VANGUARD FIXED INCOME SECURITIES FUND INC, PRES14A, 1998-02-26

VANGUARD FIXED INCOME SECURITIES FUND INC
PRES14A, 1998-02-26

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<PAGE> 1
IMPORTANT NEWS

FOR VANGUARD
SHAREHOLDERS

VANGUARD ADMIRAL FUNDS

VANGUARD BOND INDEX FUND

VANGUARD FIXED INCOME SECURITIES FUND

VANGUARD MONEY MARKET RESERVES

VANGUARD TREASURY FUND

PLEASE VOTE IMMEDIATELY!
YOU CAN VOTE BY MAIL, TELEPHONE,
OR OUR WEBSITE . . .
DETAILS CAN
BE FOUND ON
THE ENCLOSED
PROXY INSERT.

PROXY
INFORMATION

YOUR VANGUARD FUND WILL HOST A SPECIAL MEETING OF SHAREHOLDERS ON MAY 29, 1998,
AT OUR HEADQUARTERS IN MALVERN, PENNSYLVANIA. THE PURPOSE IS TO VOTE ON SOME
IMPORTANT PROPOSALS AFFECTING THE FUND.

THE FIRST FEW PAGES OF THIS BOOKLET SUMMARIZE VANGUARD'S PROPOSALS AND EXPLAIN
THE PROXY PROCESS -- INCLUDING HOW TO CAST YOUR VOTES. BEFORE YOU VOTE, PLEASE
READ THE FULL TEXT OF THE PROXY STATEMENT FOR A COMPLETE UNDERSTANDING OF OUR
PROPOSALS.

PROPOSAL 1: REORGANIZATION INTO A DELAWARE BUSINESS TRUST

We want to reorganize your Fund from a Maryland corporation into a Delaware
business trust. (Treasury Fund is already a Delaware business trust, so it won't
participate in this proposal.)

WHY? We expect this administrative change to SAVE MOST FUNDS (AND, ULTIMATELY,
THEIR SHAREHOLDERS) A SUBSTANTIAL AMOUNT OF MONEY IN STATE TAXES EACH YEAR --
$398,000 for Admiral Funds, $497,000 for Bond Index Fund, $1,935,000 for Fixed
Income Securities Fund, and $2,192,000 for Money Market Reserves, at current
asset levels. The savings realized would reduce each Fund's expenses.

KEY POINTS: The reorganization would not change your Fund's investment objective
or policies (except for any changes approved by shareholders under Proposal 2).
Your Fund also would keep the same Directors or Trustees, officers, investment
advisers, and auditors.

(continued on inside front cover)

THE VANGUARD GROUP

<PAGE> 2
PROPOSAL 2: SIX CHANGES TO INVESTMENT LIMITATIONS

We want to make a number of minor changes to the Vanguard Funds' fundamental
investment limitations. Not all of these changes relate to your Fund; you will
have the opportunity to vote separately on each change that does apply. Proposal
2a is the most important of these. It concerns an interfund lending program that
we would like to establish for all Funds. This program would permit your Fund to
borrow money from other Vanguard Funds as needed to make redemptions while
awaiting payment for securities that it has sold. In addition, your Fund could
lend its cash reserves to other Vanguard Funds to meet their temporary borrowing
needs.

WHY: Normally, your Fund has sufficient cash on hand to meet redemption
requests. If not, however, the Fund can either delay paying shareholders for up
to seven days -- not an acceptable alternative -- or pay them immediately by
taking out a temporary loan. A temporary loan through the interfund lending
program could be cheaper and easier for your Fund than borrowing from a bank. By
lending money to other Funds through this program, your Fund could earn a better
rate of interest on its cash reserves than it might receive from a bank.

KEY POINTS: The interfund lending program would feature a number of safeguards
to make sure it is fair and beneficial to all Vanguard Funds. One especially
important safeguard is this: No Fund could borrow or lend money in the program
unless it would get a more favorable interest rate than a typical bank would
offer.

-- Q&A --

Q. I'm a small investor. Why should I bother to vote?

A. Your vote makes a difference. If numerous shareholders just like you fail to
vote their proxies, your Fund may not receive enough votes to go forward with
its meeting. If this happens, we'll need to mail proxies again -- a costly
proposition for your Fund!

Q. I've owned shares of Vanguard Funds for several years. Why is this the first
notice I've received about a shareholder meeting?

A. Unlike publicly traded companies, most mutual funds do not hold shareholder
meetings every year. Instead, they undertake this expensive process only when
significant issues requiring shareholder approval come up -- such as your Fund's
plan to save on taxes by changing its form of organization. The last time all
Vanguard Funds held shareholder meetings was in 1993.

Q. Who gets to vote?

A. Any person who owned shares of your Fund on the "record date," which was
March 16, 1998, gets to vote -- even if the investor later sold the shares.
Shareholders are entitled to cast one vote for each Fund share owned on the
record date.

<PAGE> 3
Q. How can I vote?

A. You can vote in any one of four ways:

- Through the Internet at www.proxyvote.com (or by going to www.vanguard.com
and clicking on "Proxy Voting").

- By telephone, with a toll-free call to the number listed on your proxy
card.

- By mail, with the enclosed ballot.

- In person at the meeting.

We encourage you to vote by Internet or telephone, using the 12-digit "control"
number that appears on your proxy card. These voting methods will save your Fund
a good deal of money (no return-mail postage!). Whichever method you choose,
please take the time to read the full text of our proxy statement before you
vote.

Q. Is it hard to vote by Internet?

A. Not at all! If you have not yet visited Vanguard's website -- at
www.vanguard.com -- this is a great opportunity to check it out. Scan our
website and, when you're ready, click on the "Proxy Voting" link on our homepage
to access www.proxyvote.com (the voting location). Problems? Please call us at
1-800-662-2739.

Q. I plan to vote by mail. How should I sign my proxy card?

A. If you are an individual account owner, please sign exactly as your name
appears on the proxy card. Either owner of a joint account may sign the proxy
card, but the signer's name must exactly match one that appears on the card. You
should sign proxy cards for other types of accounts in a way that indicates your
authority (for instance, "John Brown, Custodian").

<PAGE> 4

VANGUARD ADMIRAL FUNDS
VANGUARD BOND INDEX FUND
VANGUARD FIXED INCOME SECURITIES FUND
VANGUARD MONEY MARKET RESERVES
VANGUARD TREASURY FUND

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

Your Vanguard Fund will host a Special Meeting of Shareholders on FRIDAY,
MAY 29, 1998, AT 9:30 A.M., EASTERN TIME. This will be a joint meeting for all
the Vanguard Funds listed above. It will be held at Vanguard's Malvern,
Pennsylvania, headquarters, at 100 Vanguard Boulevard, in the Majestic Building.
At the meeting, we'll ask shareholders to vote on:

1. A proposal to reorganize your Fund into a Delaware business trust.

2. Six proposed changes to your Fund's fundamental investment limitations
(none of which would alter your Fund's current investment objective).

3. A proposed switch from share-based voting rights to dollar-based voting
rights.

4. Any other business properly brought before the meeting.

By Order of the Board of Directors/Trustees
Raymond J. Klapinsky, Secretary
100 Vanguard Boulevard
Malvern, PA 19355

March 16, 1998

YOUR VOTE IS IMPORTANT!
YOU CAN VOTE EASILY AND QUICKLY BY TOLL-FREE TELEPHONE CALL, AT OUR WEBSITE, OR
BY MAIL. JUST FOLLOW THE SIMPLE INSTRUCTIONS THAT APPEAR ON YOUR ENCLOSED PROXY
CARD. PLEASE HELP YOUR FUND AVOID THE EXPENSE OF A FOLLOW-UP MAILING BY VOTING
TODAY!
<PAGE> 5

VANGUARD ADMIRAL FUNDS
VANGUARD BOND INDEX FUND
VANGUARD FIXED INCOME SECURITIES FUND
VANGUARD MONEY MARKET RESERVES
VANGUARD TREASURY FUND

SPECIAL MEETING OF SHAREHOLDERS
MAY 29, 1998

PROXY STATEMENT

INTRODUCTION
------------
This is a combined proxy statement for the five Vanguard Funds listed at
the top of this page. We've divided the proxy statement into five parts:

<TABLE>
<S> <C>
Part 1-- An Overview begins on page 2.
Part 2-- Your Fund's Proposals--the longest part--also
begins on page 2.
Part 3-- More on Proxy Voting and Shareholder Meetings
begins on page *.
Part 4-- Fund Information begins on page *.
Part 5-- Director/Trustee Information begins on page *.
</TABLE>

Please be sure to read the entire proxy statement before casting your vote.
Questions? Call us at 1-800-662-2739 (individual investors) or 1-800-523-1188
(participants in company-sponsored retirement plans administered by Vanguard).
This proxy statement was first mailed to shareholders the week of March 16,
1998.

