<PAGE> 1
VANGUARD
ADMIRAL FUNDS
Annual Report
January 31, 1997
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage
includes a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord
Nelson's flagship at The Battle of the Nile); a clock built circa 1816 in
Scotland, featuring a portrait of Nelson (who is also shown, accepting a
surrender, in a detail from a nineteenth-century engraving); and several views
of our recently completed campus, which is steeped in nautical imagery--from
our buildings named after Nelson's warships (Victory, Majestic, and Goliath are
three shown), to our artwork and ornamental compass rose.
[PHOTO]
<PAGE> 2
[PHOTO]
VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
Fund.
THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.
THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.
WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
5
Report From
The Adviser
7
Performance
Summaries
9
Portfolio
Profiles
13
Financial
Statements
18
Report Of
Independent
Accountants
31
Directors And
Officers
INSIDE BACK COVER
<PAGE> 3
[PHOTO]
John C. Bogle
[PHOTO]
John J. Brennan
FELLOW SHAREHOLDER,
As if fatigued from its extraordinary climb the previous year, the
bond market slipped a notch in the twelve months ended January 31, 1997, the
fiscal year for Vanguard's Admiral Funds. Interest rates increased
substantially for all but the shortest maturities. As veteran fixed-income
investors would know to expect, the biggest damage done by the rate increase
was to the prices of long-term securities.
Returns from the four Admiral Portfolios varied considerably but,
again as you would expect, were right in line with the sectors of the bond
market they represent. Although the performances of our Short-Term and
Intermediate-Term U.S. Treasury Portfolios were impeded by the rise in interest
rates, each produced positive returns for the fiscal year. Only our Long-Term
U.S. Treasury Portfolio, which is the most sensitive to interest-rate changes,
suffered a negative return for the year. In an environment so unfavorable to
the longer end of the bond spectrum, our U.S. Treasury Money Market Portfolio,
not surprisingly, provided the highest total return, posting a +5.2% gain.
The table at right presents the total return (capital change plus
reinvested dividends) for each Portfolio during the past twelve months. Each is
compared with its respective mutual fund competitive group and the unmanaged
bond market index it emulates.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
TOTAL RETURNS
FISCAL YEAR ENDED
JANUARY 31, 1997
- --------------------------------------------------------------------
<S> <C>
Long-Term U.S. Treasury Portfolio -1.7%
Average Long-Term Treasury Fund +0.2
Lehman Long-Term Treasury Index -1.6
- --------------------------------------------------------------------
Intermediate-Term U.S. Treasury
Portfolio +1.3%
Average Intermediate-Term
Treasury Fund +1.6
Lehman Intermediate-Term
(5-10 years) Treasury Index +1.3
- --------------------------------------------------------------------
Short-Term U.S. Treasury Portfolio +4.1%
Average Short-Term Treasury Fund +3.4
Lehman Short-Term U.S.
Treasury Index +4.1
- --------------------------------------------------------------------
U.S. Treasury Money Market Portfolio +5.2%
Average U.S. Treasury
Money Market Fund +4.7
Salomon 90-Day U.S. Treasury
Bills +5.2
- --------------------------------------------------------------------
</TABLE>
As we explained in the Annual Report for fiscal 1996, when each of our
Portfolios outperformed its peer group, our Portfolios carry somewhat longer
maturities than their average competitors. This means, as we said then, that
"our net asset values may rise more when interest rates fall (as in the past
year), but decline more when interest rates rise." This tendency is greatest,
as you might expect, in the more interest-rate-sensitive Intermediate- and
Long-Term Portfolios, which trailed their peers in fiscal 1997.
We note that the same factors that worked against us in fiscal 1997
have in other years worked in our favor. We believe that our investment
policies are the soundest for the long pull.
Per-share figures for each Portfolio, including net asset values,
income dividends, and any capital gains distributions, are presented in the
table that follows this letter.
1
<PAGE> 4
FISCAL 1997 PERFORMANCE OVERVIEW
Conditions that proved ideal for a continuance of the bull market in
stocks--steady economic growth, rising corporate profits, low unemployment, and
a quiescent inflation rate--weren't quite good enough to suit fixed-income
investors in fiscal 1997. As a result, the bond market provided returns that
seemed paltry in comparison with the rich rewards bestowed by stocks. The
entire U.S. stock market (as measured by the Wilshire 5000 Equity Index)
provided a total return of +24.4% in the twelve months ended January 31, on top
of a +37.1% gain the previous year.
The U.S. bond market, on the other hand, provided a return of +3.3%
for the year (as measured by the Lehman Brothers Aggregate Bond Index), a far
cry from its powerful +17.0% gain a year earlier.
Although it often gets credit or blame for bond-market movements, the
Federal Reserve Board maintained a hands-off monetary policy in fiscal 1997.
After cutting short-term interest rates by 0.25 percentage point (25 basis
points) at the end of January 1996, the Fed left them alone for the following
twelve months. As a result, short-term interest rates traded within a very
narrow band (0.45 percentage point) and ended the year a mere 10 basis points
higher than they were when fiscal 1997 began (5.15% on January 31, 1997, versus
5.05% a year earlier).
Investors in longer-term securities, however, worried with every
positive economic indicator that the economy was doing too well. The fear was
that robust growth in employment would put upward pressure on wages and,
ultimately, on the inflation rate. Although evidence of a general upsurge in
the prices of goods and services failed to materialize (the Consumer Price
Index rose 3.1% during the fiscal year), inflation anxiety did cause a surge in
interest rates. From January 31 to mid-June, the yield on the long-term U.S.
Treasury bond rose from 6.03% to 7.19%, or more than one percentage point.
Thereafter, inflation worries subsided a bit and the yield on the long Treasury
bond followed suit, declining to 6.79% by our fiscal year-end on January 31.
In this environment, our Portfolios performed just about as one would
expect. Our Money Market Portfolio, with its short maturity, maintained its
share price. The asset value of our Short-Term Portfolio was relatively
resistant to the increase in rates, owing to its short average maturity of
roughly 2 1/2 years. For our Intermediate-Term Portfolio, which is about twice
as sensitive as our Short-Term Portfolio to changes in interest rates, the
price decline was proportionately greater, though its interest income was
sufficient to produce a positive total return. Finally, our Long-Term
Portfolio, twice as sensitive again, experienced the greatest share-price
decline, pretty much offset by its interest income.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
TOTAL RETURNS
ANNUALIZED FISCAL YEAR ENDED
YIELDS* JANUARY 31, 1997
ON JANUARY 31 --------------------------
--------------- INCOME CAPITAL TOTAL
U.S. TREASURY PORTFOLIO 1996 1997 RETURN RETURN RETURN
- --------------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
Long-Term 6.05% 6.81% +6.4% -8.1% -1.7%
Intermediate-Term 5.60 6.51 +6.3 -5.0 +1.3
Short-Term 5.21 5.99 +6.0 -1.9 +4.1
Money Market 5.25 5.06 +5.2 0.0 +5.2
- ---------------------------------------------------------------------------
</TABLE>
*Seven-day yield for Money Market Portfolio; 30-day yield for other Portfolios.
The above table shows the change in the yield of each Portfolio
between January 31, 1996, and January 31, 1997, as well as the components of
each Portfolio's total return.
These returns, to be sure, look paltry relative to those generated in
the stock market. However, that should hardly suggest that this is a time for
bond investors to shift strategy
2
<PAGE> 5
and jump on the stock market bandwagon. The future is ever unknowable, and
conservative investing--owning reserves and bonds as well as stocks--should
never be out of style.
