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VANGUARD
ADMIRAL FUNDS
Semiannual Report
July 31, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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[PHOTO]
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; 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.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
4
Report From
The Adviser
6
Performance
Summaries
8
Financial
Statements
10
Directors And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
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[PHOTO]
FELLOW SHAREHOLDER,
Interest rates declined on balance during the six months ended July 31,
1997, the first half of Vanguard Admiral Funds' fiscal year. In this
environment, which was most favorable to bonds with the longest maturities, the
returns of our four Portfolios were right in line with the sectors of the bond
market they represent. Total returns ranged from +8.3% on our Long-Term U.S.
Treasury Portfolio to +2.6% on our U.S. Treasury Money Market Portfolio.
The table below presents the total return (capital change plus
reinvested dividends) for each Portfolio during the past six months compared
with that of its average mutual fund competitor.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JULY 31, 1997
---------------------------------
ADMIRAL PEER GROUP
U.S. TREASURY FUNDS PORTFOLIO AVERAGE
- -------------------------------------------------------------------
<S> <C> <C>
Money Market +2.6% +2.3%
Short-Term +3.5 +3.5
Intermediate-Term +5.3 +4.6
Long-Term +8.3 +6.3
- -------------------------------------------------------------------
</TABLE>
Details on each Portfolio, including per-share net asset values and
income dividends, as well as maturity and credit quality data, are presented in
the table that follows this letter. The table also lists the annualized current
yields for each Portfolio, which on July 31 ranged from 5.22% on our U.S.
Treasury Money Market Portfolio to 6.32% on our Long-Term U.S. Treasury
Portfolio.
In reviewing our half-year performance, it's important to note that
semiannual returns for bond funds account for only half of the year's interest
income, while price changes occur immediately in response to changes in interest
rates. Over the long run, however, interest income accounts for virtually all of
the total return on a bond fund; thus, a full year's interest income should be
considered. The table below presents each Portfolio's return for the past twelve
months, divided into its income and capital components.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
COMPONENTS OF TOTAL RETURN
TWELVE MONTHS ENDED
JULY 31, 1997
-------------------------------------
INCOME CAPITAL TOTAL
ADMIRAL PORTFOLIO RETURN RETURN RETURN
- ----------------------------------------------------------------
<S> <C> <C> <C>
Money Market +5.3% 0.0% + 5.3%
Short-Term +6.1 +1.3 + 7.4
Intermediate-Term +6.8 +3.5 +10.3
Long-Term +7.4 +6.8 +14.2
- ----------------------------------------------------------------
</TABLE>
THE PERIOD IN REVIEW
As the half-year began, investors fretted over the resurgence of higher
inflation and higher interest rates. Under this cloud, the U.S. stock market
went nowhere in February and down in March. But the stall was short-lived.
Inflation fears began to recede in April and all but vanished by July. Long-term
interest rates retreated steadily after topping out in mid-April, and strong
corporate profits and steady economic growth helped push U.S. stocks to a nearly
+27% gain in the final four months of the period alone. In sum, the nearly
utopian investment environment of the past two and one-half years prevailed.
In the U.S. bond market, interest rates declined for all but the
shortest maturities, making for a solid six months for fixed-income investments.
On balance, the yield on the benchmark 30-year U.S. Treasury bond fell to 6.30%
on July 31, from 6.79% when the
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period began in February. The long-bond yield was rising as the period began and
peaked in mid-April, before declining steadily through the remainder of the
half-year. The yield on intermediate-term Treasury bonds followed a similar
path, ending the period at 6.01%, 48 basis points below its starting point of
6.49%. But short-term interest rates ended the period at 5.23%, an increase of 8
basis points from 5.15% at the outset, as the Federal Reserve Board raised its
target for the federal funds rate by a quarter-point to 5.50% on March 25.
Though returns on bonds for the six months were generous, they were a
far cry from the returns provided by the U.S. stock market, which gained +22.5%
during the period (as measured by the Standard & Poor's 500 Composite Stock
Price Index). Common stocks continue to be aided by a powerful combination of
strong economic growth, rising corporate profits, and decelerating inflation.
For the Portfolios of Vanguard Admiral Funds, the decline in interest
rates during the six months resulted in positive capital returns that augmented
our income returns. This benefit was most apparent, of course, in our Long-Term
U.S. Treasury Portfolio, since a decline in interest rates boosts the prices of
long-term bonds more than it does the prices of short-term bonds. Conversely,
the prices of longer-term bonds decline more than the prices of short-term bonds
when interest rates are rising. For longer-term information on each Portfolio's
income and capital return, see the Performance Summaries beginning on page 8.
