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VANGUARD
ADMIRAL FUNDS
Semiannual Report - July 31, 1998
[PHOTO]
[THE VANGUARD GROUP LOGO]
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OUR CREW MAKES THE DIFFERENCE
Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.
We recognize that it is our crew members--more than 7,000 highly
motivated men and women--who form the cornerstone of our operations. We could
not survive long--let alone prosper--without them. That's why we chose this
fiscal year's fund reports to celebrate the spirit, enthusiasm, and achievements
of our crew. (We call those who work at Vanguard crew members, not employees,
because they operate as a team to accomplish our mission of serving you, our
clients.)
But while we prize the collective contributions of our crew, we also
take time to recognize the importance of the individual. Each calendar quarter,
we present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.
They, along with the rest of our valiant crew, look forward to
serving you in the years ahead.
[PHOTO] [PHOTO]
John C. Bogle John J. Brennan
Senior Chairman Chairman & CEO
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS............... 1
THE MARKETS IN PERSPECTIVE ................. 5
REPORTS FROM THE ADVISERS .................. 7
PERFORMANCE SUMMARIES ...................... 9
PORTFOLIO PROFILES ......................... 11
FINANCIAL STATEMENTS ....................... 16
</TABLE>
All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
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FELLOW SHAREHOLDER,
Interest rates held relatively steady during the first half of
Vanguard Admiral Funds' fiscal year, an environment in which the return of each
of our four U.S. Treasury portfolios was essentially equal to its rate of
interest income. During the six months ended July 31, 1998, total returns ranged
from +2.4% for our Short-Term and Intermediate-Term Portfolios to +3.5% for our
Long-Term Portfolio. Each portfolio's return topped that of its average mutual
fund peer and was in line with the segment of the Treasury bond market that it
represents.
The adjacent table presents the six-month total return (capital
change plus reinvested dividends) for each portfolio compared with that of its
average mutual fund competitor and an unmanaged bond market index.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TOTAL RETURNS SEC
SIX MONTHS ENDED ANNUALIZED
JULY 31, 1998 YIELD*
- -------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY MONEY MARKET
PORTFOLIO +2.6% 5.14%
Average Treasury Money
Market Fund +2.4
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index +2.6
- -------------------------------------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO +2.4% 5.51%
Average Short-Term Treasury Fund +2.2
Lehman Brothers 1-5 Year
U.S. Treasury Bond Index +2.4
- -------------------------------------------------------------------------------
INTERMEDIATE-TERM
U.S. TREASURY PORTFOLIO +2.4% 5.57%
Average Intermediate-Term
Treasury Fund +2.0
Lehman Brothers 5-10 Year
U.S. Treasury Bond Index +2.5
- -------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO +3.5% 5.71%
Average Long-Term Treasury Fund +2.5
Lehman Brothers Long
U.S. Treasury Bond Index +3.7
- -------------------------------------------------------------------------------
</TABLE>
*Seven-day yield for the Money Market Portfolio; 30-day yield for other
portfolios.
Details on each portfolio, including per-share net asset values,
income dividends, and any capital gains distributions, are presented in the
table that follows this letter. The portfolios' annualized yields on July 31
ranged from 5.14% for our Money Market Portfolio to 5.71% for our Long-Term
Portfolio--a remarkably narrow spread.
It's important to note that semiannual returns for bond funds account
for only half of the year's interest income, whereas 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 of a
bond fund. For this reason, we think it's useful to show results reflecting a
full year's interest income. The table on page 2 presents each portfolio's
return for the past twelve months, divided into its income and capital
components. It illustrates the impact of the fall in interest rates over the
past twelve months, especially on the Long-Term Portfolio. Interest rate
changes, to be sure, can either add to, or subtract from, the income return.
THE PERIOD IN REVIEW
For most of the six months ended July 31, 1998, optimism prevailed in U.S.
financial markets. The domestic economy grew at a robust rate, yet inflation and
interest rates remained stable at relatively low levels, making the United
States seem somewhat insulated from severe economic problems in Asia, Russia,
and several emerging markets. Interest rates and inflation were held down by
lower commodity prices and by the dollar's steep
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rise against a number of currencies, which reduced costs of imported goods. This
turmoil drove capital to the "safe haven" of dollar-denominated assets, helping
keep U.S. interest rates low. The yield on the benchmark 30-year U.S. Treasury
bond ranged from 5.57% to 6.07% during the half-year, and ended the period at
5.71%, 9 basis points below the 5.80% yield that prevailed on January 31.
Similarly, the yield on 3-month Treasury bills declined from 5.18% on January 31
to 5.07% on July 31. The yield on 3-year Treasuries, however, rose 13 basis
points to 5.46% at the end of the six months.
<TABLE>
<CAPTION>
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COMPONENTS OF TOTAL RETURNS
TWELVE MONTHS ENDED
JULY 31, 1998
-------------------------------------
INCOME CAPITAL TOTAL
U.S. TREASURY PORTFOLIO RETURN RETURN RETURN
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Money Market +5.3% 0.0% + 5.3%
Short-Term +5.8 +0.3 + 6.1
Intermediate-Term +6.4 +1.6 + 8.0
Long-Term +6.6 +5.3 +11.9
- -------------------------------------------------------------------------
</TABLE>
Though it may have seemed a ho-hum half-year in the bond market, it
was a mercurial six months for stocks. The Standard & Poor's 500 Composite Stock
Price Index rose sharply, returning +15.2% during the six months. However, as
the period progressed, an ever-narrower segment of giant blue chips was carrying
the load. The Wilshire 4500 Index, which represents the U.S. stock market beyond
the S&P 500 Index, earned +4.7% and the Russell 2000 Index of small stocks had a
negative return of -2.0%.
As noted earlier, the total returns for the four portfolios of
Vanguard Admiral Funds consisted primarily of their interest earnings during the
six months. The return of our Long-Term Portfolio received a wee boost from the
slight decline in interest rates during the half-year. Our Short-Term and
Intermediate-Term Portfolios saw their total returns slightly diminished by tiny
negative capital returns, reflecting the minor uptick in interest rates in those
segments of the bond market. Our Money Market Portfolio maintained its share
price of $1, as is expected but not guaranteed. For more information on the
portfolios' capital and income returns, see the Performance Summaries beginning
on page 9.
On a relative basis, it was a very good six months for Vanguard
Admiral Funds. Each portfolio's return outpaced that of its average peer--by a
full percentage point in the case of our Long-Term Portfolio. Generally, we have
held portfolios with maturities that are slightly longer than those of our
peers, which aids us when interest rates are stable or falling, as in the latest
half-year, just as it works to our detriment when rates are rising. The close
tracking of our respective unmanaged indexes is notable, given that our
portfolios incur operating expenses and transaction costs (at an extremely low
level) that the indexes do not.
IN SUMMARY
Bond returns fell short of stock returns during the past six months, just as
they have for the better part of the past decade. But bonds have played
important roles in balanced portfolios--and will continue to do so--by providing
regular interest income and by cushioning the volatility of the stock market.
