VANGUARD/WELLINGTON FUND INC, N-30D, 1997-01-17

VANGUARD/WELLINGTON FUND INC
N-30D, 1997-01-17

Previous: AIM EQUITY FUNDS INC, 497, 1997-01-17

Next: WESTINGHOUSE ELECTRIC CORP, SC 13D/A, 1997-01-17

<PAGE> 1

VANGUARD/
WELLINGTON
FUND

Annual Report
November 30, 1996

THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION

At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage includes
a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson (who is also shown, accepting a surrender, in a
detail from a nineteenth-century engraving); and several views of our recently
completed campus, which is steeped in nautical imagery--from our buildings
named after Nelson's warships (Victory, Majestic, and Goliath are three shown),
to our artwork and ornamental compass rose.
<PAGE> 2
[PHOTO]

VANGUARD HAS ALWAYS STRIVED TO BE THE STANDARD-BEARER for mutual fund
disclosure, going well beyond the "letter of the law" in our shareholder
communications. During the past year, we raised the standard once again by
rewriting and reformatting our Fund prospectuses. They are designed to ensure
that prospective investors fully understand, before they make an investment,
each Fund's investment strategies, risks, and costs. In that spirit, we have
redesigned our Annual Reports to shareholders, which provide a comprehensive
discussion and analysis of the year's results in the context of each Fund's
investment objectives and policies. Since Vanguard has long been recognized for
the quality and content of these Fund Reports, our overriding objective was to
maintain the character of the previous Reports, while adding information to
assist shareholders in understanding the investment characteristics of their
fund.

THE NEW FUND REPORTS INCLUDE A MESSAGE TO SHAREHOLDERS from Chairman John C.
Bogle and President John J. Brennan. This Message continues to provide a candid
assessment of the Fund's performance relative to an appropriate unmanaged
market benchmark and a peer group of mutual funds with similar investment
policies. It also reviews the principal factors contributing to--and detracting
from--the returns earned by the Fund. To help you evaluate your Fund's
current-year performance, the Message includes a discussion of the Fund's
long-term investment results, as well as a look ahead to the prospects for the
coming year. A recap of the financial markets, which had been included as part
of the Chairman's letter, now appears in The Markets In Perspective. This
overview covers the world's financial markets, putting the results of the
Fund's strategy in a global perspective.

THE PORTFOLIO PROFILE REPRESENTS AN ADDITION TO OUR FUND REPORTS. In this day
and age, many investors use detailed statistical information to evaluate their
mutual fund holdings, and our new Portfolio Profile furnishes shareholders with
comprehensive data on key characteristics--sector diversification, volatility,
top-ten holdings, among others--that ultimately define how a Fund is likely to
perform in various market environments. For this information to be used
effectively, we include a brief description of the profiled characteristics.
The Report From The Adviser (for our traditionally managed Funds) now covers
specific topics that we have defined as being the important ones for the
adviser to address--and we do our best to ensure that this Report is written in
the same simple and candid manner that characterizes all Vanguard
communications. Finally, each Adviser's Report will include an inset reminder
of the adviser's basic investment philosophy.

WE TRUST THAT THIS REDESIGNED FUND REPORT will continue to meet your need for a
fair, candid, and clear presentation of your Fund's investment results and a
thorough portfolio review. We welcome any comments that you might have at any
time regarding these Reports.

CONTENTS

A Message To
Our Shareholders
1

The Markets
In Perspective
4

Report From
The Adviser
6

Portfolio
Profile
8

Performance
Summary
11

Financial
Statements
12

Report Of
Independent
Accountants
22

Directors And
Officers

INSIDE BACK COVER
<PAGE> 3
FELLOW SHAREHOLDER,

[PHOTO]
John C. Bogle

[PHOTO]
John J. Brennan

Buoyed by a second consecutive year of banner stock market returns,
Wellington Fund provided a robust total return of +21.3% in the twelve months
ended November 30, 1996--our 68th year of operations.

Because our traditional strategy is to hold a balanced mix of about 65%
common stocks and 35% bonds, our return did not quite match that of the
ebullient stock market. Indeed, rising interest rates slightly eroded bond
returns. Even so, it was an excellent year for Wellington Fund, which has
garnered double-digit returns in 11 of the past 15 years--a rather remarkable
achievement for a conservative fund. Our results relative to comparative
benchmarks also remained excellent, as we again surpassed the returns of our
peer group of balanced mutual funds and outpaced our formidable unmanaged
composite index. The table at right compares Wellington Fund's total return
(capital change plus reinvested dividends) for the year with those of our
average competitor and the composite index, which is weighted 65% in the
Standard & Poor's 500 Composite Stock Price Index and 35% in the Lehman
Long-Term Corporate AA or Better Bond Index.

The Fund's return is based on an increase in net asset value from $24.57
per share on November 30, 1995, to $28.34 per share on November 30, 1996, with
the latter figure adjusted for dividends of $0.97 per share paid from net
investment income and a December 1995 distribution of $0.28 per share paid from
net realized capital gains. (Net realized capital gains totaling $1.11 per
share were distributed in December 1996, along with our fourth-quarter income
dividend.)

<TABLE>
<CAPTION>
- ---------------------------------------------------
TOTAL RETURN
FISCAL YEAR ENDED
NOVEMBER 30, 1996
- ---------------------------------------------------
<S> <C>
Vanguard/Wellington Fund +21.3%
- ---------------------------------------------------
Average Balanced Fund +16.4%
- ---------------------------------------------------
Composite Stock/Bond Index* +19.8%
- ---------------------------------------------------
</TABLE>

*65% S&P 500 Index, 35% Lehman Long-Term

Corporate AA or Better Bond Index.

FISCAL 1996 PERFORMANCE OVERVIEW

The bull market in stocks continued unabated during the twelve months ended
November 30, as investor optimism was fueled by moderate economic growth,
subdued inflation, and rising corporate profits. The S&P 500 Index provided
positive returns in every month except July en route to a total return of
+27.9% for the fiscal year. Interest rates fluctuated considerably during the
fiscal year but finished the period just a shade higher than where they began,
leaving bond prices a bit lower.

In this environment, Wellington Fund performed admirably. We exceeded by
1.5 percentage points the return on our theoretical benchmark, a portfolio
comprising 65% stocks and 35% high-quality, long-term bonds. We did even better
against our real-world competition, as our return was nearly five percentage
points ahead of that provided by the average balanced mutual fund.

Our advantage over the index was mainly due to excellent overall stock
selection by our adviser, Wellington Management Company. The equity portion of
the Fund provided

1
<PAGE> 4

a return of +31.2%, a remarkable margin of 3.3 percentage points above the
return of the S&P 500 Index. Our holdings in the transportation, financial, and
consumer-cyclical sectors were especially strong contributors to the Fund's
outstanding equity returns.

Stock selection also was an important part of our performance edge over
the average competing fund. In addition, the Fund gained from its emphasis on
large-capitalization stocks; the median market capitalization of our stocks was
$19.7 billion, nearly twice the $11 billion figure for the average balanced
mutual fund. During fiscal 1996, large-cap stocks were the strongest-performing
segment of the market: the S&P 500 Index, which is dominated by large-cap
stocks, beat the small-cap Russell 2000 Small Stock Index by more than ten
percentage points. Our policy of holding 60% to 70% of the Fund's assets in
stocks was a boon in the bullish environment that prevailed in fiscal 1996,
since our typical competitor held about 55% of its assets in common stocks.

The $0.97 per share of dividends paid by Wellington Fund represented a 10%
increase over the $0.88 per share paid in fiscal 1995. While we obviously are
pleased with this growth in our income over the year, we do not expect to
maintain this growth rate. Three factors contributed to this unusually strong
increase in our income. First, because of the stock market's powerful surge,
new cash flow was directed primarily to bonds, which produce considerably more
current income than stocks. Second, many stocks held by the Fund increased
their dividend payouts during the past year. Third, with bond yields moving
higher during the year, new cash flow directed into bonds earned a slightly
higher level of interest income.