As we mentioned in our Annual Report six months ago, the average
maturities of our Portfolios are longer than those of our average competitors--a
policy we believe is in the best long-term interests of our shareholders. While
this factor works to our relative disadvantage during periods of rising interest
rates (such as last year), it works to our competitive advantage in times of
falling interest rates (so far this year). As a result, our relative performance
during the period was excellent. The returns of our Long-Term,
Intermediate-Term, and Money Market Portfolios surpassed those of their peers,
while the return of our Short-Term Portfolio matched that of its peers.
IN SUMMARY
The bond market followed a generally lackluster fiscal 1997 with a strong start
in the first six months of the current fiscal year.
The returns from bonds need not exceed--or even match--the returns of
stocks to make owning bonds worthwhile. Bonds play a critical role in a balanced
investment program by adding diversification that can help smooth some of the
volatility of a portfolio that also includes stock funds.
We look forward to reporting to you in further detail in our 1998 Annual
Report six months hence.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
August 19, 1997
2
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<TABLE>
<CAPTION>
PORTFOLIO STATISTICS
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET
VALUE PER SHARE TWELVE MONTHS
---------------------- ---------------------------- SEC 30-DAY
AVERAGE AVERAGE JAN. 31, JUL. 31, INCOME CAPITAL GAINS ANNUALIZED
ADMIRAL PORTFOLIO MATURITY QUALITY* 1997 1997 DIVIDENDS DISTRIBUTION YIELD
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Money Market 35.0 days Aaa $ 1.00 $ 1.00 $0.051 -- 5.22%**
Short-Term 2.0 years Aaa 10.04 10.09 0.590 -- 5.77
Intermediate-Term 6.8 years Aaa 10.17 10.37 0.649 -- 6.09
Long-Term 20.1 years Aaa 10.13 10.61 0.676 -- 6.32
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Ratings provided by Moody's Investors Service, Inc. Securities receiving an
Aaa rating are judged to be of the best quality, carrying the smallest degree
of credit risk. U.S. government and agency securities are considered to
have Aaa ratings.
**Seven-day yield.
3
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[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JULY 31, 1997
U.S. EQUITY MARKETS
The Standard & Poor's 500 Composite Stock Price Index finished the first half of
the fiscal year with an impressive 8.0% gain in July, which brought the overall
six-month return to 22.5%.
Stocks benefited from the continued strength of corporate earnings,
which have been remarkably consistent in positively surprising Wall Street
analysts. At the end of January, the consensus forecast for 1997 called for a
6.8% rise in earnings for the S&P 500 Index. Six months later, the consensus
estimate had risen to 8.8%. Investors' confidence is also reflected in increased
price/earnings ratios. For example, in July 1996 investors were willing to pay
roughly $15 for every dollar of the S&P's earnings. One year later, that "price"
is close to $20.
Within the S&P 500 Index, technology was the top-performing sector for
the half-year, gaining 29.6%. By contrast, numerous uncertainties for utilities
caused that sector to lag the broad market, although, on an absolute basis, its
8.1% return over six months is quite good.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JULY 31, 1997
----------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 22.5% 52.1% 20.7%
Russell 2000 Index 13.1 33.4 18.1
MSCI EAFE Index 17.3 18.5 14.1
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FIXED-INCOME
Lehman Aggregate Bond Index 5.6% 10.8% 7.3%
Lehman 10-Year Municipal
Bond Index 5.8 10.3 7.3
Salomon Brothers Three-Month
U.S. Treasury Bill Index 1.8 5.3 4.5
- -------------------------------------------------------------------------------------
OTHER
Consumer Price Index 0.9% 2.2% 2.7%
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</TABLE>
*Average annual.
For the six months, large-capitalization stocks once again outperformed
smaller issues. The latter, as measured by the Russell 2000 Index, rose 13.1%
and actually outperformed the S&P 500 Index in the final three months (21.3%
versus 19.7%). The momentum in small-cap companies is a result of
better-than-expected earnings reports. In fact, the second-quarter earnings
increases for small companies were even stronger than those of their large-cap
counterparts. It is noteworthy that the recent small-cap gains were led by small
growth stocks, the worst segment of the U.S. market during the past 12 months.
This group has surged 25% since the end of April, although at the end of the six
months it still lagged the S&P 500 Index return by a sizable margin (7.9% versus
22.5%).
U.S. FIXED-INCOME MARKETS
The robust consumer spending that fueled the U.S. economy's remarkable 4.9%
growth in the first three months of 1997 slowed in the early summer. As a
result, the Gross Domestic Product expanded at a 2.2% annual rate in the second
quarter. Labor costs, which have been the flash point for inflation concerns,
grew at a modest rate over the
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period, despite an unemployment rate below 5% and strong growth in the number of
new jobs reported. In the past, strong economic growth and tight labor markets
have often led to rising inflation because of increased demand for goods and
services. With this in mind, in March the Federal Reserve raised its
federal-funds interest rate target by 0.25% in a "preemptive strike" against
inflationary pressures. Since that time, however, there has been scant evidence
that higher prices were a threat. Lower automobile prices and a sharp decrease
in the cost of imports (due to the strong dollar) were key factors.
