VANGUARD/WELLESLEY INCOME FUND INC, N-30D, 1999-08-19

VANGUARD/WELLESLEY INCOME FUND INC
N-30D, 1999-08-19

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VANGUARD
WELLESLEY INCOME
FUND

[PHOTO]

SEMIANNUAL
REPORT
JUNE 30, 1999

[THE VANGUARD GROUP LOGO]

<PAGE>

AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS

Our 9,000 crew members embrace the traditional values on which our success is
built, including integrity, hard work, thrift, teamwork, and fair dealing on
behalf of our clients.

Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:

o The 200th anniversary of the Battle of the Nile, which commenced on August
1, 1798. HMS VANGUARD, the victorious British flagship at the Nile, is our
namesake. And its motto-- "Leading the way"--serves as a guiding principle
for our company.

o The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped
to shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with
clients; and a focus on long-term investing. To our great regret, Mr.
Morgan died on September 2, 1998.

o The 70th anniversary, on December 28, 1998, of the incorporation of
Vanguard Wellington Fund. It is the nation's oldest balanced mutual fund,
and one of only a handful of funds created in the 1920s that are still in
operation.

Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.

CONTENTS
A Message to
Our Shareholders
1
The Markets in
Perspective
4
Report From
the Adviser
6
Fund Profile
8
Performance Summary
12
Financial Statements
13

For an update on our Year 2000
preparedness, see page 23.

All comparative mutual fund data
are from Lipper or Morningstar,
unless otherwise noted.

<PAGE>

FELLOW SHAREHOLDER,

[PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman

A modest downturn in bond prices during the six months ended June 30, 1999, more
than offset powerful gains in the stock market, resulting in a disappointing
six-month return of -0.2% for Vanguard Wellesley Income Fund. The table below
compares the fund's total return (capital change plus reinvested dividends) for
the first half of its fiscal year with those of the average income mutual fund
and a hypothetical Composite Index, which is constructed of market benchmarks
weighted in proportion to our typical investment mix of 65% bonds and 35%
high-yielding stocks. It also presents the returns of two indexes that are
representative of the broad markets in which we invest: the Lehman Brothers Long
Corporate AA or Better Bond Index and the Standard & Poor's 500 Index, a measure
of large-capitalization U.S. stocks.
The fund's return is based on a decrease in net asset value from
$22.12 per share on December 31, 1998, to $21.32 per share on June 30,
1999, and is adjusted for dividends totaling $0.56 per share paid from net
investment income (equal to the dividends distributed during the first half
of 1998) and a distribution of $0.175 per share paid from net realized
capital gains. As of June 30, Wellesley Income Fund's annualized yield was
5.30%.

- ----------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
JUNE 30, 1999
- ----------------------------------------------------------
Vanguard Wellesley Income Fund -0.2%
- ----------------------------------------------------------
Average Income Fund + 3.9%
- ----------------------------------------------------------
Lehman Long Corporate AA or Better Index -6.0%
- ----------------------------------------------------------
S&P 500 Index +12.4%
- ----------------------------------------------------------
Wellesley Composite Index* +0.1%
- ----------------------------------------------------------
*65% Lehman Long Corporate AA or Better Index, 26%
S&P/BARRA Value Index, 4.5% S&P Utilities Index, and
4.5% S&P Telephone Index.

THE PERIOD IN REVIEW
The key influences on financial markets during the first half of 1999 were the
surprising strength of the U.S. economy's long-running expansion, promising
corporate earnings, and the increasing signs that a number of shaky foreign
economies were on firmer footing. These factors were responsible for both
broad-based gains in U.S. stocks and increases in interest rates, which sent
bond prices lower.
The overall U.S. stock market, as measured by the Wilshire 5000 Equity
Index, gained +11.8%--equivalent to more than a full year's return based on
historical norms. But the half-year saw a sharp rotation in market leadership.
As the outlook for global economic growth kept improving, there was a notable
revival in cyclical stocks--commodity-related companies, machinery makers, and
other firms whose profit prospects are most closely tied to the economy's ups
and downs. This was a welcome change for cyclicals and other "value" stocks,
which had lagged the market not just in the first quarter but for much of the
last five years. Within the S&P 500 Index, the value stocks--those generally
characterized by above-average dividend yields and below-average price/earnings
ratios--carried the day during the second quarter and for the first half of the
year, when they gained +14.0% versus a gain of +11.0% for growth stocks.

1
<PAGE>

For bond investors, a surging economy has a dark side: the possibility that
accelerating growth will push up inflation, which diminishes the buying power of
future bond interest and principal payments. After treading water in January,
interest rates rose throughout the rest of the period. And on the final day of
the half-year, the Federal Reserve Board hiked its target for short-term
interest rates by 0.25% amid concern that higher inflation would be an
inevitable by-product of strong growth. The yield of the benchmark 30-year U.S.
Treasury bond rose 86 basis points (0.86 percentage point) on balance to end the
six months at 5.96%.
The Lehman Aggregate Bond Index, a proxy for the entire U.S. bond market,
posted a negative return of -1.4% for the six months. The -6.0% return of the
Lehman Long Corporate AA or Better Index--the measure of corporate bond market
performance that we use as a benchmark for Wellesley's bond holdings--reflected
a price decline of -9.2% that washed away all of the index's six-month income
return of +3.2%, and then some.

PERFORMANCE OVERVIEW
Vanguard Wellesley Income Fund's six-month total return of -0.2% was
disappointing both on an absolute basis and relative to its comparative
standards. The Composite Index return was only slightly higher than Wellesley's,
but the average income fund earned a substantially higher return of +3.9% for
the half-year.
Most of our shortfall versus our average peer was related to the rise in
interest rates, which depressed the prices of our bond holdings and our
interest-rate-sensitive stocks, such as utilities. Generally, the bonds held by
our fund have an average duration (a measure of the sensitivity of a bond's
price to changes in interest rates) that is about twice that of the average
income fund. And the longer a bond's duration, the more its price declines when
interest rates rise (and the more its price rises when rates decline). Relative
to the bond component of the Composite Index, Wellesley's bond holdings have an
average duration that is a bit shorter. This difference resulted in slightly
higher returns for our bonds than for the bond component of the index.
We note the funds that make up Lipper's average income group are a varied
bunch and many pursue objectives that are different from that of Vanguard
Wellesley Income Fund, which strives to provide high current income and
long-term growth in income and capital.
For those who own Vanguard Wellesley Income Fund as a long-term source of
income, the rate rise during the half-year was not all bad. The current yield of
the fund--an annualized projection of the income being produced by its
holdings--rose from 4.83% on December 31, 1998, to 5.30% on June 30.
The equity portion of Wellesley's holdings returned +6.7% during the six
months, about half the return of the equity benchmark, which is primarily made
up of large-cap value stocks. As you might expect, our income mandate precludes
the fund from investing in sectors in which stocks pay low or no dividends. In
recent years, that has meant virtually no exposure to the market's hottest
segment: technology. Consequently, Wellesley's equity holdings have had a
difficult time keeping up with market measures that include growth stocks. The
biggest share of our equity assets (about 28%) is committed to the utilities
sector, however our holdings in that group returned just +1.8% during the
period. A large part of our fund's equity return came from just two
sectors--integrated oils, which benefited from the rise in oil prices, and
materials & processing, a benefactor of the resurgence of value shares.

