<PAGE> 1
VANGUARD
BOND INDEX
FUND
Annual Report -- December 31, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 6,000 highly
motivated men and women--who form the cornerstone of our operations. As with
any cornerstone, we could not survive long--let alone prosper--without it.
That's why we chose this fiscal year's annual report to celebrate the spirit,
enthusiasm, and achievements of our crew. (We call those who work at Vanguard
crew members, not employees, because they operate as a team to accomplish our
mission of serving you, our clients.)
But while we prize the collective contributions of our crew, we also
take time to recognize the importance of the individual. Each calendar quarter,
we present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more
than 300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to serving
you in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Chairman President
CONTENTS
<TABLE>
<S> <C>
A Message To Our Shareholders. . . . . . . . . . . 1
The Markets In Perspective . . . . . . . . . . . . 6
Portfolio Profiles . . . . . . . . . . . . . . . . 8
Performance Summaries. . . . . . . . . . . . . . . 13
Financial Statements . . . . . . . . . . . . . . . 18
Report Of Independent Accountants. . . . . . . . . 50
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
FELLOW SHAREHOLDER,
A modest decline in interest rates boosted bond prices during 1997, helping the
Total Bond Market Portfolio of Vanguard Bond Index Fund post a +9.4% return.
The Portfolio's net return nicely exceeded the average return of competing bond
funds and was fully competitive with the return of its cost-free index
benchmark.
The returns of our other Portfolios also were outstanding, as each
outpaced its average peer and tracked its target index closely. The returns
ranged from +7.0% for our Short-Term Bond Portfolio to a robust +14.3% for our
Long-Term Bond Portfolio.
The adjacent table presents the twelve-month total return (capital
change plus reinvested dividends) for each Portfolio, its mutual fund peer
group, and the unmanaged bond market index it seeks to match. The inverse
relationship between interest rates and bond returns is evident in our 1997
results. When interest rates decline, as they did during the year, returns rise
in proportion to the average duration of a Portfolio. When interest rates rise,
returns are diminished in proportion with a Portfolio's average duration, with
prices falling furthest for long-term bonds.
<TABLE>
<CAPTION>
- ---------------------------------------------------------
TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1997
- ---------------------------------------------------------
<S> <C>
TOTAL BOND MARKET PORTFOLIO-
INVESTOR SHARES + 9.4%
INSTITUTIONAL SHARES + 9.6
Average Intermediate-Term
U.S. Government Fund + 8.1
Lehman Aggregate Bond Index + 9.7
- ---------------------------------------------------------
SHORT-TERM BOND PORTFOLIO + 7.0%
Average Short-Term U.S.
Government Fund + 6.4
Lehman 1-5 Year Government/
Corporate Index + 7.1
- ---------------------------------------------------------
INTERMEDIATE-TERM BOND PORTFOLIO + 9.4%
Average Intermediate-Term
U.S. Government Fund + 8.1
Lehman 5-10 Year Government/
Corporate Index + 9.4
- ---------------------------------------------------------
LONG-TERM BOND PORTFOLIO +14.3%
Average General U.S.
Government Fund + 8.8
Lehman Long Government/
Corporate Index +14.5
- ---------------------------------------------------------
</TABLE>
During 1997, the 9.44% return on our Total Bond Market Portfolio lagged
by 21 basis points (0.21 percentage point) the 9.65% return on its unmanaged
market benchmark, the Lehman Brothers Aggregate Bond Index, while our Total
Bond Market Portfolio-Institutional Shares, aided by a minuscule expense
ratio, fell just 10 basis points short of the benchmark. Likewise, returns of
our Short-Term Bond Portfolio and Long-Term Bond Portfolio were short of their
Index benchmarks by 10 and 20 basis points, respectively. Our Intermediate-Term
Bond Portfolio matched its unmanaged standard, the Lehman 5-10 Year
Government/Corporate Index. Such tight tracking of the indexes is difficult to
achieve because our Portfolios, like any real-world investment, incur operating
and transaction costs that do not burden indexes, which are theoretical
constructs. Detailed per-share figures for each Portfolio, including net asset
values and income dividends, along with yield, credit quality, and maturity
data, are presented in the table that follows this letter.
THE FINANCIAL MARKETS IN BRIEF
Steady economic growth combined with low inflation to create a near-perfect
environment for U.S. investors in 1997. Interest rates rose early in the year
as investors--and the Federal
1
<PAGE> 4
Reserve Board--were concerned that the strong economy would cause inflation to
accelerate. The Fed boosted short-term interest rates by 25 basis points on
March 25, the only action the central bank took during 1997. Short-term
interest rates bottomed out in June, then climbed irregularly. At year-end, the
yield on three-month U.S. Treasury bills was 5.35%, up just a bit from 5.17%
when the year began.
Long-term interest rates, after peaking in mid-April, began to drift
lower as news about inflation got better rather than worse. The yield on the
30-year U.S. Treasury bond fell from 7.17% on April 14 to 5.92% on December 31,
down 72 basis points from the 6.64% level at which it began the year. For the
year, the total return of the 30-year Treasury bond was +15.2%, an outstanding
result by any standard--except the standard set by the burgeoning stock market.
If the economic environment in 1997 was kind to bonds, it truly worked
wonders for equities. The economy's strength helped corporations post higher
earnings. Falling interest rates and decelerating inflation buoyed the
already-ebullient spirits of investors. The sole dark cloud to be seen--severe
turmoil that surfaced during the summer in Asian economies and currencies--only
briefly darkened the mood of equity investors. After a sharp decline in
October--the Standard & Poor's 500 Composite Stock Price Index tumbled -7% on
October 27 alone--stocks resumed their climb, and the S&P 500 Index produced a
+33.4% return for the year.
Asia's troubles actually benefited investors in U.S. bonds, as many
anxious stock investors here and overseas began shifting money into
fixed-income investments, particularly U.S. Treasury securities. The buying
raised bond prices and nudged interest rates lower.
1997 PERFORMANCE OVERVIEW
The decline in interest rates over the course of the year pushed up the prices
of existing bonds, augmenting returns from interest income. The following table
presents the current yield for each of our Portfolios at the end of 1996 and
1997 and breaks down each Portfolio's total return for 1997 into its income and
capital components.
These total returns were well in excess of those earned by competing
bond funds holding securities of similar credit quality and maturities. The
margins of superiority were impressive: 0.6 percentage point for our Short-Term
Bond Portfolio; 1.3 percentage points for our Total Bond Market-Investor Shares
and Intermediate-Term Bond Portfolios; and a gaping 5.5 percentage points for
our Long-Term Bond Portfolio.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
TOTAL RETURNS
YEAR-END YEAR ENDED
YIELDS DECEMBER 31, 1997
------------------- --------------------------
PORTFOLIO 1996 1997 INCOME CAPITAL TOTAL
- -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Bond Market-
Investor Shares 6.46% 6.22% +6.9% +2.5% + 9.4%
Institutional Shares 6.56 6.32 +7.1 +2.5 + 9.6
Short-Term Bond 5.85 5.77 +6.2 +0.8 + 7.0
Intermediate-Term
Bond 6.47 6.09 +7.0 +2.4 + 9.4
Long-Term Bond 6.80 6.21 +7.4 +6.9 +14.3
- -----------------------------------------------------------------------
</TABLE>
We note that our Total Bond Market Portfolio's competitive group--the
Intermediate-Term U.S. Government Bond Fund category--is not a perfect fit
because the Portfolio typically holds roughly 30% of its assets in high-quality
corporate bonds. The corporate segment of the Portfolio hurt us a bit in
comparison to the typical government fund in 1997, when Treasury and federal
agency securities outperformed comparable corporate securities. However, over
the long haul our corporate holdings typically help us in comparison with most
funds in the government bond category.
2
<PAGE> 5
Although the capital appreciation that each Portfolio enjoyed during
1997 was significant--and welcome--we remind shareholders that the capital
component of return may be negative or positive in any given year. We also
emphasize that the price changes that detract from or add to a Portfolio's
return increase with bond maturities. Over longer periods, the impact of these
fluctuations in the prices of bonds (and bond funds) tends to wash away,
leaving the rate of interest income--the coupon--as the main source of
long-term total return.
U.S. Treasury and federal agency securities and high-quality corporate
bonds make up the lion's share of assets in our Short-Term, Intermediate-Term,
and Long-Term Portfolios. The Total Bond Market Portfolio also includes a
significant stake (30%) in GNMAs and other mortgage-backed securities. Although
these securities carry federal guarantees as to the payment of principal and
interest, they do not protect against prepayment risk--the possibility that the
principal will be repaid early when interest rates fall and homeowners
refinance their mortgages at lower rates. It is because of this risk that
mortgage-backed securities carry higher interest yields than Treasury
securities with similar average maturities. On balance, the yield premium for
mortgage-backed securities was a boon to the Portfolio during 1997, even though
concern mounted late in the year that falling interest rates would lead to a
sharp rise in prepayments. The Lehman GNMA Index earned a +9.5% return for the
year.
The Portfolio Profile pages in this report list each Portfolio's average
duration, an estimate of how sensitive a bond portfolio's share price is to
changes in interest rates. For example, if a bond portfolio's average duration
were 7 years, its share price would decline about -7% for each
one-percentage-point increase in market interest rates. Conversely, if interest
rates declined one percentage point, the share price of a bond portfolio with
an average duration of 7 years would rise by about 7%.
LONG-TERM PERFORMANCE OVERVIEW
It has been less than a dozen years since we created our Total Bond Market
Portfolio--the nation's first bond index fund for individual investors. In that
time, the merits of indexing have become abundantly clear to bond investors. As
shown in the adjacent table, the Portfolio has amassed a significant long-term
performance advantage over the average mutual fund holding securities of
comparable maturity and credit quality. Our annual edge of 1.2 percentage
points has amounted over the past decade to an extra return of $2,400 on a
$10,000 investment in the Portfolio versus an identical investment in its
average competitor. This extra return--equal to 24% of the initial
investment--was earned with little sacrifice in credit quality.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
TOTAL RETURNS
10 YEARS ENDED
DECEMBER 31, 1997
------------------------------------
FINAL VALUE OF
AVERAGE A $10,000
ANNUAL RATE INITIAL INVESTMENT
- ---------------------------------------------------------------------
<S> <C> <C>
Total Bond Market Portfolio +8.9% $23,411
Average Intermediate-Term
U.S. Government Fund +7.7 21,011
Lehman Aggregate Bond Index +9.2 24,058
- ---------------------------------------------------------------------
</TABLE>
Our low costs are the main source of this advantage. The annual expense
ratio (operating costs as a percentage of net assets) of Total Bond Market
Portfolio is 0.20%, or $2.00 per $1,000 of assets, less than one-fifth the
1.05% expense ratio of the average bond fund. This expense advantage of more
than 0.8 percentage point gives us a very big head start in a market as
efficient as that for fixed-income securities. Significantly, it's a head start
our shareholders enjoy year after year. Especially in bond funds, cost matters.
3
<PAGE> 6
Market indexes, of course, are the ultimate in efficiency because they
exist only on paper and have no operating expenses or transaction costs.
Matching the Lehman Aggregate Bond Index is especially tough for a bond
portfolio, since the Index's tremendous breadth--encompassing some 6,300
separate securities--makes it impractical for a real portfolio to precisely
duplicate its holdings. Nonetheless, our Total Bond Market Portfolio has
closely tracked the Index over the past decade--lagging by only 0.3 percentage
point annually--because of the skill of our investment adviser, Vanguard Fixed
Income Group. The adviser carefully selects a sampling of more than 500
securities that as a group parallel the characteristics and performance of the
Index. Adroit trading minimizes transaction costs.
Our other Portfolios are only a few years old, yet already they are
following the example set by their older sibling: tracking their target indexes
very closely while strongly outperforming their real-world competitors. The
adjacent table presents the average annual return of our other Portfolios from
their inception through year-end 1997, along with the growth of hypothetical
$10,000 investments in each Portfolio. The same data are presented for each
Portfolio's average competitor and target Index.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
TOTAL RETURNS
SINCE INCEPTION THROUGH
DECEMBER 31, 1997
------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
PORTFOLIO (INCEPTION DATE) RATE INITIAL INVESTMENT
- --------------------------------------------------------------------
<S> <C> <C>
TOTAL BOND MARKET PORTFOLIO-
INSTITUTIONAL SHARES (9/18/1995)* +7.8% $11,873
Average Intermediate-Term
U.S. Government Fund +6.4 11,523
Lehman Aggregate Bond Index +7.7 11,859
- --------------------------------------------------------------------
SHORT-TERM BOND (3/1/1994) +6.2% $12,585
Average Short-Term U.S.
Government Fund +5.2 12,148
Lehman 1-5 Year Government/
Corporate Index +6.3 12,630
- --------------------------------------------------------------------
INTERMEDIATE-TERM BOND (3/1/1994) +7.5% $13,193
Average Intermediate-Term
U.S. Government Fund +5.8 12,433
Lehman 5-10 Year Government/
Corporate Index +7.6 13,246
- --------------------------------------------------------------------
LONG-TERM BOND (3/1/1994) +9.4% $14,118
Average General U.S.
Government Fund +5.8 12,419
Lehman Long Government/
Corporate Index +9.6 14,210
- --------------------------------------------------------------------
</TABLE>
*Minimum investment $10 million.
The "Vanguard advantage" amassed by each of these fledgling Portfolios
over its competitive group already amounts to significant sums. Based on
initial $10,000 investments, the performance advantage ranges from $350 for the
Institutional Shares of our Total Bond Market Portfolio (after only 21/4 years
of existence) to $1,700 for our Long-Term Bond Portfolio, which has been
operating for less than four years. The Short-Term, Intermediate-Term, and
Long-Term Bond Portfolios all operate at the same 0.20% annual expense ratio
that applies to the Investor Shares of our Total Bond Market Portfolio. The
Institutional Shares of Total Bond Market Portfolio incur a rock-bottom expense
ratio of 0.10%, or just $1 annually per $1,000 of assets.
Over their brief lifetimes, these Portfolios have come remarkably close
to their Index benchmarks. Indeed, the Institutional Shares have matched the
return of the Lehman Aggregate Bond Index. The tiny gaps between returns on the
other Portfolios and their Indexes are entirely the result of the operating
costs that the Portfolios must incur.
4
<PAGE> 7
IN SUMMARY
The bond market provided excellent returns in 1997, especially after
considering the extremely low rate of inflation (consumer prices rose just 1.7%
during the year). Investors in U.S. stocks, meanwhile, experienced returns that
were nothing short of remarkable. But a sensible investor understands that the
financial markets are not a one-way street. Risk is an inescapable element of
investing, even when the markets are providing generous rewards.
However, the greatest risk is failure to invest in the first place. We
believe that a sound approach to the risks of the financial markets is to hold
a balanced portfolio that includes not only bond funds, but also stock funds
and money market funds. Investors who maintain such portfolios--allocated in
accordance with their time horizon, financial situation, and tolerance for
market volatility--should be well prepared to "stay the course" toward their
investment objectives, no matter what the future has in store.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
January 19, 1998
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
TOTAL PER SHARE 12 MONTHS SEC
NET ASSETS ------------------- ------------------ CURRENT
(MILLIONS) AVERAGE AVERAGE DEC. 31, DEC. 31, INCOME TOTAL ANNUALIZED
PORTFOLIO DEC. 31, 1997 MATURITY QUALITY 1996 1997 DIVIDENDS RETURN YIELD
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Bond Market-
Investor Shares $5,129 8.8 years Aaa $ 9.84 $10.09 $0.645 + 9.4% 6.22%
Institutional Shares 1,628 8.8 years Aaa 9.84 10.09 0.655 + 9.6 6.32
Short-Term Bond 446 2.6 years Aaa 9.92 10.00 0.597 + 7.0 5.77
Intermediate-
Term Bond 687 7.0 years Aa1 9.96 10.20 0.661 + 9.4 6.09
Long-Term Bond 88 21.7 years Aa1 10.08 10.78 0.678 +14.3 6.21
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
THE MARKETS IN PERSPECTIVE
Year Ended December 31, 1997
U.S. EQUITY MARKETS
Despite some year-end rockiness, 1997 again provided U.S. equity investors with
exceptional returns, as illustrated by the 33.4% advance of the S&P 500 Index.
Investors' mettle was tested several times, however, and most severely by the
upheavals that devastated a number of Asian markets in the fourth quarter.
Beginning in late October, the U.S. market grew increasingly volatile, a direct
result of investors' struggle to understand the nature and implications of
Asia's economic turmoil. By the end of the year, it appeared that a new
consensus was emerging, grounded in two basic beliefs: (1) that the collapse of
currencies in the Far East would help keep inflation tame in the United States
and (2) that slower growth in Asia would most likely lead to weaker corporate
profits over the next several years.
