VANGUARD INSTITUTIONAL INDEX FUND, N-30D, 1998-02-24

VANGUARD INSTITUTIONAL INDEX FUND
N-30D, 1998-02-24

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<PAGE> 1
VANGUARD
INSTITUTIONAL INDEX
FUND

Annual Report - December 31, 1997

[PHOTO]

[THE VANGUARD GROUP LOGO]
<PAGE> 2
OUR CREW MAKES THE DIFFERENCE

Throughout our history, The Vanguard Group has received considerable attention
as the low-cost provider of mutual funds. While such accolades are gratifying,
we are most proud, not of our low operating expenses or the billions of dollars
we manage, but of our sterling reputation created by the Vanguard crew.

We recognize that it is our crew members--more than 6,000 highly
motivated men and women--who form the cornerstone of our operations. As with
any cornerstone, we could not survive long--let alone prosper--without it.
That's why we chose this fiscal year's annual report to celebrate the spirit,
enthusiasm, and achievements of our crew. (We call those who work at Vanguard
crew members, not employees, because they operate as a team to accomplish our
mission of serving you, our clients.)

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

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

[PHOTO] [PHOTO]

JOHN C. BOGLE JOHN J. BRENNAN
CHAIRMAN PRESIDENT

<TABLE>
<CAPTION>
CONTENTS
<S> <C>
A MESSAGE TO OUR SHAREHOLDERS . . . . . . . . . . 1
THE MARKETS IN PERSPECTIVE . . . . . . . . . . . 4
PERFORMANCE SUMMARIES . . . . . . . . . . . . . . 6
PORTFOLIO PROFILE . . . . . . . . . . . . . . . 8
FINANCIAL STATEMENTS . . . . . . . . . . . . . . 10
REPORT OF INDEPENDENT ACCOUNTANTS . . . . . . . 22
</TABLE>

All comparative mutual fund data are from Lipper Analytical Services, Inc., or
Morningstar unless otherwise noted.
<PAGE> 3
DEAR SHAREHOLDER,

The U.S. stock market turned in another astonishing performance in
1997 and Vanguard Institutional Index Fund followed right along. The Fund's
total return of +33.4% matched its target, the Standard & Poor's 500 Composite
Stock Price Index, and outpaced 90% of all actively managed equity mutual
funds. Absolutely and relatively, it doesn't get much better than this.

Our fine performance was due to the continued dominance of
large-capitalization stocks, which capped a three-year run during which market
averages more than doubled.

The following table compares Vanguard Institutional Index Fund's
twelve-month total return (capital change plus reinvested dividends) with those
of the average general equity fund and the S&P 500 Index. Our Fund's return is
based on an increase in net asset value from $68.86 per share on December 31,
1996, to $89.56 per share on December 31, 1997, with the latter figure adjusted
for dividends totaling $1.391 per share paid from net investment income and
distributions totaling $0.715 per share paid from net realized capital gains.

- ----------------------------------------------------------------
TOTAL RETURNS
YEAR ENDED
DECEMBER 31, 1997
- ----------------------------------------------------------------
<S> <C>
Vanguard Institutional Index Fund +33.4%
Average General Equity Fund +24.4
S&P 500 Index +33.4
- ----------------------------------------------------------------
Institutional Plus Shares* + 7.3%
- ----------------------------------------------------------------
</TABLE>
*Since inception: July 7, 1997.

On July 7, 1997, we introduced Institutional Plus Shares for Vanguard
Institutional Index Fund, which are available for a minimum investment of $200
million. From July 7 through the end of the year, the Institutional Plus Shares
provided a return of +7.3%--exactly matching the S&P 500 Index's return over
the same period.

FINANCIAL MARKETS IN BRIEF

The historic bull market in U.S. stocks that began in August 1982 continued in
impressive fashion during 1997. The economy, corporate earnings, and employment
grew solidly, and consumer confidence strengthened. Yet interest rates declined
and inflation decelerated. In short, the domestic economic news could not have
been better. The sole dark cloud--severe turmoil in Asian economies and
currencies--only briefly darkened Wall Street's mood. After a sharp decline in
October--the S&P 500 Index tumbled -7% on October 27 alone--stocks resumed
their climb and the Index produced a +33.4% return for the year.

Long-term interest rates rose through the first quarter of the year on
expectations that the economy's robust growth would cause inflation to
accelerate. The yield on the benchmark 30-year U.S. Treasury bond peaked at
7.17% in mid-April. Then, as the news on inflation got better rather than
worse, the yield turned downward, falling to 5.92% on December 31, 72 basis
points below the 6.64% level at which it began the year.

Short-term interest rates bottomed out in June and began an irregular
climb that was apparently due to sales of short-term Treasuries by foreign
central banks and investors. At year-end 1997, the yield on three-month U.S.
Treasury bills was 5.35%, up just a bit from 5.17% when the year began. The
spread between yields on three-month T-bills and 30-year Treasury bonds was a
slim 0.57 percentage point on December 31, 1997. Such a "flattening" of the
yield curve has more often than not been a precursor of a slowing economy.

1
<PAGE> 4
1997 PERFORMANCE OVERVIEW

The stock market's gains in 1997 were strongest for the largest companies,
particularly for some of the huge blue-chip growth stocks that dominate the S&P
500 Index. Though smaller stocks made up ground versus larger stocks late in
the third quarter, bigger was clearly better during 1997--as it was in 1995 and
1996, as well. The S&P 500's return of +33.4% during 1997 was 7.7 percentage
points higher than that of the rest of the U.S. stock market (as represented by
the Wilshire 4500 Index) and a remarkable 11 percentage points above the +22.4%
return of the Russell 2000 Index of small-cap stocks.

Within the S&P 500, the +36.5% return of the Index's growth component
easily outdistanced the +30.0% return of its value component.
Financial-services stocks were the leading industry group, returning +46.9%,
followed by the health-care sector with a +42.7% return, and the utilities
sector, which came on strong late in the year and provided a return of +38.1%.
Laggards during the period included stocks in the producer-durables and
materials & processing sectors--generally considered cyclical industries.

Vanguard Institutional Index Fund handily beat the average competing
fund (by a full 9 percentage points!) and matched the stellar return of the S&P
500 Index during 1997. We mirrored the Index despite the fact that our Fund
incurs modest operating expenses and transaction costs in handling inflows and
outflows of capital--costs that are absent in the Index. All told, our expense
ratio (annual expenses as a percentage of average net assets) of 0.06%, or 6
basis points, is a tiny fraction of the 1.44% in expenses charged by the
average general equity mutual fund. This expense advantage--combined with our
below-average turnover of securities, which keeps our transaction costs to a
minimum--allows our Fund to closely track its Index and gives us a significant
leg up on our mutual fund competitors. Our annual turnover rate of 7% is but a
fraction of the 80% rate for the average equity fund.

Our Institutional Plus Shares have an even lower expense ratio (2 1/2
basis points) and therefore can also be expected to provide a close match with
the Index.

LONG-TERM PERFORMANCE OVERVIEW

Indexed mutual funds have provided long-term performance superior to that of
most actively managed mutual funds, as evidenced by the excellent relative
performance of Vanguard Institutional Index Fund since its July 1990 inception.
The table at left presents the average annual returns and the ending value of
initial $10,000,000 investments made 7 1/2 years ago in Vanguard Institutional
Index Fund, the average general equity mutual fund, and the S&P 500 Index.