LIFETIME PERFORMANCE OVERVIEW
It takes time to test the mettle of a mutual fund. While just over four years
is too short a period over which to judge any fund, we believe that our
Portfolios have already demonstrated the qualities we expect of them over the
longer term. They have outperformed their competitors and have closely
paralleled their unmanaged benchmark standards. The Performance Summaries on
pages 9 through 12 include charts showing cumulative returns for the lifetime
of our Portfolios as well as a year-by-year breakdown of the income and capital
returns earned by each. The table at right summarizes the average annual total
return of each Portfolio since its inception relative to those of comparable
fixed-income mutual funds and relevant indexes. It also shows how a $50,000
investment in each fund would have grown over the period involved.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
TOTAL RETURNS
DEC. 14, 1992, TO
JAN. 31, 1997
----------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $50,000
RATE INITIAL INVESTMENT
<S> <C> <C>
- ----------------------------------------------------------------------------
Long-Term U.S. Treasury Portfolio +8.5% $70,074
Average Long-Term Treasury Fund +6.8 65,702
Lehman Long-Term Treasury Index +8.6 70,303
- ----------------------------------------------------------------------------
Intermediate-Term U.S. Treasury
Portfolio +7.1% $66,285
Average Intermediate-Term
Treasury Fund +6.1 63,940
Lehman Intermediate-Term
(5-10 years) Treasury Index +7.1 66,476
- ----------------------------------------------------------------------------
Short-Term U.S. Treasury Portfolio 5.7% $62,945
Average Short-Term Treasury Fund 5.2 61,603
Lehman Short-Term U.S.
Treasury Index +5.8 63,223
- ----------------------------------------------------------------------------
U.S. Treasury Money Market Portfolio +4.5% $59,901
Average U.S. Treasury
Money Market Fund +4.0 58,897
Salomon 90-Day U.S. Treasury
Bills +4.8 60,610
- ----------------------------------------------------------------------------
</TABLE>
As the table shows, each of our Portfolios, without exception, has
outperformed its average competitor over this period. The annual average
margins of superiority range from 0.5 percentage point to 1.7 percentage
points. Over the years, this "Vanguard advantage" can amount to significant
sums.
We emphasize that future absolute returns from our Portfolios and
competing funds may be lower or higher than those shown in the table. The
relatively brief lifetime of Vanguard Admiral Funds has been a generally
favorable period for bond funds because of a general downtrend in interest
rates. Yet, we firmly believe that our Portfolios will continue to provide
returns that are more than competitive with industry norms. The principal
reason for our confidence on this point is the significant cost advantage our
Portfolios enjoy over their peer groups.
The expense ratio of the Portfolios of Vanguard Admiral Funds was but
0.15% of average net assets in fiscal 1997. These costs--which directly reduce
the income available to be passed through to bond fund investors--are far lower
than the average 0.69% expense ratio for competing mutual funds. The difference
of roughly 0.54% in fiscal 1997 amounted to more than $5 for each $1,000 in
assets. Our "head start" of that dimension is very difficult for funds with
similar maturity and quality characteristics to overcome year after year. And
unlike bond returns, which will change unpredictably from year to
3
<PAGE> 6
year as interest rates fluctuate, low cost is a relatively predictable factor
in enhancing the net returns investors receive. We believe our cost advantage
is sustainable.
Low cost is important, but it is not the only factor in our success
thus far. Two other critical factors are our adviser, Vanguard Fixed Income
Group, which manages our Portfolios with outstanding expertise and
professionalism, and our disciplined policy of maintaining our Portfolios'
maturities within clearly defined limits.
The Performance Summaries that follow also compare the lifetime return
of each Portfolio with that of an unmanaged index benchmark. Over time, we have
come very close to matching these bond market indexes, which are very tough
standards for actively managed bond funds. The indexes exist only on paper and
are not burdened by the operating, advisory, and securities-transaction costs
that all actual mutual funds bear to one degree or another. Although three of
our four Portfolios have fallen just shy of the index benchmarks during their
lifetimes (our Intermediate-Term Portfolio provided a perfect match), we have
come far closer than our average competitors to keeping up with these
theoretical standards.
IN SUMMARY
The dazzling performance of the stock market during the past two years--the
Wilshire 5000 Index provided a cumulative return of about +70%--has made the
bond market's return of about +20% seem lackluster by comparison, especially in
light of bonds' subpar performance in fiscal 1997. But we believe that bond
funds remain a vital element in a balanced investment program. Many equity fund
investors today have experienced only upside volatility--after all, the U.S.
stock market has been rising for nearly 15 years, with only a few, relatively
brief setbacks. But sooner or later, these investors will become acquainted
with the downside of stock-market volatility. At such times, the income and
relative stability of principal that bond funds provide are extremely welcome
attributes and investors are reminded of why a fixed-income component belongs
in most long-term investment programs.
We shall continue to operate Vanguard Admiral Funds as we have in the
past, providing professionally managed, carefully structured U.S. Treasury
Portfolios at the lowest costs in the mutual fund industry. Just as we will
"stay the course" in managing our Portfolios, we suggest that investors stay
the course with diversified, balanced investment programs appropriate to their
financial goals and circumstances.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
- ----------------------- --------------------------
Chairman of the Board President
February 19, 1997
<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET
VALUE PER SHARE TWELVE-MONTHS
-------------------- ----------------------------------------- SEC 30-DAY
JANUARY 31, INCOME CAPITAL TOTAL ANNUALIZED
U.S. TREASURY PORTFOLIO 1996 1997 DIVIDENDS GAINS RETURN YIELD
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-Term $11.06 $10.13 $0.681 $0.030 -1.7% 6.81%
Intermediate-Term 10.70 10.17 0.648 -- +1.3 6.51
Short-Term 10.23 10.04 0.587 -- +4.1 5.99
Money Market 1.00 1.00 0.051 -- +5.2 5.06*
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Seven-day yield.
4
<PAGE> 7
THE MARKETS IN PERSPECTIVE: FISCAL YEAR ENDED JANUARY 31, 1997
[PHOTO]
U.S. EQUITY MARKETS
With investors' confidence backed by steady economic growth, low inflation, and
rising earnings, the stock market rose in fiscal 1997 by 26.3%, as measured by
the Standard & Poor's 500 Composite Stock Price Index. This advance, while less
than the spectacular 38.7% return of the previous fiscal year, reflects how
exceptional the recent environment has been for common stocks. When the two
years are considered cumulatively, the S&P 500 Index has risen an astonishing
75.2%--truly a roaring bull market.
The market's gains, however, were far from evenly distributed in the
12 months ended January 31. Investors strongly favored larger companies, such
as those that dominate the S&P 500 Index. In fact, even within the Index, it
was the largest companies that prevailed: The 50 biggest (which account for
roughly half the Index's market value) gained 32.8% over the last 12 months,
6.5 percentage points more than the overall Index. Looking at the S&P 500
Index's performance by sector, technology stocks were strongest, with a 54.1%
gain. Financial stocks were also notably strong, gaining 39.5%. Utilities,
plagued early in the year by higher interest rates and a rapidly changing
competitive landscape, eked out a meager 2.1% return, the lowest within the
Index.