As the dust continued to settle, many investors sought havens
traditional in periods of high uncertainty: large-capitalization issues and
particularly the "defensive" sectors of the stock market, such as utilities,
consumer staples, and health care. The closing weeks of 1997 saw a broad
advance in these "safe" sectors, with utilities gaining 20.1% and consumer
staples 10.4% in the last quarter. By contrast, more economically sensitive
sectors were thrashed in the wake of the Asian crisis, with technology issues
falling 12.3% and producer durables down 9.0% over the three months. After
posting strong results in the third quarter, small-company stocks also suffered
in the fourth, falling 3.3%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1997
-------------------------------------
1 YEAR 3 YEARS 5 YEARS
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 33.4% 31.2% 20.3%
Russell 2000 Index 22.4 22.3 16.4
MSCI EAFE Index 2.1 6.6 11.7
- ----------------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 9.7% 10.4% 7.5%
Lehman 10-Year Municipal Bond Index 9.2 10.2 7.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.3 5.4 4.7
- ----------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.7% 2.5% 2.6%
- ----------------------------------------------------------------------------------
</TABLE>
The year-end excitement did not detract from 1997's overall record as a
stellar year for U.S. stock investors. The best-performing sector was financial
services, which rose 46.9%. This sector benefited from a number of factors,
including the strength of the economy, the vibrant financial markets, and
merger activity. By contrast, the commodity-oriented materials & processing
sector posted a gain of "only" 12.3%--in itself more than a percentage point
above the long-term average return from common stocks. Small-cap stocks also
fared well overall, as illustrated by the 22.4% increase of the Russell 2000
Index. Small-company technology issues were the most glaring exception,
mustering a gain in 1997 of just 1.1%.
U.S. FIXED-INCOME MARKETS
In a year characterized by exceptionally low inflation, interest rates fell,
providing investors with very attractive total returns. The Lehman Aggregate
Bond Index, for example,
6
<PAGE> 9
posted a total return of 9.7% for 1997, comprising 7.2% in income return and
2.5% in capital appreciation. The decline in rates can be attributed largely to
better-than-expected reports about the inflation rate. Early in the year,
economists were projecting a 2.9% increase in the Consumer Price Index (CPI)
during 1997. In March, the Federal Reserve grew sufficiently concerned to boost
interest rates by 0.25% in an effort to temper economic growth and thereby ward
off inflation. By year-end, however, the worries seemed to have been
unnecessary, as the actual CPI increase was a mere 1.7%--its smallest increase
since 1986.
The bond market gradually gathered strength during the year as investors
grew more confident that four seemingly strange bedfellows--strong economic
growth, reasonable inflation, low unemployment, and stable wage growth--would
continue to coexist peacefully. In the fourth quarter, the market also was
bolstered by the "flight to quality" among investors concerned about Asia's
problems. Overall, the longest-maturity issues benefited most from the decline
in interest rates. The yield on the 30-year U.S. Treasury bond closed the year
at 5.92%, compared with 6.64% on December 31, 1996. Falling rates flattened the
yield curve considerably: Only 0.57% separated the yield on Treasury bills from
that on the 30-year issue, down from a spread of 1.47% at the end of 1996.
The best-performing sector in 1997 was long-term Treasuries, as
illustrated by the 15.1% return of the Lehman Long U.S. Treasury Index.
Investors in lower-quality securities also fared well, with the Lehman High
Yield Bond Index generating a 12.8% gain. The strength of the economy, together
with the lack of inflationary pressure, created an ideal environment for junk
bonds.
INTERNATIONAL EQUITY MARKETS
Arguably, investors' greatest disappointments were in international
markets--and, of course, Asian markets in particular. During the year, the
Morgan Stanley Capital International (MSCI) Pacific Index declined by 25.7% in
U.S. dollar terms; the Index fell 20.7% in the fourth quarter alone. Among
individual markets, the fiscal year saw sharp declines (in U.S. dollar terms)
in Japan, down 23.6% (including a 19.7% drop in the fourth quarter); Thailand,
down 76.8%; and Malaysia, down 68.1%. The general slump in Asian markets began
in midsummer with currency devaluations by a number of countries.
By contrast, the European markets continued to provide U.S. investors
with solid returns, although they, too, stumbled in late October and
subsequently recovered. The MSCI Europe Index posted a gain of 23.7% for the 12
months. The robust character of the European markets reflected strong corporate
earnings and optimism that the European Monetary Union would provide a solid
framework for future fiscal responsibility and economic growth.
7
<PAGE> 10
PORTFOLIO PROFILE
Total Bond Market Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
December 31, 1997, compared where appropriate to its unmanaged target index.
Key elements of this Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -----------------------------------------------------------
<S> <C>
Number of Issues 535
Yield--Investor Shares 6.2%
Yield--Institutional Shares 6.3%
Yield to Maturity 6.3%
Average Coupon 7.4%
Average Maturity 8.8 years
Average Quality Aaa
Average Duration 4.4 years
Expense Ratio--Investor Shares 0.20%
Expense Ratio--Institutional Shares 0.10%
Cash Reserves 2.1%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------
TOTAL BOND MARKET
PORTFOLIO LEHMAN
INVESTOR SHARES INDEX*
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 0.99 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------------------------
<S> <C>
Under 1 Year 2.8%
1-5 Years 42.6
5-10 Years 35.4
10-20 Years 4.4
20-30 Years 13.8
Over 30 Years 1.0
- -----------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- ------------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- --------------------------------------------------------
<S> <C>
Aaa 73.3%
Aa 4.1
A 12.9
Baa 9.6
Ba 0.1
B 0.0
Not Rated 0.0
- --------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- --------------------------------------------------------
<S> <C>
Asset-Backed 3.4%
Finance 12.5
Foreign 3.1
Industrial 8.9
Mortgage 31.0
U.S. Government and Agency 1.0
U.S. Treasury 37.6
Utilities 2.5
- --------------------------------------------------------
Total 100.0%
</TABLE>
8
<PAGE> 11
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by one percentage point, the share price of a portfolio with an
average duration of five years would decline by about 5%. If rates decrease by
a percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a portfolio's share price will fluctuate in response
to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating
agencies. The agencies make their judgment after appraising an issuer's
ability to meet its obligations. Quality is graded on a scale, with Aaa or AAA
indicating the most creditworthy bond issuers and A-1 or MIG-1 indicating the
most creditworthy issuers of money market securities.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate bond
investment.
DISTRIBUTION BY CREDIT QUALITY. This breakdown of a portfolio's securities by
credit rating can help in gauging the risk that returns could be affected by
defaults or other credit problems.
DISTRIBUTION BY ISSUER. A breakdown of a portfolio's holdings by type of issuer
or type of instrument.
DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a portfolio's share
price will fluctuate in response to changes in interest rates.
EXPENSE RATIO. The percentage of a portfolio's average net assets used to pay
its annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes: average maturity (short, medium, or long) and average credit
quality (high, medium, or low).
NUMBER OF ISSUES. An indicator of diversification. The more separate issues a
portfolio holds, the less susceptible it is to a price decline stemming from
the problems of a particular issue.
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
YIELD. A snapshot of a portfolio's interest income. The yield, expressed as a
percentage of the portfolio's net asset value, is based on income earned over
the past 30 days and is annualized, or projected forward for the coming year.
YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a portfolio were held to their maturity dates.
9
<PAGE> 12
PORTFOLIO PROFILE
Short-Term Bond Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
December 31, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 132
Yield 5.8%
Yield to Maturity 5.8%
Average Coupon 7.2%
Average Maturity 2.6 years
Average Quality Aaa
Average Duration 2.3 years
Expense Ratio 0.20%
Cash Reserves 1.7%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ------------------------------------------------------------
SHORT-TERM BOND LEHMAN
PORTFOLIO INDEX*
- ------------------------------------------------------------
<S> <C> <C>
R-Squared 0.95 1.00
Beta 0.53 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- --------------------------------------------------------
<S> <C>
Under 1 Year 5.5%
1-3 Years 58.7
3-5 Years 35.1
Over 5 Years 0.7
- --------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- --------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- --------------------------------------------------------
<S> <C>
Aaa 76.3%
Aa 4.3
A 13.4
Baa 6.0
Ba 0.0
B 0.0
Not Rated 0.0
- --------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- --------------------------------------------------------
<S> <C>
Asset-Backed 4.4%
Finance 12.7
Foreign 2.2
Industrial 6.3
Mortgage 0.0
U.S. Government and Agency 0.4
U.S. Treasury 71.1
Utilities 2.9
- --------------------------------------------------------
Total 100.0%
</TABLE>
10
<PAGE> 13
PORTFOLIO PROFILE
Intermediate-Term Bond Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
December 31, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 150
Yield 6.1%
Yield to Maturity 6.1%
Average Coupon 7.6%
Average Maturity 7.0 years
Average Quality Aa1
Average Duration 5.3 years
Expense Ratio 0.20%
Cash Reserves 3.9%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
INTERMEDIATE-TERM LEHMAN
BOND PORTFOLIO INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.99 1.00
Beta 1.23 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 2.6%
1-5 Years 7.3
5-10 Years 86.9
10-20 Years 2.5
20-30 Years 0.4
Over 30 Years 0.3
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Aaa 61.4%
Aa 2.2
A 18.0
Baa 18.4
Ba 0.0
B 0.0
Not Rated 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Asset-Backed 1.2%
Finance 14.3
Foreign 5.1
Industrial 16.1
Mortgage 0.0
U.S. Government and Agency 2.6
U.S. Treasury 56.1
Utilities 4.6
- -------------------------------------------------------
Total 100.0%
</TABLE>
11
<PAGE> 14
PORTFOLIO PROFILE
Long-Term Bond Portfolio
This Profile provides a snapshot of the Portfolio's characteristics as of
December 31, 1997, compared where appropriate to an unmanaged index. Key
elements of this Profile are defined on page 9.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ----------------------------------------------------------
<S> <C>
Number of Issues 106
Yield 6.2%
Yield to Maturity 6.4%
Average Coupon 8.0%
Average Maturity 21.7 years
Average Quality Aa1
Average Duration 10.1 years
Expense Ratio 0.20%
Cash Reserves 2.3%
</TABLE>
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ----------------------------------------------------------
LONG-TERM BOND LEHMAN
PORTFOLIO INDEX*
- ----------------------------------------------------------
<S> <C> <C>
R-Squared 0.96 1.00
Beta 2.00 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Under 1 Year 0.5%
1-5 Years 1.3
5-10 Years 3.8
10-20 Years 18.9
20-30 Years 72.0
Over 30 Years 3.5
- -------------------------------------------------------
Total 100.0%
</TABLE>
INVESTMENT FOCUS
- -------------------------------------------------------
[GRAPHIC]
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Aaa 62.4%
Aa 6.1
A 16.8
Baa 14.7
Ba 0.0
B 0.0
Not Rated 0.0
- -------------------------------------------------------
Total 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF PORTFOLIO)
- -------------------------------------------------------
<S> <C>
Asset-Backed 0.0%
Finance 9.9
Foreign 3.4
Industrial 16.9
Mortgage 0.0
U.S. Government and Agency 0.0
U.S. Treasury 61.3
Utilities 8.5
- -------------------------------------------------------
Total 100.0%
</TABLE>
12
<PAGE> 15
PERFORMANCE SUMMARY
Total Bond Market Portfolio
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely, so an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: DECEMBER 11, 1986-DECEMBER 31, 1997
- --------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
1986 -0.6% 0.4% -0.2% -0.2%
1987 -7.4 8.5 1.1 2.8
1988 -1.6 9.0 7.4 7.9
1989 4.3 9.3 13.6 14.5
1990 -0.3 8.9 8.6 9.0
1991 6.4 8.8 15.2 16.0
1992 -0.2 7.3 7.1 7.4
1993 3.0 6.7 9.7 9.8
1994 -8.8 6.1 -2.7 -2.9
1995 10.6 7.6 18.2 18.5
1996 -3.0 6.6 3.6 3.6
1997 2.5 6.9 9.4 9.7
- --------------------------------------------------------------
</TABLE>
*Lehman Aggregate Bond Index.
See Financial Highlights table on page 44 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: DECEMBER 31, 1987-DECEMBER 31, 1997
- -------------------------------------------------------------------------------
TOTAL BOND AVERAGE INTERMEDIATE LEHMAN AGGREGATE
MARKET PORTFOLIO U.S. GOVERNMENT FUND BOND INDEX
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1987 12 10000 10000 10000
1988 03 10348 10339 10376
1988 06 10461 10440 10498
1988 09 10657 10613 10707
1988 12 10727 10673 10789
1989 03 10821 10783 10912
1989 06 11642 11446 11780
1989 09 11757 11504 11911
1989 12 12184 11926 12357
1990 03 12051 11885 12258
1990 06 12479 12219 12705
1990 09 12573 12329 12812
1990 12 13233 12941 13464
1991 03 13577 13176 13841
1991 06 13794 13373 14064
1991 09 14548 14014 14860
1991 12 15246 14803 15618
1992 03 15050 14494 15418
1992 06 15638 15083 16039
1992 09 16295 15688 16725
1992 12 16329 15702 16774
1993 03 17008 16239 17467
1993 06 17466 16608 17928
1993 09 17939 16945 18395
1993 12 17905 16999 18409
1994 03 17419 16512 17881
1994 06 17242 16297 17695
1994 09 17329 16309 17802
1994 12 17424 16366 17872
1995 03 18261 17047 18774
1995 06 19356 17924 19916
1995 09 19718 18159 20305
1995 12 20585 18932 21173
1996 03 20191 18550 20798
1996 06 20311 18598 20916
1996 09 20673 18843 21300
1996 12 21315 19440 21941
1997 03 21182 19268 21819
1997 06 21935 19877 22620
1997 09 22680 20383 23368
1997 12 23335 21011 24058
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
--------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Bond Market Portfolio* 9.42% 7.39% 8.84% $23,335
Average Intermediate U.S. Government Fund 8.08 6.00 7.71 21,011
Lehman Aggregate Bond Index 9.65 7.48 9.18 24,058
- ------------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
10 YEARS
INCEPTION ---------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Bond Market Portfolio* 12/11/1986 9.42% 7.39% 1.17% 7.67% 8.84%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
13
<PAGE> 16
PERFORMANCE SUMMARY
Total Bond Market Portfolio-Institutional Shares
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely, so an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: SEPTEMBER 18, 1995-DECEMBER 31, 1997
- ---------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO-
INSTITUTIONAL SHARES LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
1995 2.7% 1.8% 4.5% 4.4%
1996 -3.0 6.7 3.7 3.6
1997 2.5 7.1 9.6 9.7
- ---------------------------------------------------------------
</TABLE>
*Lehman Aggregate Bond Index.
See Financial Highlights table on page 44 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: SEPTEMBER 18, 1995-DECEMBER 31, 1997
- -------------------------------------------------------------------------
VBIF - TOTAL AVERAGE INTERMEDIATE LEHMAN AGGREGATE
BND MKT INST U.S. GOVERNMENT FUND BOND INDEX
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9/18/95 10000000 10000000 10000000
1995 09 10009145 10009145 10009145
1995 12 10452849 10383487 10435534
1996 03 10256352 10205324 10250365
1996 06 10320662 10238831 10310151
1996 09 10507702 10386490 10499593
1996 12 10837942 10672248 10815527
1997 03 10773716 10616721 10755184
1997 06 11160477 10943263 11150428
1997 09 11542845 11235066 11519103
1997 12 11873019 11523235 11859226
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
-------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Bond Market Portfolio-
Institutional Shares 9.55% 7.80% $11,873,019
Average Intermediate U.S. Government Fund 8.08 6.40 11,523,235
Lehman Aggregate Bond Index 9.65 7.75 11,859,226
- -------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Bond Market Portfolio-Institutional Shares 9/18/1995 9.55% 0.97% 6.83% 7.80%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 17
PERFORMANCE SUMMARY
Short-Term Bond Portfolio
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate, so an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MARCH 1, 1994-DECEMBER 31, 1997
- ------------------------------------------------------------
SHORT-TERM BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -5.0% 4.6% -0.4% -0.2%
1995 6.0 6.9 12.9 12.9
1996 -1.5 6.0 4.5 4.7
1997 0.8 6.2 7.0 7.1
- ------------------------------------------------------------
</TABLE>
*Lehman 1-5 Year Government/Corporate Index.
See Financial Highlights table on page 45 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
CUMULATIVE PERFORMANCE: MARCH 1, 1994-DECEMBER 31, 1997
- --------------------------------------------------------------------------
VBIF - SHORT-TERM AVERAGE SHORT LEHMAN 1-5 YEAR
BOND U.S. GOVERNMENT FUND GOV'T./CORP. INDEX
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/1/94 10000 10000 10000
1994 03 9933 9933 9933
1994 06 9904 9846 9903
1994 09 9985 9916 9994
1994 12 9962 9887 9977
1995 03 10356 10221 10363
1995 06 10761 10564 10779
1995 09 10932 10720 10944
1995 12 11244 11000 11262
1996 03 11230 10987 11253
1996 06 11328 11040 11350
1996 09 11510 11210 11547
1996 12 11754 11423 11788
1997 03 11797 11487 11828
1997 06 12086 11726 12125
1997 09 12356 11957 12404
1997 12 12580 12148 12630
- -------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term Bond Portfolio* 7.02% 6.17% $12,580
Average Short U.S. Government Fund 6.35 5.20 12,148
Lehman 1-5 Year Government/
Corporate Index 7.13 6.28 12,630
- --------------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term Bond Portfolio* 3/1/1994 7.02% 0.01% 6.16% 6.17%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
15
<PAGE> 18
PERFORMANCE SUMMARY
Intermediate-Term Bond Portfolio
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely, so an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MARCH 1, 1994-DECEMBER 31, 1997
- -----------------------------------------------------------
INTERMEDIATE-TERM BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -8.2% 5.3% -2.9% -2.9%
1995 13.3 7.8 21.1 21.4
1996 -3.9 6.5 2.6 2.7
1997 2.4 7.0 9.4 9.4
- -----------------------------------------------------------
</TABLE>
*Lehman 5-10 Year Government/Corporate Index.
