VANGUARD/WELLESLEY INCOME FUND INC, 485BPOS, 2000-04-11

VANGUARD/WELLESLEY INCOME FUND INC
485BPOS, 2000-04-11

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT (NO. 2-31333) UNDER
THE SECURITIES ACT OF 1933

PRE-EFFECTIVE AMENDMENT NO.

POST-EFFECTIVE AMENDMENT NO. 51

AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940

AMENDMENT NO. 51

VANGUARD WELLESLEY INCOME
FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)

P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

REGISTRANT'S TELEPHONE NUMBER (610) 669-1000

R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.

IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE:
ON APRIL 21, 2000, PURSUANT TO PARAGRAPH (B) OF RULE 485.

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<PAGE>

VANGUARD(R)
WELLESLEY
INCOME FUND

Prospectus
April 21, 2000

This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.

[A MEMBER OF
THE VANGUARD GROUP (R) LOGO]

<PAGE>

VANGUARD WELLESLEY INCOME FUND
Prospectus

April 21, 2000

A Balanced Mutual Fund

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CONTENTS
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1 FUND PROFILE 18 INVESTING WITH VANGUARD

4 ADDITIONAL INFORMATION 18 Services and Account Features

4 A WORD ABOUT RISK 19 Types of Accounts

4 WHO SHOULD INVEST 20 Buying Shares

5 PRIMARY INVESTMENT STRATEGIES 22 Redeeming Shares

12 THE FUND AND VANGUARD 26 Transferring Registration

12 INVESTMENT ADVISER 26 Fund and Account Updates

13 DIVIDENDS, CAPITAL GAINS, AND TAXES GLOSSARY (inside back cover)

15 SHARE PRICE

16 FINANCIAL HIGHLIGHTS

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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Wellesley Income Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way. Reading
the prospectus will help you to decide whether the Fund is the right investment
for you. We suggest that you keep it for future reference.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

<PAGE>

FUND PROFILE

The following profile summarizes key features of Vanguard Wellesley Income Fund.

INVESTMENT OBJECTIVE

The Fund seeks to provide a high and sustainable level of current income along
with moderate long-term capital growth.

INVESTMENT STRATEGIES

The Fund invests approximately 60% to 65% of its assets in investment-grade,
longer- term corporate, U.S. Treasury, government agency, and mortgage-backed
bonds. The remaining 35% to 40% of Fund assets are invested in common stocks of
companies that have a history of above-average dividends or expectations of
increasing dividends.

PRIMARY RISKS

THE FUND'S TOTAL RETURN, LIKE STOCK AND BOND PRICES GENERALLY, WILL FLUCTUATE
WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. The Fund is also subject to:

n Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk is generally high for longer-term bond funds.
n Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk is generally low for longer-term bond
funds.
n Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
n Call risk, which is the chance that during periods of falling interest
rates, a bond issuer will "call"--or repay--a high-yielding bond before the
bonds maturity date. For mortgage-backed bonds, this phenomena is called
prepayment risk. Forced to reinvest the unanticipated proceeds at lower
interest rates, the Fund would experience a decline in income and lose the
opportunity for additional price appreciation associated with falling
rates. Call (or prepayment) risk is generally high for longer-term bond
funds.
n Investment style risk, which is the chance that returns from large- and
mid-capitalization value stocks will trail returns from other asset classes
or the overall stock market.

n Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.

PERFORMANCE/RISK INFORMATION

The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of both the Lehman
Brothers Long Corporate AA or Better Bond Index, a broad-based securities market
index, and a composite stock/bond index weighted to match the Fund's target
allocation. Keep in mind that the Fund's past performance does not necessarily
indicate how it will perform in the future.

<PAGE>

----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 3.76%
1991 21.57%
1992 8.67%
1993 14.65%
1994 -4.44%
1995 28.91%
1996 9.42%
1997 20.19%
1998 11.84%
1999 -4.14%
----------------------------------------------------

During the period shown in the bar chart, the highest return for a calendar
quarter was 8.50% (quarter ended June 30, 1995) and the lowest return for a
quarter was -4.47% (quarter ended March 31, 1994).

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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS 10 YEARS
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Vanguard Wellesley Income Fund -4.14% 12.69% 10.56%
Lehman Long Corporate AA or Better
Bond Index -7.00 8.44 8.35
Wellesley Composite Index* -1.40 13.55 10.68
Index*
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*Prior to April 1, 2000, weighted 65% in the Lehman Long Corporate AA
or Better Bond Index, and 35% in a blended stock composite (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). Effective April 1, 2000, the Lehman
Brothers Corporate A or Better Bond Index has replaced the Lehman
Brothers Long Corporate AA or Better Bond Index within the Wellesley
Composite Index.
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FEES AND EXPENSES

The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.28%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.30%

<PAGE>

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PLAIN TALK ABOUT
FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Wellesley Income Fund's expense ratio in fiscal year 1999 was
0.30%, or $3.00 per $1,000 of average net assets. The average balanced mutual
fund had expenses in 1999 of 1.33%, or $13.30 per $1,000 of average net assets
(derived from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a fund--such
as account maintenance, reporting, accounting, legal, and other administrative
expenses.

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The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and applies whether or not you redeem your investment at the end of each
period.

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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$31 $97 $169 $381
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.

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PLAIN TALK ABOUT
THE COSTS OF INVESTING

Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed quarterly in $3,000; $1,000 for IRAs and custodial
March, June, September, and December; accounts for minors
capital gains, if any, are distributed
annually in December NEWSPAPER ABBREVIATION
Wellsl
INVESTMENT ADVISER
Wellington Management Company, LLP, VANGUARD FUND NUMBER
Boston, Mass., since inception 027

INCEPTION DATE CUSIP NUMBER
July 1, 1970 921938106

NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$6.98 billion VWINX

SUITABLE FOR IRAS
Yes
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A WORD ABOUT RISK

This prospectus describes risks you would face as an investor in Vanguard
Wellesley Income Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond market.

Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
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WHO SHOULD INVEST

The Fund may be a suitable investment for you if:
- - You wish to add a balanced fund to your existing holdings, which could
include other stock and bond investments, as well as money market and
tax-exempt investments.
- - You are seeking moderate growth of capital over the long term--at least
five years--along with a high level of current income.
- - You want a simple way to invest in a relatively fixed percentage of stocks
and bonds.

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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING

Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
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<PAGE>

THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.

The Fund has adopted the following policies, among others, to discourage
short-term trading:

- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.

- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.

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PLAIN TALK ABOUT
BALANCED FUNDS

Balanced funds are generally "middle of the road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds often move in different directions, balanced
funds are able to use rewards from one type of investment to help offset the
risks from another.
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PRIMARY INVESTMENT STRATEGIES

This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective, income and moderate growth of capital. It also explains
how the adviser implements these strategies. In addition, this section discusses
several important risks--income risk, interest rate risk, stock market risk,
manager risk, credit risk, call or prepayment risk, and investment style
risk--faced by investors in the Fund. The Fund's Board of Trustees, which
oversees the management of the Fund, may change the Fund's investment objective
or strategies in the interest of shareholders, without a shareholder vote.

MARKET EXPOSURE

BONDS

The Fund invests approximately two-thirds of its assets in bonds.

[FLAG] THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT THE FUND'S
DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK
IS GENERALLY THE GREATEST FOR SHORT-TERM BOND FUNDS, AND THE LEAST FOR
LONG-TERM BOND FUNDS.

<PAGE>

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PLAIN TALK ABOUT
BONDS AND INTEREST RATES

As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
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Changes in interest rates will affect bond prices as well as bond income.

[FLAG] THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS DUE TO RISING
INTEREST RATES. INTEREST RATE RISK SHOULD BE HIGH FOR LONGER-TERM BOND
FUNDS.

In the past, bond investors have seen the value of their investments rise
and fall-- sometimes significantly--with changes in interest rates. Between
December 1976 and September 1981, for instance, rising interest rates caused
long-term bond prices to fall by almost 48%.

Because the Wellesley Income Fund invests mainly in bonds, changes in
interest rates will have a significant impact on the value of the Fund's assets.
To illustrate how much of an impact, the following table shows the effect of a
1% and a 2% change (both up and down) in interest rates on three bonds of
different maturities, each with a face value of $1,000.

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HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*

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AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
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Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
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*Assuming a 7% yield.
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These figures are for illustrative purposes only and should not be regarded
as an indication of future returns from the bond market as a whole, or the Fund
in particular.

<PAGE>

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PLAIN TALK ABOUT
BOND MATURITIES

A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
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STOCKS
Roughly one-third of the Fund's assets are invested in common stocks.

[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.

To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.

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U.S. STOCK MARKET RETURNS (1926-1999)
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1 YEAR 5 YEARS 10 YEARS 20 YEARS
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Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.

Because bond prices and stock prices can move in different directions, the
Fund's stock holdings help to dampen--but not eliminate--some of the bond-price
fluctuations caused by changes in interest rates. Likewise, stock market
volatility may not be as dramatic for the Fund as it would be for a fund made up
entirely of stocks.

<PAGE>

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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS

Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.

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SECURITY SELECTION

Wellington Management Company, LLP (Wellington Management), adviser to the Fund,
invests approximately 60% to 65% of the Fund's assets in investment-grade bonds
and approximately 35% to 40% of the Fund's assets in dividend-paying common
stocks. While the mix of stocks and bonds varies from time to time depending on
the adviser's view of economic and market conditions, bonds can be expected to
represent at least 60% of the Fund's holdings.
The Fund is run by Wellington Management according to traditional methods
of active investment management. To achieve the Fund's objective, income and
moderate capital growth, the adviser follows specific strategies for bond and
stock selection.

The Fund is generally managed without regard to tax ramifications.

[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF SELECTING STOCKS AND BONDS.

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PLAIN TALK ABOUT
TYPES OF BONDS

Bonds are issued (sold) by many sources: Corporations issue corporate bonds; the
federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
pass-through certificates such as those issued by the Government National
Mortgage Association (GNMAs). Each issuer is responsible for paying back the
bond's initial value as well as periodic interest payments.
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BONDS
Wellington Management selects investment-grade bonds that it believes will
generate a high and sustainable level of current income. These bonds may include
intermediate- and long-term corporate, U.S. Treasury, government agency,
mortgage-backed, and asset-backed bonds. The bonds are bought and sold according
to Wellington Management's judgment about bond issuers and the general direction
of interest rates, within the context of the economy in general. The
dollar-weighted average maturity of the Fund's bonds as of December 31, 1999,
was 15.8 years but is expected to decline in 2000.
A breakdown of the Fund's bond holdings (which amounted to 59% of net
assets) as of December 31, 1999, follows:

<PAGE>

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PERCENTAGE OF
TYPE OF BOND FUND'S BOND HOLDINGS
------------------------------------------------------

Industrial 35.5%
Bank/Finance 25.0
Utilities 15.4
Mortgage 15.1
U.S. Treasury and government agency 8.3
Foreign issuers 0.7

------------------------------------------------------

Keep in mind that, because the bond makeup of the Fund changes daily, this
listing is only a "snapshot" at one point in time.

[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.

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PLAIN TALK ABOUT
CREDIT QUALITY

A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
ratings categories are considered "investment grade." The Fund's Statement of
Additional Information includes a detailed description of the credit-rating
scales used by major, independent bond-rating agencies.
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Wellington Management purchases bonds that are investment-grade
quality--that is, bonds that are rated at least Baa by Moody's Investors
Service, Inc., or BBB by Standard & Poor's Corporation. The dollar-weighted
average quality of bonds held by the Fund, as of December 31, 1999, was Aa3,
according to Moody's.

The U.S. government guarantees the timely payment of interest and principal
for its Treasury bonds; many (but not all) agency bonds have the same guarantee.
The government does not, however, guarantee its bonds' prices. In other words,
while Treasury and agency bonds enjoy the highest credit ratings, their
prices--like the prices of other bonds in the Fund--will fluctuate with changes
in interest rates.
While falling interest rates tend to strengthen bond prices, they can cause
another sort of problem for bond fund investors--bond calls.

<PAGE>

[FLAG] THE FUND IS SUBJECT TO CALL RISK, WHICH IS THE CHANCE THAT DURING PERIODS
OF FALLING INTEREST RATES A BOND ISSUER WILL "CALL"--OR REPAY--A
HIGH-YIELDING BOND BEFORE THE BONDS MATURITY DATE. FOR MORTGAGE-BACKED
BONDS, THIS PHENOMENA IS CALLED PREPAYMENT RISK. FORCED TO REINVEST THE
UNANTICIPATED PROCEEDS AT LOWER INTEREST RATES, THE FUND WOULD EXPERIENCE A
DECLINE IN INCOME AND LOSE THE OPPORTUNITY FOR ADDITIONAL PRICE
APPRECIATION ASSOCIATED WITH FALLING RATES. CALL (OR PREPAYMENT) RISK IS
GENERALLY HIGH FOR LONGER-TERM BOND FUNDS.

To protect the Fund's corporate bond holdings against call risk, Wellington
Management purchases bonds that have reasonable protection from being called.
Bond issuers take advantage of falling interest rates by calling corporate
bonds. With mortgage-backed securities, it is the mortgage holder--such as the
American homeowner--who benefits from lower rates.

STOCKS
The Fund's stocks are chosen primarily for their dividend-producing
capabilities, but must also have the potential for moderate long-term capital
growth. Wellington Management looks for stocks of companies that either offer
significant dividends now or expect to increase their dividends in the future.
Securities are sold when an investment has achieved its intended purpose, or
because it is no longer considered attractive.

[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM LARGE- AND MID-CAPITALIZATION VALUE STOCKS WILL TRAIL RETURNS
FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET. AS A GROUP, VALUE
STOCKS TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON
STOCKS IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS.

