VANGUARD ASSET ALLOCATION FUND INC, N-30D, 2000-11-22

VANGUARD ASSET ALLOCATION FUND INC
N-30D, 2000-11-22

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VANGUARD(R)U.S. VALUE FUND
ANNUAL REPORT -- SEPTEMBER 30, 2000

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

<PAGE>

OUR REPORTS TO
THE OWNERS

At Vanguard, we regard our investors not as mere customers but as owners of the
enterprise. For that's exactly what a mutual fund shareholder is--part owner of
an investment company.
In our reports to you on how the company is doing, we have tried to convey
information without hyperbole and in the context of broad market trends and
relevant benchmarks.
We've introduced several changes to this year's annual report to make it
even more useful. Among the changes:
**Larger type and redesigned graphics to make the reports easier to read.
**An at-a-glance summary of key points about fund performance and the
financial markets.
**A table--included for many funds--in which the investment adviser
highlights significant changes in holdings.
**Comparisons of fund performance and characteristics against both a broad
market index and a "best fit" benchmark.
We hope you'll find that these changes make the reports even more
accessible and informative.

SUMMARY

* Vanguard U.S. Value Fund returned 8.2% in its first three months.

* The fund's investment adviser employs proprietary research and quantitative
models to identify attractively valued stocks from the Russell 3000 Index.

* The fund's investments will be diversified among stocks of various sizes in
various industries.

CONTENTS

1 Letter from the Chairman
5 Report from the Adviser
7 Fund Profile
8 Glossary of Investment Terms
9 Performance Summary
10 Financial Statements
21 Report of Independent Accountants

<PAGE>
1

LETTER
FROM THE CHAIRMAN

Fellow Shareholders,

This is the first of my reports to the investors in vanguard U.S. Value Fund.
Welcome aboard! We introduced the fund on June 5, 2000, and conducted a
subscription period until June 29. On that day, your fund started to pursue its
objective--to provide long-term growth of capital and income.
During its first three months of operation, the fund achieved a total
return of 8.2%. Net asset value increased from $10.02 per share on June 29 to
$10.84 per share on September 30. The fund did not distribute any dividends
during the period, nor did it distribute any capital gains realized from the
sale of securities. The fund is expected to make such distributions once each
year, in December.

2000 TOTAL RETURNS*
Period Ended September 30
----------------------------------------
Vanguard U.S. Value Fund 8.2%
Average Multi-Cap Value Fund** 3.5
Russell 3000 Value Index 5.6
Wilshire 5000 Index -1.8
----------------------------------------
*Total returns are since the fund's
inception on June 29, 2000.
**Derived from data provided by Lipper Inc.

The table above compares the fund's return with the results for competing
mutual funds and two unmanaged indexes--one that serves as a benchmark for your
fund (the Russell 3000 Value Index) and a broader one that tracks the
performance of the overall stock market (the Wilshire 5000 Total Market Index).
As you can see, your fund outpaced each of these standards. However, no
meaningful conclusions can be drawn from the results of such a brief period.
Much of the remainder of this report will provide an overview of the U.S. Value
Fund. The fund's performance will be described only briefly and "for the
record."

THE STRATEGY AND RISKS OF YOUR FUND
Vanguard U.S. Value Fund takes a distinct approach to value investing. Grantham,
Mayo, Van Otterloo & Co. (GMO), the fund's investment adviser, employs
proprietary research and a series of quantitative models to choose among stocks
in the Russell 3000 Index. This unmanaged benchmark includes 3,000 large-, mid-,
and small-capitalization stocks and represents roughly 90% of the total
capitalization of the U.S. stock market. GMO looks for stocks trading at prices
that, in its view, are below the fundamental value of the underlying companies.
These stocks typically

<PAGE>
2

have lower-than-average price/earnings ratios and higher-than-average dividend
yields.
Under the adviser's approach, the fund comprises four subportfolios, each
based on a different approach to locating value. The amount invested in each
subportfolio can vary over time. The largest component--expected to be 50% of
the fund--is deployed according to the adviser's "intrinsic value" approach, a
model that takes into account such ideas as the value of a franchise and the
stability of a company's return on equity. (As an example, in the early 1990s,
using this means of evaluating stocks, the adviser invested in Microsoft, Cisco
Systems, and Intel. Such companies would not have been characterized as value
stocks by traditional methods.) The remainder of the fund is divided more or
less evenly among holdings chosen on the basis of three factors. Two of these
are traditional methods of identifying value stocks--by assessing prices in
terms of book values, and by assessing prospects in terms of cash flows. The
final portion is invested in stocks believed to have upward price momentum.
--------------------------------------------------------------------------------
GMO INVESTS THE FUND'S ASSETS IN FOUR SUBPORTFOLIOS--EACH WITH ITS OWN APPROACH
TO LOCATING VALUE.
--------------------------------------------------------------------------------
As of September 30, the U.S. Value Fund held 386 stocks and was
well-diversified across economic sectors. About 32% of the fund's net assets
were invested in financial services companies, and about 16% of assets were held
in utilities. The fund had just 7% of its assets in technology companies.
By contrast, the average domestic stock mutual fund had a far larger stake
of about 31% of assets in tech stocks, according to Morningstar. The average
fund held about 13% of its assets in financials and 2% in utilities.
--------------------------------------------------------------------------------
WE EXPECT THAT, OVER LONG PERIODS, THE FUND WILL PROVE LESS VOLATILE THAN THE
S&P 500 INDEX, BUT INVESTORS STILL FACE SIGNIFICANT RISKS.
--------------------------------------------------------------------------------
While we expect that, over long periods, the U.S. Value Fund will prove
less volatile than the Standard & Poor's 500 Index, the fund still entails
significant risks. Like any stock fund, it subjects investors to market
risk--the chance that share prices may decline over short or even extended
periods. It is also possible that the adviser's strategies may fail to identify
the best value stocks, so the fund could lag competing value funds. Finally,
value stocks could trail growth stocks over any given period--as they did in
1998 and 1999. In such an environment, it would be difficult for the fund to
keep up with broad market indexes.

PERFORMANCE OVERVIEW IN BRIEF
The three-month period ended September 30 was volatile and generally unrewarding
for U.S. stock investors. Amid signs of slowing in the record-

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3

setting U.S. economic expansion, the Wilshire 5000 Index had a quarterly return
near zero. Technology stocks were generally weak--the tech-heavy Nasdaq
Composite Index fell -5.3%--and large-cap stocks declined slightly, on average.
But mid- and small-cap stocks, as measured by the Wilshire 4500 Completion
Index, rose 3.6%. Value stocks outperformed growth stocks.
As noted, Vanguard U.S. Value Fund had a three-month total return of 8.2%.
In truth, our launch timing was fortunate. The Russell 3000 Value Index posted
positive results in July, August, and September--the first time since January
1999 that it had three consecutive winning months. Good stock selection in the
financial services and utilities sectors drove the fund's return above that of
the index.
While reports like this one naturally involve some examination of
short-term performance, a fund's record can be fairly judged only over many
years. We think that's appropriate, given that most individuals invest for
long-term goals.
Our goal is to provide long-term returns that exceed those of our
competitive benchmarks. The fund will be aided in this effort by its low costs.
At the end of the fiscal period, the fund had an expense ratio (annual operating
expenses as a percentage of average net assets) of 0.58%, or $5.80 per $1,000 in
assets. That's less than half the 1.39% ($13.90 per $1,000) charged by our
average mutual fund peer. Because the managerial and administrative costs of all
mutual funds subtract directly from the return that shareholders would otherwise
receive, our significant cost advantage provides us with a head start versus
higher-cost funds.
--------------------------------------------------------------------------------
THE FUND'S EFFORT TO PROVIDE SUPERIOR LONG-TERM TOTAL RETURNS WILL BE AIDED BY
ITS LOW COSTS.
--------------------------------------------------------------------------------
This advantage is due in large part to our unique corporate structure: The
Vanguard Group is owned by the Vanguard funds, which, in turn, are owned by the
funds' shareholders. The typical mutual fund firm is managed by a company that
seeks to maximize its profits. In contrast, the Vanguard funds operate on an
at-cost basis, thereby passing along economies of scale to the fund
shareholders, not a management company.

IN SUMMARY
Vanguard U.S. Value Fund set sail under the financial equivalent of clear blue
skies and a strong tailwind. The sailing will not always be so smooth, of
course. Stocks will fall now and again--sometimes sharply. At such times, it
will be helpful to remember that markets are ever cyclical and that the primary
purpose of equity investing is to meet long-term goals.
It is also prudent, we believe, to maintain a balanced investment program.
We define such a program as one that includes value- and growth-oriented

<PAGE>
4

stock funds as well as bond funds and short-term investments. For its part,
Vanguard U.S. Value Fund will provide investors with a low-cost, actively
managed way to gain exposure to value stocks of all sizes. Thank you for the
confidence you've placed in us.
-----------------------
Sincerely, [PHOTO]
/s/ John J. Brennan John J. Brennan
October 18, 2000 Chairman and
Chief Executive Officer
-----------------------

<PAGE>
5

REPORT
FROM THE ADVISER GRANTHAM, MAYO, VAN OTTERLOO & CO. LLC

INVESTMENT ENVIRONMENT
We began investing the assets of vanguard u.s. value fund on June 29, after the
end of its subscription period. From then through September 30, the fund
outperformed the Russell 3000 Value Index by 2.6 percentage points--8.2% versus
5.6%.
During this three-month period, value stocks strongly outperformed growth
stocks and small-capitalization stocks led large-cap issues. The Russell 3000
Value Index return exceeded the returns of the S&P 500 Index by 5.7 percentage
points and the Nasdaq Composite Index by 10.9 percentage points. The leading
sectors in the Russell 3000 Value Index were financial services and energy. The
consumer-discretionary, materials & processing, and technology groups were among
the weakest performers for the period.
The fund uses four quantitative investment disciplines to select stocks:
"intrinsic value," which carries the largest weighting in the fund; two
traditional value disciplines (price to book value and cash flow analysis); and
a momentum discipline that singles out stocks with strong earnings and price
momentum. Using several disciplines enables us to provide diversification and
work toward consistent long-term results.

THE FUND'S SUCCESSES
The fund's margin over its benchmark index was attributable to strong stock
selection. Of the four investment disciplines we employ, the intrinsic-value and
price/book models provided good results in a market environment that favored
value stocks. Holdings chosen on the basis of these two disciplines outperformed
the benchmark for the three-month period. Stock selection was exceptionally
strong in financial services (particularly banks and insurance companies) and,
to a lesser extent, in utilities and consumer-discretionary stocks. Notable
holdings included Fannie Mae, Bank One, Allstate, Dynegy, Bear Stearns, and
Lehman Brothers, which outperformed the benchmark by an average of more than 45
percentage points.
On balance, the fund's sector weightings detracted slightly from our return
relative to the Russell 3000 Value Index, but we did benefit from holding less
than the index in the weak consumer-discretionary sector and holding more in
energy stocks, which performed well in the period.

THE FUND'S SHORTFALLS
The cash flow and momentum models we use detracted from performance, as both
resulted in holdings that lagged the benchmark for the period. In particular,

<PAGE>
6

some of our technology stocks, including Intel, Micron Technology, National
Semiconductor, and LSI Logic, hurt performance.
In terms of sector selection, the fund suffered from its overweight
positions in technology and auto stocks, both of which were weak performers.

THE FUND'S POSITION
We expect the U.S. equity market to remain volatile. We've seen extreme
variations in returns across industry sectors, with some sectors moving up
sharply and others dropping significantly. We haven't taken any specific actions
to adjust for this market environment, but we are monitoring it closely. In
general, we are not making large sector bets relative to the benchmark.
We will stay focused on adding value over the long term with investment
strategies that have demonstrated effectiveness. We believe that our process of
combining both value and momentum disciplines, in varying proportions, in the
fund will continue to add value in the long term.

Christopher M. Darnell, Chief Investment Officer
Robert M. Soucy, Managing Director

October 13, 2000

<PAGE>
7

FUND PROFILE AS OF SEPTEMBER 30, 2000
FOR U.S. VALUE FUND

This Profile provides a snapshot of the fund's characteristics, compared where
appropriate to both an unmanaged index that we consider a "best fit" for the
fund and a broad market index. Key terms are defined on page 8.
--------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Wilshire
U.S. Value Best Fit* 5000
--------------------------------------------------------------------------------
Number of Stocks 386 2,001 6,793
Median Market Cap $18.0B $35.2B $46.8B
Price/Earnings Ratio 16.1x 19.6x 31.5x
Price/Book Ratio 2.2x 3.0x 4.7x
Yield 1.8% 1.9% 1.1%
Return on Equity 18.4% 20.0% 22.4%
Earnings Growth Rate 11.3% 11.0% 17.2%
Foreign Holdings 0.1% 0.0% 0.0%
Turnover Rate 18% -- --
Expense Ratio 0.58%** -- --
Cash Investments 2.2% -- --
--------------------------------------------------------------------------------
**Annualized

------------------------------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)

Fannie Mae 4.8%
(financial services)
General Motors Corp. 3.1
(automobiles)
AT&T Corp. 2.8
(telecommunications)
The Walt Disney Co. 2.2
(entertainment)
Bank One Corp. 2.2
(banks)
Philip Morris Cos., Inc. 2.0
(tobacco)
SBC Communications Inc. 1.9
(telecommunications)
Morgan Stanley Dean Witter & Co. 1.8
(financial services)
Abbott Laboratories 1.8
(pharmaceuticals)
Oracle Corp. 1.8
(software)
------------------------------------------------------------
Top Ten 24.4%
------------------------------------------------------------

--------------------------------------------------------------------------------
SECTOR DIVERSIFICATION
(% of common stocks)
Wilshire
U.S. Value Best Fit* 5000
--------------------------------------------------------------------------------
Auto & Transportation 6.9% 3.1% 1.6%
Consumer Discretionary 8.2 9.6 12.6
Consumer Staples 4.7 7.1 4.8
Financial Services 32.3 32.1 16.7
Health Care 7.4 8.2 11.9
Integrated Oils 3.4 6.9 3.0
Other Energy 4.0 2.7 2.8
Materials & Processing 4.0 4.1 2.3
Producer Durables 2.1 3.7 3.3
Technology 7.0 4.8 27.7
Utilities 16.4 15.2 8.2
Other 3.6 2.5 5.1
--------------------------------------------------------------------------------
*Russell 3000 Value Index.