LONG-TERM PERFORMANCE OVERVIEW

Wellington Fund's strong performance in 1996 widened our long-term performance
lead over the average balanced mutual fund. However, neither the Fund nor our
average competitor has equaled the 10-year record of our theoretical benchmark,
the composite stock/bond index. The table at left summarizes returns for the
past decade for Wellington Fund and our comparative standards in both
percentage terms and dollar terms (assuming an initial investment of $10,000).

As the table shows, our 1.6 percentage point annual edge over the typical
balanced fund amounted over the decade to $4,287, or more than 42% of the
initial $10,000 investment. While Wellington ranked among the best-performing
balanced funds during the period, we fell short of the return of the composite
index. This target index, of course, is a tough competitor since it exists only
on paper and bears none of the operating and transaction costs that all mutual
funds incur.

We emphasize that future returns on stocks and bonds may be lower than
those shown for the past decade, which was an extremely favorable period for
returns on financial assets. Indeed, with yields on long-term bonds
considerably lower now than ten years ago and with stock prices at elevated
levels based on several valuation measures, investors have reason to expect
lower returns in the coming decade.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------
TOTAL RETURN*
10 YEARS ENDED NOVEMBER 30, 1996
--------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RATE INITIAL INVESTMENT
- -----------------------------------------------------------------
<S> <C> <C>
Vanguard/Wellington Fund +12.7% $32,965
- -----------------------------------------------------------------
Average Balanced Fund +11.1% $28,678
- -----------------------------------------------------------------
Composite Stock/Bond Index +13.5% $35,482
- -----------------------------------------------------------------
</TABLE>

*Assumes reinvestment of all dividends and distributions, and
excludes sales charges, if any, on the other mutual funds.

2
<PAGE> 5
IN SUMMARY

The past two years have brought generous returns to investors in U.S. stocks
and bonds. Shareholders of Wellington Fund have participated fully in this
bounty, with a cumulative two-year return exceeding +60%. After such a period,
it seems appropriate to emphasize that the risks of investing in stocks and
bonds are still very much present. Undoubtedly, the sailing on the seas before
us will not always be smooth. However, we believe that investors who "stay the
course" with a balanced portfolio of stock funds, bond funds, and money market
funds--akin to the conservative approach that has served Wellington Fund
shareholders well for nearly seven decades--should be able to weather the
occasional tempests in the financial markets.

/s/ JOHN C. BOGLE /s/ JOHN F BRENNAN
Chairman of the Board President

December 16, 1996

3
<PAGE> 6
THE MARKETS IN PERSPECTIVE: FISCAL YEAR ENDED NOVEMBER 30, 1996

[PHOTO]

U.S. EQUITY MARKETS

Few investors would have expected the stock market over the past 12 months to
come close to matching the 37.0% return of the prior 12. Yet when the past two
fiscal years are considered cumulatively, the Standard & Poor's 500 Composite
Stock Price Index has risen 75.1%. Not surprisingly, many of the factors that
drove the market higher in 1995 were also in place this year. Once again,
steady economic growth and low inflation were powerful motivators.

The equity markets were decidedly "un-equitable," however, when it came to
size and sectors. Companies with larger market values, such as those that
dominate the S&P 500 Index, prevailed. In fact, even within the Index, it was
the largest companies that turned in the best performance. The 50 biggest
companies in the S&P 500 Index (which account for roughly half its market
value) gained 31.8% in the fiscal year ended November 30, compared with an
increase of 27.9% for the entire Index. Looking at the S&P 500 Index's
performance by sector, financial stocks were strongest, closing the year with a
41.9% gain. Technology stocks were a close second, gaining 39.3%. Utilities,
plagued early in the year by higher interest rates and a rapidly changing
competitive landscape, eked out a 4.4% return, the lowest within the Index.

With the largest companies performing so well, it was difficult for
smaller issues to keep pace. This was evidenced in the considerable difference
between the 27.9% return of the S&P 500 Index and the 16.5% return of the
Russell 2000 Small Stock Index. Even for the smaller companies, there was a
significant range of performance among sectors. Energy stocks led the Russell
2000 Index with a 77.0% gain for the year. Here, rising prices, limited
exposure to the cyclical refining business, and a reduced number of competitors
created a favorable environment for the stocks. At the other end of the
spectrum were health-care stocks, which showed a loss of -0.4%.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED NOVEMBER 30, 1996
--------------------------------
1 YEAR 3 YEARS 5 YEARS
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Equity
S&P 500 Index 27.9% 21.0% 18.2%
Russell 2000 Index 16.5 14.0 16.8
MSCI-EAFE Index 12.1 11.7 9.9
- ------------------------------------------------------------------------
Fixed-Income
Lehman Aggregate Bond Index 6.1% 6.5% 7.9%
Lehman 10-Year Municipal
Bond Index 5.7 6.2 8.0
Salomon 90-Day U.S. Treasury Bills 5.3 5.0 4.4
- ------------------------------------------------------------------------
Other
Consumer Price Index 3.2% 2.8% 2.9%
- ------------------------------------------------------------------------
</TABLE>

U.S. FIXED-INCOME MARKETS

As the fiscal year ended, the 30-year U.S. Treasury yield of 6.4% was modestly
higher than its 6.1% level on November 30, 1995. The relatively small
difference in these figures belies the turmoil endured by the fixed-income
markets over the past 12 months.

When the fiscal year began, "Steady as she goes" was the common wisdom.
Modest economic growth and benign inflation were expected to continue, giving
the Federal Re-

4
<PAGE> 7
serve no reason to move interest rates higher. That complacency was shattered
by an exceptionally strong February jobs report, the first of what turned out
to be a succession of signs that in fact the economy was growing at a much
faster--and potentially inflation-inducing--pace. The bond market reacted
swiftly to compensate for the perceived risk: The 30-year Treasury yield jumped
from just below 6.0% in late December to 6.7% in late March. The next several
months saw a consistent pattern in which bond yields rose on the Friday of the
jobs-report release only to fall back by the middle of the month. In reality,
there was little bite to the bark. Inflation, as measured by the Consumer Price
Index, remained near an annualized rate of 3.2%. And, as the fiscal year
entered its final quarter, evidence once again pointed to more "acceptable"
levels of growth. That--plus the market's satisfaction with the national
election results and prospects for budget action--helped bonds finish the
fiscal year with a strong rally.

The rally enabled the longer-maturity sectors of the market to overcome
performance deficits and finish the year with positive returns. Although the
specter of the Federal Reserve Board loomed large during the year, in fact the
Board acted only twice, lowering the federal funds rate by a total of 0.5%.

Corporate bonds, mortgage-backed issues, and municipals were three
relatively bright spots over the past year. The strength in earnings that
benefited stock prices extended to the corporate bond sector as well. These
bonds, especially those of lower credit quality, performed well relative to
Treasuries as there appeared to be little risk of skipped interest payments or
bankruptcy against the good earnings backdrop. The stable-to-rising
interest-rate environment throughout most of the year benefited another large
segment of the bond market--mortgages--as the threat of refinancings receded.
Finally, municipal bonds outpaced their U.S. Treasury counterparts. The sector
was shielded to a certain extent from the inflation wars of the Treasury
market, and demand outstripped supply for much of the year.

INTERNATIONAL EQUITY MARKETS

Concern about U.S. Federal Reserve Board policy appeared to drive global
markets as much as it did those in the United States. In aggregate, the markets
rose 17.0%, as measured by the Morgan Stanley Capital International-Europe,
Australasia, Far East Index. A stronger dollar reduced this return to 12.1% for
U.S.-based investors.

Regionally, Europe's 22.9% return overshadowed the 1.4% generated by the
Pacific Basin. Europe's major markets continued to work toward the economic
targets that must be attained by 1999 under the Maastricht Treaty. This
ongoing, albeit bumpy, effort kept the continent's economic growth modest and
gave investors confidence. The Pacific region, of course, was dominated by the
influence of the Japanese market. Despite evidence of a strengthening economy
early in the year, Japan's market was shadowed by lingering problems in the
banking and real estate sectors and by tepid interest on the part of Japanese
investors. The dollar's appreciation against the yen had a significant impact
on returns, turning the year's 7.1% gain in yen into a -4.5% loss in dollars.
In contrast, the returns for a number of other countries in the region were
quite strong: for example, Hong Kong, 38.2%, and Malaysia, 31.8% (in U.S.
dollars).