1
<PAGE> 6

PART 1--AN OVERVIEW

The Board of Directors/Trustees has sent you this proxy statement to ask
for your vote on several proposals affecting your Fund. This table summarizes
the proposals and how they apply to the five Vanguard Funds that have scheduled
a shareholder meeting for May 29, 1998.

<TABLE>
<CAPTION>
PROPOSAL FUNDS AFFECTED
- --------------------------------------------- -----------------------------
<C> <S> <C>
1. Reorganization into a Delaware Business
Trust All but Treasury Fund
2. Investment Limitation Changes
a. Interfund lending program All but Treasury Fund
b. Borrowing money and pledging assets All Funds
c. Investments in securities owned by
affiliates Money Market Reserves,
d. Investments in assessable securities Bond Index Fund
e. Investments in bond futures and
options Fixed Income Securities
Fund--Short-Term Federal
Portfolio, only
f. Investments in a single issuer's
securities Money Market Reserves and
Treasury Fund,
3. Switch to dollar-based voting rights Treasury Fund,
</TABLE>

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

PART 2--YOUR FUND'S PROPOSALS

PROPOSAL 1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST (ALL BUT TREASURY
FUND)

The Board of Directors has approved a plan to reorganize your Fund into a
Delaware business trust. THE PURPOSE OF THE REORGANIZATION IS TO REDUCE THE
AMOUNT OF STATE TAXES THAT YOUR FUND PAYS ANNUALLY. To proceed with the
reorganization plan, we need shareholder approval. The next few pages of this
proxy statement discuss important details of the reorganization plan, including
the following:

- Why we want to reorganize your Fund.
- How we plan to accomplish the reorganization.
- How the reorganization will affect your Fund.
- How a Delaware business trust compares to your Fund's current legal
structure.
- How many shareholder votes we need to approve the reorganization.

A SPECIAL NOTE TO TREASURY FUND SHAREHOLDERS: Your Fund is already
organized as a Delaware business trust, so it will not participate in the
reorganization proposal. Please skip to Proposal 2, which begins on page *.

2
<PAGE> 7

A. WHY WE WANT TO REORGANIZE YOUR FUND

YOUR FUND WILL PAY LESS IN TAXES AS A BUSINESS TRUST. Your Fund currently
pays foreign franchise taxes to the Commonwealth of Pennsylvania. This tax
applies to your Fund because it is headquartered in Pennsylvania and is a
"foreign" corporation--that is, organized as a corporation under the laws of a
different state, Maryland. If your Fund were instead organized in the form of a
business trust (as many mutual funds are), it would be exempt from the
Pennsylvania foreign franchise tax. As a business trust, your Fund would be
subject to a different tax, the Pennsylvania county personal property tax.
However, Pennsylvania counties generally have stopped assessing personal
property taxes. This is because the Pennsylvania Supreme Court is expected to
declare the personal property tax unconstitutional. (The U.S. Supreme Court
declared a similar North Carolina tax unconstitutional in 1996.) We believe it
unlikely that your Fund, as reorganized, would become subject to the personal
property tax in the foreseeable future. If the personal property tax were
reinstated, or any similar state tax were imposed, we would reevaluate your
Fund's options at that time.

The following table shows (i) the amount of Pennsylvania foreign franchise
taxes paid by your Fund for its last fiscal year; and (ii) the amount of
Pennsylvania personal property taxes that your Fund would have paid if it had
been organized as a business trust for the last fiscal year.

<TABLE>
<CAPTION>
LAST YEAR'S SAME BILL AS A
FUND PENNSYLVANIA TAX BILL BUSINESS TRUST
- ------------------------------ --------------------- --------------
<S> <C> <C>
Admiral Funds $ 398,000 $ 0
Bond Index Fund $ 497,000 $ 0
Fixed Income Securities Fund $ 1,935,000 $ 0
Money Market Reserves $ 2,192,000 $ 0
</TABLE>

"Last Year's Pennsylvania Tax Bill" is the approximate amount that we
expect to save your Fund ANNUALLY by reorganizing it into a Delaware business
trust. These anticipated savings are based on the size of your Fund during its
last fiscal year. If your Fund grows, so will the amount of its tax savings. Of
course, the ONE-TIME costs of reorganizing will offset your Fund's tax savings
to a limited extent. These costs, which mostly relate to the printing, mailing
and tabulation of proxies, are estimated at $20,000 for Admiral Funds, $137,000
for Bond Index Fund, $687,000 for Fixed Income Securities Fund, and $908,000 for
Money Market Reserves.

DELAWARE LAW IS FAVORABLE TO MUTUAL FUNDS. We have proposed to reorganize
your Fund as a DELAWARE business trust because that state's business trust law
contains provisions that are well-suited to mutual funds. The "move" to Delaware
will be largely on paper; your Fund will continue to operate out of
Pennsylvania, just as it does now.

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<PAGE> 8

B. HOW WE PLAN TO ACCOMPLISH THE REORGANIZATION

AGREEMENT AND PLAN OF REORGANIZATION. The Board of Directors has approved
a written Agreement and Plan of Reorganization for your Fund. This document
spells out the terms and conditions that will apply to your Fund's
reorganization into a Delaware business trust.

THREE STEPS TO REORGANIZE. In essence, the reorganization will be a three-
step process. The first step is already taken: We have established a Delaware
business trust especially for your Fund. Prior to the reorganization, this trust
will issue a single share--to your Fund. Second, if this proposal is approved,
your Fund will transfer all of its assets and liabilities to the trust. As part
of this second step, the trust will open an account for each Fund shareholder.
The trust will then credit these accounts with the exact number of full and
fractional shares that each shareholder owned in the Fund on the reorganization
date. And third, we will dissolve your Fund's Maryland corporate entity.

EFFECTIVE AS SOON AS PRACTICABLE. If approved by shareholders, the
reorganization will take place as soon as feasible after your Fund receives the
necessary regulatory approvals and legal opinions. We think this could be
accomplished by October of 1998. However, at any time prior to the
reorganization, the Board of Directors may decide that it is in the best
interest of your Fund and its shareholders not to go forward with this project.
If that happens, your Fund will continue to operate as it is currently
organized.

C. HOW THE REORGANIZATION WILL AFFECT YOUR FUND

YOUR FUND'S INVESTMENT OBJECTIVE, POLICIES, INVESTMENT ADVISERS, AND FISCAL
YEAR WILL STAY THE SAME. The reorganization will not change any of these.
However, we are asking shareholders to waive temporarily any existing investment
restrictions that would otherwise prohibit the reorganization. (For instance,
many mutual funds are prohibited from acquiring control of any company. As part
of the reorganization, however, your Fund would be acquiring control of the
newly formed trust.) Your vote in favor of the reorganization will operate as a
temporary waiver of any such restrictions.

THE REORGANIZATION WILL HAVE NO IMPACT ON YOUR FUND'S SHARE PRICE. On the
day of the reorganization, the newly formed trust's share price will be the same
as that of your Fund. The reorganization will not cause your Fund's share price
to go up or down, and you will own the same number of shares. Any declared but
undistributed dividends or capital gains for your Fund will carry over in the
reorganization.

YOUR FUND'S EXISTING DIRECTORS WILL BE REELECTED. Federal securities laws
require that at least one-half of your Fund's Directors be elected by
shareholders. While your Fund more than meets this standard now, that
technically will not be true once it reorganizes as a trust. Rather than call
another shareholder meeting to vote on Trustees after the reorganization, we
will treat shareholder approval of

4
<PAGE> 9

this proposal as authorization to elect your Fund's current Board members to the
same positions with the trust. This approach will avoid the considerable expense
of printing, mailing, and tabulating more proxies after the reorganization.
(Please refer to Part 5 of this proxy statement for detailed information
concerning your Directors.)