As the market accepted the good news about inflation, yields on
longer-term issues fell during the six months. For example, the 10-year Treasury
yield dropped from 6.49% on January 31 to 6.01% at the end of July; the 30-year
bond's yield moved from 6.79% down to 6.30%. With the drop in rates, bond
investors fared reasonably well over the period, as illustrated by the 5.6%
return of the Lehman Brothers Aggregate Bond Index. Mortgage-backed securities,
which had outperformed other issues early in the period, gave back some of their
gains. Municipal issues tended to perform better than their taxable
counterparts.
INTERNATIONAL EQUITY MARKETS
International investors fared well over the six months. As measured by the broad
Morgan Stanley Capital International Europe, Australasia, Far East Index,
foreign markets gained 21.1% in local-currency terms. The strong dollar,
however, trimmed this return to 17.3% for U.S. investors. Regionally, the MSCI
Europe Index gained 19.2% while the MSCI Pacific Free Index rose 14.0%. The
latter gain masked significant turmoil in some of the smaller Asian markets,
most notably Thailand, Singapore, and the Philippines. Companies in Thailand, in
particular, face an environment of high real interest rates, a significant
number of nonperforming loans, and falling real estate prices. Over the
half-year, the Thai market dropped 26%.
The period saw two major developments. First, the Japanese stock market
moved sharply higher, gaining 15.8% for the six months. For U.S. investors, a
revived yen brought this return up to 18.8%. Better tone to the economy, good
earnings from the export-oriented sector, and renewed buying on the part of
foreign investors all contributed to the increase.
Arguably the biggest news came from the French elections at the end of
May. The new government is considered to be less friendly toward the austerity
measures needed to meet the eligibility requirements for the European Monetary
Union (EMU) in 1999. The French elections also had a broad impact across the
continent. Although most investors appear to agree that the elections won't
jeopardize the continent's move toward the EMU, the timing and intensity of the
fiscal measures are now less certain.
5
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[PHOTO]
REPORT FROM THE ADVISER
The bond markets performed well during the six months ended July 31, the
first half of the fiscal year for Vanguard Admiral Funds. This good news
occurred despite the Federal Reserve Board's tightening of monetary policy in
March. Ordinarily, such a signal from the nation's monetary authority would send
bond traders scurrying toward the sidelines. Not this time. Rather, interest
rates dropped anywhere from 20 to 50 basis points (0.2 to 0.5 of 1 percentage
point), the specific amount depending upon a bond's final maturity. Longer-term
issues fared best, followed by intermediate-term bonds and short-term notes.
Naturally, the four Portfolios of Vanguard Admiral Funds generated total
returns commensurate with their specific positions along the risk/return
spectrum. In other words, the riskier Portfolios, by virtue of their longer
average maturities, did better than their shorter brethren. Had interest rates
gone up instead of down, the leaders and followers would have reversed their
order. Details of each Portfolio's total return, consisting of both income
return and capital return, are given in the Message To Shareholders, which
begins on page 1. The bottom line is this: We are fortunate to have enjoyed a
rare, indeed almost unheard-of, period of strong economic growth, extremely low
unemployment, benign inflation, somewhat tighter monetary policy, and (excluding
the money markets) falling interest rates. If interest rates are to descend
further from prevailing levels, we'll need to see a lot more of the same great
news.
How did investors find themselves in this best of all possible worlds?
There is no single answer, but a variety of explanations have been offered by
economists and market commentators, not the least of whom was Alan Greenspan,
chairman of the Federal Reserve's Board of Governors. On July 22, in his
semiannual "Humphrey-Hawkins" testimony before congressional banking and finance
committees, Chairman Greenspan lauded the "exceptional" performance of the
economy and noted that "in contrast to the typical postwar business cycle,
measured price inflation is lower now than when the expansion began . . . . " He
credited this benign situation to both temporary factors and potentially more
fundamental improvements in the long-run efficiency of our economy. Prominent
among these fundamental factors were initiatives to shrink the federal budget
deficit, deregulation of industry, technological change, and the globalization
of production and labor forces.
To say the least, it is unclear whether these factors will suffice to
overcome the countervailing forces of a garden-variety business cycle. In every
expansion in modern economic history, imbalances have arisen that distorted
growth in aggregate demand, production, and inflation, thereby creating higher
interest rates and other antecedents leading to the expansion's demise. Until
now, the long-sought "soft landing" for the economy was the Panglossian stuff of
myth. This time may be totally different, but we're not betting on it.