Smaller companies generally posted solid absolute results but could
not keep pace with the largest companies, with the 19.0% return of the Russell
2000 Index of small stocks lagging the S&P 500 Index by 7.3 percentage points.
Even for the smaller companies, there was a significant range of performance
among sectors. Energy stocks led the Russell 2000 Index with a 63.1% gain for
the fiscal year. Here, rising prices, limited exposure to the cyclical refining
business, and a reduced number of competitors created a favorable environment
for the stocks. At the other end of the spectrum were the small-capitalization
health-care stocks, which showed a loss of -1.4%.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED JANUARY 31, 1997
--------------------------------------
1 YEAR 3 YEARS 5 YEARS
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 26.3% 20.8% 17.1%
Russell 2000 Index 19.0 13.3 14.3
MSCI-EAFE Index 2.2 4.5 8.2
- ----------------------------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 3.3% 5.7% 7.4%
Lehman 10-Year Municipal
Bond Index 3.9 5.0 7.5
Salomon 90-Day U.S. Treasury Bills 5.2 5.1 4.4
- ----------------------------------------------------------------------------------------------
Other
Consumer Price Index 3.1% 2.9% 2.9%
- ----------------------------------------------------------------------------------------------
</TABLE>
U.S. FIXED-INCOME MARKETS
The fiscal year saw an overall rise in interest rates that reflected concern
about the prospects for increasing inflation, due to indications of greater
than expected strength in the economy. At January 31, 1997, the 30-year U.S.
Treasury yield was 6.79%, noticeably higher than its 6.03% level one year
earlier.
5
<PAGE> 8
A year ago, the general expectation was that modest economic growth
and benign inflation would continue, giving the Federal Reserve no reason to
boost interest rates. This complacent view was shattered by an exceptionally
strong February jobs report, the first in a succession of economic reports
indicating that in fact the economy was growing at a much faster--and
potentially inflation-inducing--pace. The bond market reacted swiftly: The
30-year Treasury bond's yield jumped from 6.03% on January 31, 1996, to 6.74%
in mid-March. The next several months saw a consistent pattern in which bond
yields rose on the Friday of the jobs-report release only to fall back by the
middle of the month. As it turned out, most of the worry was wasted: Inflation,
as measured by the Consumer Price Index, remained near an annualized rate of
3.1%. But increasing signs of growth during the past three months reignited
inflation concerns and caused bonds to finish the fiscal year on a sour note.
Despite the numerous setbacks suffered by the bond market in 1996,
most indexes were able to finish the fiscal year with positive total returns.
Although the specter of the Federal Reserve Board loomed large during the past
year, the board never acted to either raise or lower interest rates.
Amid the concerns that clouded the bond market during the fiscal year
were three relatively bright spots: corporate bonds, mortgage-backed issues,
and municipals. The strength in earnings that benefited stock prices extended
to the corporate bond sector as well. These bonds, especially those of lower
credit quality, performed well relative to Treasuries, supported by general
confidence in companies' ability to meet payments. The stable-to-rising
interest-rate environment throughout most of the year benefited another large
segment of the bond market--mortgage-backed securities--as the threat of
refinancings receded. Finally, municipal bonds outpaced their U.S. Treasury
counterparts. The sector was shielded to a certain extent from the inflation
wars of the Treasury market as demand outstripped supply for much of the year.
INTERNATIONAL EQUITY MARKETS
The Morgan Stanley Capital International-Europe, Australasia, Far East Index
showed a 2.2% return for the year ended January 31--an overall result that
conceals a striking regional disparity between the European and Pacific
markets. Europe's markets provided U.S. investors with a gain of 20.8%, while
the Pacific markets declined -16.0%. Clearly, the outlook and environments that
characterized the European and Far East markets were quite different.
The poor returns in the Pacific region largely reflected ongoing
concern about the health of the Japanese economy. Growth in Japan has remained
modest at best for several years despite government efforts to stimulate the
economy through public works programs and tax incentives. In Europe, the
picture was dramatically different, with the region benefiting from a variety
of factors. Among the most important were (1) ongoing efforts to lower
government deficits consistent with the Maastricht Treaty guidelines, (2)
improving economic growth, and (3) a greater commitment by corporate executives
to increasing "shareholder value."
6
<PAGE> 9
REPORT FROM THE ADVISER
[PHOTO]
A "RODNEY DANGERFIELD" YEAR FOR BONDS
The bond markets were distinctly unfriendly, if not downright disrespectful, to
investors in the fiscal year ended January 31, 1997. Interest rates rose along
the entire spectrum of maturities familiarly known as the Treasury "yield
curve." As the table below shows, yields rose about 0.7% for 1-year securities,
about 1.0% for 5-year notes, and about 0.8% for 30-year bonds.
The upward movement in interest rates produced price declines for
notes and bonds that offset much, if not all, of the respective securities'
interest income. It will come as no surprise to observant investors, therefore,
that fiscal 1997 produced generally forgettable total returns in the low single
digits. Returns appeared all the more lackluster when compared with the
scorching performance of the stock market, which turned in yet another
spectacular year.
Looking forward, it's fair to say that the prevailing market
conditions (with their higher available yields) look appreciably more
appealing than those of 12 months ago. However, time will tell whether fiscal
1998 really turns out better than last year.
<TABLE>
<CAPTION>
- --------------------------------------------------------------
YIELDS ON TREASURY NOTES AND BONDS
- --------------------------------------------------------------
MATURITY 1/31/96 1/31/97 CHANGE
- -------- ------- ------- ------
<S> <C> <C> <C>
1 Year 4.89% 5.57% +0.68%
2 Years 4.92 5.92 +1.00
3 Years 5.03 6.04 +1.01
5 Years 5.23 6.25 +1.02
10 Years 5.58 6.49 +0.91
30 Years 6.03 6.79 +0.76
- --------------------------------------------------------------
</TABLE>
Source: Bloomberg.
The Portfolios of Vanguard Admiral Funds performed pretty much in line
with the anemic bond market returns of the past 12 months. The U.S. Treasury
Money Market Portfolio, by virtue of its mandate to maintain a stable net asset
value, produced the highest return at 5.2%. The Short-Term U.S. Treasury
Portfolio was also highly resistant to the rise in interest rates (a by-product
of its conservative average maturity of 2 to 3 years), generating a total
return of about 4.1%. While its share price is much more volatile than those of
money market funds, the Short-Term Portfolio is very attractive to investors
with three- to five-year horizons seeking more income than that available from
securities with very short-term (1 year or under) maturities. Over most past
rolling two- and three-year intervals, it has provided relatively robust and
consistent performance.
The Intermediate-Term U.S. Treasury Portfolio generated lower total
returns in fiscal 1997 than its shorter brethren, owing to its longer average
maturity. Its net asset value is about twice as sensitive to changes in
interest rates as that of the Short-Term Portfolio. Consequently, it dropped
proportionately more in price during the market downturn. What the
Intermediate-Term Portfolio surrenders in price stability, however, it picks up
in income and dividend durability. Simply put, this Portfolio "hangs on" to its
dividends much longer (about twice as long) than does the Short-Term Portfolio.
Winner of the dividend-durability contest is the Long-Term U.S.
Treasury Portfolio. In years like fiscal 1996, when interest rates fell
sharply, this resulted in the
INVESTMENT PHILOSOPHY
The Funds reflect a belief that investors who want the
unparalleled credit quality of U.S. Treasury securities
should be able to select portfolios with maturities appropriate
to their needs.
7
<PAGE> 10
Portfolio's meaningful and beneficial increment to an investor's total return.
Unfortunately, in fiscal 1997 it was akin to backing the heaviest contestant in
a flotation tournament. The Portfolio's extremely long (20+ years) average
maturity caused its net asset value to sink further than those of our other
Portfolios. Indeed, the price sensitivity of this Portfolio is twice that of
the Intermediate-Term Portfolio and four times that of the Short-Term
Portfolio. Details of each Portfolio's returns relative to competing mutual
funds are provided in the Message To Shareholders, which begins on page 1.