For this reason we urge you to maintain a diversified portfolio that is suited
to your objectives, time horizon, and tolerance for risk.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
August 18, 1998
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PORTFOLIO STATISTICS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE
PER SHARE SIX MONTHS TWELVE MONTHS
------------------------ ------------------------- ----------------------------
JAN. 31, JUL. 31, INCOME CAPITAL INCOME CAPITAL
U.S. TREASURY PORTFOLIO 1998 1998 DIVIDENDS GAINS* DIVIDENDS GAINS*
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Money Market $ 1.00 $ 1.00 $0.026 -- $0.052 --
Short-Term 10.15 10.11 0.278 $0.006 0.575 $0.006
Intermediate-Term 10.60 10.54 0.314 -- 0.637 --
Long-Term 11.12 11.17 0.330 0.006 0.664 0.006
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Includes long-term and short-term capital gains distributions.
3
<PAGE> 6
Notice to Shareholders
At a special meeting on May 29, 1998, shareholders of Vanguard Admiral Funds
overwhelmingly approved three proposals. The proposals and voting results were:
1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST. This change will reduce
the amount of state taxes the funds pay annually by approximately $465,000 at
current asset levels. Approved as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
U.S. TREASURY PORTFOLIO FOR AGAINST ABSTAIN APPROVED BY
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market 2,563,972,793 35,782,532 84,131,743 95.53%
- ----------------------------------------------------------------------------------------------
Short-Term 45,689,241 255,625 458,233 98.46%
- ----------------------------------------------------------------------------------------------
Intermediate-Term 50,441,433 292,263 514,154 98.43%
- ----------------------------------------------------------------------------------------------
Long-Term 19,017,888 273,460 286,252 97.14%
- ----------------------------------------------------------------------------------------------
</TABLE>
2A. INVESTMENT LIMITATION CHANGES--INTERFUND LENDING PROGRAM. This change
permits Vanguard Admiral Funds to participate in Vanguard's interfund lending
program, which allows funds to lend money to each other if--and only if--it
makes good financial sense to do so on both sides of the transaction. The
interfund lending program won't be an integral part of the funds' investment
program; it is a contingency arrangement for managing unusual cash flows.
Approved as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
U.S. TREASURY PORTFOLIO FOR AGAINST ABSTAIN APPROVED BY
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market 2,420,356,717 156,762,972 106,767,379 90.18%
- --------------------------------------------------------------------------------------------------
Short-Term 44,594,766 832,593 975,739 96.10%
- --------------------------------------------------------------------------------------------------
Intermediate-Term 48,971,472 1,385,674 890,703 95.56%
- --------------------------------------------------------------------------------------------------
Long-Term 18,421,839 822,574 333,188 94.10%
- --------------------------------------------------------------------------------------------------
</TABLE>
2B. INVESTMENT LIMITATION CHANGES--BORROWING MONEY AND PLEDGING ASSETS. This
change sets standard limits of 15% of net assets on the amount of money Vanguard
funds can borrow from all sources and the amount of assets that can be pledged
to secure any loans. Approved as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
U.S. TREASURY PORTFOLIO FOR AGAINST ABSTAIN APPROVED BY
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Money Market 2,400,571,005 192,277,391 91,038,672 89.44%
- ----------------------------------------------------------------------------------------------
Short-Term 43,700,275 1,994,666 708,157 94.18%
- ----------------------------------------------------------------------------------------------
Intermediate-Term 48,595,224 1,732,263 920,363 94.82%
- ----------------------------------------------------------------------------------------------
Long-Term 18,230,759 984,287 362,554 93.12%
- ----------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 7
THE MARKETS IN PERSPECTIVE
Six Months Ended July 31, 1998
The U.S. financial markets turned in a generally solid performance during the
six months ended July 31, 1998. Interest rates held fairly steady, so bond
prices were little changed. The stock market advanced, with large-capitalization
stocks gaining the most.
The economy's rapid expansion early in 1998--when it grew at a 5.5%
pace--cooled down a bit in the spring and early summer. Even so, the nation was
producing 3.5% more goods and services during the April-June quarter of 1998
than during the same period a year earlier. Americans kept the economy humming
by continuing to spend, or as economists say, consume. Consumption spending was
5.2% higher in the April-June quarter than a year before, and the savings rate
plunged to a microscopic 0.2% in June, meaning that consumers in aggregate spent
an incredible 99.8% of after-tax, or disposable, income. Their ebullience was
not without foundation--unemployment hovered around 4.5% during the period;
wages were rising (personal income in June was 5% higher than in June 1997); and
inflation was tame (consumer prices in July were up only 1.7% from a year
before).
Consumers gave the economy more than enough momentum to offset the
drag caused by Asia's economic problems, which have been unexpectedly severe and
long-lasting. Asia's weakened currencies and shrinking economies have reduced
U.S. exports and cut the cost of Asian imports, sending the U.S. trade deficit
to record levels. However, the "Asian contagion" also has lessened the
inflationary pressures in the U.S. economy.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JULY 31, 1998
----------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 15.2% 19.3% 22.9%
Russell 2000 Index -2.0 2.3 13.8
MSCI EAFE Index 12.1 5.8 9.8
- -------------------------------------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 2.8% 7.9% 6.8%
Lehman 10-Year Municipal Bond Index 1.6 5.7 6.6
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.6 5.2 5.0
- -------------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.0% 1.7% 2.5%
- -------------------------------------------------------------------------------------
</TABLE>
*Annualized.
U.S. EQUITY MARKETS
Favorable economic conditions led to a continued rise in U.S. stock prices.
Although market averages set records, the advance was not uniform. Large-cap
growth stocks led the way, while small-cap stocks trailed well behind. However,
sentiment seemed to change abruptly in mid-July, and stock prices tumbled during
the final two weeks of the half-year. Problems that investors had shrugged off
earlier in the year--such as Asia's crises and a slowing in the growth of
corporate earnings--were now accorded greater weight. On balance, the
large-cap-dominated S&P 500 Index earned 15.2% during the six months, far above
the 4.7% return of the rest of the market (as measured by the Wilshire 4500
Index) and a remarkable 17.2 percentage points above the return of the small-cap
Russell 2000 Index, which declined 2.0%. There also was a wide disparity within
the S&P 500, as its growth-stock component rose 19.0%, well above the 11.1%
return on its value stocks.
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<PAGE> 8
The rise in large-cap stock prices occurred despite lackluster growth
in corporate earnings--less than 5% for the stocks in the S&P 500. July was the
11th consecutive month in which securities analysts lowered their forecasts for
corporate earnings in 1998, according to I/B/E/S International, a financial
research group. It takes optimism for investors to reconcile sluggish earnings
growth with record price/earnings ratios on stocks, and some of that optimism
seemed to evaporate during late July.
Technology was the market's best-performing sector during the period,
with a 28% return. Other sector leaders included auto and transportation (up
24%), consumer discretionary (up 21%), and financial services (up 19%). Among
the laggards were companies hurt by falling commodity prices, such as
oil-services and oil-drilling firms and makers of paper, chemicals, and steel.
Prices also declined for companies seen as vulnerable to the stronger dollar,
including manufacturers of aircraft and construction equipment.