YOUR FUND'S EXISTING INDEPENDENT AUDITORS WILL BE RATIFIED. We will treat
shareholder approval of the reorganization as ratification of your Fund's
existing independent auditors, Price Waterhouse LLP.

Price Waterhouse is the independent auditor for all Vanguard Funds. In this
role, Price Waterhouse audits and certifies the Funds' financial statements.
Price Waterhouse also reviews the Funds' Annual Reports to Shareholders and
their filings with the U.S. Securities and Exchange Commission. Neither Price
Waterhouse nor any of its partners has any direct or material indirect financial
interest in the Vanguard Funds. If you wish to request the attendance of a Price
Waterhouse representative at the shareholder meeting, you should contact the
Fund's Secretary at 100 Vanguard Boulevard, Malvern, PA 19355.

THE REORGANIZATION IS CONDITIONED ON TAX-FREE TREATMENT AT THE FEDERAL
LEVEL. We fully expect that the reorganization will have no federal income tax
consequences for you or your Fund. We will not proceed with the reorganization
until this point is confirmed by an IRS ruling or opinion of counsel. Following
the reorganization, from a tax standpoint, the adjusted basis of your Fund
shares will be the same as before. We do not expect shareholders to incur any
personal state or local taxes as a result of the reorganization, but you should
consult your own tax adviser to be sure.

VOTING RIGHTS WILL BE BASED ON THE DOLLAR AMOUNT OF YOUR INVESTMENT. After
the reorganization, your voting rights will become "dollar-based"--which is a
different voting rights system than your Fund uses now. Currently, all Vanguard
Funds provide shareholders with one vote for each share that they own. This
share-based system treats shareholders equitably so long as all shares of a
particular Fund have the same share price. However, fairness tends to erode when
a Fund offers more than one series of shares (we often refer to these as
"portfolios") or more than one class of shares. The share prices of a Fund's
different portfolios inevitably diverge over time due to their different
investment programs. Similarly, the share prices of a Fund's different share
classes will deviate over time because of their different expense structures. As
a result, when issues are voted at the Fund level, the owners of lower-priced
shares have relatively greater voting clout than the owners of higher-priced
shares. The change to dollar-based voting will ensure that shareholders' voting
rights remain proportionate to their financial interests.

MONEY MARKET RESERVES SHAREHOLDERS: Your Fund offers money market
portfolios, only. These portfolios seek to maintain a constant price of
$1.00

5
<PAGE> 10

per share, and there should be no deviation from that price.

YOUR FUND WILL STOP ISSUING SHARE CERTIFICATES AND WILL CONVERT ANY
OUTSTANDING SHARE CERTIFICATES TO RECORD ENTRY FORM. In today's financial
world, very few investors hold share certificates as physical evidence of their
mutual fund investments. Instead, investors' mutual fund holdings are maintained
and accounted for as "record entries" on the fund's computer system. The main
problems with share certificates are that:

- They present opportunities for theft, loss, and fraud--and therefore
offer less protection to shareholders, rather than more.

- They're especially inconvenient--you must return your certificates to
the fund before your shares can be redeemed or exchanged.

In light of these downsides and the minimal demand for share certificates,
your Fund will stop issuing them after the reorganization. In addition, your
Fund will convert any outstanding share certificates to record entry form. This
will not happen automatically; we will arrange conversion details separately
with the Fund's certificate holders. (This change will have no effect on
shareholders of our money market portfolios, since that type of fund doesn't
issue share certificates.)

D. HOW A DELAWARE BUSINESS TRUST COMPARES TO YOUR FUND'S
CURRENT LEGAL STRUCTURE

Federal securities laws have much to say about the way that mutual funds
operate, but they do not cover every aspect of a fund's existence. State law and
each fund's governing documents fill in most of the gaps. The following
discussion compares the state law and documents currently governing your Fund
with the state law and documents that will apply if it reorganizes as a Delaware
business trust. This discussion is not a comprehensive review of all technical
distinctions between the different legal structures. (You or your attorney would
need to review the laws and Fund documents first hand for that sort of
analysis.) We simply want you to know how a Delaware business trust compares in
certain key areas to a Maryland corporation--your Fund's present legal
structure.

SHAREHOLDER LIABILITY. Shareholders of a Fund organized as a Maryland
corporation generally have no personal liability for the Fund's obligations.
With a Delaware business trust, shareholders essentially have the same amount of
protection from personal liability.

DIRECTOR/TRUSTEE LIABILITY AND INDEMNIFICATION. With a Maryland
corporation, Directors cannot be held liable for their activities in that role
so long as they perform their duties in good faith, prudently, and in the Fund's
best interests. The same is generally true for the Trustees of a Delaware
business trust, if so provided in the Fund's governing documents. Under each
legal structure, the Fund can indemnify its Directors/Trustees from claims and
expenses arising out of their

6
<PAGE> 11

service to the Fund--unless, that is, a Director/Trustee has acted improperly in
a particular matter.

SHAREHOLDER VOTING RIGHTS AND MEETINGS. Under a Fund organized as a
Maryland corporation, shareholders' voting rights currently are based on the
number of shares that they own. As we explained on page *, as a Delaware
business trust, your Fund would shift to a dollar-based voting rights system. As
a Maryland corporation, a Fund generally must call a shareholder meeting if one
is requested in writing by investors entitled to cast 25% or more of the Fund's
votes. The same will be true for your Fund as a Delaware business trust.

SHARE CERTIFICATES. Funds organized as Maryland corporations generally
issue share certificates to their investors upon request. Funds organized as
Delaware business trusts are not required to issue share certificates. As
explained on page *, following the reorganization, your Fund will stop issuing
share certificates and will convert any outstanding certificates to record entry
form.

E. HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE THE REORGANIZATION

To go forward with the reorganization, a majority of your Fund's
outstanding shares on March 16, 1998 must vote in favor of this proposal. YOUR
FUND'S BOARD OF DIRECTORS RECOMMENDS THAT YOU APPROVE THE REORGANIZATION.

PROPOSAL 2. SIX CHANGES TO FUNDAMENTAL INVESTMENT LIMITATIONS

2a. INTERFUND LENDING PROGRAM (ALL BUT TREASURY FUND)

We want to establish an interfund lending program for all Vanguard Funds,
including the ones that are not covered in this proxy statement. (Treasury Fund
already has this capability; that's why it's not included in this proposal.) The
program will allow the Vanguard Funds to lend money to each other if--and only
if--it makes good financial sense to do so on both sides of the transaction. THE
FUNDS WILL NOT USE THIS PROGRAM TO LEVERAGE THEIR INVESTMENTS. The U.S.
Securities and Exchange Commission has granted permission for the Vanguard Funds
to participate in this program, subject to several conditions. We need
shareholder approval, as well. In the following paragraphs we explain these
important points:

- Why your Fund would want to borrow money.
- Why your Fund would want to lend money.
- How the interfund lending program will work.
- What safeguards will ensure fair and beneficial treatment of your Fund.
- What your Fund's new investment limitation will say.
- How many shareholder votes we need to approve the interfund lending
program.

7
<PAGE> 12

YOUR FUND WOULD BORROW MONEY TO MEET REDEMPTION REQUESTS WHILE AWAITING THE
PROCEEDS OF SECURITIES SALES. Normally, your Fund has sufficient cash on hand
to satisfy all redemption requests. However, at times your Fund could be short
on cash while awaiting settlement of its securities trades (typically a three-
business-day process). While the law permits your Fund to defer redemption
payments for up to seven days, we know that shareholders prefer to be paid
immediately. This is the sole circumstance--and an unusual one, at that--under
which your Fund would want to borrow money.

YOUR FUND ROUTINELY LENDS MONEY TO BANKS--THROUGH REPURCHASE AGREEMENTS--TO
GENERATE INCOME ON ITS CASH RESERVES. All Funds--including your own--maintain
cash reserves to satisfy day-to-day redemption requests. Funds put their cash
reserves to work by entering into repurchase agreements with banks (and other
institutions, as well). In essence, these transactions are loans from the Fund
to a bank. The Fund acquires a short-term, high-quality security from the bank,
which, in turn, agrees to buy that same security back from the Fund the next
day--at a higher price. The difference between the purchase and resale prices
represents the Fund's "interest" on the loan.