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PLAIN TALK ABOUT
STOCKS AND DIVIDENDS

Many large and established companies share their profits, in the form of
dividends, with their shareholders. Other companies--particularly those that are
new or small--reinvest any profits back into the business to help the company
grow (and, hopefully, increase its stock's share price). In general, stocks that
offer above-average dividends appeal to investors who want some dividend income
and the potential for capital growth but are less tolerant of share price
fluctuations, while growth stocks are appropriate for investors who will accept
more share price volatility in hope of a greater increase in share price.
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TURNOVER RATE

Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 29%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)

<PAGE>

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PLAIN TALK ABOUT
TURNOVER RATE

Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of December 31, 1999, the average turnover rate for all
balanced funds was approximately 85%, according to Morningstar, Inc.

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OTHER INVESTMENT POLICIES AND RISKS
Besides investing in bonds and stocks, the Fund may make certain other kinds of
investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, the Fund reserves the
right to invest up to 20% of stock holdings in foreign common stocks as well as
securities that are convertible into common stocks. These securities may be
traded in U.S. or foreign markets.

To the extent that it owns foreign stocks, the Fund is subject to (1)
country risk, which is the chance that political events (such as a war),
financial problems (such as government default), or natural disasters (such as
an earthquake) will weaken a country's economy and cause investments in that
country to lose money, and (2) currency risk, which is the chance that Americans
investing abroad could lose money because of a rise in the value of the U.S.
dollar versus foreign currencies.

The Fund may also invest in fixed-income securities issued by foreign
governments and by companies domiciled outside the United States; however, these
securities must be valued in U.S. dollars and meet the Fund's credit quality
standards. With respect to its investments in foreign bonds, the Fund is subject
to country risk.

The Fund may also invest, to a limited extent, in futures and options
contracts, which are traditional types of derivatives. The Fund may also invest
modestly in less risky classes of collateralized mortgage obligations (CMOs).
Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a fund. This Fund will not use
futures for speculative purposes or as leveraged investments that magnify the
gains or losses of an investment. The Fund's obligation to purchase securities
under futures contracts will not exceed 20% of its total assets.

The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in bonds and stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.

The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES

A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------

THE FUND AND VANGUARD

The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.

Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------

INVESTMENT ADVISER

<PAGE>

Composite Index was comprised of the Lehman Brothers Long Corporate AA or Better
Bond Index.
For the year ended December 31, 1999, the net fee paid to Wellington
Management represented an effective annual rate of 0.05% of the Fund's average
net assets.
The Fund has authorized Wellington Management to choose brokers or dealers
to handle the purchase and sale of securities for the Fund, and to get the best
available price and most favorable execution from these brokers with respect to
all transactions.
In the interest of obtaining better execution of a transaction, Wellington
Management may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then Wellington Management is authorized to choose a broker who, in
addition to executing the transaction, will provide research services to
Wellington Management or the Fund. Also, the Fund may direct Wellington
Management to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER

The individuals responsible for overseeing the implementation of Wellington
Management's strategy for Vanguard Wellesley Income Fund are:

EARL E. MCEVOY, Senior Vice President and partner of Wellington Management; has
worked in investment management since 1972; with Wellington Management since
1978; Fund Manager since 1982; B.A., Dartmouth College; M.B.A., Columbia
Business School.

JOHN R. RYAN, CFA, Senior Vice President and Managing Partner of Wellington
Management; has worked in investment management with Wellington Management since
1981; Fund Manager since 1986; B.S., Lehigh University; M.B.A., University of
Virginia.

- --------------------------------------------------------------------------------

DIVIDENDS, CAPITAL GAINS, AND TAXES

FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental dividend or capital gains distributions at some other time during
the year. You can receive distributions of income dividends or capital gains in
cash, or you can have them automatically reinvested in more shares of the Fund.

<PAGE>

BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.

GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS

As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"

Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------

SHARE PRICE

The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing by the number of Fund shares outstanding:

TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING

Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is WELLSL.

<PAGE>

FINANCIAL HIGHLIGHTS

The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.

- --------------------------------------------------------------------------------
VANGUARD WELLESLEY INCOME FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $22.12 $21.86 $20.51 $20.44 $17.05
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.120 1.13 1.190 1.17 1.13
Net Realized and
Unrealized Gain (Loss)
on Investments (2.025) 1.40 2.805 .66 3.68
--------------------------------------------------------
Total from Investment
Operations (.905) 2.53 3.995 1.83 4.81
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (1.120) (1.13) (1.200) (1.16) (1.14)
Distributions from
Realized Capital Gains (1.245) (1.14) (1.445) (.60) (.28)
--------------------------------------------------------
Total Distributions (2.365) (2.27) (2.645) (1.76) (1.42)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $18.85 $22.12 $21.86 $20.51 $20.44
================================================================================

TOTAL RETURN -4.14% 11.84% 20.19% 9.42% 28.91%
================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $6,976 $8,498 $7,646 $7,013 $7,181
Ratio of Total
Expenses to Average
Net Assets 0.30% 0.31% 0.31% 0.31% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 5.22% 5.05% 5.47% 5.74% 5.96%
Turnover Rate 20% 32% 36% 26% 32%
================================================================================

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Fund began fiscal 1999 with a net asset value (price) of $22.12 per share.
During the year, the Fund earned $1.12 per share from investment income
(interest and dividends). There was a decline of $2.025 per share from
investments that had depreciated in value or that were sold for lower prices
than the Fund paid for them.
Shareholders received $2.365 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
Investment losses ($0.905 per share) plus the distributions ($2.365 per share)
resulted in a share price of $18.85 at the end of the year. This was a decrease
of $3.27 per share (from $22.12 at the beginning of the year to $18.85 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was -4.14% for the year.
As of December 31, 1999, the Fund had $6.98 billion in net assets. For the year,
its expense ratio was 0.30% ($3.00 per $1,000 of net assets); and its net
investment income amounted to 5.22% of its average net assets. It sold and
replaced securities valued at 20% of its net assets.

- --------------------------------------------------------------------------------

"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.

<PAGE>

- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK]. Please call us to request copies.
- --------------------------------------------------------------------------------

SERVICES AND ACCOUNT FEATURES

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(TM) [BOOK]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK]

Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.

- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER]

You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:

- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.

<PAGE>

- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.

*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------

CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273

Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------

TYPES OF ACCOUNTS

Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOK]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNT [BOOK]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------

<PAGE>

BUYING SHARES

You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).

add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES

The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.

- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE]
open a new account

Complete and sign the account registration form and enclose your check.

add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.

Make your check payable to: The Vanguard Group-27
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE]
open a new account

<PAGE>

add to an existing account

Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739

*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.

- --------------------------------------------------------------------------------

IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.

Wire to:
FRB ABA 021001088
HSBC Bank USA

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard Wellesley Fund-27
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.

- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES

It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.

- --------------------------------------------------------------------------------

<PAGE>

REDEEMING SHARES

This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.

When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.

*May require a signature guarantee; see footnote on page 24.

When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.

- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.

In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.

- --------------------------------------------------------------------------------

HOW TO REQUEST A REDEMPTION

You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are: VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.

- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com

You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).

- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours-- to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.

Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.

<PAGE>

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.

- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).

Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES

Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.

- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.

Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.

Depending on your account registration type, additional documentation may be
required.

First-class mail to: Express or Registered mail to:

The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815

<PAGE>

For clients of Vanguard's Institutional Division . . .

It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.

- --------------------------------------------------------------------------------

OPTIONS FOR REDEMPTION PROCEEDS

You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express Redemption.

- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------

FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.

- --------------------------------------------------------------------------------

FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:

REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.

*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.

TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.

<PAGE>

- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY

Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.

A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:

The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------

ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------

<PAGE>

TRANSFERRING REGISTRATION

You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

FUND AND ACCOUNT UPDATES

STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.

In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the adviser, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.

- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------

<PAGE>

- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK]

Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.

- --------------------------------------------------------------------------------

<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK.)

<PAGE>

GLOSSARY OF INVESTMENT TERMS

BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.

BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.

CAPITAL GAINS DISTRIBUTION

Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.

COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.

CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.

DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.

DURATION
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose one percentage point. On the other
hand, the bond's price would rise by about 2% when interest rates fell by one
percentage point.

EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.

INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.

INVESTMENT GRADE

A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances. Bonds rated in one of the four highest rating categories
are considered "investment grade."

MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.

NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.

PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.

PRINCIPAL

The amount of money you put into an investment.

TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.

VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.

YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.

<PAGE>

[SHIP(R) LOGO]
[THE VANGUARD GROUP(R) LOGO]

Post Office Box 2600
Valley Forge, PA 19482-2600

FOR MORE INFORMATION
If you'd like more information about
Vanguard Wellesley Income Fund,
the following documents are
available free upon request:

ANNUAL/SEMIANNUAL REPORT
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.

STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.

The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.

To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:

THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600

TELEPHONE:
1-800-662-7447 (SHIP)

TEXT TELEPHONE:
1-800-952-3335

WORLD WIDE WEB:
WWW.VANGUARD.COM

If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:

CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)

TEXT TELEPHONE:
1-800-749-7273

INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.

Fund's Investment Company Act
file number: 811-1776

P027N-04/21/2000

<PAGE>

VANGUARD(R)
WELLESLEY
INCOME FUND

Participant Prospectus
April 21, 2000

This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.

[A MEMBER OF
THE VANGUARD GROUP (R) LOGO]

<PAGE>

VANGUARD WELLESLEY INCOME FUND
Participant Prospectus

April 21, 2000

A Balanced Mutual Fund

- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------

1 FUND PROFILE 13 DIVIDENDS, CAPITAL GAINS, AND TAXES

3 ADDITIONAL INFORMATION 14 SHARE PRICE

4 A WORD ABOUT RISK 15 FINANCIAL HIGHLIGHTS

4 WHO SHOULD INVEST 17 INVESTING WITH VANGUARD

5 PRIMARY INVESTMENT STRATEGIES 18 ACCESSING FUND INFORMATION BY
COMPUTER
11 THE FUND AND VANGUARD
GLOSSARY (inside back cover)
12 INVESTMENT ADVISER

- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
IMPORTANT NOTE
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
- --------------------------------------------------------------------------------

<PAGE>

FUND PROFILE

The following profile summarizes key features of Vanguard Wellesley Income Fund.

INVESTMENT OBJECTIVE

The Fund seeks to provide a high and sustainable level of current income along
with moderate long-term capital growth.

INVESTMENT STRATEGIES

PRIMARY RISKS

THE FUND'S TOTAL RETURN, LIKE STOCK AND BOND PRICES GENERALLY, WILL FLUCTUATE
WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. The Fund is also subject to:

n Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.

PERFORMANCE/RISK INFORMATION

<PAGE>

FEES AND EXPENSES

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.28%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.30%

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES

- --------------------------------------------------------------------------------

THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in Wellsl
March, June, September, and December;
capital gains, if any, are distributed VANGUARD FUND NUMBER
annually in December 027

INVESTMENT ADVISER CUSIP NUMBER
Wellington Management Company, LLP, 921938106
Boston, Mass., since inception
TICKER SYMBOL
INCEPTION DATE VWINX
July 1, 1970

NET ASSETS AS OF DECEMBER 31, 1999
$6.98 billion

- --------------------------------------------------------------------------------

<PAGE>

- --------------------------------------------------------------------------------
A WORD ABOUT RISK

WHO SHOULD INVEST

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING

THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.

The Fund has adopted the following policies, among others, to discourage
short-term trading:

- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BALANCED FUNDS

PRIMARY INVESTMENT STRATEGIES

MARKET EXPOSURE

BONDS

The Fund invests approximately two-thirds of its assets in bonds.

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BONDS AND INTEREST RATES

Changes in interest rates will affect bond prices as well as bond income.

<PAGE>

- --------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*

These figures are for illustrative purposes only and should not be regarded
as an indication of future returns from the bond market as a whole, or the Fund
in particular.

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BOND MATURITIES

STOCKS
Roughly one-third of the Fund's assets are invested in common stocks.

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS

- --------------------------------------------------------------------------------

SECURITY SELECTION

The Fund is generally managed without regard to tax ramifications.

[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF SELECTING STOCKS AND BONDS.

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TYPES OF BONDS

------------------------------------------------------
PERCENTAGE OF
TYPE OF BOND FUND'S BOND HOLDINGS
------------------------------------------------------

Industrial 35.5%
Bank/Finance 25.0
Utilities 15.4
Mortgage 15.1
U.S. Treasury and government agency 8.3
Foreign issuers 0.7

------------------------------------------------------

Keep in mind that, because the bond makeup of the Fund changes daily, this
listing is only a "snapshot" at one point in time.