U.S. FIXED-INCOME MARKETS
Interest rates fluctuated within a band of roughly half a percentage point
during the six months, ending the period little changed. The 2.8% total return
of the Lehman Aggregate Bond Index during the half-year brought its return for
the 12 months ended July 31 to 7.9%, a generous 6.2% return above inflation. The
yield on 30-year U.S. Treasury bonds declined by 9 basis points (0.09 percentage
point) to 5.71% during the six months. Yields were slightly higher (13 basis
points) on 3-year Treasury notes, while the yield on 3-month Treasury bills
declined on balance by 11 basis points to 5.07%. Mild inflation kept the bond
market stable despite the economy's strong growth.
Yields rose a bit on corporate bonds and mortgage-backed securities,
which therefore had slight price declines and underperformed Treasury bonds.
Treasuries benefited to some degree from a "flight to quality" among some
investors, whereas corporate bond prices were weighed down by a large supply of
newly issued bonds. Mortgage-backed securities lagged Treasuries largely because
of expectations that many homeowners would pay off old, higher-coupon mortgage
loans and refinance with new, lower-rate loans.
INTERNATIONAL EQUITY MARKETS
Europe's bull market in stocks galloped upward, while stocks in Asia and most
emerging markets registered significant declines in U.S. dollar terms. Overall,
international markets gained 12.1% in U.S. dollars, as measured by the Morgan
Stanley Capital International Europe, Australasia, Far East Index.
Europe's bourses, which as a group rose 22.3% in local currencies,
rose 23.9% in U.S. dollars, thanks to a slight strengthening of most European
currencies against the dollar. Stocks benefited from optimism about economic
growth throughout the continent and the impending adoption by 11 countries of
the euro as a single European currency. Markets were also buoyed by signs of a
new corporate emphasis on increasing shareholder value.
The mood in most Asian and emerging stock markets was decidedly
downbeat as Japan--which had been counted on as the engine to propel the
region's weakened economies--itself fell into recession. Japanese stocks--which
rose slightly in yen but fell 11.7% in U.S.-dollar terms--were actually Asia's
bright spot during the period. Declines were worse in Singapore (-16.7%), Hong
Kong (-20.6%), and Malaysia (-29.6%), and the Pacific markets as a group were
down -12.4%. Stock prices also tumbled for oil producers Mexico (-10.7%) and
Venezuela (-38.5%). Despite gains in some eastern European countries, emerging
markets on balance declined 7.5% during the half-year.
6
<PAGE> 9
REPORT FROM THE ADVISER
The half-year ended July 31, 1998, was a period of relatively mind-numbing
tranquillity in the bond markets. Yields were little changed point-to-point, and
equally placid from month-to-month-to-month. In short, it was a yawner. The four
portfolios of Vanguard Admiral Funds generally produced total returns consistent
with six months' income, with very minor hiccups in principal value for the
Short-Term, Intermediate-Term, and Long-Term U.S. Treasury Portfolios. For
long-term investors, this is precisely what the doctor ordered: steady,
positive, attractive nominal and real rates of interest acting as a welcome
counterbalance to the adrenaline-pumping gyrations of the stock market.
At present, we are witnessing an unusual confluence of opposing
forces so evenly balanced that they appear to foster stability in the bond
markets. Principal among these are two: the economic crisis in Asia and the
exuberant confidence of Americans.
The Asian crisis has spread and began, with the April-June quarter,
to noticeably affect manufacturing in the United States. The weakening of the
economies of Japan, South Korea, Hong Kong, Thailand, Indonesia, Malaysia, and
the other countries along the Pacific Rim created turmoil in their currency and
stock markets, and is now producing secondary effects on their trade with each
other and with this country. The U.S. dollar has appreciated dramatically
against most Asian currencies, thereby making American-made goods much more
expensive there while making Asian products cheaper here. The weakening of Asian
economies also reduces demand within the region, further shrinking the market
for U.S.-made goods and services. Economists estimate that the resulting
increase in the U.S. trade deficit reduced the annual growth rate of U.S. gross
domestic product by about 2 percentage points during the first half of 1998. As
all these interrelated forces play out, the bottom line for bondholders is
bullish. Asian economic weakness beneficially influences our domestic inflation,
widens our trade gap, and, in so doing, takes some steam out of the quite robust
U.S. economy.
Although the drag caused by Asia is strong, for now it seems to be
counterbalanced by equally strong and resilient demand in the United States.
Economic conditions here remain about as good as they can get. The nation enjoys
full employment and jobs are being created at a rapid pace, indeed far beyond
the demographic capacity of the population to fill them. Consumer confidence is
at or near all-time highs, and the stock market's historic boom creates a
"wealth effect." Rising stock prices make people feel wealthier and they spend
more, thereby boosting corporate profits and incomes. Paradoxically, the United
States has been in danger of too much of a good thing, at least from the
perspective of bondholders. The ebullient state of the domestic economy has put
upward pressure on labor costs and threatened to exacerbate the benign inflation
we've been enjoying for so long. Even taking into account the effects from Asia,
our economy has expanded at a very healthy 3.5% annual rate so far in 1998.
The weakness from abroad has aided the bondholder by keeping our own
economy from overheating and keeping the Federal Reserve from tightening
monetary policy and raising interest rates. Whether this dynamic equilibrium can
remain in place for long is open to conjecture. Even Federal Reserve Chairman
Alan Greenspan has
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<PAGE> 10
conceded that the outlook today is as problematic as any he's encountered in his
40 years of economic forecasting. The fact is that no one is endowed with the
prescience to say with certainty what will happen over the next six to twelve
months. It's entirely possible that the pushes and pulls will neutralize each
other for a while longer, maybe even months; however this situation is unlikely
to continue indefinitely. Sooner or later, one force will outweigh the others,
creating disequilibrium (perhaps akin to what's occurring in the stock market as
we write this letter) as one force gains and sustains its ascendancy. If so, we
can expect more volatility than we've seen recently.
Regardless, volatility, rather than tranquillity, is the more typical
state of affairs in the bond market. Shareholders with long-term horizons can
and do marvel at the market's ups and downs, yet they are able to face an
uncertain future with confidence that over the long haul the month-to-month
noise tends to fade away, leaving reasonable and realistic rates of return. For
bond investors with long horizons, the best predictor of future returns is a
portfolio's starting yield (money market returns are less predictable because
they track movements in short-term interest rates).
In this regard, another unusual market condition prevails--the
so-called "flat" yield curve. The U.S. Treasury issues bills, notes, and bonds
in maturities that range from a few months to 30 years. If these securities'
yields are arrayed in ascending order of their term to maturity, the result is
referred to as a yield curve. Typically, the yield curve slopes upward, with
3-month T-bills yielding the least and yields increasing along with terms to
maturity. A normal yield curve might have a spread of 2% to 3% between
short-term and long-term interest rates.
Not today. In the current market, the yield differential between
short- and long-term securities has effectively disappeared. As we write, a
1-year T-bill carries a yield of 5.3%, barely distinguishable from the 5.6%
available on a 30-year Treasury bond. This condition, like the recent bond
market stability, is unlikely to prevail for long.
Ian A. MacKinnon, Managing Director
Robert F. Auwaerter, Principal
John W. Hollyer, Principal
David R. Glocke, Principal
Vanguard Fixed Income Group
August 7, 1998
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.
8
<PAGE> 11
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 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 value of $1 per share.