- --------------------------------------------------------------------------------
TOTAL RETURNS
JULY 31, 1990, TO DECEMBER 31, 1997
------------------------------------
AVERAGE FINAL VALUE OF
ANNUAL A $10,000,000
RATE INITIAL INVESTMENT
- --------------------------------------------------------------------------------
<S> <C> <C>
Vanguard Institutional Index Fund +17.6% $33,255,917
- --------------------------------------------------------------------------------
Average General Equity Fund +15.6% $29,288,089
- --------------------------------------------------------------------------------
S&P 500 Index +17.6% $33,312,498
- --------------------------------------------------------------------------------
</TABLE>

As shown in the table, our Fund's return has outpaced that of its
average peer by 2 percentage points a year, a wide margin that has amounted to
a significant sum over the past 7 1/2 years. An initial investment of
$10,000,000 made at the Fund's inception would have grown (with income
dividends and capital gains distributions reinvested) to $33,255,917, a margin
of $3,967,828 over our average competitor--extra earnings equal to nearly 40%
of the original investment.

2
<PAGE> 5
We are pleased to point out that even over this longer period, we have
been able to exactly match our target index. As noted earlier, the S&P 500
Index is a tough competitor for all mutual funds since, as a theoretical
construct, it does not incur operating or transaction costs, all of which are
borne to one degree or another by actual funds. Indeed, we estimate that these
two costs run close to 2% per year for the average equity fund, which, by no
coincidence, equals our return advantage over our peer group of actively
managed funds. Costs matter.

We stress that the returns shown in this table are unusually high, far
above the historic long-term equity return of 11% a year. Interestingly, this
period does not include a single serious downturn in the U.S. stock market.
Although the stock market is inherently unpredictable, we believe it is safe to
say that returns over the next decade are almost sure to be lower than those of
the previous one.

Although we fully expect absolute returns to be lower in the coming
years both for Vanguard Institutional Index Fund and for most general equity
mutual funds, we believe that, given our substantially lower expenses, our Fund
will continue to perform well relative to competing S&P 500 institutional index
mutual funds over the long term. Of course, in any given year index fund
returns may vary significantly from those achieved by ostensibly similar types
of mutual funds.

IN SUMMARY

Returns from the U.S. stock market over the past three years--indeed, over the
past 15 years--have no precedent in American financial history. While as
investors we have every reason to be grateful for the bounty of the financial
markets, we also have reason to regard the future with some caution. Lengthy
bull markets can breed complacency and cause investors to discount the risks
inherent in stocks. Make no mistake, the market will demonstrate these risks
from time to time.

However, the greatest risk is failure to invest in the first place. We
believe that the stock market's risks can be partially offset by holding a
balanced portfolio that includes not only stock funds but also bond funds and
money market funds. Investors who maintain such portfolios allocated in
accordance with their time horizon, financial situation, and tolerance for
market volatility should be well prepared to "stay the course" toward their
investment objectives, no matter what the future has in store.

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

John C. Bogle John J. Brennan
Chairman of the Board President

January 23, 1998

3
<PAGE> 6
THE MARKETS IN PERSPECTIVE
Year Ended December 31, 1997

U.S. EQUITY MARKETS

Despite some year-end rockiness, 1997 again provided U.S. equity investors with
exceptional returns, as illustrated by the 33.4% advance of the S&P 500 Index.
Investors' mettle was tested several times, however, and most severely by the
upheavals that devastated a number of Asian markets in the fourth quarter.
Beginning in late October, the U.S. market grew increasingly volatile, a direct
result of investors' struggle to understand the nature and implications of
Asia's economic turmoil. By the end of the year, it appeared that a new
consensus was emerging, grounded in two basic beliefs: (1) that the collapse of
currencies in the Far East would help keep inflation tame in the United States
and (2) that slower growth in Asia would most likely lead to weaker corporate
profits over the next several years.

As the dust continued to settle, many investors sought havens
traditional in periods of high uncertainty: large-capitalization issues and
particularly the "defensive" sectors of the stock market, such as utilities,
consumer staples, and health care. The closing weeks of 1997 saw a broad
advance in these "safe" sectors, with utilities gaining 20.1% and consumer
staples 10.4% in the last quarter. By contrast, more economically sensitive
sectors were thrashed in the wake of the Asian crisis, with technology issues
falling 12.3% and producer durables down 9.0% over the three months. After
posting strong results in the third quarter, small-company stocks also suffered
in the fourth, falling 3.3%.

- ---------------------------------------------------------------------------------------
AVERAGE ANNUALIZED RETURNS
PERIODS ENDED DECEMBER 31, 1997
----------------------------------------
1 YEAR 3 YEARS 5 YEARS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 33.4% 31.2% 20.3%
Russell 2000 Index 22.4 22.3 16.4
MSCI EAFE Index 2.1 6.6 11.7
- ---------------------------------------------------------------------------------------
FIXED INCOME
Lehman Aggregate Bond Index 9.7% 10.4% 7.5%
Lehman 10-Year Municipal Bond Index 9.2 10.2 7.6
Salomon Brothers Three-Month
U.S. Treasury Bill Index 5.3 5.4 4.7
- ---------------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.7% 2.5% 2.6%
- ---------------------------------------------------------------------------------------
</TABLE>

The year-end excitement did not detract from 1997's overall record as
a stellar year for U.S. stock investors. The best-performing sector was
financial services, which rose 46.9%. This sector benefited from a number of
factors, including the strength of the economy, the vibrant financial markets,
and merger activity. By contrast, the commodity-oriented materials & processing
sector posted a gain of "only" 12.3%--in itself more than a percentage point
above the long-term average return from common stocks. Small-cap stocks also
fared well overall, as illustrated by the 22.4% increase of the Russell 2000
Index. Small-company technology issues were the most glaring exception,
mustering a gain in 1997 of just 1.1%.

U.S. FIXED-INCOME MARKETS

In a year characterized by exceptionally low inflation, interest rates fell,
providing investors with very attractive total returns. The Lehman Aggregate
Bond Index, for example,

4
<PAGE> 7
posted a total return of 9.7% for 1997, comprising 7.2% in income return and
2.5% in capital appreciation. The decline in rates can be attributed largely to
better-than-expected reports about the inflation rate. Early in the year,
economists were projecting a 2.9% increase in the Consumer Price Index (CPI)
during 1997. In March, the Federal Reserve grew sufficiently concerned to boost
interest rates by 0.25% in an effort to temper economic growth and thereby ward
off inflation. By year-end, however, the worries seemed to have been
unnecessary, as the actual CPI increase was a mere 1.7%--its smallest increase
since 1986.

The bond market gradually gathered strength during the year as
investors grew more confident that four seemingly strange bedfellows--strong
economic growth, reasonable inflation, low unemployment, and stable wage
growth--would continue to coexist peacefully. In the fourth quarter, the market
also was bolstered by the "flight to quality" among investors concerned about
Asia's problems. Overall, the longest-maturity issues benefited most from the
decline in interest rates. The yield on the 30-year U.S. Treasury bond closed
the year at 5.92%, compared with 6.64% on December 31, 1996. Falling rates
flattened the yield curve considerably: Only 0.57% separated the yield on
Treasury bills from that on the 30-year issue, down from a spread of 1.47% at
the end of 1996.

The best-performing sector in 1997 was long-term Treasuries, as
illustrated by the 15.1% return of the Lehman Long U.S. Treasury Index.
Investors in lower-quality securities also fared well, with the Lehman High
Yield Bond Index generating a 12.8% gain. The strength of the economy, together
with the lack of inflationary pressure, created an ideal environment for junk
bonds.

INTERNATIONAL EQUITY MARKETS

Arguably, investors' greatest disappointments were in international
markets--and, of course, Asian markets in particular. During the year, the
Morgan Stanley Capital International (MSCI) Pacific Index declined by 25.7% in
U.S. dollar terms; the index fell 20.7% in the fourth quarter alone. Among
individual markets, the fiscal year saw sharp declines (in U.S. dollar terms)
in Japan, down 23.6% (including a 19.7% drop in the fourth quarter); Thailand,
down 76.8%; and Malaysia, down 68.1%. The general slump in Asian markets began
in midsummer with currency devaluations by a number of countries.