[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
CREDIT QUALITY

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
STOCKS AND DIVIDENDS

TURNOVER RATE

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE

- --------------------------------------------------------------------------------

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES

THE FUND AND VANGUARD

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

INVESTMENT ADVISER

Wellington Management Company, LLP (Wellington Management), 75 State Street,
Boston, MA 02109, founded in 1928, serves as the Fund's investment adviser. As
of December 31, 1999, Welllington Management managed more than $235 billion in
stock and bond portfolios, including 15 Vanguard funds. Wellington Management
manages the Fund subject to the control of the Trustees and officers of the
Fund.
Wellington Management's advisory fee is paid quarterly. This fee is based
on certain annual percentage rates applied to the Fund's average month-end
assets for each quarter.
The advisory fee can be increased or decreased based on the difference
between the Fund's total return performance and that of its unmanaged Composite
Index, 65% of which is made up of the Lehman Brothers Corporate A or Better Bond
Index and 35% of which comprises a blended stock composite (75% S&P/BARRA Value
Index, 12.5% S&P Utilities Index, and 12.5% S&P Telephone Index). Prior to April
1, 2000, the bond portion of th Composite Index was comprised of the Lehman
Brothers Long Corporate AA or Better Bond Index.
For the year ended December 31, 1999, the net fee paid to Wellington
Management represented an effective annual rate of 0.05% of the Fund's average
net assets.
The Fund has authorized Wellington Management to choose brokers or dealers
to handle the purchase and sale of securities for the Fund, and to get the best
available price and most favorable execution from these brokers with respect to
all transactions.
In the interest of obtaining better execution of a transaction, Wellington
Management may choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution of a
transaction, then Wellington Management is authorized to choose a broker who, in
addition to executing the transaction, will provide research services to
Wellington Management or the Fund. Also, the Fund may direct Wellington
Management to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER

The individuals responsible for overseeing the implementation of Wellington
Management's strategy for Vanguard Wellesley Income Fund are:

- --------------------------------------------------------------------------------

DIVIDENDS, CAPITAL GAINS, AND TAXES

The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental dividend or capital gains distributions at some other time during
the year.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS

- --------------------------------------------------------------------------------

<PAGE>

SHARE PRICE

TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING

<PAGE>

FINANCIAL HIGHLIGHTS

TOTAL RETURN -4.14% 11.84% 20.19% 9.42% 28.91%
================================================================================

<PAGE>

- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

- --------------------------------------------------------------------------------

"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.

<PAGE>

INVESTING WITH VANGUARD

The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.

- - If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.

- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.

INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.

TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.

In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.

EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits PARTICIPANT EXCHANGE ACTIVITY TO NO MORE THAN FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 DAYS APART) DURING ANY
12-MONTH PERIOD. A "ROUND TRIP" IS A REDEMPTION FROM the Fund followed by a
PURCHASE BACK INTO the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.

- - Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.

- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.

ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------

<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK.)

<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK.)

<PAGE>

GLOSSARY OF INVESTMENT TERMS

BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.

CAPITAL GAINS DISTRIBUTION

Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.

COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.

CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.

DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.

EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.

INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.

INVESTMENT GRADE

MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.

PRINCIPAL

The amount of money you put into an investment.

VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.

YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.

<PAGE>

[SHIP(R) LOGO]
[THE VANGUARD GROUP(R) LOGO]

Post Office Box 2600
Valley Forge, PA 19482-2600

FOR MORE INFORMATION
If you'd like more information about
Vanguard Wellesley Income Fund,
the following documents are
available free upon request:

ANNUAL/SEMIANNUAL REPORT
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.

STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.

The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.

To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund or other
Vanguard funds, please contact us
as follows:

THE VANGUARD GROUP

PARTICIPANT SERVICES CENTER

P.O. BOX 2900
VALLEY FORGE, PA 19482-2900

TELEPHONE:
1-800-523-1188

TEXT TELEPHONE:
1-800-523-8004

WORLD WIDE WEB:
WWW.VANGUARD.COM

Fund's Investment Company Act
file number: 811-1776

I027N-04/21/2000

<PAGE>

PART B

VANGUARD WELLESLEY INCOME FUND
(THE FUND)

STATEMENT OF ADDITIONAL INFORMATION

APRIL 21, 2000

This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus (dated April 21, 2000). To obtain, without charge, the
Prospectus or the most recent Annual Report to Shareholders, which contains the
Fund's financial statements as hereby incorporated by reference, please call:

INVESTOR INFORMATION DEPARTMENT:
1-800-662-7447

TABLE OF CONTENTS

DESCRIPTION OF THE FUND......................................................B-1
INVESTMENT POLICIES..........................................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...........................................B-8
SHARE PRICE.................................................................B-10
PURCHASE OF SHARES..........................................................B-10
REDEMPTION OF SHARES........................................................B-11
YIELD AND TOTAL RETURN......................................................B-11
MANAGEMENT OF THE FUND......................................................B-13
INVESTMENT ADVISORY SERVICES................................................B-16
PORTFOLIO TRANSACTIONS......................................................B-18
COMPARATIVE INDEXES.........................................................B-20
FINANCIAL STATEMENTS........................................................B-22
APPENDIX--DESCRIPTION OF SECURITIES AND RATINGS.............................B-22

DESCRIPTION OF THE FUND

ORGANIZATION

The Fund was organized as a Delaware corporation in 1968, reorganized as a
Maryland corporation in 1973, and then reorganized as a Delaware business trust
in May, 1998. Prior to its reorganization as a Delaware business trust, the Fund
was known as Vanguard/Wellesley Income Fund, Inc. The Fund is registered with
the United States Securities and Exchange Commission (the Commission) under the
Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified
management investment company. It currently offers a single class of shares, but
has the ability to offer additional share classes. There is no limit on the
number of full and fractional shares that the Fund may issue.

SERVICE PROVIDERS

CUSTODIAN. The Chase Manhattan Bank, N.A., 4 Chase MetroTech Center,
Brooklyn, New York 11245 serves as the Fund's custodian. The custodian is
responsible for maintaining the Fund's assets and keeping all necessary accounts
and records of Fund assets.

INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Fund's independent accountants.
The accountants audit financial statements for the Fund and provide other
related services.

TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.

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CHARACTERISTICS OF THE FUND'S SHARES

RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Fund's shares, other
than the possible future termination of the Fund. The Fund may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
its assets. Unless terminated by reorganization or liquidation, the Fund will
continue indefinitely.

SHAREHOLDER LIABILITY. The Fund is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.

DIVIDEND RIGHTS. The shareholders of the fund are entitled to receive any
dividends or other distributions declared by the Fund. No shares have priority
or preference over any other shares with respect to distributions. Distributions
will be made from the assets of the Fund, and will be paid ratably to all
shareholders according to the number of shares held by shareholders on the
record date.

VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Fund's net assets, and to change any fundamental
policy of the Fund. Shareholders of the Fund receive one vote for each dollar of
net asset value owned on the record date, and a fractional vote for each
fractional dollar of net asset value owned on the record date. Voting rights are
non-cumulative and cannot be modified without a majority vote.

LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the Fund's net assets.

PREEMPTIVE RIGHTS. There are no preemptive rights associated with the
Fund's shares.

CONVERSION RIGHTS. There are no conversion rights associated with the
Fund's shares.

REDEMPTION PROVISIONS. The Fund's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.

SINKING FUND PROVISIONS. The Fund has no sinking fund provisions.

CALLS OR ASSESSMENT. The Fund's shares, when issued, are fully paid and
non-assessable.

TAX STATUS OF THE FUND

The Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. This special tax status means
that the Fund will not be liable for federal tax on income and capital gains
distributed to shareholders. In order to preserve its tax status, the Fund must
comply with certain requirements. If the Fund fails to meet these requirements
in any taxable year, it will be subject to tax on its taxable income at
corporate rates, and all distributions from earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, will be
taxable to shareholders as ordinary income. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and interest, and
make substantial distributions before regaining its tax status as a regulated
investment company.

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INVESTMENT POLICIES

The following policies supplement the Fund's investment policies as set forth in
the Prospectus.

REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements with
commercial banks, brokers or dealers either for defensive purposes due to market
conditions or to generate income from its excess cash balances. A repurchase
agreement is an agreement under which the Fund acquires a fixed-income security
(generally a security issued by the U.S. Government or an agency thereof, a
banker's acceptance or a certificate of deposit) from a commercial bank, broker,
or dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by the Fund and is
unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Fund (including accrued interest
earned thereon) must have a total value in excess of the value of the repurchase
agreement and are held by a custodian bank until repurchased. In addition, the
Fund's Board of Trustees will monitor the Fund's repurchase agreement
transactions generally and will establish guidelines and standards for review by
the investment adviser of the creditworthiness of any bank, broker, or dealer
party to a repurchase agreement with the Fund.

The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by the Fund not within the control of the Fund
and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the adviser
acknowledges these risks, it is expected that they will be controlled through
careful monitoring procedures.

MORTGAGE-BACKED SECURITIES. The Fund may invest in mortgage-backed
securities. Mortgage-backed securities are instruments that entitle the holder
to a share of all interest and principal payments from mortgages underlying the
security. The mortgages backing these securities include conventional
thirty-year fixed rate mortgages, graduated payment mortgages and adjustable
rate mortgages. During periods of declining interest rates, prepayment of
mortgages underlying mortgage-backed securities may be expected to accelerate.
Prepayment of mortgages which underlie securities purchased at a premium often
results in capital losses, while prepayment of mortgages purchased at a discount
often results in capital gains. Because of these unpredictable prepayment
characteristics, it is often not possible to predict accurately the average life
or realized yield of a particular issue.

COLLATERALIZED MORTGAGE OBLIGATIONS. (CMOs) are debt obligations or
multi-class pass-through certificates issued by agencies or instrumentalities of
the U.S. Government, or by private originators or investors in mortgage loans.
In a CMO, series of bonds or certificates are usually issued in multiple
classes, with principal and interest allocated to each class in a variety of
ways. Each class of a CMO, or "tranche," is issued with a specific fixed or
floating coupon rate and has a stated maturity or final distribution date. The
Fund will invest modestly in those CMO classes which feature a high degree of
cash flow predictability and moderate vulnerability to prepayment risk, and that
carry high-quality investment grade credit ratings.

LENDING OF SECURITIES. The Fund may lend its investment securities to
qualified institutional investors (typically brokers, dealers, banks, or other
financial institutions) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its portfolio
securities, the Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain

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or loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Fund. The terms, the structure
and the aggregate amount of such loans must be consistent with the 1940 Act, and
the rules or interpretations of the Commission thereunder. These provisions
limit the amount of securities the Fund may lend to 33 1/3% of the Fund's total
assets, and require that (a) the borrower pledge and maintain with the Fund
collateral consisting of cash, an irrevocable letter of credit issued by a
domestic U.S. bank, or securities issued or guaranteed by the United States
Government having a value at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e. the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Fund at any time, and
(d) the Fund receive reasonable interest on the loan (which may include the
Fund's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Fund will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Fund's Board of
Trustees.

At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.

VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Fund and other Vanguard funds to participate in Vanguard's
interfund lending program. This program allows the Vanguard funds to borrow
money from and loan money to each other for temporary or emergency purposes. The
program is subject to a number of conditions, including the requirement that no
fund may borrow or lend money through the program unless it receives a more
favorable interest rate than is available from a typical bank for a comparable
transaction. In addition, a Vanguard fund may participate in the program only if
and to the extent that such participation is consistent with the fund's
investment objective and other investment policies. The Boards of Trustees of
the Vanguard funds are responsible for ensuring that the interfund lending
program operates in compliance with all conditions of the Commission's exemptive
order.

TEMPORARY INVESTMENTS. The Fund may take temporary defensive measures that
are inconsistent with the Fund's normal fundamental or non-fundamental
investment policies and strategies in response to adverse market, economic,
political or other conditions. Such measures could include investments in (a)
highly liquid short-term fixed-income securities issued by or on behalf of
municipal or corporate issuers, obligations of the U.S. Government and its
agencies, commercial paper, and bank certificates of deposit; (b) shares of
other investment companies which have investment objectives consistent with
those of the Fund; (c) repurchase agreements involving any such securities; and
(d) other money market instruments. There is no limit on the extent to which the
Fund may take temporary defensive measures. In taking such measures, the Fund
may fail to achieve its investment objective.

FOREIGN INVESTMENTS. Vanguard Wellesley Income Fund may invest up to 20% of
its equity assets in foreign common stocks and securities convertible into
foreign stocks. The Fund may also invest in U.S. dollar denominated debt
securities issued by foreign governments, their agencies and instrumentalities,
supranational entities and companies located outside the U.S. without limit.
Investors should recognize that investing in foreign companies involves certain
special considerations which are not typically associated with investing in U.S.
companies. Among these risks are the following:

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Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.

Although the Fund will endeavor to achieve the most favorable execution
costs in its portfolio transactions in foreign securities, fixed commissions on
many foreign stock exchanges are generally higher than negotiated commissions on
U.S. exchanges. In addition, it is expected that the expenses for custodial
arrangements of the Fund's foreign securities will be somewhat greater than the
expenses for the custodian arrangement for handling U.S. securities of equal
value.

Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Fund receives from its foreign investments.

Currency Risk. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Fund will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Fund permit it to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.

FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose functional currency
is the U.S. dollar is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary income or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. The
Treasury Department issued regulations under which certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by a
fund which is not subject to the special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction. It is anticipated that some of the non-U.S. dollar-denominated

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<PAGE>

investments and foreign currency contracts the Fund may make or enter into will
be subject to the special currency rules described above.

ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on the Fund's books.

The Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers or after
they have been held for a number of years, they may be considered illiquid
securities--meaning that they could be difficult for the Fund to convert to cash
if needed.

If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933. While the
Fund's investment adviser determines the liquidity of restricted securities on a
daily basis, the Board oversees and retains ultimate responsibility for the
adviser's decisions. Several factors that the Board considers in monitoring
these decisions include the valuation of a security, the availability of
qualified institutional buyers, and the availability of information about the
security's issuer.

FUTURES CONTRACTS AND OPTIONS. The Fund may enter into futures contracts,
options, and options on futures contracts for the purpose of simulating full
investment and reducing transactions costs. Futures contracts provide for the
future sale by one party and purchase by another party of a specified amount of
a specific security at a specified future time and at a specified price. Futures
contracts which are standardized as to maturity date and underlying financial
instrument are traded on national futures exchanges. Futures exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission (CFTC), a U.S. Government Agency. Assets committed to futures
contracts will be segregated to the extent required by law.

Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.

Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.

After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.

Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities

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otherwise held for investment purposes or expected to be acquired by them.
Speculators are less inclined to own the securities underlying the futures
contracts which they trade, and use futures contracts with the expectation of
realizing profits from fluctuations in the prices of underlying securities. The
Fund intends to use futures contracts only for bona fide hedging purposes.

Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. The Fund will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, the Fund expects that approximately 75% of its futures contract
purchases will be "completed," that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Fund upon sale of open
futures contracts.

Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.

Restrictions on the Use of Futures Contracts The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.

Risk Factors in Futures Transactions Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge it.

The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. The Fund also bears the risk that
the adviser will incorrectly predict market trends. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the adviser
does not believe that the Fund will be subject to the risks of loss frequently
associated with futures transactions. The Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.

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Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option. Additionally, investments in futures contracts and options involve the
risk that the adviser will incorrectly predict stock market and interest rate
trends.

Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.

FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. The Fund is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts held as of the end of
the year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term depending on the holding period of the contract. Sales of futures
contracts which are intended to hedge against a change in the value of
securities held by the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.

In order for the Fund to continue to qualify for federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies, or other income derived with respect to the
Fund's business of investing in securities or currencies. It is anticipated that
any net gain recognized on futures contracts will be considered qualifying
income for purposes of the 90% requirement.

The Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and shareholders will be advised
on the nature of the distributions.

FUNDAMENTAL INVESTMENT LIMITATIONS

The Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the Fund's shares. For these purposes, a "majority" of shares means
shares representing the lesser of: (i) 67% or more of the votes cast to approve
a change, so long as shares representing more than 50% of the Fund's net asset
value are present or represented by proxy; or (ii) more than 50% of the Fund's
net asset value.

BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. The Fund may not make any additional investments whenever its
outstanding borrowings exceed 5% of net assets.

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COMMODITIES. The Fund may not invest in commodities. The Fund may invest in
futures contracts on securities and indexes. The Fund may also invest in options
on futures and options on securities and indexes. No more than 5% of the Fund's
assets may be used as initial margin deposit and premium for futures contracts
and options, and the notional amount of futures contracts may not exceed 20% of
the Fund's assets at any time.

DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer, or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.

ILLIQUID OR RESTRICTED SECURITIES. The Fund may not acquire any security
if, as a result, more than 15% of its net assets would be invested in securities
that are illiquid.

INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry. Utility companies will be divided according to their
services; for example, gas, gas transmission, electric and gas, electric, and
telephone will each be considered a separate industry;

INVESTING FOR CONTROL. The Fund may not invest in a company for the purpose
of controlling its management.

INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.

LOANS. The Fund may not lend money to any person except by purchasing
fixed-income securities that are publicly distributed or customarily purchased
by institutional investors or by entering into repurchase agreements, or by
lending its portfolio securities.

MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.

PLEDGING ASSETS. The Fund may not pledge, mortgage or hypothecate more than
15% of its net assets.

REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate, or interests
therein.

SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.

UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.

The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.

None of these limitations prevents the Fund from participating in The
Vanguard Group, Inc. (Vanguard). As a member of The Vanguard Group of Investment
Companies, the Fund may own securities issued by Vanguard, make loans to
Vanguard, and contribute to Vanguard's costs or other financial requirements.
See "Management of the Fund" for more information.

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SHARE PRICE

The Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the close of the
New York Stock Exchange, generally 4:00 p.m. Eastern time, on each day that the
Exchange is open for trading.

Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Securities may be valued on the basis of prices,
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.

Short term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.

Bonds and other fixed-income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.

Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Fund is
valued. If events which materially affect the value of the Fund's investments
occur after the close of the securities markets on which such securities are
primarily traded, those investments may be valued by such methods as the Board
of Trustees deems in good faith to reflect fair value.

In determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indexes. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available, the rate
of exchange will be determined in accordance with policies established in good
faith by the Board of Trustees.

Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.

The share price for the Fund can be found daily in the mutual fund listings
of most major newspapers under the heading of Vanguard Funds.

PURCHASE OF SHARES

The Fund reserves the right in its sole discretion (i) to suspend the offerings
of its shares, (ii) to reject purchase or exchange purchase orders when in the
judgment of management such rejection is in the best interest of the Fund, and
(iii) to reduce or waive the minimum for any other restrictions on initial and
subsequent investments for certain fiduciary accounts or under circumstances
where certain economies can be achieved in sales of the Fund's shares.

TRADING SHARES THROUGH CHARLES SCHWAB

The Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on its
behalf purchase and redemption orders under certain terms and conditions. Schwab
is also authorized to designate other intermediaries to accept purchase and
redemption orders on the Fund's behalf subject to those terms and conditions.
Under this arrangement, the Fund will be deemed to have received a purchase or
redemption order when Schwab or, if applicable, Schwab's authorized designee,

B-10

<PAGE>

accepts the order in accordance with the Fund's instructions. Customer orders
that are properly transmitted to the Fund by Schwab, or if applicable, Schwab's
authorized designee, will be priced as follows:

Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.

REDEMPTION OF SHARES

The Fund may suspend redemption privileges or postpone the date of payment (i)
during any period that the Exchange is closed, or trading on the Exchange is
restricted as determined by the Commission, (ii) during any period when an
emergency exists as defined by the Commission as a result of which it is not
reasonably practicable for the Fund to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.

The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.

No charge is made by the Fund for redemptions. Shares redeemed may be worth
more or less than what was paid for them, depending on the market value of the
securities held by the Fund.

YIELD AND TOTAL RETURN

The yield of the Fund for the 30-day period ended December 31, 1999 was
5.73%. The average annual total return of the Fund for the one-, five-, and
ten-year periods ended December 31, 1999 was -4.14%, 12.69%, and 10.56%,
respectively.

SEC YIELD

Yield is the net annualized yield based on a specific 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:

YIELD = 2[((A-B)/CD+1)6 - 1]

Where:

a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends
d = the maximum offering price per share on the last day of
the period

AVERAGE ANNUAL TOTAL RETURN

Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, and ten years, all ended on the last day of
a recent month. Average annual total return quotations will reflect changes in
the price of the Fund's shares and assume that all dividends and capital gains
distributions during the respective periods were reinvested in Fund shares.

Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):

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<PAGE>

T = (ERV/P)1/N - 1

Where:

T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period

AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION

We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
that would equate the initial amount invested to the after-tax value, according
to the following formulas:

P (1+T)N = ATV

Where:

P = a hypothetical initial payment of $1,000
T = average annual after-tax total return
n = number of years
ATV = after-tax value at the end of the 1-, 5-, or 10-year periods
of a hypothetical $1,000 payment made at the beginning of the
time period, assuming no liquidation of the investment at the
end of the measurement periods.

Instructions.

1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.

2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e., return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).

3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.

4. State the total return quotation to the nearest hundredth of one percent.

CUMULATIVE TOTAL RETURN

Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):

B-12

<PAGE>

C = (ERV/P) - 1

Where:

C = cumulative total return.
P = a hypothetical initial investment of $1,000.
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable period.

MANAGEMENT OF THE FUND

OFFICERS AND TRUSTEES

The officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Board of Trustees. The Trustees set broad policies for the Fund and
choose its officers. The following is a list of the Trustees and officers of the
Fund and a statement of their present positions and principal occupations during
the past five years. As a group, the Fund's Trustees and officers own less than
1% of the outstanding shares of the Fund. Each Trustee also serves as a Director
of The Vanguard Group, Inc., and as a Trustee of each of the funds administered
by Vanguard. The mailing address of the Trustees and officers of the Fund is
Post Office Box 876, Valley Forge, PA 19482.

JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer, and
Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.

JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of Johnson
& Johnson*MERCK Consumer Pharmaceuticals Co., The Medical Center at Princeton,
and Women's Research and Education Institute.

BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.

BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Select
Sector SPDR Trust (Exchange-Traded Mutual Fund).

ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries,
Inc. (Machinery/ Coal/Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals),.

JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries, Inc. (Machinery/ Coal/Appliances), and Newfield
Exploration Co. (Energy); formerly, Director and Senior Partner of McKinsey &
Co., and President of New York University.

JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.

J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine

B-13

<PAGE>

Company), The Mead Corp. (Paper Products), and AmeriSource Health Corp.; and
Trustee of Vanderbilt University.

RAYMOND J. KLAPINSKY, (DOB:12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.

THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.

ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.

*Officers of the Fund are "interested persons" as defined in the 1940 Act.

THE VANGUARD GROUP

Vanguard Wellesley Income Fund is a member of The Vanguard Group of Investment
Companies which consists of more than 100 funds. Through their jointly-owned
subsidiary, The Vanguard Group, Inc., the Fund, and the other funds in The
Vanguard Group obtain at cost virtually all of their corporate management,
administrative and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain of the Vanguard funds.

Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's total expenses which are allocated among the
funds under methods approved by the Board of Trustees of each fund. In addition,
each fund bears its own direct expenses such as legal, auditing, and custodian
fees.

The Fund's officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the funds.

Vanguard and the Fund's adviser have adopted Codes of Ethics designed to
prevent employees who may have access to nonpublic information about the trading
activities of the Fund (access persons) from profiting from that information.
The Codes permit access persons to invest in securities for their own accounts,
including securities that may be held by the Fund, but place substantive and
procedural restrictions on their trading activities. For example, the Codes
require that access persons receive advance approval for every securities trade
to ensure that there is no conflict with the trading activities of the Fund.

Vanguard was established and operates under Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The amounts which each of the funds have invested are adjusted from time to time
in order to maintain the proportionate relationship between each fund's relative
net assets and its contribution to Vanguard's capital. The Amended and Restated
Funds' Service Agreement provides that each Vanguard fund may be called upon to
invest up to 0.40% of its current net assets in Vanguard as contributions to
Vanguard's capitalization. At December 31, 1999, Vanguard Wellesley Income Fund
had contributed capital of $1,500,000 to Vanguard, representing 0.02% of the
Fund's net assets and 1.5% of Vanguard's capitalization.

MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the funds by third parties.

DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
the Vanguard Group, Inc. provides all distribution and marketing activities for
the funds in the Group. The

B-14

<PAGE>

principal distribution expenses are for advertising, promotional materials, and
marketing personnel. Distribution services may also include organizing and
offering to the public, from time to time, one or more new investment companies
which will become members of Vanguard. The Trustees and officers of Vanguard
determine the amount to be spent annually on distribution activities, the manner
and amount to be spent on each fund, and whether to organize new investment
companies.

One half of the distribution expenses of a marketing and promotional nature
is allocated among the funds based upon relative net assets. The remaining one
half of those expenses is allocated among the funds based upon each fund's sales
for the preceding 24 months relative to the total sales of the funds as a group.
Provided, however, that no fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for the Vanguard, and that no fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets.

During the fiscal years ended December 31, 1997, 1998, and 1999, the Fund
incurred the following approximate amounts of The Vanguard Group's management
(including transfer agency), distribution, and marketing expenses: $16,762,000,
$19,534,000, and $19,749,000, respectively.

INVESTMENT ADVISORY SERVICES

Vanguard also provides investment advisory services to several Vanguard
funds. These services are provided on an at-cost basis from a money management
staff employed directly by Vanguard. The compensation and other expenses of this
staff are paid by the funds utilizing these services.

TRUSTEE COMPENSATION

The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table appearing on page B-16), and each fund
pays a proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by
Vanguard, not the funds.

INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the funds--in three ways:

. The independent Trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled Board
meetings.

. The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.

. Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.

"INTERESTED" TRUSTEE. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.

COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds.

B-15

<PAGE>

VANGUARD WELLESLEY INCOME FUND
TRUSTEES' COMPENSATION TABLE

PENSION OR TOTAL
AGGREGATE RETIREMENT COMPENSATION
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL FROM ALL VANGUARD
FROM THIS AS PART OF THIS BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUND(1) FUND'S EXPENSES(1) RETIREMENT TRUSTEES(2)
- --------------------------------------------------------------------------------------------------
John C. Bogle(3) None None None None
John J. Brennan None None None None
JoAnn Heffernan Heisen $1,555 $86 $15,000 $80,000
Bruce K. MacLaury $1,609 $144 $12,000 $75,000
Burton G. Malkiel $1,566 $142 $15,000 $80,000
Alfred M. Rankin, Jr. $1,555 $104 $15,000 $80,000
John C. Sawhill $1,555 $131 $15,000 $80,000
James O. Welch, Jr. $1,555 $152 $15,000 $80,000
J. Lawrence Wilson $1,555 $110 $15,000 $80,000
</TABLE>
- ---------
(1) The amounts shown in this column are based on the Fund's fiscal year ended
December 31, 1999.

(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999
calendar year.

(3) Mr. Bogle retired from the Fund's Board on December 31, 1999.

INVESTMENT ADVISORY SERVICES

The Fund employs Wellington Management Company, LLP (Wellington Management)
under an investment advisory agreement to manage the investment and reinvestment
of Vanguard Wellesley Income Fund's assets and to continuously review,
supervise, and administer the Fund's investment program. Wellington Management
is a professional investment counseling firm which provides investment services
to investment companies, other institutions and individuals. Among the clients
of Wellington Management are more than 15 Vanguard funds. Wellington Management
and its predecessor organizations have provided investment advisory services to
investment companies since 1928 and to investment counseling clients since 1960.
Wellington Management discharges its responsibilities subject to the control of
the officers and Trustees of the Fund. Wellington Management is a Massachusetts
limited liability partnership whose managing partners are Laurie A. Gabriel,
Duncan M. McFarland, and John R. Ryan.