-------------------
INVESTMENT FOCUS
MARKET CAP - LARGE
STYLE - VALUE
-------------------

[GRAPHIC]
Visit our website
WWW.VANGUARD.COM
for regularly updated
fund information.

<PAGE>
8

GLOSSARY
OF INVESTMENT TERMS

CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
--------------------------------------------------------------------------------
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
--------------------------------------------------------------------------------
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
--------------------------------------------------------------------------------
FOREIGN HOLDINGS. The percentage of a fund's equity 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 fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
--------------------------------------------------------------------------------
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
--------------------------------------------------------------------------------
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
--------------------------------------------------------------------------------
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
--------------------------------------------------------------------------------
TURNOVER RATE. An indication of trading activity during the period. Funds with
high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
--------------------------------------------------------------------------------
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
--------------------------------------------------------------------------------

<PAGE>
9

PERFORMANCE SUMMARY
FOR U.S. VALUE 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. An investor's shares, when
redeemed, could be worth more or less than their original cost.

--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE JUNE 29, 2000-SEPTEMBER 30, 2000

[GRAPHIC]

TOTAL RETURNS FINAL VALUE
PERIOD ENDED SEPTEMBER 30, 2000 OF A $10,000
------------------------------- INVESTMENT
SINCE INCEPTION
--------------------------------------------------------------------------------
U.S. Value Fund* 8.18% $10,818
Average Multi-Cap Value Fund** 3.53 10,353
Russell 3000 Value Index 5.59 10,559
Wilshire 5000 Index -1.79 9,821
--------------------------------------------------------------------------------
**Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------

--------------------------------------------------------------------------------
TOTAL RETURN PERIOD ENDED SEPTEMBER 30, 2000

SINCE INCEPTION
INCEPTION ---------------------------------
DATE CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
U.S. Value Fund* 6/29/2000 8.18% 0.00% 8.18%
--------------------------------------------------------------------------------
*Subscription period for the fund was June 5, 2000, to June 29, 2000, during
which time all assets were held in money market instruments. Performance
measurement begins June 29, 2000.

<PAGE>
10

FINANCIAL STATEMENTS
SEPTEMBER 30, 2000

STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, 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.
--------------------------------------------------------------------------------
MARKET
VALUE*
U.S. VALUE FUND SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (97.8%)
--------------------------------------------------------------------------------

AUTO & TRANSPORTATION (6.7%)
General Motors Corp. 32,800 $2,132
Ford Motor Co. 33,129 839
Burlington Northern
Santa Fe Corp. 21,300 459
Union Pacific Corp. 6,100 237
Tidewater Inc. 4,500 205
* AMR Corp. 4,300 140
CSX Corp. 6,200 135
Delta Air Lines, Inc. 2,800 124
UAL Corp. 2,300 97
Norfolk Southern Corp. 4,100 60
The Goodyear Tire & Rubber Co. 3,000 54
* Offshore Logistics, Inc. 2,000 36
Overseas Shipholding Group Inc. 1,200 33
Arctic Cat, Inc. 1,300 16
----------------
4,567
----------------
CONSUMER DISCRETIONARY (8.0%)

The Walt Disney Co. 39,800 1,522
* Viacom Inc. Class B 5,200 304
Sears, Roebuck & Co. 7,600 246
* Federated Department Stores, Inc. 9,200 240
* Toys R Us, Inc. 13,600 221
The Limited, Inc. 7,900 174
* Mandalay Resort Group 6,700 172
* Kmart Corp. 24,200 145
Tribune Co. 3,200 140
Whirlpool Corp. 3,300 128
Hollinger International, Inc. 7,400 124
* Brinker International, Inc. 3,900 117
R.R. Donnelley & Sons Co. 4,700 115
* Payless ShoeSource, Inc. 1,800 101
* AT&T Corp.-Liberty Media Class A 5,500 99
* Venator Group, Inc. 7,000 87
Banta Corp. 3,400 83
Harman International
Industries, Inc. 2,000 78
J.C. Penney Co., Inc. 6,500 77
Ruby Tuesday, Inc. 6,400 72
* Aztar Corp. 4,300 66
* Rent-A-Center, Inc. 1,900 66
CBRL Group, Inc. 4,500 65
Dillard's Inc. 5,800 62
* Mohawk Industries, Inc. 2,700 59
* GTech Holdings Corp. 3,500 58
VF Corp. 2,300 57
Bob Evans Farms, Inc. 2,900 54
American Greetings Corp. Class A 3,000 53
Media General, Inc. Class A 1,100 47
BHC Communications, Inc. Class A 300 47
Wallace Computer Services, Inc. 2,900 44
Service Corp. International 17,600 43
* Buffets Inc. 3,100 43

<PAGE>
11

--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
* AutoNation, Inc. 6,800 $ 41
Kelly Services, Inc. Class A 1,700 40
Springs Industries Inc. Class A 1,400 39
The Toro Co. 1,100 35
* Ryan's Family Steak Houses, Inc. 4,400 34
* Nautica Enterprises, Inc. 2,300 30
Russell Corp. 1,900 30
* ShopKo Stores, Inc. 2,800 29
* Pinnacle Entertainment, Inc. 1,100 24
Bowne & Co., Inc. 1,900 19
Lone Star Steakhouse
& Saloon, Inc. 2,600 19
Libbey, Inc. 500 16
* Hollywood Entertainment Corp. 2,000 15
La-Z-Boy Inc. 1,000 15
* Amerco, Inc. 700 14
* Bacou USA Inc. 500 13
The Marcus Corp. 900 9
* Volt Information Sciences Inc. 400 9
-----------------
5,440
-----------------

CONSUMER STAPLES (4.6%)
Philip Morris Cos., Inc. 46,000 1,354
PepsiCo, Inc. 11,300 520
Nabisco Group Holdings Corp. 10,300 294
Albertson's, Inc. 13,100 275
SuperValu Inc. 8,400 127
IBP, Inc. 5,800 106
Adolph Coors Co. Class B 1,200 76
Unilever NV ADR 1,400 68
Universal Foods Corp. 3,100 63
Interstate Bakeries Corp. 3,700 54
Winn-Dixie Stores, Inc. 3,100 45
Fleming Cos., Inc. 3,400 44
Earthgrains Co. 2,100 39
Ruddick Corp. 2,700 37
Coca-Cola Bottling Co. 500 21
Great Atlantic & Pacific Tea Co., Inc. 1,400 15
* 7-Eleven, Inc. 1,000 13
Ingles Markets, Inc. 1,100 12
-----------------
3,163
-----------------

FINANCIAL SERVICES (31.6%)
BANKS--NEW YORK CITY (0.9%)
J.P. Morgan & Co., Inc. 2,700 441
The Chase Manhattan Corp. 3,300 152

BANKS--OUTSIDE NEW YORK CITY (7.5%)
Bank One Corp. 39,300 1,518
First Union Corp. 29,000 933
KeyCorp 18,800 476
Bank of America Corp. 9,000 471
FleetBoston Financial Corp. 8,600 335
PNC Financial Services Group 5,000 325
National City Corp. 13,300 294
SouthTrust Corp. 3,200 10
UnionBanCal Corp. 4,000 93
Colonial BancGroup, Inc. 7,500 78
Pacific Century Financial Corp. 4,500 77
Union Planters Corp. 2,300 76
Provident Financial Group, Inc. 2,400 71
BancWest Corp. 2,900 56
Provident Bankshares Corp. 2,400 40
Riggs National Corp. 2,600 32
State Street Corp. 200 26
First Bancorp/Puerto Rico 600 15
First Citizens BancShares Class A 200 14
Regions Financial Corp. 600 14
BancFirst Corp. 400 13
Community Bank System, Inc. 500 13
* BOK Financial Corp. 600 11
Corus Bankshares Inc. 300 11
First Tennessee National Corp. 500 10

DIVERSIFIED FINANCIAL SERVICES (5.0%)
Morgan Stanley Dean Witter & Co. 13,700 1,253
The Goldman Sachs Group, Inc. 8,700 991
Merrill Lynch & Co., Inc. 11,000 726
American General Corp. 2,100 164
Citigroup, Inc. 2,966 160
PaineWebber Group, Inc. 1,700 116
Liberty Financial Cos., Inc. 500 12

FINANCIAL--MISCELLANEOUS (5.5%)
Fannie Mae 46,000 3,289
Freddie Mac 4,800 260
MBIA, Inc. 2,400 171
MBNA Corp. 700 27
MGIC Investment Corp. 300 18
* Ocwen Financial Corp. 1,700 10

INSURANCE--LIFE (0.3%)
Conseco Inc. 23,500 179
Kansas City Life Insurance Co. 300 10

INSURANCE--MULTI-LINE (5.0%)
Allstate Corp. 30,000 1,042
Loews Corp. 5,900 492
The Hartford Financial Services
Group Inc. 4,600 336
CIGNA Corp. 2,900 303
Lincoln National Corp. 4,100 197
Torchmark Corp. 7,100 197
SAFECO Corp. 6,800 185
Cincinnati Financial Corp. 4,900 174
Old Republic International Corp. 5,800 140
Allmerica Financial Corp. 2,100 134
* CNA Financial Corp. 2,700 103

<PAGE>
12

--------------------------------------------------------------------------------
MARKET
VALUE*
U.S. VALUE FUND SHARES (000)
--------------------------------------------------------------------------------
American National Insurance Co. 1,300 $ 83
American Financial Group, Inc. 1,600 37
Insurance--Property--Casualty (1.2%)
St. Paul Cos., Inc. 7,100 350
The Chubb Corp. 3,400 269
White Mountains Insurance
Group Inc. 400 109
W.R. Berkley Corp. 1,600 55
PXRE Group Ltd. 800 13
Argonaut Group, Inc. 700 12
Midland Co. 400 11

RENT & LEASE SERVICES--COMMERCIAL (0.8%)
GATX Corp. 4,400 184
Comdisco, Inc. 7,900 151
Ryder System, Inc. 5,900 109
* XTRA Corp. 1,100 49
Rollins Truck Leasing 5,200 33

SAVINGS & LOAN (3.1%)
Washington Mutual, Inc. 23,000 916
Golden West Financial Corp. 6,800 365
Bank United Corp. Class A 3,300 167
Dime Bancorp, Inc. 7,700 166
Green Point Financial Corp. 4,400 130
Washington Federal Inc. 5,000 114
Charter One Financial 3,225 79
Astoria Financial Corp. 1,400 54
Independence Community
Bank Corp. 3,500 49
PFF Bancorp, Inc. 900 20
* First Republic Bank 600 18
Bay View Capital Corp. 1,400 15
Westcorp, Inc. 900 14
First Federal Capital Corp. 1,000 12

SECURITIES BROKERS & SERVICES (2.3%)
Lehman Brothers Holdings, Inc. 3,500 517
Bear Stearns Co., Inc. 7,400 466
Franklin Resources Corp. 8,700 387
Countrywide Credit Industries, Inc. 4,300 162
Advanta Corp. Class A 900 10
-----------------
21,511
-----------------

HEALTH CARE (7.2%)
Abbott Laboratories 25,400 1,208
HCA-The Healthcare Co. 10,600 394
Aetna Inc. 6,000 348
* Universal Health Services Class B 3,400 291
American Home Products Corp. 4,700 266
Tenet Healthcare Corp. 6,400 233
Johnson & Johnson 2,400 225
Pharmacia Corp. 3,400 205
C.R. Bard, Inc. 4,100 173
Bristol-Myers Squibb Co. 2,800 160
* HEALTHSOUTH Corp. 17,500 142
Schering-Plough Corp. 3,000 140
* PE Corp.-Celera Genomics Group 1,400 139
DENTSPLY International Inc. 3,900 136
Beckman Coulter, Inc. 1,500 116
* Foundation Health Systems
Class A 6,900 115
Mallinckrodt, Inc. 1,900 87
Invacare Corp. 2,300 74
* Quorum Health Group, Inc. 5,600 73
* Lincare Holdings, Inc. 2,000 57
* Beverly Enterprises, Inc. 9,200 55
* STERIS Corp. 4,500 54
Datascope Corp. 1,300 44
Owens & Minor, Inc. Holding Co. 2,700 43
* Acuson Corp. 1,200 27
Diagnostic Products Corp. 500 27
* US Oncology, Inc. 4,800 22
* Bio-Rad Laboratories, Inc. Class A 900 20
* Life Technologies, Inc. 300 20
West Pharmaceutical Services, Inc. 700 16
* CorVel Corp. 500 14
* Covance, Inc. 1,000 8
-----------------
4,932
-----------------

INTEGRATED OILS (3.3%)
Coastal Corp. 5,400 400
Phillips Petroleum Co. 5,200 326
USX-Marathon Group 11,000 312
Unocal Corp. 7,600 269
Amerada Hess Corp. 4,000 268
Kerr-McGee Corp. 3,900 258
Occidental Petroleum Corp. 11,700 255
Texaco Inc. 2,200 116
Murphy Oil Corp. 900 58
-----------------
2,262
-----------------