See Financial Highlights table on page 45 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: MARCH 1, 1994-DECEMBER 31, 1997
- ------------------------------------------------------------------------------
VBIF - INTER-TERM AVERAGE INTERMEDIATE LEHMAN 5-10 YEAR
BOND U.S. GOVERNMENT FUND GOV'T./CORP. INDEX
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/1/94 10000 10000 10000
1994 03 9790 9790 9790
1994 06 9662 9665 9667
1994 09 9703 9701 9723
1994 12 9711 9685 9726
1995 03 10239 10107 10276
1995 06 10993 10625 11043
1995 09 11195 10799 11261
1995 12 11754 11204 11810
1996 03 11457 10998 11516
1996 06 11468 11024 11531
1996 09 11674 11206 11750
1996 12 12051 11504 12128
1997 03 11921 11424 11993
1997 06 12373 11783 12461
1997 09 12819 12122 12911
1997 12 13184 12433 13246
- ------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
--------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term Bond Portfolio* 9.39% 7.47% $13,184
Average Intermediate U.S. Government Fund 8.08 5.84 12,433
Lehman 5-10 Year Government/
Corporate Index 9.43 7.60 13,246
- -------------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Intermediate-Term Bond Portfolio* 3/1/1994 9.39% 0.60% 6.87% 7.47%
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
16
<PAGE> 19
PERFORMANCE SUMMARY
Long-Term Bond Portfolio
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Portfolio. Note, too,
that both share price and return can fluctuate widely, so an investment in the
Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: MARCH 1, 1994-DECEMBER 31, 1997
- ----------------------------------------------------------
LONG-TERM BOND PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
1994 -10.4% 5.9% -4.5% -4.6%
1995 21.0 8.7 29.7 30.0
1996 -6.8 6.5 -0.3 0.1
1997 6.9 7.4 14.3 14.5
- ----------------------------------------------------------
</TABLE>
*Lehman Long Government/Corporate Index.
See Financial Highlights table on page 46 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE: MARCH 1, 1994-DECEMBER 31, 1997
- -----------------------------------------------------------------------------------
VBIF - LONG-TERM AVERAGE GENERAL LEHMAN LONG GOV'T./
BOND U.S. GOVERNMENT FUND CORPORATE INDEX
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
3/1/94 10000 10000 10000
1994 03 9706 9706 9706
1994 06 9437 9532 9433
1994 09 9388 9535 9399
1994 12 9543 9560 9558
1995 03 10155 9992 10189
1995 06 11196 10569 11252
1995 09 11477 10755 11542
1995 12 12373 11217 12420
1996 03 11608 10920 11669
1996 06 11595 10937 11677
1996 09 11784 11104 11877
1996 12 12334 11410 12438
1997 03 11984 11300 12090
1997 06 12620 11704 12750
1997 09 13331 12071 13459
1997 12 14093 12419 14210
- -----------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $10,000 INVESTMENT
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Long-Term Bond Portfolio* 14.25% 9.36% $14,093
Average General U.S. Government Fund 8.84 5.81 12,419
Lehman Long Government/
Corporate Index 14.52 9.59 14,210
- --------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ---------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-Term Bond Portfolio* 3/1/1994 14.25% 2.06% 7.30% 9.36%
- --------------------------------------------------------------------------------------------------------
</TABLE>
*Performance figures are adjusted for the $10 annual account maintenance fee.
17
<PAGE> 20
FINANCIAL STATEMENTS
December 31, 1997
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's holdings, including
each security's market value on the last day of the reporting period.
Securities are grouped and subtotaled by bond type (U.S. government and agency
issues, corporate bonds, foreign bonds, etc.); corporate bonds are further
classified by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Portfolio's
Net Assets. Finally, Net Assets are divided by the outstanding shares of the
Portfolio to arrive at its share price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets of each Portfolio, you will
find a table displaying the composition of the Portfolio's net assets.
Undistributed Net Investment Income is usually zero because the Portfolio
distributes its net income to shareholders as a dividend each day. Any realized
gains must be distributed annually, so the bulk of net assets consists of Paid
in Capital (money invested by shareholders). The balance shown for Accumulated
Net Realized Gains usually approximates the amount available to distribute to
shareholders as capital gains as of the statement date, but may differ because
certain investments or transactions may be treated differently for financial
statement and tax purposes. Any Accumulated Net Realized Losses, and any
cumulative excess of distributions over net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the value of the Portfolio's investments and their cost, and reflects
the gains (losses) that would be realized if the Portfolio were to sell all of
its investments at their statement-date values.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S GOVERNMENT AND AGENCY OBLIGATIONS (68.2%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (36.9%)
U.S. Treasury Bonds 7.25% 5/15/2016-8/15/2022 $ 5,005 $ 5,771
U.S. Treasury Bonds 7.50% 11/15/2016 3,235 3,775
U.S. Treasury Bonds 7.625% 2/15/2007 670 712
U.S. Treasury Bonds 7.875% 11/15/2007-2/15/2021 15,095 18,525
U.S. Treasury Bonds 8.00% 11/15/2021 115,650 144,244
U.S. Treasury Bonds 8.125% 8/15/2019-8/15/2021 298,020 374,019
U.S. Treasury Bonds 8.50% 2/15/2020 38,670 50,271
U.S. Treasury Bonds 8.75% 5/15/2017-8/15/2020 77,550 102,438
U.S. Treasury Bonds 8.875% 8/15/2017-2/15/2019 72,635 96,532
U.S. Treasury Bonds 9.125% 5/15/2009-5/15/2018 16,340 22,166
U.S. Treasury Bonds 9.25% 2/15/2016 835 1,133
U.S. Treasury Bonds 9.375% 2/15/2006 110 135
U.S. Treasury Bonds 9.875% 11/15/2015 4,390 6,246
U.S. Treasury Bonds 10.00% 5/15/2010 2,000 2,485
U.S. Treasury Bonds 10.375% 11/15/2009-11/15/2012 131,370 169,941
U.S. Treasury Bonds 10.75% 2/15/2003-8/15/2005 42,270 54,956
U.S. Treasury Bonds 11.125% 8/15/2003 1,135 1,424
U.S. Treasury Bonds 11.25% 2/15/2015 200 313
U.S. Treasury Bonds 11.625% 11/15/2002-11/15/2004 13,650 17,072
U.S. Treasury Bonds 11.75% 2/15/2010-11/15/2014 1,085 1,588
U.S. Treasury Bonds 12.00% 8/15/2013 350 516
U.S. Treasury Bonds 12.375% 5/15/2004 100 135
U.S. Treasury Bonds 12.75% 11/15/2010 380 542
U.S. Treasury Bonds 13.375% 8/15/2001 2,600 3,246
U.S. Treasury Bonds 14.00% 11/15/2011 3,420 5,312
U.S. Treasury Notes 5.375% 5/31/1998 1,800 1,799
U.S. Treasury Notes 5.625% 11/30/2000-2/28/2001 45,800 45,717
U.S. Treasury Notes 5.75% 10/31/2002 22,950 22,975
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes 5.875% 8/15/1998-7/31/1999 $ 74,510 $ 74,721
U.S. Treasury Notes 6.00% 8/15/1999 21,750 21,857
U.S. Treasury Notes 6.25% 4/30/2001-2/28/2002 161,400 164,297
U.S. Treasury Notes 6.375% 1/15/1999-3/31/2001 151,350 153,045
U.S. Treasury Notes 6.50% 4/30/1999-8/15/2005 31,920 32,425
U.S. Treasury Notes 6.625% 6/30/2001-4/30/2002 120,845 124,843
U.S. Treasury Notes 6.75% 5/31/1999-4/30/2000 83,925 85,325
U.S. Treasury Notes 6.875% 7/31/1999-5/15/2006 243,855 259,065
U.S. Treasury Notes 7.00% 4/15/1999-7/15/2006 26,800 27,305
U.S. Treasury Notes 7.25% 8/15/2004 375 405
U.S. Treasury Notes 7.50% 10/31/1999-2/15/2005 53,180 55,869
U.S. Treasury Notes 7.75% 11/30/1999-2/15/2001 132,285 137,634
U.S. Treasury Notes 7.875% 1/15/1998-8/15/2001 90,160 94,047
U.S. Treasury Notes 8.00% 8/15/1999 38,925 40,302
U.S. Treasury Notes 8.50% 2/15/2000 2,450 2,586
U.S. Treasury Notes 8.75% 8/15/2000 46,300 49,697
U.S. Treasury Notes 8.875% 2/15/1999 15,000 15,518
U.S. Treasury Notes 9.25% 8/15/1998 1,000 1,022
U.S. Treasury Strip 0.00% 8/15/2001 1,000 815
------------
2,494,766
------------
AGENCY BONDS AND NOTES (1.0%)
Federal Home Loan Bank 5.90% 6/9/2000 1,000 1,002
Federal Home Loan Bank 8.60% 1/25/2000 110 116
Federal Home Loan Mortgage Corp. 6.09% 3/1/2000 285 285
Federal Home Loan Mortgage Corp. 6.155% 9/15/2000 1,000 1,009
Federal Home Loan Mortgage Corp. 6.785% 3/1/2006 9,525 9,577
Federal Home Loan Mortgage Corp. 7.09% 6/1/2005 4,400 4,469
Federal National Mortgage Assn. 4.95% 9/30/1998 2,350 2,339
Federal National Mortgage Assn. 5.35% 8/12/1998 12,350 12,326
Federal National Mortgage Assn. 5.80% 12/10/2003 2,300 2,285
Federal National Mortgage Assn. 5.90% 7/6/2000 3,000 3,006
Federal National Mortgage Assn. 6.20% 7/10/2003 625 620
Federal National Mortgage Assn. 6.25% 8/12/2003 8,200 8,150
Federal National Mortgage Assn. 6.35% 8/10/1999 100 101
Federal National Mortgage Assn. 6.40% 3/25/2003 5,000 5,001
Federal National Mortgage Assn. 7.55% 6/10/2004 8,900 9,071
Federal National Mortgage Assn. 8.10% 8/12/2019 110 134
Federal National Mortgage Assn. 8.20% 3/10/1998 225 226
Federal National Mortgage Assn. 8.25% 12/18/2000 100 107
Federal National Mortgage Assn. 8.35% 11/10/1999 270 282
Federal National Mortgage Assn. 8.45% 7/12/1999 110 114
Federal National Mortgage Assn. 8.70% 6/10/1999 110 114
Federal National Mortgage Assn. 9.55% 3/10/1999 225 235
Government Trust Certificate 9.625% 5/15/2002 403 429
Private Export Funding Corp. 8.40% 7/31/2001 225 243
Resolution Funding Corp. 8.125% 10/15/2019 550 670
Resolution Funding Corp. 8.625% 1/15/2030 110 149
Resolution Funding Corp. 8.875% 7/15/2020 280 368
Small Business Administration Variable Rate
Interest-Only Custodial Receipts 2.719% 6/25/2000 19,251 1,760
Tennessee Valley Authority 8.375% 10/1/1999 610 636
-----------
64,824
-----------
MORTGAGE-BACKED SECURITIES (30.3%)
Bear Stearns Collateralized Mortgage Obligation
Series 1988-4B (Secured by Federal Home
Loan Mortgage Corp.) 9.20% 11/1/2018 (1) 83 84
Federal Home Loan Mortgage Corp. 5.50% 12/1/1998-6/1/2011 (1) 5,618 5,524
Federal Home Loan Mortgage Corp. 6.00% 6/1/1998-4/1/2026 (1) 69,347 68,336
Federal Home Loan Mortgage Corp. 6.50% 2/1/1998-11/1/2027 (1) 165,139 164,829
Federal Home Loan Mortgage Corp. 7.00% 1/1/1998-12/1/2027 (1) 216,556 219,445
Federal Home Loan Mortgage Corp. 7.50% 3/1/1998-12/1/2027 (1) 203,253 208,538
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal Home Loan Mortgage Corp. 8.00% 5/1/2002-12/1/2027 (1) $112,629 $ 116,745
Federal Home Loan Mortgage Corp. 8.50% 9/1/2001-8/1/2027 (1) 34,068 35,607
Federal Home Loan Mortgage Corp. 9.00% 8/1/2001-11/1/2027 (1) 20,183 21,523
Federal Home Loan Mortgage Corp. 9.50% 4/1/2016-6/1/2025 (1) 10,055 10,852
Federal Home Loan Mortgage Corp. 10.00% 7/1/2000-4/1/2025 (1) 1,790 1,963
Federal Home Loan Mortgage Corp. 10.50% 9/1/2000-12/1/2015 (1) 470 498
Federal Home Loan Mortgage Corp. 11.25% 8/1/2014 (1) 29 32
Federal Housing Administration 7.43% 10/1/2020 (1) 527 537
Federal National Mortgage Assn. 5.50% 1/1/2001-6/1/2009 (1) 2,092 2,044
Federal National Mortgage Assn. 6.00% 10/1/2000-2/1/2027 (1) 36,792 36,209
Federal National Mortgage Assn. 6.50% 2/1/2000-11/1/2027 (1) 109,186 108,726
Federal National Mortgage Assn. 7.00% 9/1/1999-12/1/2027 (1) 198,214 200,426
Federal National Mortgage Assn. 7.50% 1/1/2000-8/1/2027 (1) 129,148 132,530
Federal National Mortgage Assn. 7.75% 10/1/2002 (1) 811 821
Federal National Mortgage Assn. 8.00% 9/1/1998-9/1/2027 (1) 78,889 81,852
Federal National Mortgage Assn. 8.50% 12/1/1998-7/1/2027 (1) 31,033 32,503
Federal National Mortgage Assn. 9.00% 6/1/1998-1/1/2027 (1) 16,801 17,877
Federal National Mortgage Assn. 9.50% 10/1/2001-2/1/2025 (1) 7,163 7,718
Federal National Mortgage Assn. 10.00% 8/1/2005-6/1/2022 (1) 2,678 2,906
Federal National Mortgage Assn. 10.50% 11/1/2000-8/1/2020 (1) 776 857
Government National Mortgage Assn. 6.00% 3/1/2009-5/15/2026 (1) 10,636 10,386
Government National Mortgage Assn. 6.50% 9/15/2008-6/15/2026 (1) 50,643 50,459
Government National Mortgage Assn. 7.00% 6/15/2008-12/15/2027 (1) 121,237 122,714
Government National Mortgage Assn. 7.50% 1/15/2008-11/15/2027 (1) 136,516 140,293
Government National Mortgage Assn. 8.00% 11/15/2001-9/15/2027 (1) 119,449 124,342
Government National Mortgage Assn. 8.50% 5/15/2010-9/15/2027 (1) 44,465 46,975
Government National Mortgage Assn. 9.00% 8/15/2001-6/15/2027 (1) 38,063 41,069
Government National Mortgage Assn. 9.50% 1/1/2004-9/15/2025 (1) 22,022 23,977
Government National Mortgage Assn. 10.00% 3/15/2000-8/15/2025 (1) 5,174 5,732
Government National Mortgage Assn. 10.50% 11/15/2010-1/15/2021 (1) 3,370 3,779
Government National Mortgage Assn. 11.50% 3/15/2010-11/15/2017 (1) 342 393