THE NEW PROGRAM WILL LET VANGUARD MATCH THE BORROWING AND LENDING NEEDS OF
DIFFERENT FUNDS--TO EVERYONE'S BENEFIT. On a given day, some Vanguard Funds may
wish to meet redemptions by borrowing money from banks, and other Vanguard Funds
may wish to generate additional income by lending money to banks. Under the
interfund lending program, Vanguard could match borrowing Funds with lending
Funds. Vanguard would then arrange loans between the matched Funds, in keeping
with a master loan agreement and the SEC's conditions for this program. By
dealing with each other instead of banks, the Funds will be able to borrow money
more cheaply and lend money more profitably. This is because (i) there will be
no bank fees for these transactions, and (ii) we will have eliminated the banks'
spread--that is, the difference between the rates that they typically charge
borrowers and pay lenders. In addition, the interfund lending program will allow
the Funds to forego the otherwise prudent--but expensive--step of maintaining a
committed line of credit with a bank to cover any emergency borrowing needs. (We
estimate that, altogether, the Vanguard Funds will save more than $800,000
annually by eliminating the need for a committed line of credit.)

INTERFUND LOANS WILL PRESENT VERY LITTLE CREDIT RISK. When it lends money
to another Fund, your Fund would be subject to credit risk--the possibility that
the other Fund might fail to repay the loan. But your Fund faces this same type
of risk when it lends money to a bank, through a repurchase agreement. And we
believe that the risk is extremely small in both cases. Below we describe
various safeguards designed to minimize the credit risk of interfund loans.

THESE SAFEGUARDS ARE IN PLACE TO ENSURE FAIR AND BENEFICIAL TREATMENT OF
ALL VANGUARD FUNDS. No Vanguard Fund will be permitted to borrow or lend
through the program unless it gets a more favorable interest rate than is
available

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<PAGE> 13

from a typical bank. In addition, each Fund will be permitted to borrow or lend
through the program only if that activity is consistent with the Fund's
investment objective and other investment policies. Other important protections
for your Fund include these points:

(i) Interfund loan rates will be determined by a pre-established formula
based on quotations from independent banks.

(ii) Funds that borrow money must fully secure their interfund loans OR
have total assets at least 10 times greater than the amount of the
loan.

(iii) Equity Funds will be permitted to loan no more than 5% of their net
assets through the interfund lending program; bond Funds could lend
no more than 7.5%; and money market Funds could lend no more than
10%.

(iv) All interfund loans will be very short-term. They must be repaid
within the time it takes for securities trades to settle, not to
exceed seven days.

(v) No Fund can use the interfund lending program to borrow an amount
larger than 125% of its total net cash redemptions for the preceding
seven calendar days.

(vi) A lending Fund may call in its loans on one business day's notice to
the borrowing Fund.

(vii) Each Fund will continue to maintain noncommitted loan arrangements
with banks to provide for situations where an interfund loan is not
possible or beneficial.

(viii) Each Fund's Board of Directors/Trustees will monitor the interfund
lending program to make sure that the interfund loan rate formula
and the Fund's participation in the program continue to be
appropriate.

YOUR FUND WILL ADOPT A NEW INVESTMENT POLICY TO PROVIDE FOR INTERFUND
LOANS. Your Fund's existing investment policies on borrowing and lending do not
allow for interfund loans. If shareholders approve this proposal, we'll adopt a
new investment policy which states that your Fund can borrow and lend money
through the interfund loan program so long as it complies with SEC conditions.
We'll designate this new policy as "fundamental," meaning that your Fund will
not be able to change it in the future without shareholder approval.

HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE INTERFUND
LENDING. Shareholders of each portfolio within a Fund portfolios will vote
separately on this proposal. Each portfolio's participation in the interfund
lending program must be approved by the lesser of (i) a majority of the
portfolio's outstanding shares on March 16, 1998, or (ii) 67% of the shares
voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD
OF DIRECTORS RECOMMENDS THAT YOU APPROVE THE INTERFUND LENDING PROGRAM.

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<PAGE> 14

2b. BORROWING MONEY AND PLEDGING ASSETS (ALL FUNDS)

We want to establish standard limits on (i) the total amount of money that
each Vanguard Fund can borrow from all sources and (ii) the assets that each
Fund can pledge to secure any loans. This proposal ties in with proposal 2a.,
concerning the interfund lending program. BY STANDARDIZING THE FUNDS' BORROWING
AND PLEDGE LIMITS, WE EXPECT TO SIMPLIFY VANGUARD'S ADMINISTRATION OF THE
INTERFUND LENDING PROGRAM. As you can see from the following table, currently
there is a good deal of variation in the Funds' stated borrowing and pledge
limitations:

<TABLE>
<CAPTION>
FUND BORROWING LIMIT PLEDGE LIMIT
- ----------------------------- -------------------- --------------------
<S> <C> <C>
Admiral Funds 15% of assets (taken 15% of total assets
at the lower of cost
or market value)
Bond Index Fund 15% of total assets 5% of total assets
Fixed Income Securities Fund 15% of net assets 5% of total assets
Money Market Reserves 15% of total assets 10% of total assets
Treasury Fund 15% of total assets 10% of total assets
</TABLE>

The Funds' different investment objectives do not explain the variations in
their borrowing and pledge limits. Rather, these variations arise from the fact
that many different attorneys and regulators have worked with the Funds over the
years. We would like to realign the Funds' limits by establishing a uniform 15%
OF NET ASSETS limitation on any money borrowed or assets pledged. Any future
changes to this policy would require shareholder approval. Keep in mind that
borrowing money and pledging assets are not integral parts of your Fund's
investment program. As we explained in the interfund lending discussion, your
Fund would borrow money only to meet redemptions while awaiting the proceeds of
securities sales.

HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE THE 15% BORROWING AND PLEDGE
LIMIT. Shareholders of each portfolio within a Fund will vote separately on
this proposal. Each portfolio's adoption of the 15% borrowing and pledge limit
must be approved by the lesser of (i) a majority of the portfolio's outstanding
shares on March 16, 1998, or (ii) 67% of the shares voted, so long as more than
50% of the shares actually vote. YOUR FUND'S BOARD OF DIRECTORS/TRUSTEES
RECOMMENDS THAT YOU APPROVE THE STANDARD BORROWING AND PLEDGE LIMITS.

2c. INVESTMENTS IN SECURITIES OWNED BY AFFILIATES (MONEY MARKET RESERVES
ONLY)

We want to eliminate your Fund's policy of avoiding investments in
securities issued by companies whose securities are owned in certain amounts by
Directors, officers, and key advisory personnel. THIS POLICY IS
WELL-INTENTIONED, BUT WRONGLY FOCUSED AND UNNECESSARY FOR YOUR FUND. Having
originated many

10
<PAGE> 15

years ago with now obsolete state securities laws, which were intended to
prevent conflicts of interest in the management of mutual funds, the policy
states that your Fund will 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 advisers owns beneficially more than 1/2% of
the shares or securities or 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.

Confused? You're not alone. Preventing conflicts of interest in fund
management is, of course, a critically important objective. For this reason,
your Fund has adopted a stringent Code of Ethics that restricts the private
investment activities of Directors, officers, key advisory personnel, and a wide
range of Vanguard employees. Our Code of Ethics supplements management's
separate fiduciary obligation to act with the Fund's best interests at heart. It
places the burden of avoiding potential conflicts squarely on those who would
stand to gain by inappropriately influencing or benefiting from your Fund's
investment program. The current policy takes the opposite approach--it
potentially restricts your Fund's investments. In other words, the current
policy subordinates your Fund's investment interests to those of its Directors,
officers, and key advisory personnel. We believe that this is wrong.

HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THE POLICY CONCERNING
INVESTMENTS IN SECURITIES OWNED BY AFFILIATES. Shareholders of each portfolio
within the Fund will vote separately on this proposal. Each portfolio's
elimination of this policy will require approval by the lesser of (i) a
majority of the portfolio's outstanding shares on March 16, 1998, or (ii) 67%
of the shares voted, so long as more than 50% of the shares actually vote. YOUR
FUND'S BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE TO ELIMINATE THIS POLICY.

2d. INVESTMENTS IN ASSESSABLE SECURITIES (BOND INDEX FUND ONLY)

We want to eliminate your Fund's policy of not purchasing assessable
securities. THIS POLICY HAS NO APPARENT RELEVANCE TO YOUR FUND'S INVESTMENT
PROGRAM; ITS ELIMINATION WOULD HAVE NO EFFECT ON THE WAY THAT YOUR FUND
OPERATES. "Assessable security" is a legal term, not an investment term. It
refers to situations in which a person fully pays for securities but still could
be required to contribute additional sums of money to the person who issued the
securities, or that person's creditors. Assessable securities are unheard of in
the world of publicly traded fixed income securities, where your Fund focuses
its investments.

11
<PAGE> 16

Your Fund has carried this arcane policy on its books for many years--for no
real reason--and we would now like to eliminate it.

HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THE POLICY CONCERNING
INVESTMENTS IN ASSESSABLE SECURITIES. Shareholders of each portfolio within
the Fund will vote separately on this proposal. Each portfolio's elimination
of the policy will require approval by the lesser of (i) a majority of the
portfolio's outstanding shares on March 16, 1998, or (ii) 67% of the shares
voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE TO ELIMINATE THIS POLICY.

2E. INVESTMENTS IN BOND FUTURES AND OPTIONS (FIXED INCOME SECURITIES FUND
SHORT--TERM FEDERAL PORTFOLIO ONLY)

We want to give your Fund's Short-Term Federal Portfolio the flexibility
to invest in (i) bond futures contracts and bond index futures, (ii) bond
options, and (iii) options on bond futures contracts. (We'll refer to all these
investments as bond futures and options.) In 1987, shareholders of your Fund's
other portfolios voted to permit these investments. However, the 1987 proxy
drew too few votes from Short-Term Federal Portfolio shareholders. Those who
voted overwhelmingly favored the proposal, but we failed to reach a quorum.
Consequently, your Portfolio was unable to go forward with a bond futures and
options program at that time. WE ARE RAISING THIS PROPOSAL AGAIN BECAUSE IT
POTENTIALLY WILL IMPROVE THE PORTFOLIO'S ABILITY TO MANAGE ITS CASH RESERVES,
RISK, AND TRANSACTION COSTS. The change also will put the Portfolio on a "level
playing field" with other Vanguard--and non-Vanguard--fixed-income funds. In
the following paragraphs we explain these important points:

- How bond futures and options work.
- How the Portfolio intends to use bond futures and options.
- What special risks are involved with bond futures and options.
- What the Portfolio's futures and options policy would say.
- How many shareholder votes we need to approve investments in bond futures
and options.

BOND FUTURES AND OPTIONS ARE WAYS TO LOCK IN A BOND PRICE, OR PARTICIPATE
IN THE PRICE MOVEMENT OF A BOND INDEX. Like stock futures and options, these
instruments are really contracts. With a bond futures contract, you agree to
buy or sell a specified bond (or, it could be a bond index) at a specified
price, on a specified date. Bond option contracts are similar, but more
flexible. They give you a right--but not the obligation--to buy or sell a
specified bond index, or bond futures contract at a specified price, during a
specified period of time. In each case, any earnings are measured by the amount
of any increase in the value of the underlying bond, bond index, or bond
futures contract over the life of the contract. On the other hand, potential
losses are measured differently under the two strategies. With bond futures,
your losses will match any negative price swings in the underlying securities.
By contrast, with bond

12
<PAGE> 17

options and options on bond futures contracts, potential losses are limited to
the amount that you've paid for the contract.

LIKE OTHER VANGUARD FUNDS, THE PORTFOLIO WILL USE BOND FUTURES AND OPTIONS
FOR THREE PRINCIPAL REASONS, NONE OF WHICH INVOLVES SPECULATION. Cash
management is the first--and most important--reason why the Portfolio might use
bond futures and options. By purchasing bond futures or options, the Portfolio
can participate in the earnings of an underlying bond or bond index--without
actually putting up the cash to acquire these assets. This strategy will help
the Portfolio to maintain sufficient cash on hand to meet daily redemption
requests. In addition, during periods of particular uncertainty in the
marketplace, it will buy the Portfolio time in deciding how to commit its cash.
Hedging is the second reason the Portfolio might use bond futures or options.
That is, the Portfolio can protect itself against price declines in securities
that it already owns, or intends to purchase, by locking in prices with futures
or options. More favorable pricing is the third reason the Portfolio might use
bond futures and options. Sometimes, it's possible to acquire futures or
options at better prices, or for lower transaction costs, than the underlying
securities. In these cases, the Portfolio might choose to buy bond futures or
options instead of the underlying securities.

Regardless of the strategy involved, the Portfolio will purchase futures
and options relating to U.S. government agency and U.S. Treasury securities,
only.

BOND FUTURES OPTIONS INVOLVE SPECIAL RISKS -- CONTROLLABLE ONES, IN OUR
VIEW. Bond futures raise four particular concerns for investors. These
concerns revolve around liquidity, leverage, price correlation, and risk of
loss. Permit us to explain:

- LIQUIDITY. When buying a futures contract, there's no guarantee that
you'll be able to close it out prior to the specified settlement date. To
minimize the risk of being stuck holding an unwanted futures contract,
the Portfolio will buy futures only if (i) they are traded on a
commodities or futures exchange, and (ii) they appear to have a liquid
secondary market.

- LEVERAGE. Relatively small fluctuations in the price of underlying
securities can generate substantial losses for futures traders. This is
because futures trading is so leveraged; you typically can buy futures
contracts with a margin deposit of 5%, or even less. THE PORTFOLIO WILL
SEEK TO COUNTERACT THE LEVERAGE INHERENT IN FUTURES TRADING BY SETTING
ASIDE CASH OR OTHER LIQUID ASSETS IN THE AMOUNT OF ITS NET FUTURES
OBLIGATIONS.

- PRICE CORRELATION. The whole point of hedging with futures is to mimic
the investment returns of securities that the investor either holds or
intends to buy. Sometimes, however, futures prices do not rise and fall
in sync with the targeted securities. If this happens, the investor's
hedging strategy may fall through, to an extent.

- RISK OF LOSS. Losses from trading futures are potentially unlimited.
Gaines and losses on trading bond futures and options depend on the
portfolio manager's ability to predict the direction of interest rates
and other economic factors.

13
<PAGE> 18

Like other Vanguard Funds, the Portfolio will help keep the special risks
of futures trading in check by setting strict percentage limits on this
activity.

THE PORTFOLIO WILL ADOPT THE SAME FUTURES AND OPTIONS POLICY AS YOUR FUND'S
OTHER PORTFOLIOS. Each of your Fund's other portfolios is permitted to invest
in bond futures and options so long as: (i) the sum of its initial margin
deposits on open futures contracts does not exceed 5% of its total assets; and
(ii) the sum of its outstanding futures and options obligations does not exceed
20% of its total assets. If shareholders approve this proposal, we'll adopt a
new investment policy which states the same for the Portfolio. We'll designate
this new policy as "fundamental," meaning that the Portfolio will not be able to
change it in the future without shareholder approval.

HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE BOND FUTURES AND OPTIONS
INVESTMENTS. Only shareholders of Fixed Income Securities Fund--Short-Term
Federal Portfolio will vote on this proposal. The proposal must be approved by
the lesser of (i) a majority of the Portfolio's outstanding shares on March 16,
1998, or (ii) 67% of the shares voted, so long as more than 50% of the shares
actually vote. YOUR FUND'S BOARD OF DIRECTORS RECOMMENDS THAT YOU APPROVE THIS
NEW POLICY.