By contrast, the European markets continued to provide U.S. investors
with solid returns, although they, too, stumbled in late October and
subsequently recovered. The MSCI Europe Index posted a gain of 23.7% for the 12
months. The robust character of the European markets reflected strong corporate
earnings and optimism that the European Monetary Union would provide a solid
framework for future fiscal responsibility and economic growth.

5
<PAGE> 8
PERFORMANCE SUMMARY
Institutional Index Fund

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

<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS: JULY 31, 1990-DECEMBER 31, 1997
- -------------------------------------------------------------------
INSTITUTIONAL INDEX FUND S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -------------------------------------------------------------------
<S> <C> <C> <C> <C>
1990 -7.3% 1.6% -5.7% -5.7%
1991 26.4 3.9 30.3 30.5
1992 4.5 3.0 7.5 7.6
1993 7.1 2.9 10.0 10.1
1994 -1.5 2.8 1.3 1.3
1995 34.4 3.2 37.6 37.6
1996 20.6 2.5 23.1 23.0
1997 31.2 2.2 33.4 33.4
- -------------------------------------------------------------------
</TABLE>

See Financial Highlights table on page 18 for dividend and capital gains
information for the past five years.

<TABLE>
<CAPTION>
CUMULATIVE PERFORMANCE: JULY 31, 1990-DECEMBER 31, 1997
- ----------------------------------------------------------------------------
INSTITUTIONAL AVERAGE GENERAL S&P 500
INDEX FUND EQUITY FUND INDEX
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
1990 10000000 10000000 10000000
1990 09 8656891 8570000 8653415
1990 12 9426142 9205894 9429095
1991 03 10791440 10788387 10798738
1991 06 10764020 10694528 10773988
1991 09 11336457 11475229 11350124
1991 12 12285976 12432263 12301752
1992 03 11974396 12412371 11991023
1992 06 12201142 12092132 12219062
1992 09 12580884 12427084 12604350
1992 12 13211959 13551735 13239067
1993 03 13789739 13997587 13817205
1993 06 13851949 14178156 13884455
1993 09 14207352 14929598 14243248
1993 12 14536346 15256557 14573392
1994 03 13982543 14748513 14020724
1994 06 14040773 14359153 14079766
1994 09 14726426 15189112 14768140
1994 12 14726553 14994691 14765831
1995 03 16158457 16068311 16203545
1995 06 17699150 17467861 17750314
1995 09 19109182 19024247 19160943
1995 12 20264025 19606389 20314499
1996 03 21357704 20714150 21404755
1996 06 22310709 21704286 22365488
1996 09 23005917 22270768 23056913
1996 12 24936633 23384307 24978763
1997 03 25599452 22921297 25648311
1997 06 30071855 26444301 30126087
1997 09 32328665 29570017 32382544
1997 12 33255917 29288089 33312498
- ----------------------------------------------------------------------------
</TABLE>

- ------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED DECEMBER 31, 1997
------------------------------------------- FINAL VALUE OF A
SINCE $10,000,000
1 YEAR 5 YEARS INCEPTION INVESTMENT
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Index Fund 33.36% 20.28% 17.58% $33,255,917
Average General Equity Fund 24.36 16.59 15.59 29,288,089
S&P 500 Index 33.36 20.27 17.61 33,312,498
- ------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED DECEMBER 31, 1997
- ----------------------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional Index Fund 7/31/1990 33.36% 20.28% 14.59% 2.99% 17.58%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>

6
<PAGE> 9
PERFORMANCE SUMMARY
Institutional Index Fund-Institutional Plus Shares

<TABLE>
<CAPTION>
TOTAL INVESTMENT RETURNS:
JULY 7, 1997-DECEMBER 31, 1997
- ------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND-
INSTITUTIONAL PLUS SHARES S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
PERIOD RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1997 6.2% 1.1% 7.3% 7.3%
- ------------------------------------------------------------------------------------------
</TABLE>

See Financial Highlights table on page 19 for dividend and capital gains
information since the Fund's inception.

<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN: PERIOD ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION -----------------------------------------
DATE CAPITAL INCOME TOTAL
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Index Fund-Institutional Plus Shares 7/7/1997 6.23% 1.06% 7.29%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>

7
<PAGE> 10
PORTFOLIO PROFILE
Institutional Index Fund

This Profile provides a snapshot of the Fund's characteristics as of December
31, 1997, compared where appropriate to an unmanaged index. Key elements of
this Profile are defined on page 9.

<TABLE>
<CAPTION>
PORTFOLIO CHARACTERISTICS
- -----------------------------------------------------------
INSTITUTIONAL
INDEX S&P 500
- -----------------------------------------------------------
<S> <C> <C>
Number of Stocks 510 500
Median Market Cap $34.1B $34.1B
Price/Earnings Ratio 21.9x 21.9x
Price/Book Ratio 4.1x 4.1x
Yield--Institutional Shares 1.6% 1.6%
Yield--Institutional Plus
Shares 1.6% 1.6%
Return on Equity 20.4% 20.4%
Earnings Growth Rate 17.6% 17.6%
Foreign Holdings 1.9% 1.9%
Turnover Rate 7% --
Expense Ratio--
Institutional Shares 0.06% --
Institutional Plus Shares 0.025%* --
Cash Reserves 0% --
</TABLE>

*Annualized.

[GRAPH]

<TABLE>
<CAPTION>
VOLATILITY MEASURES
- -----------------------------------------------------------
INSTITUTIONAL INDEX-
INSTITUTIONAL SHARES S&P 500
- -----------------------------------------------------------
<S> <C> <C>
R-Squared 1.00 1.00
Beta 1.00 1.00
</TABLE>

<TABLE>
<CAPTION>
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ------------------------------------------------
<S> <C>
General Electric Co. 3.2%
The Coca-Cola Co. 2.2
Microsoft Corp. 2.0
Exxon Corp. 2.0
Merck & Co., Inc. 1.7
Royal Dutch Petroleum Co. ADR 1.5
Intel Corp. 1.5
Philip Morris Cos., Inc. 1.4
Procter & Gamble Co. 1.4
International Business Machines Corp. 1.3
- ------------------------------------------------
Top Ten 18.2%
</TABLE>

<TABLE>
<CAPTION>
SECTOR DIVERSIFICATION (% OF COMMON STOCK)
- ----------------------------------------------------------------------------------------
DECEMBER 31, 1996 DECEMBER 31, 1997
----------------------------------------------
INSTITUTIONAL INSTITUTIONAL
INDEX INDEX S&P 500
----------------------------------------------
<S> <C> <C> <C>
Auto & Transportation . . . . . 4.0% 3.5% 3.5%
Consumer Discretionary . . . . . 9.8 9.8 9.8
Consumer Staples . . . . . . . . 11.7 11.5 11.5
Financial Services . . . . . . . 15.4 17.7 17.7
Health Care . . . . . . . . . . 10.5 11.5 11.4
Integrated Oils . . . . . . . . 8.0 7.2 7.2
Other Energy . . . . . . . . . . 1.3 1.4 1.4
Materials & Processing . . . . . 7.4 5.8 5.8
Producer Durables . . . . . . . 4.5 4.0 4.0
Technology . . . . . . . . . . . 11.4 11.2 11.2
Utilities . . . . . . . . . . . 10.6 10.7 10.6
Other . . . . . . . . . . . . . 5.4 5.7 5.9
- ----------------------------------------------------------------------------------------
</TABLE>

8
<PAGE> 11
BETA. A measure of the magnitude of a portfolio's past share-price fluctuations
in relation to the ups and downs of the overall market (or appropriate market
index). The market (or index) is assigned a beta of 1.00, so a portfolio with a
beta of 1.20 would have seen its share price rise or fall by 12% when the
overall market rose or fell by 10%.