The behavior of interest rates during the last two years or so has been
puzzling. Yields on U.S. Treasury bonds and notes of most maturities above three
years have fluctuated between 6% and 7%, neither breaking through
6
<PAGE> 9
the lower end of the range with any enthusiasm nor testing the higher end during
market selloffs. In this environment, the total returns of various competitors'
portfolios tend to cluster more closely to one another and to their respective
average coupons. This is especially true in the U.S. Treasury sector, where
managers cannot reduce the quality of their holdings to boost yields. At a time
of relatively little differentiation in the return of underlying assets,
expenses play an even larger role in separating competing portfolios. On that
front, the exceptionally low fees charged by the Admiral Portfolios are without
peer.
Ian A. MacKinnon, Senior Vice President
Robert F. Auwaerter, Principal
John W. Hollyer, Principal
Vanguard Fixed Income Group
August 13, 1997
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
PERFORMANCE SUMMARIES
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolios. Note that 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 per share.
<TABLE>
<CAPTION>
U.S. TREASURY MONEY MARKET PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 14, 1992-JULY 31, 1997
- -------------------------------------------------------------------
U.S. TREASURY AVERAGE
MONEY 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
1998** 0.0 2.6 2.6 2.3
- -------------------------------------------------------------------
</TABLE>
*Average U.S. Treasury money market fund.
**Six months ended July 31, 1997.
See Financial Highlights table on page 17 for dividend information since the
Portfolio's inception.
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 14, 1992-JULY 31, 1997
- --------------------------------------------------------------------
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
1998** 0.5 3.0 3.5 3.8
- -------------------------------------------------------------------
</TABLE>
*Lehman Short-Term U.S. Treasury Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 18 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997*
- --------------------------------------------------------------------------------------------------------------
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% 4.54% 4.54%
Short-Term U.S. Treasury Portfolio 12/14/92 6.58 0.12 5.60 5.72
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
8
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All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the Portfolios. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Portfolios could lose money.
<TABLE>
<CAPTION>
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 14, 1992-JULY 31, 1997
- --------------------------------------------------------------------
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
1998** 2.0 3.3 5.3 5.6
- --------------------------------------------------------------------
</TABLE>
*Lehman Intermediate-Term U.S. Treasury Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 18 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
LONG-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 14, 1992-JULY 31, 1997
- --------------------------------------------------------------------
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
1998** 4.7 3.6 8.3 9.0
- --------------------------------------------------------------------
</TABLE>
*Lehman Long-Term U.S. Treasury Index.
**Six months ended July 31, 1997.
See Financial Highlights table on page 19 for dividend and capital gains
information since the Portfolio's inception.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997*
- ---------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------------
DATE 1 YEAR CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Intermediate-Term
U.S. Treasury Portfolio 12/14/92 7.36% 0.56% 6.38% 6.94%
Long-Term U.S. Treasury Portfolio 12/14/92 8.33 1.30 7.05 8.35
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
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[PHOTO]
FINANCIAL STATEMENTS
JULY 31, 1997 (unaudited)
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 (98.5%)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bills 5.28% 9/18/97 $786,381 $ 780,783
U.S. Treasury Notes 5.625% 8/31/97 84,507 84,518
U.S. Treasury Notes 5.625% 10/31/97 50,000 50,020
U.S. Treasury Notes 5.75% 9/30/97 289,339 289,480
U.S. Treasury Notes 6.00% 8/31/97 988,137 988,512
U.S. Treasury Notes 6.50% 8/15/97 783,976 784,248
U.S. Treasury Notes 7.375% 11/15/97 331,295 332,966
U.S. Treasury Notes 8.625% 8/15/97 101,377 101,495
U.S. Treasury Notes 8.75% 10/15/97 150,357 151,346
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES (COST $3,563,368) 3,563,368
- -------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.5%)
- -------------------------------------------------------------------------------------------------------------------------------
Receivables for Investment Securities Sold 761,703
Other Assets--Note B 85,241
Payables for Investment Securities Purchased (761,678)
Other Liabilities (31,341)
----------
53,925
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------------
Applicable to 3,617,551,995 outstanding $.001 par value shares
(authorized 20,000,000,000 shares) $3,617,293
===============================================================================================================================
NET ASSET VALUE PER SHARE $1.00
===============================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
**Represents annualized yield at date of purchase for discount securities, and
coupon for coupon-bearing securities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,617,552 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note C (259) --
Unrealized Appreciation -- --
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $3,617,293 $1.00
==============================================================================================================================
</TABLE>
10