The Fund pays Wellington Management an advisory fee at the end of each
fiscal quarter, calculated by applying a quarterly rate, based on the following
annual percentage rates, to the Fund's average month-end net assets for the
quarter:

NET ASSETS ANNUAL RATE
- ---------- -----------
First $1 billion................ .100%
Next $2 billion................. .050%
Next $7 billion................. .040%
Over $10 billion................ .030%

The quarterly payment to Wellington Management may be increased or
decreased by applying an adjustment reflecting the investment performance of the
Fund relative to the investment performance of a "Composite Index," 65% of which
will comprise of the Lehman Brothers

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<PAGE>

Corporate A or Better Bond Index (the "Bond Index") and 35% of which will
comprise of a "Blended Equity Composite," (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index, and 12.5% Standard & Poor's
Telephone Index).

The following table sets forth the adjustment:

CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE
VERSUS THE COMPOSITE INDEX ADJUSTMENT*
- -------------------------- -----------
Less than -3%....................... -0.20 x Basic Fee
Between -1.5% and -3%............... -0.10 x Basic Fee
Between -1.5% and 1.5%.............. 0.00 x Basic Fee
Between +1.5% and +3%............... +0.10 x Basic Fee
More than +3%....................... +0.20 x Basic Fee

*For purposes of this calculation, the Basic Fee is calculated by applying the
quarterly rate against average assets over the same time period which the
performance is measured.

The Composite Index will not become fully operable as the sole performance
index for purposes of calculating the adjustment until the quarter ending March
31, 2003. Until that date, the adjustment will be determined by linking the
investment performance of the Composite Index and that of the "Prior Benchmark,"
35% of which will comprise of the Blended Equity Composite and 65% of which will
comprise of the Lehman Brothers Long-Term Corporate AA or Better Bond Index (the
"Prior Bond Index") as follows:

1. QUARTER ENDING JUNE 30, 2000. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the eleven
quarters ended March 31, 2000, with that of the Composite Index for the quarter
ending June 30, 2000.

2. QUARTER ENDING SEPTEMBER 30, 2000. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the ten quarters
ended March 31, 2000, with that of the Composite Index for the two quarters
ending September 30, 2000.

3. QUARTER ENDING DECEMBER 31, 2000. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the nine quarters
ended March 31, 2000, with that of the Composite Index for the three quarters
ending December 31, 2000.

4. QUARTER ENDING MARCH 31, 2001. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the eight quarters
ended March 31, 2000, with that of the Composite Index for the four quarters
ending March 31, 2001.

5. QUARTER ENDING JUNE 30, 2001. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the seven quarters
ended March 31, 2000, with that of the Composite Index for the five quarters
ending June 30, 2001.

6. QUARTER ENDING SEPTEMBER 30, 2001. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the six quarters
ended March 31, 2000, with that of the Composite Index for the six quarters
ending September 30, 2001.

7. QUARTER ENDING DECEMBER 31, 2001. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the five quarters
ended March 31, 2000, with that of the Composite Index for the seven quarters
ending December 31, 2001.

8. QUARTER ENDING MARCH 31, 2002. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the four quarters
ended March 31, 2000, with that of the Composite Index for the eight quarters
ending March 31, 2002.

9. QUARTER ENDING JUNE 30, 2002. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the three quarters
ended March 31, 2000, with that of the Composite Index for the nine quarters
ending June 30, 2002.

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<PAGE>

10. QUARTER ENDING SEPTEMBER 30, 2002. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the two quarters
ended March 31, 2000, with that of the Composite Index for the ten quarters
ending September 30, 2002.

11. QUARTER ENDING DECEMBER 31, 2002. The adjustment will be determined by
linking the investment performance of the Prior Benchmark for the one quarter
ended March 31, 2000, with that of the Composite Index for the eleven quarters
ending December 31, 2002.

12. QUARTER ENDING MARCH 31, 2003. The Composite Index is fully operable.

The investment performance of the Fund for any period, expressed as a
percentage of the Fund's net asset value per share at the beginning of the
period, shall be the sum of (i) the change in the Fund's net asset value per
share during the period; (ii) the value of the Fund's cash distributions per
share having an ex-dividend date occurring within the period, and (iii) the per
share amount of capital gains taxes paid or accrued during such period by the
Fund for undistributed realized long-term capital gains.

COMPOSITE INDEX. The investment record of the Composite Index for any
period, expressed as a percentage of the Composite Index at the beginning of
such period, will be the sum of: (i) the change in the level of the Composite
Index during the period; (ii) the value of the interest accrued or paid on the
bonds included in the Composite Index, assuming the reinvestment of such
interest on a monthly basis. Computations of the two components of the Composite
Index will be made at the beginning of each quarter, based on the allocation set
forth in this Agreement.

BOND INDEX. The investment record of the Bond Index for the period,
expressed as a percentage of the Bond Index at the beginning of such period,
will be the sum of: (i) the change in the level of the Composite Index during
the period; (ii) the value of the interest accrued or paid on the bonds included
in the Composite Index, assuming the reinvestment of such interest on a monthly
basis.

BLENDED EQUITY COMPOSITE. The investment record of the Blended Equity
Composite for any period, expressed as a weighted percentage of the respective
indexes at the beginning of such period, will be the sum of: (i) the change in
the level of the indexes during the period; (ii) the value, computed
consistently with the applicable indexes, of cash distributions having an
ex-dividend date occurring within the period made by companies whose securities
comprise the applicable indexes.

PRIOR BENCHMARK. The investment record of the Prior Benchmark for any
period will be computed in the same manner as that of the Composite Index;
provided, however, that the Prior Bond Index will be substituted for the Bond
Index.

During the fiscal years ended December 31, 1997, 1998, and 1999, the Fund
incurred investment advisory fees of approximately $3,646,000 before an increase
of $718,000 based on performance, $4,026,000 before an increase of $648,000
based on performance, and $3,763,000 before a decrease of $196,000 based on
performance, respectively.

The present agreement is renewable for successive one-year periods, only if
such renewal is specifically approved at least annually by a vote of the Fund's
Board of Trustees, including the affirmative votes of a majority of the Trustees
who are not parties to the contract or "interested persons" (as defined in the
1940 Act) of any such party, cast in person at a meeting called for the purpose
of considering such approval. The agreement is automatically terminated if
assigned, and may be terminated without penalty at any time (1) either by vote
of the Board of Trustees of the Fund or by vote of its outstanding voting
securities on 60 days' written notice to the adviser, or (2) by the adviser upon
90 days' written notice to the Fund.

PORTFOLIO TRANSACTIONS

The investment advisory agreement authorizes Wellington Management (with the
approval of the Fund's Board of Trustees) to select the brokers or dealers that
will execute the purchases and sales of portfolio securities for the Fund and
directs Wellington Management to use its best efforts to

B-18

<PAGE>

obtain the best available price and most favorable execution as to all
transactions for the Fund. Wellington Management has undertaken to execute each
investment transaction at a price and commission which provides the most
favorable total cost or proceeds reasonably obtainable under the circumstances.

In placing portfolio transactions, Wellington Management will use its best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain the best available price and the most favorable execution.
The full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and the most favorable execution, consideration
may be given to those brokers which supply investment research and statistical
information and provide other services in addition to execution services to the
Fund and/or Wellington Management. Wellington Management considers such
information useful in the performance of its obligations under the agreement but
is unable to determine the amount by which such services may reduce its
expenses.

The investment advisory agreement also incorporates the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the Fund's Board of Trustees, Wellington Management may cause the
Fund to pay a broker-dealer which furnishes brokerage and research services a
higher commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of Wellington Management to the Fund.

Currently, it is the Fund's policy that Wellington Management may at times
pay higher commissions in recognition of brokerage services felt necessary for
the achievement of better execution of certain securities transactions that
otherwise might not be available. Wellington Management will only pay such
higher commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to Wellington Management and/or the Fund.
However, Wellington Management has informed the Fund that it generally will not
pay higher commission rates specifically for the purpose of obtaining research
services.

Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be executed through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to other clients, or who act as agent in
the purchase of the Fund's shares for their clients, and may, when a number of
brokers and dealers can provide comparable best price and execution on a
particular transaction, consider the sale of Fund shares by a broker or dealer
in selecting among qualified broker-dealers.

During the fiscal years ended December 31, 1997, 1998, and 1999, the Fund
paid approximately $2,672,000, $1,984,000, and $2,600,848 in brokerage
commissions, respectively.

Some securities considered for investment by the Fund may also be
appropriate for other Vanguard Funds and/or other clients served by Wellington
Management. If purchases or sales of securities consistent with the investment
policies of the Fund, the other Vanguard funds, and/or one or more of these
other clients serviced by Wellington Management are considered at or about the
same time, transactions in such securities will be allocated among the several
Funds and clients in a manner deemed equitable by Wellington Management.
Although there will be no specified formula for allocating such transactions,
the allocation methods used, and the results of such allocations, will be
subject to periodic review by the Fund's Board of Trustees.

B-19

<PAGE>

COMPARATIVE INDEXES

Each of the investment company members of The Vanguard Group, including Vanguard
Wellesley Income Fund, may, from time to time, use one or more of the following
unmanaged indexes for comparative performance purposes.

STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.

STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.

STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.

STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.

RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.

WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.

WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.

MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia and the Far East.

GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.

SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.

SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.

LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that
contains individually priced U.S. Treasury securities with maturities of 10
years or greater.

MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.

LEHMAN BROTHERS CORPORATE (BAA) BOND INDEX--consists of all publicly offered
fixed-rate, nonconvertible domestic corporate bonds rated Baa by Moody's, with a
maturity longer than one year and with more than $100 million outstanding. This
index includes over 1,500 issues.

LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Brothers Corporate Bond Index covering all corporate, publicly issued
fixed-rate, nonconvertible US debt issues rated at least Baa, with at least $100
million principal outstanding and maturity greater than 10 years.

BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade
general obligation municipal bonds.

MERRILL LYNCH DRD-ELIGIBLE INDEX--includes preferred stock issues which are
eligible for the corporate dividends-received-deduction.

B-20

<PAGE>

NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.

COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.

COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Brothers
Corporate A or Better Bond Index.

COMPOSITE INDEX--65% Lehman Brothers Corporate A or Better Bond Index and a 35%
weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).

LEHMAN BROTHERS LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.

LEHMAN BROTHERS CORPORATE A OR BETTER BOND INDEX--consists of all publicly
issued, investment grade corporate bonds rated A or better, of all maturity
levels.

RUSSELL 2000 STOCK INDEX--consists of the smallest 2,000 stocks within the
Russell 3000; a widely-used benchmark for small capitalization common stocks.

LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market-weighted index that contains
individually priced U.S.Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$5 trillion.

LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.6 trillion.

LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $800 billion.

LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market-weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The index
has a market value of over $1.1 trillion.

LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Inc.

LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.

LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Inc.

LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper Inc. Lipper defines a small company
growth fund as a fund that by prospectus or portfolio practice, limits its
investments to companies on the basis of the size of the company. From time to
time, Vanguard may advertise using the average performance and/or the average
expense ratio of the small company growth funds. (This fund category was first
established in 1982. For years prior to 1982, the results of the Lipper Small
Company Growth category were estimated using the returns of the Funds that
constituted the Group at its inception.)

LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.

B-21

<PAGE>

LIPPER FIXED-INCOME FUND AVERAGE--an industry benchmark of average fixed-income
funds with similar investment objectives and policies, as measured by Lipper
Inc.

RUSSELL 3000 INDEX--consists of approximately the 3,000 largest stocks of
U.S.-domiciled companies commonly traded on the New York and American Stock
Exchanges or the NASDAQ over-the-counter market, accounting for over 90% of the
market value of publicly traded Stocks in the U.S.

FINANCIAL STATEMENTS

The Fund's Financial Statements for the year ended December 31, 1999, including
the financial highlights for each of the five years in the period ended December
31, 1999, appearing in the Vanguard Wellesley Income Fund's 1999 Annual Report
to Shareholders, and the report thereon of PricewaterhouseCoopers LLP,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. For a more complete discussion of
the performance, please see the Fund's Annual Report to Shareholders, which may
be obtained without charge.

APPENDIX--DESCRIPTION OF SECURITIES AND RATINGS

The Fund will invest in investment grade bonds (i.e. those rated at least Baa by
Moody's Investors Service, Inc. or those rated BBB by Standard & Poor's
Corporation). In the event that a bond held by the Fund is downgraded, the
adviser may continue to hold such bond.

The following are excerpts from Moody's Investors Service, Inc. description
of its four highest preferred bond ratings:

AAA--judged to be the best quality by all standards; AA--together with the Aaa
group, comprise what are generally known as high grade bonds; A--possess many
favorable investment attributes and are to be considered as "upper medium grade
obligations"; BAA--considered as medium grade obligations; i.e., they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and, in fact, have
speculative characteristics as well.

Moody's also supplies numerical indicators 1, 2, and 3 to rating
categories. The modifier 1 indicates that the security is in the higher end of
its rating category; the modifier 2 indicates a mid-range ranking; and 3
indicates a ranking toward the lower end of the category.

The following are excerpts from Standard & Poor's Corporation description
of its four highest stock ratings:

AAA--highest grade obligations. Capacity to pay interest and repay principal is
extremely strong; AA--also qualify as high grade obligations, a very strong
capacity to pay interest and repay principal and differs from AAA issues only in
small degree; A--regarded as upper medium grade. They have a strong capacity to
pay interest and repay principal although somewhat susceptible to the adverse
effects of changes in circumstances and economic conditions than debt in higher
rated categories; BBB--regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories. This group is the lowest
which qualifies for commercial bank investment.

Standard & Poor's applies indicators "+", no character and "-" to its
rating categories. The indicators show relative standing within the major rating
categories.

SAI027-WELLESLEY INCOME

B-22

<PAGE>

PART C

VANGUARD WELLESLEY INCOME FUND
OTHER INFORMATION

ITEM 23. EXHIBITS

(a) Declaration of Trust**
(b) By-Laws**
(c) Reference is made to Articles III and V of the Registrant's Declaration
of Trust
(d) Investment Advisory Contract*
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Fund" in the
Registrant's Statement of Additional Information
(g) Custodian Agreement**
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Not Applicable
(p) Codes of Ethics*
-- --------------
* Filed herewith
** Filed previously

ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Registrant is not controlled by or under common control with any person.