Resolution Trust Corp. Collateralized Mortgage Obligations 10.35% 8/25/2021 (1) 1,138 1,192
------------
2,050,293
------------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $4,447,953) 4,609,883
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (26.6%)
- --------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (3.3%)
American Express Credit Account Master Trust 6.40% 9/15/2002 (1) 20,000 20,303
American Express Credit Europe 5.375% 9/15/2000 (1) 4,580 4,501
California Infrastructure & Econ. Dev. Bank SP Trust PG&E 6.16% 12/14/2000 (1) 7,875 7,892
California Infrastructure & Econ. Dev. Bank SP Trust PG&E 6.42% 3/25/2005 (1) 11,325 11,431
Discover Card Master Trust 5.40% 11/16/2001 (1) 27,450 27,330
First Chicago Master Trust 6.25% 8/15/1999 (1) 900 898
First Deposit Master Trust 5.75% 6/15/2001 (1) 10,320 10,324
First Deposit Master Trust 6.05% 8/15/2002 (1) 33,600 33,658
MBNA Master Credit Card Trust 5.40% 3/15/1999 (1) 5,000 4,979
MBNA Master Credit Card Trust 6.05% 11/15/2002 (1) 4,250 4,261
MBNA Master Credit Card Trust 6.20% 1/29/1998 (1) 950 948
Sears Credit Card Master Trust 6.05% 2/15/2004 (1) 20,000 19,968
Sears Credit Card Master Trust 6.25% 1/15/2003 (1) 20,000 20,071
Sears Credit Card Master Trust 7.00% 1/15/2004 (1) 3,000 3,054
Sears Credit Card Master Trust 7.25% 7/16/2001 (1) 1,475 1,477
Sears Credit Card Master Trust 8.10% 6/15/2004 (1) 1,900 1,980
Standard Credit Card Master Trust 6.75% 6/7/1998 (1) 20,000 20,076
Standard Credit Card Master Trust 6.80% 4/7/1999 (1) 15,850 16,027
Standard Credit Card Master Trust 7.85% 2/7/2002 (1) 7,750 8,018
Standard Credit Card Master Trust 7.875% 11/7/1998 (1) 3,600 3,655
Standard Credit Card Master Trust 8.875% 7/7/1998 (1) 2,085 2,117
-------------
222,968
-------------
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCE (12.2%)
American Express Credit Corp. 6.50% 8/1/2000 $ 2,200 $ 2,222
American Express Credit Corp. 8.50% 6/15/1999 2,325 2,407
American General Finance Corp. 5.875% 7/1/2000 3,770 3,741
American General Finance Corp. 7.45% 7/1/2002 1,575 1,640
American General Finance Corp. 8.00% 2/15/2000 12,100 12,523
American General Finance Corp. 8.50% 8/15/1998 1,450 1,472
Associates Corp. 6.25% 3/15/1999 7,500 7,527
Associates Corp. 6.375% 8/15/2000 30,000 30,182
Associates Corp. 6.50% 10/15/2002 11,975 12,093
Associates Corp. 6.625% 5/15/2001 3,300 3,343
Associates Corp. 6.625% 6/15/2005 1,000 1,009
Associates Corp. 7.50% 5/15/1999 3,700 3,774
Associates Corp. 7.50% 4/15/2002 5,800 6,068
Associates Corp. 9.125% 4/1/2000 1,000 1,062
Avalon Properties Inc. 6.875% 12/15/2007 14,050 14,079
Bank of New York Capital I 7.97% 12/31/2026 3,225 3,433
BankAmerica Capital II 8.00% 12/15/2026 3,400 3,652
BankAmerica Corp. 6.20% 2/15/2006 600 589
BankAmerica Corp. 7.50% 10/15/2002 400 420
BankAmerica Corp. 7.625% 6/15/2004 1,050 1,117
BankAmerica Corp. 9.625% 2/13/2001 1,100 1,206
BankAmerica Corp. 10.00% 2/1/2003 4,900 5,678
Barnett Banks, Inc. 8.50% 1/15/2007 5,000 5,658
Bear Stearns Co., Inc. 6.50% 6/15/2000 4,225 4,247
Bear Stearns Co., Inc. 6.625% 1/15/2004 3,150 3,158
Bear Stearns Co., Inc. 6.70% 8/1/2003 1,300 1,311
BT Capital Trust B 7.90% 1/15/2027 1,100 1,148
CIT Group Holdings 6.625% 6/15/2005 7,900 7,975
Camden Property Trust 7.00% 11/15/2006 4,250 4,307
Chase Capital I 7.67% 12/1/2026 3,100 3,208
Chase Manhattan Corp. 8.125% 6/15/2002 1,410 1,508
Chase Manhattan Corp. 8.50% 2/15/2002 10,000 10,786
Chase Manhattan Corp. 10.375% 3/15/1999 3,000 3,149
Chemical Banking Corp. 7.25% 9/15/2002 2,565 2,662
Chrysler Finance Corp. 5.375% 10/15/1998 850 847
Chrysler Finance Corp. 5.625% 1/15/1999 2,725 2,716
Chrysler Finance Corp. 5.875% 2/7/2001 3,500 3,470
Chrysler Finance Corp. 6.375% 1/28/2000 2,954 2,967
Chrysler Finance Corp. 6.50% 6/15/1998 500 501
Chrysler Finance Corp. 6.625% 8/15/2000 3,050 3,083
Citicorp 8.625% 12/1/2002 2,000 2,193
Citicorp 9.50% 2/1/2002 1,000 1,113
Citicorp 9.75% 8/1/1999 4,000 4,216
Comerica, Inc. 7.125% 12/1/2013 5,000 5,090
Commercial Credit Corp. 5.90% 9/1/2003 550 538
CoreStates Capital Corp. 6.625% 3/15/2005 6,900 6,962
CoreStates Capital Corp. 9.375% 4/15/2003 1,250 1,419
Countrywide Funding 8.25% 7/15/2002 3,750 4,018
Dean Witter Discover & Co. 6.25% 3/15/2000 3,000 3,006
Dean Witter Discover & Co. 6.75% 8/15/2000 4,000 4,055
Dean Witter Discover & Co. 6.75% 10/15/2013 800 796
Dean Witter Discover & Co. 6.875% 3/1/2003 2,300 2,351
Equity Residential Properties 6.55% 11/15/2001 16,750 16,793
Fifth Third Bancorp 6.75% 7/15/2005 5,000 5,079
First Bank N.A. 7.55% 6/15/2004 10,000 10,592
First Bank System 7.625% 5/1/2005 5,000 5,331
First Chicago Corp. 6.375% 1/30/2009 5,000 4,903
First Chicago Corp. 6.875% 6/15/2003 5,000 5,130
First Chicago Corp. 7.625% 1/15/2003 2,400 2,536
First Chicago Corp. 9.25% 11/15/2001 1,225 1,351
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Chicago Corp. 10.25% 5/1/2001 $ 2,750 $ 3,079
First Fidelity Bancorp 9.625% 8/15/1999 700 738
First Interstate Bancorp 8.625% 4/1/1999 8,295 8,557
First Interstate Bancorp 10.875% 4/15/2001 2,750 3,127
First Union Corp. 8.00% 11/15/2002 100 107
First Union Corp. 8.125% 6/24/2002 2,900 3,103
Fleet Capital Trust II 7.92% 12/11/2026 3,790 3,988
Fleet Financial Group, Inc. 6.875% 3/1/2003 500 510
Fleet Financial Group, Inc. 7.125% 4/15/2006 5,700 5,904
Fleet Financial Group, Inc. 7.25% 9/1/1999 1,000 1,018
Fleet/Norstar Group 8.125% 7/1/2004 4,600 5,010
Ford Capital BV 9.00% 8/15/1998 6,300 6,417
Ford Capital BV 9.50% 7/1/2001 1,925 2,124
Ford Capital BV 9.50% 6/1/2010 825 1,026
Ford Capital BV 9.875% 5/15/2002 2,250 2,561
Ford Motor Credit Co. 6.75% 5/15/2005 1,385 1,412
Ford Motor Credit Co. 6.85% 8/15/2000 17,105 17,402
Ford Motor Credit Co. 7.25% 5/15/1999 500 508
Ford Motor Credit Co. 8.375% 1/15/2000 2,655 2,769
Ford Motor Credit Co. 9.00% 9/15/2001 5,000 5,464
General Electric Capital Corp. 8.30% 9/20/2009 275 318
General Motors Acceptance Corp. 6.625% 10/1/2002 5,800 5,888
General Motors Acceptance Corp. 7.00% 3/1/2000 3,300 3,358
General Motors Acceptance Corp. 7.125% 6/1/1999 2,950 2,995
General Motors Acceptance Corp. 8.00% 10/1/1999 3,000 3,096
General Motors Acceptance Corp. 8.40% 10/15/1999 4,190 4,354
General Motors Acceptance Corp. 8.50% 1/1/2003 5,500 6,009
General Motors Acceptance Corp. 8.625% 6/15/1999 4,250 4,403
General Motors Acceptance Corp. 9.00% 10/15/2002 10,000 11,121
General Motors Acceptance Corp. 9.375% 4/1/2000 3,515 3,751
General Motors Acceptance Corp. 9.625% 12/15/2001 1,000 1,117
Great Western Finance 6.375% 7/1/2000 16,100 16,159
Great Western Finance 8.625% 12/1/1998 2,275 2,328
Health & Retirement Property Trust 6.75% 12/18/2002 16,250 16,208
Household Finance Corp. 6.45% 2/1/2009 2,430 2,393
Household Finance Corp. 7.65% 5/15/2007 3,250 3,498
Household Finance Corp. 7.75% 6/1/1999 1,000 1,022
Household Finance Corp. 8.95% 9/15/1999 3,000 3,133
JDN Realty Corp. 6.80% 8/1/2004 10,500 10,523
Lehman Brothers Holdings 6.625% 11/15/2000 7,861 7,911
Lehman Brothers Holdings 6.90% 1/29/2001 10,800 10,969
Lehman Brothers Holdings 7.20% 8/15/2009 16,720 17,121
Lehman Brothers Holdings 8.375% 2/15/1999 5,400 5,526
Mellon Bank 6.75% 6/1/2003 2,775 2,832
Mellon Capital II 7.995% 1/15/2027 3,150 3,370
Mellon Financial Corp. 7.625% 11/15/1999 850 874
Mellon Financial Corp. 9.75% 6/15/2001 6,647 7,371
Merrill Lynch & Co., Inc. 6.38% 7/18/2000 1,000 1,008
Merrill Lynch & Co., Inc. 6.50% 4/1/2001 18,500 18,668
Merrill Lynch & Co., Inc. 7.00% 3/15/2006 300 310
Merrill Lynch & Co., Inc. 8.00% 2/1/2002 2,600 2,762
Merrill Lynch & Co., Inc. 8.30% 11/1/2002 2,735 2,964
Morgan Stanley 6.375% 8/1/2002 8,000 8,022
NAC Re Corp. 7.15% 11/15/2005 1,500 1,544
NB Capital Trust II 7.83% 12/15/2026 5,000 5,288
NCNB Corp. 9.50% 6/1/2004 1,725 2,005
National City Corp. 7.20% 5/15/2005 10,000 10,396
NationsBank Corp. 6.50% 3/15/2006 5,000 5,007
NationsBank Corp. 6.875% 2/15/2005 580 595
NationsBank Corp. 7.00% 9/15/2001 1,800 1,850
</TABLE>
22
<PAGE> 25
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NationsBank Corp. 7.25% 10/15/2025 $ 1,625 $ 1,700
NationsBank Corp. 7.75% 8/15/2004 5,000 5,356
NationsBank Texas 6.75% 8/15/2000 10,300 10,467
Norwest Corp. 6.65% 10/15/2023 40 39
Norwest Corp. 7.125% 4/1/2000 500 511
Norwest Financial, Inc. 6.25% 11/1/2002 1,000 1,002
Norwest Financial, Inc. 7.875% 2/15/2002 1,000 1,060
Orion Capital Corp. 7.25% 7/15/2005 9,200 9,489
Orion Capital Corp. 9.125% 9/1/2002 5,421 5,994
Paine Webber Group, Inc. 6.50% 11/1/2005 500 494
Paine Webber Group, Inc. 7.00% 3/1/2000 5,350 5,426
Paine Webber Group, Inc. 7.875% 2/15/2003 2,250 2,379
Pitney Bowes Credit Corp. 9.25% 6/15/2008 2,000 2,451
Realty Income Corp. 7.75% 5/6/2007 3,000 3,195
Republic New York Corp. 7.75% 5/15/2002 3,000 3,175
Republic New York Corp. 7.75% 5/15/2009 4,300 4,710
Republic New York Corp. 9.70% 2/1/2009 5,000 6,228
Salomon, Inc. 6.50% 3/1/2000 17,700 17,803
Salomon, Inc. 6.65% 7/15/2001 7,050 7,130
Salomon, Inc. 6.70% 12/1/1998 3,000 3,020
Salomon, Inc. 6.70% 7/5/2000 2,000 2,022
Salomon Smith Barney Holdings Inc. 5.50% 1/15/1999 5,000 4,976
Salomon Smith Barney Holdings Inc. 5.875% 2/1/2001 13,200 13,053
Salomon Smith Barney Holdings Inc. 6.50% 10/15/2002 300 302
Salomon Smith Barney Holdings Inc. 6.625% 6/1/2000 10,000 10,102
Salomon Smith Barney Holdings Inc. 7.00% 5/15/2000 6,000 6,102
Salomon Smith Barney Holdings Inc. 7.98% 3/1/2000 2,000 2,072
Sears, Roebuck & Co. Acceptance Corp. 6.125% 1/15/2006 4,500 4,413
Sears, Roebuck & Co. Acceptance Corp. 6.50% 6/15/2000 18,185 18,322
Security Capital Pacific Trust 8.05% 4/1/2017 4,300 4,784
Shurgard Storage Centers, Inc. 7.50% 4/25/2004 3,000 3,137
Simon DeBartolo Group, Inc. 6.75% 7/15/2004 10,000 9,997
Spieker Properties Inc. 7.50% 10/1/2027 700 715
Summit Bancorp 8.625% 12/10/2002 5,000 5,473
Summit Properties Inc. 6.80% 8/15/2002 3,500 3,534
Summit Properties Inc. 6.95% 8/15/2004 17,500 17,675
Summit Properties Inc. 7.20% 8/15/2007 1,000 1,021
SunTrust Banks, Inc. 6.00% 2/15/2026 5,000 4,903
SunTrust Banks, Inc. 7.375% 7/1/2002 5,000 5,215
SunTrust Banks, Inc. 7.375% 7/1/2006 5,000 5,290
SunTrust Banks, Inc. 8.875% 2/1/1998 115 115
Storage USA 7.00% 12/1/2007 1,050 1,059
Storage USA 7.50% 12/1/2027 5,025 5,099
Texaco Capital Corp. 7.50% 3/1/2043 850 905
Texaco Capital Corp. 8.25% 10/1/2006 1,000 1,133
Texaco Capital Corp. 8.875% 9/1/2021 705 892
Texaco Capital Corp. 9.00% 12/15/1999 300 316
Travelers/Aetna Property Casualty Corp. 6.75% 4/15/2001 9,000 9,164
Travelers/Aetna Property Casualty Corp. 7.75% 4/15/2026 1,000 1,095
USF&G Corp. 7.125% 6/1/2005 600 620
United Dominion Realty Trust, Inc. 7.25% 1/15/2007 3,500 3,632
U.S. Leasing International 6.625% 5/15/2003 195 198
Wachovia Corp. 6.375% 4/15/2003 110 111
Wachovia Corp. 6.80% 6/1/2005 10,000 10,225
Wachovia Corp. 7.00% 12/15/1999 600 611
Wells Fargo & Co. 6.125% 11/1/2003 5,000 4,942
Wells Fargo & Co. 6.875% 4/1/2006 6,400 6,548
Wells Fargo Capital I 7.96% 12/15/2026 3,600 3,814
------------
827,517
------------
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INDUSTRIAL (8.7%)
American Stores Co. 8.00% 6/1/2026 $ 10,500 $ 11,892
Anheuser-Busch Cos., Inc. 7.10% 6/15/2007 5,050 5,215
Anheuser-Busch Cos., Inc. 7.125% 7/1/2017 3,850 3,966
Anheuser-Busch Cos., Inc. 7.375% 7/1/2023 800 821
Anheuser-Busch Cos., Inc. 8.625% 12/1/2016 626 641
Applied Materials, Inc. 8.00% 9/1/2004 1,625 1,758
Archer-Daniels-Midland Co. 6.25% 5/15/2003 1,000 1,004
Archer-Daniels-Midland Co. 8.875% 4/15/2011 3,745 4,586
Auburn Hills 12.00% 5/1/2020 770 1,232
BP America, Inc. 9.375% 11/1/2000 1,500 1,627
C.R. Bard, Inc. 6.70% 12/1/2026 13,650 13,699
Baxter International, Inc. 9.25% 12/15/1999 100 106
Black & Decker Corp. 6.625% 11/15/2000 12,000 12,107
Black & Decker Corp. 7.50% 4/1/2003 22,800 23,881
The Boeing Co. 8.75% 8/15/2021 1,800 2,279
Bowater, Inc. 9.375% 12/15/2021 3,000 3,765
Burlington Northern 9.25% 10/1/2006 750 883
Burlington Northern Santa Fe Corp. 6.375% 12/15/2005 6,750 6,695
Burlington Northern Santa Fe Corp. 6.875% 2/15/2016 2,900 2,920
Burlington Northern Santa Fe Corp. 7.00% 12/15/2025 2,350 2,386
Burlington Northern Sante Fe Corp. 7.25% 8/1/2097 4,450 4,578
CSX Corp. 8.625% 5/15/2022 875 1,043
CSX Corp. 9.00% 8/15/2006 700 810
Caterpillar, Inc. 7.375% 3/1/2097 8,900 9,354
Caterpillar, Inc. 9.00% 4/15/2006 1,600 1,858
Chrysler Corp. 7.45% 2/1/2097 4,375 4,645
Comcast Cablevision 8.125% 5/1/2004 6,500 7,022
Comcast Cablevision 8.375% 5/1/2007 5,000 5,556
