<PAGE> 1
GEMINI II
[FIGURE 1 -- SEE EDGAR APPENDIX]
THIRD QUARTER REPORT
SEPTEMBER 30, 1994
<PAGE> 2
FELLOW SHAREHOLDER:
During the three months ended September 30, 1994, the stock market more than
made up for its losses during the first half of the year. While Gemini II
lagged the market's gain for the third quarter, our total return for the first
nine months of 1994 remains slightly ahead.
This table compares Gemini II's total returns (capital change plus income)
during the past three- and nine-month periods with those of the unmanaged
Standard & Poor's 500 Composite Stock Price Index, a good reflection of the
returns of large capitalization "blue-chip" stocks:
<TABLE>
<CAPTION>
- ----------------------------------------------------------
Total Return
--------------------------------
Periods Ended September 30, 1994
--------------------------------
Three Months Nine Months
- ----------------------------------------------------------
<S> <C> <C>
GEMINI II +0.9% +2.5%
- ----------------------------------------------------------
STANDARD & POOR'S 500 INDEX +4.9% +1.3%
- ----------------------------------------------------------
</TABLE>
I would underscore that it is the return of the Fund's total portfolio that is
reflected in the table. This return is allocated so that 100% of the
portfolio's capital appreciation (or depreciation) is attributed to the Capital
Shares, which provided 50% of the Fund's initial capital. The other 50% of our
initial capital was provided by the Income Shares, which receive 100% of the
portfolio's net investment income.
* CAPITAL SHARE RESULTS
While the substantially higher dividend yield of our Income Shares pushed
Gemini II's total portfolio return nicely ahead of the Standard & Poor's 500
Index during the past nine months, the return of our Capital Shares was a bit
weaker than the capital return of the Index. In other words, when market
changes are small, our capital leverage (currently 1.2 times) has only a
limited impact on the value of the Capital Shares. For the nine months, the
net asset value of each Capital Share eased downward from $22.10 on December
31, 1993, to $21.58 on September 30, 1994, a decline of -2.4% compared to a
decline of -0.8% for the Standard & Poor's 500 Index (excluding income).
* INCOME SHARE RESULTS
Each Income Share received three quarterly dividends totaling $.95 per share
during the past
<PAGE> 3
nine months. Our first-quarter dividend was paid at the rate of $.25 per share.
Then, our quarterly dividend was increased to $.35 per share, and was paid at
that level in the second and third quarters. While last year's nine-month
dividend totaled $.75 per share, the increase this year comes, not because of
higher net income for the Fund, but because we determined that a higher
proportion of net income should be distributed on a quarterly basis, and a
lower proportion as a year-end "extra" dividend, representing annual income
earned in excess of the quarterly payments. Our expectation is that we will
generate a higher level of dividends in 1994 than the $1.66 per share total for
1993.
* AN INTERIM REPORT
During the past nine months, our continuing major commitment to financial
stocks (44% of net assets versus an 11% weighting in the Index) had a slightly
negative impact on our total portfolio performance relative to the Standard &
Poor's 500 Index. The financial group turned in a stellar performance result
during the market decline that took place in the first half of the year, only
to surrender its advantage in the third quarter, when most bank and insurance
stocks declined despite the market rally. Gemini II's small margin over the
Index was accounted for largely by good stock selections among our energy
holdings, combined with our higher income component. At quarter's end, our
"equity" portion represented 99% of net assets, including 64% in common stocks,
21% in convertible preferred stocks, and 14% in high-yield and convertible
bonds.
I look forward to reporting to you again in our 1994 Annual Report three
months hence.