5
<PAGE> 8
REPORT FROM THE ADVISER

[PHOTO]

Vanguard/Wellington Fund delivered a total return of 21.3% during fiscal
1996, which ended November 30, compared with 16.4% for the average balanced
fund and 19.8% for the unmanaged 65% stock/35% bond index against which we
measure ourselves. These numbers are reviewed in more detail in the Message To
Shareholders, which begins on page 1.

The stock market provided investors with another year of exceptional
returns in 1996. Wellington Fund's equity holdings, which accounted for 63% to
66% of assets during 1996, fully participated in this positive environment,
providing a total return of 31.2%. The Fund continues to follow a conservative
approach toward the equity market, avoiding rapid rotation from sector to
sector and focusing on the long-term outlook of large companies with healthy
balance sheets and above-average dividend yields.

Our turnover in equities was 21% of average assets and resulted in shifts
of no more than a few percentage points of assets in our major sectors. The
largest change was in our utility holdings, which grew from 4% to 8% of the
equities held by the Fund. Stocks purchased during the year had an average
yield of about 3.8% when acquired; those we sold had an average yield of about
2.7% at the time of sale.

Also adding to our income growth were dividend increases on many of our
existing holdings. As a result, despite the sizable gain in stock prices during
fiscal 1996, the yield on the equity portion of the Fund declined only
modestly, from 2.9% at the beginning of the year to 2.7% at year end. As was
the case in 1995, our performance was helped by the fact that
large-capitalization companies generally did better than mid-cap or small-cap
stocks. We continue to be challenged in that our orientation toward
inexpensively priced securities with good yields keeps us out of some of the
more glamorous companies in the technology sector.

The following summarizes our activity, along with the outlook for the
major sectors currently emphasized by the Fund:

1. The financial sector, which constitutes about 20% of our equity
holdings, continued to provide excellent returns in 1996 even though
interest-rate trends were far less helpful than in 1995. We reduced positions
in a number of banks that reached our price objectives, but remain committed to
the sector because valuations and dividend growth potential remain attractive.

2. The basic-materials sector, which makes up about 19% of our equities,
did not help our performance. Earnings growth was hampered in 1996 by poor
pricing for many commodities. However, we are optimistic that this sector will
provide better relative returns during 1997 because operating rates are high
and there is a prospect of better global economic growth.

3. The transport & services sector (which includes railroads) and the
capital goods & construction sector

INVESTMENT PHILOSOPHY

The adviser believes that a reasonable level of current income and long-term
growth in capital can be achieved without undue risk by holding 60% to 70% of
assets in common stocks and the balance in fixed income securities. Consistent
with this approach, dividend paying stocks dominate the Fund's equity segment,
while long-term, high-quality corporate, U.S. Treasury, and mortgage-backed
securities make up the bond segment.

6
<PAGE> 9
sector together make up about 14% of the equity portfolio. Our investments in
these sectors generally did quite well, the result of good corporate management
and successful restructurings. The outlook for the next few years remains above
average for our holdings in these categories.

4. The energy sector, where we have about 12% of our equities, appreciated
in line with the overall market. Higher oil and gas prices and continued
cost-cutting efforts helped earnings improve considerably from 1995 levels.
While oil and gas prices are expected to flatten, volume growth remains good.

5. The health-care sector, representing 13% of equities, continued its
strong contribution to the Fund's performance. We took profits in several
stocks that had done well and whose valuations became stretched. However, we
were able to find enough attractive opportunities to maintain the Fund's
exposure to this sector.

6. In other areas, we have increased the Fund's exposure in the
consumer-cyclical sector to slightly more than 9% of equity assets (more than
half of which is in automotive stocks), and, as mentioned earlier, we raised
the Fund's utilities-sector weighting to 8%. Utilities have become more
interesting due to their defensive characteristics.

The bond market was quite volatile during the past 12 months, despite the
low and stable level of inflation, as investors have responded quickly to
changes in the economic environment. The net result for the year was that the
30-year U.S. Treasury yield rose from 6.1% to 6.4%. At one point during the
summer, the yield on the benchmark long bond was as high as 7.2%. The return on
the Fund's fixed-income holdings during the fiscal year was 6.1%, well below
the return in fiscal 1995 when the bond market benefited from declining
interest rates. Changes in investors' expectations about future economic
conditions and about the Federal Reserve Board's reactions to these conditions
create a lot of market activity, but the reality is that inflation is likely to
remain under control in the near future. The current level of interest rates
provides a substantial yield premium over the rate of inflation. The bond
market is fundamentally healthy.

Looking forward, we do not have strong views about the direction of the
stock market, except to note that there are signs of what Federal Reserve
Chairman Alan Greenspan referred to in early December as "irrational
exuberance" in some segments of the market. Wellington Fund's emphasis on
quality, value, and yield should be an attractive attribute in case the stock
market runs out of steam. In addition, one of the benefits of balanced-fund
investing is that at any given point in time there is no immediate pressure on
the Fund to invest cashflows in the equity market. For example, during the
market correction in the third quarter, Wellington Fund was a net buyer of
stocks and seller of bonds. During the fiscal year's final quarter, when the
equity market took off, we did the opposite, even though Fund cashflows were
positive during both periods.

Ernst H. von Metzsch, Senior Vice President and Portfolio Manager
Wellington Management Company, LLP

December 13, 1996

7
<PAGE> 10
PORTFOLIO PROFILE: WELLINGTON FUND
NOVEMBER 30, 1996

This Profile provides a snapshot of the Fund's equity and fixed-income
characteristics, where appropriate, compared to an unmanaged index. Key
elements of this Profile are defined on pages 9 and 10.

<TABLE>
<CAPTION>
TOTAL FUND CHARACTERISTICS
- -----------------------------------------

<S> <C>
Turnover Rate 30%
Expense Ratio 0.31%
Cash Reserves 1.8%
</TABLE>

<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- -----------------------------------------
WELLINGTON S&P 500
- -----------------------------------------
<S> <C> <C>
R-Squared 0.85 1.00
Beta 0.79 1.00
</TABLE>

<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- -----------------------------------------
WELLINGTON S&P 500
- -----------------------------------------
<S> <C> <C>
Number of Stocks 92 500
Median Market Cap $19.7B $25.9B
Price/Earnings Ratio 16.1x 19.8x
Price/Book Ratio 2.7x 3.5x
Yield 3.9% 2.0%
Return on Equity 15.5% 19.6%
Earnings Growth Rate 6.3% 13.7%
Foreign Holdings 4.5% 3.7%
</TABLE>

<TABLE>
<CAPTION>
PORTFOLIO ALLOCATION
- -----------------------------------------
[GRAPH]

<S> <C>
STOCK 64%
BONDS 34%
CASH RESERVES 2%
</TABLE>

<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF COMMON STOCK)
- -----------------------------------------
<S> <C>
General Electric Co. 3.5%
Allstate Corp. 3.3
Citicorp 3.0
First Bank System, Inc. 3.0
Kimberly-Clark Corp. 2.4
Northrop Grumman Corp. 2.3
Bristol-Myers Squibb Co. 2.2
Dow Chemical Co. 2.2
General Motors Corp. 2.1
Ford Motor Co. 2.1
- -----------------------------------------
Top Ten 26.1%
Top Ten as % of Total Net Assets 16.4
</TABLE>

<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- -----------------------------------------------------------------------------------
NOVEMBER 30, 1995 NOVEMBER 30, 1996
----------------------------------------
WELLINGTON WELLINGTON S&P 500
----------------------------------------
<S> <C> <C> <C>
Basic Materials . . . . . . . . . . . 20.0% 18.9% 6.1%
Capital Goods & Construction . . . . . 9.3 8.7 8.6
Consumer Cyclical . . . . . . . . . . 8.6 9.2 12.3
Consumer Staples . . . . . . . . . . . 1.0 2.3 12.1
Energy . . . . . . . . . . . . . . . . 12.7 11.6 9.4
Financial . . . . . . . . . . . . . . 22.3 20.0 15.1
Health Care . . . . . . . . . . . . . 13.8 13.3 10.5
Technology . . . . . . . . . . . . . . 2.1 1.9 13.0
Transport & Services . . . . . . . . . 4.1 4.8 1.4
Utilities . . . . . . . . . . . . . . 3.7 8.1 9.5
Miscellaneous . . . . . . . . . . . . 2.4 1.2 2.0
- -----------------------------------------------------------------------------------
</TABLE>