Comcast Cablevision 8.875% 5/1/2017 3,300 3,920
Conrail Corp. 9.75% 6/15/2020 1,680 2,219
Cyprus AMAX Minerals Co. 7.375% 5/15/2007 6,000 6,233
Deere & Co. 8.50% 1/9/2022 985 1,194
Delta Airlines, Inc. (Equipment Trust Certificates) 8.54% 1/2/2007 (1) 3,965 4,336
The Walt Disney Co. 7.55% 7/15/2093 1,847 2,037
Dow Chemical Co. 8.50% 6/8/2010 2,500 2,935
Eastman Chemical Co. 6.375% 1/15/2004 6,925 6,920
Eastman Chemical Co. 7.25% 1/15/2024 3,700 3,844
Eastman Chemical Co. 7.60% 2/1/2027 2,988 3,227
Falconbridge Ltd. 7.35% 11/1/2006 1,000 1,043
Federal Express Corp. 10.00% 9/1/1998 1,500 1,537
Federated Department Stores, Inc. 7.45% 7/15/2017 11,125 11,598
Federated Department Stores, Inc. 8.125% 10/15/2002 5,000 5,346
Ford Holdings 9.25% 3/1/2000 5,900 6,265
Ford Motor Co. 7.50% 11/15/1999 2,000 2,052
Ford Motor Co. 9.95% 2/15/2032 835 1,168
Fortune Brands 7.875% 1/15/2023 1,900 2,135
Gannett Co. 5.25% 3/1/1998 190 190
Gannett Co. 5.85% 5/1/2000 1,000 995
General Motors Corp. 7.00% 6/15/2003 2,000 2,061
General Motors Corp. 9.125% 7/15/2001 7,900 8,609
General Motors Corp. 9.625% 12/1/2000 9,050 9,872
W.R. Grace & Co. 7.40% 2/1/2000 6,700 6,875
W.R. Grace & Co. 7.75% 10/1/2002 500 530
W.R. Grace & Co. 8.00% 8/15/2004 11,950 12,921
H.J. Heinz Co. 6.875% 1/15/2003 100 103
Hertz Corp. 6.00% 2/1/2001 15,000 14,897
International Business Machines Corp. 6.375% 6/15/2000 500 503
International Business Machines Corp. 6.45% 8/1/2007 1,000 1,011
International Business Machines Corp. 7.125% 12/1/2096 11,325 11,649
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
International Paper Co. 7.875% 8/1/2006 $ 2,265 $ 2,450
HNG Internorth 9.625% 3/15/2006 4,680 5,562
Kroger Co. 8.15% 7/15/2006 2,700 2,958
Lockheed Martin Corp. 6.85% 5/15/2001 500 510
Lockheed Martin Corp. 7.65% 5/1/2016 5,000 5,415
May Department Stores Co. 9.75% 2/15/2021 1,680 2,124
May Department Stores Co. 9.875% 12/1/2002 1,775 2,048
McDonald's Corp. 6.75% 2/15/2003 945 958
MedPartners Inc. 7.375% 10/1/2006 3,950 3,893
Mobil Corp. 7.625% 2/23/2033 920 964
News America Holdings Inc. 7.50% 3/1/2000 1,100 1,126
News America Holdings Inc. 8.00% 10/17/2016 9,250 9,899
News America Holdings Inc. 8.50% 2/15/2005 1,600 1,753
News America Holdings Inc. 9.125% 10/15/1999 15,100 15,813
Noranda, Inc. 7.00% 7/15/2005 1,045 1,063
Noranda, Inc. 7.50% 7/15/2003 6,825 7,129
Norfolk Southern Corp. 6.875% 5/1/2001 23,475 23,918
Norfolk Southern Corp. 7.70% 5/15/2017 1,750 1,933
Norfolk Southern Corp. 7.80% 5/15/2027 4,375 4,912
Norfolk Southern Corp. 7.90% 5/15/2097 1,750 1,990
Northrop Grumman Corp. 7.00% 3/1/2006 15,700 16,153
Occidental Petroleum Corp. 8.50% 11/9/2001 14,750 15,839
Occidental Petroleum Corp. 8.50% 9/15/2004 2,500 2,583
Occidental Petroleum Corp. 9.25% 8/1/2019 1,750 2,202
Occidental Petroleum Corp. 10.125% 11/15/2001 7,000 7,906
J.C. Penney & Co., Inc. 6.125% 11/15/2003 2,000 1,982
J.C. Penney & Co., Inc. 6.875% 6/15/1999 3,000 3,035
J.C. Penney & Co., Inc. 7.125% 11/15/2023 1,855 1,910
J.C. Penney & Co., Inc. 9.05% 3/1/2001 625 675
PepsiCo, Inc. 6.25% 9/1/1999 650 653
Petro-Canada 9.25% 10/15/2021 700 898
Philip Morris Cos., Inc. 6.00% 7/15/2001 110 108
Philip Morris Cos., Inc. 7.00% 7/15/2005 7,150 7,313
Philip Morris Cos., Inc. 7.20% 2/1/2007 1,450 1,494
Philip Morris Cos., Inc. 8.25% 10/15/2003 1,900 2,056
Phillips Petroleum Co. 8.49% 1/1/2023 2,100 2,293
Phillips Petroleum Co. 9.00% 6/1/2001 3,900 4,238
Praxair, Inc. 6.70% 4/15/2001 6,225 6,302
Praxair, Inc. 6.75% 3/1/2003 1,000 1,017
Praxair, Inc. 6.90% 11/1/2006 10,750 11,067
Quaker State Corp. 6.625% 10/15/2005 3,275 3,293
Rockwell International Corp. 8.875% 9/15/1999 110 115
Rohm & Haas Co. 9.80% 4/15/2020 (1) 4,450 5,653
Safeway Inc. 6.85% 9/15/2004 19,300 19,659
Seagate Technology, Inc. 7.45% 3/1/2037 8,875 8,877
Sears, Roebuck & Co. 6.25% 1/15/2004 1,200 1,192
Sears, Roebuck & Co. 9.375% 11/1/2011 1,845 2,323
Tenneco, Inc. 8.20% 11/15/1999 12,500 12,948
Tenneco, Inc. 10.075% 2/1/2001 5,150 5,695
Texas Instruments Inc. 6.125% 2/1/2006 6,300 6,189
Tosco Corp. 7.00% 7/15/2000 16,000 16,275
Tosco Corp. 7.80% 1/1/2027 1,650 1,818
Union Carbide Corp. 6.75% 4/1/2003 3,500 3,543
Union Carbide Corp. 7.75% 10/1/2096 4,350 4,730
Union Carbide Corp. 7.875% 4/1/2023 4,755 5,216
Union Oil of California 7.20% 5/15/2005 5,000 5,213
Union Oil of California 9.125% 2/15/2006 2,935 3,423
Union Pacific Corp. 7.00% 6/15/2000 5,000 5,094
Union Pacific Corp. 7.00% 2/1/2016 1,450 1,453
Union Pacific Corp. 8.625% 5/15/2022 2,865 3,249
United Technologies Corp. 8.875% 11/15/2019 4,575 5,698
</TABLE>
25
<PAGE> 28
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
TOTAL BOND MARKET PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Whirlpool Corp. 9.00% 3/1/2003 $ 2,250 $ 2,505
Whirlpool Corp. 9.10% 2/1/2008 940 1,110
-------------
585,967
-------------
UTILITIES (2.4%)
AT&T Corp. 7.125% 1/15/2002 1,100 1,142
AT&T Corp. 8.35% 1/15/2025 2,350 2,572
Alabama Power Co. 6.00% 3/1/2000 1,950 1,948
Alabama Power Co. 8.75% 12/1/2021 1,147 1,161
Arizona Public Service Co. 7.25% 8/1/2023 2,150 2,156
Baltimore Gas & Electric Co. 8.375% 8/15/2001 5,570 5,947
Bellsouth Capital Funding 6.04% 11/15/2026 1,350 1,386
Carolina Power & Light Co. 6.875% 8/15/2023 2,550 2,504
Carolina Power & Light Co. 8.20% 7/1/2022 110 120
Cincinnati Gas & Electric Co. 6.45% 2/15/2004 1,000 1,008
Coastal Corp. 7.75% 10/15/2035 6,600 7,182
Coastal Corp. 8.125% 9/15/2002 2,300 2,464
Coastal Corp. 9.625% 5/15/2012 4,700 5,932
Consolidated Edison Co. of New York, Inc. 6.375% 4/1/2003 5,000 5,034
Consolidated Edison Co. of New York, Inc. 6.625% 2/1/2002 1,000 1,017
Enron Corp. 6.875% 10/15/2007 8,500 8,668
Enron Corp. 7.125% 5/15/2007 6,100 6,301
Enron Corp. 7.625% 9/10/2004 2,000 2,119
Enron Corp. 9.65% 5/15/2001 4,150 4,569
GTE Corp. 7.83% 5/1/2023 4,000 4,136
GTE Corp. 9.10% 6/1/2003 225 252
GTE Florida, Inc. 6.31% 12/15/2002 5,000 5,021
Houston Lighting & Power Co. 8.75% 3/1/2022 1,050 1,169
Illinois Bell Telephone Co. 8.50% 4/22/2026 1,500 1,564
Illinois Power Co. 7.50% 7/15/2025 4,200 4,163
MCI Communications Corp. 7.50% 8/20/2004 4,050 4,258
MCI Communications Corp. 7.75% 3/23/2025 4,650 4,769
Michigan Bell Telephone Co. 6.375% 2/1/2005 155 154
Michigan Bell Telephone Co. 7.50% 2/15/2023 1,610 1,676
New England Telephone & Telegraph Co. 6.875% 10/1/2023 890 884
New England Telephone & Telegraph Co. 8.625% 8/1/2001 2,500 2,701
New England Telephone & Telegraph Co. 9.00% 8/1/2031 3,750 4,167
New Jersey Bell Telephone Co. 6.625% 4/1/2008 190 193
New York Telephone Co. 7.00% 8/15/2025 1,925 1,919
New York Telephone Co. 7.25% 2/15/2024 5,000 5,090
New York Telephone Co. 7.75% 12/15/2006 120 122
Northern States Power Co. 7.125% 7/1/2025 5,000 5,281
Northern Telecom Ltd. 6.875% 9/1/2023 4,565 4,602
Pacific Bell Telephone Co. 7.25% 7/1/2002 250 260
Pacific Gas & Electric Co. 6.25% 8/1/2003 5,000 5,012
Pacific Gas & Electric Co. 6.75% 10/1/2023 150 146
Pacific Gas & Electric Co. 8.25% 11/1/2022 4,000 4,301
Pacific Gas & Electric Co. 8.375% 5/1/2025 5,000 5,545
Pacific Gas & Electric Co. 8.75% 1/1/2001 2,000 2,141
Pennsylvania Power & Light Co. 6.50% 4/1/2005 135 136
Public Service Electric & Gas Co. 6.50% 5/1/2004 170 171
South Carolina Electric & Gas 9.00% 7/15/2006 145 170
Southern California Edison Co. 6.375% 1/15/2006 2,350 2,344
Southern California Edison Co. 6.75% 1/15/2000 600 608
Southern California Gas 7.375% 3/1/2023 120 121
Southwestern Bell Telephone Co. 7.25% 7/15/2025 10,650 10,873
Southwestern Bell Telephone Co. 7.625% 10/1/2013 1,120 1,141
Southwestern Bell Telephone Co. 7.625% 3/1/2023 8,355 8,838
Texas Utilities Co. 7.375% 8/1/2001 2,800 2,896
Texas Utilities Co. 7.875% 3/1/2023 2,075 2,178
Texas Utilities Co. 8.75% 11/1/2023 180 198
Union Electric Power Co. 6.75% 5/1/2008 40 41
</TABLE>
26
<PAGE> 29
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U S WEST Communications Group 6.875% 9/15/2033 $ 165 $ 159
Virginia Electric & Power Co. 6.625% 4/1/2003 2,300 2,326
Wisconsin Electric Power Co. 7.70% 12/15/2027 65 69
-----------
165,025
-----------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $1,762,256) 1,801,477
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (U.S. DOLLAR-DENOMINATED)(3.1%)
- --------------------------------------------------------------------------------------------------------------------------
Province of Alberta 9.25% 4/1/2000 5,075 5,414
Amoco Canada Petroleum Co. 6.75% 2/15/2005 145 149
Asian Development Bank 9.125% 6/1/2000 740 792
Bayerische Landesbank 7.375% 12/14/2002 145 152
British Aerospace 8.50% 6/10/2002 3,000 3,242
Province of British Columbia 7.00% 1/15/2003 2,550 2,647
British Columbia Hydro 12.50% 9/1/2013 400 432
Canadian Imperial Bank of Commerce (NY Branch) 6.20% 8/1/2000 55,200 55,338
European Investment Bank 10.125% 10/1/2000 125 138
Finland Global Bond 7.875% 7/28/2004 10,300 11,272
Grand Metropolitan Investment Corp. 9.00% 8/15/2011 2,225 2,723
Hanson Overseas 7.375% 1/15/2003 7,100 7,396
Inter-American Development Bank 7.125% 3/15/2023 975 1,012
Inter-American Development Bank 8.50% 3/15/2011 2,705 3,247
International Bank for Reconstruction & Development 9.25% 7/15/2017 1,615 2,151
KFW International Finance, Inc. 7.20% 3/15/2014 3,550 3,842
KFW International Finance, Inc. 7.625% 2/15/2004 7,025 7,556
KFW International Finance, Inc. 8.85% 6/15/1999 1,025 1,067
KFW International Finance, Inc. 9.125% 5/15/2001 2,400 2,621
Korean Development Bank 6.25% 5/1/2000 5,000 4,426
Province of Manitoba 7.75% 2/1/2002 6,975 7,359
Province of Manitoba 8.75% 5/15/2001 6,200 6,695
Province of Manitoba 9.25% 4/1/2020 2,645 3,503
Province of Manitoba 9.50% 10/1/2000 1,560 1,693
Province of Manitoba 9.625% 3/15/1999 2,500 2,604
Province of Manitoba 9.625% 12/1/2018 3,500 4,763
National Westminster Bancorp Inc. 9.375% 11/15/2003 2,800 3,208
Province of New Brunswick 6.75% 8/15/2013 210 218
Province of New Brunswick 8.75% 5/1/2022 1,850 2,353
New Zealand Government 8.75% 12/15/2006 1,175 1,383
New Zealand Government 10.625% 11/15/2005 400 509
Province of Newfoundland 7.32% 10/13/2023 8,050 8,600
Province of Ontario 7.375% 1/27/2003 915 965
Province of Ontario 7.75% 6/4/2002 1,175 1,250
Petro-Canada 7.875% 6/15/2026 10,000 11,295
Republic of Portugal 5.75% 10/8/2003 14,650 14,450
Province of Saskatchewan 7.125% 3/15/2008 1,200 1,279
Province of Saskatchewan 7.375% 7/15/2013 1,800 1,957
Province of Saskatchewan 8.00% 7/15/2004 15,950 17,449
Sweden Global Bond 6.50% 3/4/2003 145 149
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $200,722) 207,299
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.1%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 6.54% 1/2/1998 76,841 76,841
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note F 6.50%-6.55% 1/2/1998 65,111 65,111
- --------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $141,952) 141,952
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.0%)
(COST $6,552,883) 6,760,611
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 30
W
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
TOTAL BOND MARKET PORTFOLIO (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B $ 289,396
Payables for Investment Securities Purchased (204,655)
Other Liabilities--Note F (87,908)
-------------
(3,167)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%) $6,757,444
=========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------
AMOUNT
(000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
Paid in Capital $6,562,585
Undistributed Net Investment Income --
Accumulated Net Realized Losses--Note D (12,869)
Unrealized Appreciation--Note E 207,728
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS $6,757,444
=========================================================================================================================
Investor Shares--Net Assets applicable to 508,189,147 outstanding
$.001 par value shares** $5,129,361
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--INVESTOR SHARES $10.09
=========================================================================================================================
Institutional Shares--Net Assets applicable to 161,305,669 outstanding
$.001 par value shares** $1,628,083
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--INSTITUTIONAL SHARES $10.09
=========================================================================================================================