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

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

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

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

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

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

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

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

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

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

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

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

TEN LARGEST HOLDINGS. The percentage of net assets that a portfolio has
invested in its ten largest holdings. (The average for stock mutual funds is
about 30%.) As this percentage rises, a portfolio's returns are likely to be
more volatile, because they are more dependent on the fortunes of a few
companies.

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

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

9
<PAGE> 12
FINANCIAL STATEMENTS
December 31, 1997

STATEMENT OF NET ASSETS

This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.), with the
Fund's S&P 500 Index common stocks listed in descending market value order.
Other assets are added to, and liabilities are subtracted from, the value of
Total Investments to calculate the Fund's Net Assets. Finally, Net Assets are
divided by the outstanding shares of the Fund to arrive at its share price, or
Net Asset Value (NAV) Per Share.

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

10
<PAGE> 13
<TABLE>
<CAPTION>

- ------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Banc One Corp. 1,452,458 $ 78,887
Texaco Inc. 1,354,876 73,671
MCI Communications Corp. 1,717,978 73,551
Wells Fargo & Co. 214,674 72,868
Norwest Corp. 1,867,344 72,126
Freddie Mac 1,719,513 72,112
Computer Associates International, Inc. 1,353,061 71,543
U.S. Bancorp 607,115 67,959
Kimberly-Clark Corp. 1,375,217 67,815
- - Dell Computer Corp. 805,915 67,697
- - WorldCom, Inc. 2,234,120 67,582
- - Cendant Corp. 1,957,931 67,304
Sara Lee Corp. 1,187,436 66,867
Campbell Soup Co. 1,131,246 65,754
Atlantic Richfield Co. 794,188 63,634
Sprint Corp. 1,057,727 62,009
Emerson Electric Co. 1,097,071 61,916
Monsanto Co. 1,467,089 61,618
Medtronic, Inc. 1,161,470 60,759
Merrill Lynch & Co., Inc. 824,237 60,118
First Chicago NBD Corp. 719,905 60,112
Xerox Corp. 806,094 59,500
Tyco International Ltd. 1,317,561 59,373
Northern Telecom Ltd. 648,563 57,722
Chrysler Corp. 1,639,662 57,696
Dow Chemical Co. 561,059 56,947
AlliedSignal Inc. 1,395,536 54,339
- - Oracle Corp. 2,421,727 54,035
U S WEST Communications Group 1,196,717 54,002
The Bank of New York Co., Inc. 932,752 53,925
Colgate-Palmolive Co. 732,502 53,839
Anheuser-Busch Cos., Inc. 1,213,286 53,385
- - AirTouch Communications, Inc. 1,248,341 51,884
CBS Corp. 1,742,648 51,299
Kellogg Co. 1,015,999 50,419
J.P. Morgan & Co., Inc. 439,991 49,664
Duke Energy Corp. 889,836 49,275
Eastman Kodak Co. 803,891 48,887
Columbia/HCA Healthcare Corp. 1,602,108 47,462
Lockheed Martin Corp. 480,605 47,340
Fleet Financial Group, Inc. 620,414 46,492
H.J. Heinz Co. 908,276 46,152
Pharmacia & Upjohn, Inc. 1,254,223 45,936
Caterpillar, Inc. 920,354 44,695
Automatic Data Processing, Inc. 723,649 44,414
Southern Co. 1,709,893 44,243
Sears, Roebuck & Co. 969,521 43,871
Texas Instruments, Inc. 965,461 43,446
Gannett Co., Inc. 701,546 43,364
- - U S WEST Media Group 1,501,201 43,347
PNC Bank Corp. 756,337 43,158
United Technologies Corp. 576,372 41,967
General Re Corp. 193,699 41,064
Wachovia Corp. 503,867 40,876
Washington Mutual, Inc. 634,454 40,486
CoreStates Financial Corp. 489,981 39,229
KeyCorp 543,679 38,499
ConAgra, Inc. 1,167,658 38,314
CPC International, Inc. 355,561 38,312
Mellon Bank Corp. 630,362 38,216
Walgreen Co. 1,216,913 38,181
Union Pacific Corp. 611,312 38,169
J.C. Penney Co., Inc. 618,805 37,322
SunTrust Banks, Inc. 522,652 37,304
Illinois Tool Works, Inc. 616,651 37,076
- - Sun Microsystems, Inc. 924,015 36,845
Dayton-Hudson Corp. 539,953 36,447
Deere & Co. 623,945 36,384
Burlington Northern Santa Fe Corp. 386,869 35,955
- - Viacom Inc. Class B 852,063 35,307
- - Amgen, Inc. 649,868 35,174
The Gap, Inc. 986,900 34,973
- - Tele-Communications, Inc. Class A 1,251,438 34,962
Baxter International, Inc. 692,986 34,952
National City Corp. 529,003 34,782
Barnett Banks, Inc. 478,020 34,358
Raytheon Co. Class B 673,853 34,030
MBNA Corp. 1,239,565 33,856
BankBoston Corp. 359,753 33,794
Household International, Inc. 264,269 33,711
Halliburton Co. 647,761 33,643
- - EMC Corp. 1,225,441 33,623
PG&E Corp. 1,085,059 33,026
American General Corp. 603,434 32,623
Enron Corp. 784,693 32,614
International Paper Co. 748,067 32,260
Pitney Bowes, Inc. 358,325 32,227
The Chubb Corp. 421,681 31,890
CIGNA Corp. 183,249 31,714
Phillips Petroleum Co. 650,131 31,613
Marsh & McLennan Cos., Inc. 420,032 31,319
Fifth Third Bancorp 379,913 31,058
Waste Management Inc. 1,125,813 30,960
First Data Corp. 1,057,175 30,922
Loews Corp. 284,677 30,211
May Department Stores Co. 573,274 30,204
Aluminum Co. of America 426,916 30,044
Archer-Daniels-Midland Co. 1,381,103 29,953
- - 3Com Corp. 857,095 29,945
CSX Corp. 539,691 29,143
- - AMR Corp. 225,540 28,982
Albertson's, Inc. 607,798 28,794
Norfolk Southern Corp. 933,478 28,763
The Seagram Co. Ltd. 881,823 28,494
General Mills, Inc. 391,635 28,051
NIKE, Inc. Class B 712,666 27,972
Charles Schwab Corp. 657,227 27,562
The Hartford Financial Services Group Inc. 292,244 27,343
CVS Corp. 425,525 27,260
- - Applied Materials, Inc. 899,317 27,092
- - HEALTHSOUTH Corp. 972,349 26,983
Rockwell International Corp. 515,941 26,958
Mattel, Inc. 719,073 26,785
FPL Group, Inc. 450,105 26,641
Bankers Trust New York Corp. 236,513 26,593
</TABLE>

