VANGUARD ASSET ALLOCATION FUND INC, N-30D, 1998-05-19

VANGUARD ASSET ALLOCATION FUND INC
N-30D, 1998-05-19

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<PAGE> 1

VANGUARD
ASSET ALLOCATION
FUND

Semiannual Report -- March 31, 1998

[PHOTO]

[THE VANGUARD GROUP LOGO]

<PAGE> 2

OUR CREW MAKES THE DIFFERENCE

Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew. We
recognize that it is our crew members--more than 7,000 highly motivated men and
women--who form the cornerstone of our operations.

We could not survive long--let alone prosper--without them. That's why we
chose this fiscal year's fund reports to celebrate the spirit, enthusiasm, and
achievements of our crew. (We call those who work at Vanguard crew members, not
employees, because they operate as a team to accomplish our mission of serving
you, our clients.)

But while we prize the collective contributions of our crew, we also take
time to recognize the importance of the individual. Each calendar quarter, we
present our Award For Excellence to a handful of crew members who have
demonstrated particular excellence in the performance of their jobs and who
embody "The Vanguard Spirit." Our report cover shows only a few of the more than
300 crew members who have received this distinction since 1984.

They, along with the rest of our valiant crew, look forward to serving
you in the years ahead.

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

CONTENTS

A MESSAGE TO OUR SHAREHOLDERS . . . . . . . . . . 1

THE MARKETS IN PERSPECTIVE . . . . . . . . . . . 3

REPORT FROM THE ADVISER . . . . . . . . . . . . . 5

PERFORMANCE SUMMARY . . . . . . . . . . . . . . . 7

PORTFOLIO PROFILE . . . . . . . . . . . . . . . . 8

FINANCIAL STATEMENTS . . . . . . . . . . . . . . 12

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

<PAGE> 3

FELLOW SHAREHOLDER,

Vanguard Asset Allocation Fund provided an exceptional total return of +15.7%
during the six months ended March 31, 1998, the first half of our fiscal year.
This performance was far ahead of the average asset allocation fund, nicely
ahead of our composite index of stocks and bonds, and even came close to the
torrid pace set by stocks during the period.

The Fund, as you know, may allocate its assets among three classes of
financial assets: common stocks (as represented by the Standard & Poor's 500
Composite Stock Price Index), long-term U.S. Treasury bonds, and cash reserves.
A portfolio equally weighted in each class would have provided a total return
(capital change plus reinvested dividends) of +9.5% during the half-year. The
adjacent table compares our six-month return with those of the average asset
allocation fund and the three asset classes. The Fund's total return is based on
net asset values of $21.53 per share on September 30, 1997, and $23.19 per share
on March 31, 1998, adjusted for the reinvestment of a semiannual dividend of
$0.54 per share from net investment income and a distribution of $1.01 per share
from net realized capital gains.

<TABLE>
<CAPTION>
- ------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
MARCH 31, 1998
- ------------------------------------------------------
<S> <C>
Vanguard Asset Allocation Fund +15.7%
- ------------------------------------------------------
Average Asset Allocation Fund + 8.9%
- ------------------------------------------------------
Composite Index* +14.1%
- ------------------------------------------------------
S&P 500 Index +17.2%
Lehman Brothers Long U.S. Treasury
Bond Index + 8.1
Salomon Brothers Three-Month
U.S. Treasury Bill Index + 3.1
- ------------------------------------------------------
</TABLE>

*65% S&P 500 Index and 35% Lehman Long U.S. Treasury Index.

THE PERIOD IN REVIEW

The six months ended March 31 were bountiful for investors in stocks and
bonds--a sharp, but brief, market downturn in late October notwithstanding. The
general upswing reflects a remarkable mix of strong economic growth, low
unemployment, tame inflation, and declining interest rates. Wall Street
generally shrugged off the potential impact of serious economic turmoil in
Asia--where currency devaluation and stock plunges afflicted a number of
important developing markets, including Thailand, Indonesia, the Philippines,
South Korea, and Malaysia. After tumbling -7% on October 27, 1997, the S&P 500
quickly recovered and ended the semiannual period in record territory.

Although all the broad market indexes were up significantly during the six
months, large-capitalization stocks--which dominate your Fund's stock
allocation, modeled on the S&P 500 Index--generally showed the biggest gains.
The S&P 500 Index advanced +17.2%, while the rest of the stock market, as
measured by the Wilshire 4500 Equity Index, earned +10.0%. The growth-stock
component of the S&P 500 gained +20.3%, versus +14.0% for the value component.

This tilt toward large-cap growth stocks accounted for a part of the
margin your Fund achieved over its competitors. The average asset allocation
fund holds significant positions in mid- and small-cap stocks and more foreign
stocks; but such a combination was a distinct disadvantage during the past six
months, when bigger was better on Wall Street and many foreign markets lagged.
For the half-year ended March 31, the Russell 2000 Index, a small-cap stock
benchmark, earned +6.4%, only about one-third of the return on the S&P 500
Index.

1
<PAGE> 4

In the bond market, the continued good news on inflation and the economic
turmoil in Asia helped drive interest rates down as many investors sought the
perceived safety of U.S. government bonds. The yield on the benchmark 30-year
U.S. Treasury bond drifted generally lower, from 6.40% on September 30, 1997, to
5.80% on January 31, 1998. From there, the long bond's yield rose slightly,
ending the six-month period at 5.93%. That was still 47 basis points (0.47
percentage point) lower than it started, engendering a nice enhancement in bond
prices. Short-term interest rates were nearly unchanged (up 2 basis points)
during the period.

The asset allocation model used by our investment manager, Mellon Capital
Management Corporation, led to several marginal shifts in the Fund's allocation
during the six-month period. Those changes--intended to take advantage of brief
imbalances in the relative pricing of stocks, bonds, and cash reserves--enhanced
the Fund's return by 1.6 percentage points in comparison with the 14.1% return
that would have been achieved in our neutral position of 65% stocks and 35%
bonds. The Fund entered the period with a 50% stocks/50% bonds allotment and
ended it with a configuration of approximately 60% stocks/40% bonds and cash
reserves. The Report From the Adviser starting on page 5 contains details of all
the allocation shifts.

Our margin over other asset allocation funds (+15.7% versus +8.9%) is also
attributable in part to our low-cost structure. Our operating expenses--0.48% of
net assets on an annual basis--are a full percentage point below the 1.49%
charged by the average asset allocation fund. While this advantage may seem
small, it can have a dramatic impact over time.

IN SUMMARY

For nearly 16 years--more than the entire lifetime of Vanguard Asset Allocation
Fund--the U.S. stock market has experienced a bull market that is without
precedent. Returns over this period--and during the six months just
concluded--have been nearly twice the average long-term return of about +11% a
year from common stocks.

While investors have good reason to celebrate such remarkable returns, we
believe they also should be aware of the risks that are part of investing in
stocks. Investors must be able and willing to withstand these risks--which are
substantial--to reap the rewards of owning stocks. We recommend a balanced
portfolio of stocks, bonds, and cash reserves--in short, a combination such as
that offered by the Asset Allocation Fund--as a time-tested vessel for staying
on course toward your financial goals.

We will next report to you at our fiscal year-end, September 30, 1998.
Shortly thereafter, we will complete our first decade of operations, and we look
forward to an anniversary of rather remarkable accomplishments.

/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN

John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer

April 16, 1998

2
<PAGE> 5

THE MARKETS IN PERSPECTIVE
Six Months Ended March 31, 1998

The U.S. stock and bond markets benefited from a favorable, if rare, combination
of influences during the fiscal half-year ended March 31. Economic growth was
strong, inflationary forces were weak, interest rates were subdued, and
consumers were in an upbeat mood.

