VANGUARD ASSET ALLOCATION FUND INC, 485APOS, 2000-03-16

VANGUARD ASSET ALLOCATION FUND INC
485APOS, 2000-03-16

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A

REGISTRATION STATEMENT (NO. 33-23444) UNDER THE SECURITIES ACT OF 1933

PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 17

AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

AMENDMENT NO. 20

VANGUARD ASSET ALLOCATION FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)

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

REGISTRANT'S TELEPHONE NUMBER (610) 669-1000

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

IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON MAY 30, 2000, PURSUANT TO PARAGRAPH (A) OF RULE 485.

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

<PAGE>

Subject to Completion
Preliminary Prospectus
Dated March 16, 2000

VANGUARD(R) U.S. VALUE FUND
Prospectus
May 30, 2000

This is the Fund's initial
prospectus, so it contains
no performance data.

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. SHARES OF
VANGUARD U.S. VALUE FUND MAY NOT BE SOLD, NOR MAY OFFERS TO BUY BE ACCEPTED,
PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
COMMUNICATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN A STATE IN
WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAW OF THE STATE.

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VANGUARD U.S. VALUE FUND
Prospectus
May 30, 2000

A Growth and Income Stock Mutual Fund

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CONTENTS

1 FUND PROFILE 12 INVESTING WITH VANGUARD

2 ADDITIONAL INFORMATION 12 Services and Account Features

3 A WORD ABOUT RISK 12 Services and Account Features

3 WHO SHOULD INVEST 14 Buying Shares

4 PRIMARY INVESTMENT STRATEGIES 16 Redeeming Shares

7 THE FUND AND VANGUARD 19 Transferring Registration

7 INVESTMENT ADVISER 20 Fund and Account Updates

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

10 SHARE PRICE
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WHY READING THIS PROSPECTUS IS IMPORTANT

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

The following profile summarizes key features of Vanguard U.S. Value Fund.

INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital and income.

INVESTMENT STRATEGIES
The Fund invests primarily in value stocks--those that are generally out of
favor with investors, and that typically (but not always) have
lower-than-average price/earnings (P/E) ratios and higher-than-average dividend
yields. The adviser selects stocks by using computerized models to identify
those that are trading at prices below the fundamental value of the underlying
companies.

PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from value stocks
will trail returns from the overall stock market.
- Manager risk, which is the chance that poor security selection will
cause the Fund to underperform other funds with similar investment
objectives.

PERFORMANCE/RISK INFORMATION
The Fund began operations on June 5, 2000, so performance information (including
annual total returns and average annual total returns) for a full calendar year
is not yet available.

FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on estimated amounts for the current fiscal year. The Fund has no
operating history; actual operating expenses could be different.

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

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: .%
12b-1 Distribution Fee: None
Other Expenses: .%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.53%

The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain
<PAGE>

the same. The results apply whether or not you redeem your investment at the end
of each period.

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

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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard U.S. Value Fund's estimated expense ratio for the current
fiscal year is 0.53%, or $5.30 per $1,000 of average net assets. The average
multi-cap value mutual fund had expenses in 1999 of 1.38%, or $13.80 per $1,000
of average net assets (derived from data provided as of December 31, 1999, by
Lipper Inc., which reports on the mutual fund industry). Management expenses,
which are one part of operating expenses, include investment advisory fees as
well as other costs of managing a fund--such as account maintenance, reporting,
accounting, legal, and other administrative expenses.
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PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed annually in $3,000; $1,000 for IRAs and custodial
December; capital gains, if any, are accounts
distributed in December for minors

INVESTMENT ADVISER NEWSPAPER ABBREVIATION
- - Grantham, Mayo, Van Otterloo & Co. .
LLC, Boston, Mass., since inception.
VANGUARD FUND NUMBER
INCEPTION DATE .
June 5, 2000
CUSIP NUMBER
SUITABLE FOR IRAS .
Yes
TICKER SYMBOL
.
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A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard U.S.
Value Fund. It is important to keep in mind one of the main axioms of investing:
The higher the risk of losing money, the higher the potential reward. The
reverse, also, is generally true: The lower the risk, the lower the potential
reward. As you consider an investment in the Fund, you should also take into
account your personal tolerance for the daily fluctuations of the stock market.
Look for this [FLAG]symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
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WHO SHOULD INVEST

The Fund may be a suitable investment for you if:
- - You are seeking a value-oriented investment that seeks to provide long-term
growth as well as some dividend income.
- - You wish to add a value-oriented growth and income stock fund to your
existing holdings, which could include other stock investments as well as
bond, money market, and tax-exempt investments.
- - You are seeking growth of capital and income over the long term--at least
five years.

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

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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
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The Fund has adopted the following policies, among others, to discourage
short- term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
<PAGE>

PRIMARY INVESTMENT STRATEGIES

This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective, long-term growth of capital and income. It also
explains how the adviser implements these strategies. In addition, this section
discusses several important risks--market risk, investment style risk, and
manager risk--faced by investors in the Fund. The Fund's Board of Trustees
oversees the management of the Fund and may change the investment strategies in
the interest of shareholders.

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PLAIN TALK ABOUT
VALUE FUNDS AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize stocks of companies from which the
market does not expect strong growth. The prices of value stocks typically are
below-average in comparison to such factors as earnings and book value, and
these stocks typically have above-average dividend yields. Growth funds
generally focus on companies believed to have above-average potential for growth
in revenue and earnings. Reflecting the market's high expectations for superior
growth, such stocks typically have low dividend yields and above-average prices
in relation to such measures as revenue, earnings, and book value. Value and
growth stocks have, in the past, produced similar long-term returns, though each
category has periods when it outperforms the other. In general, value funds are
appropriate for investors who want some dividend income and the potential for
capital gains but are less tolerant of share-price fluctuations. Growth funds,
by contrast, appeal to investors who will accept more volatility in hopes of a
greater increase in share price. Growth funds also may appeal to investors with
taxable accounts who want a higher proportion of returns to come as capital
gains (which may be taxed at lower rates than dividend income).
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MARKET EXPOSURE
As a value fund, the Fund's primary strategy is to invest primarily in common
stocks that have favorable prospects for growth of earnings and dividend income,
but whose prices do not reflect this potential for positive returns.

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

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

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

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

RISK OF NONDIVERSIFICATION
[FLAG] Although it has no current intention to do so, the Fund reserves the
right to invest heavily in just a few stocks. As a result, the Fund is
considered non-diversified by the SEC. If the Fund were to invest heavily
in just a few stocks, its performance could be hurt disproportionately by
those stocks.

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

Grantham, Mayo, Van Otterloo & Co. LLC (GMO), adviser to the Fund, seeks out
companies whose stocks it considers to be undervalued. The Fund will invest in
small-, mid-, and large-capitalization stocks. These are generally stocks that
are out of favor with investors and currently trading at prices that, the
adviser feels, are below what the stocks are worth in relation to the
fundamental value of the underlying companies. These stocks typically--but not
always--have lower-than-average price/earnings (P/E) ratios, and
higher-than-average dividend yields.
<PAGE>

The adviser employs proprietary research and multiple quantitative models
for stock selection from the Russell 3000 Index. These models together
constitute a proprietary dividend discount model, that considers other
fundamental characteristics such as book value and cash flow. GMO strategically
combines its models to construct a portfolio that exhibits value characteristics
overall.
The Fund is generally managed without regard to tax ramifications.