2
<PAGE>

IN SUMMARY
Although Vanguard Wellesley Income Fund's first-half results were subpar, our
faith in the time-tested value of balanced investing has not been shaken. In
fact, the divergence between stock and bond returns and the sudden shift in
leadership among stocks during the first half of 1999 reinforced the benefits of
a balanced investment approach--the bedrock principle on which Wellesley is
built. Diversifying your investment program through holdings in stock funds,
bond funds, and short-term reserves gives you exposure to the rewards of the
financial markets while spreading out the risks that go along with investing.
Sticking with a balanced investment program can be trying at times,
particularly when one market segment runs ahead of the others and seems to be
"the only game in town." But in the long run, such a program helps investors to
ride out the inevitable downturns en route to capturing the returns needed to
meet their financial goals. So once you've decided on an investment plan suited
to your time horizon, goals, and tolerance for risk, we urge you to "stay the
course."

John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
July 15, 1999

3
<PAGE>

THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1999

[PHOTO]

A markedly improved global economic outlook during the first half of 1999 led to
mostly positive stock market returns and lower bond prices.
As the year began, many observers expected that severe economic crises in
Asia, Russia, and some Latin American nations would restrain business activity
worldwide, even in the United States, which has been the world's economic
locomotive. By spring, however, a consensus emerged that global economic
activity was likely to be solid, if not robust. This change in sentiment stemmed
from several factors, including further vigorous growth in the U.S. economy, a
belief that Asia's slump had bottomed out, and moves in Europe to ease monetary
policy to encourage growth.
Interest rates rose as investors stopped wondering whether the Federal
Reserve Board would lower interest rates--as it had three times in autumn
1998--and began to wonder when the Fed would increase rates to slow growth and
thereby forestall inflation. Indeed, on the final day of the period, the Fed
boosted short-term rates by 0.25 percentage point. In the stock market, the
brighter economic outlook led to a change in leadership from glamorous
large-capitalization growth stocks to value stocks and small-cap stocks, both of
which had been among Wall Street's wallflowers in recent years.

- --------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED JUNE 30, 1999
----------------------------
6 MONTHS 1 YEAR 5 YEARS*
- --------------------------------------------------------------------------------
STOCKS
S&P 500 Index 12.4% 22.8% 27.9%
Russell 2000 Index 9.3 1.5 15.4
Wilshire 5000 Index 11.8 19.5 25.7
MSCI EAFE Index 4.1 7.9 8.5
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index -1.4% 3.2% 7.8%
Lehman 10 Year Municipal Bond Index -1.7 2.3 6.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.7 5.2
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.4% 2.0% 2.3%
- --------------------------------------------------------------------------------
*Annualized.

U.S. STOCK MARKETS
The rise in stock prices reflected the healthy domestic economy and improving
prospects for corporate earnings. The overall market, as measured by the
Wilshire 5000 Index, rose 11.8% during the period, while the S&P 500 Index, a
yardstick for large-cap stocks, gained 12.4%.
Large-cap growth stocks, which are generally perceived as less vulnerable
than other stocks to economic slowdowns, continued to lead the market's climb
during the first quarter of the year. During the second quarter, however, value
stocks--especially producers of commodity products such as oil, aluminum, and
chemicals--moved to the front of the pack. Providing support were generally
upbeat corporate profit reports. Indeed, earnings gains were sufficient to send
prices higher despite rising interest rates, which often depress stock prices as
well as bond prices. For the six months, the S&P 500 Index's value stocks posted
a 14.0% return while its growth stocks gained 11.0% as a group.

4
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Small-cap stocks, as measured by the Russell 2000 Index, gained 9.3%,
although that fact masks a remarkable turnaround: Small-caps declined 5.4%
during the first quarter of 1999, then advanced 15.6% during the second quarter.
Even so, the cumulative return of the Russell 2000 over the past three years
lags the S&P 500 Index by nearly 80 percentage points (+37.6% for the Russell
2000 versus +115.2% for the S&P 500).
Four of the top-performing sectors within the S&P 500 Index during the
half-year were solidly in the value camp--the "other energy" group (+40%);
producer durables (+26%); materials & processing (+25%); and integrated-oils
(+17%). The strongest growth-oriented sector was the irrepressible technology
group (+24%). The poor performance of the consumer staples sector (-8%) was due
in part to the gains of the U.S. dollar against most foreign currencies, which
reduced the value of earnings from overseas operations.

U.S. BOND MARKETS
The powerful economic expansion that buoyed corporate profits and stock prices
was too much of a good thing for the bond market. Inflation was well
behaved--consumer prices rose 1.4% for the six months and 2.0% for the twelve
months ended June 30--but investors and Fed policymakers clearly were concerned
that an overheated economy might yet trigger significant increases in wages and
overall prices. Certainly, there was no evidence of the "natural slowing" that
many analysts expected for the economy, which is in the longest peacetime
expansion ever.
Yields on U.S. Treasury bonds rose by approximately 1 percentage point--a
significant rise for a six-month period. The yield of the 30-year Treasury bond
rose 86 basis points, to 5.96% on June 30 from 5.10% on December 31, 1998. The
yield of the 10-year Treasury rose 113 basis points, to 5.78% from 4.65%. Money
market rates didn't rise as far: Yields on 3-month T-bills increased on balance
by only 33 basis points, to 4.78% on June 30. Bond prices, which move in the
opposite direction from interest rates, fell. The Lehman Aggregate Bond Index, a
benchmark for investment-grade taxable bonds, declined 1.4% on a total-return
basis, as bond prices declined an average of 4.4%, outweighing the 3.0% in
interest income for the period.

INTERNATIONAL STOCK MARKETS
Led by sharp recoveries in stock prices in Japan and many emerging markets,
international stock prices generated positive returns in local currencies during
the six months. However, a pervasive rise in the value of the U.S. dollar
against other currencies reduced returns for U.S. investors (returns from abroad
are augmented when the dollar falls in value against other currencies).
Overall, the developed markets outside the United States gained 4.1% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The biggest increases were in the
Pacific region--up 27.3% in local-currency terms and 21.1% when measured in U.S.
dollars. Europe, which accounts for the lion's share of EAFE's market
capitalization, was up 8.2% in local currencies. But in U.S. dollars, the return
from European stocks was a negative 2.3%, as weakness in European
currencies--notably in the euro, the new 11-nation common currency--lopped more
than 10 percentage points from the local-currency returns. The MSCI Select
Emerging Markets Free Index shot up 31.5% in dollar terms, led by Asian markets
that rebounded from severe losses suffered in 1997 and 1998.