Suffice it to say, it's good to get this kind of year behind us.
WHAT'S IN STORE FOR FISCAL 1998?
Accurate forecasts in the financial markets are difficult, if not impossible,
to achieve. The problem lies not only with predicting the economic variables
that influence interest rates, but also with predicting how market participants
will react to those changing variables. The economist John Maynard Keynes
captured the essence of this conundrum when he likened the financial markets to
a contest whose object is to predict the winner of a beauty pageant. The trick
is not to pick the most beautiful contestant, but to pick the one whom the
judges will select as most beautiful. The years 1995 and 1996 are vivid
examples of this "self-referential" kind of contest. As far as historical
inflation measures are concerned, the years were essentially identical, as the
table above shows.
<TABLE>
<CAPTION>
- -------------------------------------------------------
INFLATION RATES AND BOND RETURNS 1995 1996
- -------------------------------------------------------
<S> <C> <C>
GDP Implicit Price
Deflator* (change) 2.6% 2.0%
CPI (change) 2.6 3.3
Total Return: Lehman
Aggregate Bond Index 18.5 3.6
- -------------------------------------------------------
</TABLE>
*The broadest statistical measure of inflation in the U.S. economy.
In both years, inflation was effectively dormant. But what a
difference a year makes for the bond market! The perceptions of the judges
(market participants) as to the future were dramatically different in each year
and were the source of both the bond market's euphoric 1995 and its lackluster
1996. The new year will probably be no different. Expectations will be as
important as reality, if not more so. What do we expect? Given the current
state of economic affairs, we anticipate relatively low volatility in bond
prices. With luck, this scenario will produce total returns for the Portfolios
close to their dividend distribution yields. Our Portfolios are positioned to
perform well under these conditions.
On that note, it is appropriate to underscore the Vanguard expense
advantage, which is even greater in the ultra-low-cost Admiral Portfolios.
During periods of low price volatility, the main source of a bond portfolio's
total return is its coupon income, distributed to shareholders in the form of
dividends. With yields on U.S. Treasury bonds in the mid-single digits, every
basis point (1/100th of a percentage point) counts and investors should seek
out the most efficient investments available. On this score there are few, if
any, serious competitors to Vanguard Admiral Funds. At the risk of preaching to
the converted, we can reiterate and reaffirm our enduring competitive edge.
Virtually all of Vanguard's bond portfolios' income (and the state income tax
exemption for interest on U.S. Treasury securities) goes directly to the
shareholders' "bottom line." In the long run, that's what counts.
Ian A. MacKinnon, Senior Vice President
Robert F. Auwaerter, Principal
John W. Hollyer, Principal
Vanguard Fixed Income Group
February 13, 1997
8
<PAGE> 11
PERFORMANCE SUMMARY: U.S. TREASURY MONEY 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 that
annual returns can fluctuate widely. An investment in a money market fund is
neither insured nor guaranteed by the U.S. government, and there is no
assurance that the fund will be able to maintain a stable net asset value of
$1.00 per share.
TOTAL INVESTMENT RETURNS: 12/14/92-1/31/97
<TABLE>
<CAPTION>
- ------------------------------------------------------
U.S. TREASURY MONEY AVERAGE
MARKET PORTFOLIO FUND*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ------------------------------------------------------
<S> <C> <C> <C> <C>
1993 0.0% 0.4% 0.4% 0.4%
1994 0.0 3.0 3.0 2.6
1995 0.0 4.2 4.2 3.8
1996 0.0 5.7 5.7 5.3
1997 0.0 5.2 5.2 4.7
- ------------------------------------------------------
</TABLE>
*Average U.S. Treasury Money Market Fund.
See Financial Highlights table on page 25 for dividend information since the
Portfolio's inception.
CUMULATIVE PERFORMANCE: 12/14/92-1/31/97
<TABLE>
<CAPTION>
- -----------------------------------------------------------------
U.S. TREASURY
MONEY MARKET LIPPER U.S. SALOMON
PORTFOLIO TREASURY MONEY 90-DAY
ADMIRAL-TRSY MONEYMKT MARKET T-BILL
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
1992 12 50000 50000 50000
1993 01 50205 50190 50210
1993 04 50565 50510 50575
1993 07 50935 50835 50960
1993 10 51320 51165 51355
1994 01 51705 51500 52150
1994 04 52105 51840 52190
1994 07 52605 52285 52715
1994 10 53185 52815 53340
1995 01 53875 53445 54470
1995 04 54625 54125 54835
1995 07 55400 54845 55620
1995 10 56160 55550 56405
1996 01 56920 56255 57595
1996 04 57635 56875 57885
1996 07 58375 57535 58620
1996 10 59135 58210 59400
1997 01 59901 58897 60610
- -----------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $50,000 INVESTMENT
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. TREASURY MONEY MARKET
PORTFOLIO 5.24% 4.47% $59,901
AVERAGE U.S. TREASURY MONEY
MARKET FUND 4.70 4.04 58,897
SALOMON 90-DAY
U.S. TREASURY BILLS 5.23 4.77 60,610
- ---------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- -------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Treasury Money Market
Portfolio 12/14/92 5.26% 0.00% 4.46% 4.46%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
9
<PAGE> 12
PERFORMANCE SUMMARY: SHORT-TERM U.S. TREASURY 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 that an investment in the
Portfolio could lose money.
TOTAL INVESTMENT RETURNS: 12/14/92-1/31/97
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 1.7% 0.7% 2.4% 2.3%
1994 1.0 4.5 5.5 6.1
1995 -4.6 5.2 0.6 -0.1
1996 4.7 6.7 11.4 12.0
1997 -1.9 6.0 4.1 4.1
- ----------------------------------------------------------------
</TABLE>
*Lehman Short-Term U.S. Treasury Index.
See Financial Highlights table on page 26 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 12/14/92-1/31/97
[CHART]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
-------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $50,000 INVESTMENT
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
SHORT-TERM U.S. TREASURY
PORTFOLIO 4.05% 5.73% $62,945
AVERAGE SHORT-TERM
U.S. TREASURY FUND 3.36 5.18 61,603
LEHMAN SHORT-TERM
U.S. TREASURY INDEX 4.07 5.84 63,223
- ------------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ------------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Short-Term U.S. Treasury Portfolio 12/14/92 4.46% 0.21% 5.54% 5.75%
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
10
<PAGE> 13
PERFORMANCE SUMMARY: INTERMEDIATE-TERM U.S. TREASURY 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 that an investment in
the Portfolio could lose money.
TOTAL INVESTMENT RETURNS: 12/14/92-1/31/97
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
INTERMEDIATE-TERM U.S.
TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
1993 2.9% 0.9% 3.8% 3.8%
1994 4.1 5.8 9.9 10.6
1995 -9.4 5.7 -3.7 -4.5
1996 11.7 7.5 19.2 19.6
1997 -5.0 6.3 1.3 1.3
- ----------------------------------------------------------------------
</TABLE>
*Lehman Intermediate-Term U.S. Treasury Index.