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

TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.

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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of September 30, 1999, the average turnover rate for all
domestic stock funds was approximately .%, according to Morningstar, Inc.
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OTHER INVESTMENT POLICIES AND RISKS
Besides investing in undervalued common stocks, the Fund may make certain other
kinds of investments to achieve its objective.
The Fund may invest up to 15% of its assets in restricted securities with
limited marketability or other illiquid securities.
The Fund may also invest, to a limited extent, in futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation under futures contracts will not
exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
<PAGE>

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

The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $520 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.

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

The Fund employs Grantham, Mayo, Van Otterloo & Co. LLC, 40 Rowes Wharf, Boston,
MA 02110, as its investment adviser. GMO manages the Fund subject to the control
of the Trustees and officers of the Fund.
The Fund pays GMO a basic fee at the end of each quarter, based on the
Fund's average month-end net assets for the quarter. In addition, GMO's advisory
fee is increased or decreased based on the cumulative investment performance of
the Fund over a trailing 36-month period as compared with the cumulative total
return of the Russell 3000 Value Index over the same period. Although the actual
fees paid will depend on the Fund's relative performance and size, the following
table illustrates the maximum annual fee potentially payable by the Fund to GMO:

------------------------------------
AVERAGE NET ASSETS ANNUAL RATE
------------------------------------
First $1 billion 0.35%
Over $1 billion 0.30%
------------------------------------

<PAGE>

For purposes of the performance adjustment, the basic fee is determined
using the Fund's average net assets over the same period for which performance
is measured.
The Fund has authorized the adviser to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction the adviser
may choose brokers who charge higher commissions. If more than one broker can
obtain the best available price and most favorable execution of a transaction,
then the adviser is authorized to choose a broker who, in addition to executing
the transaction, will provide research services to the adviser or the Fund.
Also, the Fund may direct the adviser to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser--either as
a replacement for the existing adviser or as an additional adviser. Any
significant change in the Fund's advisory arrangement will be communicated to
shareholders in writing. In addition, as the Fund's sponsor and overall manager,
The Vanguard Group may provide investment advisory services to the Fund, on an
at-cost basis, at any time.

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PLAIN TALK ABOUT
THE FUND'S ADVISER
Grantham, Mayo, Van Otterloo & Co. LLC, is a privately held investment advisory
firm founded in 1977, that serves an institutional client base. As of March 31,
2000, GMO managed approximately $. billion in assets. The managers responsible
for overseeing the implementation of GMO's strategy for the Fund are:

CHRISTOPHER M. DARNELL, Chief Investment Officer of Quantitative Investment
Products and Chairman of the U.S. Equity Investment Policy Group at GMO; has
managed portfolio investments since 1979; with GMO since 1979; Fund Manager
since inception; B.A., Yale University; M.B.A., Harvard University.

ROBERT M. SOUCY, Managing Director, U.S. Quantitative Equity at GMO; has managed
portfolio investments since 1987; with GMO since 1987; Fund Manager since
inception; B.S., University of Massachusetts.
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DIVIDENDS, CAPITAL GAINS, AND TAXES

FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends and capital gains are generally
distributed in December. You can receive distributions of income dividends or
capital gains in cash, or you can have them automatically reinvested in more
shares of the Fund.

BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
<PAGE>

- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.

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

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

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

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

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

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

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

<PAGE>

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

SERVICES AND ACCOUNT FEATURES

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD (R) DIRECT DEPOSIT SERVICE [BOOKLET]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD (R) AUTOMATIC EXCHANGE SERVICE [BOOKLET]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS (R) [BOOKLET]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS TM [BOOKLET]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT (R) 1-800-662-6273 (ON-BOARD)[BOOKLET]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or ex-change shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD TM www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>

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

*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------

TYPES OF ACCOUNTS

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

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

<PAGE>

BUYING SHARES

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

add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.

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

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

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

For clients of Vanguard's Institutional Division . . .

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . .[TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
<PAGE>

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

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

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

Wire to:
FRB ABA 021001088
HSBC Bank USA

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard U.S. Value Fund-.
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES It is important that you call Vanguard before you
invest a large dollar amount. It is our responsibility to consider the interests
of all Fund shareholders, and so we reserve the right to refuse any purchase
that may disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------

<PAGE>

REDEEMING SHARES

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

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

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

When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.

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

HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours-- to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.

<PAGE>

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

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number, if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES Vanguard reserves the right to revise or
terminate the telephone redemption privilege at any time, without notice. In
addition, Vanguard can stop selling shares or postpone payment at times when the
New York Stock Exchange is closed or under any emergency circumstances as
determined by the U.S. Securities and Exchange Commission. If you experience
difficulty making a telephone redemption during periods of drastic economic or
market change, you can send us your request by regular or express mail. Follow
the instructions on selling or exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.

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

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

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

For clients of Vanguard's Institutional Division . . .

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------

OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------

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

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

- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.

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

TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.

A "round trip" is a redemption from the Fund followed by a purchase back
into the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------

TRANSFERRING REGISTRATION

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

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

For clients of Vanguard's Institutional Division . . .

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
<PAGE>

FUND AND ACCOUNT UPDATES

STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOKLET]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in December and June for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOKLET]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------

<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK.)

<PAGE>

(THIS PAGE INTENTIONALLY LEFT BLANK.)

<PAGE>

GLOSSARY OF INVESTMENT TERMS

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

CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments, which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.

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

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

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

GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, growth
stocks typically have low dividend yields and above-average prices in relation
to such factors as revenue, earnings, and book value.

FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.

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

MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.

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

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

PRINCIPAL
The amount of money you put into an investment.

SECURITIES
Stocks, bonds, and interest in other investment vehicles.

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

VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as earnings, and book value, and these stocks
typically have above-average dividend yields.

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

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

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

FOR MORE INFORMATION
If you'd like more information about
Vanguard U.S. Value Fund, the
following documents are available
free upon request:

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

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

The SAI is incorporated by
reference into
(and is thus legally a part of)
this prospectus.

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

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

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

TEXT TELEPHONE:
1-800-952-3335

WORLD WIDE WEB:
WWW.VANGUARD.COM

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

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

TEXT TELEPHONE:
1-800-749-7273

INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-800-SEC-0330. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a fee,
by writing the Public Reference
Section, Securities and Exchange
Commission, Washington,
DC 20549-0102.

Fund's Investment Company Act
file number: 811-5628

P0.N-05/30/2000

<PAGE>

VANGUARD(R) U.S.
VALUE FUND

Participant Prospectus
May 30, 2000

This is the Fund's initial
prospectus, so it contains
no performance data.

[A MEMBER OF
THE VANGUARD GROUP LOGO]

<PAGE>

VANGUARD U.S. VALUE FUND
Participant Prospectus
May 30, 2000

A Growth and Income Stock Mutual Fund

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

1 FUND PROFILE 8 DIVIDENDS, CAPITAL GAINS, AND TAXES

2 ADDITIONAL INFORMATION 9 SHARE PRICE

3 A WORD ABOUT RISK 10 INVESTING WITH VANGUARD

3 WHO SHOULD INVEST 11 ACCESSING FUND INFORMATION BY
COMPUTER
4 PRIMARY INVESTMENT STRATEGIES
GLOSSARY (inside back cover)
7 THE FUND AND VANGUARD

7 INVESTMENT ADVISER
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard U.S.
Value Fund. To highlight terms and concepts important to mutual fund investors,
we have provided "Plain Talk/(R)/" explanations along the way. Reading the
prospectus will help you to decide whether the Fund is the right investment for
you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------

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

FUND PROFILE

The following profile summarizes key features of Vanguard U.S. Value Fund.