OTHER ENERGY (4.0%)
Dynegy, Inc. 11,200 638
Apache Corp. 5,200 307
EOG Resources, Inc. 6,900 268
El Paso Energy Corp. 3,400 210
Noble Affiliates, Inc. 5,600 208
Transocean Sedco Forex Inc. 2,400 141
Helmerich & Payne, Inc. 3,200 116
* BJ Services Co. 1,700 104
* Key Energy Services, Inc. 10,300 101
Ashland, Inc. 2,700 91
* Veritas DGC Inc. 2,500 72
ENSCO International, Inc. 1,700 65
* Pride International Inc. 2,100 56
* Parker Drilling Co. 7,300 51
* Seitel, Inc. 3,300 47

<PAGE>
13

--------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
--------------------------------------------------------------------------------
Cabot Oil & Gas Corp. Class A 2,100 $ 43
* Oceaneering International, Inc. 2,400 40
Valero Energy Corp. 1,000 35
* Marine Drilling Co., Inc. 1,200 34
* Pioneer Natural Resources Co. 1,900 27
* Global Marine, Inc. 800 25
* Atwood Oceanics, Inc. 400 17
-----------------
2,696
-----------------

MATERIALS & PROCESSING (3.9%)
International Paper Co. 7,400 212
Alcan Aluminium Ltd. 6,100 176
Phelps Dodge Corp. 3,800 159
Archer-Daniels-Midland Co. 15,865 137
Georgia Pacific Group 4,800 113
USX-U.S. Steel Group 7,100 108
Precision Castparts Corp. 2,800 107
Crown Cork & Seal Co., Inc. 9,900 106
The Mead Corp. 4,500 105
Westvaco Corp. 3,900 104
Lyondell Chemical Co. 8,500 100
Temple-Inland Inc. 2,500 95
Ball Corp. 2,800 89
* Cytec Industries, Inc. 2,400 80
Boise Cascade Corp. 2,900 77
* Owens-Illinois, Inc. 7,400 68
Bemis Co., Inc. 2,100 67
Harsco Corp. 3,000 66
AK Steel Corp. 6,400 60
The Timken Co. 3,900 53
Lubrizol Corp. 2,300 45
IMC Global Inc. 3,100 45
Texas Industries, Inc. 1,300 41
Aptargroup Inc. 1,700 41
Interface, Inc. 4,800 38
* Unifi, Inc. 3,500 36
* Airgas, Inc. 5,000 34
Wellman, Inc. 2,100 30
* Mueller Industries Inc. 1,300 29
Ryerson Tull, Inc. 3,100 29
Caraustar Industries, Inc. 2,300 25
* Bethlehem Steel Corp. 8,400 25
Commercial Metals Co. 700 18
Georgia Gulf Corp. 1,100 13
* PolyOne Corp. 1,800 13
Sonoco Products Co. 700 13
Barnes Group, Inc. 700 13
The Standard Register Co. 800 13
Rock-Tenn Co. 1,300 13
* Nortek, Inc. 700 12
Weyerhaeuser Co. 300 12
* Griffon Corp. 1,400 11
LTV Corp. 8,600 11
Stepan Co. 500 10
National Steel Corp. Class B 2,900 9
Liqui-Box Corp. 200 6
-----------------
2,667
-----------------

PRODUCER DURABLES (2.0%)
Emerson Electric Co. 3,000 201
Lockheed Martin Corp. 4,200 138
Deere & Co. 3,900 130
The Boeing Co. 1,700 107
Northrop Grumman Corp. 1,100 100
Cooper Industries, Inc. 2,400 85
Pulte Corp. 2,200 73
Pentair, Inc. 2,500 67
HON Industries, Inc. 2,400 59
Ryland Group, Inc. 1,700 53
Kennametal, Inc. 2,000 52
Kimball International, Inc. Class B 2,700 48
AGCO Corp. 3,700 44
Cummins Engine Co., Inc. 1,400 42
Milacron Inc. 2,700 36
* Esterline Technologies Corp. 1,800 35
NACCO Industries, Inc. Class A 700 29
Woodward Governor Co. 600 27
MDC Holdings, Inc. 600 16
Thomas Industries, Inc. 600 12
Mine Safety Appliances Co. 500 11
Caterpillar, Inc. 300 10
-----------------
1,375
-----------------

Technology (6.8%)
* Oracle Corp. 15,200 1,197
Intel Corp. 11,900 495
Compaq Computer Corp. 17,600 485
Hewlett-Packard Co. 4,200 407
Electronic Data Systems Corp. 6,300 261
* Micron Technology, Inc. 5,600 258
* SDL, Inc. 800 246
Raytheon Co. Class B 6,200 176
* Apple Computer, Inc. 6,500 167
* Advanced Micro Devices, Inc. 6,900 163
Harris Corp. 4,200 119
* General Motors Corp. Class H 3,100 115
* Litton Industries, Inc. 2,400 107
* Cabletron Systems, Inc. 3,100 91
* National Semiconductor Corp. 2,200 89
* Computer Sciences Corp. 1,000 74
* Seagate Technology Inc. 1,000 69
Reynolds & Reynolds Class A 2,800 56
* Atmel Corp. 3,000 46
Motorola, Inc. 400 11
* Microsoft Corp. 100 6
-----------------
4,638
-----------------

<PAGE>
14

--------------------------------------------------------------------------------
MARKET
VALUE*
U.S. VALUE FUND SHARES (000)
--------------------------------------------------------------------------------
UTILITIES (16.0%)
AT&T Corp. 64,100 $ 1,883
SBC Communications Inc. 26,100 1,305
Verizon Communications 20,402 988
* Sprint PCS 18,600 652
Entergy Corp. 11,300 421
Unicom Corp. 5,900 332
Dominion Resources, Inc. 5,200 302
Reliant Energy, Inc. 6,200 288
TXU Corp. 7,100 281
Southern Co. 8,500 276
PG&E Corp. 11,000 266
Public Service Enterprise
Group, Inc. 5,100 228
Constellation Energy Group 4,500 224
FirstEnergy Corp. 7,900 213
DTE Energy Co. 5,500 210
FPL Group, Inc. 3,200 210
Consolidated Edison Inc. 5,500 188
Telephone & Data Systems, Inc. 1,700 188
Xcel Energy, Inc. 6,600 182
American Electric Power Co., Inc. 4,600 180
GPU, Inc. 5,400 175
Ameren Corp. 4,100 172
Edison International 8,700 168
Pinnacle West Capital Corp. 3,300 168
* Niagara Mohawk Holdings Inc. 10,600 167
Questar Corp. 5,000 139
* Citizens Communications Co. 8,600 116
Northeast Utilities 4,800 104
Western Resources, Inc. 4,300 93
Public Service Co. of New Mexico 3,300 85
KeySpan Corp. 2,100 84
Potomac Electric Power Co. 3,000 76
Wisconsin Energy Corp. 3,800 76
Allegheny Energy, Inc. 1,700 65
ONEOK, Inc. 1,400 56
Southwest Gas Corp. 2,600 54
SCANA Corp. 1,700 52
* WorldCom, Inc. 1,700 52
PPL Corp. 1,100 46
UniSource Energy Corp. 2,800 46
Florida Progress Corp. 800 42
* El Paso Electric Co. 1,500 21
Hickory Tech Corp. 700 16
Southwestern Energy Co. 1,400 12
North Pittsburgh Systems, Inc. 800 11
------------------
10,913
------------------

OTHER (3.7%)
Honeywell International Inc. 24,500 873
The Seagram Co. Ltd. 8,100 465
Minnesota Mining &
Manufacturing Co. 3,500 319
Hillenbrand Industries, Inc. 3,600 161
Brunswick Corp. 6,400 117
Fortune Brands, Inc. 3,600 95
Trinity Industries, Inc. 3,000 70
McDermott International, Inc. 5,200 57
Carlisle Co., Inc. 1,300 54
* FMC Corp. 800 54
Teleflex Inc. 1,400 48
Lancaster Colony Corp. 1,900 47
National Service Industries, Inc. 2,100 41
* Ogden Corp. 2,900 39
Walter Industries, Inc. 3,800 34
GenCorp, Inc. 2,200 18
* Sequa Corp. Class A 300 13
------------------
2,505
------------------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $63,297) 66,669
--------------------------------------------------------------------------------
Face
Amount
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (3.3%)
--------------------------------------------------------------------------------
U.S. TREASURY BILL
5.99%, 12/7/2000 $ 40 40

REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a
Pooled Cash Account
6.50%, 10/2/2000 2,257 2,257
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $2,297) 2,297
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.1%)
(COST $65,594) 68,966
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.1%)
--------------------------------------------------------------------------------
Receivables for Investment Securities Sold 2,626
Other Assets--Note C 431
Payables for Investment Securities Purchased (3,697)
Other Liabilities (130)
------------
(770)
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 6,289,228 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $68,196
================================================================================

NET ASSET VALUE PER SHARE $10.84
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
ADR--American Depositary Receipt.

<PAGE>
15

--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
Paid in Capital $64,563 $10.26
Undistributed Net
Investment Income 262 .04
Accumulated Net Realized Losses (1) --
Unrealized Appreciation--Note E 3,372 .54
--------------------------------------------------------------------------------
NET ASSETS $68,196 $10.84
================================================================================

<PAGE>
16

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.

--------------------------------------------------------------------------------
U.S. VALUE FUND
JUNE 5* TO
SEPTEMBER 30, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 256
Interest 78
--------------------------------------------------------------------------------
Total Income 334
--------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B 31
The Vanguard Group--Note C
Management and Administrative 12
Custodian Fees 20
Auditing Fees 9
--------------------------------------------------------------------------------
Total Expenses 72
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 262
--------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold (26)
Futures Contracts 25
--------------------------------------------------------------------------------
REALIZED NET (LOSS) (1)
--------------------------------------------------------------------------------
UNREALIZED APPRECIATION OF INVESTMENT SECURITIES 3,372
--------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $3,633
================================================================================
*Commencement of operations.

<PAGE>
17

STATEMENT OF CHANGES IN NET ASSETS

This Statement shows how the fund's total net assets changed during the
reporting period. The Operations section summarizes information detailed in the
Statement of Operations. The fund has not yet made any Distributions to
shareholders. The Capital Share Transactions section shows the amount
shareholders invested in the fund, as well as the amounts redeemed. The
corresponding numbers of Shares Issued and Redeemed are shown at the end of the
Statement.

--------------------------------------------------------------------------------
U.S. VALUE FUND
JUNE 5* TO
SEPTEMBER 30, 2000
(000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 262
Realized Net Loss (1)
Unrealized Appreciation 3,372
--------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations 3,633
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income --
Realized Capital Gain --
--------------------------------------------------------------------------------
Total Distributions --
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 66,331
Issued in Lieu of Cash Distributions --
Redeemed (1,768)
--------------------------------------------------------------------------------
Net Increase from Capital Share Transactions 64,563
--------------------------------------------------------------------------------
Total Increase 68,196
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Period --
End of Period $68,196
================================================================================

1Shares Issued (Redeemed)
Issued 6,455
Issued in Lieu of Cash Distributions --
Redeemed (166)
--------------------------------------------------------------------------------
Net Increase in Shares Outstanding 6,289
================================================================================
*Commencement of operations.

<PAGE>
18

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.

--------------------------------------------------------------------------------
U.S. VALUE FUND
JUNE 5* TO
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
--------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .04
Net Realized and Unrealized Gain (Loss) on Investments .80
--------------------------------------------------------------------------------
Total from Investment Operations .84
--------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income --
Distributions from Realized Capital Gains --
--------------------------------------------------------------------------------
Total Distributions --
--------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $10.84
================================================================================

TOTAL RETURN 8.18%
================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $68
Ratio of Total Expenses to Average Net Assets 0.58%**
Ratio of Net Investment Income to Average Net Assets 2.08%**
Portfolio Turnover Rate 18%
================================================================================
*Subscription period for the fund was June 5, 2000, to June 29, 2000,
during which time all assets were held in money market instruments.
Performance measurement begins June 29, 2000, at a net asset value of $10.02.
**Annualized.

<PAGE>
19

NOTES TO FINANCIAL STATEMENTS

Vanguard U.S. Value 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 U.S. 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. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the board of trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends 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 CONTRACTS: The fund uses S&P 500 Index futures contracts to a
limited extent, with the objective of maintaining full exposure to the stock
market while maintaining liquidity. The fund may purchase or sell futures
contracts to achieve a desired level of investment, whether to accommodate
portfolio turnover or cash flows from capital share transactions. 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.

B. Grantham, Mayo, Van Otterloo, & Co. LLC provides investment advisory services
to the fund for a fee calculated at an annual percentage rate of average net
assets. For the period ended September 30, 2000, the advisory fee represented an
effective annual rate of 0.225% of the fund's average net assets.

<PAGE>
20

C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At September 30, 2000, the fund had contributed capital of $11,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.01% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.

D. During the period ended September 30, 2000, the fund purchased $70,013,000 of
investment securities and sold $6,695,000 of investment securities other than
temporary cash investments.

E. At September 30, 2000, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $3,372,000,
consisting of unrealized gains of $6,316,000 on securities that had risen in
value since their purchase and $2,944,000 in unrealized losses on securities
that had fallen in value since their purchase.

<PAGE>
21

REPORT
OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Trustees of Vanguard U.S. Value 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 U.S. Value Fund (the "Fund") at September 30, 2000, and the results of
its operations, the changes in its net assets and the financial highlights for
the period then ended, in conformity with accounting principles generally
accepted in the United States of America. 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 audit. We conducted our audit
of these financial statements in accordance with auditing standards generally
accepted in the United States of America, 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 audit, which included confirmation of securities at September
30, 2000 by correspondence with the custodian, provides a reasonable basis for
our opinion.

