of 1986, are private
entities formed for the purpose of holding a fixed pool of mortgages secured by
an interest in real property. REMICs are similar to CMOs in that they issue
multiple classes of securities. The GNMA Portfolio may invest in real estate
investment conduits ("REMICs"). A REMIC is a CMO that qualifies for special tax
treatment under the Internal Revenue Code and invests in certain mortgages
principally secured by interests in real property. Investors may purchase
beneficial interests in REMICs, which are known as "regular" interests, or
"residual" interests. Guaranteed REMIC pass-through certificates ("REMIC
Certificates") issued by FNMA or FHLMC represent beneficial ownership interests
in a REMIC trust consisting principally of mortgage loans or FNMA, FHLMC or
GNMA-guaranteed mortgage pass-through certificates. For FHLMC REMIC
Certificates, FHLMC guarantees the timely payment of interest, and also
guarantees the payment of principal as payments are required to be made on the
underlying mortgage participation certificates, FNMA REMIC Certificates are
issued and guaranteed as to timely distribution of principal and interest by
FNMA.