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<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- ------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (96.6%)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Inflation-Indexed Note 3.625% 7/15/02 $ 13,200 $ 13,208
U.S. Treasury Notes 4.75% 8/31/98 36,000 35,686
U.S. Treasury Notes 6.125% 8/31/98 15,000 15,083
U.S. Treasury Notes 6.25% 7/31/98 65,800 66,240
U.S. Treasury Notes 6.75% 6/30/99 80,000 81,502
U.S. Treasury Notes 6.875% 8/31/99 103,100 105,385
U.S. Treasury Notes 7.125% 9/30/99 45,200 46,462
U.S. Treasury Notes 7.75% 11/30/99 73,500 76,661
U.S. Treasury Notes 7.75% 12/31/99 129,600 135,349
U.S. Treasury Notes 7.75% 1/31/00 52,150 54,524
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 4.62% 10/15/98 (1) 2,433 2,411
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 5.10% 4/15/98 (1) 1,200 1,196
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 5.48% 10/15/97 (1) 303 303
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 6.475% 5/15/00 (1) 3,533 3,558
Banco Nacional de Comercio Exterior (U.S. Government Guaranteed) 8.038% 1/15/00 (1) 3,493 3,592
Bariven, SA Eximbank Guaranteed Export Financing
(U.S. Government Guaranteed) 6.277% 4/15/01 (1)(2) 6,400 6,431
Government Export Trust (U.S. Government Guaranteed) 4.61% 9/1/98 (1) 360 358
Government Export Trust (U.S. Government Guaranteed) 5.69% 2/1/98 (1) 200 200
Government Export Trust (U.S. Government Guaranteed) 7.75% 1/1/00 (1) 3,000 3,071
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.743% 9/15/98 (1) 2,700 2,684
Guaranteed Export Certificates (U.S. Government Guaranteed) 6.61% 9/15/99 (1) 3,500 3,525
Guaranteed Trade Trust (U.S. Government Guaranteed) 4.77% 11/1/97 (1) 930 928
Guaranteed Trade Trust (U.S. Government Guaranteed) 4.86% 4/1/98 (1) 1,000 996
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $654,267) 659,353
- ------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.7%)
- ------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $31,965) 5.82% 8/1/97 31,965 31,965
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.3%)
(COST $686,232) 691,318
- ------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.3%)
- ------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 9,273
Liabilities (17,960)
----------
(8,687)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ------------------------------------------------------------------------------------------------------------------------------
Applicable to 67,672,289 outstanding $.001 par value shares
(authorized 500,000,000 shares) $682,631
==============================================================================================================================
NET ASSET VALUE PER SHARE $10.09
==============================================================================================================================
</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 0.9% of net assets at July 31, 1997.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $681,055 $10.06
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note C (3,510) (.05)
Unrealized Appreciation--Note D 5,086 .08
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $682,631 $10.09
==============================================================================================================================
</TABLE>
11
<PAGE> 14
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (94.1%)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bonds 10.375% 11/15/12 (2) $110,850 $145,680
U.S. Treasury Bonds 10.75% 5/15/03 28,500 35,134
U.S. Treasury Bonds 11.125% 8/15/03 10,500 13,223
U.S. Treasury Bonds 11.625% 11/15/04 12,600 16,724
U.S. Treasury Bonds 11.875% 11/15/03 5,000 6,530
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/07 13,137 12,928
U.S. Treasury Inflation-Indexed Note 3.625% 7/15/02 7,000 7,004
U.S. Treasury Notes 5.625% 11/30/00 8,500 8,453
U.S. Treasury Notes 6.25% 4/30/01 10,000 10,136
U.S. Treasury Notes 6.625% 7/31/01 14,450 14,836
U.S. Treasury Notes 7.25% 5/15/04 102,349 109,594
U.S. Treasury Notes 7.25% 8/15/04 54,150 58,042
U.S. Treasury Notes 7.50% 2/15/05 30,500 33,221
U.S. Treasury Notes 7.75% 12/31/99 11,000 11,488
U.S. Treasury Notes 7.875% 11/15/04 87,200 96,746
Export Funding Trust (U.S. Government Guaranteed) 8.21% 12/29/06 (1) 8,581 9,336
Government Export Trust (U.S. Government Guaranteed) 6.00% 3/15/05 (1) 9,674 9,599
Government Export Trust (U.S. Government Guaranteed) 7.46% 12/15/05 (1) 11,826 12,346
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.39% 6/26/06 (1) 2,145 2,235
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.80% 8/15/06 (1) 7,917 8,426
Guaranteed Trade Trust (U.S. Government Guaranteed) 8.17% 1/15/07 (1) 3,167 3,439
Overseas Private Investment Corp. (U.S. Government Guaranteed) 5.735% 1/15/02 (1) 4,500 4,466
Overseas Private Investment Corp. (U.S. Government Guaranteed) 5.94% 6/20/06 (1) 4,737 4,669
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.08% 8/15/04 (1) 22,500 22,376
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.726% 9/15/10 (1) 9,000 9,136
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.75% 12/15/08 (1) 15,333 15,611
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $662,533) 681,378
- ----------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.2%)
- ----------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $30,554) 5.82% 8/1/97 30,554 30,554
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (98.3%)
(COST $693,087) 711,932
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (1.7%)
- ----------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes B and E 143,630
Liabilities--Note E (131,032)
------------
12,598
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------------------------------------
Applicable to 69,891,096 outstanding $.001 par value shares
(authorized 500,000,000 shares) $724,530
==================================================================================================================================
NET ASSET VALUE PER SHARE $10.37