8
<PAGE> 11
EQUITY INVESTMENT FOCUS
[GRAPH]

FIXED-INCOME INVESTMENT FOCUS
[GRAPH]

<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- -----------------------------------------
<S> <C>
Number of Bonds 379
Average Coupon 7.3%
Average Maturity 16.4 years
Average Quality Aa2
Average Duration 8.2 years
</TABLE>

<TABLE>
<CAPTION>
DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- -------------------------------------------
<S> <C>
Aaa 41.6%
Aa 15.8
A 33.5
Baa 6.8
Ba 0.5
B --
Not Rated 1.8
Total 100.0%
- -------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
DISTRIBUTION BY ISSUER (% OF BONDS)
- -----------------------------------------
<S> <C>
Treasury/Agency 34.2%
Industrial 23.0
Utilities 13.4
Banks/Finance 19.4
Foreign 9.4
Other 0.6
Total 100.0%
- -----------------------------------------
</TABLE>

[PHOTO]

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

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

AVERAGE MATURITY. The average length of time until bonds in a portfolio reach
maturity and are repaid. In general, the longer the average maturity, the more
a portfolio's share price will fluctuate in response to changes in market
interest rates.

AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
credit ratings assigned to the portfolio's securities holdings by credit-rating
agencies. Agencies assign credit ratings after an appraisal of an issuer's
ability to meet its obligations. Quality is graded on a scale, with Aaa
indicating the most creditworthy bond issuers.

BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the fluctuations in the overall market (or appropriate market
index). The market, or index, has a beta

9
<PAGE> 12
of 1.00, so a portfolio with a beta of 0.80 would have seen its share price
rise or fall by 8% when the overall market rose or fell by 10%.

CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing investments.

DISTRIBUTION BY CREDIT QUALITY. An indicator of the risk of default or other
credit problems on securities held by a portfolio.

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

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

FOREIGN HOLDINGS. The percentage of a portfolio's investments represented by
securities of companies based outside of the United States.

INVESTMENT FOCUS. This grid indicates the focus of a portfolio in terms of two
attributes. For equity portfolios, the attributes are market capitalization
(large, medium, or small) and relative valuation (growth, value, or a blend).
For fixed-income portfolios, the attributes are average maturity (short,
medium, or long) and average credit quality (high, medium, or low).

MEDIAN MARKET CAPITALIZATION. The midpoint of market capitalization (market
price x shares outstanding) of the stocks in a portfolio. Half the stocks in
the portfolio have higher market capitalizations and half lower.

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

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

PORTFOLIO ALLOCATION. This graph shows the distribution, by type of asset, of
the Fund's holdings.

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

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

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

RETURN ON EQUITY. The rate of return generated by a company during the past
year for each dollar of shareholder's equity (net income for the year /
shareholder's equity). For a portfolio, the weighted average return on equity
for the companies represented in the portfolio.

SECTOR DIVERSIFICATION. The percentage of a portfolio's common stocks invested
in each of the major industry classifications that compose the stock market.

TEN LARGEST HOLDINGS. The percentage of a portfolio's stock holdings in its ten
largest stocks (the average for stock mutual funds is about 25%). As this
percentage rises, a portfolio's returns are likely to be more volatile, since
its return is more dependent on the fortunes of a few companies.

TURNOVER RATE. Indicates trading activity during the past year. Portfolios with
high turnover rates incur higher transaction costs and are more likely to
relize and distribute capital gains (which are taxable to investors).

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

10
<PAGE> 13
PERFORMANCE SUMMARY: WELLINGTON FUND

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

<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: 11/30/76-11/30/96
- -----------------------------------------------------------------
WELLINGTON FUND COMPOSITE*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------------------------------
<S> <C> <C> <C> <C>
1977 -6.5% 5.1% -1.4% 0.5%
1978 -0.3 6.2 5.9 3.7
1979 4.9 7.9 12.8 10.1
1980 18.1 9.2 27.3 21.8
1981 -5.6 8.4 2.8 -0.4
1982 10.1 9.7 19.8 22.4
1983 17.0 8.7 25.7 19.2
1984 0.6 7.7 8.3 7.2
1985 18.3 8.2 26.5 27.5
1986 17.3 7.0 24.3 26.4
1987 -7.1% 2.8% -4.3% -2.0%
1988 13.8 7.2 21.0 19.3
1989 13.4 6.6 20.0 25.7
1990 -8.4 5.8 -2.6 -0.2
1991 10.2 6.6 16.8 19.2
1992 9.2 5.8 15.0 15.9
1993 8.4 5.2 13.6 11.8
1994 -5.2 4.4 -0.8 -1.6
1995 27.3 5.4 32.7 33.0
1996 16.7 4.6 21.3 19.8
- -----------------------------------------------------------------
</TABLE>

*65% S&P 500 Index, 35% Lehman Long-Term Corporate AA or Better Bond Index.

See Financial Highlights table on page 19 for dividend and capital gains
information for the past five years.

CUMULATIVE PERFORMANCE: 11/30/86-11/30/96
- -----------------------------------------------------------------
<TABLE>
<S> <C> <C> <C> <C>
1986 11 10000 10000 10000
1987 02 11065 10966 11107
1987 05 11077 10941 11081
1987 08 11910 11816 12090
1987 11 9574 9755 9798
1988 02 11148 10959 11202
1988 05 10935 10848 10955
1988 08 11099 10994 11120
1988 11 11588 11319 11687
1989 02 12218 11824 12228
1989 05 13202 12781 13447
1989 08 14160 13628 14567
1989 11 13903 13618 14685
1990 02 13653 13244 14274
1990 05 14296 13960 15277
1990 08 13310 13180 14298
1990 11 13535 13369 14650
1991 02 15028 14762 16300
1991 05 15849 15501 17193
1991 08 16171 15937 17712
1991 11 15810 15843 17469
1992 02 17009 17183 18881
1992 05 17553 17246 19207
1992 08 17804 17398 19610
1992 11 18180 18072 20242
1993 02 19055 18724 21218
1993 05 19777 19151 21607
1993 08 20702 19978 22663
1993 11 20656 19934 22624
1994 02 21014 20381 22866
1994 05 20765 19769 22204
1994 08 21688 20351 23056
1994 11 20486 19606 22261
1995 02 22152 20623 24002
1995 05 24293 22048 26346
1995 08 25431 23188 27562
1995 11 27185 24629 29607
1996 02 28153 25506 30673
1996 05 28823 26189 31368
1996 08 29145 25964 31076
1996 11 32965 28678 35482
</TABLE>

CUMULATIVE PERFORMANCE: 11/30/86-11/30/96
- -------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED NOVEMBER 30, 1996
---------------------------------- FINAL VALUE OF A
1 YEAR 5 YEARS 10 YEARS $10,000 INVESTMENT
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WELLINGTON FUND 21.26% 15.83% 12.67% $32,965
AVERAGE BALANCED FUND 16.44 12.38 11.11 28,678
COMPOSITE INDEX* 19.84 15.23 13.50 35,482
- -------------------------------------------------------------------------------------
</TABLE>

*65% S&P 500 Index, 35% Lehman Long-Term Corporate AA or Better Bond Index.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED 9/30/96*
- --------------------------------------------------------------------------------------
10 YEARS
INCEPTION -----------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Wellington Fund 7/1/29 15.38% 13.35% 6.67% 5.67% 12.34%
- --------------------------------------------------------------------------------------
</TABLE>

*SEC rules require that we provide this average annual total return information
through the latest calendar quarter as well as for the Fund's fiscal year end.

11
<PAGE> 14
FINANCIAL STATEMENTS
NOVEMBER 30, 1996

[PHOTO]

STATEMENT OF NET ASSETS

This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, preferred stocks, bonds,
etc.) and by industry sector. Other assets are added to, and liabilities are
subtracted from, the value of Total Investments to calculate the Fund's Net
Assets. Finally, Net Assets are divided by the outstanding shares of the Fund
to arrive at its share price, or Net Asset Value (NAV) Per Share.