</TABLE>
**Authorized 1,250,000,000 shares for Total Bond Market Portfolio.
28
<PAGE> 31
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S GOVERNMENT AND AGENCY OBLIGATIONS (70.2%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (69.9%)
U.S. Treasury Notes 5.125% 11/30/1998 $ 7,750 $ 7,717
U.S. Treasury Notes 5.625% 11/30/2000 21,875 21,835
U.S. Treasury Notes 5.75% 10/31/2002 9,050 9,060
U.S. Treasury Notes 6.00% 8/15/1999 1,800 1,809
U.S. Treasury Notes 6.25% 8/31/2000-2/28/2002 43,645 44,432
U.S. Treasury Notes 6.375% 4/30/1999-3/31/2001 28,100 28,392
U.S. Treasury Notes 6.50% 4/30/1999 6,900 6,975
U.S. Treasury Notes 6.625% 6/30/2001-4/30/2002 28,510 29,459
U.S. Treasury Notes 6.75% 5/31/1999 825 837
U.S. Treasury Notes 6.875% 7/31/1999-3/31/2000 12,450 12,684
U.S. Treasury Notes 7.50% 10/31/1999-11/15/2001 3,570 3,687
U.S. Treasury Notes 7.75% 11/30/1999-2/15/2001 30,060 31,267
U.S. Treasury Notes 7.875% 11/15/1999-8/15/2001 24,625 25,740
U.S. Treasury Notes 8.00% 8/15/1999 44,500 46,074
U.S. Treasury Notes 8.50% 2/15/2000-11/15/2000 10,250 10,959
U.S. Treasury Notes 8.75% 8/15/2000 20,675 22,192
U.S. Treasury Notes 8.875% 2/15/1999 7,425 7,681
U.S. Treasury Notes 9.125% 5/15/1999 950 993
-----------
311,793
-----------
AGENCY BONDS AND NOTES (0.3%)
Federal National Mortgage Assn. 4.95% 9/30/1998 700 697
Federal National Mortgage Assn. 5.35% 8/12/1998 700 699
Tennessee Valley Authority 6.875% 1/15/2002 200 204
-----------
1,600
-----------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $310,110) 313,393
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (25.9%)
- --------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (4.4%)
American Express Credit Account Master Trust 6.80% 12/15/2003 (1) 4,000 4,096
California Infrastructure & Econ. Dev. Bank SP Trust PG&E 6.16% 12/14/2000 (1) 1,250 1,253
Discover Card Master Trust 5.40% 11/16/2001 (1) 3,150 3,136
First Chicago Master Trust 6.25% 8/15/1999 (1) 50 50
First Deposit Master Trust 5.75% 6/15/2001 (1) 2,500 2,501
First Deposit Master Trust 6.05% 8/15/2002 (1) 2,500 2,504
Sears Credit Card Master Trust 7.25% 7/16/2001 (1) 108 108
Sears Credit Card Master Trust 8.10% 6/15/2004 (1) 2,500 2,605
Standard Credit Card Master Trust 6.80% 4/7/1999 (1) 650 657
Standard Credit Card Master Trust 7.875% 11/7/1998 (1) 2,500 2,538
------------
19,448
------------
FINANCE (12.5%)
American General Finance Corp. 5.875% 7/1/2000 450 447
American General Finance Corp. 7.45% 7/1/2002 425 442
American General Finance Corp. 8.00% 2/15/2000 1,000 1,035
American General Finance Corp. 8.50% 8/15/1998 300 305
Associates Corp. 6.25% 3/15/1999 500 502
Associates Corp. 6.50% 10/15/2002 1,250 1,262
Associates Corp. 7.50% 4/15/2002 1,400 1,465
Associates Corp. 9.125% 4/1/2000 1,000 1,062
BankAmerica Corp. 7.75% 7/15/2002 250 265
BankAmerica Corp. 9.625% 2/13/2001 400 439
Bear Stearns Co., Inc. 7.625% 4/15/2000 750 771
The Chase Manhattan Corp. 7.75% 11/1/1999 135 139
The Chase Manhattan Corp. 8.625% 5/1/2002 1,000 1,087
Chemical Banking Corp. 7.25% 9/15/2002 1,500 1,557
Chrysler Finance Corp. 5.375% 10/15/1998 400 398
Chrysler Finance Corp. 5.625% 1/15/1999 350 349
</TABLE>
29
<PAGE> 32
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Chrysler Finance Corp. 6.625% 8/15/2000 $ 450 $ 455
Citicorp 9.75% 8/1/1999 1,000 1,054
Countrywide Funding 8.25% 7/15/2002 250 268
Dean Witter Discover & Co. 6.25% 3/15/2000 210 210
Equity Residential Properties 6.55% 11/15/2001 1,350 1,353
First Chicago Corp. 9.875% 8/15/2000 150 163
First Chicago Corp. 10.25% 5/1/2001 250 280
First Fidelity Bancorp 9.625% 8/15/1999 800 844
First Interstate Bancorp 8.625% 4/1/1999 900 928
First Interstate Bancorp 10.875% 4/15/2001 250 284
First Union Corp. 8.125% 6/24/2002 1,600 1,712
Ford Capital BV 9.00% 8/15/1998 535 545
Ford Capital BV 9.50% 7/1/2001 675 745
Ford Capital BV 9.875% 5/15/2002 1,520 1,730
Ford Motor Credit Co. 8.20% 2/15/2002 900 963
General Motors Acceptance Corp. 5.50% 12/15/2001 750 729
General Motors Acceptance Corp. 7.125% 6/1/1999 500 508
General Motors Acceptance Corp. 8.625% 6/15/1999 750 777
Great Western Finance 6.375% 7/1/2000 2,000 2,007
Health & Retirement Property Trust 6.75% 12/18/2002 1,250 1,247
International Lease Finance Corp. 6.20% 5/1/2000 3,000 3,002
Lehman Brothers Holdings 6.90% 1/29/2001 2,000 2,031
Manufacturers Hanover Corp. 8.50% 2/15/1999 900 924
Mellon Financial Corp. 6.30% 6/1/2000 1,250 1,257
Mellon Financial Corp. 7.625% 11/15/1999 600 617
Merrill Lynch & Co., Inc. 6.38% 7/18/2000 1,000 1,008
Merrill Lynch & Co., Inc. 6.50% 4/1/2001 1,500 1,514
Merrill Lynch & Co., Inc. 8.00% 2/1/2002 400 425
NationsBank Corp. 7.00% 9/15/2001 1,500 1,542
NationsBank Corp. 8.125% 6/15/2002 1,000 1,072
Orion Capital Corp. 9.125% 9/1/2002 1,500 1,659
PaineWebber Group, Inc. 7.00% 3/1/2000 2,450 2,485
Republic New York Corp. 7.75% 5/15/2002 700 741
Salomon, Inc. 6.50% 3/1/2000 1,000 1,006
Salomon, Inc. 6.70% 12/1/1998 1,500 1,510
Salomon Smith Barney Holdings Inc. 5.50% 1/15/1999 500 498
Salomon Smith Barney Holdings Inc. 5.625% 11/15/1998 700 698
Salomon Smith Barney Holdings Inc. 5.875% 2/1/2001 700 692
Salomon Smith Barney Holdings Inc. 7.98% 3/1/2000 1,000 1,036
Summit Properties Inc. 6.80% 8/15/2002 1,500 1,514
SunTrust Banks 8.875% 2/1/1998 500 501
Texaco Capital Corp. 9.00% 12/15/1999 700 738
Travelers/Aetna Property Casualty Corp. 6.75% 4/15/2001 1,000 1,018
----------
55,815
----------
INDUSTRIAL (6.2%)
Black & Decker Corp. 7.50% 4/1/2003 1,700 1,781
Cyprus Minerals Co. 10.125% 4/1/2002 1,500 1,698
Federal Express Corp. 10.00% 9/1/1998 600 615
Ford Holdings 9.25% 3/1/2000 1,000 1,062
General Motors Corp. 9.125% 7/15/2001 1,000 1,090
General Motors Corp. 9.625% 12/1/2000 1,100 1,200
W.R. Grace & Co. 7.40% 2/1/2000 1,550 1,590
Johnson & Johnson 7.375% 6/29/2002 200 211
Kimberly-Clark 8.625% 5/1/2001 100 108
Mobil Corp. 8.375% 2/12/2001 2,238 2,386
News America Holdings Inc. 7.50% 3/1/2000 400 409
News America Holdings Inc. 9.125% 10/15/1999 2,400 2,513
Norfolk Southern Corp. 6.875% 5/1/2001 3,150 3,209
Occidental Petroleum Corp. 8.50% 11/9/2001 1,500 1,611
J.C. Penney & Co., Inc. 6.875% 6/15/1999 750 759
</TABLE>
30
<PAGE> 33
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
J.C. Penney & Co., Inc. 9.05% 3/1/2001 $ 375 $ 405
Phillips Petroleum Co. 9.00% 6/1/2001 1,500 1,630
Praxair, Inc. 6.25% 6/30/2000 1,250 1,250
Praxair, Inc. 6.70% 4/15/2001 2,000 2,025
Sears, Roebuck & Co. 6.50% 6/15/2000 1,500 1,511
Tenneco, Inc. 8.20% 11/15/1999 350 363
Xerox Corp. 8.125% 4/15/2002 150 161
----------
27,587
----------
UTILITIES (2.8%)
Alabama Power Co. 6.00% 3/1/2000 1,050 1,049
Baltimore Gas & Electric Co. 7.25% 7/1/2002 200 208
Coastal Corp. 8.125% 9/15/2002 1,700 1,821
Consolidated Edison Co. of New York, Inc. 6.625% 2/1/2002 500 509
New England Telephone & Telegraph Co. 8.625% 8/1/2001 3,000 3,241
Pacific Bell Telephone Co. 7.25% 7/1/2002 450 469
Pacific Gas & Electric Co. 7.875% 3/1/2002 3,000 3,191
Public Service of Colorado 6.00% 1/1/2001 1,000 998
Texas Utilities Co. 7.375% 8/1/2001 450 465
Texas Utilities Co. 8.125% 2/1/2002 600 639
----------
12,590
----------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $114,648) 115,440
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (U.S. DOLLAR-DENOMINATED)(2.2%)
- --------------------------------------------------------------------------------------------------------------------------
Asian Development Bank 9.125% 6/1/2000 700 749
Canadian Imperial Bank of Commerce (NY Branch) 6.20% 8/1/2000 3,600 3,609
KFW International Finance, Inc. 9.125% 5/15/2001 400 437
Province of Manitoba 7.75% 2/1/2002 1,500 1,583
Province of Manitoba 8.75% 5/15/2001 1,000 1,080
Province of Manitoba 9.50% 10/1/2000 450 488
Province of Manitoba 9.625% 3/15/1999 500 521
National Westminster Bancorp Inc. 9.45% 5/1/2001 250 274
Noranda, Inc. 8.625% 7/15/2002 500 542
Province of Ontario 7.75% 6/4/2002 550 585
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $9,777) 9,868
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $5,188) 6.54% 1/2/1998 5,188 5,188
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(COST $439,723) 443,889
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES--NET (0.5%) 2,380
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 44,613,256 outstanding $.001 par value shares
(authorized 250,000,000 shares) $446,269
==========================================================================================================================
NET ASSET VALUE PER SHARE $10.00
==========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
31
<PAGE> 34
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
SHORT-TERM BOND PORTFOLIO (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
STATEMENT OF ASSETS AND LIABILITIES
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments in Securities, at Value $443,889
Receivables for Investment Securities Sold 12,219
Other Assets--Note B 14,690
----------
Total Assets 470,798
----------
LIABILITIES
Payables for Investment Securities Purchased 22,548
Other Liabilities 1,981
----------
Total Liabilities 24,529
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $446,269
==========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note D $441,382 $ 9.89
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains--Note D 721 .02
Unrealized Appreciation--Note E 4,166 .09
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $446,269 $10.00
==========================================================================================================================
</TABLE>
32
<PAGE> 35
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S GOVERNMENT AND AGENCY OBLIGATIONS (56.4%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (54.0%)
U.S. Treasury Bonds 10.00% 5/15/2010 $10,990 $ 13,656
U.S. Treasury Bonds 10.375% 11/15/2009-11/15/2012 86,590 110,621
U.S. Treasury Bonds 10.75% 8/15/2005 21,890 28,473
U.S. Treasury Notes 5.75% 10/31/2000-8/15/2003 23,975 24,000
U.S. Treasury Notes 5.875% 11/15/2005 1,450 1,458
U.S. Treasury Notes 6.00% 8/15/1999 5,000 5,025
U.S. Treasury Notes 6.25% 1/31/2002-2/15/2003 10,524 10,762
U.S. Treasury Notes 6.375% 5/15/1999-8/15/2002 17,970 18,390
U.S. Treasury Notes 6.625% 4/30/2002 8,810 9,103
U.S. Treasury Notes 6.875% 5/15/2006 94,175 100,779
U.S. Treasury Notes 7.00% 7/15/2006 28,045 30,277
U.S. Treasury Notes 7.125% 2/29/2000 100 103
U.S. Treasury Notes 7.25% 5/15/2004-8/15/2004 10,233 11,046
U.S. Treasury Notes 7.50% 11/15/2001-2/15/2005 4,180 4,562
U.S. Treasury Notes 8.875% 11/15/1998 2,250 2,310
-----------
370,565
-----------
AGENCY BONDS AND NOTES (2.4%)
Federal Home Loan Mortgage Corp. 6.785% 3/1/2006 4,500 4,525
Federal Home Loan Mortgage Corp. 7.09% 6/1/2005 3,000 3,047
Federal National Mortgage Assn. 5.80% 12/10/2003 900 894
Federal National Mortgage Assn. 6.25% 8/12/2003 5,600 5,566
Federal National Mortgage Assn. 7.55% 6/10/2004 2,900 2,956
-----------
16,988
-----------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT AND AGENCY OBLIGATIONS
(COST $374,170) 387,553
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (34.8%)
- --------------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES (1.1%)
California Infrastructure & Econ. Dev. Bank SP Trust PG&E 6.38% 5/4/2005 (1) 5,500 5,542
California Infrastructure & Econ. Dev. Bank SP Trust PG&E 6.42% 3/25/2005 (1) 2,400 2,423
-----------
7,965
-----------
FINANCE (13.8%)
Avalon Properties Inc. 6.875% 12/15/2007 3,700 3,708
BankAmerica Corp. 6.20% 2/15/2006 3,000 2,946
BankAmerica Corp. 7.50% 10/15/2002 400 420
BankAmerica Corp. 7.625% 6/15/2004 450 479
BankAmerica Corp. 10.00% 2/1/2003 700 811
Bear Stearns Co. 6.625% 1/15/2004 350 351
Bradley Operating LP 7.00% 11/15/2004 2,000 2,012
CIT Group Holdings 6.625% 6/15/2005 350 353
Camden Property Trust 7.00% 11/15/2006 2,000 2,027
Citicorp 7.125% 6/1/2003 135 140
Citicorp 8.625% 12/1/2002 1,500 1,644
Commercial Credit Corp. 5.90% 9/1/2003 450 440
Commercial Credit Corp. 7.875% 7/15/2004 2,000 2,156
CoreStates Capital Corp. 6.625% 3/15/2005 2,400 2,422
CoreStates Capital Corp. 9.375% 4/15/2003 500 568
Dean Witter Discover & Co. 6.875% 3/1/2003 400 409
First Chicago Corp. 7.625% 1/15/2003 600 634
First Union Corp. 8.00% 11/15/2002 2,000 2,140
Fleet Financial Group, Inc. 6.875% 3/1/2003 600 612
Fleet Financial Group, Inc. 7.125% 4/15/2006 1,300 1,347
Fleet/Norstar Group 8.125% 7/1/2004 900 980
Ford Motor Credit Co. 6.625% 6/30/2003 3,000 3,044
Ford Motor Credit Co. 6.75% 5/15/2005 115 117
General Motors Acceptance Corp. 6.625% 10/1/2002 3,200 3,249
Household Finance Corp. 7.625% 1/15/2003 3,500 3,683
</TABLE>
33
<PAGE> 36
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Household Finance Corp. 7.65% 5/15/2007 $ 1,000 $ 1,076
JDN Realty Corp. 6.80% 8/1/2004 2,310 2,315
Lehman Brothers Holdings 7.20% 8/15/2009 8,000 8,192
Mellon Bank 6.75% 6/1/2003 225 230
Merrill Lynch & Co., Inc. 8.30% 11/1/2002 250 271
NAC Re Corp. 7.15% 11/15/2005 2,500 2,574
NCNB Corp. 9.50% 6/1/2004 2,000 2,325
NationsBank Corp. 6.50% 3/15/2006 2,900 2,904
NationsBank Corp. 6.875% 2/15/2005 420 431
NationsBank Corp. 7.75% 8/15/2004 500 536
Norwest Financial, Inc. 7.00% 1/15/2003 110 114
Orion Capital Corp. 7.25% 7/15/2005 800 825
Paine Webber Group, Inc. 7.875% 2/15/2003 250 264
Realty Income Corp. 7.75% 5/6/2007 2,000 2,130
Republic New York Corp. 7.75% 5/15/2009 2,400 2,629
Salomon Smith Barney Holdings Inc. 6.875% 6/15/2005 3,300 3,360
Sears, Roebuck & Co. Acceptance Corp. 6.125% 1/15/2006 150 147
Sears, Roebuck & Co. Acceptance Corp. 6.75% 9/15/2005 3,000 3,057
Shurgard Storage Centers, Inc. 7.50% 4/25/2004 3,000 3,137
Simon DeBartolo Group, Inc. 6.75% 7/15/2004 4,000 3,999
Summit Properties Inc. 7.20% 8/15/2007 3,450 3,523
SunTrust Banks, Inc. 7.375% 7/1/2006 2,400 2,539
Storage USA 7.00% 12/1/2027 3,000 3,026
USF&G Corp. 7.125% 6/1/2005 2,400 2,478
United Dominion Realty Trust, Inc. 7.25% 1/15/2007 2,500 2,595
Wells Fargo & Co. 6.875% 4/1/2006 3,000 3,069
-----------
94,438
-----------
INDUSTRIAL (15.4%)
Air Products & Chemicals, Inc. 6.25% 6/15/2003 125 125
Anheuser-Busch Cos., Inc. 7.10% 6/15/2007 3,400 3,511
Applied Materials, Inc. 8.00% 9/1/2004 150 162
Archer-Daniels-Midland Co. 6.25% 5/15/2003 250 251
C.R. Bard, Inc. 6.70% 12/1/2026 2,300 2,308
Black & Decker Corp. 7.50% 4/1/2003 6,500 6,808
Burlington Northern 9.25% 10/1/2006 1,000 1,178
Burlington Northern Santa Fe Corp. 6.375% 12/15/2005 3,000 2,975
CSX Corp. 9.00% 8/15/2006 300 347
Caterpillar, Inc. 9.00% 4/15/2006 600 697
Caterpillar, Inc. 9.375% 8/15/2011 1,550 1,957
Comcast Cablevision 8.125% 5/1/2004 3,500 3,781
Delta Airlines, Inc. (Equipment Trust Certificates) 8.54% 1/2/2007 (1) 498 544
Eastman Chemical Co. 6.375% 1/15/2004 5,075 5,071
Falconbridge Ltd. 7.35% 11/1/2006 1,000 1,043
Federated Department Stores, Inc. 8.50% 6/15/2003 4,000 4,371
First Data Corp. 6.625% 4/1/2003 2,000 2,031
General Motors Corp. 7.00% 6/15/2003 500 515
W.R. Grace & Co. 7.75% 10/1/2002 500 530
W.R. Grace & Co. 8.00% 8/15/2004 3,150 3,406
International Business Machines Corp. 6.45% 8/1/2007 4,000 4,044
International Paper Co. 7.875% 8/1/2006 35 38
HNG Internorth 9.625% 3/15/2006 2,000 2,377
Kroger Co. 8.15% 7/15/2006 3,800 4,163
Lockheed Martin Corp. 6.50% 4/15/2003 2,000 2,016
Lockheed Martin Corp. 7.70% 6/15/2008 3,200 3,497
May Department Stores Co. 9.875% 12/1/2002 225 260
McDonald's Corp. 6.75% 2/15/2003 450 456
MedPartners Inc. 7.375% 10/1/2006 600 591
News America Holdings Inc. 8.50% 2/15/2005 2,400 2,629
Noranda, Inc. 7.00% 7/15/2005 3,000 3,050
Noranda, Inc. 7.50% 7/15/2003 1,000 1,045
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Norfolk Southern Corp. 7.35% 5/15/2007 $ 2,000 $ 2,126