INVESTMENT OBJECTIVE
The Fund seeks to provide long-term growth of capital and income.

PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Investment style risk, which is the chance that returns from value stocks
will trail returns from the overall stock market.
- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: .%
12b-1 Distribution Fee: None
Other Expenses: .%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.53%

the same. The results apply whether or not you redeem your investment at the end
of each period.

------------------------
1 YEAR 3 YEARS
------------------------
$. $.
------------------------

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

- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed annually in .
December; capital gains, if any, are
distributed in December VANGUARD FUND NUMBER
.
INVESTMENT ADVISER
- - Grantham, Mayo, Van Otterloo & Co. CUSIP NUMBER
LLC, Boston, Mass., since inception. .

INCEPTION DATE TICKER SYMBOL
June 5, 2000 .
- --------------------------------------------------------------------------------

<PAGE>

================================================================================
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard U.S.
Value Fund. It is important to keep in mind one of the main axioms of investing:
The higher the risk of losing money, the higher the potential reward. The
reverse, also, is generally true: The lower the risk, the lower the potential
reward. As you consider an investment in the Fund, you should also take into
account your personal tolerance for the daily fluctuations of the stock market.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================

WHO SHOULD INVEST

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

The Fund has adopted the following policies, among others, to discourage
short- term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
<PAGE>

PRIMARY INVESTMENT STRATEGIES

MARKET EXPOSURE
As a value fund, the Fund's primary strategy is to invest in common stocks that
have favorable prospects for growth of earnings and dividend income, but whose
prices do not reflect this potential for positive returns.

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

SECURITY SELECTION
Grantham, Mayo, Van Otterloo & Co. LLC (GMO), adviser to the Fund, seeks out
companies whose stocks it considers to be undervalued. The Fund will invest in
small-, mid-, and large-capitalization stocks. These are generally stocks that
are out of favor with investors and currently trading at prices that, the
adviser feels, are below what the stocks are worth in relation to the
fundamental value of the underlying companies. These stocks typically--but not
always--have lower-than-average price/earnings (P/E) ratios, and
higher-than-average dividend yields.
<PAGE>

The adviser employs proprietary research and multiple quantitative models
for stock selection from the Russell 3000 Index. These models together
constitute a proprietary dividend discount model, and considers other
fundamental characteristics such as book value and cash flow. GMO strategically
combines its models to construct a portfolio that exhibits value characteristics
overall.
The Fund is generally managed without regard to tax ramifications.

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

TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.

THE FUND AND VANGUARD

INVESTMENT ADVISER

------------------------------------
AVERAGE NET ASSETS ANNUAL RATE
------------------------------------
First $1 billion 0.35%
Over $1 billion 0.30%
------------------------------------

For purposes of the performance adjustment, the basic fee is determined
using the Fund's average net assets over the same period for which performance
is measured.
The Fund has authorized the adviser to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the adviser
may choose brokers who charge higher commissions. If more than one broker can
obtain the best available price and most favorable execution of a transaction,
then the adviser is authorized to choose a broker who, in addition to executing
the transaction, will provide research services to the adviser or the Fund.
Also, the Fund may direct the adviser to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser--either as
a replacement for the existing adviser or as an additional adviser. Any
significant change in the Fund's advisory arrangement will be communicated to
shareholders in writing. In addition, as the Fund's sponsor and overall manager,
The Vanguard Group may provide investment advisory services to the Fund, on an
at-cost basis, at any time.

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

Grantham, Mayo, Van Otterloo & Co. LLC, is a privately held investment advisory
firm founded in 1977, that serves an institutional client base. As of March 31,
2000, GMO managed approximately $. billion in assets. The managers responsible
for overseeing the implementation of GMO's strategy for the Fund are:

DIVIDENDS, CAPITAL GAINS, AND TAXES

The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends and capital gains are generally
distributed in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin
<PAGE>

withdrawals from the plan. You should consult your plan administrator, your
plan's Summary Plan Description, or your tax adviser about the tax consequences
of plan withdrawals.

SHARE PRICE

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

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

INVESTING WITH VANGUARD

The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- - If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.

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

TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on a Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.

EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>

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

<PAGE>

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<PAGE>

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<PAGE>

GLOSSARY OF INVESTMENT TERMS

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

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

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

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

FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.

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

MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.

PRINCIPAL
The amount of money you put into an investment.

SECURITIES
Stocks, bonds, and interest in other investment vehicles.

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

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

[SHIP]
[THE VANGUARD GROUP LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900

FOR MORE INFORMATION
If you'd like more information about
Vanguard U.S. Value Fund, the
following documents are available
free upon request:

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

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

The SAI is incorporated by
reference into (and is thus legally a part of)
this prospectus.

THE VANGUARD GROUP
PARTICIPANT SERVICES CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900

TELEPHONE:
1-800-523-1188

TEXT TELEPHONE:
1-800-523-8004

WORLD WIDE WEB:
WWW.VANGUARD.COM

Fund's Investment Company Act
file number: 811-5628

I0.N-05/30/2000

<PAGE>
The Vanguard Asset Allocation Fund Prospectus from PEA # 16 is incorporated by
reference.

<PAGE>

PART B

VANGUARD(R) . FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION

MAY 30, 2000

This Statement is not a prospectus but should be read in conjunction with the
Trust's current Prospectuses (dated January 21, and May 30, 2000, respectively).
To obtain, without charge, a Prospectus and the most recent Annual Report to
Shareholders, containing the Funds' Financial Statements, which are hereby
incorporated by reference, please call:

INVESTOR INFORMATION DEPARTMENT
1-800-662-7447 (SHIP)

TABLE OF CONTENTS

PAGE
DESCRIPTION OF THE FUNDS ........................................B-.
INVESTMENT POLICIES..............................................B-.
FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-.
SHARE PRICE......................................................B-.
PURCHASE OF SHARES...............................................B-.
REDEMPTION OF SHARES.............................................B-.
MANAGEMENT OF THE FUNDS .........................................B-.
COMPARATIVE INDEXES..............................................B-.
TOTAL RETURN.....................................................B-.
INVESTMENT ADVISORY SERVICES.....................................B-.
PORTFOLIO TRANSACTIONS...........................................B-.
GLOSSARY.........................................................B-.
FINANCIAL STATEMENTS.............................................B-.

DESCRIPTION OF THE FUNDS

ORGANIZATION

The Trust was organized as a Maryland corporation in 1988, and was reorganized
as a Delaware business trust in May, 1998. Prior to its reorganization as a
Delaware business trust, the Trust was known as Vanguard Asset Allocation Fund,
Inc. The Trust is registered with the United States Securities and Exchange
Commission (the Commission) under the Investment Company Act of 1940 (the 1940
Act) as an open-end, diversified management investment company. It currently
offers the following funds, each of which has outstanding one class of shares:

Vanguard Asset Allocation Fund
Vanguard U.S. Value Fund
(INDIVIDUALLY, THE FUND; COLLECTIVELY, THE FUNDS)

The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that each Fund may
issue.