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania

November 1, 2000

--------------------------------------------------------------------------------
SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR
VANGUARD U.S. VALUE FUND
This information for the fiscal period ended September 30, 2000, is included
pursuant to provisions of the Internal Revenue Code.
For corporate shareholders, 94.9% of investment income (dividend income
plus short-term gains, if any) qualifies for the dividends-received deduction.

<PAGE>
22

THE VANGUARD(R)
FAMILY OF FUNDS

STOCK FUNDS
500 Index Fund
Calvert Social Index(TM) Fund
Capital Opportunity Fund
Convertible Securities Fund
Developed Markets Index Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets
Index Fund
Institutional Index Fund
International Growth Fund
International Value Fund
Mid-Cap Index Fund
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital
Appreciation Fund
Tax-Managed Growth and
Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock
Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Utilities Income Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund

BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative
Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate
Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund

BOND FUNDS
Admiral(TM) Intermediate-Term
Treasury Fund
Admiral(TM) Long-Term
Treasury Fund
Admiral(TM) Short-Term
Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Insured Long-Term
Tax-Exempt Fund
Intermediate-Term Bond
Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term
Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida,
Massachusetts, New Jersey,
New York, Ohio, Pennsylvania)
Total Bond Market Index Fund

MONEY MARKET FUNDS

Admiral(TM) Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market
Funds (California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund

VARIABLE ANNUITY PLAN
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio

For information about Vanguard funds and our variable annuity plan, including
charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box
2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send
money.

<PAGE>

THE PEOPLE
WHO GOVERN YOUR FUND

The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/ directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. The year in which the trustee joined the Vanguard board is noted
in parentheses.
--------------------------------------------------------------------------------
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.

JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.

BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.

BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Argentaria, Gestion, BKF Capital, The Jeffrey Co., NeuVis, Inc., and
Select Sector SPDR Trust.

ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.

JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc. (Food
Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco
Products); Director of TECO Energy, Inc., and Kmart Corp.

J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm &
Haas Co.; Director of AmeriSource Health Corporation, Cummins Engine Co., and
The Mead Corp.; Trustee of Vanderbilt University.

--------------------------------------------------------------------------------
OTHER FUND OFFICERS

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

THOMAS J. HIGGINS, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS

R. GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. GUBANICH, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
JOHN C. BOGLE
Founder; Chairman and Chief Executive, 1974-1996.

<PAGE>

[SHIP LOGO]
THE VANGUARD GROUP(R)
Post Office Box 2600
Valley Forge, PA 19482-2600

ABOUT OUR COVER
Our cover art evokes both Vanguard's rich past and the course we've set for the
future--our determination to provide superior investment performance and
top-notch service. The image is based on two works: a painting titled The First
Journey of 'Victory,' by the English artist W.L. Wyllie (1851-1931), and a
sculpture of a compass rose on Vanguard's campus near Valley Forge,
Pennsylvania.

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

Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500, 500, S&P
MidCap400, and S&P SmallCap 600 are trademarks of The McGraw-Hill Companies,
Inc. All other index names may contain trademarks and are the exclusive property
of their respective owners.

WORLD WIDE WEB
www.vanguard.com

FUND INFORMATION
1-800-662-7447

INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739

INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036

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

Q1240 112000

<PAGE>

VANGUARD(R)ASSET ALLOCATION FUND
ANNUAL REPORT SEPTEMBER 30, 2000

[GRAPHIC]
{A MEMBER OF THE VANGUARD GROUP (R)]

<PAGE>

OUR REPORTS TO
THE OWNERS

SUMMARY

* Vanguard Asset Allocation Fund posted an 11.4% return during a volatile
period in financial markets.

* Small-capitalization stocks outperformed large-caps during the 12 months
ended September 30.

* The prices of longer-term government bonds surged, outpacing corporate
bonds.

* Technology-related stocks stumbled in the second half of the fiscal year,
bringing down most market indexes.

CONTENTS

1 LETTER FROM THE CHAIRMAN
5 REPORT FROM THE ADVISER
7 FUND PROFILE
9 GLOSSARY OF INVESTMENT TERMS
11 PERFORMANCE SUMMARY
12 REPORT ON AFTER-TAX RETURNS
13 FINANCIAL STATEMENTS
25 REPORT OF INDEPENDENT ACCOUNTAN

LETTER
FROM THE CHAIRMAN

FELLOW SHAREHOLDERS,

VANGUARD ASSET ALLOCATION FUND earned an 11.4% return during the 12 months ended
September 30, 2000--a period of extreme volatility in the financial markets.
While solid in absolute terms, the fund's return lagged those of its average
peer and its benchmark index.
The adjacent table presents the fiscal-year total returns (capital change
plus reinvested dividends) for the Asset Allocation Fund, the average
flexible-portfolio fund, and our composite index benchmark, which is 65%
Standard & Poor's 500 Index and 35% Lehman Brothers Long U.S. Treasury Index. As
you know, the investments of the Asset Allocation Fund may be split among
large-capitalization common stocks, long-term U.S. Treasury bonds, and cash
equivalents. As you might expect, the fund's return fell between the 13.3% gain
of the S&P 500 Index and the 9.8% return of the Lehman Long Treasury Index.

2000 TOTAL RETURNS
FISCAL YEAR ENDED
SEPTEMBER 30
----------------------------------------------------------------
Vanguard Asset Allocation Fund 11.4%
Average Flexible Fund* 12.8
Asset Allocation Composite Index** 12.4
----------------------------------------------------------------
*Derived from data provided by Lipper Inc.
**65% S&P 500 Index and 35% Lehman Long Treasury Index.

The fund's return is based on an increase in net asset value from $24.11
per share on September 30, 1999, to $24.79 per share on September 30, 2000, and
is adjusted for dividends totaling $1.00 per share paid from net investment
income and a distribution of $0.96 per share paid from net realized capital
gains.
If you own Vanguard Asset Allocation Fund in a taxable account, see page 12
for a review of the fund's after-tax returns.

MARKET BAROMETER
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED SEPTEMBER 30, 2000

ONE THREE FIVE
YEAR YEARS YEARS
--------------------------------------------------------------------------------
STOCKS
S&P 500 Index (Large-caps) 13.3% 16.4% 21.7%
Russell 2000 Index (Small-caps) 23.4 6.0 12.4
Wilshire 5000 Index (Entire market) 17.7 15.6 20.5
MSCI EAFE Index (International) 3.4 7.7 8.9
--------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index (Entire market) 7.0% 5.9% 6.5%
Lehman Long Treasury Index 9.8 7.4 7.5
Lehman 10 Year Municipal Bond Index 6.4 4.8 5.8
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.6 5.2 5.2
================================================================================
CPI
Consumer Price Index 3.5% 2.5% 2.5%
--------------------------------------------------------------------------------

FINANCIAL MARKETS IN REVIEW
During the fiscal period, the juggernaut U.S.

<PAGE>
2

economy was well into a record tenth year of uninterrupted expansion. The labor
market remained tight; the unemployment rate hovered around--and even dipped
below--4%. Except for energy prices, inflation stayed in check, partly thanks to
the Federal Reserve Board's series of short-term interest rate hikes. In recent
months, statistics indicate that the Fed may have succeeded in slowing the pace
of economic growth, though it remained robust overall. Nevertheless, as the
fiscal year progressed, investors became increasingly concerned about the impact
that slower growth could have on corporate earnings. Other causes of investor
anxiety were higher energy prices and the weakness of the euro, which cuts into
profits of companies with European operations.
--------------------------------------------------------------------------------
THE FUND TOOK A DEFENSIVE POSITION DURING MOST OF THE YEAR.
--------------------------------------------------------------------------------
Against this backdrop, the U.S. stock market, as measured by the Wilshire
5000 Total Market Index, posted a terrific 12-month return of 17.7%. However,
that figure belies the market's split personality. During the first six months,
several market indexes reached record levels, largely driven by
technology-related growth stocks. Meanwhile, value stocks--those whose prices
are seen as "cheap" relative to such measures as a company's earnings, book
value, and dividends--lagged far behind. However, midway through the fiscal
year, market leadership switched--sometimes dramatically. By September 30, the
tech-heavy Nasdaq Composite Index was 27% below the peak it reached in March.
The growth stocks within the large-cap S&P 500 Index fell -10.1% in the
second half of the period, ending with a 12.0% return for the fiscal year,
versus 13.7% for the index's value stocks. Mid- and small-cap stocks, as a
whole, outpaced large-cap stocks.
--------------------------------------------------------------------------------
ASSET ALLOCATION'S LONG-TERM RECORD WELL SURPASSES THAT OF ITS AVERAGE PEER.
--------------------------------------------------------------------------------
In the bond market, the government's repurchasing of its long-term debt
drove up prices of 30-year Treasury bonds and pushed yields lower. This created
an "inversion of the yield curve," in which the yields of short-term securities
were higher than those of long-term bonds. While the yield curve seemed to be
heading back toward normalcy at the end of the period, the 30-year Treasury's
yield on September 30--it stood at 5.89%, down 16 basis points (0.16 percentage
point) from a year earlier--was still 32 basis points below that of 3-month
Treasury bills. Because of their higher prices, long-term government bonds
provided better 12-month returns than corporate issues and certainly better than
high-yield "junk" bonds, whose returns were virtually flat.

FISCAL 2000 PERFORMANCE OVERVIEW
Vanguard Asset Allocation Fund's 12-month return of 11.4% modestly trailed those
of its benchmarks because the fund's somewhat defensive stance toward

<PAGE>
3

stocks proved to be premature. The fund's adviser, Mellon Capital Management
Corporation, uses a proprietary asset-allocation model to take advantage of
perceived imbalances in the relative prices and expected returns of stocks,
bonds, and cash investments. The fund began the fiscal year with assets split
equally between stocks and bonds, but because of a run-up in stock prices and
lower prices on long-term Treasury bonds, the adviser changed the allocation in
early November to 40% stocks and 60% bonds. In August 2000, with the prices of
stocks down and bonds up, the adviser changed the allocation back to 50%
stocks/50% bonds.
Therefore, throughout its fiscal year, the fund held a more defensive
position than its "neutral allocation" of 65% stocks/35% bonds. The fund's
relatively conservative stance reduced the effects of volatility somewhat in the
last half of the fiscal year: While the index declined -1.0%, the fund posted a
slight gain of 0.5%. Through the course of the fiscal year, the fund benefited
from its greater exposure to long-term Treasury bonds during their run-up in
prices, but the fund's lower exposure to stocks occurred just when stock market
indexes reached their record highs in the first quarter of 2000.

LONG-TERM PERFORMANCE OVERVIEW
A 12-month result does not provide an adequate picture of a fund's long- term
performance. Over longer periods, Vanguard Asset Allocation Fund's record truly
shines. As shown in the accompanying table, a $10,000 investment in the fund a
decade ago would have grown to $45,571 by September 30. That is $11,455 more
than a comparable investment in the fund's average competitor, an advantage that
exceeds the initial investment. The fund's average return was slightly greater
than that of the composite index. This is a notable achievement, because indexes
are theoretical constructs that do not incur the real-world expenses that mutual
funds must bear.

TOTAL RETURNS TEN YEARS ENDED
SEPTEMBER 30, 2000

AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
------------------------------------------------------------------------------
Vanguard Asset Allocation Fund 16.4% $45,571
Average Flexible Fund 13.1 34,116
Asset Allocation Composite Index 16.3 45,212
S&P 500 Index 19.4 59,081
------------------------------------------------------------------------------

In large part, our strong long-term performance relative to our peers is
due to our low cost. The fund's expense ratio (expenses as a percentage of
average net assets) of 0.44% is a fraction of the average peer's 1.39%. While a
0.95-percentage point gap might seem small, the difference translates into a
margin of more than $10,000 over ten years (assuming an initial investment of
$10,000 earning 10% a year). Over time, costs matter.

<PAGE>
4

While the fund's performance may seem modest compared with the stock
market's average return of more than 19% over the past ten years, it is
important to note that Asset Allocation's balanced approach entails far less
risk than an all-stock portfolio. In fact, the fund has captured 84% of the S&P
500 Index's average annual return over ten years with only 70% of the
volatility, as measured by standard deviation. A fund with these risk/return
characteristics can be a valuable component of an investment program,
particularly during times of turbulence and unpredictability. We thank the
shareholders of the Asset Allocation Fund for their steadfast support.

IN SUMMARY
At Vanguard, we avoid the role of prognosticator. As the volatility of the past
12 months shows, it is extremely difficult to predict the near-term direction of
financial markets, let alone the prospects for certain asset classes or market
sectors.
Because of this investing truism, we hold firm in our view that investors
should construct a diversified portfolio of stock funds, bond funds, and
short-term investments in proportions appropriate to their goals, time horizon,
and risk tolerance. Once such a plan is established, the most prudent strategy
is to stay the course.