At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested
by shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the Fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the Fund's investments and their cost, and reflects
the gains (losses) that would be realized if the Fund were to sell all of its
investments at their statement-date values.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
WELLINGTON FUND SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (62.9%)
- ----------------------------------------------------------------------
BASIC MATERIALS (11.9%)
Alumax, Inc. 987,552 $ 31,972
Aluminum Co. of America 2,500,000 159,063
British Steel PLC ADR 3,840,400 107,531
Cabot Corp. 2,144,500 55,221
Dow Chemical Co. 2,700,000 226,125
E.I. du Pont de Nemours & Co. 2,000,000 188,500
International Paper Co. 2,400,000 102,000
Kimberly-Clark Corp. 2,600,000 254,150
(1) Lubrizol Corp. 3,250,000 99,937
Norsk Hydro AS ADR 1,000,000 50,250
PPG Industries, Inc. 1,700,000 104,125
Phelps Dodge Corp. 2,200,000 159,775
Reynolds Metals Co. 1,400,200 83,312
Temple-Inland Inc. 1,984,600 106,672
Westvaco Corp. 3,300,000 93,225
Willamette Industries, Inc. 1,379,800 93,137
Witco Chemical Corp. 1,714,200 52,069
-------------
1,967,064
-------------
CAPITAL GOODS & CONSTRUCTION (5.5%)
General Electric Co. 3,500,000 364,000
Honeywell, Inc. 2,747,900 188,575
Northrop Grumman Corp. 2,846,300 236,599
United Technologies Corp. 850,000 119,212
-------------
908,386
-------------
CONSUMER CYCLICAL (5.8%)
Brunswick Corp. 2,060,000 52,530
Chrysler Corp. 4,400,000 156,200
Eastman Kodak Co. 804,600 65,173
Ford Motor Co. 6,504,515 213,023
General Motors Corp. 3,800,000 218,975
May Department Stores Co. 1,508,000 73,515
J.C. Penney Co., Inc. 1,600,000 86,000
Sears, Roebuck & Co. 1,907,017 94,874
-------------
960,290
-------------
CONSUMER STAPLES (1.4%)
General Mills, Inc. 1,000,000 63,500
Philip Morris Cos., Inc. 1,000,000 103,125
SuperValu Inc. 2,279,400 67,527
-------------
234,152
-------------
ENERGY (7.3%)
Amerada Hess Corp. 1,400,000 82,425
Amoco Corp. 1,600,000 124,200
Ashland Inc. 1,000,000 48,000
Atlantic Richfield Co. 300,000 41,738
Chevron Corp. 1,850,000 123,950
Exxon Corp. 1,850,000 175,056
Kerr-McGee Corp. 900,000 63,000
Mobil Corp. 200,000 24,200
Pennzoil Co. 417,800 23,501
Phillips Petroleum Co. 1,200,000 54,150
Repsol SA ADR 2,697,700 98,803
Royal Dutch Petroleum Co. ADR 535,512 90,970
Texaco Inc. 1,000,000 99,125
Total SA ADR 2,000,000 80,750
Unocal Corp. 1,900,000 77,425
-------------
1,207,293
-------------
FINANCIAL (12.6%)
Allstate Corp. 5,687,168 342,652
Banc One Corp. 2,000,000 95,250
The Bank of New York Co., Inc. 1,750,000 62,781
BankAmerica Corp. 1,710,400 176,171
CIGNA Corp. 1,000,000 141,375
</TABLE>

12
<PAGE> 15
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ----------------------------------------------------------------------
<S> <C> <C>
Citicorp 2,850,000 $ 311,363
CoreStates Financial Corp. 3,700,000 199,337
First Bank System, Inc. 4,249,800 309,704
First Union Corp. 2,307,200 176,212
Jefferson-Pilot Corp. 1,416,800 82,529
Wachovia Corp. 2,977,400 178,644
-------------
2,076,018
-------------
HEALTH CARE (8.3%)
Abbott Laboratories 2,950,000 164,463
American Home Products Corp. 3,250,000 208,813
C.R. Bard, Inc. 2,437,000 68,236
Baxter International, Inc. 2,954,700 125,575
Bristol-Myers Squibb Co. 2,000,000 227,500
Johnson & Johnson 3,400,000 180,625
Pharmacia & Upjohn, Inc. 3,000,000 115,875
Pfizer, Inc. 1,500,000 134,437
Rhone-Poulenc SA ADR 3,068,303 99,336
Zeneca Group ADR 650,000 53,950
-------------
1,378,810
-------------
TECHNOLOGY (1.2%)
Xerox Corp. 3,979,300 195,483
-------------
TRANSPORT & SERVICES (3.0%)
Canadian National Railway Co. 2,000,000 82,250
Canadian Pacific Ltd. 5,392,300 148,288
Conrail, Inc. 612,385 59,554
Norfolk Southern Corp. 466,700 42,003
Union Pacific Corp. 2,854,000 166,246
-------------
498,341
-------------
UTILITIES (5.1%)
AT&T Corp. 2,500,000 98,125
BellSouth Corp. 2,000,000 80,750
Carolina Power & Light Co. 2,000,000 73,250
CINergy Corp. 2,155,000 72,193
Equitable Resources, Inc. 1,000,000 30,500
NYNEX Corp. 1,000,000 46,375
Pacific Gas & Electric Co. 3,000,000 72,375
PacifiCorp 3,150,000 66,150
Pinnacle West Capital Corp. 2,000,000 62,250
SBC Communications Inc. 1,436,300 75,585
Sonat, Inc. 627,500 32,473
Texas Utilities Co. 2,490,000 98,355
U S WEST Communications
GROUP 964,856 30,152
-------------
838,533
-------------
MISCELLANEOUS (0.8%)
Minnesota Mining &
Manufacturing Co. 1,500,000 125,625
-------------
- ----------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $6,134,451) 10,389,995
- ----------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (0.8%)
Bethlehem Steel Corp. $3.31 500,000 18,750
Cyprus Amax Minerals Co. $4.00 480,000 26,040
Reynolds Metals Co. $3.31 634,000 30,907
Sun Co., Inc. $1.80 Series A 2,000,000 51,250
- ----------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(COST $132,772) 126,947
- ----------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ----------------------------------------------------------------------
<S> <C> <C>
CORPORATE BONDS (19.2%)
- ----------------------------------------------------------------------
FINANCE (6.7%)
Abbey National PLC
6.69%, 10/17/05 $ 25,000 $ 25,147
Abbey National First Capital
8.20%, 10/15/04 15,000 16,456
H.F. Ahmanson & Co.
8.25%, 10/1/02 10,000 10,827
Allstate Corp.
7.50%, 6/15/13 15,000 15,547
AMBAC, Inc.
7.50%, 5/1/23 14,000 14,371
Associates Corp. N.A.
6.875%, 11/15/08 35,000 35,363
BHP Finance USA Ltd.
7.25%, 3/1/16 35,000 35,156
Banc One Corp.
9.875%, 3/1/09 20,000 24,982
Bank of Boston Corp.
6.625%, 12/1/05 27,000 26,711
Bank of Montreal
7.80%, 4/1/07 15,000 16,045
BankAmerica Corp.
7.20%, 4/15/06 20,000 20,719
The Chase Manhattan Corp.
6.50%, 1/15/09 30,000 29,272
Citicorp
6.75%, 8/15/05 30,000 30,101
Comerica, Inc.
7.125%, 12/1/13 7,000 6,852
8.375%, 7/15/24 20,500 22,140
Continental Bank N.A.
12.50%, 4/1/01 15,000 18,466
Dean Witter Discover & Co.
6.75%, 10/15/13 19,275 18,353
Fairfax Financial Holdings Ltd.
8.25%, 10/1/15 11,875 12,682
First Bank N.A.
7.55%, 6/15/04 16,000 16,833
First Chicago Corp.
6.375%, 1/30/09 15,000 14,303
First Colony Corp.
6.625%, 8/1/03 27,100 27,434
First Union Bancorp
7.50%, 4/15/35 30,000 32,116
General Electric Capital Corp.
8.125%, 5/15/12 30,000 33,625
General Electric Capital Services
7.50%, 8/21/35 11,000 11,806
General Electric Insurance
Holdings Corp.
7.00%, 2/15/26 35,000 34,843
GMAC
6.00%, 4/1/11 20,370 18,296
General Reinsurance Corp.
9.00%, 9/12/09 15,000 17,719
Great Western Financial Corp.
6.125%, 6/15/98 20,000 20,070
John Hancock
7.375%, 2/15/24 29,000 28,874
</TABLE>