ITEM 25. INDEMNIFICATION

The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.

C-1

<PAGE>

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Wellington Management Company, LLP (Wellington Management), 75 State Street,
Boston, Massachusetts 02109, is a Massachusetts limited liability partnership,
of which the following are managing partners: Laurie A. Garbriel, Duncan M.
McFarland, and John R. Ryan.
Wellington Management is an investment adviser registered under the Investment
Advisers Act of 1940, as amended (the Advisers Act). The list required by this
Item 26 of officers and partners of Wellington Management, together with any
information as to any business profession, vocation, or employment of a
substantial nature engaged in by such officers and partners during the past two
years, is incorporated herein by reference from Schedules B and D of Form ADV
filed by Wellington Management pursuant to the Advisers Act (SEC File No.
801-15908).

ITEM 27. PRINCIPAL UNDERWRITERS

(a) Not Applicable
(b) Not Applicable
(c) Not Applicable

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

The books, accounts, and other documents required to be maintained by Section 31
(a) of the Investment Company Act and the rules promulgated thereunder will be
maintained at the offices of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; and
the Registrant's Custodian, The Chase Manhattan Bank, N.A., 4 Chase MetroTech
Center, Brooklyn, New York 11245.

ITEM 29. MANAGEMENT SERVICES

Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.

ITEM 30. UNDERTAKINGS

Not Applicable

C-2

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Valley Forge and the
Commonwealth of Pennsylvania, on the 11th day of April, 2000.

VANGUARD WELLESLEY INCOME FUND
BY:_________________________________
(signature)
(HEIDI STAM)
JOHN J. BRENNAN*
CHAIRMAN AND CHIEF EXECUTIVE OFFICER

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:

SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------

By:/S/ JOHN J. BRENNAN President, Chairman, Chief April 11, 2000
--------------------------- Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*

By:/S/ JOANN HEFFERNAN HEISEN Trustee April 11, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*

By:/S/ BRUCE K. MACLAURY Trustee April 11, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*

By:/S/ BURTON G. MALKIEL Trustee April 11, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*

By:/S/ ALFRED M. RANKIN, JR. Trustee April 11, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*

By:/S/ JOHN C. SAWHILL Trustee April 11, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*

By:/S/ JAMES O. WELCH, JR. Trustee April 11, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*

By:/S/ J. LAWRENCE WILSON Trustee April 11, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*

By:/S/ THOMAS J. HIGGINS Treasurer and Principal April 11, 2000
--------------------------- Financial Officer and Principal
(Heidi Stam) Accounting Officer
Thomas J. Higgins*

*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.

<PAGE>

INDEX TO EXHIBITS

Consent of Independent Accountants .................................... Ex-99.BJ
Codes of Ethics ....................................................... Ex-99.BP

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 51 to the registration statement on Form N-1A (the Registration
Statement) of our report dated February 2, 2000, relating to the financial
statements and financial highlights appearing in the 1999 Annual Report to
Shareholders of Vanguard Wellesley Income Fund, which are also incorporated by
reference into the Registration Statement. We also consent to the references to
us under the heading "Financial Highlights" in the Prospectuses and under the
headings "Financial Statements" and "Service Providers--Independent Accountants"
in the Statement of Additional Information.

PricewaterhouseCoopers LLP
Philadelphia, PA

April 7, 2000

THE VANGUARD GROUP, INC.
------------------------

CODE OF ETHICS
--------------

SECTION 1: BACKGROUND

This Code of Ethics has been approved and adopted by the Board of Directors of
The Vanguard Group, Inc. ("Vanguard") and the Boards of Trustees of each of the
Vanguard funds in compliance with Rule 17j-1 under the Investment Company Act of
1940. The Code has been amended and restated effective as of May 1, 1999. Except
as otherwise provided, the Code applies to all "Vanguard personnel," which term
includes all employees, officers, Directors and Trustees of Vanguard and the
Vanguard funds. The Code also contains provisions which apply to the investment
advisers to the Vanguard funds (see section 11).

SECTION 2: STATEMENT OF GENERAL FIDUCIARY STANDARDS

This Code of Ethics is based on the overriding principle that Vanguard personnel
act as fiduciaries for shareholders' investments in the Vanguard funds.
Accordingly, Vanguard personnel must conduct their activities at all times in
accordance with the following standards:

a) SHAREHOLDERS' INTERESTS COME FIRST. In the course of fulfilling their
duties and responsibilities to Vanguard fund shareholders, Vanguard personnel
must at all times place the interests of Vanguard fund shareholders first. In
particular, Vanguard personnel must avoid serving their own personal interests
ahead of the interests of Vanguard fund shareholders.

b) CONFLICTS OF INTEREST MUST BE AVOIDED. Vanguard personnel must avoid
any situation involving an actual or potential conflict of interest or possible
impropriety with respect to their duties and responsibilities to Vanguard fund
shareholders.

c) COMPROMISING SITUATIONS MUST BE AVOIDED. Vanguard personnel must not
take advantage of their position of trust and responsibility at Vanguard.
Vanguard personnel must avoid any situation that might compromise or call into
question their exercise of full independent judgment in the best interests of
Vanguard fund shareholders.

<PAGE>

All activities of Vanguard personnel should be guided by and adhere to these
fiduciary standards. The remainder of this Code sets forth specific rules and
procedures which are consistent with these fiduciary standards. However, all
activities by Vanguard personnel are required to conform with these fiduciary
standards regardless of whether the activity is specifically covered in this
Code.

SECTION 3: DUTY OF CONFIDENTIALITY

Vanguard personnel must keep confidential at all times any nonpublic information
they may obtain in the course of their employment at Vanguard. This information
includes but is not limited to:

1) information on the vanguard funds, including recent or impending
securities transactions by the funds, activities of the
funds'advisers, offerings of new funds, and closings of funds;

2) information on Vanguard fund shareholders and prospective
shareholders, including their identities, investments, and account
transactions;

3) information on other vanguard personnel, including their pay,
benefits, position level, and performance ratings; and

4) information on Vanguard business activities, including new services,
products, technologies, and business initiatives.

Vanguard personnel have the highest fiduciary obligation not to reveal
confidential Vanguard information to any party that does not have a clear and
compelling need to know such information.

SECTION 4: GIFT POLICY

Vanguard personnel are prohibited from seeking or accepting gifts of material
value from any person or entity, including any Vanguard fund shareholder or
Vanguard client, when such gift is in relation to doing business with Vanguard.
In certain cases, Vanguard PERSONNEL MAY ACCEPT GIFTS OF DE MINIMIS value (as
determined in accordance with guidelines set forth in Vanguard's Human Resources
Policy Manual) but only if they obtain the approval of a Vanguard officer.

<PAGE>

SECTION 5: OUTSIDE ACTIVITIES

a) PROHIBITIONS ON SECONDARY EMPLOYMENT. Vanguard employees are
prohibited from working for any business or enterprise in the financial services
industry that competes with Vanguard. In addition, Vanguard employees are
prohibited from working for any organization that could possibly benefit from
the employee's knowledge of confidential Vanguard information, such as new
Vanguard services and technologies. Beyond these prohibitions, Vanguard
employees may accept secondary employment, but only with prior approval from the
Vanguard Compliance Department. Vanguard officers are prohibited from accepting
or serving in any form of secondary employment unless they have received
approval from a Vanguard Managing Director or the Vanguard Chairman and Chief
Executive Officer.

b) PROHIBITION ON SERVICE AS DIRECTOR OR PUBLIC OFFICIAL. Vanguard
officers and employees are prohibited from serving on the board of directors of
any publicly traded company or in an official capacity for any federal, state,
or local government (or governmental agency or instrumentality) without prior
approval from the Vanguard Compliance Department.

c) PROHIBITION ON MISUSE OF VANGUARD TIME OR PROPERTY. Vanguard personnel
are prohibited from using Vanguard time, equipment, services, personnel or
property for any purposes other than the performance of their duties and
responsibilities at Vanguard.

SECTION 6: GENERAL PROHIBITIONS ON TRADING

a) TRADING ON KNOWLEDGE OF VANGUARD FUNDS ACTIVITIES. All Vanguard
personnel are prohibited from taking personal advantage of their knowledge of
recent or impending securities activities of the Vanguard funds or the funds'
investment advisers. In particular, Vanguard personnel are prohibited from
purchasing or selling, directly or indirectly, any security when they have
actual knowledge that the security is being purchased or sold, or considered for
purchase or sale, by a Vanguard fund. This prohibition applies to all securities
in which the person has acquired or will acquire "beneficial ownership." For
these purposes, a person is considered to have beneficial ownership in all
securities over which the person enjoys economic benefits substantially
equivalent to ownership (for example, securities held in trust for the person's
benefit), regardless of who is the registered owner. Under this Code of Ethics,
Vanguard personnel are considered to have beneficial ownership of all securities
owned by their spouse or minor children.

<PAGE>

b) VANGUARD INSIDER TRADING POLICY. All Vanguard personnel are subject
to Vanguard's Insider Trading Policy, which is considered an integral part of
this Code of Ethics. Vanguard's Insider Trading Policy prohibits Vanguard
personnel from buying or selling any security while in the possession of
material nonpublic information about the issuer of the security. The policy also
prohibits Vanguard personnel from communicating to third parties any material
nonpublic information about any security or issuer of securities. Any violation
of Vanguard's Insider Trading Policy may result in penalties which could include
termination of employment with Vanguard.

SECTION 7: ADDITIONAL TRADING RESTRICTIONS FOR ACCESS PERSONS

a) APPLICATION. The restrictions of this section 7 apply to all Vanguard
access persons. For purposes of the Code of Ethics, "access persons" include:

1) any Director or Trustee of Vanguard or a Vanguard fund, excluding
disinterested Directors and Trustees (i.e., any Director or Trustee
who is not an "interested person" of a Vanguard fund within the
meaning of Section 2(a)(19) of the Investment Company Act of 1940);

2) any officer of Vanguard or a Vanguard fund; and

3) any employee of Vanguard or a Vanguard fund who in the course of his
or her regular duties participates in the selection of a Vanguard
fund's securities or who works in a Vanguard department or unit that
has access to information regarding a Vanguard fund's impending
purchases or sales of securities.

The Vanguard Compliance Department will notify all Vanguard personnel who
qualify as access persons of their duties and responsibilities under this Code
of Ethics. The restrictions of this section 7 apply to all transactions in which
a Vanguard access person has or will acquire beneficial ownership (see section
6a) of a security, including transactions by a spouse or minor child. However,
the restrictions do not apply to transactions involving: (i) direct obligations
of the Government of the United States; (ii) high quality short-term debt
instruments, including bankers' acceptances, bank certificates of deposit,
commercial paper, and repurchase agreements; and (iii) shares of registered
open-end investment companies (including shares of

<PAGE>

any Vanguard fund). In addition, the restrictions do not apply to transactions
in accounts over which the access person has no direct or indirect control or
influence.

b) GENERAL RESTRICTIONS FOR ACCESS PERSONS. Vanguard access persons are
subject to the following restrictions with respect to their securities
transactions:

1) PRE-CLEARANCE OF SECURITIES TRANSACTIONS. Vanguard access persons must
receive approval from the Vanguard Compliance Department before
purchasing or selling any securities. The Vanguard Compliance
Department will notify Vanguard access persons if their proposed
securities transactions are permitted under this Code of Ethics.

2) TRADING THROUGH VANGUARD BROKERAGE SERVICES. Vanguard access persons
must conduct all their securities transactions through Vanguard
Brokerage Services. Vanguard Brokerage Services will send a
confirmation notice of any purchase or sale of securities by a
Vanguard access person to the Vanguard Compliance Department.

3) PROHIBITION ON INITIAL PUBLIC OFFERINGS. Vanguard access persons are
prohibited from acquiring securities in an initial public offering.

4) PROHIBITION ON PRIVATE PLACEMENTS. Vanguard access persons are
prohibited from acquiring securities in a private placement without
prior approval from the Vanguard Compliance Department. In the event
an access person receives approval to purchase securities in a private
placement, the access person must disclose that investment if he or
she plays any part in a Vanguard fund's later consideration of an
investment in the issuer.

5) PROHIBITION ON OPTIONS. Vanguard access persons are prohibited from
acquiring or selling any option on any security.

6) PROHIBITION ON SHORT-SELLING. Vanguard access persons are prohibited
from selling any security that the access person does not own or
otherwise engaging in "short-selling" activities.

7) PROHIBITION ON SHORT-TERM TRADING PROFITS. Vanguard access persons are
prohibited from profiting in the purchase and sale, or sale and
purchase, of the same (or related) securities within 60 calendar days.
In the event that an access person realizes profits on

<PAGE>

such short-term trades, the access person must relinquish such profits
to The Vanguard Group Foundation.

c) BLACKOUT RESTRICTIONS FOR ACCESS PERSONS. All Vanguard access persons
are subject to the following restrictions when their purchases and sales of
securities coincide with trades by the Vanguard funds:

1) PURCHASES AND SALES WITHIN THREE DAYS FOLLOWING A FUND TRADE. Vanguard
access persons are prohibited from purchasing or selling any security
within three calendar days after a Vanguard fund has traded in the
same (or a related) security. In the event that an access person makes
a prohibited purchase or sale within the three-day period, the access
person must unwind the transaction and relinquish any gain from the
transaction to The Vanguard Group Foundation.