Sincerely,
/s/John J. Brennan

[PHOTO]
JOHN J. BRENNAN
CHAIRMAN AND
October 17, 2000 CHIEF EXECUTIVE OFFICER

<PAGE>
5

REPORT
FROM THE ADVISER MELLON CAPITAL MANAGEMENT CORPORATION

VANGUARD ASSET ALLOCATION FUND had a total return of 11.4% for the fiscal year
ended September 30, 2000. The fund's benchmark index, a composite that is
weighted 65% in the S&P 500 Index and 35% in long-term U.S. Treasury bonds, had
a total return of 12.4%, with the S&P 500 returning 13.3% and long-term Treasury
bonds 9.8% during the period. For most of the fiscal year, the fund was
underweight in stocks and overweight in bonds. Although this defensive asset
allocation resulted in a shortfall in the fund's return relative to its
benchmark during the first half of the fiscal year, it aided the fund's
performance versus its benchmark over the last six months.
--------------------------------------------------------------------------------
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 FUND TO
TAKE ADVANTAGE OF THEM.
--------------------------------------------------------------------------------

THE INVESTMENT ENVIRONMENT
During the fiscal year, the economic expansion became the longest in U.S.
history, and the unemployment rate touched a 30-year low of 3.9% of the
workforce. Meanwhile, inflation, as measured by year-over-year changes in the
"core" Consumer Price Index, which excludes energy and food prices, reached a
34-year low of 1.9% before rising to 2.5% at fiscal year-end.
Our asset allocation decisions are driven by the spreads between expected
returns for stocks, bonds, and cash. These spreads changed due to the sharp
divergence in the performance of stocks and bonds during the fiscal year. During
the first half of the fiscal year, stocks rose strongly, underpinned by the
continued meteoric rise in the technology sector. The S&P 500 rose 17.5% during
this period (with its technology component rising 53%), and bond yields
increased as the Federal Reserve Board continued to raise short-term interest
rates to slow the economy. By fiscal year-end, the Fed had raised the target
federal funds rate to 6.5%--a nine-year high.
The sharp rise in stock prices drove down our expected return for equities,
while rising bond yields boosted our expected return for fixed income assets.
The result was a steady decline in the spread between expected returns for
stocks and bonds. By January 2000, the spread had reached a level we last
observed in the summer of 1987. This is why we adopted a decisively defensive
posture during the first half of the fiscal year. During the second half of the

<PAGE>
6

fiscal year, technology stocks fell -21%, causing the S&P 500 Index to decline
-3.6%. Meanwhile, bond prices rose and their yields fell. By early August, the
decline in stock prices and the fall in bond yields had made the stock market
less overvalued in relation to bonds.

OUR SUCCESSES
Given the low spread between the expected returns on stocks and bonds that has
prevailed this fiscal year, we have consistently maintained a defensive
allocation to stocks. This position significantly benefited the fund in three
out of the four quarters during the fiscal year. The fall in stock prices in the
technology-led correction and the decline in expected returns for bonds prompted
us to tactically change the fund's asset allocation on August 2 to a balance of
50% stocks/50% bonds from 40% stocks/60% bonds.
The fund was aided by our policy of using long-term Treasury bonds for our
fixed income allocation. As yields declined during calendar-year 2000, long
bonds have significantly outperformed other sectors of the bond market.

OUR SHORTFALLS
We began the fiscal year with a 50% allocation to stocks. We cut that allocation
to 40% on November 4, 1999, in response to the sustained decline in the spread
between the expected returns for stocks and bonds. Although this was a prudent
defensive position, it hurt performance during the first half of the fiscal
year, when growing optimism about future earnings propelled stocks to
unrealistic heights. Emotion--whether due to optimism or pessimism--can drive
markets in unusual ways. But we are committed to a discipline of evaluating
stocks in the context of the returns available on alternative investments. And
the unequivocal message from our tactical asset allocation (TAA) model was that
for long-term investors it was prudent to be overweight in bonds relative to
stocks. At 40% stocks, our asset allocation was 25 percentage points below the
benchmark's weighting of 65% stocks. To put this in perspective, I note that the
fund has never had an equity allocation substantially lower than 40%. And we had
not lowered our stock allocation to 40% since 1992.

OUR PORTFOLIO POSITION
The fund's asset allocation entered the new fiscal year at approximately 50%
stocks/50% bonds--an underweighting in stocks and an overweighting in bonds
compared with our benchmark. Our estimate for the long-term expected return for
stocks exceeds 10.5%. But with yields on long corporate bonds around 7.5%, our
TAA model clearly finds bonds attractive relative to stocks on a risk-adjusted
basis.

William L. Fouse, CFA October 16, 2000

<PAGE>
7

FUND PROFILE AS OF SEPTEMBER 30, 2000
FOR ASSET ALLOCATION FUND

-----------------------------------------
TOTAL FUND CHARACTERISTICS
Turnover Rate 29%
Expense Ratio 0.44%
Cash Investments 1.0%
-----------------------------------------

-----------------------------------------
TEN LARGEST STOCKS
(% of equities)
General Electric Co.
(conglomerate) 4.5%
Cisco Systems, Inc.
(computer networks) 3.1
Microsoft Corp.
(software) 2.5
Exxon Mobil Corp.
(oil) 2.5
Pfizer, Inc.
(pharmaceuticals) 2.2
Intel Corp.
(computer hardware) 2.2
Citigroup, Inc.
(financial services) 1.9
Oracle Corp.
(software) 1.8
American International Group, Inc.
(insurance) 1.8
EMC Corp.
(computer technology) 1.7
-----------------------------------------
Top Ten 24.2%
-----------------------------------------
Top Ten as % of Total Net Assets 8.6%
-----------------------------------------

--------------------------------------------------------------------
TOTAL FUND VOLATILITY MEASURES
ASSET WILSHIRE
ALLOCATION BEST FIT* 5000
--------------------------------------------------------------------
R-Squared 0.86 0.93 1.00
Beta 0.55 0.94 1.00
--------------------------------------------------------------------

--------------------------------------------------------------------
SECTOR DIVERSIFICATION (% of common stocks)

ASSET WILSHIRE
ALLOCATION BEST FIT* 5000
--------------------------------------------------------------------
Auto & Transportation 1.6% 1.6% 1.6%
Consumer Discretionary 11.0 11.0 12.6
Consumer Staples 5.8 5.8 4.8
Financial Services 16.5 16.5 16.7
Health Care 11.5 11.5 11.9
Integrated Oils 4.8 4.8 3.0
Other Energy 2.3 2.3 2.8
Materials & Processing 2.0 2.0 2.3
Producer Durables 2.7 2.7 3.3
Technology 27.1 27.1 27.7
Utilities 8.4 8.4 8.2
Other 6.3 6.3 5.1
--------------------------------------------------------------------

---------------------------
FUND ASSET ALLOCATION**
[PIE CHART]
CASH INVESTMENTS - 1%
BONDS - 49%
STOCKS - 50%
---------------------------

*S&P 500 Index.
**Actual allocation may vary slightly from target allocation because of
day-to-day market fluctuations.

<PAGE>
8

--------------------------------------------------------------------
EQUITY CHARACTERISTICS
ASSET WILSHIRE
ALLOCATION BEST FIT* 5000
--------------------------------------------------------------------
Number of Stocks 502 500 6,793
Median Market Cap $80.9B $80.9B $46.8B
Price/Earnings Ratio 28.5x 28.5x 31.5x
Price/Book Ratio 5.2x 5.2x 4.7x
Dividend Yield 1.1% 1.1% 1.1%
Return on Equity 23.6% 23.6% 22.4%
Earnings Growth Rate 17.0% 17.0% 17.2%
Foreign Holdings 1.2% 1.2% 0.0%
--------------------------------------------------------------------

---------------------------
EQUITY INVESTMENT FOCUS
[CHART]
STYLE -- BLEND
MARKET CAP -- LARGE
---------------------------

--------------------------------------------------------------------
FIXED INCOME CHARACTERISTICS
ASSET LEHMAN
ALLOCATION BEST FIT** INDEXY
--------------------------------------------------------------------
Number of Bonds 31 45 6,013
Average Coupon 8.0% 8.0% 6.9%
Average Duration 10.6 years 10.5 years 4.8 years
Average Maturity 20.6 years 20.5 years 8.7 years
Average Quality Treasury Treasury Aaa
--------------------------------------------------------------------

-----------------------------------
FIXED INCOME INVESTMENT FOCUS
[CHART]
AVERAGE MATURITY -- LONG
CREDIT QUALITY -- TREASURY/AGENCY
-----------------------------------

[GRAPHIC]
*S&P 500 Index. Visit our website
**Lehman Long Treasury Index. WWW.VANGUARD.COM
YLehman Aggregate Bond Index. for regularly updated
fund information.

<PAGE>
9

GLOSSARY
OF INVESTMENT TERMS

AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
It is expressed as a percentage of face value.
--------------------------------------------------------------------------------
AVERAGE DURATION. An estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the fund's duration by the change in rates. If interest rates
rise by one percentage point, the share price of a fund with an average duration
of five years would decline by about 5%. If rates decrease by a percentage
point, the fund's share price would rise by 5%.
--------------------------------------------------------------------------------
AVERAGE MATURITY. The average length of time until bonds held by a fund reach
maturity (or are called) and are repaid. In general, the longer the average
maturity, the more a fund's share price will fluctuate in response to changes in
market interest rates.
--------------------------------------------------------------------------------
AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a fund's securities holdings by credit-rating agencies. The
agencies make their judgment after appraising an issuer's ability to meet its
obligations. Quality is graded on a scale, with Aaa or AAA indicating the most
creditworthy bond issuers and A-1 or MIG-1 indicating the most creditworthy
issuers of money market securities. U.S. Treasury securities are considered to
have the highest credit quality.
--------------------------------------------------------------------------------
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a fund with a beta
of 1.20 would have seen its share price rise or fall by 12% when the overall
market rose or fell by 10%.
--------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing instruments. This
figure does not include cash invested in futures contracts to simulate stock or
bond investment.
--------------------------------------------------------------------------------
DIVIDEND YIELD. The current, annualized rate of dividends paid on a share of
stock, divided by its current share price. For a fund, the weighted average
yield for stocks it holds.
--------------------------------------------------------------------------------
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
--------------------------------------------------------------------------------
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
--------------------------------------------------------------------------------
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
--------------------------------------------------------------------------------
FUND ASSET ALLOCATION. This chart shows the proportions of a fund's holdings
allocated to different types of assets.
--------------------------------------------------------------------------------
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
--------------------------------------------------------------------------------

<PAGE>
10

PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
--------------------------------------------------------------------------------
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
--------------------------------------------------------------------------------
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the overall market (or its benchmark index). If a fund's total
return were precisely synchronized with the overall market's return, its
R-squared would be 1.00. If a fund's returns bore no relationship to the
market's returns, its R-squared would be 0.
--------------------------------------------------------------------------------
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
--------------------------------------------------------------------------------
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
--------------------------------------------------------------------------------

<PAGE>
11

PERFORMANCE SUMMARY
FOR ASSET ALLOCATION FUND

---------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) SEPTEMBER 30, 1990-SEPTEMBER 30, 2000

---------------------------------------------------------------------------
ASSET ALLOCATION FUND Composite
Index*
Fiscal Capital Income Total Total
Year Return Return Return Return
---------------------------------------------------------------------------
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
---------------------------------------------------------------------------
*65% S&P 500 Index, 35% Lehman Long Treasury Index.
See Financial Highlights table on page 22 for dividend and capital gains
information for the past five years.

---------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) SEPTEMBER 30, 1990-SEPTEMBER 30, 2000

----------------------------------------------------------------------------
ASSET ALLOCATION FUND Composite
Index*
Fiscal Capital Income Total Total
Year Return Return Return Return
----------------------------------------------------------------------------
1996 11.1% 4.2% 15.3% 13.9%
1997 24.7 4.7 29.4 30.4
1998 11.5 3.7 15.2 14.2
1999 10.5 4.2 14.7 14.4
2000 7.0 4.4 11.4 12.4
----------------------------------------------------------------------------
*65% S&P 500 Index, 35% Lehman Long Treasury Index.
Asset Allocation Fund Composite
See Financial Highlights table on page 22 for dividend and capital gains
information for the past five years.

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------
[GRAPH]
CUMULATIVE PERFORMANCE SEPTEMBER 30, 1990-SEPTEMBER 30, 2000
AVERAGE ANNUAL TOTAL RETURNS FINAL VALUE
PERIODS ENDED SEPTEMBER 30, 2000 OF A $10,000
1 YEAR 5 YEARS 10 YEARS INVESTMENT
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asset Allocation Fund 11.36% 17.03% 16.38% $45,571
Average Flexible Fund* 12.82 13.12 13.06 34,116
Asset Allocation Composite Index** 12.37 16.86 16.29 45,212
S&P 500 Index 13.28 21.69 19.44 59,081
--------------------------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
*65% S&P 500 Index, 35% Lehman Long Treasury Index.
--------------------------------------------------------------------------------------------------
</TABLE>

--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2000

10 YEARS
INCEPTION ------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
--------------------------------------------------------------------------------
Asset Allocation Fund 11/3/1988 11.36% 17.03% 11.87% 4.51% 16.38%
--------------------------------------------------------------------------------

<PAGE>
12

A REPORT
ON YOUR FUND'S AFTER-TAX RETURNS

This table presents pre-tax and after-tax returns for your fund and an
appropriate peer group of mutual funds. The after-tax returns represent the
fund's past results only and should not be used to predict future tax
efficiency.
If you own the fund in a tax-deferred account such as an individual
retirement account or a 401(k), this information does not apply to you. Such
accounts are not subject to current taxes.

PRE-TAX AND AFTER-TAX PERIODS ENDED SEPTEMBER 30, 2000
AVERAGE ANNUAL TOTAL RETURNS

ONE YEAR FIVE YEARS TEN YEARS
-----------------------------------------------------------------
PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX PRE-TAX AFTER-TAX
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Vanguard Asset Allocation Fund 11.4% 8.4% 17.0% 13.8% 16.4% 13.7%
Average Domestic Hybrid Fund* 11.1 8.6 12.2 9.4 12.5 9.9
---------------------------------------------------------------------------------------------------
*Based on data from Morningstar, Inc. Elsewhere in this report, returns for
comparable funds are derived from data provided by Lipper Inc., which may differ
somewhat.
</TABLE>

Income taxes can have a considerable impact on a fund's return--an
important consideration for investors who own mutual funds in taxable accounts.
While the pre-tax return is most often used to tally a fund's performance, the
fund's after-tax return, which accounts for taxes on distributions of capital
gains and income dividends, is an important measure of the return that many
investors actually received.
The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden would be less, and the
after-tax return higher, for those in lower tax brackets.
We must stress that because many interrelated factors affect how
tax-friendly a fund may be, it is very difficult to predict tax efficiency. A
fund's tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses, and the net cash flow it
receives.
Finally, it's important to understand that our calculation does not reflect
the tax effect of your own investment activities. Specifically, you may incur
additional capital gains taxes--thereby lowering your after-tax return--if you
decide to sell all or some of your shares.
--------------------------------------------------------------------------------
A NOTE ABOUT OUR CALCULATIONS: Pre-tax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.