See Financial Highlights table on page 26 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 12/14/92-1/31/97
[CHART]
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
-------------------------------- FINAL VALUE OF A
1 YEAR SINCE INCEPTION $50,000 INVESTMENT
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTERMEDIATE-TERM U.S. TREASURY
PORTFOLIO 1.30% 7.06% $66,285
AVERAGE INTERMEDIATE-TERM
U.S. TREASURY FUND 1.63 6.13 63,940
LEHMAN INTERMEDIATE-TERM
U.S. TREASURY INDEX 1.33 7.14 66,476
- --------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
- ---------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -------------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Intermediate-Term U.S. Treasury
Portfolio 12/14/92 2.05% 0.85% 6.35% 7.20%
- ---------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
11
<PAGE> 14
PERFORMANCE SUMMARY: LONG-TERM U.S. TREASURY 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 that an investment in
the Portfolio could lose money.
<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 12/14/92-1/31/97
- --------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO LEHMAN*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------
<S> <C> <C> <C> <C>
1993 3.0% 1.0% 4.0% 3.8%
1994 8.6 7.3 15.9 16.7
1995 -12.9 6.3 -6.6 -7.5
1996 18.6 8.1 26.7 27.4
1997 -8.1 6.4 -1.7 -1.6
- --------------------------------------------------------
</TABLE>
*Lehman Long-Term U.S. Treasury Index.
See Financial Highlights table on page 27 for dividend and capital gains
information since the Portfolio's inception.
CUMULATIVE PERFORMANCE: 12/14/92-1/31/97
[CHART]
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED JANUARY 31, 1997
------------------------------ FINAL VALUE OF A
1 YEAR SINCE INCEPTION $50,000 INVESTMENT
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
LONG-TERM U.S. TREASURY
PORTFOLIO -1.75% 8.51% $70,074
AVERAGE LONG-TERM
U.S. TREASURY FUND 0.23 6.83 65,702
LEHMAN LONG-TERM
U.S. TREASURY INDEX -1.58 8.60 70,303
- ------------------------------------------------------------------------------
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 12/31/96*
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Long-Term U.S. Treasury Portfolio 12/14/92 -1.07% 1.80% 7.09% 8.89%
- -------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Portfolio's fiscal
year-end.
12
<PAGE> 15
PORTFOLIO PROFILE: U.S. TREASURY MONEY MARKET PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics. Key
elements of this Profile are defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -------------------------------------------
<S> <C>
Number of Issues 13
Yield 5.1%
Average Maturity 53 days
Average Quality U.S. Treasury
Expense Ratio 0.15%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
U.S. Treasury 100%
</TABLE>
13
<PAGE> 16
[PHOTO]
AVERAGE COUPON. The average interest rate, expressed as a percentage of face
value, paid on the securities held by a portfolio.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To estimate the price
sensitivity of a portfolio, multiply its 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 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 assign ratings after appraising an issuer's ability to
meet its obligations. U.S. Treasury securities are considered to be the
highest-quality credits.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has 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 investments.
DISTRIBUTION BY CREDIT QUALITY. An indicator of the risk of default or other
credit problems on securities held by a portfolio.
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. Callable
securities trading at premium to par value are treated as coming due on their
earliest redemption date.
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 income from interest and dividends. The
yield, expressed as a percentage of the portfolio's net asset value, is based
on income earned over the past 30 days (7 days for money market portfolios) 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.
14
<PAGE> 17
PORTFOLIO PROFILE: SHORT-TERM U.S. TREASURY PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -----------------------------------------
<S> <C>
Number of Issues 27
Yield 6.0%
Yield to Maturity 6.0%
Average Coupon 6.8%
Average Maturity 2.3 years
Average Quality U.S. Treasury
Average Duration 2.1 years
Expense Ratio 0.15%
Cash Reserves 1.9%
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------
[CHART]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ------------------------------------------------------
SHORT-TERM
U.S. TREASURY LEHMAN*
- ------------------------------------------------------
<S> <C> <C>
R-Squared 0.93 1.00
Beta 0.50 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ----------------------------------------------
<S> <C>
U.S. Treasury 100%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------
<S> <C>
Under 1 Year 2.9%
1-5 Years 93.9
Over 5 Years 3.2
- -----------------------------------------
Total 100.0%
</TABLE>
15
<PAGE> 18
PORTFOLIO PROFILE: INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -----------------------------------------
<S> <C>
Number of Issues 25
Yield 6.5%
Yield to Maturity 6.5%
Average Coupon 8.3%
Average Maturity 7.3 years
Average Quality U.S. Treasury
Average Duration 5.3 years
Expense Ratio 0.15%
Cash Reserves 2.5%
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------
[CHART]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ------------------------------------------------------
INTERMEDIATE-TERM
U.S. TREASURY LEHMAN*
- ------------------------------------------------------
<S> <C> <C>
R-Squared 0.98 1.00
Beta 1.17 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- ----------------------------------------------
<S> <C>
U.S. Treasury 100%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------
<S> <C>
Under 1 Year 0.9%
1-5 Years 8.6
5-10 Years 64.1
Over 10 Years 26.4
- -----------------------------------------
Total 100.0%
</TABLE>
16
<PAGE> 19
PORTFOLIO PROFILE: LONG-TERM U.S. TREASURY PORTFOLIO
JANUARY 31, 1997
This Profile provides a snapshot of the Portfolio's characteristics, compared
where appropriate to an unmanaged index. Key elements of this Profile are
defined on page 14.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- -----------------------------------------
<S> <C>
Number of Issues 7
Yield 6.8%
Yield to Maturity 6.8%
Average Coupon 8.5%
Average Maturity 20.6 years
Average Quality U.S. Treasury
Average Duration 9.7 years
Expense Ratio 0.15%
Cash Reserves 6.6%
</TABLE>
INVESTMENT FOCUS
- -----------------------------------------
[CHART]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ------------------------------------------------------
LONG-TERM
U.S. TREASURY LEHMAN*
- ------------------------------------------------------
<S> <C> <C>
R-Squared 0.94 1.00
Beta 1.86 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
U.S. Treasury 100%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ------------------------------------------
<S> <C>
Under 1 Year 3.8%
1-5 Years --
5-10 Years --
10-20 Years 14.2
20-25 Years 79.4
Over 25 Years 2.6
- ------------------------------------------
Total 100.0%
</TABLE>
17
<PAGE> 20
[PHOTO]
FINANCIAL STATEMENTS
JANUARY 31, 1997
STATEMENT OF NET ASSETS
This Statement provides a detailed list of each Portfolio's holdings of U.S.