Asia's economic troubles--currency and banking crises afflicted several
nations--created anxiety and were largely blamed for a slump in stock prices
during October, when the S&P 500 Index declined by 7% in a single day. However,
a drumbeat of good news from the domestic economy soon restored the spring to
the markets' step. Economic growth continued to be robust. The U.S. economy
expanded at a 3.7% rate in the October-December quarter, job growth was rapid,
and the nation's unemployment rate was 4.7% in March. Despite the strong growth,
inflation was a virtual no-show, as consumer prices rose only 0.6% during the
half-year and were up a mere 1.4% for the 12 months ended March 31. Prices were
generally held in check by falling oil prices, improved productivity, and a
strengthening of the U.S. dollar, which has substantially reduced the prices of
imported products and materials. The combination of plentiful jobs and low
inflation helped to raise the spirits of consumers, whose spending is the
biggest force in the economy.

U.S. EQUITY MARKETS

Spirits were also high among investors in U.S. stocks, and they powered the
market averages to yet another impressive gain. The big blue chip stocks led the
advance, as the S&P 500 Index provided a total return of 17.2% during the six
months. Smaller stocks, as represented by the Russell 2000 Index, returned 6.4%.

<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED MARCH 31, 1998
------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- -----------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 17.2% 48.0% 22.4%
Russell 2000 Index 6.4 42.0 17.7
MSCI EAFE Index 5.9 18.9 12.2
- -----------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 4.5% 12.0% 6.9%
Lehman 10-Year Municipal Bond Index 3.7 10.4 7.0
Salomon Brothers Three-Month
U.S. Treasury Bill Index 3.1 5.3 4.8
- -----------------------------------------------------------------------
OTHER
Consumer Price Index 0.6% 1.4% 2.5%
- -----------------------------------------------------------------------
</TABLE>

*Annualized.

Two key underpinnings of the stock market are corporate earnings and
interest rates. Investors hold stocks as long-term investments because they
expect the underlying earnings to grow over time, thereby making each share of
stock more valuable. Interest rates affect stocks in two ways. First, the
current level of interest rates represents the return an investor could get by
holding fixed-income securities instead of stocks. Second, the level of interest
rates reflects market expectations about inflation.

During the fiscal half-year, stock prices benefited from a moderate
decline in long-term interest rates and the low inflation rate. The news
concerning corporate earnings was more ambiguous. Security analysts'
expectations about earnings of stocks in the S&P 500

3
<PAGE> 6

Index began to decline in November and have continued to do so. However,
analysts still are forecasting gains in the high single digits for overall
profits in 1998. Despite the so-so news on profits, stock prices generally
advanced.

The best-performing market sectors during the six months appeared to
benefit from a combination of factors. One of these was concern about how much
Asia's economic troubles would affect the profits of U.S. companies. Another was
the confidence demonstrated by U.S. consumers, who continued to spend freely.
Primary beneficiaries of these influences were sectors unlikely to be affected
much by foreign competitors: utilities (which gained an extraordinary 36.6% for
the six months), health care (up 28.2%), and consumer staples (up 20.6%).

The sectors that lagged were those considered to be particularly
vulnerable to price-cutting by foreign competition or to a downturn in demand
caused by slower economic growth. This group included oil service and
exploration companies (down 4.4%), integrated oil companies (up only 2.0%), and
the materials & processing, technology, and producer- durables groups (up,
respectively, by 4.3%, 5.4%, and 6.4%).

U.S. FIXED-INCOME MARKETS

Inflation--the enemy of the fixed-income investor--was extraordinarily
well-behaved during the first half of the fiscal year. Consequently, bond prices
rose and the total return of the Lehman Brothers Aggregate Bond Index, a good
measure of the overall market for taxable bonds, provided a 4.5% return for the
six months, bringing its return over the past 12 months to 12.0%, a phenomenal
inflation-adjusted return of more than 10%. The yield on the benchmark 30-year
U.S. Treasury bond declined from 6.40% on September 30, 1997, to 5.93% on March
31.

Short-term interest rates were nearly unchanged, reflecting the stable
monetary policy of the Federal Reserve Board, whose policymakers seem to have
taken a "wait and see" approach to the question of how significantly the Asian
financial crisis will affect the U.S. economy.

INTERNATIONAL EQUITY MARKETS

Europe's stock markets generally rose during the first half of fiscal 1998,
while most Asian markets declined. Overall, the Morgan Stanley Capital
International Europe, Australasia, Far East Index gained 5.9% in U.S. dollar
terms. The Index returned 10.7% in local currency terms, but this was cut nearly
in half for U.S. investors by the dollar's strength (the U.S. currency gained
against every other key currency except the British pound).

The bull market in Europe was even more powerful than that on Wall Street.
European stocks returned more than 23% in local currency terms, which translated
to gains of 20.4% for the MSCI Europe Index in dollar terms. Stocks were buoyed
by signs that economic growth is accelerating throughout Europe and by progress
toward the planned adoption of a single European currency later in 1998.

The Pacific was a world away, economically as well as geographically, from
Europe. Although the emerging markets in Asia (Malaysia, Thailand, South Korea)
rebounded from their lows reached in late 1997, the overall downturn in Pacific
stocks was nearly as pronounced as the European upturn. Japan, the Pacific Rim's
largest market, returned -18.0%, and Hong Kong was hit even harder (-28.1%). The
Tokyo market was beset by fears about the soundness of Japan's banking system
and skepticism about the will and ability of Japan's government to deal with the
nation's financial problems.

4
<PAGE> 7

REPORT FROM THE ADVISER

Vanguard Asset Allocation Fund earned a total return of 15.7% for the fiscal
half-year ended March 31, 1998. During the same period, the S&P 500 Index
advanced 17.2% and the Lehman Brothers Long U.S. Treasury Index returned 8.1%.

During the first fiscal quarter, the meltdown of Asian equity and currency
markets reverberated through U.S. financial markets. On October 27, the stock
market fell 7%, spurring the New York Stock Exchange to halt trading twice by
invoking "circuit breakers" that hadn't been used since their implementation
after the crash of 1987. Stocks and bonds posted sharply divergent returns
during October as the bond market benefited from a flight to quality. November
saw financial markets profit from a growing realization that despite the Asian
financial crisis, the U.S. economy remained on its path of steady growth with
low inflation. During calendar 1997, consumer prices rose a modest 1.7% and
producer prices fell 1.1%, while the earnings of companies in the S&P 500 rose
by an estimated 12.4%. Over the past five years, S&P 500 earnings have grown
14.1% annually.

From January through March, our fiscal second quarter, the S&P 500 Index
rose 13.9%, a particularly strong showing given that the Index has risen by more
than 10% during only three quarters in the past decade. Moreover, this
performance occurred despite warnings from several corporations that prospective
earnings could be lower than expected. Domestic demand has been strong and so
far has exceeded the fall-off in exports from the Asian crisis. On the labor
front, job growth moderated--employment gains averaged 205,000 per month for the
January-March quarter, down from 356,000 per month the previous quarter. News on
the inflation front continued to be favorable, with wholesale prices falling. On
March 31 the Federal Reserve chose to leave interest rates unchanged.

Your Fund began the fiscal year with an asset mix of 50% stocks and 50%
bonds. The sharp drop in equity prices in October increased the expected return
on equities, while the rally in the bond market lowered expected returns on
bonds. This widened the spread between expected returns on stocks and bonds, and
prompted our tactical asset allocation (TAA) model to signal a 10% shift out of
bonds into stocks, a move we implemented on October 28, moving the Fund's asset
mix to 60% stocks/40% bonds. The bond rally that began in the aftermath of the
October 27 stock market decline continued for the rest of the quarter.
Meanwhile, yields on short-term cash instruments rose substantially between late
November and mid-December, reducing the spread between the expected returns on
bonds and cash. This prompted the TAA model to call for a 10% move out of bonds
into cash, and on December 15 the Fund's asset allocation was shifted from 60%
stocks/40% bonds to 60% stocks/30% bonds/10% cash.