13
<PAGE> 16
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLINGTON FUND (000) (000)
- ----------------------------------------------------------------------
<S> <C> <C>
Liberty Mutual Insurance Co.
7.875%, 10/15/26 $ 30,000 $ 31,071
Lumbermans Mutual Casualty
9.15%, 7/1/26 35,000 39,181
Metropolitan Life Insurance Co.
7.70%, 11/1/15 30,000 30,933
NBD Bancorp
7.125%, 5/15/07 15,000 15,421
National City Bank Pennsylvania
7.25%, 10/21/11 20,000 20,556
National City Columbus
7.25%, 7/15/10 25,000 25,883
NationsBank Corp.
7.80%, 9/15/16 35,000 37,304
Norwest Financial Inc.
6.25%, 12/15/07 35,000 33,874
Republic New York Corp.
7.75%, 5/15/09 10,000 10,836
9.50%, 4/15/14 5,000 6,150
9.70%, 2/1/09 5,000 6,192
Royal Bank of Scotland
6.375%, 2/1/11 30,000 28,494
Southern Investments UK
6.80%, 12/1/06 35,000 35,159
Sun Life Financial
6.625%, 12/15/07 40,000 39,370
SunTrust Atlanta
7.25%, 9/15/06 35,000 36,807
TransAmerica Finance
6.50%, 3/15/11 29,265 27,913
Wachovia Corp.
6.375%, 2/1/09 6,000 5,793
6.80%, 6/1/05 15,000 15,245
Wells Fargo & Co.
6.125%, 11/1/03 22,000 21,534
-------------
1,102,825
-------------
INDUSTRIAL (7.9%)
ARCO Chemical Co.
9.80%, 2/1/20 15,000 19,372
Air Products & Chemicals, Inc.
8.75%, 4/15/21 26,650 31,481
Albertson's Inc.
7.75%, 6/15/26 30,000 32,612
Amoco Canada Petroleum Co.
6.75%, 2/15/05 10,000 10,228
7.95%, 10/1/22 20,000 21,145
Anheuser-Busch Co.
7.00%, 12/1/25 30,000 29,233
Becton Dickinson
8.70%, 1/15/25 20,000 22,422
Boeing Co.
8.75%, 8/15/21 38,200 46,408
Browning-Ferris Industries, Inc.
6.375%, 1/15/08 34,000 33,203
Coca-Cola Enterprises, Inc.
8.50%, 2/1/22 30,000 35,042
E.I. du Pont de Nemours & Co.
8.25%, 1/15/22 25,000 27,089
Eaton Corp.
7.00%, 4/1/11 10,600 10,508
7.625%, 4/1/24 15,000 15,605
Exxon Capital Corp.
6.00%, 7/1/05 13,500 13,150
Ford Motor Co.
8.875%, 1/15/22 25,000 29,825
General Motors Corp.
7.70%, 4/15/16 25,000 26,360
Georgia-Pacific Corp.
9.625%, 3/15/22 22,000 24,749
Husky Oil Ltd.
7.55%, 11/15/16 30,000 30,839
IBM Corp.
8.375%, 11/1/19 25,000 28,815
Johnson & Johnson
6.73%, 11/15/23 20,000 19,670
Eli Lilly & Co.
7.125%, 6/1/25 29,000 29,732
Lockheed Martin Corp.
7.65%, 5/1/16 40,000 42,465
Lucent Technologies Inc.
7.25%, 7/15/06 35,000 36,734
McDonald's Corp.
7.375%, 7/15/33 15,000 15,413
Mobil Corp.
8.625%, 8/15/21 20,000 24,140
Morton International, Inc.
9.25%, 6/1/20 21,000 26,065
Motorola Inc.
7.50%, 5/15/25 43,500 46,474
News America Holdings
8.00%, 10/17/16 25,000 25,394
Norsk Hydro AS
7.75%, 6/15/23 9,000 9,510
9.00%, 4/15/12 20,000 23,402
PPG Industries, Inc.
9.00%, 5/1/21 19,750 24,111
PanEnergy Corp.
7.00%, 10/15/06 25,000 25,648
Petro-Canada
7.875%, 6/15/26 32,000 34,781
Philips Electronics NV
7.75%, 4/15/04 15,000 15,879
Phillips Petroleum Co.
9.375%, 2/15/11 20,000 24,668
Procter & Gamble ESOP
9.36%, 1/1/21 20,000 24,945
Raytheon Co.
7.375%, 7/15/25 18,000 17,795
Rockwell International Corp.
7.875%, 2/15/05 17,000 18,469
Rohm & Haas Holdings
9.80%, 4/15/20 15,000 18,785
Sears, Roebuck & Co.
9.375%, 11/1/11 14,000 17,304
SmithKline Beecham Corp.
7.375%, 4/15/05 15,000 15,888
Talisman Energy, Inc.
7.125%, 6/1/07 20,000 20,413
Tele-Communications, Inc.
9.80%, 2/1/12 25,000 26,998
Texaco Capital, Inc.
9.75%, 3/15/20 15,000 19,449
</TABLE>

14
<PAGE> 17
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- ----------------------------------------------------------------------
<S> <C> <C>
Union Pacific Corp.
7.00%, 2/1/16 $ 35,000 $ 34,238
United Parcel Service
8.375%, 4/1/20 30,070 35,052
United Technologies Corp.
8.75%, 3/1/21 32,000 38,183
Wal-Mart Stores, Inc.
7.25%, 6/1/13 24,000 24,793
Waste Management
7.65%, 3/15/11 20,150 21,839
Wendy's International, Inc.
6.35%, 12/15/05 25,500 24,909
Zeneca Group
7.00%, 11/15/23 36,500 35,955
-------------
1,307,187
-------------
UTILITIES (4.6%)
AT&T Corp.
7.75%, 3/1/07 40,000 43,547
Atlantic City Electric
7.00%, 9/1/23 18,000 17,087
BellSouth Telecommunications
5.875%, 1/15/09 15,000 14,226
7.50%, 6/15/33 30,000 30,897
Carolina Power & Light Co.
8.625%, 9/15/21 31,000 36,274
Chesapeake & Potomac
Telephone MD
7.15%, 5/1/23 10,000 9,975
Chesapeake & Potomac
Telephone VA
7.625%, 12/1/12 9,400 10,154
Consolidated Edison of
New York, Inc.
7.50%, 6/15/23 25,000 25,256
Duke Power Co.
7.00%, 7/1/33 10,000 9,592
8.625%, 3/1/22 8,000 8,500
El Paso Natural Gas
7.50%, 11/15/26 24,945 25,792
Enersis SA
7.40%, 12/1/16 35,000 34,923
GTE North Inc.
6.90%, 11/1/08 30,000 30,717
GTE Southwest Inc.
6.00%, 1/15/06 30,000 28,886
Illinois Bell Telephone Co.
6.625%, 2/1/25 27,725 25,904
Indiana Bell Telephone Co.
7.30%, 8/15/26 30,000 31,482
New Jersey Bell Telephone Co.
8.00%, 6/1/22 25,519 28,438
New York Telephone Co.
6.70%, 11/1/23 11,000 10,355
7.25%, 2/15/24 20,000 19,797
Northern States Power Co.
7.125%, 7/1/25 45,000 45,465
Ohio Bell Telephone Co.
7.85%, 12/15/22 20,000 21,112
Pacific Bell Telephone Co.
7.125%, 3/15/26 40,000 40,436
Pacific Gas & Electric Co.
7.05%, 3/1/24 25,000 24,987
8.375%, 5/1/25 10,000 10,489
PacifiCorp
6.625%, 6/1/07 20,500 20,422
Southern California Edison Co.
6.90%, 10/1/18 20,750 20,013
Southwestern Bell Telephone Co.
7.25%, 7/15/25 25,000 25,073
7.60%, 4/26/07 7,000 7,496
Texas Utilities Electric Co.
7.875%, 4/1/24 14,000 14,404
U S WEST Communications Group
6.875%, 9/15/33 30,000 27,819
Washington Gas & Light
6.15%, 1/26/26 23,000 22,226
Wisconsin Electric Power Co.
7.70%, 12/15/27 29,100 30,356
Wisconsin Gas Co.
6.60%, 9/15/13 13,100 12,610
-------------
764,710
-------------
- ----------------------------------------------------------------------
TOTAL CORPORATE BONDS
(COST $3,009,882) 3,174,722
- ----------------------------------------------------------------------
FOREIGN BONDS (3.3%)
- ----------------------------------------------------------------------
ABN AMRO Holding NV
7.25%, 5/31/05 40,000 41,627
Asian Development Bank
9.125%, 6/1/00 10,000 10,967
Bayerische Landesbank Girozentrale
6.375%, 10/15/05 25,000 24,962
Republic of Ireland MTN
7.64%, 1/2/02 30,000 31,672
Italy Global Bond
6.875%, 9/27/23 30,000 29,435
Japanese Financial Corp.
7.375%, 4/27/05 38,500 40,916
KFW International Finance
7.00%, 3/1/13 10,000 10,252
7.20%, 3/15/14 25,000 26,042
Province of Manitoba
9.125%, 1/15/18 20,000 24,482
9.25%, 4/1/20 20,000 25,158
National Westminster Bancorp Inc.
9.45%, 5/1/01 10,000 11,242
Province of New Brunswick
6.75%, 8/15/13 10,000 9,919
Province of Nova Scotia
8.25%, 7/30/22 30,000 34,196
Province of Ontario
7.00%, 8/4/05 40,000 41,529
Province of Quebec
6.86%, 4/15/26 20,000 20,293
7.50%, 7/15/23 25,000 25,578
Province of Saskatchewan
7.125%, 3/15/08 11,000 11,546
Scotland International Finance
8.85%, 11/1/06 24,000 27,270
Societe Generale
7.40%, 6/1/06 25,000 26,061
</TABLE>