Treasury issues and other U.S. government-guaranteed securities, including each
security's market value on the last day of the reporting period. 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 on both a
dollar and per-share basis. 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. 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*
U.S. TREASURY MONEY MARKET PORTFOLIO YIELD DATE (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (97.8%)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bills 5.022% 4/3/97 $204,422 $ 202,710
U.S. Treasury Bills 5.041% 2/13/97 1,018 1,016
U.S. Treasury Bills 5.11% 2/6/97 24,596 24,578
U.S. Treasury Bills 5.29% 5/1/97 7,130 7,042
U.S. Treasury Notes 4.75% 2/15/97 354,702 354,601
U.S. Treasury Notes 6.50% 4/30/97 457,655 458,948
U.S. Treasury Notes 6.50% 5/15/97 118,058 118,440
U.S. Treasury Notes 6.625% 3/31/97 430,975 431,923
U.S. Treasury Notes 6.875% 2/28/97 784,203 785,100
U.S. Treasury Notes 6.875% 3/31/97 315,000 315,808
U.S. Treasury Notes 6.875% 4/30/97 90,837 91,185
U.S. Treasury Notes 8.50% 4/15/97 146,204 147,140
U.S. Treasury Notes 8.50% 5/15/97 236,000 238,072
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $3,176,563) 3,176,563
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.2%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 89,904
Liabilities (19,853)
-------
70,051
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 3,246,814,928 outstanding $.001 par value shares (authorized 20,000,000,000 shares) $3,246,614
================================================================================================================================
NET ASSET VALUE PER SHARE $1.00
================================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,246,815 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note C (201) --
Unrealized Appreciation -- --
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $3,246,614 $1.00
================================================================================================================================
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (98.1%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Notes 4.75% 8/31/98 $ 36,000 $ 35,421
U.S. Treasury Notes 5.625% 10/31/97 10,200 10,205
U.S. Treasury Notes 5.875% 3/31/99 3,500 3,495
U.S. Treasury Notes 6.25% 7/31/98 85,800 86,336
U.S. Treasury Notes 6.25% 8/31/00 8,200 8,221
U.S. Treasury Notes 6.50% 4/30/99 3,000 3,033
U.S. Treasury Notes 6.75% 6/30/99 70,500 71,667
U.S. Treasury Notes 6.875% 8/31/99 55,900 57,001
U.S. Treasury Notes 6.875% 3/31/00 21,200 21,654
U.S. Treasury Notes 7.125% 9/30/99 39,500 40,530
U.S. Treasury Notes 7.75% 11/30/99 45,100 47,031
U.S. Treasury Notes 7.75% 12/31/99 88,900 92,804
U.S. Treasury Notes 7.75% 1/31/00 16,750 17,499
U.S. Treasury Notes 7.875% 4/15/98 10,500 10,754
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 4.62% 10/15/98 (1) 3,243 3,203
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 5.10% 4/15/98 (1) 1,800 1,791
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 5.48% 10/15/97 (1) 607 606
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 6.475% 5/15/00 (1) 4,122 4,137
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 8.038% 1/15/00 (1) 4,192 4,316
Bariven, SA Eximbank Guaranteed Export Financing
(U.S. Government Guaranteed) 6.277% 4/15/01 (1)(2) 7,200 7,196
Government Export Trust (U.S. Government Guaranteed) 4.61% 9/1/98 (1) 480 475
Government Export Trust (U.S. Government Guaranteed) 5.69% 2/1/98 (1) 300 300
Government Export Trust (U.S. Government Guaranteed) 7.75% 1/1/00 (1) 3,600 3,688
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.743% 9/15/98 (1) 3,600 3,569
Guaranteed Export Certificates (U.S. Government Guaranteed) 6.61% 9/15/99 (1) 4,300 4,332
Guaranteed Trade Trust (U.S. Government Guaranteed) 4.77% 11/1/97 (1) 1,860 1,851
Guaranteed Trade Trust (U.S. Government Guaranteed) 4.86% 4/1/98 (1) 1,500 1,490
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $541,312) 542,605
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (1.0%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $5,563) 5.51% 2/3/97 5,563 5,563
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.1%)
(COST $546,875) 548,168
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.9%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes B and E 12,556
Liabilities--Note E (7,509)
-------
5,047
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 55,100,703 outstanding $.001 par value shares
(authorized 500,000,000 shares) $553,215
================================================================================================================================
NET ASSET VALUE PER SHARE $10.04
================================================================================================================================
</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.
(2) Restricted security representing 1.3% of net assets at January 31, 1997.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $554,978 $10.07
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note C (3,056) (.05)
Unrealized Appreciation--Note D 1,293 .02
- ---------------------------------------------------------------------------------------------
NET ASSETS $553,215 $10.04
=============================================================================================
</TABLE>
19
<PAGE> 22
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (97.5%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds 10.375% 11/15/12 $114,550 $146,302
U.S. Treasury Bonds 10.75% 2/15/03 5,000 6,085
U.S. Treasury Bonds 10.75% 5/15/03 37,150 45,433
U.S. Treasury Bonds 11.125% 8/15/03 10,500 13,117
U.S. Treasury Bonds 11.625% 11/15/04 12,600 16,520
U.S. Treasury Bonds 11.875% 11/15/03 5,000 6,483
U.S. Treasury Notes 5.875% 2/15/04 9,000 8,735
U.S. Treasury Notes 6.25% 4/30/01 17,000 17,005
U.S. Treasury Notes 6.625% 7/31/01 5,000 5,071
U.S. Treasury Notes 7.25% 5/15/04 92,779 97,201
U.S. Treasury Notes 7.25% 8/15/04 25,800 27,033
U.S. Treasury Notes 7.50% 2/15/05 34,500 36,705
U.S. Treasury Notes 7.75% 12/31/99 28,000 29,229
U.S. Treasury Notes 7.875% 11/15/04 77,000 83,605
Export Funding Trust (U.S. Government Guaranteed) 8.21% 12/29/06 (1) 8,876 9,398
Government Export Trust (U.S. Government Guaranteed) 6.00% 3/15/05 (1) 10,298 10,079
Government Export Trust (U.S. Government Guaranteed) 7.46% 12/15/05 (1) 12,522 12,913
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.39% 6/26/06 (1) 2,264 2,323
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.80% 8/15/06 (1) 8,333 8,712
Guaranteed Trade Trust (U.S. Government Guaranteed) 8.17% 1/15/07 (1) 3,333 3,544
Overseas Private Investment Corp. (U.S. Government Guaranteed) 5.735% 1/15/02 (1) 5,000 4,928
Overseas Private Investment Corp. (U.S. Government Guaranteed) 5.94% 6/20/06 (1) 5,000 4,850
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.08% 8/15/04 (1) 22,500 21,976
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.726% 9/15/10 (1) 9,000 8,892
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.75% 12/15/08 (1) 16,000 15,969
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $639,011) 642,108
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.9%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $5,594) 5.51% 2/3/97 5,594 5,594
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.4%)
(COST $644,605) 647,702
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.6%)
- --------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes B and E 88,437
Liabilities--Note E (77,598)
-------
10,839
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------------------------------------------------------
Applicable to 64,731,311 outstanding $.001 par value shares
(authorized 500,000,000 shares) $658,541
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $10.17
================================================================================================================================
</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 JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $665,236 $10.27
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note C (9,792) (.15)
Unrealized Appreciation--Note D 3,097 .05
- ---------------------------------------------------------------------------------------------
NET ASSETS $658,541 $10.17
=============================================================================================
</TABLE>
20
<PAGE> 23
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (93.4%)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds 7.50% 11/15/24 $ 4,600 $ 4,952
U.S. Treasury Bonds 7.875% 2/15/21 45,704 50,917
U.S. Treasury Bonds 8.125% 8/15/19 22,133 25,235
U.S. Treasury Bonds 8.875% 8/15/17 30,170 36,803
U.S. Treasury Bonds 8.875% 2/15/19 28,103 34,413
U.S. Treasury Bonds 9.875% 11/15/15 6,700 8,847
U.S. Treasury Bonds 10.375% 11/15/12 14,090 17,996
- ------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $175,206) 179,163
- ------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (3.8%)
- ------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $7,357) 5.51% 2/3/97 7,357 7,357
- ------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.2%)
(COST $182,563) 186,520
- ------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.8%)
- ------------------------------------------------------------------------------------------------------------
Other Assets--Note B 5,884
Liabilities (444)
------
5,440
- ------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------
Applicable to 18,942,168 outstanding $.001 par value shares
(authorized 500,000,000 shares) $ 191,960