During the second fiscal quarter, rapidly moving markets created several
opportunities, and our TAA model recommended a number of shifts during the
quarter. These were modest, with our allocation to equities varying between 60%
and 70%. The Fund began January at 60% stocks/30% bonds/10% cash, but as
expected returns on

5
<PAGE> 8

bonds declined along with interest rates, the Fund's allocation was shifted to a
60%/20%/20% mix on January 7. A sharp retreat in stock prices early in the month
led on January 12 to a 10% shift from cash to stocks, moving the Fund's mix to
70% stocks/20% bonds/10% cash. Finally, the Fund moved out of cash to a mix of
70%/30%/0% on January 26, after bond yields rose while cash yields held steady.

During February, a sharp rise in equity prices drove down expected returns
on stocks while cash and bond expected returns held relatively steady. This
prompted the TAA model to recommend a 10% shift from stocks to cash, a move we
implemented on February 19, when the Fund's asset mix shifted to 60% stocks/30%
bonds/10% cash.

During March, equity prices rose again, further reducing their expected
returns. Meanwhile, a sell-off in the bond market that began in mid-February
continued into early March, boosting the expected return on bonds while cash
yields held relatively steady. On March 4, we shifted 10% of the Fund's assets
from cash into bonds, moving the asset mix to 60%/40%/0%. Although forecasts of
corporate earnings were revised downward by analysts during March, for the full
quarter such revisions did not materially affect our expected return forecasts.
Rather, expected returns have declined largely due to rising stock prices. It is
important to note that our long-run equity expected return remains just under
10% annually, and our TAA model continues to recommend a substantial allocation
to both stocks and bonds.

William L. Fouse, CFA
Mellon Capital Management Corporation

April 16, 1998

INVESTMENT PHILOSOPHY

The adviser believes that, although the financial markets are very efficient,
imbalances can be identified in the relative pricing of stocks, bonds, and money
market instruments. Implicit in this approach is a belief that such imbalances
occur only periodically and do not persist for long periods. The adviser
attempts to identify these windows of opportunity and to structure the portfolio
to take advantage of them.

6
<PAGE> 9

PERFORMANCE SUMMARY

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

<TABLE>
<CAPTION>
ASSET ALLOCATION FUND
TOTAL INVESTMENT RETURNS: NOVEMBER 3, 1988-MARCH 31, 1998
- ---------------------------------------------------
ASSET ALLOCATION FUND COMPOSITE
INDEX*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- ---------------------------------------------------
<S> <C> <C> <C> <C>
1989 21.1% 2.8% 23.9% 27.8%
1990 -8.6 4.0 -4.6 -5.1
1991 20.9 6.4 27.3 27.5
1992 7.2 5.0 12.2 12.2
1993 10.7 4.7 15.4 15.5
1994 -5.2 3.1 -2.1 -1.5
1995 23.6 5.0 28.6 27.4
1996 11.1 4.2 15.3 13.9
1997 24.7 4.7 29.4 30.4
1998** 12.9 2.8 15.7 14.1
- ---------------------------------------------------
</TABLE>

*65% S&P 500 Index, 35% Lehman Long U.S. Treasury Index.

**Six months ended March 31, 1998.

See Financial Highlights table on page 20 for dividend and capital gains
information for the past five years.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1998
- ---------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION ----------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Asset Allocation Fund 11/3/1988 38.80% 18.20% 12.02% 4.58% 16.60%
- ---------------------------------------------------------------------------------------------------------
</TABLE>

7
<PAGE> 10

PORTFOLIO PROFILE
Asset Allocation Fund

This Profile provides a snapshot of the Fund's characteristics as of March 31,
1998, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 10 and 11.

<TABLE>
<CAPTION>
TOTAL FUND CHARACTERISTICS
- --------------------------------------------------
<S> <C>
Turnover Rate 66%*
Expense Ratio 0.48%*
Cash Reserves 2.5%
</TABLE>

*Annualized.

PORTFOLIO ASSET ALLOCATION
- --------------------------------------------------

CASH RESERVES 3%
BONDS 35%
STOCKS 62%

<TABLE>
<CAPTION>
TOTAL FUND VOLATILITY MEASURES
- --------------------------------------------------
ASSET ALLOCATION S&P 500
- --------------------------------------------------
<S> <C> <C>
R-Squared 0.89 1.00
Beta 0.71 1.00
</TABLE>

<TABLE>
<CAPTION>
TEN LARGEST STOCKS (% OF EQUITIES)
- -----------------------------------------------
<S> <C>
General Electric Co. 3.3%
Microsoft Corp. 2.5
The Coca-Cola Co. 2.2
Exxon Corp. 1.9
Merck & Co., Inc. 1.8
Pfizer, Inc. 1.5
Intel Corp. 1.5
Royal Dutch Petroleum Co. ADR 1.4
Wal-Mart Stores, Inc. 1.3
Procter & Gamble Co. 1.3
- -----------------------------------------------
Top Ten 18.7%
- -----------------------------------------------
Top Ten as % of Total Net Assets 7.2%
</TABLE>

<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ---------------------------------------------------------------------------------------------------
MARCH 31, 1997 MARCH 31, 1998
---------------------------------------------------
ASSET ALLOCATION ASSET ALLOCATION S&P 500
---------------------------------------------------
<S> <C> <C> <C>
Auto & Transportation . . . . . . . . . . . . 3.7% 3.6% 3.6%
Consumer Discretionary . . . . . . . . . . . 9.7 10.0 10.0
Consumer Staples . . . . . . . . . . . . . . 12.1 10.9 10.9
Financial Services . . . . . . . . . . . . . 16.2 17.9 17.9
Health Care . . . . . . . . . . . . . . . . . 10.6 11.7 11.7
Integrated Oils . . . . . . . . . . . . . . . 8.2 6.7 6.7
Other Energy . . . . . . . . . . . . . . . . 1.2 1.2 1.2
Materials & Processing . . . . . . . . . . . 6.9 5.6 5.6
Producer Durables . . . . . . . . . . . . . . 4.6 4.1 4.1
Technology . . . . . . . . . . . . . . . . . 11.4 11.9 12.0
Utilities . . . . . . . . . . . . . . . . . . 9.9 10.6 10.7
Other . . . . . . . . . . . . . . . . . . . . 5.5 5.8 5.6
- ---------------------------------------------------------------------------------------------------
</TABLE>

8
<PAGE> 11

<TABLE>
<CAPTION>
EQUITY CHARACTERISTICS
- -------------------------------------------------------
ASSET ALLOCATION S&P 500
- -------------------------------------------------------
<S> <C> <C>
Number of Stocks 508 500
Median Market Cap $41.7B $41.7B
Price/Earnings Ratio 24.5x 24.5x
Price/Book Ratio 4.6x 4.6x
Dividend Yield 1.4% 1.4%
Return on Equity 20.7% 20.7%
Earnings Growth Rate 17.2% 17.2%
Foreign Holdings 1.9% 1.9%
</TABLE>

EQUITY INVESTMENT FOCUS
- -------------------------------------------------------

[GRAPH]

<TABLE>
<CAPTION>
FIXED-INCOME CHARACTERISTICS
- -------------------------------------------------------
<S> <C>
Number of Bonds 24
Average Coupon 8.4%
Average Duration 11.1 years
Average Maturity 22.1 years
Average Quality Aaa
</TABLE>

FIXED-INCOME INVESTMENT FOCUS
- -------------------------------------------------------

[GRAPH]

9
<PAGE> 12

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

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

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

AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a portfolio's securities holdings by credit-rating agencies.
The agencies make their judgment after appraising an issuer's ability to meet
its obligations. Quality is graded on a scale, with Aaa or AAA indicating the
most creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities.

BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.

CASH RESERVES. The percentage of a portfolio's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock and
bond investments.

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

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

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

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

FIXED-INCOME INVESTMENT FOCUS. This grid indicates the focus of a portfolio in
terms of two attributes: average maturity (short, medium, or long) and average
credit quality (high, medium, or low).

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

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

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 to perform in line with
the overall stock market.

PORTFOLIO ASSET ALLOCATION. This chart shows the proportions of a portfolio's
holdings allocated to different types of asset.

10
<PAGE> 13

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

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

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

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

11
<PAGE> 14
FINANCIAL STATEMENTS
March 31, 1998 (unaudited)

STATEMENT OF NET ASSETS

This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.), with the
Fund's S&P 500 Index common stocks listed in descending market value order.
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. 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, but may differ because certain investments or transactions may
be treated differently for financial statement and tax purposes. Any
Accumulated Net Realized Losses, and any cumulative excess of distributions
over net 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.

12
<PAGE> 15
<TABLE>
<CAPTION>

- -----------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Motorola, Inc. 129,400 $ 7,845
Xerox Corp. 70,548 7,509
MCI Communications Corp. 150,200 7,435
Northern Telecom Ltd. 113,800 7,354
Freddie Mac 152,800 7,248
Texaco Inc. 119,400 7,194
- Cendant Corp. 176,734 7,003
Computer Associates
International, Inc. 118,500 6,843
Norwest Corp. 164,500 6,837
U.S. Bancorp 54,801 6,836
Tyco International Ltd. 124,800 6,817
- Oracle Corp. 211,500 6,675
Monsanto Co. 127,600 6,635
Sara Lee Corp. 103,900 6,403
Wells Fargo & Co. 19,281 6,387
Emerson Electric Co. 95,800 6,245
Sprint Corp. 92,200 6,241
Kimberly-Clark Corp. 120,492 6,040
Merrill Lynch & Co., Inc. 71,800 5,959
Chrysler Corp. 141,180 5,868
U S WEST Communications
Group 104,430 5,718
Campbell Soup Co. 99,200 5,630
First Chicago NBD Corp. 63,365 5,584
Colgate-Palmolive Co. 64,400 5,579
Atlantic Richfield Co. 69,000 5,425
- AirTouch Communications, Inc. 110,100 5,388
J.P. Morgan & Co., Inc. 39,842 5,351
Medtronic, Inc. 102,200 5,302
CBS Corp. 153,200 5,199
The Bank of New York Co., Inc. 82,600 5,188
AlliedSignal Inc. 123,100 5,170
Fleet Financial Group, Inc. 59,377 5,051
Anheuser-Busch Cos., Inc. 106,114 4,914
Dow Chemical Co. 50,350 4,897
Sears, Roebuck & Co. 85,200 4,894
United Technologies Corp. 52,100 4,809
Lockheed Martin Corp. 42,641 4,797
Pharmacia & Upjohn, Inc. 108,790 4,760
National City Corp. 63,891 4,684
Duke Energy Corp. 78,581 4,680
Eastman Kodak Co. 72,000 4,671
- U S WEST Media Group 133,730 4,647
Columbia/HCA Healthcare Corp. 143,445 4,626
H.J. Heinz Co. 79,000 4,612
Texas Instruments, Inc. 85,100 4,606
Caterpillar, Inc. 82,200 4,526
Gannett Co., Inc. 61,900 4,449
Automatic Data Processing, Inc. 65,200 4,438
Raytheon Co. Class B 73,600 4,296
Dayton Hudson Corp. 47,509 4,181
J.C. Penney Co., Inc. 54,400 4,117
Southern Co. 148,400 4,109
- Viacom Inc. Class B 76,200 4,096
Washington Mutual, Inc. 56,094 4,023
- EMC Corp. 106,200 4,016
PNC Bank Corp. 66,400 3,980
Kellogg Co. 90,400 3,899
The Gap, Inc. 86,150 3,877
CoreStates Financial Corp. 43,109 3,869
General Re Corp. 17,400 3,839
MBNA Corp. 107,100 3,836
Walgreen Co. 108,000 3,800
Wachovia Corp. 44,500 3,774
KeyCorp 98,200 3,713
- Tele-Communications, Inc.
Class A 116,720 3,629
BestFoods 30,900 3,611
SunTrust Banks, Inc. 47,700 3,595
BankBoston Corp. 32,501 3,583
American General Corp. 55,295 3,577
Mellon Bank Corp. 55,400 3,518
Burlington Northern
Santa Fe Corp. 33,732 3,508
Illinois Tool Works, Inc. 54,100 3,503
- Amgen, Inc. 56,600 3,446
- Sun Microsystems, Inc. 82,500 3,442
Deere & Co. 55,200 3,419
May Department Stores Co. 53,400 3,391
CIGNA Corp. 16,300 3,342
ConAgra, Inc. 104,000 3,341
Baxter International, Inc. 59,900 3,302
Marsh & McLennan Cos., Inc. 37,100 3,239
Enron Corp. 69,300 3,214
Pitney Bowes, Inc. 63,400 3,182
Household International, Inc. 22,903 3,155
PG&E Corp. 95,200 3,142
First Data Corp. 95,800 3,114
International Paper Co. 66,000 3,090
The Seagram Co. Ltd. 80,200 3,063
Waste Management Inc. 97,800 3,013
Union Pacific Corp. 53,500 3,006
Norfolk Southern Corp. 80,400 3,005
The Chubb Corp. 37,300 2,923
Fifth Third Bancorp 33,900 2,898
- AMR Corp. 20,100 2,878
Halliburton Co. 57,100 2,866
Albertson's, Inc. 53,900 2,836
CVS Corp. 37,300 2,816
Phillips Petroleum Co. 56,300 2,811
- Boston Scientific Corp. 41,600 2,808
- Applied Materials, Inc. 79,200 2,797
CSX Corp. 46,900 2,791
- 3Com Corp. 77,500 2,785
NIKE, Inc. Class B 62,900 2,783
Textron, Inc. 35,800 2,757
Edison International 93,700 2,752
HBO & Co. 45,400 2,741
The Hartford Financial Services
Group Inc. 25,000 2,713
PPG Industries, Inc. 39,800 2,704
Aetna Inc. 32,306 2,696
Archer-Daniels-Midland Co. 122,644 2,691
Rockwell International Corp. 46,700 2,679
Comcast Corp. Class A Special 75,600 2,670
United Healthcare Corp. 40,900 2,648
Lowe's Cos., Inc. 36,900 2,590
General Mills, Inc. 34,000 2,584
Comerica, Inc. 24,300 2,571
</TABLE>