[GRAPHIC]
You can use Vanguard's online after-tax
return calculator at
WWW.VANGUARD.COM/?AFTERTAX
to customize the calculation
of your after-tax return.

<PAGE>
13

FINANCIAL STATEMENTS
SEPTEMBER 30, 2000

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.

--------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES SHARES (000)
--------------------------------------------------------------------------------
COMMON STOCKS (35.6%)(1)
--------------------------------------------------------------------------------
General Electric Co. 2,448,300 $ 141,236
* Cisco Systems, Inc. 1,751,900 96,792
* Microsoft Corp. 1,302,300 78,545
Exxon Mobil Corp. 859,620 76,614
Pfizer, Inc. 1,554,425 69,852
Intel Corp. 1,657,500 68,890
Citigroup, Inc. 1,111,221 60,075
* Oracle Corp. 700,900 55,196
American International
Group, Inc. 571,002 54,638
* EMC Corp. 537,124 53,242
Wal-Mart Stores, Inc. 1,102,900 53,077
International Business
Machines Corp. 438,800 49,365
* Sun Microsystems, Inc. 392,500 45,824
Nortel Networks Corp. 733,040 43,662
Merck & Co., Inc. 569,000 42,355
SBC Communications Inc. 838,914 41,946
The Coca-Cola Co. 607,900 33,510
Verizon Communications 673,232 32,610
Johnson & Johnson 343,400 32,258
Royal Dutch Petroleum Co. ADR 531,100 31,833
* America Online, Inc. 568,600 30,562
Home Depot, Inc. 571,300 30,315
Bristol-Myers Squibb Co. 486,660 27,800
AT&T Corp. 928,578 27,277
Time Warner, Inc. 324,900 25,423
Morgan Stanley Dean
Witter & Co. 277,600 25,383
Lucent Technologies, Inc. 805,971 24,632
Hewlett-Packard Co. 250,000 24,250
Eli Lilly & Co. 278,900 22,626
* Viacom Inc. Class B 376,408 22,020
* JDS Uniphase Corp. 229,900 21,769
Procter & Gamble Co. 323,944 21,704
Corning, Inc. 72,600 21,562
Tyco International Ltd. 415,470 21,553
* WorldCom, Inc. 706,966 21,474
Bank of America Corp. 406,488 21,290
American Express Co. 331,335 20,129
Texas Instruments, Inc. 426,200 20,111
The Walt Disney Co. 514,200 19,668
* Dell Computer Corp. 635,900 19,594
* Qwest Communications
International Inc. 400,672 19,257
Pharmacia Corp. 313,457 18,866
BellSouth Corp. 462,200 18,603
Wells Fargo Co. 404,010 18,559
American Home Products Corp. 321,800 18,202
Fannie Mae 252,500 18,054
Abbott Laboratories 378,700 18,012
* Amgen, Inc. 251,500 17,562
Philip Morris Cos., Inc. 579,100 17,047

<PAGE>
14

--------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES SHARES (000)
--------------------------------------------------------------------------------
Schering-Plough Corp. 359,200 $ 16,703
PepsiCo, Inc. 361,500 16,629
Enron Corp. 180,700 15,834
Medtronic, Inc. 294,200 15,243
Motorola, Inc. 531,520 15,015
The Chase Manhattan Corp. 321,483 14,849
The Boeing Co. 222,386 14,010
Chevron Corp. 159,600 13,606
* Veritas Software Corp. 95,400 13,547
* Broadcom Corp. 53,100 12,943
* QUALCOMM, Inc. 181,300 12,918
Merrill Lynch & Co., Inc. 192,300 12,692
* Yahoo!, Inc. 133,200 12,121
Charles Schwab Corp. 336,175 11,934
* Applied Materials, Inc. 198,700 11,785
Ford Motor Co. 463,708 11,738
Schlumberger Ltd. 140,500 11,565
Compaq Computer Corp. 417,548 11,516
Bank One Corp. 286,435 11,063
* Siebel Systems, Inc. 98,608 10,976
E.I. du Pont de Nemours & Co. 260,167 10,781
Automatic Data Processing, Inc. 155,700 10,412
The Bank of New York Co., Inc. 183,200 10,271
McDonald's Corp. 333,200 10,058
Anheuser-Busch Cos., Inc. 226,628 9,589
* Network Appliance, Inc. 74,200 9,451
Walgreen Co. 247,100 9,374
* Comcast Corp.-Special Class A 226,700 9,281
Freddie Mac 170,300 9,207
Minnesota Mining &
Manufacturing Co. 99,500 9,067
General Motors Corp. 136,504 8,873
Marsh & McLennan Cos., Inc. 66,750 8,861
FleetBoston Financial Corp. 222,837 8,691
* NEXTEL Communications, Inc. 185,800 8,686
* Clear Channel
Communications, Inc. 144,300 8,153
United Technologies Corp. 117,600 8,144
Gillette Co. 262,800 8,114
* Sprint PCS 224,300 7,865
First Union Corp. 242,732 7,813
Duke Energy Corp. 90,781 7,784
MBNA Corp. 198,550 7,644
Kimberly-Clark Corp. 134,792 7,523
Palm, Inc. 139,715 7,396
* AES Corp. 106,600 7,302
Honeywell International Inc. 201,050 7,162
* Analog Devices, Inc. 86,700 7,158
Emerson Electric Co. 106,800 7,156
Texaco Inc. 136,000 7,140
J.P. Morgan & Co., Inc. 42,342 6,918
Allstate Corp. 197,954 6,879
* Xilinx, Inc. 79,200 6,782
Colgate-Palmolive Co. 143,500 6,773
Unilever NV ADR 139,842 6,747
Associates First Capital Corp. 177,212 6,734
* Global Crossing Ltd. 216,315 6,706
* Solectron Corp. 144,400 6,660
Household International, Inc. 114,788 6,500
* Micron Technology, Inc. 137,000 6,302
Sprint Corp. 213,100 6,246
Fifth Third Bancorp 113,925 6,138
The Seagram Co. Ltd. 104,900 6,025
PE Corp.-PE Biosystems Group 51,300 5,976
Mellon Financial Corp. 126,700 5,876
Cardinal Health, Inc. 66,350 5,851
* Safeway, Inc. 124,700 5,822
Washington Mutual, Inc. 144,441 5,751
Target Corp. 221,836 5,685
Baxter International, Inc. 69,900 5,579
Alcoa Inc. 220,036 5,570
Southern Co. 169,500 5,498
* Maxim Integrated Products, Inc. 68,300 5,494
Firstar Corp. 244,549 5,472
* Agilent Technologies, Inc. 110,747 5,420
Halliburton Co. 110,600 5,412
HCA-The Healthcare Co. 141,045 5,236
* Guidant Corp. 73,800 5,217
State Street Corp. 39,000 5,070
Bestfoods 69,100 5,027
Linear Technology Corp. 76,500 4,953
Northern Trust Corp. 54,200 4,817
American General Corp. 61,595 4,804
PNC Financial Services Group 73,700 4,791
Electronic Data Systems Corp. 115,000 4,773
* Tellabs, Inc. 99,100 4,732
* Kohl's Corp. 81,600 4,707
* Altera Corp. 98,100 4,684
Paychex, Inc. 88,750 4,659
Adobe Systems, Inc. 29,800 4,626
Williams Cos., Inc. 109,100 4,609
* The Kroger Co. 200,400 4,522
Sara Lee Corp. 221,300 4,495
* ADC Telecommunications, Inc. 166,700 4,483
CVS Corp. 95,200 4,409
Providian Financial Corp. 33,900 4,305
CIGNA Corp. 40,800 4,260
Lehman Brothers Holdings, Inc. 28,800 4,255
Lowe's Cos., Inc. 94,000 4,218
The Gap, Inc. 208,637 4,199
Conoco Inc. Class B 155,339 4,184
U.S. Bancorp 183,903 4,184
The Hartford Financial Services
Group Inc. 57,200 4,172
First Data Corp. 106,700 4,168
AFLAC, Inc. 64,700 4,145
Illinois Tool Works, Inc. 73,600 4,112
Dow Chemical Co. 162,850 4,061

<PAGE>
15

--------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES SHARES (000)
--------------------------------------------------------------------------------
* Comverse Technology, Inc. 37,500 $ 4,050
UnitedHealth Group Inc. 41,000 4,049
ALLTEL Corp. 77,300 4,034
Anadarko Petroleum Corp. 60,233 4,003
Sysco Corp. 85,600 3,964
Phillips Petroleum Co. 62,800 3,941
* MedImmune Inc. 50,400 3,893
* Seagate Technology Inc. 56,100 3,871
Coastal Corp. 52,000 3,855
SunTrust Banks, Inc. 76,900 3,831
* Costco Wholesale Corp. 106,212 3,711
* Gateway, Inc. 79,000 3,693
Carnival Corp. 149,800 3,689
Computer Associates
International, Inc. 145,400 3,662
Gannett Co., Inc. 68,700 3,641
Harley-Davidson, Inc. 74,200 3,552
National City Corp. 158,782 3,513
Lockheed Martin Corp. 105,982 3,493
Dominion Resources, Inc. 59,678 3,465
El Paso Energy Corp. 56,100 3,457
* Sanmina Corp. 36,700 3,436
International Paper Co. 118,210 3,391
Reliant Energy, Inc. 72,922 3,391
Capital One Financial Corp. 47,500 3,328
Tribune Co. 76,202 3,324
The Chubb Corp. 41,500 3,284
H.J. Heinz Co. 87,900 3,258
Eastman Kodak Co. 79,500 3,250
General Dynamics Corp. 50,900 3,197
Omnicom Group Inc. 43,700 3,187
* Best Buy Co., Inc. 50,000 3,181
* Mercury Interactive Corp. 20,000 3,135
RadioShack Corp. 48,128 3,110
* FedEx Corp. 70,120 3,109
Baker Hughes, Inc. 82,560 3,065
Sears, Roebuck & Co. 94,300 3,057
* Computer Sciences Corp. 41,000 3,044
The McGraw-Hill Cos., Inc. 47,700 3,032
American Electric Power Co., Inc. 77,060 3,015
Transocean Sedco Forex Inc. 51,107 2,996
Southwest Airlines Co. 122,900 2,980
Caterpillar, Inc. 87,300 2,946
FPL Group, Inc. 43,600 2,867
Campbell Soup Co. 110,000 2,846
Wachovia Corp. 49,800 2,823
Unicom Corp. 50,200 2,821
NIKE, Inc. Class B 70,100 2,808
St. Paul Cos., Inc. 55,756 2,749
PECO Energy Corp. 45,300 2,743
KeyCorp 108,100 2,736
Franklin Resources Corp. 61,000 2,710
Tenet Healthcare Corp. 74,400 2,706
BB&T Corp. 89,000 2,681
TXU Corp. 67,541 2,676
General Mills, Inc. 75,200 2,670
Allergan, Inc. 31,600 2,668
Pitney Bowes, Inc. 66,200 2,611
Molex, Inc. 47,650 2,594
The Quaker Oats Co. 32,600 2,579
Avon Products, Inc. 63,100 2,579
Public Service Enterprise
Group, Inc. 57,700 2,578
Waste Management, Inc. 147,210 2,567
Interpublic Group of Cos., Inc. 74,500 2,538
Burlington Northern
Santa Fe Corp. 114,796 2,475
Scientific-Atlanta, Inc. 38,400 2,443
Kellogg Co. 100,500 2,431
ConAgra Foods, Inc. 121,000 2,428
Xerox Corp. 160,996 2,425
Aon Corp. 61,225 2,403
PaineWebber Group, Inc. 35,100 2,391
* Stilwell Financial, Inc. 54,600 2,375
Lincoln National Corp. 49,300 2,373
Raytheon Co. Class B 82,400 2,343
Comerica, Inc. 39,950 2,335
Union Pacific Corp. 59,900 2,329
Dover Corp. 49,400 2,319
Weyerhaeuser Co. 56,400 2,277
The Clorox Co. 57,400 2,271
Loews Corp. 27,100 2,259
PG&E Corp. 93,000 2,249
* Biogen, Inc. 36,800 2,245
* Conexant Systems, Inc. 53,600 2,245
The Limited, Inc. 101,476 2,239
Marriott International, Inc.
Class A 61,100 2,226
Golden West Financial Corp. 41,100 2,204
Nabisco Group Holdings Corp. 77,100 2,197
Entergy Corp. 58,900 2,194
* ALZA Corp. 25,200 2,180
Albertson's, Inc. 103,636 2,176
Xcel Energy, Inc. 78,795 2,167
* LSI Logic Corp. 73,500 2,150
USX-Marathon Group 75,700 2,148
Unocal Corp. 59,139 2,096
Delphi Automotive Systems Corp. 137,818 2,085
Wrigley, (Wm.) Jr. Co. 27,800 2,082
Aetna Inc. 35,706 2,073
* Apple Computer, Inc. 80,200 2,065
Air Products & Chemicals, Inc. 56,700 2,041
McKesson HBOC, Inc. 66,565 2,034
Deere & Co. 61,100 2,032
Masco Corp. 108,600 2,023
USA Education Inc. 40,900 1,971
Hershey Foods Corp. 36,000 1,949
Occidental Petroleum Corp. 88,800 1,937