<TABLE>
<CAPTION>
U.S. TREASURY MONEY MARKET PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 14, 1992-JULY 31, 1998
- --------------------------------------------------------------------
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 5.3 5.3 4.8
1999** 0.0 2.6 2.6 2.4
- --------------------------------------------------------------------
</TABLE>
*Average Treasury Money Market Fund.
**Six months ended July 31, 1998.
See Financial Highlights table on page 26 for dividend information for the past
five years.
<TABLE>
<CAPTION>
SHORT-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 14, 1992-JULY 31, 1998
- --------------------------------------------------------------------
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 1.1 6.1 7.2 7.9
1999** -0.3 2.7 2.4 2.4
- --------------------------------------------------------------------
</TABLE>
*Lehman 1-5 Year U.S. Treasury Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 27 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- ---------------------------------------------------------------------------------------------------------------------------------
INCEPTION SINCE INCEPTION
-------------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury Money Market Portfolio 12/14/1992 5.33% 4.87% 0.00% 4.68% 4.68%
Short-Term U.S. Treasury Portfolio 12/14/1992 6.90 5.53 0.27 5.66 5.93
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
9
<PAGE> 12
PERFORMANCE SUMMARIES (continued)
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 an investment in the
portfolios could lose money.
<TABLE>
<CAPTION>
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 14, 1992-JULY 31, 1998
- --------------------------------------------------------------------
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 4.2 6.8 11.0 11.7
1999** -0.6 3.0 2.4 2.5
- --------------------------------------------------------------------
</TABLE>
*Lehman 5-10 Year U.S. Treasury Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 28 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
LONG-TERM U.S. TREASURY PORTFOLIO
TOTAL INVESTMENT RETURNS: DECEMBER 14, 1992-JULY 31, 1998
- --------------------------------------------------------------------
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 9.8 7.3 17.1 18.3
1999** 0.5 3.0 3.5 3.7
- --------------------------------------------------------------------
</TABLE>
*Lehman Long U.S. Treasury Index.
**Six months ended July 31, 1998.
See Financial Highlights table on page 29 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1998*
- ------------------------------------------------------------------------------------------------------------------------------
INCEPTION SINCE INCEPTION
-----------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Intermediate-Term U.S. Treasury Portfolio 12/14/1992 10.90% 6.49% 1.24% 6.40% 7.64%
Long-Term U.S. Treasury Portfolio 12/14/1992 18.55 8.56 3.07 7.06 10.13
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.
10
<PAGE> 13
PORTFOLIO PROFILE
U.S. Treasury Money Market Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998. Key elements of this Profile are defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ------------------------------------------
<S> <C>
Yield 5.1%
Average Maturity 73 days
Average Quality U.S. Treasury
Expense Ratio 0.15%*
</TABLE>
*Annualized.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
11
<PAGE> 14
AVERAGE COUPON. The average interest rate paid on the securities held by a
portfolio. It is expressed as a percentage of face value.
AVERAGE DURATION. An estimate of how much a bond portfolio's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the portfolio's duration by the change in rates. If interest
rates rise by 1 percentage point, the share price of a portfolio with an average
duration of five years would decline by about 5%. If rates decrease by a
percentage point, the portfolio's share price would rise by 5%.
AVERAGE MATURITY. The average length of time until bonds held by a portfolio
reach maturity (or are called) and are repaid. In general, the longer the
average maturity, the more a portfolio's share price will fluctuate in response
to changes in market interest rates.
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating agencies.
The agencies make their judgment after appraising an issuer's ability to meet
its obligations. U.S. Treasury securities are considered to have the highest
credit quality.
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.
CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate bond
investment.
DISTRIBUTION BY CREDIT QUALITY. 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.
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).
R-SQUARED. A measure of how much of a portfolio's past returns can be explained
by the returns from the overall market (or its benchmark index). If a
portfolio's total return were precisely synchronized with the overall market's
return, its R-squared would be 1.00. If a portfolio's returns bore no
relationship to the market's returns, its R-squared would be 0.
YIELD. A snapshot of a portfolio's interest income. The yield, expressed as a
percentage of the portfolio's net asset value, is based on income earned over
the past 30 days (7 days for money market funds) 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.
12
<PAGE> 15
PORTFOLIO PROFILE
Short-Term U.S. Treasury Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- ------------------------------------
<S> <C>
Number of Issues 29
Yield 5.5%
Yield to Maturity 5.6%
Average Coupon 6.2%
Average Maturity 2.7 years
Average Quality U.S. Treasury
Average Duration 2.2 years
Expense Ratio 0.15%*
Cash Reserves 2.2%
</TABLE>
*Annualized.
INVESTMENT FOCUS
- -----------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- --------------------------------------------------
SHORT-TERM LEHMAN
U.S. TREASURY INDEX*
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.91 1.00
Beta 0.44 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------
<S> <C>
Under 1 Year 2.0%
1-3 Years 46.7
3-5 Years 39.6
Over 5 Years 11.7
- -----------------------------------------
Total 100.0%
</TABLE>
13
<PAGE> 16
PORTFOLIO PROFILE
Intermediate-Term U.S. Treasury Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------------
<S> <C>
Number of Issues 24
Yield 5.6%
Yield to Maturity 5.7%
Average Coupon 7.5%
Average Maturity 6.8 years
Average Quality U.S. Treasury
Average Duration 5.5 years
Expense Ratio 0.15%*
Cash Reserves 8.6%
</TABLE>
*Annualized.
INVESTMENT FOCUS
- -----------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
- ------------------------------------------------------
INTERMEDIATE-TERM LEHMAN
U.S. TREASURY INDEX*
- ------------------------------------------------------
<S> <C> <C>
R-Squared 0.98 1.00
Beta 1.22 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- -----------------------------------------
<S> <C>
Under 1 Year 7.2%
1-5 Years 5.5
5-10 Years 82.6
10-20 Years 4.7
20-30 Years 0.0
Over 30 Years 0.0
- -----------------------------------------
Total 100.0%
</TABLE>
14
<PAGE> 17
PORTFOLIO PROFILE
Long-Term U.S. Treasury Portfolio
This Profile provides a snapshot of the portfolio's characteristics as of July
31, 1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on page 12.
<TABLE>
<CAPTION>
FINANCIAL ATTRIBUTES
- --------------------------------------
<S> <C>
Number of Issues 15
Yield 5.7%
Yield to Maturity 5.8%
Average Coupon 8.0%
Average Maturity 20.7 years
Average Quality U.S. Treasury
Average Duration 10.4 years
Expense Ratio 0.15%*
Cash Reserves 5.4%
</TABLE>
*Annualized.
INVESTMENT FOCUS
- -----------------
[GRAPH]
<TABLE>
<CAPTION>
VOLATILITY MEASURES
LONG-TERM LEHMAN
U.S. TREASURY INDEX*
- ---------------------------------------------------
<S> <C> <C>
R-Squared 0.96 1.00
Beta 2.14 1.00
</TABLE>
*Lehman Aggregate Bond Index.