5
<PAGE>

REPORT FROM THE ADVISER

[PHOTO]

Vanguard Wellesley Income Fund's -0.2% total return for the first half of 1999
trailed the +0.1% return of our unmanaged index benchmark.
The fund's stock segment returned 6.7% during the half-year, after
full-year returns of 15.6% in 1998, 32.8% in 1997, and 24.2% in 1996. These
equity returns are very generous by historical standards. However, during the
first six months of this year, the rise in interest rates and decline in bond
prices more than offset the gains of our stock holdings. The 6.7% return for
Wellesley Income Fund's stock segment trailed the 12.1% return for our
benchmark's equity component primarily because of sector allocation and stock
selection. The equity portion of the benchmark is weighted 75% in the S&P/BARRA
Value Index, 12.5% in the S&P Utilities Index, and 12.5% in the S&P Telephone
Index.
The bond segment's return of -4.4% for the first half of 1999 was ahead of
the-6.0% return for the Lehman Long Corporate AA or Better Index, against which
we measure our performance. While we beat our benchmark, it's always
disappointing when our bonds provide negative returns. We cushioned the effects
of rising interest rates by reducing the duration of the Wellesley bond
portfolio during the half-year, making its principal value slightly less
sensitive than that of the index to interest rate changes. If long-term interest
rates continue to rise, this shorter duration should help our performance
relative to the index, although rising rates will hurt our absolute returns.
The fund has maintained its traditional posture of investing 60%-65% of
assets in longer-term, investment-grade bonds and 35%-40% of assets in
dividend-paying equities. In general, the fund's performance is extremely
sensitive to the direction of long-term interest rates because of the long
average maturity of the fund's bonds and because of our meaningful weighting in
high-yielding, interest-rate-sensitive stocks.

INVESTMENT PHILOSOPHY
The fund reflects a belief that relatively high current income and moderate
long-term growth in income and capital can be achieved without undue risk by
holding 60% to 65% of assets in fixed-income securities and the balance in
income-oriented common stocks. Consistent with this approach, the fund's bond
segment comprises intermediate- and long-term U.S. Treasury securities and
high-quality corporate bonds; its equity segment is dominated by stocks with
above-average dividend yields and strong potential for dividend increases.

SECOND-HALF INVESTMENT OUTLOOK
The U.S. economy continues to enjoy robust growth and low inflation.
Inflation-adjusted economic output increased at a 4.3% annual rate in the first
quarter, on top of the fourth quarter's 6.0% annualized gain. The Federal
Reserve Board remains uncomfortable with this rapid expansion in economic
activity, fearing that it will prove inflationary down the road. In an effort to
ward off future inflation, the Fed raised short-term interest rates by 25 basis
points (0.25 percentage point) on June 30. We anticipate another 50 basis points
of increases over the next six months. The magnitude of the Fed's tightening of
monetary policy will be small relative to past cycles because inflation will
remain low. We expect that after rising 1.6% in 1998, the Consumer Price Index
will increase 2.0% this year and 1.5% in 2000. The uptick in inflation this year
reflects higher

6
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oil prices. Core inflation (the CPI excluding food and energy items) continues
to edge lower. Despite a very tight labor market, there is no sign of a
"cost-push" inflation emanating from labor costs. Recent data show that wage
increases are being offset almost completely by productivity gains. Higher
interest rates will slow the economy slightly, and we expect inflation-adjusted
gross domestic product to grow 3.6% in 2000, slightly below this year's
estimated rise of 4.1%.
The federal government's budget surplus continues to grow. The total
surplus is estimated to reach about $125 billion for the fiscal year ending
September 30 and to grow to $165 billion in fiscal year 2000. The surpluses
create a strong underpinning for bond investors.
The global economic landscape is substantially brighter than it appeared
six months ago. We envision a period of synchronized global growth, which should
lead to accelerating profits for several multinational companies the fund owns.
As for the stock market, we look for continued acceleration in earnings
during the remainder of this year and through 2000. Our forecast for earnings
growth of 9% in 1999 and 12% in 2000 exceeds the market consensus.

STRATEGY IN 1999
Because we have a more positive outlook for stocks than bonds, we have raised
the fund's equity holdings close to the maximum level of 40% of the fund's
assets. The percentage of assets invested in stocks fluctuates in a narrow range
of 35%-40%, so the move from 36% at the beginning of the year to the current
level of 39% is substantial for us. In its bond holdings, the fund continues to
emphasize long-term securities with call protection to provide a consistent
income stream. We purchase only investment-grade, U.S.-dollar-denominated bonds
with an emphasis on stable or improving credit fundamentals.
The strategy for the stock portfolio is to purchase shares of companies
with above-market yields across different industries. We typically sell stocks
that have approached our target prices. The majority of Wellesley's stocks are
New York Stock Exchange-listed issues with above-average dividend yields. The
average yield on our stocks is 3.4%, which is 183% higher than the current 1.2%
dividend yield on the S&P 500 Index.
The dominant theme guiding the fund's investment strategy is our obligation
to shareholders to provide an attractive level of income by investing in
high-quality securities. Our long-term goal is to achieve increases in
Wellesley's dividend by purchasing stocks of strong companies, which are able to
pass along higher dividends generated from rising earnings. We avoid stocks with
ultrahigh dividends, which may not be sustainable over the long term.

SUMMARY
We are disappointed to end the first half of the year with a negative return,
especially when the stock market has achieved new highs. We will continue to
focus on the fund's charter, maintaining our stock and bond allocations within
our tightly defined ranges while buying high-quality securities.

Earl E. McEvoy John R. Ryan
Senior Vice President Senior Vice President

WELLINGTON MANAGEMENT COMPANY, LLP

July 14, 1999

7
<PAGE>

FUND PROFILE
WELLESLEY INCOME FUND

This Profile provides a snapshot of the fund's characteristics as of June 30,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 10 and 11.

TOTAL FUND CHARACTERISTICS
- ----------------------------------
Yield 5.3%
Turnover Rate 27%*
Expense Ratio 0.32%*
Cash Reserves 2.0%

*Annualized.