13
<PAGE> 16
<TABLE>
<CAPTION>

- -----------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- Tellabs, Inc. 38,100 $ 2,557
Loews Corp. 24,500 2,554
Aluminum Co. of America 37,100 2,553
The Goodyear Tire & Rubber Co. 33,300 2,522
FPL Group, Inc. 39,100 2,512
Mattel, Inc. 62,887 2,492
- The Kroger Co. 53,800 2,485
Bankers Trust New York Corp. 20,400 2,454
- Costco Cos., Inc. 45,556 2,437
- Tenet Healthcare Corp. 66,500 2,415
- HEALTHSOUTH Corp. 85,700 2,405
Ralston-Ralston Purina Group 22,600 2,396
Weyerhaeuser Co. 42,400 2,396
State Street Corp. 34,900 2,375
Aon Corp. 36,550 2,367
Hershey Foods Corp. 32,800 2,349
Consolidated Edison Inc. 50,200 2,347
Guidant Corp. 31,800 2,333
Service Corp. International 54,600 2,317
Conseco Inc. 40,800 2,310
USX-Marathon Group 61,400 2,310
- Federated Department Stores 44,400 2,300
Honeywell, Inc. 27,200 2,249
- FDX Corp. 31,360 2,230
Avon Products, Inc. 28,400 2,215
Corning, Inc. 49,100 2,173
Occidental Petroleum Corp. 73,900 2,166
Williams Cos., Inc. 67,200 2,150
Masco Corp. 36,000 2,142
Charles Schwab Corp. 56,250 2,138
Texas Utilities Co. 53,641 2,109
BB&T Corp. 31,100 2,105
Cognizant Corp. 36,400 2,088
Fort James Corp. 45,500 2,084
- Clear Channel Communications 21,200 2,078
Progressive Corp. of Ohio 15,400 2,074
Unocal Corp. 53,139 2,056
AMP, Inc. 46,844 2,052
Cardinal Health, Inc. 23,000 2,028
Wrigley, (Wm.) Jr. Co. 24,800 2,027
SunAmerica Inc. 42,300 2,025
American Electric Power Co., Inc. 40,000 2,010
Sysco Corp. 77,600 1,989
Delta Air Lines, Inc. 16,700 1,975
Public Service Enterprise
Group, Inc. 52,100 1,973
Air Products & Chemicals, Inc. 23,800 1,972
Summit Bancorp. 38,300 1,917
Lincoln National Corp. 22,300 1,893
The Clorox Co. 22,000 1,885
Dover Corp. 48,800 1,854
- Toys R Us, Inc. 61,600 1,852
Tribune Co. 26,200 1,847
Dresser Industries, Inc. 38,300 1,841
Burlington Resources, Inc. 38,085 1,826
- Parametric Technology Corp. 54,600 1,819
Northern Trust Corp. 24,300 1,816
Becton, Dickinson & Co. 26,500 1,804
Rite Aid Corp. 52,600 1,802
Houston Industries, Inc. 62,122 1,786
ALLTEL Corp. 40,500 1,769
H.F. Ahmanson & Co. 22,800 1,767
Computer Sciences Corp. 32,000 1,760
- Digital Equipment Corp. 33,300 1,742
Barrick Gold Corp. 80,400 1,739
- Kmart Corp. 104,000 1,736
UNUM Corp. 31,200 1,722
Praxair, Inc. 33,400 1,718
Dominion Resources, Inc. 40,750 1,712
Interpublic Group of Cos., Inc. 27,150 1,687
Hilton Hotels Corp. 52,700 1,680
SAFECO Corp. 30,700 1,678
Ingersoll-Rand Co. 34,950 1,675
The Quaker Oats Co. 29,100 1,666
The Limited, Inc. 57,895 1,661
MGIC Investment Corp. 25,200 1,655
Lehman Brothers Holdings, Inc. 22,100 1,655
MBIA, Inc. 21,300 1,651
Omnicom Group Inc. 35,000 1,647
Newell Co. 34,000 1,647
Transamerica Corp. 14,100 1,643
American Stores Co. 62,400 1,622
The McGraw-Hill Cos., Inc. 21,300 1,620
Unicom Corp. 46,000 1,610
TJX Cos., Inc. 35,400 1,602
St. Paul Cos., Inc. 17,900 1,595
Entergy Corp. 53,200 1,583
Republic New York Corp. 11,800 1,574
Eaton Corp. 16,500 1,571
Tenneco, Inc. 36,500 1,558
PacifiCorp 63,000 1,551
Mercantile Bancorp, Inc. 28,300 1,551
Northrop Grumman Corp. 14,400 1,547
FirstEnergy Corp. 50,200 1,547
Coastal Corp. 23,350 1,521
Huntington Bancshares Inc. 41,700 1,519
TRW, Inc. 27,500 1,516
Alcan Aluminium Ltd. 48,450 1,514
Cooper Industries, Inc. 25,457 1,513
Winn-Dixie Stores, Inc. 32,400 1,503
Cincinnati Financial Corp. 11,900 1,490
Browning-Ferris Industries, Inc. 45,500 1,484
Genuine Parts Co. 38,850 1,481
Baker Hughes, Inc. 36,600 1,473
Carolina Power & Light Co. 32,400 1,466
Torchmark Corp. 32,000 1,466
Crown Cork & Seal Co., Inc. 27,400 1,466
- US Airways Group, Inc. 19,700 1,460
New York Times Co. Class A 20,800 1,456
Beneficial Corp. 11,700 1,454
Fortune Brands, Inc. 36,400 1,451
Rohm & Haas Co. 13,800 1,426
VF Corp. 27,028 1,421
Synovus Financial Corp. 37,900 1,407
Union Carbide Corp. 27,700 1,388
The Times Mirror Co. Class A 21,900 1,388
Pioneer Hi-Bred International, Inc. 14,080 1,374
Southwest Airlines Co. 46,200 1,366
Jefferson-Pilot Corp. 15,200 1,352
Sherwin-Williams Co. 38,000 1,349
</TABLE>

14
<PAGE> 17
<TABLE>
<CAPTION>

- -----------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
R.R. Donnelley & Sons Co. 32,700 $ 1,343
- Seagate Technology 53,000 1,338
W.R. Grace & Co. 15,700 1,314
- NEXTEL Communications, Inc. 38,700 1,306
- Micron Technology, Inc. 44,500 1,293
UST, Inc. 40,100 1,293
- Thermo Electron Corp. 32,000 1,292
- Owens-Illinois, Inc. 29,700 1,285
Union Pacific Resources
Group, Inc. 53,422 1,275
Dana Corp. 21,700 1,263
Georgia Pacific Group 19,500 1,263
Parker Hannifin Corp. 24,525 1,257
- Bay Networks, Inc. 46,100 1,250
CINergy Corp. 33,718 1,248
The Dun & Bradstreet Corp. 36,400 1,244
DTE Energy Co. 31,100 1,223
Central & South West Corp. 44,900 1,201
Consolidated Natural Gas Co. 20,800 1,200
General Dynamics Corp. 13,900 1,197
Avery Dennison Corp. 22,400 1,196
Countrywide Credit
Industries, Inc. 22,400 1,191
Equifax, Inc. 32,400 1,183
Golden West Financial Corp. 12,300 1,178
Tandy Corp. 25,064 1,178
Nordstrom, Inc. 18,300 1,168
Amerada Hess Corp. 20,000 1,166
W.W. Grainger, Inc. 11,300 1,162
Providian Financial Corp. 20,000 1,149
Frontier Corp. 35,100 1,143
Knight Ridder 20,400 1,140
Whirlpool Corp. 16,600 1,138
GPU, Inc. 25,700 1,137
Eastman Chemical Co. 16,750 1,130
Hercules, Inc. 22,800 1,126
Maytag Corp. 23,500 1,124
International Flavors &
Fragrances, Inc. 23,700 1,117
Johnson Controls, Inc. 18,400 1,117
The Stanley Works 20,000 1,115
Champion International Corp. 20,500 1,113
Black & Decker Corp. 20,900 1,109
Dow Jones & Co., Inc. 20,700 1,096
- AutoZone Inc. 32,200 1,091
Laidlaw, Inc. 68,100 1,081
Baltimore Gas & Electric Co. 32,750 1,071
Case Corp. 15,500 1,056
H & R Block, Inc. 22,100 1,051
PECO Energy Corp. 47,500 1,051
Sonat, Inc. 23,900 1,040
Newmont Mining Corp. 33,946 1,037
PACCAR, Inc. 17,340 1,033
Allegheny Teledyne Inc. 37,110 1,032
Marriott International, Inc. 27,400 1,019
Nucor Corp. 18,700 1,018
- Tricon Global Restaurants, Inc. 33,500 1,007
ITT Industries, Inc. 26,300 1,001
- Consolidated Stores, Inc. 23,300 1,000
Morton International, Inc. 30,400 998
Marriott International, Inc. Class A 27,400 981
Hasbro, Inc. 27,600 975
Reynolds Metals Co. 15,700 965
IKON Office Solutions 27,900 964
Northern States Power Co. 16,200 956
- Ceridian Corp. 17,300 933
Dillard's Inc. 25,200 931
- Mirage Resorts, Inc. 38,100 926
Circuit City Stores, Inc. 21,500 919
Ameren Corp. 21,800 918
Columbia Energy Group 11,800 917
Harris Corp. 17,600 917
Ashland, Inc. 16,200 917
- Unisys Corp. 48,100 914
- Western Atlas, Inc. 11,800 913
Rubbermaid, Inc. 31,900 909
- Advanced Micro Devices, Inc. 31,200 907
Phelps Dodge Corp. 14,000 904
Fluor Corp. 17,900 891
Anadarko Petroleum Corp. 12,900 890
Willamette Industries, Inc. 23,600 886
Union Camp Corp. 14,700 878
Harcourt General, Inc. 15,563 862
- Humana, Inc. 34,600 859
PP&L Resources Inc. 36,200 855
Green Tree Financial Corp. 29,400 836
Brown-Forman Corp. Class B 15,200 836
Freeport-McMoRan Copper &
Gold Inc. Class B 41,700 831
Sigma-Aldrich Corp. 22,200 827
- ALZA Corp. 18,400 825
Ecolab, Inc. 28,400 824
- Novell, Inc. 75,300 807
The BFGoodrich Co. 15,600 797
The Mead Corp. 22,200 795
Raychem Corp. 19,000 790
Liz Claiborne, Inc. 15,600 778
Temple-Inland Inc. 12,400 770
- LSI Logic Corp. 30,500 770
Biomet, Inc. 25,600 768
American Greetings Corp. Class A 16,500 759
- Apple Computer, Inc. 27,600 759
Pacific Enterprises 18,500 755
Brunswick Corp. 21,500 750
Armstrong World Industries Inc. 8,600 744
Thomas & Betts Corp. 11,600 742
- Woolworth Corp. 29,500 738
- National Semiconductor Corp. 35,000 733
Great Lakes Chemical Corp. 13,500 729
SuperValu Inc. 15,600 727
Kerr-McGee Corp. 10,400 723
Apache Corp. 19,500 717
USX-U.S. Steel Group 18,940 715
Perkin-Elmer Corp. 9,700 701
Echlin, Inc. 13,300 697
Westvaco Corp. 22,500 692
Adobe Systems, Inc. 15,300 691
- KLA-Tencor Corp. 18,000 688
Placer Dome, Inc. 51,100 674
Inco Ltd. 35,898 671
</TABLE>