11
<PAGE> 14
<TABLE>
<CAPTION>

- ------------------------------------------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Aetna Inc. 368,030 $ 25,969
Edison International 944,700 25,684
Texas Utilities Co. 610,813 25,387
Textron, Inc. 406,069 25,379
PPG Industries, Inc. 440,093 25,140
- - Tenet Healthcare Corp. 753,889 24,973
The Goodyear Tire & Rubber Co. 386,471 24,589
HBO & Co. 512,208 24,586
Occidental Petroleum Corp. 836,796 24,529
Ralston-Ralston Purina Group 263,474 24,487
Aon Corp. 414,445 24,297
American Electric Power Co., Inc. 470,078 24,268
Weyerhaeuser Co. 491,927 24,135
USX-Marathon Group 712,226 24,038
- - ITT Corp. 288,413 23,902
Consolidated Edison Co. of New York, Inc. 581,130 23,826
- - Tellabs, Inc. 449,382 23,761
Unocal Corp. 609,945 23,673
- - Costco Cos., Inc. 525,497 23,450
Comerica, Inc. 259,805 23,447
- - The Kroger Co. 629,440 23,250
State Street Corp. 397,729 23,143
United Healthcare Corp. 464,361 23,073
Service Corp. International 621,645 22,962
Guidant Corp. 366,770 22,831
AMP, Inc. 543,547 22,829
Wrigley, (Wm.) Jr. Co. 286,602 22,803
Williams Cos., Inc. 789,424 22,400
Air Products & Chemicals, Inc. 271,034 22,293
- - Federated Department Stores 517,436 22,282
- - Toys R Us, Inc. 705,620 22,183
- - Boston Scientific Corp. 480,247 22,031
Marriott International 315,167 21,825
Hershey Foods Corp. 351,319 21,760
Delta Air Lines, Inc. 182,846 21,759
Honeywell, Inc. 314,354 21,533
Progressive Corp. of Ohio 178,273 21,370
Conseco Inc. 465,635 21,157
Corning, Inc. 569,783 21,153
Masco Corp. 406,866 20,699
SunAmerica Inc. 480,293 20,533
Lowe's Cos., Inc. 430,472 20,528
Cardinal Health, Inc. 270,404 20,314
Comcast Corp. Class A Special 642,562 20,281
The Clorox Co. 255,630 20,211
Avon Products, Inc. 327,361 20,092
PacifiCorp 731,902 19,990
Dover Corp. 550,244 19,878
Lincoln National Corp. 252,487 19,726
Fort James Corp. 514,381 19,675
Dominion Resources, Inc. 460,745 19,610
Burlington Resources, Inc. 435,890 19,533
Sysco Corp. 422,261 19,239
- - Clear Channel Communications 241,440 19,179
Cincinnati Financial Corp. 135,182 19,027
Northrop Grumman Corp. 164,571 18,926
Tribune Co. 303,842 18,914
ALLTEL Corp. 457,024 18,767
MGIC Investment Corp. 282,148 18,763
Houston Industries, Inc. 701,803 18,729
UNUM Corp. 342,347 18,615
Hilton Hotels Corp. 617,752 18,378
Baker Hughes, Inc. 415,937 18,145
Public Service Enterprise Group, Inc. 572,212 18,132
Dresser Industries, Inc. 431,975 18,116
Entergy Corp. 604,875 18,108
The McGraw-Hill Cos., Inc. 244,275 18,076
Browning-Ferris Industries, Inc. 488,308 18,067
The Quaker Oats Co. 341,489 18,014
Rite Aid Corp. 306,841 18,008
Cognizant Corp. 400,626 17,853
Praxair, Inc. 389,293 17,518
- - Federal Express Corp. 284,067 17,346
SAFECO Corp. 352,352 17,177
Barrick Gold Corp. 921,054 17,155
BB&T Corp. 266,741 17,088
The Limited, Inc. 669,530 17,073
Eaton Corp. 190,208 16,976
Huntington Bancshares Inc. 471,534 16,975
St. Paul Cos., Inc. 206,242 16,925
UST, Inc. 455,029 16,808
Newell Co. 392,521 16,682
- - Thermo Electron Corp. 373,990 16,643
Tenneco, Inc. 419,818 16,583
Transamerica Corp. 155,062 16,514
Ingersoll-Rand Co. 407,320 16,496
- - FirstEnergy Corp. 567,384 16,454
Unicom Corp. 534,615 16,439
Coastal Corp. 261,734 16,211
TRW, Inc. 303,657 16,208
- - Computer Sciences Corp. 192,201 16,049
Winn-Dixie Stores, Inc. 366,128 15,995
Crown Cork & Seal Co., Inc. 316,637 15,871
Carolina Power & Light Co. 369,756 15,692
Fortune Brands, Inc. 423,254 15,687
New York Times Co. Class A 237,100 15,678
Omnicom Group Inc. 369,575 15,661
H.F. Ahmanson & Co. 233,466 15,628
Interpublic Group of Cos., Inc. 310,901 15,487
Alcan Aluminium Ltd. 559,475 15,456
Republic New York Corp. 134,738 15,385
Union Pacific Resources Group, Inc. 626,083 15,183
Becton, Dickinson & Co. 301,621 15,081
Genuine Parts Co. 440,926 14,964
CINergy Corp. 389,136 14,909
- - Parametric Technology Corp. 313,900 14,871
W.R. Grace & Co. 183,087 14,727
MBIA, Inc. 220,390 14,725
Cooper Industries, Inc. 298,278 14,616
Union Electric Co. 335,669 14,518
Rohm & Haas Co. 151,267 14,484
The Times Mirror Co. Class A 234,717 14,435
Torchmark Corp. 339,933 14,298
Consolidated Natural Gas Co. 235,254 14,233
Central & South West Corp. 522,976 14,153
- - US Airways Group, Inc. 224,933 14,058
- - Kmart Corp. 1,204,098 13,922
</TABLE>