==================================================================================================================================
</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) Securities with a value of $1,314,000 have been segregated as initial margin
for open futures contracts.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $718,278 $10.28
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note C (10,483) (.15)
Unrealized Appreciation (Depreciation)--Note D
Investment Securities 18,845 .27
Futures Contracts (2,110) (.03)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $724,530 $10.37
==================================================================================================================================
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (93.3%)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/07 $ 2,021 $ 1,989
U.S. Treasury Bonds 6.625% 2/15/27 1,500 1,565
U.S. Treasury Bonds 6.75% 8/15/26 3,560 3,755
U.S. Treasury Bonds 7.125% 2/15/23 5,750 6,290
U.S. Treasury Bonds 7.875% 2/15/21 53,154 62,767
U.S. Treasury Bonds 8.125% 8/15/19 25,358 30,576
U.S. Treasury Bonds 8.875% 8/15/17 35,270 45,267
U.S. Treasury Bonds 8.875% 2/15/19 31,703 40,955
U.S. Treasury Bonds 9.875% 11/15/15 8,800 12,152
U.S. Treasury Bonds 10.375% 11/15/12 (1) 13,315 17,499
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $207,068) 222,815
- -------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (4.4%)
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government Obligations
in a Pooled Cash Account
(COST $10,488) 5.82% 8/1/97 10,488 10,488
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (97.7%)
(COST $217,556) 233,303
- -------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.3%)
- -------------------------------------------------------------------------------------------------------------------------------
Other Assets--Notes B and E 8,897
Liabilities--Note E (3,492)
----------
5,405
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------------
Applicable to 22,500,036 outstanding $.001 par value shares
(authorized 500,000,000 shares) $238,708
===============================================================================================================================
NET ASSET VALUE PER SHARE $10.61
===============================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) Securities with a value of $1,314,000 have been segregated as initial margin
for open futures contracts.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $225,047 $10.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses--Note C (1,396) (.06)
Unrealized Appreciation (Depreciation)--Note D
Investment Securities 15,747 .70
Futures Contracts (690) (.03)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $238,708 $10.61
===============================================================================================================================
</TABLE>
13
<PAGE> 16
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>
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SHORT-TERM INTERMEDIATE-TERM LONG-TERM
MONEY MARKET U.S. TREASURY U.S. TREASURY U.S. TREASURY
PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------------
SIX MONTHS ENDED JULY 31, 1997
-----------------------------------------------------------------------------
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $92,421 $18,703 $21,448 $ 7,070
-----------------------------------------------------------------------------
Total Income 92,421 18,703 21,448 7,070
-----------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 276 48 53 16
Management and Administrative 1,634 288 305 95
Marketing and Distribution 514 89 93 27
Custodian Fees 37 6 6 4
Taxes (other than income taxes) 129 23 24 7
Auditing Fees 4 3 3 3
Shareholders' Reports 10 3 4 2
Directors' Fees and Expenses 4 1 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
Total Expenses 2,608 461 488 154
- ----------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 89,813 18,242 20,960 6,916
- ----------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (58) (454) (297) 12
Futures Contracts -- -- (394) (57)
- ----------------------------------------------------------------------------------------------------------------------------------
REALIZED NET LOSS (58) (454) (691) (45)
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities -- 3,793 15,748 11,790
Futures Contracts -- -- (2,110) (690)
- ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) -- 3,793 13,638 11,100
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $89,755 $21,581 $33,907 $17,971
==================================================================================================================================
</TABLE>
14
<PAGE> 17
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 Gains 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
------------------------------------ -------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1997 JAN. 31, 1997 JUL. 31, 1997 JAN. 31, 1997
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 89,813 $ 132,096 $ 18,242 $ 27,680
Realized Net Gain (Loss) (58) (249) (454) 2,759
Change in Unrealized Appreciation
(Depreciation) -- -- 3,793 (10,366)
-----------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 89,755 131,847 21,581 20,073
DISTRIBUTIONS -----------------------------------------------------------------------------
Net Investment Income (89,813) (132,096) (18,242) (27,680)
Realized Capital Gain -- -- -- --
-----------------------------------------------------------------------------
Total Distributions (89,813) (132,096) (18,242) (27,680)
-----------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 2,166,959 3,443,596 249,117 335,675
Issued in Lieu of Cash Distributions 85,604 125,454 14,111 20,447
Redeemed (1,881,826) (2,100,531) (137,151) (221,325)
-----------------------------------------------------------------------------
Net Increase from Capital
Share Transactions 370,737 1,468,519 126,077 134,797
- ----------------------------------------------------------------------------------------------------------------------------------
Total Increase 370,679 1,468,270 129,416 127,190