15
<PAGE> 18
<TABLE>
<CAPTION>

- -----------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Ryder System, Inc. 17,500 $ 665
Pennzoil Co. 10,200 659
- St. Jude Medical, Inc. 19,700 659
National Service Industries, Inc. 11,000 647
USF&G Corp. 25,800 643
Snap-On Inc. 14,050 641
Sun Co., Inc. 15,667 640
Wendy's International, Inc. 28,600 638
- FMC Corp. 8,100 636
Mallinckrodt, Inc. 15,900 628
Nalco Chemical Co. 15,300 621
- Sealed Air Corp. 9,400 616
Engelhard Corp. 32,250 613
- General Instrument Corp. 28,700 601
Deluxe Corp. 18,200 599
Bausch & Lomb, Inc. 13,000 594
- Navistar International Corp. 16,580 580
- Oryx Energy Co. 22,000 572
- Harrah's Entertainment, Inc. 22,700 558
Darden Restaurants Inc. 35,600 554
Mercantile Stores Co., Inc. 8,200 551
Pall Corp. 25,566 550
- Rowan Cos., Inc. 18,700 542
Crane Co. 10,225 542
Allergan, Inc. 14,200 540
Louisiana-Pacific Corp. 23,200 539
- Silicon Graphics, Inc. 38,146 532
Centex Corp. 13,800 526
- Fruit of the Loom, Inc. 17,100 524
Bemis Co., Inc. 11,600 523
Meredith Corp. 12,400 522
U.S. Surgical Corp. 15,700 518
Tektronix, Inc. 11,550 515
Manor Care Inc. 13,900 514
Giant Food, Inc. Class A 13,300 514
General Signal Corp. 10,700 500
Cummins Engine Co., Inc. 9,000 496
McDermott International, Inc. 11,900 492
NICOR, Inc. 11,600 490
King World Productions, Inc. 16,600 486
- Cabletron Systems, Inc. 32,800 478
C.R. Bard, Inc. 12,800 470
The Timken Co. 13,800 467
Polaroid Corp. 10,362 456
- DSC Communications Corp. 25,000 455
Autodesk, Inc. 10,400 449
Cooper Tire & Rubber Co. 18,500 439
- Niagara Mohawk Power Corp. 31,900 415
Shared Medical Systems Corp. 5,100 400
Owens Corning 11,100 399
Boise Cascade Corp. 10,700 386
Alberto-Culver Co. Class B 12,600 384
- Andrew Corp. 19,275 382
Harnischfeger Industries Inc. 11,000 376
- Reebok International Ltd. 12,300 375
Aeroquip-Vickers Inc. 6,400 370
Moore Corp. Ltd. 22,100 367
Worthington Industries, Inc. 20,150 365
Safety-Kleen Corp. 12,800 363
Fleetwood Enterprises, Inc. 7,775 362
Tupperware Corp. 13,300 354
Cyprus Amax Minerals Co. 20,711 344
Helmerich & Payne, Inc. 11,000 344
Homestake Mining Co. 31,200 339
- Bethlehem Steel Corp. 24,500 332
Scientific-Atlanta, Inc. 16,800 329
Battle Mountain Gold Co. Class A 51,400 328
Millipore Corp. 9,200 320
The Pep Boys
(Manny, Moe & Jack) 13,700 318
Adolph Coors Co. Class B 8,400 294
EG&G, Inc. 10,100 294
Briggs & Stratton Corp. 6,300 289
Peoples Energy Corp. 7,700 280
Longs Drug Stores, Inc. 9,200 280
Potlatch Corp. 6,500 280
Inland Steel Industries, Inc. 10,100 279
Pulte Corp. 5,900 274
Foster Wheeler Corp. 8,700 266
- Stone Container Corp. 20,810 260
Great Atlantic & Pacific
Tea Co., Inc. 8,500 257
Vlasic Foods International, Inc. 9,920 254
ASARCO, Inc. 9,400 251
Cincinnati Milacron, Inc. 7,800 249
ONEOK, Inc. 6,000 245
Kaufman & Broad Home Corp. 7,500 244
Russell Corp. 8,900 239
NACCO Industries, Inc. Class A 1,760 236
Jostens Inc. 9,600 230
Springs Industries Inc. Class A 4,100 225
Ball Corp. 6,600 216
Eastern Enterprises 4,500 194
Sodexho Marriott Services, Inc. 27,400 182
- Data General Corp. 9,500 168
- Armco, Inc. 23,300 137
- Charming Shoppes, Inc. 23,000 109
- Siebel Systems, Inc. 101 3
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $927,043) 1,881,379
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
FACE
AMOUNT
(000)
- -----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (35.4%)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bonds
6.375%, 8/15/2027 $106,500 112,490
6.50%, 11/15/2026 90,185 96,208
6.875%, 8/15/2025 12,725 14,181
7.125%, 2/15/2023 91,905 104,793
7.25%, 5/15/2016 58,880 66,928
7.50%, 11/15/2016 46,870 54,583
7.50%, 11/15/2024 107,290 128,223
7.625%, 11/15/2022 82,120 98,753
7.625%, 2/15/2025 34,520 41,868
8.00%, 11/15/2021 83,280 103,685
8.125%, 8/15/2019 34,640 43,276
8.125%, 5/15/2021 76,245 95,923
8.75%, 5/15/2017 3,100 4,054
8.75%, 5/15/2020 74,040 98,423
</TABLE>