FUND ASSET ALLOCATION
- ----------------------------------
[PIE CHART]
STOCKS 39%
BONDS 59%
CASH RESERVES 2%

TOTAL FUND VOLATILITY MEASURES
- ----------------------------------
WELLESLEY S&P 500
- ----------------------------------
R-Squared 0.52 1.00
Beta 0.31 1.00

TEN LARGEST STOCKS (% OF EQUITIES)
- ----------------------------------------
Ford Motor Co. 4.2%
National City Corp. 4.0
BP Amoco PLC ADR 4.0
Bell Atlantic Corp. 3.8
GPU, Inc. 3.6
Wachovia Corp. 3.2
Royal Dutch Petroleum Co. ADR 3.2
Pharmacia & Upjohn, Inc. 3.2
USX-Marathon Group 3.2
Equitable Resources, Inc. 2.8
- ----------------------------------------
Top Ten 35.2%
- ----------------------------------------
Top Ten as % of Total Net Assets 13.8%

SECTOR DIVERSIFICATION (% OF COMMON STOCKS)
- ----------------------------------------------------------------------
JUNE 30, 1998 JUNE 30, 1999
-----------------------------------------------
WELLESLEY WELLESLEY S&P 500
-----------------------------------------------
Auto & Transportation .... 4.5% 5.9% 2.5%
Consumer Discretionary ... 8.5 5.5 12.8
Consumer Staples ......... 5.0 5.8 7.8
Financial Services ....... 24.6 17.2 16.5
Health Care .............. 4.6 5.4 11.1
Integrated Oils .......... 15.5 15.5 5.1
Other Energy ............. 0.0 2.8 1.4
Materials & Processing ... 7.4 9.6 3.5
Producer Durables ........ 0.9 0.0 3.5
Technology ............... 0.0 0.0 18.9
Utilities ................ 27.6 26.5 11.3
Other .................... 1.4 5.8 5.6
- ----------------------------------------------------------------------

8
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EQUITY CHARACTERISTICS
- ------------------------------------------
WELLESLEY S&P 500
- ------------------------------------------
Number of Stocks 71 500
Median Market Cap $17.4B $70.1B
Price/Earnings Ratio 20.5x 29.6x
Price/Book Ratio 2.7x 5.2x
Dividend Yield 3.4% 1.2%
Return on Equity 17.6% 22.4%
Earnings Growth Rate 6.3% 14.8%
Foreign Holdings 11.1% 1.6%

EQUITY INVESTMENT FOCUS
- -----------------------
[GRID]
STYLE-VALUE
MARKET CAP-LARGE

FIXED-INCOME CHARACTERISTICS
- --------------------------------------------------
WELLESLEY LEHMAN*
- --------------------------------------------------
Number of Bonds 175 7,520
Yield to Maturity 7.0% 6.6%
Average Coupon 6.9% 6.8%
Average Maturity 16.6 years 9.0 years
Average Quality Aa3 Aaa
Average Duration 8.1 years 4.9 years

*Lehman Aggregate Bond Index.

FIXED-INCOME INVESTMENT FOCUS
- -----------------------------------------
[GRID]
AVERAGE MATURITY-LONG
CREDIT QUALITY-INVESTMENT-GRADE CORPORATE

DISTRIBUTION BY ISSUER (% OF BONDS)
- -----------------------------------
Asset-Backed 0.0%
Finance 24.5
Foreign 1.7
Industrial 34.9
Mortgage 13.0
Treasury/Agency 11.1
Utilities 14.8
- -----------------------------------
Total 100.0%

DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- -------------------------------------------
Treasury/Agency 11.1%
Aaa 15.7
Aa 19.5
A 39.7
Baa 14.0
Ba 0.0
B 0.0
Not Rated 0.0
- -------------------------------------------
Total 100.0%

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<PAGE>

AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
It is expressed as a percentage of face value.

AVERAGE DURATION. An estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the fund's duration by the change in rates. If interest rates
rise by one percentage point, the share price of a fund with an average duration
of five years would decline by about 5%. If rates decrease by a percentage
point, the fund's share price would rise by 5%.

AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity (or are called) and are repaid. In general, the longer the average
maturity, the more a fund'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 fund's securities holdings by credit-rating agencies. The
agencies make their judgment after appraising an issuer's ability to meet its
obligations. Quality is graded on a scale, with Aaa or AAA indicating the most
creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities. U.S. Treasury securities are considered to
have the highest credit quality.

BETA. A measure of the magnitude of a fund'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 fund 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 fund'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 stock or
bond investment.

DISTRIBUTION BY CREDIT QUALITY. This breakdown of a fund's securities by credit
rating can help in gauging the risk that returns could be affected by defaults
or other credit problems.

DISTRIBUTION BY ISSUER. A breakdown of a fund's holdings by type of issuer or
type of instrument.

DIVIDEND YIELD. The current, annualized rate of dividends paid on a share of
stock, divided by its current share price. For a fund, the weighted average
yield for stocks it holds.

EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.

EQUITY INVESTMENT FOCUS. This grid indicates the focus of a fund's equity
holdings in terms of two attributes: market capitalization (large, medium, or
small) and relative valuation (growth, value, or a blend).

EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.

FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a fund's
fixed-income holdings in terms of two attributes: average maturity (short,
medium, or long) and average credit quality (Treasury/agency, investment-grade
corporate, or below investment-grade).

FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.

FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings
allocated to different types of assets.

MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.

10
<PAGE>

NUMBER OF BONDS. An indicator of diversification. The more separate issues a
fund holds, the less susceptible it is to a price decline stemming from the
problems of a particular bond issuer.

NUMBER OF STOCKS. An indicator of diversification. The more stocks a fund holds,
the more diversified it is and the more likely to perform in line with the
overall stock market.

PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.

PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.

R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.

RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.

SECTOR DIVERSIFICATION. The percentages of a fund's common stocks that come from
each of the major industry groups that compose the stock market.

TEN LARGEST STOCKS. The percentage of equity assets that a fund has invested in
its ten largest stocks. As this percentage rises, a fund's returns are likely to
be more volatile because they are more dependent on the fortunes of a few
companies.

TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).

YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year.

YIELD TO MATURITY. The rate of return an investor would receive if the
securities held by a fund were held to their maturity dates.

11
<PAGE>

PERFORMANCE SUMMARY
WELLESLEY INCOME FUND

All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely, so an investment in the fund could
lose money.