Northrop Grumman Corp. 7.00% 3/1/2006 3,500 3,601
Occidental Petroleum Corp. 8.50% 9/15/2004 3,000 3,099
J.C. Penney & Co., Inc. 6.125% 11/15/2003 130 129
Philip Morris Cos., Inc. 7.00% 7/15/2005 2,200 2,250
Philip Morris Cos., Inc. 8.25% 10/15/2003 250 270
Praxair, Inc. 6.75% 3/1/2003 2,500 2,543
Praxair, Inc. 6.90% 11/1/2006 1,900 1,956
Quaker State Corp. 6.625% 10/15/2005 950 955
Safeway Inc. 6.85% 9/15/2004 3,500 3,565
Seagate Technology, Inc. 7.45% 3/1/2037 1,900 1,900
Sears, Roebuck & Co. 6.25% 1/15/2004 650 646
Texas Instruments Inc. 6.125% 2/1/2006 3,100 3,045
Tosco Corp. 7.25% 1/1/2007 3,000 3,134
Union Carbide Corp. 6.75% 4/1/2003 3,050 3,088
Union Oil of California 6.375% 2/1/2004 2,000 1,998
Union Oil of California 9.125% 2/15/2006 915 1,067
Union Pacific Corp. 6.125% 1/15/2004 1,000 982
Union Pacific Corp. 7.60% 5/1/2005 3,200 3,381
Whirlpool Corp. 9.00% 3/1/2003 400 445
-----------
105,957
-----------
UTILITIES (4.5%)
Cincinnati Gas & Electric Co. 6.45% 2/15/2004 1,000 1,008
Enron Corp. 6.875% 10/15/2007 1,500 1,530
Enron Corp. 7.125% 5/15/2007 2,546 2,630
Enron Corp. 7.625% 9/10/2004 1,000 1,059
Florida Power & Light Co. 6.625% 2/1/2003 210 210
MCI Communications Corp. 7.50% 8/20/2004 3,250 3,417
Pacific Bell Telephone Co. 7.00% 7/15/2004 3,175 3,297
Southern California Edison Co. 6.375% 1/15/2006 3,000 2,992
Southwestern Bell Telephone Co. 5.75% 9/1/2004 2,000 1,924
Texas Utilities Co. 8.25% 4/1/2004 4,900 5,347
Union Electric Power Co. 7.65% 7/15/2003 3,000 3,199
Virginia Electric & Power Co. 6.625% 4/1/2003 4,000 4,045
-----------
30,658
-----------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $232,169) 239,018
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (U.S. DOLLAR-DENOMINATED)(4.9%)
- --------------------------------------------------------------------------------------------------------------------------
Bank of Nova Scotia 6.875% 5/1/2003 750 765
Province of British Columbia 7.00% 1/15/2003 400 415
Finland Global Bond 7.875% 7/28/2004 3,500 3,830
Hanson Overseas 7.375% 1/15/2003 2,500 2,604
KFW International Finance, Inc. 7.625% 2/15/2004 4,625 4,974
Province of Manitoba 6.125% 1/19/2004 8,000 7,982
National Westminster Bancorp Inc. 9.375% 11/15/2003 1,150 1,318
New Zealand Government 8.75% 12/15/2006 325 383
New Zealand Government 10.625% 11/15/2005 600 764
Noranda, Inc. 8.125% 6/15/2004 1,000 1,079
Republic of Portugal 5.75% 10/8/2003 4,700 4,636
Province of Saskatchewan 7.125% 3/15/2008 500 533
Province of Saskatchewan 8.00% 7/15/2004 3,900 4,266
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $32,593) 33,549
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
35
<PAGE> 38
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TEMPORARY CASH INVESTMENTS (8.4%)
- ---------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations in a
Pooled Cash Account 6.54% 1/2/1998 $25,383 $25,383
Collateralized by U.S. Government Obligations in a
Pooled Cash Account--Note F 6.50%-6.55% 1/2/1998 31,921 31,921
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $57,304) 57,304
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (104.5%)
(COST $696,236) 717,424
- ---------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-4.5%)
- ---------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 17,774
Security Lending Collateral Payable to Brokers--Note F (31,921)
Other Liabilities (16,695)
----------
(30,842)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------------------------------------------------
Applicable to 67,296,089 outstanding $.001 par value shares
(authorized 250,000,000 shares) $686,582
===========================================================================================================================
NET ASSET VALUE PER SHARE $10.20
===========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $669,413 $ 9.95
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note E (4,019) (.06)
Unrealized Appreciation--Note E 21,188 .31
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $686,582 $10.20
==========================================================================================================================
</TABLE>
36
<PAGE> 39
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S GOVERNMENT SECURITIES (59.8%)
- --------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds 7.875% 2/15/2021 $ 145 $ 178
U.S. Treasury Bonds 8.00% 11/15/2021 13,145 16,395
U.S. Treasury Bonds 8.125% 8/15/2019-8/15/2021 20,175 25,322
U.S. Treasury Bonds 8.50% 2/15/2020 570 741
U.S. Treasury Bonds 8.75% 5/15/2017-5/15/2020 2,165 2,840
U.S. Treasury Bonds 8.875% 8/15/2017-2/15/2019 3,275 4,356
U.S. Treasury Bonds 10.375% 11/15/2012 275 365
U.S. Treasury Notes 6.25% 1/31/2002 600 611
U.S. Treasury Notes 6.375% 5/15/1999-3/31/2001 500 508
U.S. Treasury Notes 6.875% 5/15/2006 1,075 1,150
U.S. Treasury Notes 7.875% 11/15/2004 125 140
- --------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $48,305) 52,606
- --------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS (34.6%)
- --------------------------------------------------------------------------------------------------------------------------
FINANCE (9.7%)
Avalon Properties Inc. 6.875% 12/15/2007 700 701
Bank of New York Capital I 7.97% 12/31/2026 375 399
BankAmerica Capital II 8.00% 12/15/2026 400 430
BT Capital Trust B 7.90% 1/15/2027 200 209
Chase Capital I 7.67% 12/1/2026 400 414
Chemical Bank Corp. 6.125% 11/1/2008 500 484
Citicorp Capital II 8.015% 2/15/2027 450 483
Dean Witter, Discover & Co. 6.75% 10/15/2013 200 199
Fleet Capital Trust II 7.92% 12/11/2026 400 421
Ford Capital BV 9.50% 6/1/2010 180 224
Household Finance Corp. 6.45% 2/1/2009 70 69
Lehman Brothers Holdings 7.20% 8/15/2009 835 855
Mellon Capital II 7.995% 1/15/2027 450 481
NationsBank Corp. 7.25% 10/15/2025 375 392
Norwest Financial, Inc. 6.65% 10/15/2023 60 59
Security Capital Pacific Trust 8.05% 4/1/2017 200 223
Spieker Properties Inc. 7.50% 10/1/2027 300 306
Summit Properties Inc. 7.20% 8/15/2007 550 562
Storage USA 7.50% 12/1/2027 400 406
Texaco Capital Corp. 8.875% 9/1/2021 155 196
Travelers/Aetna Property Casualty Corp. 7.75% 4/15/2026 275 301
United Dominion Realty Trust, Inc. 7.25% 1/15/2007 300 311
Wells Fargo Capital I 7.96% 12/15/2026 400 424
----------
8,549
----------
INDUSTRIAL (16.6%)
American Stores Co. 8.00% 6/1/2026 400 453
Anheuser-Busch Cos., Inc. 7.125% 7/1/2017 600 618
Archer-Daniels-Midland Co. 8.875% 4/15/2011 80 98
Auburn Hills 12.00% 5/1/2020 260 416
C.R. Bard, Inc. 6.70% 12/1/2026 500 502
Bowater, Inc. 9.375% 12/15/2021 250 314
Burlington Northern Santa Fe Corp. 6.875% 2/15/2016 300 302
Burlington Northern Santa Fe Corp. 7.00% 12/15/2025 50 51
Burlington Northern Santa Fe Corp. 7.25% 8/1/2097 150 154
CSX Corp. 8.625% 5/15/2022 25 30
Caterpillar, Inc. 7.375% 3/1/2097 50 53
Caterpillar, Inc. 9.375% 8/15/2011 450 568
Chrysler Corp. 7.45% 2/1/2097 225 239
Comcast Cablevision 8.875% 5/1/2017 500 594
Deere & Co. 8.50% 1/9/2022 115 139
The Walt Disney Co. 7.55% 7/15/2093 375 413
Eastman Chemical Co. 7.25% 1/15/2024 250 260
</TABLE>
37
<PAGE> 40
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM BOND PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Eastman Chemical Co. 7.60% 2/1/2027 $ 150 $ 162
Federated Department Stores, Inc. 7.45% 7/15/2017 475 495
Ford Motor Co. 9.95% 2/15/2032 100 140
International Business Machines Corp. 7.125% 12/1/2096 500 514
Lockheed Martin Corp. 7.70% 6/15/2008 500 546
May Department Stores Co. 9.75% 2/15/2021 40 51
Mobil Corp. 7.625% 2/23/2033 230 241
News America Holdings Inc. 8.00% 10/17/2016 750 803
Norfolk Southern Corp. 7.70% 5/15/2017 100 110
Norfolk Southern Corp. 7.80% 5/15/2027 325 365
Norfolk Southern Corp. 7.90% 5/15/2097 100 114
Northrop Grumman Corp. 9.375% 10/15/2024 400 472
Occidental Petroleum 9.25% 8/1/2019 250 315
J.C. Penney & Co., Inc. 7.125% 11/15/2023 220 226
Petro-Canada 9.25% 10/15/2021 300 385
Phillips Petroleum Co. 8.49% 1/1/2023 900 983
Rohm & Haas Co. 9.80% 4/15/2020 (1) 550 699
Seagate Technology, Inc. 7.45% 3/1/2037 250 250
Sears, Roebuck & Co. 9.375% 11/1/2011 395 497
Tosco Corp. 7.80% 1/1/2027 350 386
Union Carbide Corp. 7.75% 10/1/2096 150 163
Union Carbide Corp. 7.875% 4/1/2023 220 241
Union Pacific Corp. 7.00% 2/1/2016 550 551
Union Pacific Corp. 8.625% 5/15/2022 35 40
United Technologies Corp. 8.875% 11/15/2019 425 529
Whirlpool Corp. 9.10% 2/1/2008 60 71
----------
14,553
----------
UTILITIES (8.3%)
AT&T Corp. 8.35% 1/15/2025 300 328
Alabama Power Co. 8.75% 12/1/2021 140 142
Arizona Public Service Co. 7.25% 8/1/2023 200 201
Coastal Corp. 7.75% 10/15/2035 400 435
Coastal Corp. 9.625% 5/15/2012 300 379
Illinois Power Co. 7.50% 7/15/2025 300 297
MCI Communications Corp. 7.75% 3/23/2025 250 256
Michigan Bell Telephone Co. 7.50% 2/15/2023 1,040 1,083
New England Telephone & Telegraph Co. 6.875% 10/1/2023 110 109
New England Telephone & Telegraph Co. 9.00% 8/1/2031 250 278
Northern Telecom Ltd. 6.875% 9/1/2023 250 252
Pacific Gas & Electric Co. 8.25% 11/1/2022 1,000 1,075
Southwestern Bell Telephone Co. 7.25% 7/15/2025 450 459
Southwestern Bell Telephone Co. 7.625% 10/1/2013 580 591
Southwestern Bell Telephone Co. 7.625% 3/1/2023 45 48
Texas Utilities Co. 7.875% 3/1/2023 1,090 1,144
Texas Utilities Co. 8.75% 11/1/2023 50 55
Union Electric Power Co. 6.75% 5/1/2008 120 123
Wisconsin Electric Power Co. 7.70% 12/15/2027 75 79
----------
7,334
----------
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $29,400) 30,436
- --------------------------------------------------------------------------------------------------------------------------
FOREIGN AND INTERNATIONAL AGENCY BONDS (U.S. DOLLAR-DENOMINATED)(3.3%)
- --------------------------------------------------------------------------------------------------------------------------
British Columbia Hydro 12.50% 9/1/2013 100 108
Grand Metropolitan Investment Corp. 9.00% 8/15/2011 75 92
Inter-American Development Bank 7.125% 3/15/2023 25 26
Inter-American Development Bank 8.50% 3/15/2011 110 132
International Bank for Reconstruction & Development 9.25% 7/15/2017 135 180
KFW International Finance, Inc. 7.20% 3/15/2014 600 649
Province of Manitoba 9.25% 4/1/2020 485 642
</TABLE>
38
<PAGE> 41
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Province of New Brunswick 8.75% 5/1/2022 $ 250 $ 318
Province of Saskatchewan 7.125% 3/15/2008 100 107
Province of Saskatchewan 7.375% 7/15/2013 600 652
- --------------------------------------------------------------------------------------------------------------------------
TOTAL FOREIGN AND INTERNATIONAL AGENCY BONDS
(COST $2,652) 2,906
- --------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.1%)
- --------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations in a
Pooled Cash Account
(COST $942) 6.54% 1/2/1998 942 942
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.8%)
(COST $81,299) 86,890
- --------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.2%)
- --------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 2,166
Liabilities (1,104)
----------
1,062
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------
Applicable to 8,156,577 outstanding $.001 par value shares
(authorized 250,000,000 shares) $87,952
==========================================================================================================================
NET ASSET VALUE PER SHARE $10.78
==========================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) The average maturity is shorter than the final maturity shown due to
scheduled interim principal payments.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $82,269 $10.08
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 92 .01
Unrealized Appreciation--Note E 5,591 .69
- --------------------------------------------------------------------------------------------------------------------------
NET ASSETS $87,952 $10.78
==========================================================================================================================
</TABLE>
39
<PAGE> 42
STATEMENT OF OPERATIONS
This Statement shows interest earned by each Portfolio during the reporting
period, and details the operating expenses charged to each class of its shares.
These expenses directly reduce the amount of investment income available to pay
to shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and any Unrealized Appreciation
(Depreciation) on investments during the period.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BOND SHORT-TERM INTERMEDIATE- LONG-TERM
MARKET BOND TERM BOND BOND
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------------------------------------
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $365,736 $26,481 $38,891 $4,003
-----------------------------------------------------------------------
Total Income 365,736 26,481 38,891 4,003
-----------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 764 60 81 8
Management and Administrative 2,409 450 550 --
Shareholder Account Maintenance(1) 4,100 161 251 62
Marketing and Distribution(1) 1,512 124 172 16
Taxes (other than income taxes) 415 16 42 4
Custodian Fees 200 25 24 15
Auditing Fees 11 8 8 8
Shareholders' Reports1 119 6 8 3
Annual Meeting and Proxy Costs(1) 35 1 2 1
Directors' Fees and Expenses 12 1 1 --
-----------------------------------------------------------------------
Total Expenses 9,577 852 1,139 117
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 356,159 25,629 37,752 3,886
- -------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON INVESTMENT
SECURITIES SOLD 425 1,429 (80) 565
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENT SECURITIES 161,978 3,076 15,797 4,404
- -------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $518,562 $30,134 $53,469 $8,855
=========================================================================================================================
</TABLE>
(1) Expenses of the Total Bond Market Portfolio by class of shares are:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(000)
------------------------------------------------
INVESTOR INSTITUTIONAL
SHARES SHARES TOTAL
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class-Specific Expenses:
Shareholder Account Maintenance $4,073 $ 27 $4,100
Marketing and Distribution 1,136 376 1,512
Shareholders' Reports 116 3 119
Annual Meeting and Proxy Costs 35 -- 35
------------------------------------------------
Total Class-Specific Expenses 5,360 406 5,766
All Other Portfolio Expenses 2,931 880 3,811
- -------------------------------------------------------------------------------------------------------------------------
Total Expenses $8,291 $1,286 $9,577
=========================================================================================================================
</TABLE>
See Note C in Notes to Financial Statements.
40
<PAGE> 43
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each Portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes
information detailed in the Statement of Operations. Because the Portfolio
distributes its income to shareholders each day, the amounts of
Distributions--Net Investment Income generally equal the net income earned as
shown under the Operations section. The amounts of Distributions--Realized
Capital Gain may not match the capital gains shown in the Operations section,
because distributions are determined on a tax basis and may be made in a period
different from the one in which the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Portfolio, either by purchasing shares or by
reinvesting distributions, and the amounts redeemed. The corresponding numbers
of Shares Issued and Redeemed are shown at the end of the Statement.