16
<PAGE> 19
<TABLE>
<CAPTION>

- -----------------------------------------------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
8.75%, 8/15/2020 $ 79,810 $ 106,230
8.875%, 8/15/2017 116,720 154,535
8.875%, 2/15/2019 53,295 71,167
10.375%, 11/15/2012 25,600 33,912
10.625%, 8/15/2015 29,060 43,516
11.25%, 2/15/2015 19,970 31,181
11.75%, 11/15/2014 36,665 54,396
12.00%, 8/15/2013 77,180 113,281
12.75%, 11/15/2010 7,140 10,134
14.00%, 11/15/2011 30,900 47,741
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $1,654,747) 1,729,481
- -----------------------------------------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (28.8%)
- -----------------------------------------------------------------------------------------------------------------------------
U.S. TREASURY BILL
(2)5.315%, 6/25/1998 48,000 47,428
COMMERCIAL PAPER
Associates First Capital Corp.
5.50%, 6/10/1998 40,000 39,570
CIT Group Inc.
5.48%, 6/22/1998 50,000 49,372
Ciesco LP
5.52%, 4/28/1998 50,000 49,793
Daimler-Benz North America Corp.
5.50%, 5/14/1998 55,000 54,636
E.I. du Pont de Nemours & Co.
5.48%, 5/28/1998 50,000 49,565
Ford Credit Europe PLC
5.50%, 6/5/1998 25,000 24,713
5.50%, 6/9/1998 28,000 27,704
France Telecom SA
5.50%, 5/18/1998 35,000 34,749
General Electric Capital Corp.
5.822%, 5/29/1998 80,000 79,292
General Motors Acceptance Corp.
5.48%, 6/22/1998 50,000 49,368
Motorola Credit Corp.
5.47%, 6/25/1998 25,000 24,677
National Rural Utilities Cooperative
Finance Corp.
5.47%, 6/18/1998 24,750 24,454
Sheffield Receiving Corp.
5.54%, 5/8/1998 25,000 24,858
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.95%, 4/1/1998--Note F 169,723 169,723
5.97%, 4/1/1998 653,793 653,793
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,403,756) 1,403,695
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (102.7%)
(COST $3,985,546) 5,014,555
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>

- -----------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (-2.7%)
- -----------------------------------------------------------------------------------------------------------------------------
Other Assets--Note C $ 51,156
Security Lending Collateral Payable
to Brokers--Note F (169,723)
Other Liabilities (11,598)
------------
(130,165)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSETS (100%)
- -----------------------------------------------------------------------------------------------------------------------------
Applicable to 210,612,908 outstanding
$.001 par value shares
(authorized 1,000,000,000 shares) $4,884,390
=============================================================================================================================

NET ASSET VALUE PER SHARE $23.19
=============================================================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.

- -Non-Income-Producing Security.

(1) The combined market value of common stocks and S&P 500 Index futures
contracts represents 62.1% of net assets. See Note E in Notes to Financial
Statements.

(2) Security segregated as initial margin for open futures contracts.

ADR--American Depositary Receipt.

- -----------------------------------------------------------------------------------------------------------------------------
AT MARCH 31, 1998, NET ASSETS CONSISTED OF:
- -----------------------------------------------------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $3,554,419 $16.88
Undistributed Net
Investment Income 38,382 .18
Accumulated Net
Realized Gains 227,846 1.08
Unrealized Appreciation--
Note E
Investment Securities 1,029,009 4.89
Futures Contracts 34,734 .16
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSETS $4,884,390 $23.19
=============================================================================================================================
</TABLE>

17
<PAGE> 20

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. If the
Fund invested in futures contracts during the period, the results of these
investments are shown separately.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
ASSET ALLOCATION FUND
SIX MONTHS ENDED MARCH 31, 1998
(000)
- --------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 13,030
Interest 75,768
-------------
Total Income 88,798
-------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 2,476
Performance Adjustment (624)
The Vanguard Group--Note C
Management and Administrative 7,436
Marketing and Distribution 544
Taxes (other than income taxes) 153
Custodian Fees 35
Auditing Fees 12
Shareholders' Reports 41
Annual Meeting and Proxy Costs 33
Directors' Fees and Expenses 4
-------------
Total Expenses 10,110
- --------------------------------------------------------------------------------------
NET INVESTMENT INCOME 78,688
- --------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 84,310
Futures Contracts 170,343
- --------------------------------------------------------------------------------------
REALIZED NET GAIN 254,653
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 263,123
Futures Contracts 32,703
- --------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 295,826
- --------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $629,167
======================================================================================
</TABLE>

18
<PAGE> 21
STATEMENT OF CHANGES IN NET ASSETS

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

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND
----------------------------------
SIX MONTHS YEAR
ENDED ENDED
MAR. 31, 1998 SEP. 30, 1997
(000) (000)
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 78,688 $ 118,433
Realized Net Gain 254,653 180,914
Change in Unrealized Appreciation (Depreciation) 295,826 474,305
----------------------------------
Net Increase in Net Assets Resulting from Operations 629,167 773,652
----------------------------------
DISTRIBUTIONS
Net Investment Income (97,109) (101,081)
Realized Capital Gain (181,631) (137,804)
----------------------------------
Total Distributions (278,740) (238,885)
----------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 758,500 1,014,872
Issued in Lieu of Cash Distributions 268,849 229,554
Redeemed (231,779) (381,985)
----------------------------------
Net Increase from Capital Share Transactions 795,570 862,441
- -------------------------------------------------------------------------------------------------
Total Increase 1,145,997 1,397,208
- -------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 3,738,393 2,341,185
----------------------------------
End of Period $4,884,390 $3,738,393
=================================================================================================

(1)Shares Issued (Redeemed)
Issued 34,665 52,552
Issued in Lieu of Cash Distributions 12,925 12,599
Redeemed (10,580) (19,710)
----------------------------------
Net Increase in Shares Outstanding 37,010 45,441
=================================================================================================
</TABLE>

19
<PAGE> 22
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 Securities and Exchange Commission
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>
- ---------------------------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND
YEAR ENDED SEPTEMBER 30,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------
THROUGHOUT EACH PERIOD MARCH 31, 1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $21.53 $18.27 $17.03 $13.78 $15.08 $13.79
- ---------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .39 .74 .69 .64 .52 .54
Net Realized and Unrealized Gain (Loss)
on Investments 2.82 4.29 1.82 3.18 (.81) 1.51
----------------------------------------------------------
Total from Investment Operations 3.21 5.03 2.51 3.82 (.29) 2.05
----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.54) (.72) (.66) (.57) (.48) (.59)
Distributions from Realized Capital Gains (1.01) (1.05) (.61) -- (.53) (.17)
----------------------------------------------------------
Total Distributions (1.55) (1.77) (1.27) (.57) (1.01) (.76)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $23.19 $21.53 $18.27 $17.03 $13.78 $15.08
=====================================================================================================================

TOTAL RETURN 15.74% 29.42% 15.27% 28.57% -2.05% 15.41%
=====================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $4,884 $3,738 $2,341 $1,593 $1,120 $1,003
Ratio of Total Expenses to
Average Net Assets 0.48%* 0.49% 0.47% 0.49% 0.50% 0.49%
Ratio of Net Investment Income to
Average Net Assets 3.74%* 3.96% 4.17% 4.41% 3.68% 4.07%
Portfolio Turnover Rate 66%* 10% 47% 34% 51% 31%
Average Commission Rate Paid $.0200 $.0099 $.0160 N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>

*Annualized.