2f. INVESTMENTS IN A SINGLE ISSUER'S SECURITIES (MONEY MARKET RESERVES
AND TREASURY FUND, ONLY)

We want to eliminate your Fund's policy of not holding more than 10% of any
class of an issuer's securities. THIS POLICY IS VERY UNUSUAL FOR A MONEY MARKET
FUND, AND YOUR FUND WILL REMAIN WELL-DIVERSIFIED WITHOUT IT. Money market funds
are required to adhere to strict diversification rules dictated by the SEC. The
10% limitation is not part of the SEC's diversification framework, which
primarily looks at investments in a particular issuer in relation to the size
of the fund--not the size of the issuer. The limitation doesn't contribute
meaningfully to your Fund's investment objective of maintaining a stable, $1.00
per share price. Overall, we believe that the burdens of monitoring this
limitation outweigh any benefits.

HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THE POLICY AGAINST HOLDING
MORE THAN 10% OF ANY CLASS OF AN ISSUER'S SECURITIES. Shareholders of each
portfolio within the Fund will vote separately on this proposal. Each
portfolio's elimination of the policy will require approval by the lesser of
(i) a majority of the portfolio's outstanding shares on March 16, 1998, or (ii)
67% of the shares voted, so long as more than 50% of the shares actually vote.
YOUR FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU VOTE TO ELIMINATE
THIS POLICY.

14
<PAGE> 19

PROPOSAL 3. SWITCH TO DOLLAR-BASED VOTING RIGHTS (TREASURY FUND, ONLY.)

We want to amend your Fund's Declaration of Trust to provide for dollar-
based voting rights. This is the type of voting rights that all other Vanguard
Funds purpose to offer their shareholders after reorganizing into Delaware
business trust form. (Your Fund is already a Delaware business trust.)

Currently, all Vanguard Funds provide shareholders with one vote for each
share that they own. This share-based system treats shareholders equitably so
long as all shares of a particular Fund have the same share price. However,
fairness tends to erode when a Fund offers more than one series of shares (we
often refer to these as "portfolios"), or more than one class of shares. The
share prices of a Fund's different portfolios inevitably diverge over time due
to their different investment programs. Similarly, the share prices of a Fund's
different share classes will deviate over time because of their different
expense structures. As a result, when issues are voted at the Fund level, the
owners of lower-priced shares have relatively greater voting clout than the
owners of higher-priced shares. The change to dollar-based voting will ensure
that shareholders' voting rights remain proportionate to their financial
interests.

Your Fund currently offers a money market portfolio, only. However, dollar-
based voting would apply to any additional portfolios that your Fund may offer
in the future.

HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE THE SWITCH TO DOLLAR-BASED
VOTING RIGHTS. This proposal must be approved by the lesser of (i) a majority
of the Fund's outstanding shares on March 16, 1998, or (ii) 67% of the shares
voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD
OF TRUSTEES RECOMMENDS THAT YOU APPROVE THIS NEW POLICY.

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

PART 3--MORE ON PROXY VOTING AND SHAREHOLDER MEETINGS

This section provides information on a number of topics relating to proxy
voting and shareholder meetings.

PROXY SOLICITATION METHODS. Your Fund will solicit shareholder proxies in
a variety of ways. All shareholders who are entitled to vote will receive these
proxy materials by mail. In addition, Vanguard employees and officers may
solicit shareholder proxies in person, by telephone, or through the Internet. We
may also arrange for an outside firm, Shareholder Communications Corporation, to
solicit shareholder votes by telephone on the Fund's behalf. This procedure,
which is expected to cost the Fund approximately $4 per shareholder vote, will
be employed only after all more cost-effective means of soliciting shareholder
votes have been exhausted.

15
<PAGE> 20

PROXY SOLICITATION COSTS. Your Fund will pay all costs of soliciting
proxies from its own shareholders, including costs relating to the printing,
mailing, and tabulation of proxies. By voting immediately, you can help your
Fund avoid the considerable expense of a second solicitation.

QUORUM. In order for the shareholder meeting to go forward, your Fund must
achieve a quorum. This means that a majority of your Fund's shares must be
represented at the meeting--either in person or by proxy. All returned proxies
count towards a quorum, regardless of how they are voted ("For," "Against," or
"Abstain"). Your Fund will count broker non-votes toward a quorum, but not
toward the approval of any proposals. (Broker non-votes are shares for which (i)
the underlying owner has not voted and (ii) the broker holding the shares does
not have discretionary authority to vote on the particular matter.)

REVOKING YOUR PROXY. You may revoke your proxy at any time up until voting
results are announced at the shareholder meeting. You can do this by writing to
your Fund's Secretary, Raymond J. Klapinsky, at 100 Vanguard Boulevard, Malvern,
PA 19355, or by voting in person at the meeting. In addition, you can revoke a
prior proxy simply by voting again--using your original proxy card, by toll-free
telephone call, or at our website.

SHAREHOLDER PROPOSALS. Any shareholder proposals to be included in the
proxy statement for your Fund's next annual or special meeting must be received
by the Fund within a reasonable period of time prior to that meeting. Your Fund
has no current plans to hold an annual or special meeting in 1999.

NOMINEE ACCOUNTS. Upon request, the Vanguard Funds will reimburse nominees
for their reasonable expenses in forwarding proxy materials to beneficial owners
of the Funds' shares. Please submit invoices for our review to Vanguard Legal
Department, P.O. Box 2600, Valley Forge, PA 19482-2600.

ANNUAL/SEMI-ANNUAL REPORTS. Your Fund's most recent annual and semi-annual
reports to shareholders are available at no cost. To request a report, please
call us toll-free at 1-800-662-2739 or write us at P.O. Box 2600, Valley Forge,
PA 19482-2600.

LITIGATION. Your Fund is not involved in any litigation.

OTHER MATTERS. At this point, we know of no other business to be brought
before the shareholder meeting. However, if any other matters do come up, we
will use our best judgment to vote on your behalf. If you object to our voting
other matters on your behalf, please tell us so in writing before the meeting.

THE VANGUARD GROUP, INC. Your Fund is a member of The Vanguard Group,
Inc., the only mutual mutual fund company. Vanguard is owned jointly by the
Funds it oversees (and therefore by the shareholders of those Funds). Vanguard
provides the Funds--more than 95 distinct investment portfolios-- with their
corporate management, administrative, and distribution services on an at-cost
basis.

16
<PAGE> 21

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

PART 4--FUND INFORMATION

This section contains background information about your Fund and its
investment adviser(s).

A. YOUR FUND (AS OF FEBRUARY 28, 1998)

<TABLE>
<CAPTION>
OUTSTANDING 5%
FUND NAME ORGANIZATION NET ASSETS SHARES OWNERS*
- ------------------- ------------ --------------- ------------- -------
<S> <C> <C> <C> <C>
Admiral Funds 1993
Bond Index Fund 198*
Fixed Income
Securities Fund 19**
Money Market
Reserves 19**
Treasury Fund 1996
</TABLE>

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

*SEC rules require each Fund to tell you name and address of any person known to
be the beneficial owner of more than 5% of the Fund's outstanding shares. The
Fund must also tell you how many shares such persons own and what percentage of
the Fund these shares represent.

(1)

(2)

(3)

(4)

(5)

(6)

17
<PAGE> 22

B. YOUR FUND'S INVESTMENT ADVISER(S)

<TABLE>
<CAPTION>
FUND NAME ADVISER NAME AND ADDRESS
- ----------------------------- ----------------------------------------
<S> <C>
Admiral Funds The Vanguard Group, Inc.
Bond Index Fund 100 Vanguard Boulevard
Money Market Reserves Malvern, PA 19355
Treasury Fund
Fixed Income Securities Fund Wellington Management Company, LLP
75 State Street, Boston, MA 02109
The Vanguard Group, Inc.
100 Vanguard Boulevard,
Malvern, PA 19355
</TABLE>

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

PART 5--DIRECTOR/TRUSTEE INFORMATION

Your "yes" vote on the reorganization proposal (see page 2) will be treated
as a vote to elect each of your Fund's current Directors to the position of
Trustee with the newly organized Delaware business trust. Following the
reorganization, the Trustees will serve until the next election or until their
terms are for some reason terminated. This section provides detailed information
about the individual Directors. The information presented includes:

- The backgrounds and qualifications of the Directors/Trustees.
- The identity of your Fund's principal executive officers.
- How many Fund shares are owned by management.
- How often the Board and its committees meet.
- How Directors/Trustees are compensated.