15
<PAGE> 18
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
WELLINGTON FUND (000) (000)
- ----------------------------------------------------------------------
<S> <C> <C>
Toronto-Dominion Bank
6.45%, 1/15/09 $ 14,000 $ 13,682
6.50%, 8/15/08 10,000 9,849
Westdeutsche Landesbank
6.75%, 6/15/05 40,000 40,604
- ----------------------------------------------------------------------
TOTAL FOREIGN BONDS
(COST $509,150) 537,282
- ----------------------------------------------------------------------
U.S. GOVERNMENT & AGENCY OBLIGATIONS (8.9%)
- ----------------------------------------------------------------------
Agency for International
Development (Israel)
(U.S. Government Guaranteed)
5.89%, 8/15/05 23,000 22,295
Federal Home Loan Bank
7.66%, 7/20/04 10,000 10,845
Federal Home Loan Mortgage Corp.
6.19%, 1/21/04 15,000 14,578
Federal National Mortgage Assn.
6.28%, 2/3/04 25,000 24,504
Tennessee Valley Authority
6.875%, 12/15/43 25,000 23,844
U.S. Treasury Bonds
7.25%, 5/15/16 225,000 245,005
7.50%, 11/15/16 150,000 167,461
U.S. Treasury Notes
5.875%, 2/15/04 150,000 149,274
6.25%, 2/15/03 200,000 203,562
6.375%, 8/15/02 140,000 143,478
6.50%, 8/15/05 100,000 103,047
7.25%, 8/15/04 170,000 182,990
7.875%, 11/15/04 154,000 171,902
- ----------------------------------------------------------------------
TOTAL U.S. GOVERNMENT & AGENCY OBLIGATIONS
(COST $1,387,462) 1,462,785
- ----------------------------------------------------------------------
MORTGAGE BACKED SECURITIES (2.9%)
- ----------------------------------------------------------------------
Government National
Mortgage Assn.
6.50%, 4/15/23-3/15/26 99,338 96,758
Federal Home Loan Mortgage Corp.
6.50%, 7/1/25-4/1/26 396,471 386,044
- ----------------------------------------------------------------------
TOTAL MORTGAGE BACKED SECURITIES
(COST $477,516) 482,802
- ----------------------------------------------------------------------
TAXABLE MUNICIPAL SECURITY (0.2%)
- ----------------------------------------------------------------------
Stanford University
7.65%, 6/15/26
(COST $28,761) 29,000 31,484
- ----------------------------------------------------------------------
TEMPORARY CASH INVESTMENT (0.9%)
- ----------------------------------------------------------------------
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.71%, 12/2/96
(COST $149,347) 149,347 149,347
- ----------------------------------------------------------------------
TOTAL INVESTMENTS (99.1%)
(COST $11,829,341) 16,355,364
- ----------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
MARKET
VALUE*
(000)
- ----------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (0.9%)
- ----------------------------------------------------------------------
Other Assets--Notes C and F 634,006
Liabilities--Note F (483,997)
-------------
150,009
- ----------------------------------------------------------------------
NET ASSETS (100%)
- ----------------------------------------------------------------------
Applicable to 582,396,426 outstanding
$1.00 par value shares
(authorized 1,100,000,000 shares) $16,505,373
======================================================================

NET ASSET VALUE PER SHARE $28.34
======================================================================
</TABLE>

*See Note A in Notes to Financial Statements.

(1) Considered an affiliated company as the Fund owns more than 5% of the
outstanding voting securities of the company.

(2) Scheduled principal and interest payments are guaranteed by MBIA
(Municipal Bond Insurance Association).

ADR--American Depository Receipt.

MTN--Medium-Term Note.

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
AT NOVEMBER 30, 1996, NET ASSETS CONSISTED OF:
- ----------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- ----------------------------------------------------------------------
<S> <C> <C>
Paid in Capital--Note A $11,117,823 $19.09
Undistributed Net Investment
Income--Notes A and D 214,161 .37
Accumulated Net Realized Gains--
Note D 647,366 1.11
Unrealized Appreciation--
Note E 4,526,023 7.77
- ----------------------------------------------------------------------
NET ASSETS $16,505,373 $28.34
======================================================================
</TABLE>

16
<PAGE> 19
STATEMENT OF OPERATIONS

This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.

<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
WELLINGTON FUND
YEAR ENDED NOVEMBER 30, 1996
(000)
- ------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 264,486
Interest 349,635
--------------
Total Income 614,121
--------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 6,042
Performance Adjustment 79
The Vanguard Group--Note C
Management and Administrative 32,343
Marketing and Distribution 2,818
Taxes (other than income taxes) 964
Custodian Fees 277
Auditing Fees 17
Shareholders' Reports 500
Annual Meeting and Proxy Costs 214
Directors' Fees and Expenses 44
--------------
Total Expenses 43,298
Expenses Paid Indirectly--Note C (1,183)
--------------
Net Expenses 42,115
- ------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME 572,006
- ------------------------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 695,226
- ------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 1,544,678
- ------------------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,811,910
================================================================================================
</TABLE>

17
<PAGE> 20
STATEMENT OF CHANGES IN NET ASSETS

This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
WELLINGTON FUND
YEAR ENDED NOVEMBER 30,
------------------------------
1996 1995
(000) (000)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 572,006 $ 450,868
Realized Net Gain 695,226 140,850
Change in Unrealized Appreciation (Depreciation) 1,544,678 2,303,426
------------------------------
Net Increase in Net Assets Resulting from Operations 2,811,910 2,895,144
------------------------------
DISTRIBUTIONS
Net Investment Income (519,183) (407,411)
Realized Capital Gain (141,199) (13,409)
------------------------------
Total Distributions (660,382) (420,820)
------------------------------
NET EQUALIZATION CREDITS--Note A -- 8,922
------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 3,193,817 2,183,536
Issued in Lieu of Cash Distributions 617,054 386,562
Redeemed (1,789,640) (1,359,003)
------------------------------
Net Increase from Capital Share Transactions 2,021,231 1,211,095
- ---------------------------------------------------------------------------------------------------------
Total Increase 4,172,759 3,694,341
- ---------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 12,332,614 8,638,273
------------------------------
End of Year $16,505,373 $12,332,614
=========================================================================================================

(1) Shares Issued (Redeemed)
Issued 126,321 100,558
Issued in Lieu of Cash Distributions 24,884 18,428
Redeemed (70,741) (63,856)
------------------------------
Net Increase in Shares Outstanding 80,464 55,130
=========================================================================================================
</TABLE>

18
<PAGE> 21
FINANCIAL HIGHLIGHTS

This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.