SERVICE PROVIDERS

CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, serves as Vanguard Asset Allocation Fund's
custodian. . serves as custodian for Vanguard U.S. Value Fund. The custodian is
responsible for maintaining the Fund's assets and keeping all necessary accounts
and records.

B-1
<PAGE>

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

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

CHARACTERISTICS OF THE FUNDS' SHARES

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

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

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

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

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

PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares of
the Funds.

CONVERSION RIGHTS. There are no conversion rights associated with shares of
the Funds.

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

SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.

CALLS OR ASSESSMENT. Each Fund's shares are fully paid and non-assessable.

TAX STATUS OF THE FUND

Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. This special tax status means that a
fund will not be liable for federal tax or income and capital gains distributed
to shareholders. In order to preserve its tax status, the Fund must comply with
certain requirements. If a Fund fails to meet these requirements in any taxable
year, it will be subject to tax on its taxable income at corporate rates, and
all distributions from

B-2
<PAGE>

earnings and profits, including any distributions of net tax-exempt income and
net long-term capital gains, will be taxable to shareholders as ordinary income.
In addition, a Fund could be required to recognize unrealized gains, pay
substantial taxes and interest, and make substantial distributions before
regaining its tax status as a regulated investment company.

INVESTMENT POLICIES

The following policies supplement the Fund's investment objectives and policies
set forth in each Fund's Prospectus:

FUTURES CONTRACTS AND OPTIONS

Each Fund may enter into stock index and fixed-income futures contracts, stock
index and fixed income options, and options on such futures contracts to remain
fully invested as an investment tool when reallocating assets, to add value when
these instruments are favorably priced, to hedge dividend accruals, or to reduce
transactions costs. Futures contracts provide for the future sale by one party
and purchase by another party of a specified amount of a specific security or
index at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission (CFTC), a U.S. Government Agency. Assets committed to futures
contracts will be segregated to the extent required by law.

Although many fixed-income futures contracts call for actual delivery or
acceptance of the underlying securities at a specified date (stock index futures
contracts do not permit delivery of securities), the contracts are normally
closed out before the settlement date without the making or taking of delivery.
Closing out an open futures position is done by taking an opposite position
("buying" a contract which has previously been "sold," "selling" a contract
previously "purchased") in an identical contract to terminate the position.
Brokerage commissions are incurred when a futures contract is bought or sold.

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

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

Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes (anticipated or potential) in the value of securities
currently owned or expected to be acquired by them. Speculators are less
inclined to own the securities underlying the futures contracts which they
trade, and use futures contracts with the expectation of realizing profits from
fluctuations in the value of the underlying securities. The Funds intend to use
futures contracts for hedging purposes, risk reduction, securities exposure,
liquidity, and other similar purposes.

Regulations of the CFTC applicable to the Funds require that all of their
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins

B-3
<PAGE>

and premiums required to establish any non-hedging positions do not exceed five
percent of the value of the respective Fund's portfolio.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS AND OPTIONS. A Fund will not
enter into futures contract transactions to the extent that, immediately
thereafter, the sum of its initial margin deposits on open contracts exceeds 5%
of its total assets; however, because only a small margin deposit is required to
trade in futures and options, each Fund may have up to 50% of the value of its
assets exposed to futures and options.

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

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

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

Utilization of futures transactions by the Funds do involve the risk of
imperfect or no correlation between the futures price and the value of
securities underlying futures contracts. It is also possible that a Fund could
both lose money on futures contracts and also experience a decline in value of
its portfolio securities. There is also the risk of loss by a Fund of margin
deposits in the event of bankruptcy of a broker with whom a Fund has an open
position in a futures contract or related option.

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

FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Each Fund is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on futures contracts as of the end of the year as
well as those actually realized during the year. In most

B-4
<PAGE>

cases, any gain or loss recognized with respect to a futures contract is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. Furthermore,
sales of futures contracts which are intended to hedge against a change in the
value of securities held by a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition. Each Fund may be required to defer the recognition of losses
on futures contracts to the extent of any unrecognized gains on related
positions held by the Fund.

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

Each Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes including unrealized
gains at the end of the Funds' fiscal year on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Funds' other investments and shareholders will be advised on the nature of
the payments.

ILLIQUID SECURITIES

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

Each Fund may invest in restricted, privately placed securities that, under
the Commission's rules, may be sold only to qualified institutional buyers.
Because these securities can be resold only to qualified institutional buyers,
they may be considered illiquid securities -- meaning that they could be
difficult for a Fund to convert to cash if needed.

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

LENDING OF SECURITIES

Each Fund may lend its investment securities to qualified institutional
investors (typically brokers, dealers, banks or other financial institutions)
who need to borrow securities in order to complete certain transactions, such as
covering short sales, avoiding failures to deliver securities or completing
arbitrage operations. By lending its investment securities, a Fund attempts to
increase its net investment income through the receipt of interest on the loan.
Any gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Fund. The terms and
the structure and the aggregate amount of such loans must be consistent with the
1940 Act, and the Rules and Regulations or interpretations of the Commission
thereunder. These provisions limit the amount of securities a fund may lend to
33 1/3% of the fund's total assets, and require that (a) the borrower pledge and
maintain with the fund collateral consisting of cash, an irrevocable letter of
credit or securities issued or guaranteed by the United States Government having
at all times not less than 100% of the value of the securities loaned, (b) the
borrower add to such collateral whenever the price of the securities loaned
rises (i.e., the borrower "marks to the market" on a daily basis), (c) the loan
be made subject to termination by the fund at any time, and (d) the Fund receive
reasonable interest on the loan (which may include the

B-5
<PAGE>

fund's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Fund will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which presently require the borrower, after notice, to redeliver
the securities within the normal settlement time of three business days. All
relevant facts and circumstances, including the creditworthiness of the broker,
dealer or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Funds' Board of Trustees.

VANGUARD INTERFUND LENDING PROGRAM

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

TEMPORARY INVESTMENTS

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

FOREIGN INVESTMENTS

The Funds may invest up to 20% of their assets in securities of foreign
companies. Investors should recognize that investing in foreign companies
involves certain special considerations which are not typically associated with
investing in U.S. companies.

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

FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the

B-6
<PAGE>

U.S. dollar by a U.S. taxpayer is also treated as a transaction subject to the
special currency rules. However, foreign currency-related regulated futures
contracts and non-equity options are generally not subject to the special
currency rules if they are or would be treated as sold for their fair market
value at year-end under the marking-to-market rules applicable to other futures
contracts unless an election is made to have such currency rules apply. With
respect to transactions covered by the special rules, foreign currency gain or
loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. The Treasury Department issued regulations under which certain
transactions subject to the special currency rules that are part of a "section
988 hedging transaction" (as defined in the Internal Revenue Code of 1986, as
amended, and the Treasury regulations) will be integrated and treated as a
single transaction or otherwise treated consistently for purposes of the Code.
Any gain or loss attributable to the foreign currency component of a transaction
engaged in by a Fund which is not subject to the special currency rules (such as
foreign equity investments other than certain preferred stocks) will be treated
as capital gain or loss and will not be segregated from the gain or loss on the
underlying transaction. It is anticipated that some of the non-U.S.
dollar-denominated investments and foreign currency contracts Vanguard Asset
Allocation Fund may make or enter into will be subject to the special currency
rules described above.

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

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

Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from foreign companies held by the Funds.