Sincerely,
/S/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board October 18, 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------
Premiums and Discounts
September 30, 1994
------------------------------
Net Asset Market
Value Price Difference
- ------------------------------------------------------
<S> <C> <C> <C>
CAPITAL SHARES $21.58 $19.375 -10.2%
INCOME SHARES 9.68 11.375 +17.5
- ------------------------------------------------------
TOTAL $31.26 $30.750 - 1.6%
- ------------------------------------------------------
</TABLE>
<PAGE> 4
INVESTMENTS
September 30, 1994
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Market
Value
Shares (000)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (63.5%)
- -------------------------------------------------------------------------------------------
BANKS (23.1%)
BankAmerica Corp. 100,766 $ 4,446
Bankers Trust New York Corp. 254,592 16,994
The Chase Manhattan Corp. 70,499 2,441
Chemical Banking Corp. 396,400 13,874
First Tennessee National Corp. 21,300 953
First Union Corp. 404,000 17,473
KeyCorp 584,189 17,818
NationsBank, Inc. 100,000 4,900
----------
GROUP TOTAL 78,899
----------
- -------------------------------------------------------------------------------------------
ELECTRIC UTILITIES (4.3%)
Unicom Corp. 658,937 14,661
----------
- -------------------------------------------------------------------------------------------
INSURANCE (9.8%)
Aetna Life & Casualty Co. 342,260 15,872
CIGNA Corp. 287,100 17,693
----------
GROUP TOTAL 33,565
----------
- -------------------------------------------------------------------------------------------
OIL (14.2%)
Atlantic Richfield Co. 188,500 19,015
Pennzoil Co. 185,500 8,695
USX-Marathon Group 867,100 15,391
Ultramar Corp. 203,400 5,187
----------
GROUP TOTAL 48,288
----------
- -------------------------------------------------------------------------------------------
RETAILERS (3.4%)
Kmart Corp. 654,800 11,705
----------
- -------------------------------------------------------------------------------------------
SAVINGS & LOAN (8.7%)
H. F. Ahmanson & Co. 703,100 14,677
Great Western Financial Corp. 776,875 14,955
----------
GROUP TOTAL 29,632
----------
- -------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $213,280) 216,750
- -------------------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (21.0%)
- -------------------------------------------------------------------------------------------
AMR Corp. 6.00% 80,000 3,240
Advanced Micro Devices, Inc. $3.00 171,000 10,175
Bethlehem Steel Corp.
$2.50 86,400 2,322
$3.50 50,000 2,875
$5.00 93,600 4,937
Citicorp 10.75% 73,000 8,650
Delta Air Lines $3.50 250,000 11,188
(1)Kaiser Aluminum $.65 1,376,000 11,352
Reynolds Metals $3.31 124,400 6,686
Santa Fe Energy Resources, Inc. 8.25% 200,000 1,900
Sea Containers, Ltd. $4.00 124,400 5,505
Valero Energy $3.125 65,000 3,055
- -------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $63,796) 71,885
- -------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Face Market
Amount Value
(000) (000)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
BONDS (14.1%)
- -------------------------------------------------------------------------------------------
CONVERTIBLE (5.8%)
Conner Peripherals
6.50%, 3/1/02 $ 3,250 $ 2,551
Continental Homes
6.875%, 3/15/02 2,586 2,276
Owens-Corning
8.00%, 12/30/05 2,000 2,260
Seagate Technology
6.75%, 5/1/12 11,000 9,212
Toll Corp.
4.75%, 1/15/04 1,814 1,392
Western Digital
9.00%, 6/1/14 2,000 2,205
----------
GROUP TOTAL 19,896
----------
- -------------------------------------------------------------------------------------------
NON-CONVERTIBLE (8.3%)
Chrysler Corp.
10.40%, 8/1/99 12,000 12,990
Family Restaurants
0.00%, 2/1/04 3,000 1,770
Geneva Steel
11.125%, 3/15/01 7,000 7,035
Ryland Group
9.625%, 6/1/04 2,500 2,250
Weirton Steel Corp.
10.875%, 10/15/99 4,000 4,055
----------
GROUP TOTAL 28,100
----------
- -------------------------------------------------------------------------------------------
TOTAL BONDS
(Cost $41,635) 47,996
- -------------------------------------------------------------------------------------------
TEMPORARY INVESTMENTS (1.2%)
- -------------------------------------------------------------------------------------------
U.S. TREASURY NOTE (.5%)
7.25%, 11/15/96 1,700 1,720
- -------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT (.7%)
Collateralized by U.S. Government
Obligations in a Pooled Cash
Account, 4.85%, 10/3/94 2,304 2,304
- -------------------------------------------------------------------------------------------
TOTAL TEMPORARY INVESTMENTS
(Cost $4,072) 4,024
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(Cost $322,783) 340,655
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--
NET (.2%) 714
- -------------------------------------------------------------------------------------------
NET ASSETS (100%) $341,369
===========================================================================================
</TABLE>
(1) Mandatory conversion June 30, 1996.
<PAGE> 6
THE VANGUARD FAMILY OF FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund-Money Market Portfolio
Vanguard State Tax-Free Funds (CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds (CA, FL, NJ, NY, OH, PA)
FIXED INCOME FUNDS
Vanguard Admiral Funds
Vanguard Bond Index Fund
Vanguard Fixed Income Securities Fund
Vanguard Preferred Stock Fund
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard Balanced Index Fund
Vanguard STAR Fund
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
EQUITY FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible Securities Fund
Vanguard Equity Income Fund
Vanguard Index Trust
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund-U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International Equity Index Fund
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity Fund-International Portfolio
The Vanguard Group * Vanguard Financial Center
Valley Forge, PA 19482
New Account Information: 1-(800) 662-7447
Shareholder Account Services: 1-(800) 662-2739
This Report has been prepared for shareholders and
may be distributed to others only if preceded or
accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
Q343-9/94