============================================================================================================
NET ASSET VALUE PER SHARE $ 10.13
============================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
AT JANUARY 31, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $ 189,354 $ 9.99
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note C (1,351) (.07)
Unrealized Appreciation--Note D 3,957 .21
- ------------------------------------------------------------------------------------------------------------
NET ASSETS $ 191,960 $10.13
============================================================================================================
</TABLE>
21
<PAGE> 24
STATEMENT OF OPERATIONS
This Statement shows interest earned by each Portfolio during the reporting
period, and details the operating expenses charged to the Portfolio. 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 the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If a
Portfolio invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 31, 1997
------------------------------------------------------------------------
U.S. TREASURY SHORT-TERM INTERMEDIATE-TERM LONG-TERM
MONEY MARKET U.S. TREASURY U.S. TREASURY U.S. TREASURY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
(000) (000) (000) (000)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $135,963 $ 28,389 $ 40,563 $ 12,598
-------------------------------------------------------------------
Total Income 135,963 28,389 40,563 12,598
-------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 307 61 82 25
Management and Administrative 2,572 450 600 164
Marketing and Distribution 728 140 172 54
Custodian Fees 37 8 14 9
Taxes (other than income taxes) 188 35 47 14
Auditing Fees 8 6 6 6
Shareholders' Reports 19 7 9 3
Annual Meeting and Proxy Costs 2 1 1 --
Directors' Fees and Expenses 6 1 1 --
-------------------------------------------------------------------
Total Expenses 3,867 709 932 275
- ------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 132,096 27,680 39,631 12,323
- ------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities (249) 2,759 434 (1,281)
Futures Contracts -- -- 47 (68)
- ------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) ON INVESTMENT
SECURITIES SOLD (249) 2,759 481 (1,349)
- ------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities -- (10,366) (30,503) (13,669)
Futures Contracts -- -- -- --
- ------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) -- (10,366) (30,503) (13,669)
- ------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $131,847 $ 20,073 $ 9,609 $ (2,695)
============================================================================================================
</TABLE>
22
<PAGE> 25
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 that is 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.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SHORT-TERM
MONEY MARKET U.S. TREASURY
PORTFOLIO PORTFOLIO
--------------------------------------------------------------
YEAR ENDED JANUARY 31,
--------------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 132,096 $ 87,829 $ 27,680 $ 23,904
Realized Net Gain (Loss) (249) 73 2,759 1,729
Change in Unrealized Appreciation (Depreciation) -- -- (10,366) 15,462
--------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 131,847 87,902 20,073 41,095
--------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (132,096) (87,829) (27,680) (23,904)
Realized Capital Gain -- -- -- --
--------------------------------------------------------------
Total Distributions (132,096) (87,829) (27,680) (23,904)
--------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 3,443,596 1,644,118 335,675 264,098
Issued in Lieu of Cash Distributions 125,454 82,822 20,447 18,618
Redeemed (2,100,531) (1,320,063) (221,325) (206,839)
--------------------------------------------------------------
Net Increase from Capital Share Transactions 1,468,519 406,877 134,797 75,877
- -----------------------------------------------------------------------------------------------------------------------
Total Increase 1,468,270 406,950 127,190 93,068
- -----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 1,778,344 1,371,394 426,025 332,957
--------------------------------------------------------------
End of Year $ 3,246,614 $ 1,778,344 $ 553,215 $ 426,025
=======================================================================================================================
(1)Shares Issued (Redeemed)
Issued 3,443,596 1,644,118 33,493 26,346
Issued in Lieu of Cash Distributions 125,454 82,822 2,041 1,849
Redeemed (2,100,531) (1,320,063) (22,075) (20,626)
--------------------------------------------------------------
Net Increase in Shares Outstanding 1,468,519 406,877 13,459 7,569
=======================================================================================================================
</TABLE>
23
<PAGE> 26
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (continued)
- ----------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM LONG-TERM
U.S. TREASURY U.S. TREASURY
PORTFOLIO PORTFOLIO
-----------------------------------------------------------
YEAR ENDED JANUARY 31,
-----------------------------------------------------------
1997 1996 1997 1996
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 39,631 $ 32,104 $ 12,323 $ 10,585
Realized Net Gain (Loss) 481 6,041 (1,349) 4,194
Change in Unrealized Appreciation (Depreciation) (30,503) 46,712 (13,669) 23,788
-----------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 9,609 84,857 (2,695) 38,567
-----------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (39,631) (32,104) (12,323) (10,585)
Realized Capital Gain -- -- (527) (1,495)
-----------------------------------------------------------
Total Distributions (39,631) (32,104) (12,850) (12,080)
-----------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 330,265 320,851 138,400 145,811
Issued in Lieu of Cash Distributions 28,181 23,082 9,008 8,307
Redeemed (254,568) (169,135) (125,781) (130,533)
-----------------------------------------------------------
Net Increase from Capital Share Transactions 103,878 174,798 21,627 23,585
- ----------------------------------------------------------------------------------------------------------------------
Total Increase 73,856 227,551 6,082 50,072
- ----------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 584,685 357,134 185,878 135,806
-----------------------------------------------------------
End of Year $ 658,541 $ 584,685 $ 191,960 $ 185,878
======================================================================================================================
(1)Shares Issued (Redeemed)
Issued 32,362 31,613 13,651 14,158
Issued in Lieu of Cash Distributions 2,777 2,244 892 794
Redeemed (25,076) (16,469) (12,404) (12,599)
-----------------------------------------------------------
Net Increase in Shares Outstanding 10,063 17,388 2,139 2,353
======================================================================================================================
</TABLE>
24
<PAGE> 27
FINANCIAL HIGHLIGHTS
This table summarizes each Portfolio's investment results and distributions to
shareholders on a per-share basis. It also presents the Portfolio's 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. Money market portfolios do not show a Portfolio
Turnover Rate because securities purchased with less than one year to maturity
are excluded from the calculation of turnover rates.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
YEAR ENDED JANUARY 31,
--------------------------------------- DEC. 14, 1992,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 1994 JAN. 31, 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .051 .055 .041 .029 .004
Net Realized and Unrealized Gain (Loss) on Investments -- -- -- -- --
-----------------------------------------------------------
Total from Investment Operations .051 .055 .041 .029 .004
-----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.051) (.055) (.041) (.029) (.004)
Distributions from Realized Capital Gains -- -- -- -- --
-----------------------------------------------------------
Total Distributions (.051) (.055) (.041) (.029) (.004)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00
=====================================================================================================================
TOTAL RETURN 5.24% 5.66% 4.19% 2.99% 0.41%
=====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $3,247 $1,778 $1,371 $860 $149
Ratio of Total Expenses to Average Net Assets 0.15% 0.15% 0.15% 0.15% 0.15%**
Ratio of Net Investment Income to Average Net Assets 5.12% 5.50% 4.21% 3.06% 3.12%**
Portfolio Turnover Rate N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
25
<PAGE> 28
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
-------------------------------------- DEC. 14, 1992,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 1994 JAN. 31, 1993
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.23 $ 9.77 $10.26 $10.17 $10.00
- ----------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .587 .626 .518 .448 .065
Net Realized and Unrealized Gain (Loss) on Investments (.190) .460 (.468) .101 .170
----------------------------------------------------------
Total from Investment Operations .397 1.086 .050 .549 .235
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.587) (.626) (.518) (.448) (.065)
Distributions from Realized Capital Gains -- -- (.022) (.011) --
Total Distributions (.587) (.626) (.540) (.459) (.065)
- ----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.04 $10.23 $ 9.77 $10.26 $10.17