12
<PAGE> 15
<TABLE>
<CAPTION>

- ------------------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Georgia-Pacific Corp. 228,411 $ 13,876
VF Corp. 301,771 13,863
American Stores Co. 674,064 13,860
TJX Cos., Inc. 403,054 13,855
International Flavors & Fragrances, Inc. 268,990 13,853
Golden West Financial Corp. 140,262 13,719
Jefferson-Pilot Corp. 174,801 13,613
- - Micron Technology, Inc. 521,178 13,551
- - Digital Equipment Corp. 364,879 13,501
General Dynamics Corp. 155,489 13,440
R.R. Donnelley & Sons Co. 359,854 13,405
PECO Energy Corp. 551,994 13,386
- - Bay Networks, Inc. 521,305 13,326
Southwest Airlines Co. 540,666 13,314
Pioneer Hi-Bred International, Inc. 123,080 13,200
- - Owens-Illinois, Inc. 346,698 13,153
Equifax, Inc. 370,491 13,129
Union Carbide Corp. 304,219 13,062
The Dun & Bradstreet Corp. 419,920 12,991
Dow Jones & Co., Inc. 236,348 12,689
Parker Hannifin Corp. 275,291 12,629
GPU, Inc. 297,607 12,537
Amerada Hess Corp. 226,592 12,434
Baltimore Gas & Electric Co. 364,438 12,414
DTE Energy Co. 357,760 12,410
Dana Corp. 258,304 12,269
Hercules, Inc. 238,575 11,944
W.W. Grainger, Inc. 122,563 11,912
Sherwin-Williams Co. 426,591 11,838
- - Seagate Technology 602,948 11,607
H & R Block, Inc. 257,415 11,535
Nordstrom, Inc. 190,982 11,531
Eastman Chemical Co. 193,431 11,521
Countrywide Credit Industries, Inc. 266,004 11,405
Avery Dennison Corp. 254,678 11,397
Newmont Mining Corp. 385,022 11,310
Morton International, Inc. 328,067 11,277
Case Corp. 185,225 11,195
Allegheny Teledyne Inc. 429,903 11,124
Laidlaw, Inc. 807,117 10,997
Reynolds Metals Co. 182,660 10,960
Beneficial Corp. 131,224 10,908
- - Tricon Global Restaurants, Inc. 374,416 10,881
Knight-Ridder, Inc. 208,936 10,865
- - AutoZone Inc. 374,396 10,857
Columbia Gas Systems, Inc. 136,839 10,750
Champion International Corp. 237,091 10,743
Northern States Power Co. 182,780 10,647
Providian Financial Corp. 235,119 10,624
Nucor Corp. 216,900 10,479
- - National Semiconductor Corp. 402,010 10,427
The Stanley Works 220,939 10,426
Whirlpool Corp. 185,426 10,198
PACCAR, Inc. 192,235 10,092
- - Mirage Resorts, Inc. 443,004 10,078
- - Western Atlas, Inc. 134,653 9,964
Ashland, Inc. 184,856 9,924
Sigma-Aldrich Corp. 248,348 9,872
Johnson Controls, Inc. 206,539 9,862
Tandy Corp. 255,569 9,855
Hasbro, Inc. 312,397 9,841
PP&L Resources Inc. 409,109 9,793
Frontier Corp. 403,299 9,704
Sonat, Inc. 211,431 9,673
Dillard's Inc. 273,531 9,642
Harcourt General, Inc. 173,340 9,490
Synovus Financial Corp. 286,150 9,371
Brown-Forman Corp. Class B 168,612 9,316
Union Camp Corp. 172,285 9,250
IKON Office Solutions 328,293 9,233
Rubbermaid, Inc. 368,263 9,207
Raychem Corp. 212,692 9,159
ITT Industries, Inc. 291,849 9,157
Black & Decker Corp. 233,972 9,140
Harris Corp. 197,120 9,043
Phelps Dodge Corp. 145,247 9,042
Anadarko Petroleum Corp. 147,708 8,964
Green Tree Financial Corp. 337,042 8,826
Willamette Industries, Inc. 273,940 8,817
Ecolab, Inc. 158,505 8,787
Maytag Corp. 234,580 8,753
Circuit City Stores, Inc. 243,469 8,658
- - Ceridian Corp. 187,606 8,595
- - Humana, Inc. 404,036 8,384
- - KLA-Tencor Corp. 211,382 8,165
Westvaco Corp. 251,943 7,920
Wendy's International, Inc. 326,486 7,856
Raytheon Co. Class A 158,789 7,830
Apache Corp. 223,306 7,830
Pennzoil Co. 116,900 7,810
Perkin-Elmer Corp. 108,908 7,739
Pacific Enterprises 205,456 7,730
Fluor Corp. 206,441 7,716
Armstrong World Industries Inc. 100,262 7,495
Placer Dome, Inc. 590,088 7,487
Brunswick Corp. 246,284 7,465
Adobe Systems, Inc. 180,721 7,455
Kerr-McGee Corp. 117,467 7,437
Sun Co., Inc. 176,758 7,435
Temple-Inland Inc. 139,791 7,313
The BFGoodrich Co. 176,348 7,307
The Mead Corp. 259,925 7,278
American Greetings Corp. Class A 181,856 7,115
Biomet, Inc. 276,465 7,084
- - DSC Communications Corp. 292,586 7,022
Inco Ltd. 410,184 6,973
Comcast Corp. Class A 218,396 6,961
Deluxe Corp. 201,647 6,957
- - St. Jude Medical, Inc. 227,205 6,930
- - LSI Logic Corp. 350,090 6,914
Liz Claiborne, Inc. 165,075 6,902
Mallinckrodt, Inc. 180,102 6,844
- - Woolworth Corp. 333,023 6,785
- - ALZA Corp. 210,709 6,703
- - Oryx Energy Co. 261,540 6,669
USX-U.S. Steel Group, Inc. 213,394 6,669
</TABLE>

13
<PAGE> 16
<TABLE>
<CAPTION>

- ------------------------------------------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Great Lakes Chemical Corp. 147,671 $ 6,627
Snap-On Inc. 150,924 6,584
- - Rowan Cos., Inc. 213,629 6,516
- - NextLevel Systems, Inc. 364,476 6,515
Whitman Corp. 249,905 6,513
Nalco Chemical Co. 164,276 6,499
Pall Corp. 313,283 6,481
- - Novell, Inc. 863,439 6,476
Thomas & Betts Corp. 135,481 6,401
Freeport-McMoRan Copper & Gold, Inc. Class B 399,543 6,293
- - Advanced Micro Devices, Inc. 349,384 6,267
SuperValu Inc. 149,501 6,260
Ryder System, Inc. 189,378 6,202
Engelhard Corp. 355,465 6,176
USF&G Corp. 278,319 6,140
- - FMC Corp. 91,030 6,127
- - Unisys Corp. 433,908 6,020
- - Cabletron Systems, Inc. 388,789 5,832
Bemis Co., Inc. 130,901 5,768
- - Silicon Graphics, Inc. 461,054 5,734
Echlin, Inc. 155,356 5,622
Cummins Engine Co., Inc. 94,251 5,567
Mercantile Stores Co., Inc. 90,117 5,486
Manor Care Inc. 156,229 5,468
U.S. Surgical Corp. 186,248 5,459
Polaroid Corp. 110,767 5,393
Bausch & Lomb, Inc. 136,059 5,391
Allergan, Inc. 160,635 5,391
- - Andrew Corp. 222,943 5,351
The Timken Co. 155,047 5,330
National Service Industries, Inc. 106,761 5,291
King World Productions, Inc. 90,430 5,222
General Signal Corp. 122,773 5,179
Louisiana-Pacific Corp. 269,338 5,117
McDermott International, Inc. 138,467 5,071
NICOR, Inc. 119,265 5,031
Giant Food, Inc. Class A 148,546 5,004
Tektronix, Inc. 124,717 4,950
Crane Co. 113,055 4,904
Cooper Tire & Rubber Co. 194,997 4,753
Darden Restaurants Inc. 377,215 4,715
- - Harrah's Entertainment, Inc. 249,196 4,704
Meredith Corp. 130,970 4,674
Caliber System Inc. 95,885 4,668
Centex Corp. 73,709 4,639
- - Fruit of the Loom, Inc. 179,890 4,610
- - Navistar International Corp. 185,176 4,595
Owens Corning 131,585 4,490
Autodesk, Inc. 120,850 4,471
C.R. Bard, Inc. 141,233 4,422
Alberto-Culver Co. Class B 137,037 4,394
Harnischfeger Industries Inc. 121,384 4,286
Tupperware Corp. 150,850 4,205
Boise Cascade Corp. 138,393 4,186
Helmerich & Payne, Inc. 61,386 4,167
- - Apple Computer, Inc. 313,726 4,118
Shared Medical Systems Corp. 61,468 4,057
- - Reebok International Ltd. 138,413 3,988
Safety-Kleen Corp. 143,492 3,937
Worthington Industries, Inc. 236,853 3,908
Fleetwood Enterprises, Inc. 89,065 3,780
Pep Boys (Manny, Moe & Jack) 156,638 3,740
- - Niagara Mohawk Power Corp. 355,241 3,730
Millipore Corp. 107,424 3,646
Cyprus Amax Minerals Co. 229,968 3,536
Aeroquip-Vickers Inc. 69,704 3,420
Peoples Energy Corp. 86,490 3,406
Battle Mountain Gold Co. Class A 566,149 3,326
Moore Corp. Ltd. 217,362 3,288
Scientific-Atlanta, Inc. 195,866 3,281
Homestake Mining Co. 361,548 3,209
ONEOK, Inc. 76,266 3,079
Longs Drug Stores, Inc. 95,607 3,071
Potlatch Corp. 71,364 3,069
Adolph Coors Co. Class B 91,632 3,047
Briggs & Stratton Corp. 61,597 2,991
Great Atlantic & Pacific Tea Co., Inc. 94,154 2,795
Foster Wheeler Corp. 101,151 2,737
Ball Corp. 73,431 2,593
Springs Industries Inc. Class A 49,256 2,561
- - Stone Container Corp. 244,818 2,555
Cincinnati Milacron, Inc. 98,502 2,555
- - Bethlehem Steel Corp. 277,430 2,393
Russell Corp. 89,761 2,384
EG&G, Inc. 112,867 2,349
Eastern Enterprises 50,782 2,285
ASARCO, Inc. 100,020 2,244
Jostens Inc. 94,828 2,187
Pulte Corp. 52,217 2,183
Kaufman & Broad Home Corp. 96,449 2,164
NACCO Industries, Inc. Class A 19,992 2,143
Inland Steel Industries, Inc. 120,377 2,061
- - Data General Corp. 117,296 2,045
- - UNOVA, Inc. 108,878 1,790
John H. Harland Co. 75,909 1,594
- - Beverly Enterprises, Inc. 101,809 1,324
- - Armco, Inc. 265,249 1,310
- - Charming Shoppes, Inc. 259,307 1,216
Freeport-McMoRan Copper & Gold, Inc. Class A 72,417 1,109
- - PharMerica, Inc. 86,345 896
- - Echo Bay Mines Ltd. 339,863 828
- - Viacom Inc. Class A 18,015 736
- - Fresenius National Medical Care Pfd. 114,209 7
- ------------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (99.1%)(1)
(COST $11,830,077) 18,670,509
- ------------------------------------------------------------------------------------------
</TABLE>