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 3,246,614 1,778,344 553,215 426,025
-----------------------------------------------------------------------------
End of Period $3,617,293 $3,246,614 $682,631 $553,215
==================================================================================================================================
(1)Shares Issued (Redeemed)
Issued 2,166,959 3,443,596 24,888 33,493
Issued in Lieu of Cash Distributions 85,604 125,454 1,410 2,041
Redeemed (1,881,826) (2,100,531) (13,726) (22,075)
-----------------------------------------------------------------------------
Net Increase in Shares Outstanding 370,737 1,468,519 12,572 13,459
==================================================================================================================================
</TABLE>
15
<PAGE> 18
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN NET ASSETS (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM LONG-TERM
U.S. TREASURY U.S. TREASURY
PORTFOLIO PORTFOLIO
------------------------------------ ------------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1997 JAN. 31, 1997 JUL. 31, 1997 JAN. 31, 1997
(000) (000) (000) (000)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 20,960 $ 39,631 $ 6,916 $ 12,323
Realized Net Gain (Loss) (691) 481 (45) (1,349)
Change in Unrealized Appreciation
(Depreciation) 13,638 (30,503) 11,100 (13,669)
----------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 33,907 9,609 17,971 (2,695)
---------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (20,960) (39,631) (6,916) (12,323)
Realized Capital Gain -- -- -- (527)
----------------------------------------------------------------------------
Total Distributions (20,960) (39,631) (6,916) (12,850)
----------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 205,569 330,265 71,872 138,400
Issued in Lieu of Cash Distributions 14,862 28,181 4,788 9,008
Redeemed (167,389) (254,568) (40,967) (125,781)
----------------------------------------------------------------------------
Net Increase from Capital
Share Transactions 53,042 103,878 35,693 21,627
- ----------------------------------------------------------------------------------------------------------------------------------
Total Increase 65,989 73,856 46,748 6,082
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 658,541 584,685 191,960 185,878
----------------------------------------------------------------------------
End of Period $724,530 $658,541 $238,708 $191,960
==================================================================================================================================
(1)Shares Issued (Redeemed)
Issued 20,294 32,362 7,128 13,651
Issued in Lieu of Cash Distributions 1,469 2,777 474 892
Redeemed (16,603) (25,076) (4,044) (12,404)
----------------------------------------------------------------------------
Net Increase in Shares Outstanding 5,160 10,063 3,558 2,139
==================================================================================================================================
</TABLE>
16
<PAGE> 19
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 are not required to report a
Portfolio Turnover Rate.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY MONEY MARKET PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------- DEC. 14, 1992,* TO
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 JAN. 31, 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .026 .051 .055 .041 .029 .004
Net Realized and Unrealized Gain (Loss)
on Investments -- -- -- -- -- --
----------------------------------------------------------------------
Total from Investment Operations .026 .051 .055 .041 .029 .004
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.026) (.051) (.055) (.041) (.029) (.004)
Distributions from Realized Capital Gains -- -- -- -- -- --
----------------------------------------------------------------------
Total Distributions (.026) (.051) (.055) (.041) (.029) (.004)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
=================================================================================================================================
TOTAL RETURN 2.59% 5.24% 5.66% 4.19% 2.99% 0.41%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $3,617 $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% 0.15%**
Ratio of Net Investment Income to
Average Net Assets 5.16%** 5.12% 5.50% 4.21% 3.06% 3.12%**
Portfolio Turnover Rate N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
17
<PAGE> 20
<TABLE>
<CAPTION>
FINANCIAL HIGHLIGHTS (continued)
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------- DEC. 14, 1992,* TO
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 JAN. 31, 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.04 $10.23 $ 9.77 $10.26 $10.17 $10.00
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .294 .587 .626 .518 .448 .065
Net Realized and Unrealized Gain (Loss)
on Investments .050 (.190) .460 (.468) .101 .170
-------------------------------------------------------------------------
Total from Investment Operations .344 .397 1.086 .050 .549 .235
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.294) (.587) (.626) (.518) (.448) (.065)
Distributions from Realized Capital Gains -- -- -- (.022) (.011) --
-------------------------------------------------------------------------
Total Distributions (.294) (.587) (.626) (.540) (.459) (.065)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.09 $10.04 $10.23 $ 9.77 $10.26 $10.17
==================================================================================================================================
TOTAL RETURN 3.49% 4.05% 11.41% 0.57% 5.50% 2.35%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $683 $553 $426 $333 $252 $63
Ratio of Total Expenses to
Average Net Assets 0.15%** 0.15% 0.15% 0.15% 0.15% 0.15%**
Ratio of Net Investment Income to
Average Net Assets 5.94%** 5.85% 6.22% 5.30% 4.38% 4.87%**
Portfolio Turnover Rate 43%** 80% 95% 129% 90% 7%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------- DEC. 14, 1992,* TO