TOTAL INVESTMENT RETURNS: DECEMBER 31, 1978-JUNE 30, 1999
- --------------------------------------------------------------------------------
WELLESLEY INCOME FUND COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
1979 -2.6% 8.8% 6.2% 3.5%
1980 0.9 11.0 11.9 9.4
1981 -3.1 11.8 8.7 -1.7
1982 10.1 13.2 23.3 36.3
1983 7.1 11.5 18.6 13.2
1984 4.9 11.7 16.6 13.8
1985 16.0 11.4 27.4 29.4
1986 9.2 9.1 18.3 19.9
1987 -8.1 6.2 -1.9 2.5
1988 4.7 8.9 13.6 13.7
1989 11.8 9.1 20.9 21.0
- --------------------------------------------------------------------------------
WELLESLEY INCOME FUND COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
1990 -4.3% 8.1% 3.8% 2.5%
1991 12.9 8.7 21.6 20.5
1992 1.6 7.1 8.7 9.2
1993 8.2 6.4 14.6 14.6
1994 -10.2 5.8 -4.4 -4.6
1995 21.6 7.3 28.9 30.7
1996 3.3 6.1 9.4 6.8
1997 13.8 6.4 20.2 19.4
1998 6.4 5.4 11.8 13.9
1999** -2.8 2.6 -0.2 0.1
- --------------------------------------------------------------------------------
*65% Lehman Long-Term Corporate Bond Index and 35% S&P 500 Index through
December 31, 1985; 65% Lehman Long Corporate AA or Better Bond Index,
26% S&P/BARRA Value Index, and 9% S&P Utilities Index through June 30,
1996, when the S&P Utilities component was separated into the S&P
Utilities Index and the S&P Telephone Index.
**Six months ended June 30, 1999.
See Financial Highlights table on page 20 for dividend and capital gains
information for the past five years.

AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
10 YEARS
INCEPTION -------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Wellesley Income Fund 7/1/1970 4.63% 13.69% 4.96% 6.85% 11.81%
- --------------------------------------------------------------------------------

12
<PAGE>

FINANCIAL STATEMENTS
JUNE 30, 1999 (UNAUDITED)

[PHOTO]

STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the fund's investments and their cost, and reflects
the gains (losses) that would be realized if the fund were to sell all of its
investments at their statement-date values.

13
<PAGE>

- -------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLESLEY INCOME FUND (000) (000)
- -------------------------------------------------------------
CORPORATE BONDS (43.6%)
- -------------------------------------------------------------
MBIA Inc.
7.00%, 12/15/2025 $ 19,500 $ 18,625
Massachusetts Mutual Life
7.50%, 3/1/2024 8,690 8,898
7.625%, 11/15/2023 14,500 15,051
Metropolitan Life Insurance Co.
7.80%, 11/1/2025 40,000 41,420
J.P. Morgan & Co., Inc.
5.75%, 10/15/2008 20,000 18,170
6.25%, 1/15/2009 20,000 18,821
NBD Bank N.A
6.25%, 8/15/2003 20,000 19,760
National City Bank Cleveland
6.50%, 5/1/2003 10,000 9,956
National City Bank Pennsylvania
7.25%, 10/21/2011 22,000 22,242
National City Corp.
7.20%, 5/15/2005 20,000 20,394
NationsBank Corp.
7.25%, 10/15/2025 10,000 9,660
7.75%, 8/15/2004 20,000 20,838
Republic New York Corp.
5.875%, 10/15/2008 15,000 13,706
SunTrust Banks, Inc.
6.00%, 2/15/2026 25,000 23,788
6.125%, 2/15/2004 20,000 19,650
Transamerica Financial Corp.
6.125%, 11/1/2001 25,000 24,879
Travelers Property Casualty Corp.
7.75%, 4/15/2026 25,000 25,748
UNUM Corp.
6.75%, 12/15/2028 25,000 22,955
Wachovia Corp.
6.375%, 4/15/2003 20,000 19,871
6.605%, 10/1/2025 30,000 29,761
-------------
1,172,401
-------------
INDUSTRIAL (20.5%)
AirTouch Communications, Inc.
6.35%, 6/1/2005 25,000 24,515
Aluminum Co. of America
6.75%, 1/15/2028 25,000 23,113
Baxter International, Inc.
7.65%, 2/1/2027 25,000 25,438
Bestfoods
6.625%, 4/15/2028 30,000 27,447
Bristol-Myers Squibb Co.
6.80%, 11/15/2026 40,000 39,084
Burlington Northern Santa Fe Corp.
6.375%, 12/15/2005 12,500 12,178
6.875%, 12/1/2027 25,000 23,233
CPC International, Inc.
7.25%, 12/15/2026 30,000 29,864
CSX Corp.
7.95%, 5/1/2027 35,000 36,082
Caterpillar Inc.
6.625%, 7/15/2028 25,000 22,650
Champion International Corp.
7.35%, 11/1/2025 30,000 28,727
Chrysler Corp.
7.45%, 3/1/2027 25,000 25,297
Coca Cola Enterprises
5.75%, 11/1/2008 25,000 23,057
Comcast Cable Communications
6.20%, 11/15/2008 25,000 23,264
Conoco Inc.
6.35%, 4/15/2009 25,000 23,869
The Walt Disney Co.
6.75%, 3/30/2006 15,000 15,037
E.I. du Pont de Nemours & Co.
6.50%, 1/15/2028 25,000 22,926
6.75%, 9/1/2007 25,000 25,290
Eaton Corp.
6.50%, 6/1/2025 10,000 9,713
7.625%, 4/1/2024 10,000 10,107
Ferro Corp.
7.125%, 4/1/2028 10,000 8,849
Ford Motor Co.
7.50%, 8/1/2026 20,000 20,003
8.90%, 1/15/2032 20,000 23,287
General Motors Corp.
7.40%, 9/1/2025 30,000 29,695
9.40%, 7/15/2021 20,000 23,996
Georgia-Pacific Group
7.25%, 6/1/2028 25,000 23,191
Gillette Co.
5.75%, 10/15/2005 35,000 33,624
6.25%, 8/15/2003 10,000 9,968
Hershey Foods Corp.
6.95%, 3/1/2007 13,000 13,298
Hubbell Inc.
6.625%, 10/1/2005 10,000 10,001
Illinois Tool Works, Inc.
5.75%, 3/1/2009 25,000 23,375
International Business
Machines Corp.
7.00%, 10/30/2025 60,000 58,736
International Paper Co.
7.625%, 1/15/2007 15,000 15,451
Johnson & Johnson
6.73%, 11/15/2023 15,000 14,634
Kimberly-Clark Corp.
6.25%, 7/15/2018 25,000 22,976
Eli Lilly & Co.
7.125%, 6/1/2025 50,000 50,095
Lockheed Corp.
6.75%, 3/15/2003 7,000 6,951
Masco Corp.
6.625%, 4/15/2018 20,000 18,461
Mead Corp.
7.35%, 3/1/2017 10,350 10,210
Merck & Co.
6.30%, 1/1/2026 30,000 27,592
Minnesota Mining &
Manufacturing Corp.
6.375%, 2/15/2028 35,000 32,116
Mobil Corp.
8.625%, 8/15/2021 20,000 23,631
Monsanto Co.
6.75%, 12/15/2027 25,000 22,677
Motorola, Inc.
7.50%, 5/15/2025 50,000 50,404