The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
WELLINGTON FUND
YEAR ENDED NOVEMBER 30,
----------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $24.57 $19.33 $20.78 $19.34 $17.95
- -------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.02 .96 .88 .92 .93
Net Realized and Unrealized Gain (Loss) on Investments 4.00 5.19 (1.03) 1.62 1.65
----------------------------------------------------
Total from Investment Operations 5.02 6.15 (.15) 2.54 2.58
----------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.97) (.88) (.92) (.94) (.96)
Distributions from Realized Capital Gains (.28) (.03) (.38) (.16) (.23)
----------------------------------------------------
Total Distributions (1.25) (.91) (1.30) (1.10) (1.19)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $28.34 $24.57 $19.33 $20.78 $19.34
===================================================================================================================

TOTAL RETURN 21.26% 32.70% -0.82% 13.62% 14.99%
===================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $16,505 $12,333 $8,638 $7,917 $5,359
Ratio of Total Expenses to Average Net Assets 0.31% 0.33% 0.35% 0.34% 0.33%
Ratio of Net Investment Income to Average Net Assets 4.08% 4.37% 4.35% 4.55% 4.98%
Portfolio Turnover Rate 30% 24% 32% 34% 24%
Average Commission Rate Paid $.0287 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
</TABLE>

19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS

Vanguard/Wellington Fund is registered under the Investment Company Act of 1940
as a diversified open-end investment company, or mutual fund.

A. The following significant accounting policies conform with generally
accepted accounting principles for mutual funds. The Fund consistently follows
such policies in preparing its financial statements.

1. SECURITY VALUATION: Common stocks listed on an exchange are valued at
the latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid prices. Bonds are valued using the latest bid
prices and using valuations based on a matrix system (which considers such
factors as security prices, yields, maturities, and ratings), both as furnished
by independent pricing services. Temporary cash investments are valued at
cost, which approximates market value.

2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.

3. EQUALIZATION: Prior to December 1995, the Fund followed the accounting
practice known as "equalization," under which a portion of the price of capital
shares issued and redeemed, equivalent to undistributed net investment income
per share on the date of the transaction, was credited or charged to
undistributed income. As a result, undistributed income per share was
unaffected by capital share transactions. As of December 1, 1995, the Fund has
discontinued equalization accounting and has reclassified accumulated net
equalization credits of $59,430,000 from undistributed net investment income to
paid in capital. This reclassification has no effect on the Fund's net assets,
results of operations, or net asset value per share.

4. REPURCHASE AGREEMENTS: The Fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other
party to the agreement, retention of the collateral may be subject to legal
proceedings.

5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.

6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.

B. Under a contract that expires March 1, 1998, the Fund pays Wellington
Management Company, llp, an investment advisory fee calculated at an annual
percentage rate of average net assets. The basic fee is subject to quarterly
adjustments based on performance relative to a combined index comprising the
S&P 500 Index and the Lehman Long-Term Corporate AA or Better Bond Index. For
the year ended November 30, 1996, the advisory fee represented an effective
annual basic rate of 0.04% of the Fund's average net assets before an increase
of $79,000 based on performance. The basic fee reflects a fee waiver of
$169,000 during the period December 1, 1995, to February 29, 1996.

C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At November 30,
1996, the Fund had contributed capital of $1,445,000 to Vanguard (included in
Other Assets), representing 7.2% of Vanguard's capitalization. The Fund's
directors and officers are also directors and officers of Vanguard.

20
<PAGE> 23
Vanguard has asked the Fund's investment adviser to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate to the Fund part of the commissions generated. Such
rebates are used solely to reduce the Fund's administrative expenses. For the
year ended November 30, 1996, these arrangements reduced the Fund's expenses by
$1,183,000 (0.01% of average net assets).

D. During the year ended November 30, 1996, the Fund purchased $4,035,836,000
of investment securities and sold $2,450,975,000 of investment securities,
other than U.S. government securities and temporary cash investments. Purchases
and sales of U.S. government securities were $1,970,416,000 and $1,656,307,000,
respectively. Gains of $46,694,000 on securities held less than one year are
treated as ordinary income for tax purposes and will be included in income
dividends to shareholders; accordingly, such gains have been reclassified from
accumulated net realized gains to undistributed net investment income.

E. At November 30, 1996, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $4,526,023,000,
consisting of unrealized gains of $4,564,033,000 on securities that had risen
in value since their purchase and $38,010,000 in unrealized losses on
securities that had fallen in value since their purchase.

F. The market value of securities on loan to broker/dealers at November 30,
1996, was $451,780,000, for which the Fund had received as collateral cash of
$246,079,000 and U.S. Treasury securities with a market value of $215,903,000.
Security loans are required to be secured at all times by collateral at least
equal to the market value of securities loaned; however, in the event of
default or bankruptcy by the other party to the agreement, retention of the
collateral may be subject to legal proceedings.

21
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and
Board of Directors of
Vanguard/Wellington Fund

In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard/Wellington Fund (the "Fund") at November 30, 1996, and the results of
its operations, the changes in its net assets and the financial highlights for
each of the periods indicated, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at November 30, 1996 by correspondence with the
custodian and the application of alternative auditing procedures, provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103

December 31, 1996

22
<PAGE> 25
SPECIAL 1996 TAX INFORMATION (UNAUDITED)
VANGUARD/WELLINGTON FUND

This information for the fiscal year ended November 30, 1996, is included
pursuant to provisions of the Internal Revenue Code.

The Fund designates $605,050,000 as capital gain dividends (from net
long-term capital gains), which will be distributed in December 1996.

For corporate shareholders, 36.1% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.

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

23
<PAGE> 26
DIRECTORS AND OFFICERS

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

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

ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer Inc.;
Director of Sun Company, Inc. and Westinghouse Electric Corp.

BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massa-chusetts
Mutual Life Insurance Co.

BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.

BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England
Communications Co.

ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co.,
and The Standard Products Co.

JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric
Co., Procter & Gamble Co., and NACCO Industries.

JAMES O. WELCH, JR., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and
Kmart Corp.

J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.

HONORARY CHAIRMAN

WALTER L. MORGAN, Founder.

OTHER FUND OFFICERS

RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.

RICHARD F. HYLAND, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.

KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.

OTHER VANGUARD OFFICERS

ROBERT A. DISTEFANO, Senior Vice President, Information Technology.

JAMES H. GATELY, Senior Vice President, Individual Investor Group.

IAN A. MACKINNON, Senior Vice President, Fixed Income Group.

F. WILLIAM MCNABB III, Senior Vice President, Institutional.

RALPH K. PACKARD, Senior Vice President and Chief Financial Officer.

[VANGUARD LOGO]

Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482

Fund Information: 1-800-662-7447

Individual Account Services: 1-800-662-2739

Institutional Investor Services: 1-800-523-1036

[email protected] http://www.vanguard.com

All Vanguard Funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group(R)

EQUITY AND BALANCED FUNDS

Growth and Income Funds
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-U.S. Portfolio
Vanguard Convertible Securities Fund

Balanced Funds
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios

Growth Funds
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio

Aggressive Growth Funds
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund

International Funds
Vanguard International Growth Portfolio
Vanguard/Trustees' Equity-International Portfolio

INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Vanguard International Equity Index Fund
Vanguard Total International Portfolio

FIXED-INCOME FUNDS
Money Market Funds
Vanguard Money Market Reserves
Vanguard Admiral Funds

Income Funds
Vanguard Fixed Income Securities Fund
Vanguard Admiral Funds
Vanguard Preferred Stock Fund

Tax-Exempt Money Market Funds
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, NJ, OH, PA)

Tax-Exempt Income Funds
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)

Q210-11/96

[PHOTO]