A. THE BACKGROUNDS AND QUALIFICATIONS OF DIRECTORS/TRUSTEES

Except as otherwise noted, the individuals listed below currently serve as
Directors/Trustees of The Vanguard Group, Inc., and all Vanguard Funds. The
mailing address of the Directors/Trustees is P.O. Box 876, Valley Forge, PA
19482.

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING THE
NAME AGE LAST 5 YEARS AND OTHER DIRECTORSHIPS
- -------------------------- --- -------------------------------------
<S> <C> <C>
John C. Bogle(1) 68 Senior Chairman of the Board and
Director of The Vanguard Group,
Inc., and all Vanguard Funds;
Director of The Mead Corporation,
General Accident Insurance Company,
and Chris-Craft Industries, Inc.
</TABLE>

18
<PAGE> 23

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING THE
NAME AGE LAST 5 YEARS AND OTHER DIRECTORSHIPS
- -------------------------- --- -------------------------------------
<S> <C> <C>
John J. Brennan(1) 43 Chairman of the Board, Director,
President, and Chief Executive
Officer of The Vanguard Group,
Inc., and all Vanguard Funds
Robert E. Cawthorn(2) 62 Chairman Emeritus and Director of
Rhone-Poulenc Rorer, Inc.; Managing
Director of Global Health Care
Partners/DLJ Merchant Banking
Partners; Director of Sun Company,
Inc., and Westinghouse Electric
Corp.
Barbara Barnes Hauptfuhrer 69 Director of The Great Atlantic and
Pacific Tea Co., IKON Office
Solutions, Inc., Raytheon Co.,
Knight-Ridder, Inc., Massachusetts
Mutual Life Insurance Co., and
Ladies Professional Golf
Association; Trustee Emerita of
Wellesley College
Bruce K. MacLaury(3) 66 President Emeritus of The Brookings
Institution; Director of American
Express Bank Ltd., The St. Paul
Companies, Inc., and National Steel
Corp.
Burton G. Malkiel(2) 65 Chemical Bank Chairman's Professor of
Economics, Princeton University;
Director of Prudential Insurance
Co. of America, Amdahl Corp., Baker
Fentress & Co., The Jeffrey Co.,
and Southern New England
Telecommunications Co.
Alfred M. Rankin, Jr. 56 Chairman, President, and Chief
Executive Officer of NACCO
Industries, Inc.; Director of NACCO
Industries, The BFGoodrich Co., and
the Standard Products Co.
John C. Sawhill 61 President and Chief Executive Officer
of The Nature Conservancy;
formerly, Director and Senior
Partner of McKinsey & Co. and
President of New York University;
Director of Pacific Gas and
Electric Co., Procter & Gamble Co.,
and NACCO Industries
</TABLE>

19
<PAGE> 24

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING THE
NAME AGE LAST 5 YEARS AND OTHER DIRECTORSHIPS
- -------------------------- --- -------------------------------------
<S> <C> <C>
James O. Welch, Jr. 66 Retired Chairman of Nabisco Brands,
Inc.; retired Vice Chairman and
Director of RJR Nabisco; Director
of TECO Energy, Inc., and Kmart
Corp.
J. Lawrence Wilson 61 Chairman and Chief Executive Officer
of Rohm & Haas Co.; Director of
Cummins Engine Co., and The Mead
Corporation; Trustee of Vanderbilt
University
</TABLE>

- ---------------
(1) Messrs. Bogle and Brennan are considered "interested persons" because they
serve as Fund officers, as well as Directors/Trustees.
(2) Messrs. Cawthorn and Malkiel do not serve as Directors of Vanguard Equity
Income Fund.
(3) Mr. MacLaury does not serve as Director/Trustee of Vanguard Municipal Bond
Fund or the Vanguard State Tax-Free Funds.

B. PRINCIPAL EXECUTIVE OFFICERS

The following individuals are the principal executive officers of The
Vanguard Group, Inc., and all Vanguard Funds. Each principal executive officer
has held substantially the same position with the Funds for the last five years
or more (except that Mr. Brennan succeeded Mr. Bogle as Chairman of the Board on
January 31, 1998). Their mailing address is P.O. Box 876, Valley Forge, PA
19482.

<TABLE>
<CAPTION>
NAME AGE OFFICE
- -------------------- --- ----------------------------------------
<S> <C> <C>
John C. Bogle 68 Senior Chairman of the Board
John J. Brennan 43 Chairman of the Board, President, and
Chief Executive Officer
Raymond J. Klapinsky 59 Secretary
Richard F. Hyland 60 Treasurer
Karen E. West 51 Controller
</TABLE>

C. FUND SHARES OWNED BY DIRECTORS/TRUSTEES

Messrs. Bogle and Brennan each have invested substantially all of their
assets in the Vanguard Funds. The independent Directors/Trustees are also
committed to investing a significant portion of their assets in the Funds. All
Directors/Trustees allocate their investments among more than 95 Vanguard Funds
based on their own investment needs. Their aggregate Vanguard investments
totaled over $79.5 million as of December 31, 1997. The total amount of Fund
shares beneficially owned by each Director/Trustee as of that date, along with
the year in which each individual became a Director/Trustee of the

20
<PAGE> 25

Vanguard Funds, appears below. As of December 31, 1997, the Directors/ Trustees
and officers owned less than 1% of each Fund's total outstanding shares.

JOHN C. BOGLE (1966)
Admiral Funds--* shares [* shares]; Bond Index Fund-- *
shares [* shares]; Fixed Income Securities Fund-- * shares [*
shares]; Money Market Reserves--* shares [* shares]; Treasury
Fund--* shares [* shares]; all Vanguard Funds 1,655,037 shares
[701,163 shares]. NOTE: The bracketed amounts represent shares held by
charitable and related trusts, created by Mr. Bogle, in which he disclaims
ownership, control or voting power.

JOHN J. BRENNAN (1987)
Admiral Funds--* shares; Bond Index Fund--* shares; Fixed
Income Securities Fund--* shares; Money Market Reserves--* shares;
Treasury Fund--* shares; all Vanguard Funds--84,779 shares.

ROBERT E. CAWTHORN (1992)
Admiral Funds--* shares; Bond Index Fund--* shares; Fixed
Income Securities Fund--* shares; Money Market Reserves--* shares;
Treasury Fund--* shares; all Vanguard Funds--8,369,629 shares.

BARBARA B. HAUPTFUHRER (1972)
Admiral Funds--* shares; Bond Index Fund--* shares; Fixed
Income Securities Fund--* shares; Money Market Reserves--* shares;
Treasury Fund--* shares; all Vanguard Funds--1,910,269 shares.

BRUCE K. MACLAURY (1989)
Admiral Funds--* shares; Bond Index Fund--* shares; Fixed
Income Securities Fund--* shares; Money Market Reserves--* shares;
Treasury Fund--* shares; all Vanguard Funds--20,373 shares.

BURTON G. MALKIEL (1977)
Admiral Funds--* shares; Bond Index Fund--* shares; Fixed
Income Securities Fund--* shares; Money Market Reserves--* shares;
Treasury Fund--* shares; all Vanguard Funds--520,104 shares.

ALFRED M. RANKIN, JR. (1992)
Admiral Funds--* shares; Bond Index Fund--* shares; Fixed
Income Securities Fund--* shares; Money Market Reserves--* shares;
Treasury Fund--* shares; all Vanguard Funds--396,002 shares.

JOHN C. SAWHILL (1991)
Asset Allocation Fund--3,865 shares; All Vanguard Funds--790,828 shares.

21
<PAGE> 26

JAMES O. WELCH, JR. (1971)
Admiral Funds--* shares; Bond Index Fund--* shares; Fixed
Income Securities Fund--* shares; Money Market Reserves--* shares;
Treasury Fund--* shares; all Vanguard Funds--144,797 shares.

J. LAWRENCE WILSON (1985)
Admiral Funds--* shares; Bond Index Fund--* shares; Fixed
Income Securities Fund--* shares; Money Market Reserves--* shares;
Treasury Fund--* shares; all Vanguard Funds--311,590 shares.

D. BOARD AND COMMITTEE MEETINGS

During 1997, your Fund's Board of Directors/Trustees held 11 meetings.