DESCRIPTION OF U.S. GOVERNMENT SECURITIES

As used in this Statement of Additional Information, the term "U.S. Government
Securities" refers to a variety of securities which are issued or guaranteed by
the United States Treasury, by various agencies of the United States Government,
and by various instrumentalities which have been established or sponsored by the
United States Government. The term also refers to "repurchase agreements"
collateralized by such securities.

U.S. Treasury Securities are backed by the "full faith and credit" of the
United States. Securities issued or guaranteed by Federal agencies and U.S.
Government sponsored instrumentalities may or may not be backed by the full
faith and credit of the United States. In the case of securities not backed by
the full faith and credit of the United States, the investor must look
principally to the agency or instrumentality issuing or guaranteeing the
obligation for ultimate repayment, and may not be able to assert a claim against
the United States itself in the event the agency or instrumentality does not
meet its commitment.

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<PAGE>

Some of the U.S. Government agencies that issue or guarantee securities
include the Export-Import Bank of the United States, Farmers Home
Administration, Federal Housing Administration, Maritime Administration, Small
Business Administration, and The Tennessee Valley Authority.

An instrumentality of the U.S. Government is a government agency organized
under Federal charter with government supervision. Instrumentalities issuing or
guaranteeing securities include, among others, Federal Home Loan Banks, the
Federal Land Banks, Central Bank for Cooperatives, Federal Intermediate Credit
Banks, and the Federal National Mortgage Association.

DESCRIPTION OF REPURCHASE AGREEMENTS

Repurchase agreements are transactions by which a person purchases a security
and simultaneously commits to resell that security to the seller (a member bank
of the Federal Reserve System or recognized securities dealer) at an agreed upon
price on an agreed upon date within a number of days (usually not more than
seven) from the date of purchase. The resale price reflects the purchase price
plus an agreed upon market rate of interest which is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value of the underlying security.

The use of repurchase agreements involves certain risks. For example, if
the seller of the agreement defaults on its obligation to repurchase the
underlying securities at a time when the value of these securities has declined,
a Fund may incur a loss upon disposition of them. If the seller of the agreement
becomes insolvent and subject to liquidation or reorganization under the
Bankruptcy Code or other laws, a bankruptcy court may determine that the
underlying securities are collateral not within the control of a Fund and
therefore subject to sale by the trustee in bankruptcy. Finally, it is possible
that a Fund may not be able to substantiate its interest in the underlying
securities. While the Funds' management acknowledges these risks, it is expected
that they can be controlled through stringent security selection criteria and
careful monitoring procedures.

FUNDAMENTAL INVESTMENT LIMITATIONS

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

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

COMMODITIES. The Fund may not invest in commodities, except that it may
invest in bond or stock index futures contracts, bond or stock options and
options on bond or stock index futures contracts. No more than 5% of the Fund's
total assets may be used as initial margin deposit for futures contracts, and no
more than 50% of the Asset Allocation Fund's or 20% of the U.S. Value Fund's
total assets may be obligated under futures contracts or options at any time.

DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities. Vanguard U.S. Value Fund will limit the
aggregate value of all holdings (except U.S. Government and cash items, as
defined under Subchapter M of the Internal Revenue Code (the "Code")), each of
which exceeds 5% of the Fund's total assets, to an aggregate of 50% of such
assets. Additionally, the Fund will limit the aggregate value of holdings of a
single

B-8
<PAGE>

issuer (except U.S. Government and cash items, as defined in the Code) to a
maximum of 25% fo the Fund's total assets.

INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.

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

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

LOANS. The Fund may not lend money to any person except by purchasing fixed
income securities that are publicly distributed, lending its portfolio
securities, or through Vanguard's interfund lending program.

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

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

REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate and bonds secured
by real estate.

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

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

The investment limitations above are considered at the time that investment
securities are purchased.

*These limitations are non-fundamental for Vanguard U.S. Value Fund and,
therefore are subject to change at the discretion of the Fund's Board of
Trustees.

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

SHARE PRICE

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

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

B-9
<PAGE>

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

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

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

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

PURCHASE OF SHARES

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

REDEMPTION OF SHARES

Each Fund may suspend redemption privileges or postpone the date of payment (i)
during any period that the New York Stock Exchange is closed, or trading on the
Exchange is restricted as determined by the Commission, (ii) during any period
when an emergency exists as defined by the rules of the Commission as a result
of which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for such
other periods as the Commission may permit. No charge is made by the Funds for
redemptions. Shares redeemed may be worth more or less than what was paid for
them, depending on the market value of the securities held by the Funds.

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

TRADING SHARES THROUGH CHARLES SCHWAB

Each Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on its
behalf purchase and redemption orders under certain terms and conditions. Schwab
is also authorized to designate other intermediaries to accept purchase and
redemption orders on each Fund's behalf subject to those terms and conditions.
Under this arrangement, the Funds will be deemed to have received a purchase or
redemption order when Schwab or, if applicable, Schwab's authorized designee,
accepts the order in accordance with the respective Fund's instructions.
Customer orders that are properly transmitted to a Fund by Schwab, or if
applicable, Schwab's authorized designee, will be priced as follows:

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

B-10
<PAGE>

MANAGEMENT OF THE FUND

TRUSTEES AND OFFICERS

The officers of each Fund manage its day-to-day operations and are responsible
to the Funds' Board of Trustees. The Trustees set broad policies for each Fund
and choose its officers. The following is a list of Trustees and officers of the
Funds and a statement of their present positions and principal occupations
during the past five years. As a group, the Funds' Trustees and officers own
less than 1% of the outstanding shares of each Fund. Each Trustee also serves as
a Director of The Vanguard Group, Inc., and as a Trustee of each of 103 funds
administered by Vanguard (102 in the case of Mr. Malkiel and 93 in the case of
Mr. MacLaury). The mailing address of the Trustees and officers of the Fund is
Post Office Box 876, Valley Forge, PA 19482.

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

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

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

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

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

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

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

J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), and The Mead Corp. (Paper Products); and Trustee of
Vanderbilt University.

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

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

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

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

The Funds are members of The Vanguard Group of Investment Companies, which
consists of more than 35 investment companies. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. (Vanguard), the Funds and the other funds
in Vanguard obtain at cost virtually all of their corporate management,
administrative and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain of the Vanguard funds.

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

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

Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the 1940 Act. The Code is designed to prevent unlawful practices in
connection with the purchase or sale of securities by persons associated with
Vanguard. Under Vanguard's Code of Ethics certain officers and employees of
Vanguard who are considered access persons are permitted to engage in personal
securities transactions. However, such transactions are subject to procedures
and guidelines similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.

Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The amounts which each of the funds have invested are adjusted from time to time
in order to maintain the proportionate relationship between each fund's relative
net assets and its contribution to Vanguard's capital. The Amended and Restated
Funds' Service Agreement provides that: (a) each Vanguard fund may be called
upon to invest up to 0.40% of its current assets in Vanguard, and (b) there is
no limit on the dollar amount that each Vanguard fund may contribute to
Vanguard's capitalization. At September 30, 1999, the Trust had contributed
capital of $1,770,000, representing 1.8% of Vanguard's capitalization.

MANAGEMENT

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

DISTRIBUTION

Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard Group,
Inc. provides all distribution and marketing activities for the funds in the
Group. The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of The Vanguard Group. The
Trustees and officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each fund, and
whether to organize new investment companies. One-half of the distribution
expenses of a marketing and promotional nature is allocated among the funds
based upon relative net assets. The remaining one-half of those expenses is
allocated among the funds based upon each fund's sales for the preceding 24
months relative to the total sales of the funds as a Group, provided, however,
that no fund's aggregate quarterly rate of contribution for distribution
expenses of a marketing and promotional nature shall exceed 125% of average
distribution expense rate for The Vanguard Group, and that no fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets.