<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF PORTFOLIO)
- -----------------------------------------------
<S> <C>
U.S. Treasury 100.0%
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION BY MATURITY (% OF PORTFOLIO)
- ------------------------------------------
<S> <C>
Under 1 Year 3.1%
1-5 Years 0.0
5-10 Years 6.1
10-20 Years 22.8
20-30 Years 68.0
Over 30 Years 0.0
- ------------------------------------------
Total 100.0%
</TABLE>
15
<PAGE> 18
FINANCIAL STATEMENTS
July 31, 1998 (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, but may differ because certain investments or transactions may be treated
differently for financial statement and tax purposes. Any Accumulated Net
Realized Losses, and any cumulative excess of distributions over net realized
gains, will appear as negative balances. Unrealized Appreciation (Depreciation)
is the difference between the value of the portfolio's investments and their
cost, and reflects the gains (losses) that would be realized if the portfolio
were to sell all of its investments at their statement-date values.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
U.S. TREASURY MONEY MARKET PORTFOLIO YIELD** DATE (000) (000)
- -----------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (98.0%)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bill 4.869% 8/20/1998 $ 3,590 $ 3,581
U.S. Treasury Bill 4.996% 10/29/1998 15,445 15,257
U.S. Treasury Bill 5.168% 10/15/1998 1,798 1,779
U.S. Treasury Bill 5.205% 12/24/1998 1,895 1,856
U.S. Treasury Bill 5.218% 11/5/1998 3,405 3,359
U.S. Treasury Bill 5.512% 12/10/1998 55,000 53,968
U.S. Treasury Note 4.75% 8/31/1998 55,000 54,969
U.S. Treasury Note 4.75% 9/30/1998 283,980 283,683
U.S. Treasury Note 4.75% 10/31/1998 37,263 37,194
U.S. Treasury Note 5.125% 11/30/1998 50,000 49,973
U.S. Treasury Note 5.50% 11/15/1998 645,000 645,109
U.S. Treasury Note 5.625% 11/30/1998 65,000 65,030
U.S. Treasury Note 5.875% 8/15/1998 683,522 683,642
U.S. Treasury Note 5.875% 10/31/1998 758,815 759,490
U.S. Treasury Note 5.875% 1/31/1999 95,000 95,145
U.S. Treasury Note 5.875% 2/28/1999 205,000 205,510
U.S. Treasury Note 6.00% 9/30/1998 400,000 400,410
U.S. Treasury Note 6.125% 8/31/1998 85,000 85,050
U.S. Treasury Note 6.375% 4/30/1999 100,000 100,689
U.S. Treasury Note 6.50% 4/30/1999 50,000 50,375
U.S. Treasury Note 7.125% 10/15/1998 91,698 92,005
U.S. Treasury Note 9.25% 8/15/1998 483,009 483,715
- -----------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $4,171,789) 4,171,789
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- ----------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (2.0%)
- ----------------------------------------------------------------------------------------------------------
<S> <C>
Other Assets--Note B $ 98,375
Liabilities (12,358)
----------
86,017
- ----------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------------------------------------------
Applicable to 4,257,444,210 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $4,257,806
==========================================================================================================
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, 1998, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $4,257,444 $1.00
Undistributed Net Investment Income -- --
Accumulated Net Realized Gains 362 --
Unrealized Appreciation -- --
- ----------------------------------------------------------------------------------------------------------
NET ASSETS $4,257,806 $1.00
==========================================================================================================
</TABLE>
17
<PAGE> 20
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
SHORT-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- --------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (97.8%)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/2007 $ 27,742 $ 26,832
U.S. Treasury Note 4.75% 8/31/1998 1,500 1,499
U.S. Treasury Note 5.625% 10/31/1999 95,000 95,114
U.S. Treasury Note 5.75% 10/21/2002 47,500 47,813
U.S. Treasury Note 5.75% 8/15/2003 77,000 77,687
U.S. Treasury Note 5.875% 8/31/1999 102,715 103,110
U.S. Treasury Note 5.875% 11/30/2001 25,000 25,247
U.S. Treasury Note 6.125% 12/31/2001 36,600 37,237
U.S. Treasury Note 6.50% 8/31/2001 45,200 46,419
U.S. Treasury Note 6.50% 5/31/2002 10,000 10,319
U.S. Treasury Note 6.625% 7/31/2001 111,000 114,344
U.S. Treasury Note 6.625% 4/30/2002 14,000 14,486
U.S. Treasury Note 6.875% 8/31/1999 122,600 124,336
U.S. Treasury Note 7.50% 11/15/2001 36,000 38,078
U.S. Treasury Note 7.75% 12/31/1999 16,400 16,890
U.S. Treasury Note 7.875% 8/15/2001 4,000 4,259
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 4.62% 10/15/1998 (1)(3) 811 809
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 6.475% 5/15/2000 (1) 2,356 2,370
Banco Nacional de Comercio Exterior
(U.S. Government Guaranteed) 8.038% 1/15/2000 (1) 2,096 2,134
Bariven, SA Eximbank Guaranteed Export Financing
(U.S. Government Guaranteed) 6.277% 4/15/2001 (1)(2) 4,800 4,831
Eximbank Guaranteed Export Financing
(U.S. Government Guaranteed) 5.73% 1/15/2003 (1)(3) 31,008 30,872
Government Export Trust (U.S. Government Guaranteed) 4.61% 9/1/1998 (1) 120 120
Government Export Trust (U.S. Government Guaranteed) 6.61% 9/15/1999 (1) 1,900 1,907
Government Export Trust (U.S. Government Guaranteed) 7.75% 1/1/2000 (1)(3) 1,800 1,830
Guaranteed Export Certificates (U.S. Government Guaranteed) 4.743% 9/15/1998 (1) 900 899
Guaranteed Trade Trust (U.S. Government Guaranteed) 6.104% 7/15/2003 (1) 33,333 33,477
Overseas Private Investment Corp. (U.S. Government Guaranteed) 5.696% 2/1/2005 (1) 6,000 5,918
Overseas Private Investment Corp. (U.S. Government Guaranteed) 5.926% 6/15/2005 (1) 13,000 12,997
Overseas Private Investment Corp. (U.S. Government Guaranteed) 5.735% 1/15/2002 (1) 7,583 7,569
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $887,133) 889,403
- --------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (2.7%)
- --------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.64% 8/3/1998 8,997 8,997
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note E 5.65% 8/3/1998 15,818 15,818
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $24,815) 24,815
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.5%)
(COST $911,948) 914,218
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- ---------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.5%)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C>
Other Assets--Note B $ 16,245
Liabilities (21,228)
---------
(4,983)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------------------------------------------------------
Applicable to 89,966,139 outstanding $.001 par value shares of
beneficial interest (unlimited authorization) $909,235
=================================================================================================================================
NET ASSET VALUE PER SHARE $10.11
=================================================================================================================================
</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 0.5%
of net assets at July 31, 1998.