14
<PAGE>

- -------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -------------------------------------------------------------
CORPORATE BONDS (43.6%)
- -------------------------------------------------------------
New York Times Co.
8.25%, 3/15/2025 $ 26,000 $ 27,653
News America Holdings Inc.
8.00%, 10/17/2016 50,000 50,139
Norfolk Southern Corp.
7.80%, 5/15/2027 35,000 36,182
PPG Industries, Inc.
6.875%, 2/15/2012 10,200 9,975
9.00%, 5/1/2021 15,000 17,690
Phelps Dodge Corp.
7.125%, 11/1/2027 12,500 11,130
Praxair, Inc.
6.75%, 3/1/2003 25,000 24,910
Procter & Gamble Co.
5.25%, 9/15/2003 15,000 14,455
6.45%, 1/15/2026 30,000 27,961
Procter & Gamble Co. ESOP
9.36%, 1/1/2021 30,000 36,453
Raytheon Co.
7.20%, 8/15/2027 25,000 24,329
Rohm & Haas Co.
7.85%, 7/15/2029 12,195 12,186
E.W. Scripps Co.
6.625%, 10/15/2007 20,000 19,615
Joseph Seagram & Sons, Inc.
7.50%, 12/15/2018 9,290 9,006
Tenneco Inc.
7.625%, 6/15/2017 30,000 28,969
7.875%, 4/15/2027 20,000 19,528
Texaco Capital
8.625%, 4/1/2032 30,000 34,759
Time Warner Inc.
6.625%, 5/15/2029 25,000 22,035
Tribune Co.
6.875%, 11/1/2006 20,000 19,989
USX Corp.
6.85%, 3/1/2008 40,000 38,454
USA Waste Services Inc.
7.00%, 7/15/2028 25,000 23,285
Ultramar Diamond Shamrock
7.20%, 10/15/2017 25,000 23,460
Vulcan Materials Co.
6.00%, 4/1/2009 25,000 23,586
Washington Post Co.
5.50%, 2/15/2009 50,000 46,020
Weyerhaeuser Co.
8.50%, 1/15/2025 10,000 11,181
Whirlpool Corp.
9.00%, 3/1/2003 10,000 10,647
-------------
1,667,709
-------------
UTILITIES (8.7%)
AT&T Corp.
6.50%, 3/15/2029 50,000 45,234
Alabama Power Co.
5.49%, 11/1/2005 8,250 7,749
Arizona Public Service Co.
6.625%, 3/1/2004 10,000 9,961
Baltimore Gas & Electric Co.
7.25%, 7/1/2002 15,000 15,429
BellSouth Telecommunications
6.25%, 5/15/2003 12,000 11,967
7.00%, 10/1/2025 10,000 9,664
Chesapeake & Potomac Telephone
Co. (VA)
7.875%, 1/15/2022 16,000 17,406
Consolidated Edison Co. of
New York, Inc.
6.375%, 4/1/2003 20,000 19,937
Duke Energy Corp.
6.00%, 12/1/2028 25,000 21,118
El Paso Natural Gas Co.
7.50%, 11/15/2026 25,000 24,491
Enron Corp.
6.875%, 10/15/2007 20,000 19,704
Florida Power Corp.
6.75%, 2/1/2028 22,380 21,248
GTE California Inc.
6.70%, 9/1/2009 25,000 24,668
GTE Southwest, Inc.
6.00%, 1/15/2006 10,000 9,577
Illinois Power Co.
6.50%, 8/1/2003 10,000 9,843
Indiana Bell Telephone Co., Inc.
7.30%, 8/15/2026 30,000 31,128
Kentucky Utilities Co.
7.92%, 5/15/2007 5,000 5,285
MCI Communications Corp.
7.50%, 8/20/2004 15,000 15,444
Michigan Bell Telephone Co.
7.85%, 1/15/2022 25,000 26,543
New Jersey Bell Telephone Co.
8.00%, 6/1/2022 40,000 43,145
New York Telephone Co.
6.50%, 3/1/2005 30,000 29,907
Northern States Power Co.
6.375%, 4/1/2003 8,000 7,988
7.125%, 7/1/2025 30,000 29,779
Ohio Bell Telephone Co.
6.125%, 5/15/2003 15,000 14,870
Oklahoma Gas & Electric Co.
6.50%, 4/15/2028 12,770 11,706
Pacific Bell
7.125%, 3/15/2026 25,000 24,491
PacifiCorp
6.625%, 6/1/2007 10,000 9,856
Pennsylvania Power & Light Co.
6.50%, 4/1/2005 15,000 14,970
PECO Energy
6.50%, 5/1/2003 30,000 29,967
Southwestern Public Service Co.
7.25%, 7/15/2004 10,000 10,294
Sprint Capital Corp.
6.875%, 11/15/2028 35,000 31,924
Tennessee Gas Pipeline Co.
7.50%, 4/1/2017 25,000 25,519

15
<PAGE>

- -------------------------------------------------------------
MARKET
VALUE*
Shares (000)
- -------------------------------------------------------------
COMMON STOCKS (39.3%)
- -------------------------------------------------------------
AUTO & TRANSPORTATION (2.3%)
Ford Motor Co. 2,350,500 $ 132,656
General Motors Corp. 500,000 33,000
CSX Corp. 235,600 10,676
Delphi Automotive
Systems Corp. 349,465 6,487
Norfolk Southern Corp. 210,000 6,326
-------------
189,145
-------------
CONSUMER DISCRETIONARY (2.2%)
May Department Stores Co. 1,635,000 66,831
Eastman Kodak Co. 916,000 62,059
J.C. Penney Co., Inc. 970,300 47,120
-------------
176,010
-------------
CONSUMER STAPLES (2.3%)
Philip Morris Cos., Inc. 1,645,000 66,108
Flowers Industries, Inc. 2,718,300 58,953
H.J. Heinz Co. 1,000,800 50,165
Universal Corp. 383,200 10,897
-------------
186,123
-------------
FINANCIAL SERVICES (6.7%)
National City Corp. 1,970,100 129,041
Wachovia Corp. 1,206,900 103,265
Marsh & McLennan Cos., Inc. 735,000 55,492
General Growth Properties
Inc. REIT 812,300 28,837
Colonial Properties Trust REIT 1,004,900 28,388
Sun Communities, Inc. REIT 620,600 22,031
Urban Shopping Centers,
Inc. REIT 617,000 19,435
Camden Property Trust REIT 652,172 18,098
The Macerich Co. REIT 619,100 16,251
Bank of America Corp. 216,064 15,840
CBL & Associates Properties,
Inc. REIT 580,400 15,308
Nationwide Health Properties,
Inc. REIT 700,000 13,344
IPC Holdings Ltd. 655,300 13,106
FelCor Lodging Trust, Inc. REIT 630,000 13,073
KeyCorp 400,000 12,850
HSB Group Inc. 260,000 10,709
Brandywine Realty Trust REIT 484,500 9,599
First Union Corp. 200,000 9,400
Kimco Realty Corp. REIT 218,700 8,557
Highwood Properties, Inc. REIT 245,000 6,722
-------------
549,346
-------------
HEALTH CARE (2.1%)
Pharmacia & Upjohn, Inc. 1,808,500 102,745
Baxter International, Inc 1,147,700 69,579
-------------
172,324
-------------
INTEGRATED OILS (6.1%)
BP Amoco PLC ADR 1,163,102 126,196
Royal Dutch Petroleum Co. ADR 1,713,000 103,208
USX-Marathon Group 3,096,100 100,817
Atlantic Richfield Co. 1,036,000 86,571