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During the fiscal years ended September 30, 1997, 1998, and 1999, Vanguard
Asset Allocation Fund incurred the following approximate amounts of The Vanguard
Group's management (including transfer agency), distribution, and marketing
expenses: $11,315,000, $18,555,000, and $29,870,000, respectively. Vanguard U.S.
Value Fund did not begin operations until June 5, 2000.

INVESTMENT ADVISORY SERVICES

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

TRUSTEE COMPENSATION

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

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

- - The independent Trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled Board
meetings.
- - The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
- - Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.

"INTERESTED" TRUSTEES. The funds' interested Trustee -- Mr. Brennan --
receives no compensation for his service in that capacity. However, he is paid
in his role as officer of The Vanguard Group, Inc.

COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds. All information shown is for the fiscal year
ended September 30, 1999.

VANGUARD . FUNDS COMPENSATION TABLE

PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED FROM ALL
COMPENSATION PART OF THIS ANNUAL VANGUARD
FROM THIS FUND'S BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUND(3) EXPENSES(3) RETIREMENT TRUSTEES(1)
- -----------------------------------------------------------------------------------------------------
John C. Bogle(2) .................... None None None None
John J. Brennan ..................... None None None None
JoAnn Heffernan Heisen .............. $1,400 $77 $15,000 $80,000
Bruce K. MacLaury ................... $1,453 $131 $12,000 $75,000
Burton G. Malkiel ................... $1,411 $128 $12,000 $80,000
Alfred M. Rankin, Jr. ............... $1,400 $93 $15,000 $80,000
John C. Sawhill ..................... $1,400 $118 $15,000 $80,000
James O. Welch, Jr. ................. $1,400 $137 $15,000 $80,000
J. Lawrence Wilson .................. $1,400 $99 $15,000 $80,000
</TABLE>

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(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Trustee of 103 funds (102 in the case of
Mr. Malkiel; 93 in the case of Mr. MacLaury).

(2) Mr. Bogle retired from the Trust's Board, effective December 31, 1999.

(3) These amounts were incurred entirely by Vanguard Asset Allocation Fund
because Vanguard U.S. Value Fund did not begin operations until June 5,
2000.

COMPARATIVE INDEXES

Vanguard may use reprinted material discussing The Vanguard Group, Inc. or any
of the member funds of The Vanguard Group of Investment Companies. Each of the
investment company members of The Vanguard Group, including Vanguard Asset
Allocation Fund and Vanguard U.S. Value Fund, , may, from time to time, use one
or more of the following unmanaged indexes for comparative performance purposes.

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

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

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

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

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

RUSSELL 3000 VALUE INDEX-- Consists of the stocks in the Russell 3000 Index
(comprising the 3000 largest U.S. companies based on total market
capitalization, which represents approximately 98% of the investable US equity
market) with the lowest price-to-book ratios and lower forecasted growth values.

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

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

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

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

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

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

LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
over 4,000 individually priced U.S. Treasury, agency, corporate, and mortgage
pass-through securities corporate rated BBB - or better. The Index has a market
value of over $5 trillion.

B-14
<PAGE>

LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains over 1,500 individually priced U.S.
Treasury, agency, and corporate investment grade bonds rated BBB - or better
with maturities between one and five years. The index has a market value of over
$1.6 trillion.

LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains over 1,500 individually priced U.S.
Treasury, agency, and corporate securities rated BBB - or better with maturities
between five and ten years. The index has a market value of over $800 billion.

LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market weighted
index that contains over 1,900 individually priced U.S. Treasury, agency, and
corporate securities rated BBB - or better with maturities greater than ten
years. The index has a market value of over $1.1 trillion.

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

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

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

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

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

STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high grade, noncallable preferred stock issues.

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

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

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

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

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

TOTAL RETURN

The average annual total return for Vanguard Asset Allocation Fund for the one,
five, and ten year periods ended September 30, 1999 was +14.68%, +20.45%, and
+14.60%, respectively. Vanguard U.S. Value Fund did not begin operations until
June 5, 2000.

AVERAGE ANNUAL TOTAL RETURN

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

B-15
<PAGE>

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

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

Where:

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

AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION

We calculate the Funds' average annual after-tax total return by finding the
average annual compounded rate of return over the one-, five-, and ten-year
periods (or for periods of the Fund's operations) that would equate the initial
amount invested to the after-tax value, according to the following formulas:

After-tax return:

P (1+T)/N/ = ATV

Where:

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

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

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

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

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

CUMULATIVE TOTAL RETURN

Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Funds' shares and assume that all
dividends and capital gains distributions during the period were

B-16
<PAGE>

reinvested in Fund shares. Cumulative total return is calculated by finding the
cumulative rates of a return of a hypothetical investment over such periods,
according to the following formula (cumulative total return is then expressed as
a percentage):

C = (ERV/P)-1

Where:

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

SEC YIELDS

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

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

Where:

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

INVESTMENT ADVISORY SERVICES

VANGUARD ASSET ALLOCATION FUND
The Fund employs Mellon Capital Management Corporation (Mellon Capital), 595
Market St., Suite 3000, San Francisco, California 94105 under an investment
advisory agreement dated . to manage the investment and reinvestment of the
assets of the Fund and to continuously review, supervise and administer the
Fund's investment program. Mellon Capital discharges its responsibilities
subject to the control of the officers and Board of Trustees of the Fund.

The Fund pays Mellon Capital a Basic Fee at the end of each fiscal quarter,
calculated by applying a quarterly rate, based on the following annual
percentage rates, to the Fund's average month-end net assets for the quarter:

NET ASSETS ANNUAL RATE
First $100 million...... 0.200%
Next $900 million....... 0.150%
Next $500 million....... 0.125%
Over $1.5 billion....... 0.100%

This fee may be increased or decreased by applying an adjustment formula
based on the performance of the Fund's portfolio relative to the investment
record of a "Combined Index", 65% of which shall be comprised of the Standard &
Poor's 500 Composite Price Index and 35% of which shall be comprised of the
Lehman Brothers Long-Term U.S. Treasury Index. The fee payment will be increased
(decreased) by an incentive (penalty) of 0.05% of average net assets, if the
Fund's cumulative investment performance for the thirty-six months preceding the
end of the quarter is at least six percentage points above (below) the
cumulative investment record of the Combined Index for the same period. For the
purpose of determining the fee adjustment for investment

B-17
<PAGE>

performance, as described above, the net assets of the Fund will be averaged
over the same period as the performance of the Fund and the investment record of
the Combined Index are computed.