<PAGE>
16

--------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES SHARES (000)
--------------------------------------------------------------------------------
Bear Stearns Co., Inc. 30,287 $ 1,908
* Cendant Corp. 175,234 1,906
Burlington Resources, Inc. 51,685 1,903
Consolidated Edison Inc. 55,600 1,897
Devon Energy Corp. 31,300 1,883
* PeopleSoft, Inc. 66,300 1,852
* KLA-Tencor Corp. 44,600 1,837
Constellation Energy Group 36,550 1,818
* Starbucks Corp. 45,100 1,807
Ralston-Ralston Purina Group 74,900 1,774
* Advanced Micro Devices, Inc. 74,900 1,769
TJX Cos., Inc. 77,900 1,753
PPG Industries, Inc. 44,100 1,750
* National Semiconductor Corp. 43,100 1,735
Jefferson-Pilot Corp. 25,500 1,731
MGIC Investment Corp. 28,000 1,712
MBIA, Inc. 23,800 1,693
Edison International 87,200 1,684
* Boston Scientific Corp. 101,800 1,673
* Bed Bath & Beyond, Inc. 68,500 1,671
IMS Health, Inc. 80,400 1,668
Coca-Cola Enterprises, Inc. 104,500 1,665
May Department Stores Co. 80,800 1,656
Textron, Inc. 35,900 1,656
PPL Corp. 39,500 1,649
* Staples, Inc. 115,600 1,640
Apache Corp. 27,700 1,638
Fort James Corp. 53,500 1,635
Danaher Corp. 32,800 1,632
New York Times Co. Class A 41,400 1,628
UnumProvident Corp. 58,591 1,597
Becton, Dickinson & Co. 59,400 1,570
Alcan Aluminium Ltd. 54,250 1,570
* Wellpoint Health
Networks Inc. Class A 16,300 1,565
Rohm & Haas Co. 53,439 1,553
* Watson Pharmaceuticals, Inc. 23,600 1,531
CP&L, Inc. 36,500 1,522
FirstEnergy Corp. 56,400 1,519
Newell Rubbermaid, Inc. 65,909 1,504
Amerada Hess Corp. 22,400 1,499
Biomet, Inc. 42,700 1,495
Northrop Grumman Corp. 16,300 1,481
* Teradyne, Inc. 42,100 1,474
Summit Bancorp 42,700 1,473
* Convergys Corp. 37,700 1,466
* Novellus Systems, Inc. 31,100 1,448
Progressive Corp. of Ohio 17,300 1,416
Cincinnati Financial Corp. 39,800 1,413
Dun & Bradstreet Corp. 41,000 1,412
Columbia Energy Group 19,800 1,406
Praxair, Inc. 37,600 1,405
Kerr-McGee Corp. 21,097 1,398
Rockwell International Corp. 46,200 1,398
Ameren Corp. 33,300 1,394
T. Rowe Price 29,700 1,394
Dow Jones & Co., Inc. 23,000 1,392
Barrick Gold Corp. 90,400 1,379
Delta Air Lines, Inc. 31,000 1,376
Tiffany & Co. 35,600 1,373
Archer-Daniels-Midland Co. 158,556 1,367
Dollar General Corp. 81,588 1,367
Norfolk Southern Corp. 93,000 1,360
Synovus Financial Corp. 63,950 1,355
Ingersoll-Rand Co. 39,250 1,330
Charter One Financial 54,495 1,328
DTE Energy Co. 34,700 1,327
Avery Dennison Corp. 28,300 1,312
* Federated Department
Stores, Inc. 50,100 1,309
* Cabletron Systems, Inc. 44,500 1,307
SouthTrust Corp. 40,600 1,276
Florida Progress Corp. 23,800 1,260
Cinergy Corp. 37,918 1,254
TRW, Inc. 30,500 1,239
* AMR Corp. 36,900 1,206
AmSouth Bancorp 95,700 1,196
Union Carbide Corp. 31,400 1,185
Regions Financial Corp. 52,000 1,180
* Lexmark International, Inc. 31,400 1,178
PerkinElmer, Inc. 11,200 1,169
* BMC Software, Inc. 60,900 1,165
KeySpan Corp. 29,000 1,164
Tosco Corp. 37,200 1,160
* Sapient Corp. 28,400 1,156
Mattel, Inc. 102,687 1,149
CSX Corp. 52,600 1,147
Union Planters Corp. 34,700 1,147
Ecolab, Inc. 31,600 1,140
* Tricon Global Restaurants, Inc. 37,200 1,139
The CIT Group, Inc. 64,900 1,136
Eaton Corp. 18,200 1,122
Circuit City Stores, Inc. 48,200 1,109
Knight Ridder 21,800 1,108
* St. Jude Medical, Inc. 21,600 1,102
* Toys R Us, Inc. 67,600 1,099
Johnson Controls, Inc. 20,500 1,090
Fortune Brands, Inc. 40,700 1,079
* Ceridian Corp. 37,900 1,064
Pinnacle West Capital Corp. 20,700 1,053
Hilton Hotels Corp. 90,600 1,048
Sempra Energy 50,292 1,047
The BFGoodrich Co. 26,600 1,042
Georgia Pacific Group 44,000 1,034
Countrywide Credit
Industries, Inc. 27,300 1,031
Harcourt General, Inc. 17,363 1,024
UST, Inc. 44,300 1,013

<PAGE>
17

--------------------------------------------------------------------------------
MARKET
VALUE*
ASSET ALLOCATION FUND SHARES SHARES (000)
--------------------------------------------------------------------------------
GPU, Inc. 31,200 $ 1,012
Vulcan Materials Co. 24,600 989
Tektronix, Inc. 12,850 987
Torchmark Corp. 35,100 976
Equifax, Inc. 36,100 972
* Thermo Electron Corp. 37,400 972
Brown-Forman Corp. Class B 17,100 936
H & R Block, Inc. 25,200 934
SAFECO Corp. 34,200 932
CenturyTel, Inc. 33,850 922
Parker Hannifin Corp. 27,325 922
Huntington Bancshares Inc. 61,787 908
* Sealed Air Corp. 20,015 906
* American Power
Conversion Corp. 47,200 906
Sherwin-Williams Co. 42,300 904
* Citrix Systems, Inc. 44,800 899
Old Kent Financial Corp. 31,035 898
* NCR Corp. 23,600 892
R.R. Donnelley & Sons Co. 35,700 877
Phelps Dodge Corp. 20,803 869
* Harrah's Entertainment, Inc. 31,400 864
* Unisys Corp. 76,200 857
Young & Rubicam Inc. 17,200 851
* Novell, Inc. 84,600 841
* HEALTHSOUTH Corp. 102,500 833
Genuine Parts Co. 43,250 824
Dana Corp. 38,059 818
Cooper Industries, Inc. 23,057 813
* AutoZone Inc. 35,800 812
Mallinckrodt, Inc. 17,600 803
Sigma-Aldrich Corp. 24,100 795
Sabre Holdings Corp. 27,419 793
Black & Decker Corp. 23,100 790
Darden Restaurants Inc. 37,900 789
ITT Industries, Inc. 23,900 775
Leggett & Platt, Inc. 48,300 764
* Inco Ltd. 46,798 755
Placer Dome, Inc. 79,900 754
* Compuware Corp. 89,800 752
Willamette Industries, Inc. 26,700 748
* Parametric Technology Corp. 68,300 747
VF Corp. 29,828 736
* US Airways Group, Inc. 23,700 721
J.C. Penney Co., Inc. 60,800 718
PACCAR, Inc. 19,340 717
Whirlpool Corp. 18,300 711
* Niagara Mohawk Holdings Inc. 45,000 709
* Office Depot, Inc. 90,100 704
* Kmart Corp. 116,500 699
Eastman Chemical Co. 18,850 696
The Goodyear Tire & Rubber Co. 37,500 675
Maytag Corp. 21,600 671
CMS Energy Corp. 24,900 671
Westvaco Corp. 25,100 670
W.W. Grainger, Inc. 24,900 655
Liz Claiborne, Inc. 16,900 651
Newmont Mining Corp. 37,846 643
Nucor Corp. 21,000 633
Wendy's International, Inc. 31,500 632
* Rowan Cos., Inc. 21,400 621
Sunoco, Inc. 22,767 613
Ashland, Inc. 18,100 610
Fluor Corp. 20,000 600
* FMC Corp. 8,900 597
C.R. Bard, Inc. 14,100 596
Adolph Coors Co. Class B 9,300 588
The Mead Corp. 25,000 584
Engelhard Corp. 35,650 579
Conseco Inc. 75,745 578
Pall Corp. 28,866 576
Visteon Corp. 37,804 572
* Andrew Corp. 21,275 557
Bausch & Lomb, Inc. 14,100 549
* Navistar International Corp. 17,880 535
Temple-Inland Inc. 13,800 523
Winn-Dixie Stores, Inc. 36,100 519
The Stanley Works 22,100 510
* Adaptec, Inc. 25,400 508
SuperValu Inc. 33,400 503
Nordstrom, Inc. 32,100 500
Millipore Corp. 10,300 499
Centex Corp. 15,200 488
Hasbro, Inc. 42,400 485
International Flavors &
Fragrances, Inc. 26,300 480
* Pactiv Corp. 40,800 456
NICOR, Inc. 12,500 452
* Quintiles Transnational Corp. 27,600 440
Brunswick Corp. 24,000 438
Great Lakes Chemical Corp. 14,800 434
Allegheny Technologies Inc. 23,655 429
* Manor Care, Inc. 27,000 424
* Allied Waste Industries, Inc. 46,000 423
* Humana, Inc. 39,100 420
Bemis Co., Inc. 13,000 418
Pulte Corp. 12,400 409
Autodesk, Inc. 16,100 408
Deluxe Corp. 20,000 406
* Freeport-McMoRan Copper &
Gold Inc. Class B 46,000 405
Meredith Corp. 13,600 401
Alberto-Culver Co. Class B 13,900 400
Crane Co. 16,837 385
Snap-On Inc. 15,150 357
* Consolidated Stores, Inc. 26,300 355
Hercules, Inc. 24,900 352
Ryder System, Inc. 18,900 348

<PAGE>
18

Face
Amount
(000)
----------------------------------------------------------------------------
U.S. GOVERNMENT OBLIGATIONS (49.2%)
----------------------------------------------------------------------------
U.S. TREASURY BONDS
5.25%, 11/15/2028 82,200 $ 73,716
5.25%, 2/15/2029 65,000 58,420
5.50%, 8/15/2028 194,590 180,741
6.125%, 11/15/2027 127,330 128,518
6.125%, 8/15/2029 92,650 94,639
6.375%, 8/15/2027 214,210 223,100
6.50%, 11/15/2026 168,160 177,641
6.875%, 8/15/2025 140,075 154,217
7.125%, 2/15/2023 290,495 326,452
7.25%, 5/15/2016 140,550 156,529
7.50%, 11/15/2016 40,840 46,571
7.50%, 11/15/2024 96,490 113,568
7.625%, 11/15/2022 87,370 103,333
7.625%, 2/15/2025 72,585 86,693
(2) 8.00%, 11/15/2021 110,920 135,563
8.125%, 8/15/2019 107,970 131,924
(2) 8.125%, 5/15/2021 121,485 149,831
8.125%, 8/15/2021 151,830 187,495
8.50%, 2/15/2020 172,034 218,038
8.75%, 5/15/2017 127,140 161,683
8.75%, 5/15/2020 99,400 128,968
8.75%, 8/15/2020 84,880 110,264
8.875%, 8/15/2017 171,560 220,753
8.875%, 2/15/2019 189,990 247,054
10.375%, 11/15/2012 52,868 65,720
10.625%, 8/15/2015 82,990 119,178
11.25%, 2/15/2015 66,730 99,193
11.75%, 11/15/2014 124,775 173,461
12.00%, 8/15/2013 148,525 202,500
12.75%, 11/15/2010 7,220 9,311
14.00%, 11/15/2011 17,300 24,201
----------------------------------------------------------------------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(Cost $4,304,309) 4,309,275
----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (20.8%)(1)
----------------------------------------------------------------------------
COMMERCIAL PAPER (13.8%)
A1 Credit Corp.
6.47%, 10/12/2000 24,200 24,152
AIG Funding, Inc.
6.46%, 11/1/2000 30,000 29,838
ALCOA, Inc.
6.49%, 11/7/2000 50,000 49,666
AT & T Corp.
6.49%, 10/2/2000 30,000 29,995
American Honda Finance Co.
6.48%, 10/10/2000 60,000 59,903
Associates Corp. NA
6.46%, 11/2/2000 25,000 24,861
BellSouth Capital Fund
6.47%, 10/27/2000 30,000 29,860
British Telecommunication PLC
6.50%, 11/27/2000 28,000 27,717

6.52%, 11/1/2000 25,000 24,865

DaimlerChrysler Finance Inc.
6.47%, 10/2/2000 25,000 24,996
E.I. du Pont de Nemours & Co.
6.46%, 10/12/2000 27,500 27,446

6.50%, 10/26/2000 17,000 16,926

Ford Motor Credit Co.
6.49%, 10/20/2000 50,000 49,828
6.50%, 10/27/2000 25,000 24,883
General Electric Capital Corp.
6.49%, 10/25/2000 24,000 23,896
General Motors Acceptance Corp.
6.49%, 10/23/2000 80,000 79,683
H. J. Heinz & Co.
6.47%, 10/4/2000 30,000 29,984
6.48%, 10/10/2000 50,000 49,919