14
<PAGE> 17
<TABLE>
<CAPTION>

- -------------------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -------------------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.6%)
- -------------------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILL
(2)5.02%, 1/22/1998 $ 13,000 $ 12,963
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.54%, 1/2/1998 270,992 270,992
6.50%, 1/2/1998---Note E 20,753 20,753
- -------------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $304,707) 304,708
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.7%)
(COST $12,134,784) 18,975,217
- -------------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-0.7%)
- -------------------------------------------------------------------------------------------
Other Assets 578,376
Liabilities--Note E (717,786)
------------
(139,410)
- -------------------------------------------------------------------------------------------
NET ASSETS (100%) $18,835,807
===========================================================================================
</TABLE>
*See Note A in Notes to Financial Statements.

- Non-Income-Producing Security.

(1) The combined market value of common stocks and S&P 500 Index futures
contracts represents 100.0% of net assets.

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

ADR--American Depositary Receipt.

- ------------------------------------------------------------------
AMOUNT
(000)
- ------------------------------------------------------------------
AT DECEMBER 31, 1997, NET ASSETS CONSISTED OF:
- ------------------------------------------------------------------
<S> <C>
Paid in Capital--Notes A and C $11,962,015
Undistributed Net Investment Income--
Notes A and C 93
Accumulated Net Realized Gains--Note C 33,087
Unrealized Appreciation---Note D
Investment Securities 6,840,433
Futures Contracts 179
- ------------------------------------------------------------------
NET ASSETS $18,835,807
==================================================================

Institutional Shares--
Net Assets applicable to 171,367,700
outstanding shares of beneficial interest
(unlimited authorization) $15,347,841
- ------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INSTITUTIONAL SHARES $89.56
==================================================================

Institutional Plus Shares--
Net Assets applicable to 38,945,007
outstanding shares of beneficial interest
(unlimited authorization) $3,487,966
- ------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INSTITUTIONAL PLUS SHARES $89.56
==================================================================
</TABLE>

15
<PAGE> 18
STATEMENT OF OPERATIONS

This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to each class of
its shares. These expenses directly reduce the amount of investment income
available to pay to shareholders as dividends. This Statement also shows any
Net Gain (Loss) realized on the sale of investments, and the increase or
decrease in the Unrealized Appreciation (Depreciation) on investments during
the period. If the Fund invested in futures contracts during the period, the
results of these investments are shown separately.

- ---------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND
YEAR ENDED DECEMBER 31, 1997
(000)
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 270,560
Interest 10,977
-----------
Total Income 281,537
-----------
EXPENSES
The Vanguard Group--Note B
Management and Administrative 3,123
Shareholder Services--Institutional Shares 5,727
Shareholder Services--Institutional Plus Shares 65
-----------
Total Expenses 8,915
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 272,622
- --------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 209,435
Futures Contracts 61,344
- --------------------------------------------------------------------------------
REALIZED NET GAIN 270,779
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 3,767,001
Futures Contracts 862
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 3,767,863
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,311,264
================================================================================
</TABLE>

16
<PAGE> 19
STATEMENT OF CHANGES IN NET ASSETS

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

- ------------------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996
(000) (000)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 272,622 $ 195,323
Realized Net Gain 270,779 169,598
Change in Unrealized Appreciation (Depreciation) 3,767,863 1,528,203
---------------------------------------
Net Increase in Net Assets Resulting from Operations 4,311,264 1,893,124
---------------------------------------
DISTRIBUTIONS
Net Investment Income
Institutional Shares (244,664) (204,455)
Institutional Plus Shares (27,865) --
Realized Capital Gain
Institutional Shares (122,571) (154,705)
Institutional Plus Shares (20,702) --
---------------------------------------
Total Distributions (415,802) (359,160)
---------------------------------------
NET EQUALIZATION CREDITS-- Note A -- 14,428
---------------------------------------
CAPITAL SHARE TRANSACTIONS--Institutional shares(1)
Issued 5,668,456 4,539,900
Issued in Lieu of Cash Distributions 331,598 325,871
Redeemed (5,841,427) (1,662,138)
---------------------------------------
Net Increase--Institutional Shares 158,627 3,203,633
---------------------------------------
CAPITAL SHARE TRANSACTIONS--Institutional Plus Shares (2)
Issued 3,404,088 --
Issued in Lieu of Cash Distributions 48,567 --
Redeemed (97,352) --
---------------------------------------
Net Increase--Institutional Plus Shares 3,355,303 --
- ------------------------------------------------------------------------------------------------------------
Total Increase 7,409,392 4,752,025
- ------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 11,426,415 6,674,390
---------------------------------------
End of Year $18,835,807 $11,426,415
============================================================================================================

(1)Shares Issued (Redeemed)--Institutional Shares
Issued 71,347 71,930
Issued in Lieu of Cash Distributions 3,973 4,831
Redeemed (69,894) (26,039)
---------------------------------------
Net Increase in Shares Outstanding 5,426 50,722
============================================================================================================

(2)Shares Issued (Redeemed)--Institutional Plus Shares
Issued 39,499 --
Issued in Lieu of Cash Distributions 559 --
Redeemed (1,113) --
---------------------------------------
Net Increase in Shares Outstanding 38,945 --
============================================================================================================
</TABLE>

17
<PAGE> 20
FINANCIAL HIGHLIGHTS

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

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

- ------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND-INSTITUTIONAL SHARES
YEAR ENDED DECEMBER 31,
------------------------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH YEAR 1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $68.86 $57.93 $43.22 $44.20 $41.45
- ------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.391 1.38 1.28 1.23 1.20
Net Realized and Unrealized Gain (Loss) on Investments 21.415 11.90 14.86 (.66) 2.92
------------------------------------------------------
Total from Investment Operations 22.806 13.28 16.14 .57 4.12
------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.391) (1.36) (1.27) (1.21) (1.19)
Distributions from Realized Capital Gains (.715) (.99) (.16) (.34) (.18)
------------------------------------------------------
Total Distributions (2.106) (2.35) (1.43) (1.55) (1.37)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $89.56 $68.86 $57.93 $43.22 $44.20
========================================================================================================================

TOTAL RETURN 33.36% 23.06% 37.60% 1.31% 10.02%
========================================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $15,348 $11,426 $6,674 $3,265 $3,103
Ratio of Total Expenses to Average Net Assets 0.06% 0.06% 0.06% 0.07% 0.07%
Ratio of Net Investment Income to Average Net Assets 1.77% 2.18% 2.49% 2.80% 2.72%
Portfolio Turnover Rate* 7% 9% 4% 23% 4%
Average Commission Rate Paid $.0166 $.0167 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Portfolio turnover rates excluding in-kind redemptions were 6%, 9%, 4%, 19%,
and 3%, RESPECTIVELY.