(3) Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from registration,
normally to qualified institutional buyers. At July 31, 1998, the aggregate
value of these securities was $33,511,000, representing 3.7% of net assets.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $906,284 $10.07
Undistributed Net Investment Income ---- ----
Accumulated Net Realized Gains 681.01 .01
Unrealized Appreciation--Note D 2,270 .03
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $909,235 $10.11
=================================================================================================================================
</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 (91.4%)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond 10.375% 11/15/2012 (2) $155,450 $206,937
U.S. Treasury Bond 11.625% 11/15/2004 12,600 16,581
U.S. Treasury Inflation-Indexed Note 3.375% 1/15/2007 10,758 10,405
U.S. Treasury Note 6.50% 10/15/2006 100,300 106,162
U.S. Treasury Note 6.625% 5/15/2007 21,500 23,014
U.S. Treasury Note 6.875% 5/15/2006 31,000 33,485
U.S. Treasury Note 7.25% 5/15/2004 45,849 49,630
U.S. Treasury Note 7.25% 8/15/2004 23,450 25,461
U.S. Treasury Note 7.50% 2/15/2005 160,300 177,000
U.S. Treasury Note 7.875% 11/15/2004 128,200 143,627
Export Funding Trust (U.S. Government Guaranteed) 8.21% 12/29/2006 (1) 7,954 8,729
Government Export Trust (U.S. Government Guaranteed) 6.00% 3/15/2005 (1) 8,426 8,455
Guaranteed Export Certificates (U.S. Government Guaranteed) 7.46% 12/15/2005 (1) 10,435 11,008
Guaranteed Trade Trust (U.S. Government Guaranteed) 6.69% 1/15/2009 (1) 18,085 18,713
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.39% 6/26/2006 (1) 1,907 1,995
Guaranteed Trade Trust (U.S. Government Guaranteed) 7.80% 8/15/2006 (1) 7,083 7,563
Guaranteed Trade Trust (U.S. Government Guaranteed) 8.17% 1/15/2007 (1) 2,833 3,082
Overseas Private Investment Corp. (U.S. Government Guaranteed) 5.94% 6/20/2006 (1) 4,211 4,207
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.08% 8/15/2004 (1) 21,150 21,213
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.726% 9/15/2010 (1) 9,000 9,337
Overseas Private Investment Corp. (U.S. Government Guaranteed) 6.75% 12/15/2008 (1) 14,000 14,483
Private Export Funding Corp. (U.S. Government Guaranteed) 5.87% 7/31/2008 49,800 49,685
Private Export Funding Corp. (U.S. Government Guaranteed) 6.49% 7/15/2007 5,500 5,718
Private Export Funding Corp. (U.S. Government Guaranteed) 7.11% 4/15/2007 13,235 14,336
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $941,148) 970,826
- -------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (15.4%)
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.64% 8/3/1998 76,302 76,302
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note E 5.65% 8/3/1998 87,599 87,599
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $163,901) 163,901
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (106.8%)
(COST $1,105,049) 1,134,727
- -------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-6.8%)
- -------------------------------------------------------------------------------------------------------------------------------
Other Assets--Note B 31,950
Security Lending Collateral Payable to Brokers--Note E (87,599)
Other Liabilities (16,425)
------------
(72,074)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------------
Applicable to 100,813,001 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $1,062,653
===============================================================================================================================
NET ASSET VALUE PER SHARE $10.54
===============================================================================================================================
</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 $1,331,000 have been segregated as initial margin
for open futures contracts.
20
<PAGE> 23
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $1,041,232 $10.33
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (8,211) (.08)
Unrealized Appreciation (Depreciation)--Note D
Investment Securities 29,678 .29
Futures Contracts (46) --
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $1,062,653 $10.54
===============================================================================================================================
</TABLE>
21
<PAGE> 24
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
FACE MARKET
MATURITY AMOUNT VALUE*
LONG-TERM U.S. TREASURY PORTFOLIO COUPON DATE (000) (000)
- -------------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT SECURITIES (94.6%)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury Bond 6.00% 2/15/2026 $ 1,875 $ 1,928
U.S. Treasury Bond 6.375% 8/15/2027 4,665 5,064
U.S. Treasury Bond 6.50% 11/15/2026 7,465 8,192
U.S. Treasury Bond 6.625% 2/15/2027 21,600 24,124
U.S. Treasury Bond 6.75% 8/15/2026 5,910 6,685
U.S. Treasury Bond 6.875% 8/15/2025 2,350 2,690
U.S. Treasury Bond 7.125% 2/15/2023 22,545 26,367
U.S. Treasury Bond 7.875% 2/15/2021 59,854 75,116
U.S. Treasury Bond 8.125% 8/15/2019 34,208 43,733
U.S. Treasury Bond 8.875% 8/15/2017 50,470 68,159
U.S. Treasury Bond 8.875% 2/15/2019 43,353 59,128
U.S. Treasury Bond 9.875% 11/15/2015 12,350 17,828
U.S. Treasury Bond 10.375% 11/15/2012 (1) 16,565 22,051
U.S. Treasury Inflation-Indexed Note 3.625% 4/15/2028 3,890 3,840
U.S. Treasury Note 6.125% 8/15/2007 1,000 1,037
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT SECURITIES
(COST $334,719) 365,942
- -------------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (9.1%)
- -------------------------------------------------------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government Obligations
in a Pooled Cash Account 5.64% 8/3/1998 11,914 11,914
Collateralized by U.S. Government Obligations
in a Pooled Cash Account--Note E 5.65% 8/3/1998 23,500 23,500
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $35,414) 35,414
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (103.7%)
(COST $370,133) 401,356
- -------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.7%)
Other Assets--Note B 10,549
Security Lending Collateral Payable to Brokers--Note E (23,500)
Other Liabilities (1,398)
----------
(14,349)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------------------------------------------------------
Applicable to 34,638,527 outstanding $.001 par value shares of beneficial interest
(unlimited authorization) $387,007
===============================================================================================================================
NET ASSET VALUE PER SHARE $11.17
===============================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
(1) Securities with a value of $1,331,000 have been segregated as initial margin
for open futures contracts.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
AT JULY 31, 1998, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $356,828 $10.30
Undistributed Net Investment Income -- --
Accumulated Net Realized Losses (1,030) (.03)
Unrealized Appreciation (Depreciation)--Note D
Investment Securities 31,223 .90
Futures Contracts (14) --
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSETS $387,007 $11.17
===============================================================================================================================
</TABLE>
22
<PAGE> 25
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, 1998
--------------------------------------------------------------------------------
(000) (000) (000) (000)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
INCOME
Interest $108,379 $23,415 $29,891 $10,969
--------------------------------------------------------------------------------
Total Income 108,379 23,415 29,891 10,969
--------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B
Investment Advisory Services 272 55 64 23
Management and Administrative 1,951 389 470 175
Marketing and Distribution 676 134 148 46
Custodian Fees 7 6 7 7
Taxes (other than income taxes) 122 25 29 11
Auditing Fees 5 3 3 3
Shareholders' Reports 12 3 4 2
Annual Meeting and Proxy Costs 1 -- -- --
Trustees' Fees and Expenses 3 1 1 --
--------------------------------------------------------------------------------
Total Expenses 3,049 616 726 267
- -------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 105,330 22,799 29,165 10,702
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold 88 702 3,444 (104)
Futures Contracts -- -- 125 26
- -------------------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) 88 702 3,569 (78)
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION)
Investment Securities -- (3,762) (7,805) 2,601
Futures Contracts -- -- (46) (14)
- -------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION
(DEPRECIATION) -- (3,762) (7,851) 2,587
- -------------------------------------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS $105,418 $19,739 $24,883 $13,211
===============================================================================================================================
</TABLE>
23
<PAGE> 26