20
<PAGE> 23
NOTES TO FINANCIAL STATEMENTS

Vanguard Asset Allocation 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 to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.

1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid
and asked prices. Prices are taken from the primary market in which each
security trades. Bonds, and temporary cash investments acquired over 60 days
to maturity, are valued using the latest bid prices or using valuations based
on a matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value.

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

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

4. FUTURES: The Fund uses S&P 500 Index futures contracts, with the
objectives of maintaining full exposure to the stock market, enhancing returns,
maintaining liquidity, and minimizing transaction costs. The Fund may purchase
futures contracts to immediately invest incoming cash in the market, or sell
futures in response to cash outflows, thereby simulating a fully invested
position in the underlying index while maintaining a cash balance for
liquidity. The Fund may seek to enhance returns by using futures contracts
instead of the underlying securities when futures are believed to be priced
more attractively than the underlying securities. The primary risks associated
with the use of futures contracts are imperfect correlation between changes in
market values of stocks held by the Fund and the prices of futures contracts,
and the possibility of an illiquid market.

Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).

5. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.

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. Premiums and discounts on debt
securities purchased are amortized and accreted, respectively, to interest
income over the lives of the respective securities.

B. Mellon Capital Management Corporation provides investment advisory services
to the Fund for a fee calculated at an annual percentage rate of average net
assets. The basic fee is subject to quarterly adjustments based on performance
relative to a combined index comprising the S&P 500 Index and the Lehman
Brothers Long U.S. Treasury Bond Index. For the six months ended

21
<PAGE> 24
March 31, 1998, the advisory fee represented an effective annual basic rate of
0.12% of the Fund's average net assets before a decrease of $624,000 (an annual
rate of 0.03%) based on performance.

C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At March 31,
1998, the Fund had contributed capital of $278,000 to Vanguard (included in
Other Assets), representing 1.4% of Vanguard's capitalization. The Fund's
Directors and officers are also Directors and officers of Vanguard.

D. During the six months ended March 31, 1998, the Fund purchased $40,328,000
of investment securities and sold $9,965,000 of investment securities, other
than U.S. government securities and temporary cash investments. Purchases and
sales of U.S. government securities were $988,305,000 and $1,139,852,000,
respectively.

E. At March 31, 1998, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $1,029,009,000,
consisting of unrealized gains of $1,037,229,000 on securities that had risen
in value since their purchase and $8,220,000 in unrealized losses on securities
that had fallen in value since their purchase.

At March 31, 1998, the aggregate settlement value of open futures contracts
expiring in June 1998 and the related unrealized appreciation were:

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
(000)
----------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE APPRECIATION
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 4,147 $1,151,311 $34,734
- -------------------------------------------------------------------------------------------------
</TABLE>

F. The market value of securities on loan to brokers/dealers at March 31,
1998, was $264,275,000, for which the Fund had received as collateral cash of
$169,723,000 and U.S. Treasury securities with a market value of $99,867,000.
Cash collateral received is invested in repurchase agreements. Security loans
are required to be secured at all times by collateral at least equal to the
market value of securities loaned; however, in the event of default or
bankruptcy by the other party to the agreement, retention of the collateral may
be subject to legal proceedings.

22
<PAGE> 25

DIRECTORS AND OFFICERS

JOHN C. BOGLE
Senior 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
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
of each of the investment companies in The Vanguard Group.

ROBERT E. CAWTHORN
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing Director
of Global Health Care Partners/DLJ Merchant Banking Partners; Director of Sun
Company, Inc., and Westinghouse Electric Corp.

BARBARA BARNES HAUPTFUHRER
Director of The Great Atlantic and Pacific Tea Co., IKON Office Solutions, Inc.,
Raytheon Co., Knight-Ridder, Inc., Massachusetts Mutual Life Insurance Co., and
Ladies Professional Golf Association; Trustee Emerita of Wellesley College.

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

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

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

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

OTHER FUND OFFICERS

RAYMOND J. KLAPINSKY
Secretary; Managing Director and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.

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

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

OTHER VANGUARD OFFICERS

R. GREGORY BARTON
Managing Director, Legal Department.

ROBERT A. DISTEFANO
Managing Director, Information Technology.

JAMES H. GATELY
Managing Director, Individual Investor Group.

KATHLEEN C. GUBANICH
Managing Director, Human Resources.

IAN A. MACKINNON
Managing Director, Fixed Income Group.

F. WILLIAM MCNABB, III
Managing Director, Institutional Investor Group.

MICHAEL S. MILLER
Managing Director, Planning and Development.

RALPH K. PACKARD
Managing Director and Chief Financial Officer.

GEORGE U. SAUTER
Managing Director, Core Management Group.

"Standard & Poor's 500," "S&P 500(R)," "Standard & Poor's(R),"
"S&P(R)," and "500" are trademarks of The McGraw-Hill Companies, Inc.
Frank Russell Company is the owner of trademarks and copyrights
relating to the Russell Indexes. "Wilshire 4500" and "Wilshire 5000"
are trademarks of Wilshire Associates.

<PAGE> 26

VANGUARD FAMILY OF FUNDS

STOCK FUNDS
Convertible Securities Fund
Equity Income Fund
Explorer Fund
Growth and Income Portfolio
Horizon Fund
Aggressive Growth Portfolio
Capital Opportunity Portfolio
Global Equity Portfolio
Index Trust
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Small Capitalization Stock
Portfolio
Total Stock Market Portfolio
Value Portfolio
Institutional Index Fund
International Equity Index Fund
Emerging Markets Portfolio
European Portfolio
Pacific Portfolio
International Growth Portfolio
International Value Portfolio
Morgan Growth Fund
PRIMECAP Fund
Selected Value Portfolio
Specialized Portfolios
Energy Portfolio
Gold & Precious Metals
Portfolio
Health Care Portfolio
REIT Index Portfolio
Utilities Income Portfolio
Tax-Managed Fund
Capital Appreciation
Portfolio
Growth and Income Portfolio
Total International Portfolio
Trustees' Equity Fund
U.S. Portfolio
U.S. Growth Portfolio
Windsor Fund
Windsor II

BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
Moderate Growth Portfolio
STAR Portfolio
Tax-Managed Fund
Balanced Portfolio
Wellesley Income Fund
Wellington Fund

BOND FUNDS
Admiral Funds
Intermediate-Term U.S.
Treasury Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term U.S. Treasury
Portfolio
Bond Index Fund
Intermediate-Term Bond
Portfolio
Long-Term Bond Portfolio
Short-Term Bond Portfolio
Total Bond Market Portfolio
Fixed Income Securities Fund
GNMA Portfolio
High Yield Corporate Portfolio
Intermediate-Term Corporate
Portfolio
Intermediate-Term U.S.
Treasury Portfolio
Long-Term Corporate
Portfolio
Long-Term U.S. Treasury
Portfolio
Short-Term Corporate
Portfolio
Short-Term Federal Portfolio
Short-Term U.S. Treasury
Portfolio
Municipal Bond Fund
High-Yield Portfolio
Insured Long-Term Portfolio
Intermediate-Term Portfolio
Limited-Term Portfolio
Long-Term Portfolio
Short-Term Portfolio
Preferred Stock Fund
State Tax-Free Funds
(CA, FL, NJ, NY, OH, PA)

MONEY MARKET FUNDS
Admiral Funds
U.S. Treasury Money Market
Portfolio
Money Market Reserves
Federal Portfolio
Prime Portfolio
Municipal Bond Fund
Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)
Treasury Money Market Portfolio

Q782-3/1998

[THE VANGUARD GROUP LOGO]
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

www.vanguard.com
[email protected]

All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before you invest or send money. Prospectuses can
be obtained directly from The Vanguard Group.