16
<PAGE>

- -------------------------------------------------------------
MARKET
VALUE*
Shares (000)
- -------------------------------------------------------------
Mobil Corp. 420,000 41,580
Texaco Inc. 570,000 35,625
-------------
493,997
-------------
OTHER ENERGY (1.1%)
(2)Equitable Resources, Inc. 2,352,100 88,792
-------------

MATERIALS & PROCESSING (3.8%)
Weyerhaeuser Co. 1,064,000 73,150
Eastman Chemical Co. 1,283,400 66,416
The Timber Co. 2,077,000 52,444
Westvaco Corp. 1,620,000 46,980
BOC Group PLC ADR 1,125,000 45,351
Consolidated Papers 503,200 13,461
Witco Chemical Corp. 435,900 8,718
-------------
306,520
-------------
UTILITIES (10.4%)
Bell Atlantic Corp. 1,832,900 119,826
GPU, Inc. 2,728,000 115,087
GTE Corp. 1,169,400 88,582
DQE Inc. 1,951,650 78,310
AT&T Corp. 1,297,500 72,417
Central & South West Corp. 2,332,300 54,518
DTE Energy Co. 1,238,200 49,528
Consolidated Edison Inc. 947,400 42,870
Questar Corp. 2,000,000 38,250
Southern Co. 1,400,000 37,100
American Electric Power
Co., Inc. 760,000 28,549
NICOR, Inc. 722,300 27,493
SCANA Corp. 1,021,600 23,880
U S WEST, Inc. 405,000 23,794
National Fuel Gas Co. 271,600 13,173
MCN Energy Group Inc. 501,100 10,398
New England Electric System 200,000 10,025
Duke Energy Corp. 100,000 5,438
Pinnacle West Capital Corp. 120,000 4,830
SBC Communications Inc. 39,000 2,262
-------------
846,330
-------------
Other (2.3%)
Shell Transport & Trading
Co. ADR 1,738,900 80,641
Minnesota Mining &
Manufacturing Co. 600,000 52,163
Cooper Industries, Inc. 995,900 51,787
-------------
184,591
-------------
- -------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $2,314,541) 3,193,178
- -------------------------------------------------------------

- -------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.4%)
- -------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.87%, 7/1/1999 $ 113,771 $ 113,771
4.98%, 7/1/1999--Note G 2,963 2,963
- -------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $116,734) 116,734
- -------------------------------------------------------------
TOTAL INVESTMENTS (99.5%)
(COST $7,322,824) 8,095,582
- -------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.5%)
- -------------------------------------------------------------
Other Assets--Note C 108,036
Liabilities--Note G (65,343)
-------------
42,693
- -------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------
Applicable to 381,703,627 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $8,138,275
=============================================================

NET ASSET VALUE PER SHARE $21.32
=============================================================
*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)Considered an affiliated company as the fund owns
more than 5% of the outstanding voting securities
of such company.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.

- -------------------------------------------------------------
AT JUNE 30, 1999, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------
Amount Per
(000) Share
- -------------------------------------------------------------
Paid in Capital $7,106,946 $18.62
Overdistributed Net
Investment Income (5,133) (.01)
Accumulated Net
Realized Gains 263,704 .69
Unrealized Appreciation--
Note F 772,758 2.02
- -------------------------------------------------------------
NET ASSETS $8,138,275 $21.32
=============================================================

17
<PAGE>

STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as 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.

- --------------------------------------------------------------------------------
WELLESLEY INCOME FUND
SIX MONTHS ENDED JUNE 30, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 56,125
Interest 167,421
Security Lending 93
----------
Total Income 223,639
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 1,866
Performance Adjustment 190
The Vanguard Group--Note C
Management and Administrative 10,352
Marketing and Distribution 635
Custodian Fees 53
Auditing Fees 6
Shareholders' Reports 112
Trustees' Fees and Expenses 6
----------
Total Expenses 13,220
Expenses Paid Indirectly--Note D (310)
----------
Net Expenses 12,910
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 210,729
- --------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD* 263,955
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENT SECURITIES (496,630)
- --------------------------------------------------------------------------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(21,946)
================================================================================
*Dividend income and realized net gain from affiliated companies were $1,161,000
and $835,000, respectively.

18
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts 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
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.

<TABLE>
- ---------------------------------------------------------------------------------------
WELLESLEY INCOME FUND
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1999 DEC. 31, 1998
(000) (000)
- ---------------------------------------------------------------------------------------
<S> <C> <C>

INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 210,729 $ 403,978
Realized Net Gain 263,955 397,100
Change in Unrealized Appreciation (Depreciation) (496,630) 96,210
------------------------------
Net Increase (Decrease) in Net Assets
Resulting from Operations (21,946) 897,288
------------------------------
DISTRIBUTIONS
Net Investment Income (213,393) (402,480)
Realized Capital Gain (66,982) (413,626)
------------------------------
Total Distributions (280,375) (816,106)
------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 544,142 1,254,529
Issued in Lieu of Cash Distributions 236,537 705,454
Redeemed (837,863) (1,189,285)
------------------------------
Net Increase (Decrease) from Capital
Share Transactions (57,184) 770,698
- ---------------------------------------------------------------------------------------
Total Increase (Decrease) (359,505) 851,880
- ---------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 8,497,780 7,645,900
End of Period $8,138,275 $8,497,780
=======================================================================================

(1)Shares Issued (Redeemed)
Issued 25,040 55,868
Issued in Lieu of Cash Distributions 11,200 31,680
Redeemed (38,677) (53,098)
------------------------------
Net Increase (Decrease) in Shares
Outstanding (2,437) 34,450
=======================================================================================
</TABLE>

19
<PAGE>

FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund'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 fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund 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 fund for
one year.