Your Board has a standing Compensation, Nomination, and Audit Committee,
which consists of all Directors/Trustees who are not "interested persons" of the
Fund (that is, all but Messrs. Bogle and Brennan). During 1997, the Committee
held two meetings. The Committee's role is to:

1. Evaluate the performance of your Fund's officers and employees.

2. Develop and approve the compensation arrangements for your Fund's
officers and employees.

3. Interview, evaluate, and recommend to shareholders candidates for
election to your Fund's Board of Directors/Trustees. (The Committee will
consider shareholder nominations for Director/Trustee; please write to
Mr. Wilson, Chairman of the Committee.).

4. Select your Fund's independent accountants and review their fees.

5. Oversee your Fund's internal controls.

Following the reorganization, your Fund's Board of Trustees will form a
similar committee.

E. DIRECTOR/TRUSTEE COMPENSATION

The same individuals serve as Directors/Trustees of all Vanguard Funds, and
each Fund pays a proportionate share of the Directors'/Trustees' compensation.
The Funds employ their officers on a shared basis, as well. However, officers
are compensated by The Vanguard Group, Inc., not the Funds. The reorganization
(Proposal 1) will not change the compensation arrangements described in this
section.

22
<PAGE> 27

INDEPENDENT DIRECTORS/TRUSTEES. The Funds compensate their independent
Directors/Trustees--that is, the ones who are not also officers of the Fund--in
three ways:

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

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

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

"INTERESTED" DIRECTORS/TRUSTEES. The Funds' interested Directors/
Trustees--Messrs. Bogle and Brennan--receive no compensation for their service
in that capacity. However, they are paid in their role as officers of the Funds.

COMPENSATION TABLES. The following tables provide compensation details for
each of the Directors/Trustees. For each Fund covered in this proxy statement,
we list the amounts paid as compensation and accrued as retirement benefits by
that Fund for each Director/Trustee. In addition, the last table shows the total
amount of benefits that we expect each Director/Trustee to receive from all
Vanguard Funds upon retirement, and the total amount of compensation paid to
each Director/Trustee by all Vanguard Funds. All information shown in this
section relates to each Fund's most recent fiscal year.

<TABLE>
<CAPTION>
ADMIRAL FUNDS BOND INDEX FUND
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
- --------------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn
Hauptfuhrer
MacLaury
Malkiel
Rankin
Sawhill
Welch
Wilson
</TABLE>

23
<PAGE> 28

<TABLE>
<CAPTION>
FIXED INCOME
SECURITIES FUND MONEY MARKET RESERVES
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
- --------------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn
Hauptfuhrer
MacLaury
Malkiel
Rankin
Sawhill
Welch
Wilson
</TABLE>

<TABLE>
<CAPTION>
TREASURY FUND ALL VANGUARD FUNDS
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
- --------------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn
Hauptfuhrer
MacLaury
Malkiel
Rankin
Sawhill
Welch
Wilson
</TABLE>

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

(1) All Directors/Trustees serve as such for 35 Vanguard Funds, except for
Messrs. Malkiel and MacLaury, who serve on the Boards of 34 and 28 Vanguard
Funds, respectively.

24
<PAGE> 29
[THE VANGUARD GROUP LOGO]

Post Office Box 2600
Valley Forge, PA 19482

World Wide Web
www.vanguard.com

E-mail
[email protected]

XXXXX - 0298-2.5MB

<PAGE> 30
VOTE BY TOUCH-TONE PHONE OR THE INTERNET
CALL TOLL-FREE: 1-800-690-6903 OR VISIT OUR WEBSITE
WWW.VANGUARD.COM OR WWW.PROXYVOTE.COM

12-DIGIT CONTROL NUMBER: 021 345 678 912

(See enclosed insert for further instructions to vote by phone/internet)

[THE VANGUARD GROUP LOGO]
- - Please detach at perforation before mailing -

VANGUARD ADMIRAL FUNDS ("FUND")
PROXY SOLICITED BY THE BOARD OF DIRECTORS

By my signature below, I appoint John J. Brennan, J. Lawrence Wilson and
Raymond J. Klapinsky as my attorneys to vote all Fund shares that I am entitled
to vote at the Special Meeting of Shareholders to be held in the Majestic
Building, Room 118A, Vanguard Financial Center, 100 Vanguard Boulevard,
Malvern, PA on May 29, 1998 at 9:30 A.M., E.T. and at any adjournments of the
meeting. Any one or more of Messrs. Brennan, Wilson and Klapinsky may vote my
shares, and they may appoint substitutes to vote my shares on their behalf. I
instruct Messrs. Brennan, Wilson and Klapinsky to vote this proxy as specified
on the reverse side, and I revoke any previous proxies that I have executed. I
acknowledge receipt of the Fund's Notice of Special Meeting of Shareholders and
proxy statement.

PLEASE SIGN, DATE AND RETURN PROMPTLY
IN ENCLOSED ENVELOPE IF YOU ARE NOT
VOTING BY PHONE OR INTERNET

Date
---------------------
NOTE: Please sign exactly as your name appears on this proxy. When signing in
a fiduciary capacity, such as executor, administrator, trustee, attorney,
guardian, etc., please so indicate. Corporate and partnership proxies should
be signed by an authorized person indicating the person's title.

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

- -----------------------------------------------------------
Signature (s) (and Title(s), if applicable) VAN-REG

CONTINUED ON REVERSE SIDE

<PAGE> 31
Please refer to the Proxy Statement discussion of these proposals.
THE PROXY WILL BE VOTED FOR THE PROPOSALS IF YOU DO NOT SPECIFY OTHERWISE.
---
Your appointed attorneys will vote any other matters that arise at the meeting
in accordance with their best judgment.
THE BOARD OF DIRECTORS/TRUSTEES RECOMMENDS A VOTE FOR EACH OF THE FOLLOWING:
---

- Please detach at perforation before mailing -

PLEASE VOTE BY CHECKING THE APPROPRIATE BOX(ES) BELOW.

<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. To reorganize the Fund into a Delaware business trust. (All but Treasury Fund) [ ] [ ] [ ] 1.

2. To change the Fund's fundamental investment limitations with regards to:

(a) The interfund lending program. (All but Treasury Fund) [ ] [ ] [ ] 2a.

(b) Borrowing money and pledging assets (All Funds) [ ] [ ] [ ] 2b.

(d) Investments in assessable securities. (Bond Index Fund) [ ] [ ] [ ] 2d.

(e) Investments in bond futures and options. (Fixed Income Securities Fund-Short- [ ] [ ] [ ] 2e.
Term Portfolio)

(f) Investments in a single issuer's securities. (Money Market Reserves and [ ] [ ] [ ] 2f.
Treasury Fund)

3. Switch to dollar-based voting rights. (Treasury Fund) [ ] [ ] [ ] 3.
</TABLE>

VAN-REG

<PAGE> 32
VOTE BY TOUCH-TONE PHONE OR THE INTERNET
CALL TOLL-FREE: 1-800-690-6903 OR VISIT OUR WEBSITE
WWW.VANGUARD.COM OR WWW.PROXYVOTE.COM

12-DIGIT CONTROL NUMBER: 021 345 678 912

(See enclosed insert for further instructions to vote by phone/internet)

[THE VANGUARD GROUP LOGO]
- - Please detach at perforation before mailing -

VANGUARD BOND INDEX FUND ("FUND")
PROXY SOLICITED BY THE BOARD OF DIRECTORS

PLEASE SIGN, DATE AND RETURN PROMPTLY
IN ENCLOSED ENVELOPE IF YOU ARE NOT
VOTING BY PHONE OR INTERNET

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

- -----------------------------------------------------------
Signature (s) (and Title(s), if applicable) VAN-REG

CONTINUED ON REVERSE SIDE

<PAGE> 33
Please refer to the Proxy Statement discussion of these proposals.
THE PROXY WILL BE VOTED FOR THE PROPOSALS IF YOU DO NOT SPECIFY OTHERWISE.
---
Your appointed attorneys will vote any other matters that arise at the meeting
in accordance with their best judgment.
THE BOARD OF DIRECTORS/TRUSTEES RECOMMENDS A VOTE FOR EACH OF THE FOLLOWING:
---