======================================================================================================================
TOTAL RETURN 4.05% 11.41% 0.57% 5.50% 2.35%
======================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $553 $426 $333 $252 $63
Ratio of Total Expenses to Average Net Assets 0.15% 0.15% 0.15% 0.15% 0.15%**
Ratio of Net Investment Income to Average Net Assets 5.85% 6.22% 5.30% 4.38% 4.87%**
Portfolio Turnover Rate 80% 95% 129% 90% 7%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
-------------------------------------- DEC. 14, 1992,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 1994 JAN. 31, 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.70 $ 9.58 $10.58 $10.29 $10.00
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .648 .665 .598 .578 .084
Net Realized and Unrealized Gain (Loss) on Investments (.530) 1.120 (.995) .418 .290
-----------------------------------------------------------
Total from Investment Operations .118 1.785 (.397) .996 .374
-----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.648) (.665) (.598) (.578) (.084)
Distributions from Realized Capital Gains -- -- (.005) (.128) --
-----------------------------------------------------------
Total Distributions (.648) (.665) (.603) (.706) (.084)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.17 $10.70 $ 9.58 $10.58 $10.29
========================================================================================================================
TOTAL RETURN 1.30% 19.16% -3.67% 9.89% 3.75%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $659 $585 $357 $332 $78
Ratio of Total Expenses to Average Net Assets 0.15% 0.15% 0.15% 0.15% 0.15%**
Ratio of Net Investment Income to Average Net Assets 6.37% 6.49% 6.15% 5.46% 6.31%**
Portfolio Turnover Rate 52% 64% 134% 102% 0%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
26
<PAGE> 29
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
-------------------------------------- DEC. 14, 1992,* TO
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 1997 1996 1995 1994 JAN. 31, 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.06 $ 9.40 $ 10.90 $10.30 $10.00
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .681 .691 .670 .709 .096
Net Realized and Unrealized Gain (Loss) on Investments (.900) 1.749 (1.405) .881 .300
----------------------------------------------------------
Total from Investment Operations (.219) 2.440 (.735) 1.590 .396
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.681) (.691) (.670) (.709) (.096)
Distributions from Realized Capital Gains (.030) (.089) (.095) (.281) --
----------------------------------------------------------
Total Distributions (.711) (.780) (.765) (.990) (.096)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.13 $11.06 $ 9.40 $10.90 $10.30
========================================================================================================================
TOTAL RETURN -1.75% 26.74% -6.60% 15.90% 3.97%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $192 $186 $136 $99 $49
Ratio of Total Expenses to Average Net Assets 0.15% 0.15% 0.15% 0.15% 0.15%**
Ratio of Net Investment Income to Average Net Assets 6.72% 6.66% 7.06% 6.58% 7.22%**
Portfolio Turnover Rate 42% 125% 44% 51% 17%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
27
<PAGE> 30
NOTES TO FINANCIAL STATEMENTS
Vanguard Admiral Funds is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual fund, and comprises the
U.S. Treasury Money Market, Short-Term U.S. Treasury, Intermediate-Term U.S.
Treasury, and Long-Term U.S. Treasury Portfolios.
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: Money Market Portfolio: Investment securities
are valued at amortized cost, which approximates market value. Other
Portfolios: 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: The Short-Term U.S. Treasury,
Intermediate-Term U.S. Treasury, and Long-Term U.S. Treasury Portfolios, along
with other members of The Vanguard Group, transfer 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. FUTURES CONTRACTS: Each Portfolio, except the U.S. Treasury Money
Market Portfolio, may use Municipal Bond Index, U.S. Treasury Bond, and U.S.
Treasury Note futures contracts, with the objectives of enhancing returns,
managing interest-rate risk, maintaining liquidity, diversifying credit risk,
and minimizing transaction costs. The Portfolios may purchase or sell futures
contracts instead of bonds to take advantage of pricing differentials between
the futures contracts and the underlying bonds. The Portfolios may also seek to
take advantage of price differences among bond market sectors by simultaneously
buying futures (or bonds) of one market sector and selling futures (or bonds)
of another sector. Futures contracts may also be used to simulate a fully
invested position in the underlying bonds while maintaining a cash balance for
liquidity. The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of bonds held by the
Portfolios and the prices of futures contracts, and the possibility of an
illiquid market.
Futures contracts are valued based upon their quoted daily settlement
prices. The aggregate principal amounts of the contracts are not recorded in
the financial statements. Fluctuations in the value of the contracts are
recorded in the Statement of Net Assets as an asset (liability) and in the
Statement of Operations as unrealized appreciation (depreciation) until the
contracts are closed, when they are recorded as realized futures gains
(losses).
5. 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.
6. 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 original issue discounts are amortized and accreted, respectively,
to interest income over the lives of the respective securities.
28
<PAGE> 31
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 January 31, 1997, the Fund had contributed capital aggregating
$400,000 to Vanguard (included in Other Assets), representing 2.0% of
Vanguard's capitalization. The Fund's directors and officers are also directors
and officers of Vanguard.
C. During the year ended January 31, 1997, purchases and sales of U.S.
government securities were:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
(000)
-------------------------
PORTFOLIO PURCHASES SALES
------------------------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury $554,246 $362,576
Intermediate-Term U.S. Treasury 426,503 314,520
Long-Term U.S. Treasury 96,127 74,657
------------------------------------------------------------------------------
</TABLE>
At January 31, 1997, capital loss carryforwards available to offset
future net capital gains were:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
EXPIRATION
FISCAL YEAR(S) ENDING AMOUNT
PORTFOLIO JANUARY 31 (000)
----------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Money Market 2005-2006 $ 343
Short-Term U.S. Treasury 2003-2006 3,047
Intermediate-Term U.S. Treasury 2003-2006 9,794
Long-Term U.S. Treasury 2005-2006 1,281
----------------------------------------------------------------------------------
</TABLE>
D. At January 31, 1997, net unrealized appreciation of investment
securities for financial reporting and federal income tax purposes was:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
(000)
-----------------------------------------------
NET
APPRECIATED DEPRECIATED UNREALIZED
PORTFOLIO SECURITIES SECURITIES APPRECIATION
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-Term U.S. Treasury $1,723 $ (430) $1,293
Intermediate-Term U.S. Treasury 9,691 (6,594) 3,097
Long-Term U.S. Treasury 4,156 (199) 3,957
----------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 32
E. The market values of securities on loan to broker/dealers at January
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>
Short-Term U.S. Treasury $88,123 $ 2,591 $90,727
Intermediate-Term U.S. Treasury 74,931 76,046 --
-------------------------------------------------------------------------------------------
</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.
30
<PAGE> 33
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
Vanguard Admiral Funds
In our opinion, the accompanying statements of net assets 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
U.S. Treasury Money Market, Short-Term U.S. Treasury, Intermediate-Term U.S.
Treasury, and Long-Term U.S. Treasury Portfolios (constituting Vanguard Admiral
Funds, hereafter referred to as the "Fund") at January 31, 1997, and the
results of each of their operations, the changes in each of their net assets
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 January 31, 1997 by
correspondence with the custodian and, with respect to unsettled securities
transactions, the application of alternative auditing procedures, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 28, 1997
All comparative mutual fund data are from Lipper Analytical Services, Inc. or
Morningstar unless otherwise noted.
31
<PAGE> 34
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.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.
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
Communications 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.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President 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
ROBERT A. DISTEFANO, Senior Vice President,
Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 35
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International
Portfolio
INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio
FIXED-INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Treasury Money Market Portfolio
Vanguard Admiral Funds
INCOME FUNDS
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
Q120-1/97
[PHOTO]