2) PURCHASES WITHIN SEVEN DAYS BEFORE A FUND PURCHASE. A Vanguard access
person who purchases a security within seven calendar days before a
Vanguard fund purchases the same (or a related) security is prohibited
from selling the security for a period of six months following the
fund's trade. In the event that an access person makes a prohibited
sale within the six-month period, the access person must relinquish to
The Vanguard Group Foundation any gain from the transaction.

3) SALES WITHIN SEVEN DAYS BEFORE A FUND SALE. A Vanguard access person
who sells a security within seven days before a Vanguard fund sells
the same (or a related) security must relinquish to The Vanguard Group
Foundation the difference between the access person's sale price and
the Vanguard fund's sale price (assuming the access person's sale
price is higher).

4) RESTRICTIONS NOT APPLICABLE TO TRADES BY VANGUARD INDEX FUNDS. The
restrictions of this section 7c do not apply to purchases and sales of
securities by Vanguard access persons which would otherwise violate
section 7c solely because the transactions coincide with trades by any
Vanguard index funds.

SECTION 8: ADDITIONAL TRADING RESTRICTIONS FOR INSTITUTIONAL CLIENT CONTACTS

<PAGE>

a) APPLICATION. The restrictions of this section 8 apply to all Vanguard
Institutional client contacts. For purposes of the Code of Ethics, an
"Institutional client contact" includes any Vanguard employee who works in a
department or unit at Vanguard that has significant levels of interaction or
dealings with the management of clients of Vanguard's Institutional Investor
Group. The Vanguard Compliance Department will notify Vanguard employees who
qualify as Institutional client contacts of the restrictions of this Section 8.

b) PROHIBITION ON TRADING SECURITIES OF INSTITUTIONAL CLIENTS. Vanguard
Institutional client contacts are prohibited from acquiring securities issued by
clients of the Vanguard Institutional Investor Group (including any options or
futures contracts based on such securities). In the event that any individual
who becomes subject to this prohibition already owns securities issued by
Institutional clients, the individual will be prohibited from disposing of those
securities without prior approval from the Vanguard Compliance Department. The
restrictions of this section 8 apply to all transactions in which Institutional
client contacts have acquired or would acquire beneficial ownership (see section
6a) of a security, including transactions by a spouse or minor child. However,
the restrictions do not apply to transactions in any account over which an
individual does not possess any direct or indirect control or influence. The
Vanguard Compliance Department will maintain a list of the Institutional clients
to which the prohibitions of this section 8 apply. The Vanguard Compliance
Department may waive the prohibition on acquiring securities of Institutional
clients in appropriate cases (including, for example, cases in which an
individual acquires securities as part of an inheritance or through an
employer-sponsored employee benefits or compensation program).

SECTION 9: COMPLIANCE PROCEDURES

a) APPLICATION. The requirements of this section 9 apply to all Vanguard
personnel other than disinterested Directors and Trustees (see section 7a). The
requirements apply to all transactions in which Vanguard personnel have acquired
or would acquire beneficial ownership (see section 6a) of a security, including
transactions by a spouse or minor child. However, the requirements do not apply
to transactions involving: (i) direct obligations of the Government of the
United States; (ii) high quality short-term debt instruments, including bankers'
acceptances, bank certificates of deposit, commercial paper, and repurchase
agreements; and (iii) shares of registered open-end investment companies
(including shares of any Vanguard fund). In addition, the requirements do not
apply to securities acquired for accounts over which the person has no direct or
indirect control or influence.

<PAGE>

b) DISCLOSURE OF PERSONAL HOLDINGS. All Vanguard personnel must disclose
their personal securities holdings to the Vanguard Compliance Department upon
commencement of employment with Vanguard. These disclosures must identify the
title, number of shares, and principal amount with respect to each security
holding.

c) RECORDS OF SECURITIES TRANSACTIONS. All Vanguard personnel must notify
the Vanguard Compliance Department if they have opened or intend to open a
brokerage account. Vanguard personnel must direct their brokers to supply the
Vanguard Compliance Department with duplicate confirmation statements of their
securities transactions and copies of all periodic statements for their
brokerage accounts.

d) CERTIFICATION OF COMPLIANCE. All Vanguard personnel must certify
annually to the Vanguard Compliance Department that: (i) they have read and
understand this Code of Ethics; (ii) they have complied with all requirements of
the Code of Ethics; and (3) they have reported all transactions required to be
reported under the Code of Ethics.

SECTION 10: REQUIRED REPORTS BY DISINTERESTED DIRECTORS AND TRUSTEES

Disinterested Directors and Trustees (see section 7a) are required to report
their securities transactions to the Vanguard Compliance Department only in
cases where the Director or Trustee knew or should have known during the 15-day
period immediately preceding or following the date of the transaction that the
security had been purchased or sold, or was being considered for purchase or
sale, by a Vanguard fund.

SECTION 11: APPLICATION TO INVESTMENT ADVISERS

a) ADOPTION OF CODE OF ETHICS. Each investment adviser to a Vanguard fund
must adopt a code of ethics in compliance with Rule 17j-1 and provide the
Vanguard Compliance Department with a copy of the code of ethics and any
subsequent amendments. Each investment adviser is responsible for enforcing its
code of ethics and reporting to the Vanguard Compliance Department on a timely
basis any violations of the code of ethics and resulting sanctions.

<PAGE>

b) PREPARATION OF ANNUAL REPORTS. Each investment adviser to a Vanguard
fund must prepare an annual report on its code of ethics for review by the Board
of Trustees of the Vanguard fund. This report must contain the following:

1) a description of any issues arising under the adviser's code of ethics
including, but not limited to, information about any violations of the
code, sanctions imposed in response to such violations, changes made
to the code's provisions or procedures, and any recommended changes to
the code; and

2) a certification that the investment adviser has adopted such
procedures as are reasonably necessary to prevent access persons from
violating the code of ethics.

SECTION 12: REVIEW BY BOARDS OF DIRECTORS AND TRUSTEES

a) REVIEW OF INVESTMENT ADVISERS' CODE OF ETHICS. Prior to retaining the
services of any investment adviser for a Vanguard fund, the Board of Trustees of
the Vanguard fund must review the code of ethics adopted by the investment
adviser pursuant to Rule 17j-1 under the Investment Company Act of 1940. The
Board of Trustees must receive a certification from the investment adviser that
the adviser has adopted such procedures as are reasonably necessary to prevent
access persons from violating the adviser's code of ethics. A majority of the
Trustees of the Vanguard fund, including a majority of the disinterested
Trustees of the Fund, must determine whether the adviser's code of ethics
contains such provisions as are reasonably necessary to prevent access persons
from engaging in any act, practice, or course of conduct prohibited by the
anti-fraud provisions of Rule 17j-1.

b) REVIEW OF VANGUARD ANNUAL REPORTS. The Vanguard Compliance Department
must prepare an annual report on this Code of Ethics for review by the Board of
Directors of Vanguard and the Boards of Trustees of the Vanguard funds. The
report must contain the following:

1) a description of issues arising under the Code of Ethics since the
last report including, but not limited to, information about any
violations of the Code, sanctions imposed in response to such
violations, changes made to the Code's provisions or procedures, and
any recommended changes to the Code; and

<PAGE>

2) a certification that Vanguard and the Vanguard Funds have adopted such
procedures as are reasonably necessary to prevent access persons from
violating the Code of Ethics.

SECTION 13: SANCTIONS

In the event of any violation of this Code of Ethics, Vanguard senior management
will impose such sanctions as deemed necessary and appropriate under the
circumstances and in the best interests of Vanguard fund shareholders. In the
case of any violations by Vanguard employees, the range of sanctions could
include a letter of censure, suspension of employment without pay, or permanent
termination of employment.

SECTION 14: RETENTION OF RECORDS

Vanguard must maintain all records required by Rule 17j-1 including: (i) copies
of this Code of Ethics and the codes of ethics of all investment advisers to the
Vanguard funds; (ii) records of any violations of the codes of ethics and
actions taken as a result of the violations; (iii) copies of all certifications
made by Vanguard personnel pursuant to section 9d; (iv) lists of all Vanguard
personnel who are, or within the past five years have been, access persons
subject to the trading restrictions of section 8 and lists of the Vanguard
compliance personnel responsible for monitoring compliance with those trading
restrictions; and (v) copies of the annual reports to the Boards of Directors
and Trustees pursuant to section 12.

<PAGE>

WELLINGTON MANAGEMENT COMPANY, LLP
WELLINGTON TRUST COMPANY, NA
WELLINGTON MANAGEMENT INTERNATIONAL
WELLINGTON INTERNATIONAL MANAGEMENT COMPANY PTE LTD.

CODE OF ETHICS
- --------------------------------------------------------------------------------
Summary

Wellington Management Company, llp and its affiliates have a fiduciary duty to
investment company and investment counseling clients which requires each
employee to act solely for the benefit of clients. Also, each employee has a
duty to act in the best interest of the firm. In addition to the various laws
and regulations covering the firm's activities, it is clearly in the firm's best
interest as a professional investment advisory organization to avoid potential
conflicts of interest or even the appearance of such conflicts with respect to
the conduct of the firm's employees. Wellington Management's personal trading
and conduct must recognize that the firm's clients always come first, that the
firm must avoid any actual or potential abuse of our positions of trust and
responsibility, and that the firm must never take inappropriate advantage of its
positions. While it is not possible to anticipate all instances of potential
conflict, the standard is clear.

In light of the firm's professional and legal responsibilities, we believe it is
appropriate to restate and periodically distribute the firm's Code of Ethics to
all employees. It is Wellington Management's aim to be as flexible as possible
in its internal procedures, while simultaneously protecting the organization and
its clients from the damage that could arise from a situation involving a real
or apparent conflict of interest. While it is not possible to specifically
define and prescribe rules regarding all possible cases in which conflicts might
arise, this Code of Ethics is designed to set forth the policy regarding
employee conduct in those situations in which conflicts are most likely to
develop. If an employee has any doubt as to the propriety of any activity, he or
she should consult the President or Regulatory Affairs Department.

The Code reflects the requirements of United States law, Rule 17j-1 of the
Investment Company Act of 1940, as amended on October 29, 1999, as well as the
recommendations issued by an industry study group in 1994, which were strongly
supported by the SEC. The term "Employee" includes all employees and Partners.

- --------------------------------------------------------------------------------
Policy on Personal
Securities
Transactions

Essentially, this policy requires that all personal securities transactions
(including acquisitions or dispositions other than through a purchase or sale)
by all Employees must be cleared prior to execution. The only exceptions to this
policy of prior clearance are noted below.

- --------------------------------------------------------------------------------
Definition of
"Personal Securities
Transactions"

The following transactions by Employees are considered "personal" under
applicable SEC rules and therefore subject to this statement of policy:

1. Transactions for an Employee's own account, including IRA's.

2. Transactions for an account in which an Employee has indirect beneficial
ownership, unless the Employee has no direct or indirect influence or
control over the account. Accounts involving family (including husband,
wife, minor children or other dependent relatives), or accounts in which an
Employee has a beneficial interest (such as a trust of which the Employee
is an income or principal beneficiary) are included within the meaning of
"indirect beneficial interest".

If an Employee has a substantial measure of influence or control over an
account, but neither the Employee nor the Employee's family has any direct or
indirect beneficial interest (e.g., a trust for which the Employee is a trustee
but not a direct or indirect beneficiary), the rules relating to personal
securities transactions are not considered to be directly applicable. Therefore,
prior clearance and subsequent reporting of such transactions are not required.
In all transactions involving such an account an Employee should, however,
conform to the spirit of these rules and avoid any activity which might appear
to conflict with the investment company or counseling clients or with respect to
the Employee's position within Wellington Management. In this regard, please
note "Other Conflicts of Interest", found later in this Code of Ethics, which
does apply to such situations.
- --------------------------------------------------------------------------------
<PAGE>

Preclearance
Required

EXCEPT AS SPECIFICALLY EXEMPTED IN THIS SECTION, ALL EMPLOYEES MUST CLEAR
PERSONAL SECURITIES TRANSACTIONS PRIOR TO EXECUTION. This includes bonds, stocks
(including closed end funds), convertibles, preferreds, options on securities,
warrants, rights, etc. for domestic and foreign securities, whether publicly
traded or privately placed. The only exceptions to this requirement are
automatic dividend reinvestment and stock purchase plan acquisitions,
broad-based stock index and U.S. government securities futures and options on
such futures, transactions in open-end mutual funds, U.S. Government securities,
commercial paper, or non-volitional transactions. Non-volitional transactions
include gifts to an Employee over which the Employee has no control of the
timing or transactions which result from corporate action applicable to all
similar security holders (such as splits, tender offers, mergers, stock
dividends, etc.). Please note, however, that most of these transactions must be
reported even though they do not have to be precleared. See the following
section on reporting obligations.

Clearance for transactions must be obtained by contacting the Director of Global
Equity Trading or those personnel designated by him for this purpose. Requests
for clearance and approval for transactions may be communicated orally or via
email. The Trading Department will maintain a log of all requests for approval
as coded confidential records of the firm. Private placements (including both
securities and partnership interests) are subject to special clearance by the
Director of Regulatory Affairs, Director of Enterprise Risk Management or the
General Counsel, and the clearance will remain in effect for a reasonable period
thereafter, not to exceed 90 days.

CLEARANCE FOR PERSONAL SECURITIES TRANSACTIONS FOR PUBLICLY TRADED SECURITIES
WILL BE IN EFFECT FOR ONE TRADING DAY ONLY. THIS "ONE TRADING DAY" POLICY IS
INTERPRETED AS FOLLOWS:

O IF CLEARANCE IS GRANTED AT A TIME WHEN THE PRINCIPAL MARKET IN WHICH THE
SECURITY TRADES IS OPEN, CLEARANCE IS EFFECTIVE FOR THE REMAINDER OF THAT
TRADING DAY UNTIL THE OPENING OF THAT MARKET ON THE FOLLOWING DAY.