Distributions, Capital Share Transactions, and Shares Issued and Redeemed are
shown separately for each class of shares.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
--------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------
1997 1996
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 356,159 $ 219,381
Realized Net Gain (Loss) 425 (5,514)
Change in Unrealized Appreciation (Depreciation) 161,978 (74,246)
--------------------------------
Net Increase in Net Assets Resulting from Operations 518,562 139,621
--------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (270,877) (171,657)
Institutional Shares (85,282) (47,724)
Realized Capital Gain
Investor Shares -- --
Institutional Shares -- --
--------------------------------
Total Distributions (356,159) (219,381)
--------------------------------
CAPITAL SHARE TRANSACTIONS--INVESTOR SHARES(1)
Issued 2,673,249 1,373,171
Issued in Lieu of Cash Distributions 239,069 147,464
Redeemed (867,035) (893,692)
--------------------------------
Net Increase--Investor Shares 2,045,283 626,943
--------------------------------
CAPITAL SHARE TRANSACTIONS--INSTITUTIONAL SHARES(2)
Issued 802,671 702,749
Issued in Lieu of Cash Distributions 73,511 41,752
Redeemed (311,860) (124,465)
--------------------------------
Net Increase--Institutional Shares 564,322 620,036
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 2,772,008 1,167,219
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 3,985,436 2,818,217
--------------------------------
End of Year $6,757,444 $3,985,436
=========================================================================================================================
(1)Shares Issued (Redeemed)--Investor Shares
Issued 270,831 139,884
Issued in Lieu of Cash Distributions 24,183 15,068
Redeemed (87,926) (91,062)
--------------------------------
Net Increase in Shares Outstanding 207,088 63,890
=========================================================================================================================
(2)Shares Issued (Redeemed)--Institutional Shares
Issued 81,271 71,819
Issued in Lieu of Cash Distributions 7,435 4,272
Redeemed (31,495) (12,749)
--------------------------------
Net Increase in Shares Outstanding 57,211 63,342
=========================================================================================================================
</TABLE>
41
<PAGE> 44
STATEMENT OF CHANGES IN NET ASSETS (continued)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INTERMEDIATE-TERM
BOND PORTFOLIO BOND PORTFOLIO
-------------------------------- ------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 25,629 $ 16,550 $ 37,752 $ 28,307
Realized Net Gain (Loss) 1,429 (90) (80) (3,931)
Change in Unrealized Appreciation
(Depreciation) 3,076 (3,312) 15,797 (11,605)
-------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 30,134 13,148 53,469 12,771
-------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (25,629) (16,550) (37,752) (28,307)
Realized Capital Gain -- (88) -- (166)
-------------------------------------------------------------------
Total Distributions (25,629) (16,638) (37,752) (28,473)
-------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 264,067 166,669 299,703 281,767
Issued in Lieu of Cash Distributions 21,565 14,288 30,780 24,466
Redeemed (172,160) (56,772) (119,977) (175,804)
-------------------------------------------------------------------
Net Increase from Capital
Share Transactions 113,472 124,185 210,506 130,429
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 117,977 120,695 226,223 114,727
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 328,292 207,597 460,359 345,632
-------------------------------------------------------------------
End of Year $446,269 $328,292 $686,582 $460,359
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 26,634 16,763 30,030 28,221
Issued in Lieu of Cash Distributions 2,171 1,443 3,083 2,469
Redeemed (17,286) (5,726) (12,023) (17,819)
-------------------------------------------------------------------
Net Increase in Shares Outstanding 11,519 12,480 21,090 12,871
=========================================================================================================================
</TABLE>
42
<PAGE> 45
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
LONG-TERM BOND PORTFOLIO
------------------------------
YEAR ENDED DECEMBER 31,
------------------------------
1997 1996
(000) (000)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 3,886 $ 2,389
Realized Net Gain (Loss) 565 (473)
Change in Unrealized Appreciation (Depreciation) 4,404 (1,054)
------------------------------
Net Increase in Net Assets Resulting from Operations 8,855 862
------------------------------
DISTRIBUTIONS
Net Investment Income (3,886) (2,389)
Realized Capital Gain -- (26)
------------------------------
Total Distributions (3,886) (2,415)
------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 57,876 36,232
Issued in Lieu of Cash Distributions 3,143 1,913
Redeemed (22,160) (16,950)
------------------------------
Net Increase from Capital Share Transactions 38,859 21,195
- -------------------------------------------------------------------------------------------------------------------------
Total Increase 43,828 19,642
- -------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 44,124 24,482
------------------------------
End of Year $87,952 $44,124
=========================================================================================================================
(1)Shares Issued (Redeemed)
Issued 5,640 3,616
Issued in Lieu of Cash Distributions 307 192
Redeemed (2,167) (1,693)
------------------------------
Net Increase in Shares Outstanding 3,780 2,115
=========================================================================================================================
</TABLE>
43
<PAGE> 46
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents
the Total Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
Portfolio's net income and total returns from year to year; the relative
contributions of net income and capital gains to the Portfolio's total return;
how much it costs to operate the Portfolio; and the extent to which the
Portfolio tends to distribute capital gains. The table also shows the Portfolio
Turnover Rate, a measure of trading activity. A turnover rate of 100% means
that the average security is held in the Portfolio for one year.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO-INVESTOR SHARES
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 9.84 $10.14 $ 9.17 $10.06 $ 9.88
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .645 .640 .650 .622 .638
Net Realized and Unrealized Gain (Loss) on Investments .250 (.300) .970 (.888) .300
-------------------------------------------------------------
Total from Investment Operations .895 .340 1.620 (.266) .938
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.645) (.640) (.650) (.622) (.638)
Distributions from Realized Capital Gains -- -- -- (.002) (.120)
-------------------------------------------------------------
Total Distributions (.645) (.640) (.650) (.624) (.758)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $10.09 $ 9.84 $10.14 $ 9.17 $10.06
=========================================================================================================================
TOTAL RETURN* 9.44% 3.58% 18.18% -2.66% 9.68%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $5,129 $2,962 $2,405 $1,731 $1,540
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.18% 0.18%
Ratio of Net Investment Income to Average Net Assets 6.54% 6.54% 6.66% 6.57% 6.24%
Portfolio Turnover Rate 39% 39% 36% 33% 50%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO-INSTITUTIONAL SHARES
YEAR ENDED DECEMBER 31,
-------------------------- SEP. 18* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 DEC. 31, 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.84 $10.14 $ 9.87
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .655 .650 .174
Net Realized and Unrealized Gain (Loss) on Investments .250 (.300) .270
---------------------------------------------------
Total from Investment Operations .905 .350 .444
---------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.655) (.650) (.174)
Distributions from Realized Capital Gains -- -- --
---------------------------------------------------
Total Distributions (.655) (.650) (.174)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.09 $ 9.84 $10.14
========================================================================================================================
TOTAL RETURN 9.55% 3.68% 4.53%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,628 $1,024 $413
Ratio of Total Expenses to Average Net Assets 0.10% 0.10% 0.10%**
Ratio of Net Investment Income to Average Net Assets 6.64% 6.66% 6.48%**
Portfolio Turnover Rate 39% 39% 36%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
44
<PAGE> 47
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SHORT-TERM BOND PORTFOLIO
YEAR ENDED DECEMBER 31,
----------------------------------- MAR. 1* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 DEC. 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.92 $10.07 $ 9.50 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .597 .587 .623 .463
Net Realized and Unrealized Gain (Loss) on Investments .080 (.146) .570 (.500)
-----------------------------------------------------
Total from Investment Operations .677 .441 1.193 (.037)
-----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.597) (.587) (.623) (.463)
Distributions from Realized Capital Gains -- (.004) -- --
-----------------------------------------------------
Total Distributions (.597) (.591) (.623) (.463)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.00 $ 9.92 $10.07 $ 9.50
===========================================================================================================================
TOTAL RETURN** 7.04% 4.55% 12.88% -0.37%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $446 $328 $208 $77
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.03% 5.93% 6.28% 5.77%+
Portfolio Turnover Rate 88%++ 65% 65% 53%
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was from January 18, 1994, through
February 28, 1994, during which time all assets were held in money market
instruments.
**Total return figures do not reflect the annual account maintenance fee of
$10.
+Annualized.
++Portfolio turnover rate excluding in-kind redemptions was 73%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM BOND PORTFOLIO
YEAR ENDED DECEMBER 31,
------------------------------------ MAR. 1* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 DEC. 31, 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.96 $10.37 $ 9.18 $10.00
- ----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .661 .648 .661 .533
Net Realized and Unrealized Gain (Loss) on Investments .240 (.406) 1.217 (.820)
------------------------------------------------------
Total from Investment Operations .901 .242 1.878 (.287)
------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.661) (.648) (.661) (.533)
Distributions from Realized Capital Gains -- (.004) (.027) --
------------------------------------------------------
Total Distributions (.661) (.652) (.688) (.533)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.20 $ 9.96 $10.37 $ 9.18
============================================================================================================================
TOTAL RETURN** 9.41% 2.55% 21.07% -2.88%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $687 $460 $346 $71
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.64% 6.54% 6.55% 6.88%+
Portfolio Turnover Rate 56% 80% 71% 63%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was from January 18, 1994, through
February 28, 1994, during which time all assets were held in money market
instruments.
**Total return figures do not reflect the annual account maintenance fee of
$10.
+Annualized.
45
<PAGE> 48
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
LONG-TERM BOND PORTFOLIO
YEAR ENDED DECEMBER 31,
------------------------------------- MAR. 1* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 DEC. 31, 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.08 $10.82 $ 8.96 $10.00
- -----------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .678 .674 .692 .586
Net Realized and Unrealized Gain (Loss) on Investments .700 (.731) 1.884 (1.040)
-------------------------------------------------------
Total from Investment Operations 1.378 (.057) 2.576 (.454)
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.678) (.674) (.692) (.586)
Distributions from Realized Capital Gains -- (.009) (.024) --
-------------------------------------------------------
Total Distributions (.678) (.683) (.716) (.586)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.78 $10.08 $10.82 $ 8.96
=============================================================================================================================
TOTAL RETURN** 14.30% -0.26% 29.72% -4.53%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $88 $44 $24 $9
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.18%+
Ratio of Net Investment Income to Average Net Assets 6.66% 6.75% 6.90% 7.70%+
Portfolio Turnover Rate 58% 46% 45% 70%
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Subscription period for the Portfolio was from January 18, 1994, through
February 28, 1994, during which time all assets were held in money market
instruments.
**Total return figures do not reflect the annual account maintenance fee of
$10.
+Annualized.
46
<PAGE> 49
NOTES TO FINANCIAL STATEMENTS
Vanguard Bond Index Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual fund, and comprises the
Total Bond Market, Short-Term Bond, Intermediate-Term Bond, and Long-Term Bond
Portfolios. Certain of the Fund's investments are in corporate debt
instruments; the issuers' abilities to meet their obligations may be affected
by economic developments in their respective industries.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Bonds, and temporary cash investments acquired
over 60 days to maturity, are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by independent
pricing services. Other temporary cash investments are valued at amortized
cost, which approximates market value.
2. FEDERAL INCOME TAXES: Each Portfolio intends to continue to qualify as
a regulated investment company and distribute all of its income. Accordingly,
no provision for federal income taxes is required in the financial statements.
3. REPURCHASE AGREEMENTS: Each Portfolio of the Fund, along with other
members of The Vanguard Group, transfers uninvested cash balances into a Pooled
Cash Account, which is invested in repurchase agreements secured by U.S.
government securities. Securities pledged as collateral for repurchase
agreements are held by a custodian bank until the agreements mature. Each
agreement requires that the market value of the collateral be sufficient to
cover payments of interest and principal; however, in the event of default or
bankruptcy by the other party to the agreement, retention of the collateral may
be subject to legal proceedings.
4. DISTRIBUTIONS: Distributions from net investment income are declared
daily and paid on the first business day of the following month. Annual
distributions from realized capital gains, if any, are recorded on the
ex-dividend date.
5. OTHER: Security transactions are accounted for on the date securities
are bought or sold. Costs used to determine realized gains (losses) on the sale
of investment securities are those of the specific securities sold. Premiums
and discounts on debt securities purchased are amortized and accreted,
respectively, to interest income over the lives of the respective securities.
B. The Vanguard Group furnishes at cost investment advisory, corporate
management, administrative, marketing, and distribution services. The costs of
such services are allocated to the Fund under methods approved by the Board of
Directors. At December 31, 1997, the Fund had contributed capital aggregating
$425,000 to Vanguard (included in Other Assets), representing 2.1% of
Vanguard's capitalization. The Fund's Directors and officers are also Directors
and officers of Vanguard.
C. The Total Bond Market Portfolio offers two classes of shares, the
Investor Shares and the Institutional Shares. Institutional shares are designed
primarily for institutional investors that meet certain administrative and
servicing criteria and have a minimum investment of $10 million. Investor
shares are offered to all other investors. Both classes of shares have equal
rights as to assets and earnings, except that each class bears certain
class-specific expenses related to its shareholder activity. For the year ended
December 31, 1997, class-specific expenses represented 0.13% and 0.03% of
average net assets of the Investor Shares and Institutional Shares,
respectively. Income, expenses not attributable to a specific class, and
realized and unrealized gains and losses on investments are allocated to each
class of shares based on its relative net assets.
47
<PAGE> 50
D. During the year ended December 31, 1997, purchases and sales of investment
securities other than U.S. government securities and temporary cash investments
were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(000)
----------------------------------------
PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Bond Market $984,258 $238,110
Short-Term Bond 77,383 40,913
Intermediate-Term Bond 131,717 57,550
Long-Term Bond 22,690 4,898
- ------------------------------------------------------------------------------------------------
</TABLE>
Purchases and sales of U.S. government securities were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(000)
----------------------------------------
PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Total Bond Market $3,860,328 $1,867,663
Short-Term Bond 403,454 324,072
Intermediate-Term Bond 372,124 251,634
Long-Term Bond 48,755 29,009
- ------------------------------------------------------------------------------------------------
</TABLE>
During the year ended December 31, 1997, the Short-Term Bond Portfolio
realized $622,000 of net capital gains resulting from in-kind redemptions--in
which shareholders exchanged Portfolio shares for securities held by the
Portfolio rather than for cash. Because such gains are not taxable to the
Portfolio, and are not distributed to shareholders, they have been reclassified
from accumulated net realized gains to paid in capital.
E. Capital gains distributions are determined on a tax basis and may differ
from realized capital gains for financial reporting purposes due to differences
in the timing of realization of gains. For federal income tax purposes, the
Portfolios had the following capital gains available for distribution at
December 31, 1997, or capital losses available to offset future capital gains:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
CAPITAL LOSS
-----------------------------------
CAPITAL GAINS EXPIRATION
AVAILABLE FOR FISCAL YEAR(S)
DISTRIBUTION AMOUNT ENDING
PORTFOLIO (000) (000) DECEMBER 31,
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Bond Market -- $12,406 2002-2004
Short-Term Bond $721 -- --
Intermediate-Term Bond -- 4,012 2004-2006
Long-Term Bond 92 -- --
- ------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 51
At December 31, 1997, unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(000)
---------------------------------------------------------------
APPRECIATED DEPRECIATED NET UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Bond Market $211,237 $(3,509) $207,728
Short-Term Bond 4,214 (48) 4,166
Intermediate-Term Bond 21,210 (22) 21,188
Long-Term Bond 5,623 (32) 5,591
- -------------------------------------------------------------------------------------------------
</TABLE>
The Short-Term and Long-Term Portfolios used capital loss carryforwards
of $90,000 and $472,000, respectively, to offset taxable capital gains realized
during the year ended December 31, 1997, reducing the amount of capital gains
that would otherwise be available to distribute to shareholders.
F. The market values of securities on loan to brokers/dealers at December 31,
1997, and collateral received with respect to such loans, were:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(000)
--------------------------------------------------------------
COLLATERAL RECEIVED
--------------------------------------
MARKET VALUE MARKET VALUE
OF LOANED OF U.S. TREASURY
PORTFOLIO SECURITIES CASH SECURITIES
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Bond Market $63,821 $65,111 $132
Intermediate-Term Bond 31,336 31,921 --
- -------------------------------------------------------------------------------------------------
</TABLE>
Security loans are required to be secured at all times by collateral at
least equal to the market value of securities loaned; however, in the event of
default or bankruptcy by the other party to the agreement, retention of the
collateral may be subject to legal proceedings. Cash collateral received is
invested in repurchase agreements.
49
<PAGE> 52
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Bond Index Fund
In our opinion, the accompanying statements of net assets (and statement of
assets and liabilities for Short-Term Bond Portfolio) and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Total Bond Market, Short-Term Bond, Intermediate-Term Bond and Long-Term Bond
Portfolios (constituting Vanguard Bond Index Fund, hereafter referred to as the
"Fund") at December 31, 1997, the results of each of their operations for the
year then ended, the changes in each of their net assets for each of the two
years in the period ended and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits, which included confirmation of
securities at December 31, 1997 by correspondence with the custodian and
brokers and the application of alternative auditing procedures where securities
purchased had not been settled, provide a reasonable basis for the opinion
expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 6, 1998
50
<PAGE> 53
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD BOND INDEX FUND
This information for the fiscal year ended December 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.
The Short-Term and Long-Term Portfolios designate $35,000 and $92,000,
respectively, as capital gain dividends (from net long-term capital gains),
which will be distributed in March 1998. Of the total capital gain dividends,
the Portfolios designate $35,000 and $90,000, respectively, as a 20% rate gain
distribution.
51
<PAGE> 54
DIRECTORS AND OFFICERS
JOHN C. BOGLE
Chairman of the Board and Director of The Vanguard Group, Inc., and of each of
the investment companies in The Vanguard Group.
JOHN J. BRENNAN
President, Chief Executive Officer, and Director of The Vanguard Group, Inc.,
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN
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
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
President Emeritus of The Brookings Institution; Director of American Express
Bank Ltd., The St. Paul Companies, Inc., and National Steel Corp.
BURTON G. MALKIEL
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.
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
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.
JAMES O. WELCH, JR.
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
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R),"
and "500" are trademarks of The McGraw-Hill Companies, Inc. Frank Russell
Company is the owner of trademarks and copyrights relating to the Russell
Indexes. "Wilshire 4500" and "Wilshire 5000" are trademarks of Wilshire
Associates.
<PAGE> 55
VANGUARD FAMILY OF FUNDS
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(CA, NJ, NY, OH, PA)
Q840-12/1997
(C) 1998 Vanguard Marketing
Corporation, Distributor
[THE VANGUARD GROUP LOGO]
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1-800-662-7447
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complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