<TABLE>
- --------------------------------------------------------------------------------------------
WELLESLEY INCOME FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ---------------------------------------------
Throughout Each Period June 30, 1999 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>

NET ASSET VALUE, BEGINNING OF PERIOD $22.12 $21.86 $20.51 $20.44 $17.05 $19.24
- --------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .560 1.13 1.190 1.17 1.13 1.11
Net Realized and Unrealized
Gain (Loss) on Investments (.625) 1.40 2.805 .66 3.68 (1.95)
-------------------------------------------------------
Total from Investment Operations (.065) 2.53 3.995 1.83 4.81 (.84)
-------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.560) (1.13) (1.200) (1.16) (1.14) (1.11)
Distributions from Realized Capital
Gains (.175) (1.14) (1.445) (.60) (.28) (.24)
-------------------------------------------------------
Total Distributions (.735) (2.27) (2.645) (1.76) (1.42) (1.35)
- --------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $21.32 $22.12 $21.86 $20.51 $20.44 $17.05
============================================================================================

TOTAL RETURN -0.23% 11.84% 20.19% 9.42% 28.91% -4.44%
============================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $8,138 $8,498 $7,646 $7,013 $7,181 $5,681
Ratio of Total Expenses to
Average Net Assets 0.32%* 0.31% 0.31% 0.31% 0.35% 0.34%
Ratio of Net Investment Income to
Average Net Assets 5.08%* 5.05% 5.47% 5.74% 5.96% 6.16%
Portfolio Turnover Rate 27%* 32% 36% 26% 32% 32%
============================================================================================
*Annualized.
</TABLE>

20
<PAGE>

NOTES TO FINANCIAL STATEMENTS
Vanguard Wellesley Income Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company, or mutual fund. Certain of
the fund's investments are in long-term corporate debt instruments; the issuers'
abilities to meet these obligations may be affected by economic developments in
their respective industries.

A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest
quoted sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Bonds 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.
Temporary cash investments are valued at 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: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
5. OTHER: Dividend income is recorded on the ex-dividend date. 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. Wellington Management Company, llp provides investment advisory services to
the fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
relative to a combined index comprising the Lehman Brothers Long Corporate AA or
Better Bond Index, the S&P/BARRA Value Index, the S&P Utilities Index, and the
S&P Telephone Index. For the six months ended June 30, 1999, the advisory fee
represented an effective annual basic rate of 0.04% of the fund's average net
assets before an increase of $190,000 based on performance.

C. The Vanguard Group furnishes at cost 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. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At June 30, 1999, the fund had contributed capital of $1,274,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 1.7% of Vanguard's capitalization. The fund's Trustees and officers are also
Directors and officers of Vanguard.

21
<PAGE>

NOTES TO FINANCIAL STATEMENTS (continued)

D. Vanguard has asked the fund's investment adviser to direct certain security
trades, subject to obtaining the best price and execution, to brokers who have
agreed to rebate to the fund part of the commissions generated. Such rebates are
used solely to reduce the fund's management and administrative expenses. The
fund's custodian bank has also agreed to reduce its fees when the fund maintains
cash on deposit in the non-interest-bearing custody account. For the six months
ended June 30, 1999, directed brokerage and custodian fee offset arrangements
reduced expenses by $296,000 and $14,000, respectively. The total expense
reduction represented an effective annual rate of 0.01% of the fund's average
net assets.

E. During the six months ended June 30, 1999, the fund purchased $766,783,000 of
investment securities and sold $876,977,000 of investment securities, other than
U.S. government securities and temporary cash investments. Purchases and sales
of U.S. government securities were $349,480,000 and $314,928,000, respectively.

F. At June 30, 1999, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $772,758,000, consisting
of unrealized gains of $967,784,000 on securities that had risen in value since
their purchase and $195,026,000 in unrealized losses on securities that had
fallen in value since their purchase.

G. The market value of securities on loan to broker/dealers at June 30, 1999,
was $160,968,000, for which the fund held cash collateral of $2,963,000 and U.S.
Treasury securities with a market value of $161,925,000. 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.

22
<PAGE>

NOTICE TO SHAREHOLDERS ABOUT Y2K

As is well known by now, the approaching calendar change to 2000 has posed a
challenge to many computer systems worldwide. Computers that are not modified
could interpret "00" as 1900 rather than 2000 and produce errors in
date-dependent calculations, including bond interest payments, stock trade
settlements, retirement benefits, and other financial transactions.

OUR APPROACH
Vanguard has taken this challenge seriously. We have had a Year 2000 Project
under way since 1996 to fulfill our responsibility to safeguard our business
relationships and the security of our investors' accounts.
Our internal systems are Year 2000-compliant. They have been renovated
and thoroughly tested and are ready for the date change. As for the external
systems that connect with ours, we have been working for many months with
clients, business partners, and providers of products and services to assess
their compliance. We have analyzed the external services we require and have
developed contingency plans--including provision for alternative providers where
appropriate.
On New Year's Day, our telephone centers will be staffed and ready for
shareholder calls. However, we expect the volume of inquiries over the New
Year's weekend to be high, and we encourage shareholders to check their accounts
via our website or automated telephone systems, which offer much greater service
capacity and efficiency. This will also help our live representatives to provide
a higher level of service to those with specific transaction or other
service-related needs.

WHAT YOU CAN DO
We assure you we will protect our shareholders' records, so account records will
not be lost. Nevertheless, keeping copies of current records is always
advisable. You should keep at least your third-quarter statement and any
confirmations you receive from us between October 1, 1999, and year-end.
If you are a registered user of Access Vanguard(TM) (www.vanguard.com),
you can retrieve this information through the secure "Your Accounts" section and
print copies for your files. If you are not registered for Access Vanguard and
wish to have this flexibility, you should register as soon as possible so that
you can receive your password and become familiar with this service before the
New Year's weekend. Likewise, you may need personal identification numbers to
use our automated telephone services: Vanguard Tele-Account(R) for individual
investors (1-800-662-6273) and The VOICE(TM) Network for participants in
employer-sponsored retirement plans (1-800-523-1188).
Our Year 2000 Project's primary goal from the start has been to prepare
our systems for business as usual on behalf of our shareholders into 2000 and
beyond. We remain confident we will meet that goal, and we look forward to
serving you in the years to come.

23
<PAGE>

TRUSTEES AND OFFICERS

JOHN C. BOGLE
Founder, Senior Chairman of the Board, and
Director/Trustee of The Vanguard Group, Inc.,
and each of the investment companies in
The Vanguard Group.

JOHN J. BRENNAN
Chairman of the Board, Chief Executive Officer,
and Director/Trustee of The Vanguard Group, Inc.,
and each of the investment companies in
The Vanguard Group.

JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson
& Johnson; Director of Johnson & JohnsonoMerck
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.

THOMAS J. HIGGINS
Treasurer; Principal of The Vanguard Group, Inc.;
Treasurer 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(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>

VANGUARD
MILESTONES

[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."

[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.

[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28,1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.

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[THE VANGUARD GROUP (R) LOGO]

Post Office Box 2600
Valley Forge, Pennsylvania 19482-2600

WORLD WIDE WEB
www.vanguard.com

FUND INFORMATION
1-800-662-7447

INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739

INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036

This report is intended for the fund's
shareholders. It may not be distributed
to prospective investors unless it
is preceded or accompanied by the
current fund prospectus.

Q272-08/19/1999