O IF CLEARANCE IS GRANTED AT A TIME WHEN THE PRINCIPAL MARKET IN WHICH THE
SECURITY TRADES IS CLOSED, CLEARANCE IS EFFECTIVE FOR THE NEXT TRADING DAY
UNTIL THE OPENING OF THAT MARKET ON THE FOLLOWING DAY.

- --------------------------------------------------------------------------------
Filing of Reports

Records of personal securities transactions by Employees will be maintained. All
Employees are subject to the following reporting requirements:

1
Duplicate Brokerage
Confirmations

All Employees must require their securities brokers to send duplicate
confirmations of their securities transactions to the Regulatory Affairs
Department. Brokerage firms are accustomed to providing this service. Please
contact Regulatory Affairs to obtain a form letter to request this service. Each
employee must return to the Regulatory Affairs Department a completed form for
each brokerage account that is used for PERSONAL SECURITIES TRANSACTIONS OF THE
EMPLOYEE. EMPLOYEES SHOULD NOT send the completed forms to their brokers
directly. The form must be completed and returned to the Regulatory Affairs
Department prior to any transactions being placed with the broker. The
Regulatory Affairs Department will process the request in order to assure
delivery of the confirms directly to the Department and to preserve the
confidentiality of this information. When possible, the transaction confirmation
filing requirement will be satisfied by electronic filings from securities
depositories.

2
Filing of Quarterly
Report of all
"Personal Securities
Transactions"

SEC rules require that a quarterly record of all personal securities
transactions submitted by each person subject to the Code's requirements and
that this record be available for inspection. To comply with these rules, every
Employee must file a quarterly personal securities transaction report within 10
calendar days after the end of each calendar quarter. Reports are filed
electronically utilizing the firm's proprietary Personal Securities Transaction
Reporting System (PSTRS) accessible to all Employees via the Wellington
Management Intranet.

At the end of each calendar quarter, Employees will be notified of the filing
requirement. Employees are responsible for submitting the quarterly report
within the deadline established in the notice.

Transactions during the quarter indicated on brokerage confirmations or
electronic filings are displayed on the Employee's reporting screen and must be
affirmed if they are accurate. Holdings not acquired through a broker submitting
confirmations must be entered manually. All Employees are required to submit a
quarterly report, even if there were no reportable transactions during the
quarter.

Employees must also provide information on any new brokerage account established
during the quarter including the name of the broker, dealer or bank and the date
the account was established.

IMPORTANT NOTE: The quarterly report must include the required information for
all "personal securities transactions" as defined above, except transactions in
open-end mutual funds, money market securities, U.S. Government securities, and
futures and options on futures on U.S. government securities. Non-volitional
transactions and those resulting from corporate actions must also be reported
even though preclearance is not required and the nature of the transaction must
be clearly specified in the report.

3
Certification of Compliance

As part of the quarterly reporting process on PSTRS, Employees are required to
confirm their compliance with the provisions of this Code of Ethics.

4
Filing of Personal

Annually, all Employees must file a schedule indicating their personal
securities holdings as of December 31 of each year by the following January 30.
SEC Rules require that this report include the title, number of shares and
principal amount of each security held in an Employee's personal account, and
the name of any broker, dealer or bank with whom the Employee maintains an
account. "Securities" for purposes of this report are those which must be
reported as indicated in the prior paragraph. Newly hired Employees are required
to file a holding report within ten (10) days of joining the firm. Employees may
indicate securities held in a brokerage account by attaching an account
statement, but are not required to do so, since these statements contain
additional information not required by the holding report.

5
Review of Reports

All reports filed in accordance with this section will be maintained and kept
confidential by the Regulatory Affairs Department. Reports will be reviewed by
the Director of Regulatory Affairs or personnel designated by her for this
purpose.
- --------------------------------------------------------------------------------

Restrictions on
"Personal Securities
Transactions"

While all personal securities transactions must be cleared prior to execution,
the following guidelines indicate which transactions will be prohibited,
discouraged, or subject to nearly automatic clearance. The clearance of personal
securities transactions may also depend upon other circumstances, including the
timing of the proposed transaction relative to transactions by our investment
counseling or investment company clients; the nature of the securities and the
parties involved in the transaction; and the percentage of securities involved
in the transaction relative to ownership by clients. The word "clients" refers
collectively to investment company clients and counseling clients. Employees are
expected to be particularly sensitive to meeting the spirit as well as the
letter of these restrictions.

Please note that these restrictions apply in the case of debt securities to the
specific issue and in the case of common stock, not only to the common stock,
but to any equity-related security of the same issuer including preferred stock,
options, warrants, and convertible bonds. Also, a gift or transfer from you (an
Employee) to a third party shall be subject to these restrictions, unless the
donee or transferee represents that he or she has no present intention of
selling the donated security.

1
No Employee may engage in personal transactions involving any securities which
are:

o being bought or sold on behalf of clients until one trading day after such
buying or selling is completed or canceled. In addition, no Portfolio
Manager may engage in a personal transaction involving any security for 7
days prior to, and 7 days following, a transaction in the same security for
a client account managed by that Portfolio Manager without a special
exemption. See "Exemptive Procedures" below. Portfolio Managers include all
designated portfolio managers and others who have direct authority to make
investment decisions to buy or sell securities, such as investment team
members and analysts involved in Research Equity portfolios. All Employees
who are considered Portfolio Managers will be so notified by the Regulatory
Affairs Department.

o the subject of a new or changed action recommendation from a research
analyst until 10 business days following the issuance of such
recommendation;

o the subject of a reiterated but unchanged recommendation from a research
analyst until 2 business days following reissuance of the recommendation

o actively contemplated for transactions on behalf of clients, even though no
buy or sell orders have been placed. This restriction applies from the
moment that an Employee has been informed in any fashion that any Portfolio
Manager intends to purchase or sell a specific security. This is a
particularly sensitive area and one in which each Employee must exercise
caution to avoid actions which, to his or her knowledge, are in conflict or
in competition with the interests of clients.

2
The Code of Ethics strongly discourages short term trading by Employees. In
addition, no Employee may take a "short term trading" profit in a security,
which means the sale of a security at a gain (or closing of a short position at
a gain) within 60 days of its purchase, without a special exemption. See
"Exemptive Procedures". The 60 day prohibition does not apply to transactions
resulting in a loss, nor to futures or options on futures on broad-based
securities indexes or U.S. government securities.

3
No Employee engaged in equity or bond trading may engage in personal
transactions involving any equity securities of any company whose primary
business is that of a broker/dealer.

4
Subject to preclearance, Employees may engage in short sales, options, and
margin transactions, but such transactions are strongly discouraged,
particularly due to the 60 day short term profit-taking prohibition. Any
Employee engaging in such transactions should also recognize the danger of being
"frozen" or subject to a forced close out because of the general restrictions
which apply to personal transactions as noted above. In specific case of
hardship an exception may be granted by the Director of Regulatory Affairs or
her designee upon approval of the Ethics Committee with respect to an otherwise
"frozen" transaction.

5
No Employee may engage in personal transactions involving the purchase of any
security on an initial public offering. This restriction also includes new
issues resulting from spin-offs, municipal securities and thrift conversions,
although in limited cases the purchase of such securities in an offering may be
approved by the Director of Regulatory Affairs or her designee upon determining
that approval would not violate any policy reflected in this Code. This
restriction does not apply to open-end mutual funds, U. S. government issues or
money market investments.

6
EMPLOYEES MAY NOT PURCHASE SECURITIES IN PRIVATE PLACEMENTS UNLESS APPROVAL OF
THE DIRECTOR OF REGULATORY AFFAIRS, DIRECTOR OF ENTERPRISE RISK MANAGEMENT OR
THE GENERAL COUNSEL HAS BEEN OBTAINED. This approval will be based upon a
determination that the investment opportunity need not be reserved for clients,
that the Employee is not being offered the investment opportunity due to his or
her employment with Wellington Management and other relevant factors on a
case-by-case basis. If the Employee has portfolio management or securities
analysis responsibilities and is granted approval to purchase a private
placement, he or she must disclose the privately placed holding later if asked
to evaluate the issuer of the security. An independent review of the Employee's
analytical work or decision to purchase the security for a client account will
then be performed by another investment professional with no personal interest
in the transaction.

Gifts and Other
Sensitive Payments

Employees should not seek, accept or offer any gifts or favors of more than
minimal value or any preferential treatment in dealings with any client,
broker/dealer, portfolio company, financial institution or any other
organization WITH WHOM THE FIRM TRANSACTS business. Occasional participation in
lunches, dinners, cocktail parties, sporting activities or similar gatherings
conducted for business purposes are not prohibited. However, for both the
Employee's protection and that of the firm it is extremely important that even
the appearance of a possible conflict of interest be avoided. Extreme caution is
to be exercised in any instance in which business related travel and lodgings
are paid for other than by Wellington Management, and prior approval must be
obtained from the Regulatory Affairs Department.

Any question as to the propriety of such situations should be discussed with the
Regulatory Affairs Department and any incident in which an Employee is
encouraged to violate these provisions should be reported immediately. An
explanation of all extraordinary travel, lodging and related meals and
entertainment is to be reported in a brief memorandum to the Director of
Regulatory Affairs.

Employees must not participate individually or on behalf of the firm, a
subsidiary, or any client, directly or indirectly, in any of the following
transactions:

1
Use of the firm's funds for political purposes.

2
Payment or receipt of bribes, kickbacks, or payment or receipt of any other
amount with an understanding that part or all of such amount will be refunded or
delivered to a third party in violation of any law applicable to the
transaction.

3
Payments to government officials or employees (other than disbursements in the
ordinary course of business for such legal purposes as payment of taxes).

4
Payment of compensation or fees in a manner the purpose of which is to assist
the recipient to evade taxes, federal or state law, or other valid charges or
restrictions applicable to such payment.

5
Use of the funds or assets of the firm or any subsidiary for any other unlawful
or improper purpose.

- --------------------------------------------------------------------------------
Other Conflicts of
Interest
Employees should also be aware that areas other than personal securities
transactions or gifts and sensitive payments may involve conflicts of interest.
The following should be regarded as examples of situations involving real or
potential conflicts rather than a complete list of situations to avoid.

"Inside Information"
Specific reference is made to the firm's policy on the use of "inside
information" which applies to personal securities transactions as well as to
client transactions.

Use of Information
Information acquired in connection with employment by the organization may not
be used in any way which might be contrary to or in competition with the
interests of clients. Employees are reminded that certain clients have
specifically required their relationship with us to be treated confidentially.

Disclosure of
Information
Information regarding actual or contemplated investment decisions, research
priorities or client interests should not be disclosed to persons outside our
organization and in no way can be used for personal gain.

Outside
Activities
All outside relationships such as directorships or trusteeships of any kind or
membership in investment organizations (e.g., an investment club) must be
cleared by the Director of Regulatory Affairs prior to the acceptance of such a
position. As a general matter, directorships in unaffiliated public companies or
companies which may reasonably be expected to become public companies will not
be authorized because of the potential for conflicts which may impede our
freedom to act in the best interests of clients. Service with charitable
organizations generally will be authorized, subject to considerations related to
time required during working hours and use of proprietary information.

Exemptive Procedure
The Director of Regulatory Affairs, the Director of Enterprise Risk Management,
the General Counsel or the Ethics Committee can grant exemptions from the
personal trading restrictions in this Code upon determining that the transaction
for which an exemption is requested would not result in a conflict of interest
or violate any other policy embodied in this Code. Factors to be considered may
include: the size and holding period of the Employee's position in the security,
the market capitalization of the issuer, the liquidity of the security, the
reason for the Employee's requested transaction, the amount and timing of client
trading in the same or a related security, and other relevant factors.

Any Employee wishing an exemption should submit a written request to the
Director of Regulatory Affairs setting forth the pertinent facts and reasons why
the employee believes that the exemption should be granted. Employees are
cautioned that exemptions are intended to be exceptions, and repetitive
exemptive applications by an Employee will not be well received.

Records of the approval of exemptions and the reasons for granting exemptions
will be maintained by the Regulatory Affairs Department.

- --------------------------------------------------------------------------------
Compliance with
The Code of Ethics

Adherence to the Code of Ethics is considered a basic condition of employment
with our organization. The Ethics Committee monitors compliance with the Code
and reviews violations of the Code to determine what action or sanctions are
appropriate.

Violations of the provisions regarding personal trading will presumptively be
subject to being reversed in the case of a violative purchase, and to
disgorgement of any profit realized from the position (net of transaction costs
and capital gains taxes payable with respect to the transaction) by payment of
the profit to any client disadvantaged by the transaction, or to a charitable
organization, as determined by the Ethics Committee, unless the Employee
establishes to the satisfaction of the Ethics Committee that under the
particular circumstances disgorgement would be an unreasonable remedy for the
violation.

Violations of the Code of Ethics may also adversely affect an Employee's career
with Wellington Management with respect to such matters as compensation and
advancement.

Employees must recognize that a serious violation of the Code of Ethics or
related policies may result, at a minimum, in immediate dismissal. Since many
provisions of the Code of Ethics also reflect provisions of the U.S. securities
laws, Employees should be aware that violations could also lead to regulatory
enforcement action resulting in suspension or expulsion from the securities
business, fines and penalties, and imprisonment.

Again, Wellington Management would like to emphasize the importance of obtaining
prior clearance of all personal securities transactions, avoiding prohibited
transactions, filing all required reports promptly and avoiding other situations
which might involve even an apparent conflict of interest. Questions regarding
interpretation of this policy or questions related to specific situations should
be directed to the Regulatory Affairs Department or Ethics Committee.

Revised: March 1, 2000