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how each portfolio's total net assets changed during the
two most recent reporting periods. The Operations section summarizes information
detailed in the Statement of Operations. Because the portfolio distributes its
income to shareholders each day, the amounts of Distributions--Net Investment
Income generally equal the net income earned as shown under the Operations
section. The amounts of Distributions--Realized Capital Gain may not match the
capital gains shown in the Operations section, because distributions are
determined on a tax basis and may be made in a period different from the one in
which the gains were realized on the financial statements. The Capital Share
Transactions section shows the amount shareholders invested in the portfolio,
either by purchasing shares or by reinvesting distributions, and the amounts
redeemed. The corresponding numbers of Shares Issued and Redeemed are shown at
the end of the Statement.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY SHORT-TERM
MONEY MARKET PORTFOLIO U.S. TREASURY PORTFOLIO
------------------------------------ -----------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1998 JAN. 31, 1998 JUL. 31, 1998 JAN. 31, 1998
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 105,330 $ 188,001 $ 22,799 $ 39,594
Realized Net Gain (Loss) 88 475 702 3,514
Change in Unrealized Appreciation
(Depreciation) -- -- (3,762) 4,739
--------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations $ 105,418 188,476 19,739 47,847
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (105,330) (188,001) (22,799) (39,594)
Realized Capital Gain -- -- (479) --
--------------------------------------------------------------------------------
Total Distributions (105,330) (188,001) (23,278) (39,594)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 2,178,874 4,121,503 323,940 520,096
Issued in Lieu of Cash Distributions 97,300 177,963 18,113 30,788
Redeemed (1,898,858) (3,666,153) (210,239) (331,392)
--------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions 377,316 633,313 131,814 219,492
- ---------------------------------------------------------------------------------------------------------------------------------
Total Increase 377,404 633,788 128,275 227,745
NET ASSETS
Beginning of Period 3,880,402 3,246,614 780,960 553,215
--------------------------------------------------------------------------------
End of Period $ 4,257,806 $ 3,880,402 $ 909,235 $ 780,960
=================================================================================================================================
(1)Shares Issued (Redeemed)
Issued 2,178,874 4,121,503 32,055 51,766
Issued in Lieu of Cash Distributions 97,300 177,963 1,793 3,063
Redeemed (1,898,858) (3,666,153) (20,814) (32,998)
--------------------------------------------------------------------------------
Net Increase in Shares Outstanding 377,316 633,313 13,034 21,831
=================================================================================================================================
</TABLE>
24
<PAGE> 27
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM LONG-TERM
U.S. TREASURY PORTFOLIO U.S. TREASURY PORTFOLIO
------------------------------------ -----------------------------------
SIX MONTHS YEAR SIX MONTHS YEAR
ENDED ENDED ENDED ENDED
JUL. 31, 1998 JAN. 31, 1998 JUL. 31, 1998 JAN. 31, 1998
(000) (000) (000) (000)
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 29,165 $ 45,988 $ 10,702 $ 15,440
Realized Net Gain (Loss) 3,569 (1,988) (78) 588
Change in Unrealized Appreciation
(Depreciation) (7,851) 34,386 2,587 24,665
--------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations 24,883 78,386 13,211 40,693
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (29,165) (45,988) (10,702) (15,440)
Realized Capital Gain -- -- (189) --
--------------------------------------------------------------------------------
Total Distributions (29,165) (45,988) (10,891) (15,440)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 263,184 476,383 136,116 210,148
Issued in Lieu of Cash Distributions 22,623 33,777 7,869 10,722
Redeemed (124,281) (295,690) (86,392) (110,989)
--------------------------------------------------------------------------------
Net Increase from Capital
Share Transactions 161,526 214,470 57,593 109,881
- ---------------------------------------------------------------------------------------------------------------------------------
Total Increase 157,244 246,868 59,913 135,134
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 905,409 658,541 327,094 191,960
--------------------------------------------------------------------------------
End of Period $1,062,653 $ 905,409 $387,007 $ 327,094
=================================================================================================================================
(1)Shares Issued (Redeemed)
Issued 25,031 46,385 12,314 19,985
Issued in Lieu of Cash Distributions 2,152 3,286 711 1,026
Redeemed (11,819) (28,954) (7,803) (10,537)
--------------------------------------------------------------------------------
Net Increase in Shares Outstanding 15,364 20,717 5,222 10,474
=================================================================================================================================
</TABLE>
25
<PAGE> 28
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
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<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 .052 .051 .055 .041 .029
Net Realized and Unrealized Gain (Loss)
on Investments -- -- -- -- -- --
----------------------------------------------------------------------
Total from Investment Operations .026 .052 .051 .055 .041 .029
----------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.026) (.052) (.051) (.055) (.041) (.029)
Distributions from Realized Capital Gains -- -- -- -- -- --
----------------------------------------------------------------------
Total Distributions (.026) (.052) (.051) (.055) (.041) (.029)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
==============================================================================================================================
TOTAL RETURN 2.60% 5.31% 5.24% 5.66% 4.19% 2.99%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $4,258 $3,880 $3,247 $1,778 $1,371 $860
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 5.18%* 5.20% 5.12% 5.50% 4.21% 3.06%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
26
<PAGE> 29
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
-------------------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.15 $10.04 $10.23 $ 9.77 $10.26 $10.17
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT OPERATIONS
Net Investment Income .278 .592 .587 .626 .518 .448
Net Realized and Unrealized Gain (Loss)
on Investments (.034) .110 (.190) .460 (.468) .101
------------------------------------------------------------------------
Total from Investment Operations .244 .702 .397 1.086 .050 .549
------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.278) (.592) (.587) (.626) (.518) (.448)
Distributions from Realized Capital Gains (.006) -- -- -- (.022) (.011)
------------------------------------------------------------------------
Total Distributions (.284) (.592) (.587) (.626) (.540) (.459)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.11 $10.15 $10.04 $10.23 $ 9.77 $10.26
==============================================================================================================================
TOTAL RETURN 2.44% 7.21% 4.05% 11.41% 0.57% 5.50%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $909 $781 $553 $426 $333 $252
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 5.55%* 5.89% 5.85% 6.22% 5.30% 4.38%
Portfolio Turnover Rate 129%* 81% 80% 95% 129% 90%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
27
<PAGE> 30
FINANCIAL HIGHLIGHTS (continued)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
INTERMEDIATE-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
---------------------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED
THROUGHOUT EACH PERIOD JULY 31, 1998 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.60 $10.17 $10.70 $ 9.58 $10.58 $10.29
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .314 .645 .648 .665 .598 .578
Net Realized and Unrealized Gain (Loss)
on Investments (.060) .430 (.530) 1.120 (.995) .418
------------------------------------------------------------------------
Total from Investment Operations .254 1.075 .118 1.785 (.397) .996
------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.314) (.645) (.648) (.665) (.598) (.578)
Distributions from Realized Capital Gains -- -- -- -- (.005) (.128)
------------------------------------------------------------------------
Total Distributions (.314) (.645) (.648) (.665) (.603) (.706)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.54 $10.60 $10.17 $10.70 $ 9.58 $10.58
==============================================================================================================================