For the purpose of determining the fee adjustment for investment
performance, as described above, the net assets of the Fund shall be averaged
over the same period as the investment performance of the Fund and the
investment record of the Combined Index are computed. The "investment
performance" of the Fund for the period, expressed as a percentage of the Fund's
net asset value per share at the beginning of the period. The benchmark used for
the new rate calculation will consist of linking the return of the "new"
benchmark (a "Combined Index", 65% of which is comprised of the Standard &
Poor's 500 Composite Price Index and 35% of which is comprised of the Lehman
Brothers Long-Term U.S. Treasury Index) to the return of the "previous"
benchmark (Standard & Poor's 500 Composite Price Index) in the same varying
percentages that are listed below. The previous incentive/penalty fee structure
provided that the Basic Fee be increased or decreased by an amount equal to
0.05% of the average month-end assets of the Fund if the Fund's investment
performance for the thirty-six months preceding the end of the quarter was six
percentage points or more above or below, respectively, the investment record of
the Standard & Poor's 500 Composite Price Index. shall be the sum of: (i) the
change in the Fund's net asset value per share during such period; (ii) the
value of the Fund's cash distributions per share having an ex-dividend date
occurring within the period; and (iii) the per share amount of capital gains
taxes paid or accrued during such period by the Fund for undistributed realized
long-term capital gains.

The "investment record" of the Stock Index for the period, expressed as a
percentage of the Stock Index level at the beginning of the period, shall be the
sum of (i) the change in the level of the Stock Index during the period and (ii)
the value, computed consistently with the Stock Index, of cash distributions
having an ex-dividend date occurring within the period made by companies whose
securities comprise the Stock Index. The "investment record" of the Bond Index
for the period, expressed as a percentage of the Bond Index level at the
beginning of such period shall be the sum of (i) the change in the level of the
Bond Index during the period and (ii) the value of the interest accrued or paid
on the bonds included in the Bond Index, assuming the reinvestment of such
interest on a monthly basis. Computation of these two components as the Combined
Index shall be made on the basis of 65% in the Stock Index and 35% in the Bond
Index at the beginning of each quarter.

DESCRIPTION OF THE ADVISER. Mellon Capital is an investment management firm
which manages well diversified stock and bond portfolios for institutional
clients. As of September 30, 1999 Mellon Capital provided investment advisory
services to 270 clients and managed assets with an approximate value of $73
billion. Mellon Capital's asset allocation strategy was developed by Mellon
Capital's co-founder, William Fouse, in 1972, and is used by 134 of its clients
and accounts for approximately $30 billion of the assets that it manages. Mellon
Capital is a wholly-owned subsidiary of MBC Investment Corporation, which itself
is a wholly-owned subsidiary of Mellon Financial Corporation. For the fiscal
years ended September 30, 1997, 1998, and 1999, the Fund incurred approximately
$3,723,000 (before a decrease of $921,000 based on performance), $5,466,000
(before a decrease of $1,404,000 based on performance) and $8,336,000 (before a
decrease of $1,564,000), respectively, for investment advisory services.

VANGUARD U.S. VALUE FUND

The Fund employs Grantham, Mayo, Van Otterloo & Co. LLC (GMO), 40 Rowes Wharf,
Boston, Massachusetts, 02110 under an investment advisory agreement to manage
the investment and reinvestment of the assets of the Fund and to continuously
review, supervise, and administer the Fund's investment program. GMO discharges
its responsibilities subject to the control of the officers and Board of
Trustees of the Fund.
The Fund pays GMO a Basic Fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the Fund's average month-end net assets for the quarter:

B-18
<PAGE>

NET ASSETS ANNUAL RATE
---------- -----------
First $1 billion........ 0.225%
Over $1 billion......... 0.175%

Subject to the transition rules described below, the Basic Fee, as provided
above, will be increased or decreased by the amount of a Performance Fee
Adjustment (Adjustment). The Adjustment will be calculated as a percentage of
the Basic Fee and will change proportionately with the investment performance of
the Fund relative to the investment performance of the Russell 3000 Value Index
(the "Index") for the thirty-six (36) month period ending with the then ended
quarter. The Adjustment is computed as follows:

CUMULATIVE 36-MONTH ADJUSTMENT AS A PERCENTAGE OF
PERFORMANCE VERSUS THE INDEX (a) BASIC FEE (b)
-------------------------------- -------------
Trails by more than 1%........ -.125%
Exceeds by 1% to trails by 1%. Linear decrease from 0% to -.125%
Exceeds by 1% to 2%........... Linear increase from 0% to +.125%
Exceeds by more than 2%....... +.125%

(a) During the first thirty-six month (36) period, inception-to-date Fund
performance versus the Index for the same period will be utilized. Subject
to the transition rules provided below, the +/-.125% hurdle rate
illustrated in the table above will be multiplied by a fraction, the
numerator being the months elapsed since inception and the denominator
being thirty-six (36).

(b) For purposes of the Adjustment calculation, the Basic Fee is calculated by
applying the above rate schedule against the average month-end net assets
over the same time period for which the performance is measured. Linear
application of the adjustment provides for an infinite number of results
within the stated range.

TRANSITION RULE FOR CALCULATING GMO'S COMPENSATION. The Adjustment will not
be fully operable until the Fund has been in operation, pursuant to its regular
investment policies, for a full 36-months. Until that time, the following
transition rules will apply (assuming that the Fund commences operations on June
5, 2000 and begins its regular investment program on June 30, 2000):

JUNE 5, 2000 THROUGH JUNE 30, 2001. GMO's compensation will be the
Basic Fee. No Adjustment will apply during this period.

JULY 1, 2001 THROUGH JUNE 30, 2003. Beginning July 1, 2001 the
Adjustment will take effect on a progressive basis with regards to the
number of months elapsed between July 1, 2000 and the quarter end for
which GMO's fee is being computed. During this period, the Adjustment
that has been determined as provided above will be multiplied by a
fraction. The fraction's numerator will equal the number of months
elapsed since July 1, 2000 and the denominator will be thirty-six
(36).

ON AND AFTER JULY 1, 2003. Commencing July 1, 2003, the Adjustment
will be fully operable.

OTHER SPECIAL RULES RELATING TO GMO'S COMPENSATION. The following special
rules also apply to the GMO's compensation.

(A) FUND PERFORMANCE. The investment performance of the Fund for any
period, expressed as a percentage of the Fund's net asset value per
share at the beginning of the period will be the sum of: (i) the
change in the Fund's net asset value per share during the period; (ii)
the

B-19
<PAGE>

value of the Fund's cash distributions per share having an ex-dividend
date occurring within the period; (iii) the per share amount of
capital gains taxes paid or accrued during such period by the Fund for
undistributed realized long-term capital gains.

(B) INDEX PERFORMANCE. The investment record of the Index for any
period, expressed as a percentage of the Index at the beginning of
such period, will be the sum of: (i) the change in the level of the
Index during the period; (ii) the value, computed consistently with
the Index, of cash distributions having an ex-dividend date occurring
within the period made by companies whose securities comprise the
Index.

DESCRIPTION OF GMO. GMO is a privately held investment firm founded in 1977
and serves an institutional client base. As of May 31, 2000 assets under
management by GMO totaled approximately $. billion, divided between high minimum
mutual funds and separate accounts. GMO manages investment across a range of
assets categories, including: domestic and international stocks, large and small
cap stocks, and mature and emerging markets stocks. GMO also manages fixed
income and asset allocation programs.

The investment advisory agreements will be renewable for successive
one-year periods, only if each renewal is specifically approved by a vote of the
respective Fund's Board of Trustees, including the affirmative votes of a
majority of the Trustees who are not parties to the contract or "interested
persons" (as defined in the 1940 Act) of any such party, cast in person at a
meeting called for the purpose of considering such approval. An agreement is
automatically terminated if assigned, and may be terminated without penalty at
any time:

(1) either by vote of the Board of Trustees of a Fund or by vote of its
outstanding voting securities on 60 days' written notice to the adviser, or

(2) by the adviser upon 90 days' written notice to a Fund.