<PAGE>
19

--------------------------------------------------------------------------------
Face MARKET
Amount VALUE*
ASSET ALLOCATION FUND SHARES (000) (000)
--------------------------------------------------------------------------------
Hewlett-Packard Co.
6.48%, 10/17/2000 80,000 79,770
Household Finance Corp.
6.48%, 10/27/2000 85,000 84,602
IBM Corp.
6.40%, 10/2/2000 80,000 79,986
International Lease Finance Corp.
6.46%, 11/7/2000 9,600 9,536
6.47%, 10/6/2000 20,000 19,982
6.50%, 10/17/2000 50,000 49,864
MetLife Funding, Inc.
6.47%, 10/5/2000 23,428 23,411
6.47%, 10/6/2000 22,771 22,751
6.49%, 10/25/2000 25,000 24,897
Phillip Morris Co.
6.48%, 10/25/2000 43,000 42,814
6.49%, 10/6/2000 30,000 29,973
TransAmerica Corp.
6.53%, 10/23/2000 30,000 29,886
Transamerica Finance Corp.
6.52%, 10/4/2000 45,000 44,983
USAA Capital Corp.
6.47%, 11/6/2000 35,000 34,780
-------------
1,205,653
-------------
----------------------------------------------------------------------------
REPURCHASE AGREEMENTS (7.0%)
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.46%-6.47%, 10/2/2000--
Note F 395,343 395,343
6.50%, 10/2/2000 220,808 220,808
-------------
616,151
-------------
----------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $1,821,771) 1,821,804
----------------------------------------------------------------------------
TOTAL INVESTMENTS (105.6%)
(COST $7,748,586) 9,249,776
----------------------------------------------------------------------------

----------------------------------------------------------------------------
Market
Value*
(000)
----------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.6%)
----------------------------------------------------------------------------
Other Assets--Note C $ 76,720
Security Lending Collateral Payable
to Brokers--Note F (395,343)
Other Liabilities (169,905)
-------------
(488,528)
-------------
----------------------------------------------------------------------------
NET ASSETS (100%)
----------------------------------------------------------------------------
Applicable to 353,369,569 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $8,761,248
============================================================================

NET ASSET VALUE PER SHARE $24.79
============================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1)The fund invests a portion of its cash reserves in equity markets through the
use of index futures contracts. After giving effect to futures investments, the
fund's effective common stock and temporary cash investment positions represent
49.8% and 6.6%, respectively, of net assets. See Note E in Notes to Financial
Statements.
(2)Securities with an aggregate value of $98,332,000, have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.

----------------------------------------------------------------------------
AT SEPTEMBER 30, 2000, NET ASSETS CONSISTED OF:
----------------------------------------------------------------------------
Amount Per
(000) Share
----------------------------------------------------------------------------
Paid in Capital--Note D $7,061,209 $19.98
Undistributed Net
Investment Income 105,916 .30
Accumulated Net
Realized Gains--Note D 153,747 .43
Unrealized Appreciation
(Depreciation)--Note E
Investment Securities 1,501,190 4.25
Futures Contracts (60,814) (.17)
----------------------------------------------------------------------------
NET ASSETS $8,761,248 $24.79
============================================================================

<PAGE>
20

STATEMENT OF OPERATIONS

----------------------------------------------------------------------------
ASSET ALLOCATION FUND
YEAR ENDED SEPTEMBER 30, 2000
(000)
----------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 31,959
Interest 360,068
Security Lending 971
----------------------------------------------------------------------------
Total Income 392,998
----------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 9,200
Performance Adjustment (709)
The Vanguard Group--Note C
Management and Administrative 27,693
Marketing and Distribution 1,224
Custodian Fees 53
Auditing Fees 31
Shareholders' Reports 185
Trustees' Fees and Expenses 11
----------------------------------------------------------------------------
Total Expenses 37,688
----------------------------------------------------------------------------
NET INVESTMENT INCOME 355,310
----------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 145,382
Futures Contracts 80,420
----------------------------------------------------------------------------
REALIZED NET GAIN 225,802
----------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 336,152
Futures Contracts (9,406)
----------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 326,746
----------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $907,858
============================================================================

<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.

----------------------------------------------------------------------------
ASSET ALLOCATION FUND
--------------------------
YEAR ENDED SEPTEMBER 30,
--------------------------
2000 1999
(000) (000)
----------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 355,310 $ 261,315
Realized Net Gain 225,802 477,764
Change in Unrealized Appreciation (Depreciation) 326,746 102,998
----------------------------------------------------------------------------
Net Increase in Net Assets Resulting
from Operations 907,858 842,077
----------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (341,720) (263,532)
Realized Capital Gain (330,282) (308,685)
----------------------------------------------------------------------------
Total Distributions (672,002) (572,217)
----------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 1,735,812 3,038,828
Issued in Lieu of Cash Distributions 646,106 550,958
Redeemed (2,038,647) (1,314,040)
----------------------------------------------------------------------------
Net Increase from Capital Share Transactions 343,271 2,275,746
----------------------------------------------------------------------------
Total Increase 579,127 2,545,606
----------------------------------------------------------------------------
NET ASSETS
Beginning of Year 8,182,121 5,636,515
End of Year $8,761,248 $8,182,121
============================================================================

1Shares Issued (Redeemed)
Issued 71,069 123,320
Issued in Lieu of Cash Distributions 26,967 23,236
Redeemed (84,051) (53,361)
----------------------------------------------------------------------------
Net Increase in Shares Outstanding 13,985 93,195
============================================================================

<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.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
ASSET ALLOCATION FUND
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 2000 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $24.11 $22.90 $21.53 $18.27 $17.03
-----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.03 .80 .79 .74 .69
Net Realized and Unrealized Gain
(Loss) on Investments 1.61 2.50 2.33 4.29 1.82
-----------------------------------------------------------------------------------------------------
Total from Investment Operations 2.64 3.30 3.12 5.03 2.51
DISTRIBUTIONS
Dividends from Net Investment Income (1.00) (.91) (.74) (.72) (.66)
Distributions from Realized Capital Gains (.96) (1.18) (1.01) (1.05) (.61)
-----------------------------------------------------------------------------------------------------
Total Distributions (1.96) (2.09) (1.75) (1.77) (1.27)
-----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $24.79 $24.11 $22.90 $21.53 $18.27
=====================================================================================================

TOTAL RETURN 11.36% 14.68% 15.24% 29.42% 15.27%
=====================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $8,761 $8,182 $5,637 $3,738 $2,341
Ratio of Total Expenses to
Average Net Assets 0.44% 0.49% 0.49% 0.49% 0.47%
Ratio of Net Investment Income to
Average Net Assets 4.18% 3.49% 3.80% 3.96% 4.17%
Portfolio Turnover Rate 29% 11% 60% 10% 47%
=====================================================================================================
</TABLE>

<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 U.S. 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.
Securities for which market quotations are not readily available are valued by
methods deemed by the board of trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. FUTURES CONTRACTS: 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.

<PAGE>
24

NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
for the preceding three years relative to a combined index comprising the S&P
500 Index and the Lehman Long Treasury Index. For the year ended September 30,
2000, the advisory fee represented an effective annual basic rate of 0.11% of
the fund's average net assets before a decrease of $709,000 (0.01%) based on
performance.

C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At September 30, 2000, the fund had contributed capital of $1,643,000
to Vanguard (included in Other Assets), representing 0.02% of the fund's net
assets and 1.6% of Vanguard's capitalization. The fund's trustees and officers
are also directors and officers of Vanguard.

D. During the year ended September 30, 2000, the fund purchased $2,208,939,000
of investment securities and sold $2,217,941,000 of investment securities, other
than U.S. government securities and temporary cash investments. Purchases and
sales of U.S. government securities were $1,469,088,000 and $1,387,930,000,
respectively.
The fund used a tax accounting practice to treat a portion of the price of
capital shares redeemed during the year as distributions from realized capital
gains. Accordingly, the fund has reclassified $47,933,000 from accumulated net
realized gains to paid in capital.

E. At September 30, 2000, net unrealized appreciation of investment securities
for financial reporting and federal income tax purposes was $1,501,190,000,
consisting of unrealized gains of $1,624,423,000 on securities that had risen in
value since their purchase and $123,233,000 in unrealized losses on securities
that had fallen in value since their purchase.
At September 30, 2000, the aggregate settlement value of open futures
contracts expiring in December 2000 and the related unrealized depreciation
were:

--------------------------------------------------------------------------------
(000)
---------------------------------
AGGREGATE
NUMBER OF SETTLEMENT UNREALIZED
FUTURES CONTRACTS LONG CONTRACTS VALUE DEPRECIATION
--------------------------------------------------------------------------------
S&P 500 Index 3,429 $1,246,184 $(60,814)
--------------------------------------------------------------------------------

Unrealized depreciation on open futures contracts is required to be treated as
realized loss for federal income tax purposes.

F. The market value of securities on loan to broker/dealers at September 30,
2000, was $831,879,000, for which the fund held as collateral cash of
$395,343,000 and U.S. Treasury securities with a market value of $469,090,000.
The fund invests cash collateral received in repurchase agreements, and records
a liability for the return of the collateral, during the period the securities
are on loan. 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.

<PAGE>
25

REPORT
OF INDEPENDENT ACCOUNTANTS

TO THE SHAREHOLDERS AND TRUSTEES OF VANGUARD ASSET ALLOCATION 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 Asset Allocation Fund (the "Fund") at September 30, 2000, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. 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 auditing
standards generally accepted in the United States of America, 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 September 30, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 1, 2000

--------------------------------------------------------------------------------
SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR
VANGUARD ASSET ALLOCATION FUND
This information for the fiscal year ended September 30, 2000, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $211,631,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year, all of which is
designated as a 20% rate gain distribution.
For corporate shareholders, 7.9% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.

<PAGE>
26

THE VANGUARD(R)
FAMILY OF FUNDS

STOCK FUNDS
-----------------------------------------
500 Index Fund
Calvert Social Index(TM) Fund
Capital Opportunity Fund
Convertible Securities Fund
Developed Markets Index Fund
Emerging Markets Stock
Index Fund
Energy Fund
Equity Income Fund
European Stock Index Fund
Explorer(TM) Fund
Extended Market Index Fund
Global Equity Fund
Gold and Precious Metals Fund
Growth and Income Fund
Growth Equity Fund
Growth Index Fund
Health Care Fund
Institutional Developed Markets
Index Fund
Institutional Index Fund
International Growth Fund
International Value Fund
Mid-Cap Index Fund
Morgan(TM) Growth Fund
Pacific Stock Index Fund
PRIMECAP Fund
REIT Index Fund
Selected Value Fund
Small-Cap Growth Index Fund
Small-Cap Index Fund
Small-Cap Value Index Fund
Strategic Equity Fund
Tax-Managed Capital
Appreciation Fund
Tax-Managed Growth and
Income Fund
Tax-Managed International Fund
Tax-Managed Small-Cap Fund
Total International Stock
Index Fund
Total Stock Market Index Fund
U.S. Growth Fund
U.S. Value Fund
Utilities Income Fund
Value Index Fund
Windsor(TM) Fund
Windsor(TM) II Fund

BALANCED FUNDS
-----------------------------------------
Asset Allocation Fund
Balanced Index Fund
Global Asset Allocation Fund
LifeStrategy(R) Conservative
Growth Fund
LifeStrategy(R) Growth Fund
LifeStrategy(R) Income Fund
LifeStrategy(R) Moderate
Growth Fund
STAR(TM) Fund
Tax-Managed Balanced Fund
Wellesley(R) Income Fund
Wellington(TM) Fund

BOND FUNDS
-----------------------------------------
Admiral(TM) Intermediate-Term
Treasury Fund
Admiral(TM) Long-Term
Treasury Fund
Admiral(TM) Short-Term
Treasury Fund
GNMA Fund
High-Yield Corporate Fund
High-Yield Tax-Exempt Fund
Inflation-Protected Securities Fund
Insured Long-Term
Tax-Exempt Fund
Intermediate-Term Bond
Index Fund
Intermediate-Term Corporate Fund
Intermediate-Term
Tax-Exempt Fund
Intermediate-Term Treasury Fund
Limited-Term Tax-Exempt Fund
Long-Term Bond Index Fund
Long-Term Corporate Fund
Long-Term Tax-Exempt Fund
Long-Term Treasury Fund
Preferred Stock Fund
Short-Term Bond Index Fund
Short-Term Corporate Fund
Short-Term Federal Fund
Short-Term Tax-Exempt Fund
Short-Term Treasury Fund
State Tax-Exempt Bond Funds
(California, Florida, Massachusetts, New
Jersey, New York, Ohio, Pennsylvania)
Total Bond Market Index Fund

MONEY MARKET FUNDS
-----------------------------------------
Admiral(TM) Treasury Money
Market Fund
Federal Money Market Fund
Prime Money Market Fund
State Tax-Exempt Money Market Funds
(California, New Jersey,
New York, Ohio, Pennsylvania)
Tax-Exempt Money Market Fund
Treasury Money Market Fund

VARIABLE ANNUITY PLAN
-----------------------------------------
Balanced Portfolio
Diversified Value Portfolio
Equity Income Portfolio
Equity Index Portfolio
Growth Portfolio
High-Grade Bond Portfolio
High Yield Bond Portfolio
International Portfolio
Mid-Cap Index Portfolio
Money Market Portfolio
REIT Index Portfolio
Short-Term Corporate Portfolio
Small Company Growth Portfolio

<PAGE>

THE PEOPLE
WHO GOVERN YOUR FUND

--------------------------------------------------------------------------------
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and each of the investment
companies in The Vanguard Group.

BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.

ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.

--------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Managing Director and Secretary of The Vanguard
Group, Inc.; Secretary of each of the investment companies in The Vanguard
Group.
THOMAS J. HIGGINS, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.

--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. GUBANICH, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
JOHN C. BOGLE
Founder; Chairman and Chief Executive, 1974-1996.

<PAGE>

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

WORLD WIDE WEB
www.vanguard.com

FUND INFORMATION
1-800-662-7447

INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739

INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036

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

Q780 112000