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 JAN. 31, 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.17 $10.70 $ 9.58 $10.58 $10.29 $10.00
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .323 .648 .665 .598 .578 .084
Net Realized and Unrealized Gain (Loss)
on Investments .200 (.530) 1.120 (.995) .418 .290
------------------------------------------------------------------------
Total from Investment Operations .523 .118 1.785 (.397) .996 .374
DISTRIBUTIONS
Dividends from Net Investment Income (.323) (.648) (.665) (.598) (.578) (.084)
Distributions from Realized Capital Gains -- -- -- (.005) (.128) --
------------------------------------------------------------------------
Total Distributions (.323) (.648) (.665) (.603) (.706) (.084)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.37 $10.17 $10.70 $ 9.58 $10.58 $10.29
==================================================================================================================================
TOTAL RETURN 5.27% 1.30% 19.16% -3.67% 9.89% 3.75%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $725 $659 $585 $357 $332 $78
Ratio of Total Expenses to
Average Net Assets 0.15%** 0.15% 0.15% 0.15% 0.15% 0.15%**
Ratio of Net Investment Income to
Average Net Assets 6.43%** 6.37% 6.49% 6.15% 5.46% 6.31%**
Portfolio Turnover Rate 39%** 52% 64% 134% 102% 0%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
18
<PAGE> 21
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ----------------------------------------- DEC. 14, 1992,* TO
THROUGHOUT EACH PERIOD JULY 31, 1997 1997 1996 1995 1994 JAN. 31, 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.13 $11.06 $ 9.40 $10.90 $10.30 $10.00
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .335 .681 .691 .670 .709 .096
Net Realized and Unrealized Gain (Loss)
on Investments .480 (.900) 1.749 (1.405) .881 .300
------------------------------------------------------------------------
Total from Investment Operations .815 (.219) 2.440 (.735) 1.590 .396
DISTRIBUTIONS
Dividends from Net Investment Income (.335) (.681) (.691) (.670) (.709) (.096)
Distributions from Realized Capital Gains -- (.030) (.089) (.095) (.281) --
------------------------------------------------------------------------
Total Distributions (.335) (.711) (.780) (.765) (.990) (.096)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.61 $10.13 $11.06 $ 9.40 $10.90 $10.30
==================================================================================================================================
TOTAL RETURN 8.27% -1.75% 26.74% -6.60% 15.90% 3.97%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $239 $192 $186 $136 $99 $49
Ratio of Total Expenses to
Average Net Assets 0.15%** 0.15% 0.15% 0.15% 0.15% 0.15%**
Ratio of Net Investment Income to
Average Net Assets 6.71%** 6.72% 6.66% 7.06% 6.58% 7.22%**
Portfolio Turnover Rate 11%** 42% 125% 44% 51% 17%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.
**Annualized.
19
<PAGE> 22
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: U.S. Treasury 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, 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.
20
<PAGE> 23
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 July 31, 1997, the Fund had contributed capital aggregating
$379,000 to Vanguard (included in Other Assets), representing 1.9% of Vanguard's
capitalization. The Fund's directors and officers are also directors and
officers of Vanguard.
C. During the six months ended July 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 $243,841 $128,502
Intermediate-Term U.S. Treasury 150,346 124,070
Long-Term U.S. Treasury 42,360 10,258
---------------------------------------------------------------------------------------------
</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 July 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 $ 5,125 $ (39) $ 5,086
Intermediate-Term U.S. Treasury 19,203 (358) 18,845
Long-Term U.S. Treasury 15,747 -- 15,747
-------------------------------------------------------------------------------------------------------------------
</TABLE>
At July 31, 1997, the aggregate settlement value of open futures
contracts expiring in September 1997 and the related unrealized depreciation
were:
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
(000)
--------------------------------------------------
NUMBER OF AGGREGATE
SHORT SETTLEMENT UNREALIZED
PORTFOLIO/FUTURES CONTRACTS CONTRACTS VALUE DEPRECIATION
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term U.S. Treasury/
U.S. Treasury Note 560 $62,160 $(2,110)
Long-Term U.S. Treasury/
U.S. Treasury Bond 110 12,843 (690)
-------------------------------------------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 24
E. The market values of securities on loan to broker/dealers at July 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>
Intermediate-Term U.S. Treasury $126,953 $129,243 --
Long-Term U.S. Treasury 17,503 1,637 $16,343
-------------------------------------------------------------------------------------------------------------------
</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.
22
<PAGE> 25
"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R)," "S&P(R)," and
"500" are trademarks of
The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights relating to the
Russell Indexes.
<PAGE> 26
DIRECTORS AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer,
Inc.; Managing Director of Global Health Care Partners/DLJ Merchant
Banking Partners; Director of Sun Company, Inc. and Westinghouse
Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
IKON Office Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., and
Massachusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl
Corp., Baker Fentress & Co., The Jeffrey Co., and Southern New England
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 Investor Group.
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> 27
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Growth and Income Portfolio
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 International Value 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)
Q122-7/97