The Fund's Board of Trustees may, without the approval of
shareholders, provide for:

- - The employment of a new investment adviser pursuant to the terms of a new
advisory agreement, either as a replacement for an existing adviser or as
an additional adviser.

- - A change in the terms of an advisory agreement.

- - The continued employment of an existing adviser on the same advisory
contract terms where a contract has been assigned because of a change in
control of the adviser. Any such change will be communicated to
shareholders in writing.

PORTFOLIO TRANSACTIONS

The investment advisory agreements authorize the Advisers (with the
approval of the Funds' Board of Trustees) to select the brokers or dealers that
will execute the purchases and sales of portfolio securities for the Funds and
directs the Advisers to use their best efforts to obtain the best available
price and most favorable execution as to all transactions for the Funds. The
Advisers undertake to execute each investment transaction at a price and
commission which provides the most favorable total cost or proceeds reasonably
obtainable under the circumstances.
In placing portfolio transactions, each Adviser will use its best judgment
to choose the broker most capable of providing the brokerage services necessary
to obtain best available price and most favorable execution. The full range and
quality of brokerage services available will be considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration may be given to
those brokers which supply investment research and statistical information and
provide other services in addition to execution services to the Funds and/or the
Advisers. Each Adviser considers such information useful in the performance of
its obligations under the agreement, but is unable to determine the amount by
which such services may reduce its expenses.

B-20
<PAGE>

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

Currently, it is each Fund's policy that an Adviser may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Advisers will only pay such higher
commissions if this is believed to be in the best interest of a Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Advisers and/ or the Funds.

The total brokerage commissions paid by Vanguard Asset Allocation Fund for
the fiscal years ended September 30, 1997, 1998, and 1999, totaled $113,938,
$96,955, and $90,273, respectively. (Vanguard U.S. Value Fund began operations
on June 5, 2000.)

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

GLOSSARY

a. HISTORICAL MARKET RETURNS -- Total returns of broad asset class benchmarks.
As examples, the returns of well-known benchmarks for domestic stocks, bonds,
and money market instruments are given below.

<TABLE>
<CAPTION>
MONEY MARKET
ASSET CLASS COMMON STOCKS BONDS INSTRUMENTS
STANDARD & POOR'S 500
COMPOSITE STOCK PRICE LEHMAN BROTHERS LONG 90 DAY U.S. TREASURY
BENCHMARK INDEX TREASURY INDEX BILLS
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1989 31.6% 18.9% 8.6%
1990 -3.1 6.3 7.9
1991 30.4 18.5 5.8
1992 7.6 8.0 3.6
1993 10.1 17.3 3.1
1994 1.3 -7.6 4.2
1995 37.6 30.7 5.8
1996 23.0 -0.9 5.2
1997 29.6 8.1 3.9
1998 (9/30) 9.1 22.1 5.2
</TABLE>

b. ASSET ALLOCATION -- Asset allocation -- in its most generic sense -- is the
allotment of an investor's monies to broad asset classes such as stocks or
bonds. Investors establish percentage allocation guidelines for stocks, bonds,
and money market instruments which are consistent with their particular
long-term investment needs. These needs will include current income, potential
growth in capital, and willingness to accept risk.

B-21
<PAGE>

In implementing their asset allocation targets, some investors attempt to
maintain a stable mix -- such as 50% stocks and 50% bonds -- while others will
actively manage the stock/bond mix in pursuit of higher returns, lower risk, or
other investment objectives. The key difference between investors who maintain a
stable mix and those who actively change allocations is their willingness to
forecast the risks and returns of individual asset classes, their forecasting
abilities, and their comfort in making investment decisions based upon such
forecasts. Historically, investors who actively managed the mix based upon
conjecture have often underperformed both investors with relatively stable
allocations and investors with logical, disciplined methods for assessing
relative value and risk. Institutional investors commonly refer to active asset
allocation approaches which are based upon disciplined methodologies as tactical
asset allocation.

FINANCIAL STATEMENTS

Vanguard Asset Allocation Fund's financial statements, including the financial
highlights for each of the five fiscal years in the period ended September 30,
1999, appearing in the Fund's 1999 Annual Report to Shareholders and the report
thereon of PricewaterhouseCoopers LLP, independent accountants, also appearing
therein, are incorporated by reference into this Statement of Additional
Information. For a more complete discussion of the performance, please see the
Fund's Annual Report to Shareholders, which may be obtained without charge.
(Vanguard U.S. Value Fund did not begin operations until June 5, 2000.)

SAI078

B-22
<PAGE>

PART C

VANGUARD ASSET ALLOCATION FUND
OTHER INFORMATION

ITEM 23. EXHIBITS

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

* Filed herewith
**Previously filed
+ To be filed by amendment

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

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

ITEM 25. INDEMNIFICATION

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

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Mellon Capital Management Corporation is an investment adviser registered under
the Investment Advisers Act of 1940, as amended (the Advisers Act). The list
required by this Item 26 of officers and directors of Mellon Capital Managment
Corporation, together with any information as to any business profession,
vocation, or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated herein by reference from
Schedules B and

C-1
<PAGE>

D of Form ADV filed by Mellon Capital Management Corporation pursuant to the
Advisers Act (SEC File No. 801-19785).

Grantham, Mayo, Van Otterloo & Co. is an investment adviser registered under the
Investment Advisers Act of 1940, as amended (the Advisers Act). The list
required by this Item 26 of officers and directors of Grantham, Mayo, Van
Otterloo & Co., together with any information as to any business profession,
vocation, or employment of a substantial nature engaged in by such officers and
directors during the past two years, is incorporated herein by reference from
Schedules B and D of Form ADV filed by Grantham, Mayo, Van Otterloo & Co.
pursuant to the Advisers Act (SEC File No. .).

ITEM 27. PRINCIPAL UNDERWRITERS

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

ITEM 28. LOCATION OF ACCOUNTS AND RECORDS

The books, accounts, and other documents required to be maintained by Section 31
(a) of the Investment Company Act and the rules promulgated thereunder will be
maintained at the offices of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., Valley Forge, Pennsylvania 19482; and the Registrant's
Custodian, State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02105.

ITEM 29. MANAGEMENT SERVICES

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

ITEM 30. UNDERTAKINGS

Not Applicable

C-2

<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it has duly caused
this Post-Effective Amendment to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Valley
Forge and the Commonwealth of Pennsylvania, on the 16th day of March, 2000.

VANGUARD ASSET ALLOCATION FUND

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

By:/S/ JOHN J. BRENNAN President, Chairman, Chief March 16, 2000
---------------------------Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*

By:/S/ JOANN HEFFERNAN HEISEN Trustee March 16, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*

By:/S/ BRUCE K. MACLAURY Trustee March 16, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*

By:/S/ BURTON G. MALKIEL Trustee March 16, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*

By:/S/ ALFRED M. RANKIN, JR. Trustee March 16, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*

By:/S/ JOHN C. SAWHILL Trustee March 16, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*

By:/S/ JAMES O. WELCH, JR. Trustee March 16, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*

By:/S/ J. LAWRENCE WILSON Trustee March 16, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*

By:/S/ THOMAS J. HIGGINS Treasurer and Principal March 16, 2000
---------------------------
(Heidi Stam) Financial Officer and Principal
Thomas J. Higgins* Accounting Officer

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