TOTAL RETURN 2.44% 10.98% 1.30% 19.16% -3.67% 9.89%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,063 $905 $659 $585 $357 $332
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 6.02%* 6.28% 6.37% 6.49% 6.15% 5.46%
Portfolio Turnover Rate 55%* 34% 52% 64% 134% 102%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
28
<PAGE> 31
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
FOR A SHARE OUTSTANDING SIX MONTHS ENDED
THROUGHOUT EACH PERIOD JULY 31, 1998
- ---------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.12
- ---------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .330
Net Realized and Unrealized Gain (Loss)
on Investments .056
-------------
Total from Investment Operations .386
-------------
DISTRIBUTIONS
Dividends from Net Investment Income (.330)
Distributions from Realized Capital Gains (.006)
-------------
Total Distributions (.336)
=====================================================================
NET ASSET VALUE, END OF PERIOD $11.17
=====================================================================
TOTAL RETURN 3.54%
=====================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $387
Ratio of Total Expenses to
Average Net Assets 0.15%*
Ratio of Net Investment Income to
Average Net Assets 6.01%*
Portfolio Turnover Rate 13%*
- ---------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
LONG-TERM U.S. TREASURY PORTFOLIO
YEAR ENDED JANUARY 31,
FOR A SHARE OUTSTANDING ---------------------------------------------------------------------
THROUGHOUT EACH PERIOD 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.13 $11.06 $ 9.40 $ 10.90 $10.30
- -------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .669 .681 .691 .670 .709
Net Realized and Unrealized Gain (Loss)
on Investments .990 (.900) 1.749 (1.405) .881
--------------------------------------------------------------------------
Total from Investment Operations 1.659 (.219) 2.440 (.735) 1.590
--------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.669) (.681) (.691) (.670) (.709)
Distributions from Realized Capital Gains -- (.030) (.089) (.095) (.281)
--------------------------------------------------------------------------
Total Distributions (.669) (.711) (.780) (.765) (.990)
=========================================================================================================================
NET ASSET VALUE, END OF PERIOD $11.12 $10.13 $11.06 $ 9.40 $10.90
=========================================================================================================================
TOTAL RETURN 17.05% -1.75% 26.74% -6.60% 15.90%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $327 $192 $186 $136 $99
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 6.41% 6.72% 6.66% 7.06% 6.58%
Portfolio Turnover Rate 13% 42% 125% 44% 51%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
29
<PAGE> 32
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.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair 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 discounts on debt securities purchased are amortized and accreted,
respectively, to interest income over the lives of the respective securities.
B. The Vanguard Group furnishes at cost investment advisory, corporate
management, administrative, marketing, and distribution services. The costs of
such services are allocated to the fund under methods approved by the Board of
Trustees. At July 31, 1998, the fund had contributed capital
30
<PAGE> 33
aggregating $1,232,000 to Vanguard (included in Other Assets), representing 1.8%
of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.
C. During the six months ended July 31, 1998, purchases and sales of U.S.
government securities other than temporary cash investments were:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
(000)
--------------------------------------
PORTFOLIO PURCHASES SALES
- ------------------------------------------------------------------------------
<S> <C> <C>
Short-Term U.S. Treasury $655,516 $525,563
Intermediate-Term U.S. Treasury 353,519 257,799
Long-Term U.S. Treasury 83,548 22,406
- ------------------------------------------------------------------------------
</TABLE>
Capital gains distributions are determined on a tax basis and may
differ from realized capital gains for financial reporting purposes due to
differences in the timing of realization of gains. At January 31, 1998, the
Intermediate-Term U.S. Treasury Portfolio had available a capital loss
carryforward of $9,329,000 to offset future net capital gains through January
31, 2003.
D. At July 31, 1998, 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 $ 2,616 $(346) $ 2,270
Intermediate-Term U.S. Treasury 29,857 (179) 29,678
Long-Term U.S. Treasury 31,241 (18) 31,223
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
At July 31, 1998, the aggregate settlement value of open futures
contracts expiring in September 1998 and the related unrealized depreciation
were:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
(000)
-----------------------------------------
NUMBER OF
LONG (SHORT) AGGREGATE UNREALIZED
PORTFOLIO/FUTURES CONTRACTS CONTRACTS SETTLEMENT VALUE DEPRECIATION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Intermediate-Term U.S. Treasury/
U.S. Treasury Bond 386 $47,321 $ (46)
Long-Term U.S. Treasury/
U.S. Treasury Bond (50) 6,130 (4)
U.S. Treasury Note 94 10,675 (10)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 34
E. The market values of securities on loan to brokers/dealers at July 31, 1998,
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 $84,672 $15,818 $71,700
Intermediate-Term U.S. Treasury 85,827 87,599 --
Long-Term U.S. Treasury 27,752 23,500 4,900
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Cash collateral received is invested in repurchase agreements.
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.
32
<PAGE> 35
TRUSTEES AND OFFICERS
JOHN C. BOGLE
Senior Chairman of the Board and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.
JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a member of the Executive
Committee of Johnson & Johnson; Director of Johnson & Johnson-Merck Consumer
Pharmaceuticals Co., Women First HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and Women's Research and Education
Institute.
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, Banco Bilbao Gestinova, Baker Fentress &
Co., The Jeffrey Co., and Southern New England Telecommunications Co.
ALFRED M. RANKIN, JR.
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of NACCO Industries, The BFGoodrich Co., and The Standard Products Co.
JOHN C. SAWHILL
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co. and President of New York
University; Director of Pacific Gas and Electric Co., Procter & Gamble Co.,
NACCO Industries, and Newfield Exploration Co.
JAMES O. WELCH, JR.
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and Director of
RJR Nabisco; Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON
Chairman and Chief Executive Officer of Rohm & Haas Co.; Director of Cummins
Engine Co. and The Mead Corp.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary
of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND
Treasurer; Principal of The Vanguard Group, Inc.; Treasurer of each of the
investment companies in The Vanguard Group.
KAREN E. WEST
Controller; Principal of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
R. GREGORY BARTON
Managing Director, Legal Department.
ROBERT A. DISTEFANO
Managing Director, Information Technology.
JAMES H. GATELY
Managing Director, Individual Investor Group.
KATHLEEN C. GUBANICH
Managing Director, Human Resources.
IAN A. MACKINNON
Managing Director, Fixed Income Group.
F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.
MICHAEL S. MILLER
Managing Director, Planning and Development.
RALPH K. PACKARD
Managing Director and Chief Financial Officer.
GEORGE U. SAUTER
Managing Director, Core Management Group.
"STANDARD & POOR'S(R)," "S&P 500(R)," "STANDARD & POOR'S 500," AND "500" ARE
TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. FRANK RUSSELL COMPANY IS
THE OWNER OF TRADEMARKS AND COPYRIGHTS RELATING TO THE RUSSELL
INDEXES. "WILSHIRE 4500" AND "WILSHIRE 5000" ARE TRADEMARKS
OF WILSHIRE ASSOCIATES.
<PAGE> 36
VANGUARD FAMILY OF FUNDS
STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Mid Capitalization Stock
Portfolio
Small Capitalization Growth
Stock Portfolio
Small Capitalization Stock
Portfolio
Small Capitalization Value
Stock Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II
MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Treasury Money Market Portfolio
BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)
BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund
Q282-7/1998
(C) 1998 Vanguard Marketing
Corporation, Distributor.
All rights reserved.
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1-800-662-7447
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1-800-523-1036
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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 you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.