18
<PAGE> 21
<TABLE>
<CAPTION>

- --------------------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND-INSTITUTIONAL PLUS SHARES
JULY 7* TO
FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $84.91
- --------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .681
Net Realized and Unrealized Gain (Loss) on Investments 5.455
-------------------
Total from Investment Operations 6.136
-------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.866)
Distributions from Realized Capital Gains (.620)
-------------------
Total Distributions (1.486)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $89.56
==============================================================================================================

TOTAL RETURN 7.29%
==============================================================================================================

RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $3,488
Ratio of Total Expenses to Average Net Assets 0.025%**
Ratio of Net Investment Income to Average Net Assets 1.72%**
Portfolio Turnover Rate 7%+
Average Commission Rate Paid $.0166
- --------------------------------------------------------------------------------------------------------------
</TABLE>
*Commencement of operations.

**Annualized.

+Portfolio turnover rate excluding in-kind redemptions was 6%.

19
<PAGE> 22
NOTES TO FINANCIAL STATEMENTS

Vanguard Institutional Index Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company, or mutual fund. The
Fund offers two classes of shares, Institutional Shares and Institutional Plus
Shares. Institutional Plus Shares are designed primarily for institutional
investors that meet certain administrative and servicing criteria and have a
minimum investment of $200 million. Institutional Shares are offered to other
institutional investors that have a minimum investment of $10 million.

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

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

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

3. EQUALIZATION: Prior to January 1997, the Fund followed the
accounting practice known as "equalization," under which a portion of the price
of capital shares issued and redeemed, equivalent to undistributed net
investment income per share on the date of the transaction, was credited or
charged to undistributed net investment income. As a result, undistributed
income per share was unaffected by capital share transactions. As of January 1,
1997, the Fund has discontinued equalization accounting and has reclassified
accumulated net equalization credits of $40,198,000 from undistributed net
investment income to paid in capital. This reclassification has no effect on
the Fund's net assets, results of operations, or net asset value per share.

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

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

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

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

20
<PAGE> 23
7. OTHER: Dividend income is recorded on the ex-dividend date.
Security transactions are accounted for on the date securities are bought or
sold. Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold. Income, expenses not
attributable to a specific class, and realized and unrealized gains and losses
on investments are allocated to each class of shares based on its relative net
assets.

B. The Vanguard Group provides investment advisory, corporate management,
administrative, marketing, and distribution services and pays for all other
operating expenses, except for taxes, in return for a fee calculated at an
annual percentage rate of the average net assets of the Fund. For the period
ended December 31, 1997, the annualized fees for such services were 0.06% and
0.025%, respectively, of average net assets for the Institutional and
Institutional Plus Shares of the Fund, of which 0.04% and 0.005%, respectively,
related to class-specific shareholder services. The Fund's Trustees and
officers are also Directors and officers of Vanguard.

C. During the year ended December 31, 1997, the Fund purchased
$4,415,935,000 of investment securities and sold $1,070,546,000 of investment
securities, other than temporary cash investments.

During the year ended December 31, 1997, the Fund realized $90,793,000
of net capital gains resulting from in-kind redemptions--in which shareholders
exchanged Fund shares for securities held by the Fund rather than for cash.
Because such gains are not taxable to the Fund, and are not distributed to
shareholders, they have been reclassified from accumulated net realized gains
to paid in capital.

Gains of $30,068,000 on securities held for less than one year are
treated as ordinary income for tax purposes and have been included in income
dividends to shareholders; accordingly such gains have been reclassified from
accumulated net realized gains to undistributed net investment income.

D. At December 31, 1997, net unrealized appreciation of investment
securities for financial reporting and federal income tax purposes was
$6,840,433,000, consisting of unrealized gains of $6,998,472,000 on securities
that had risen in value since their purchase and $158,039,000 in unrealized
losses on securities that had fallen in value since their purchase.

At December 31, 1997, the aggregate settlement value of open futures
contracts expiring in March 1998, and the related unrealized appreciation were:

-----------------------------------------------------------------------------
(000)
---------------------------------------
NUMBER OF AGGREGATE
LONG SETTLEMENT UNREALIZED
FUTURES CONTRACTS CONTRACTS VALUE APPRECIATION
-----------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 680 $166,447 $179
-----------------------------------------------------------------------------
</TABLE>

E. The market value of securities on loan to brokers/dealers at December
31, 1997, was $19,931,000, for which the Fund held cash collateral of
$20,753,000. Cash collateral received is invested in repurchase agreements.

21
<PAGE> 24
REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and
Board of Trustees of
Vanguard Institutional Index Fund

In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Institutional Index Fund (the "Fund") at December 31, 1997, the
results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the periods presented, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where securities purchased had not been settled, provide a
reasonable basis for the opinion expressed above.

PRICE WATERHOUSE LLP

Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103

February 6, 1998

22
<PAGE> 25
SPECIAL 1997 TAX INFORMATION (UNAUDITED) FOR VANGUARD INSTITUTIONAL INDEX FUND

This information for the fiscal year ended December 31, 1997, is included
pursuant to provisions of the Internal Revenue Code.

The Fund designates $126,028,000 as capital gain dividends (from net
long-term capital gains), of which $95,928,000 was distributed to shareholders
in December 1997 and $30,100,000 will be distributed in March 1998. Of the
$126,028,000 capital gain dividends, the Fund designates $66,875,000 as a 20%
rate gain distribution.

For corporate shareholders, 79.4% of investment income (dividend
income plus short-term gains, if any) qualifies for the dividends-received
deduction.

23
<PAGE> 26
TRUSTEES AND OFFICERS

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

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

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

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

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

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

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

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

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

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

OTHER FUND OFFICERS

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

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

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

OTHER VANGUARD OFFICERS

R. GREGORY BARTON
Managing Director, Legal Department.

ROBERT A. DISTEFANO
Managing Director, Information Technology.

JAMES H. GATELY
Managing Director, Individual Investor Group.

KATHLEEN C. GUBANICH
Managing Director, Human Resources.

IAN A. MACKINNON
Managing Director, Fixed Income Group.

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

MICHAEL S. MILLER
Managing Director, Planning and Development.

RALPH K. PACKARD
Managing Director and Chief Financial Officer.

GEORGE U. SAUTER
Managing Director, Core Management Group.

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

<PAGE> 27
VANGUARD FAMILY OF FUNDS

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

BALANCED FUNDS
Asset Allocation Fund
Balanced Index Fund
Horizon Fund
Global Asset Allocation
Portfolio
LifeStrategy Portfolios
Conservative Growth
Portfolio
Growth Portfolio
Income Portfolio
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STAR Portfolio
Tax-Managed Fund
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Wellesley Income Fund
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BOND FUNDS
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Intermediate-Term U.S.
Treasury Portfolio
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Portfolio
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Portfolio
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Portfolio
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Fixed Income Securities Fund
GNMA Portfolio
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Portfolio
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Portfolio
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Portfolio
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Portfolio
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(CA, FL, NJ, NY, OH, PA)

MONEY MARKET FUNDS
Admiral Funds
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Portfolio
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Money Market Portfolio
Treasury Money Market Portfolio
State Tax-Free Funds
(CA, NJ, NY, OH, PA)

Q940-12/1997

[THE VANGUARD GROUP LOGO]

Post Office Box 2600
Valley Forge, Pennsylvania 19482

FUND INFORMATION
1-800-662-7447

INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739

INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036

www.vanguard.com
[email protected]

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