VANGUARD BALANCED INDEX FUND INC, 485BPOS, 1997-03-21

VANGUARD BALANCED INDEX FUND INC
485BPOS, 1997-03-21

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT (NO. 33-48863) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [X]

POST-EFFECTIVE AMENDMENT NO. 8

AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940

AMENDMENT NO. 10

VANGUARD BALANCED INDEX FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)

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

REGISTRANT'S TELEPHONE NUMBER (610) 669-1000

RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482

IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:

on March 28, 1997, pursuant to paragraph (b) of Rule 485.

APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.

WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SECURITIES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24F-2 OF THE INVESTMENT COMPANY ACT OF
1940. REGISTRANT FILED ITS RULE 24F-2 NOTICE FOR ITS FISCAL YEAR ENDED DECEMBER
31, 1996 WITH THE COMMISSION ON FEBRUARY 19, 1997.

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<PAGE> 2

VANGUARD BALANCED INDEX FUND, INC.

CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Not Applicable
Item 3. Condensed Financial Information............... Fund Expenses
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Funds....................... Directors and Officers; Management of
the Funds
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of the Fund; Dividends,
Capital Gains, and Taxes; General
Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable

<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Management of the Fund
Item 13. Investment Objective and Policies............. Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3

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[VANGUARD BALANCED INDEX FUND LOGO]
A Member of The Vanguard Group
================================================================================

PROSPECTUS -- MARCH 28, 1997

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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
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INVESTMENT
OBJECTIVE
AND POLICIES Vanguard Balanced Index Fund, Inc. (the "Fund") is an
open-end diversified investment company that invests in a
portfolio of common stocks and bonds. The objective of the
Fund is to replicate, with respect to 60% of its assets,
the investment performance of the Wilshire 5000 Index (the
"Wilshire 5000") and, with respect to 40% of its assets,
the investment performance of the Lehman Brothers
Aggregate Bond Index (the "Lehman Brothers Index"). There
is no assurance that the Fund will achieve its stated
objective. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
- - --------------------------------------------------------------------------------

OPENING AN
ACCOUNT To open a regular (non-retirement) account, please
complete and return the Account Registration Form. If you
need assistance in completing this Form, please call our
Investor Information Department. To open an Individual
Retirement Account (IRA), please use a Vanguard IRA
Adoption Agreement. To obtain a copy of this form, call
1-800-662-7447, Monday through Friday, from 8:00 a.m. to
9:00 p.m. and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). The minimum initial investment is $3,000
or $1,000 for Uniform Gifts/Transfers to Minors Act
accounts. The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees). However,
the Fund incurs expenses for management, administrative,
and distribution services. Shareholders will also incur a
$10 annual account maintenance fee, deducted at a rate of
$2.50 per quarter from the dividend income of each Fund
account.
- - --------------------------------------------------------------------------------

ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Fund before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Fund has been filed with
the Securities and Exchange Commission. This Statement is
dated March 28, 1997 and has been incorporated by
reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund or by calling the
Investor Information Department.

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TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
Page Page Page
Fund Expenses ...................... 2 Investment Limitations ............ 12 SHAREHOLDER GUIDE
Financial Highlights ............... 3 Management of the Fund ............ 12 Opening an Account and
Yield and Total Return ............. 3 Investment Adviser ................ 13 Purchasing Shares ................ 17
FUND INFORMATION Dividends, Capital Gains When Your Account Will
Investment Objective .............. 4 and Taxes ......................... 13 Be Credited ...................... 20
Investment Policies ................ 4 The Share Price of Selling Your
Investment Risks .................. 6 the Fund .......................... 15 Shares ........................... 20
Who Should Invest .................. 7 General Information ............... 15 Exchanging Your Shares ........... 22
Implementation of Policies.......... 8 Important Information About
Telephone Transactions ........... 23
Transferring Registration ........ 24
Other Vanguard Services .......... 24
</TABLE>

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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- - --------------------------------------------------------------------------------

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<PAGE> 4

FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Fund. The expenses
and fees set forth in the table are for the 1996 fiscal
year.

<TABLE>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Redemption Fees............................................... None
Exchange Fees................................................. None
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Expenses*......................... 0.12%
Investment Advisory Fees...................................... 0.01
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs.......................................... 0.02%
Miscellaneous Expenses...................................... 0.05
----
Total Other Expenses.......................................... 0.07
------
TOTAL FUND OPERATING EXPENSES........................ 0.20%
======
* In addition to these costs, shareholders will incur an annual account maintenance
fee of $10. This fee will be waived for shareholders with an account balance of
$10,000 or more.
</TABLE>

The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Fund.

FUND ASSESSES
A $10 ACCOUNT
MAINTENANCE FEE The Fund assesses an annual account maintenance fee of $10
to allocate part of the fixed costs of maintaining
shareholder accounts equally to all accounts. This fee,
which is paid directly by shareholders, is deducted at a
rate of $2.50 per quarter from the Fund's quarterly
dividend. See "Dividends, Capital Gains and Taxes" for
more information on this fee. The $10 fee amounts to 1.00%
on a $1,000 investment in the Fund, 0.33% on a $3,000
investment. This fee will be waived for shareholders with
an account balance of $10,000 or more.

The Fund reserves the right to deduct a transaction fee,
ranging from 0.15% to 0.25%, from a purchase of Fund
shares, if such purchase or cumulative purchases are of a
size that is reasonably deemed to be disruptive to
efficient portfolio management. The fee will be paid to
the Fund to offset transaction costs of buying securities.
The fee is not paid to Vanguard and is not a sales charge.

The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period. A $10 annual fee payable on
accounts of less than $10,000 is not included.

1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C>
$ 2 $ 6 $11 $ 26
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.

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2
<PAGE> 5

FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period have been audited by Price
Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read
in conjunction with the Fund's financial statements and
notes thereto which, together with the remaining portions
of the Fund's 1996 Annual Report to Shareholders, are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the report of Price Waterhouse LLP, in the
Fund's 1996 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1996 Annual Report to Shareholders, which may
be obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447.

<TABLE>
<CAPTION>
SEPT. 28+,
YEAR ENDED DECEMBER 31, TO DEC. 31,
1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................. $12.77 $10.34 $10.91 $10.31 $10.00
------ ------ ------ ------ -----------
INVESTMENT OPERATIONS
Net Investment Income............................... .50 .45 .41 .39 .08
Net Realized and Unrealized Gain (Loss) on
Investments....................................... 1.26 2.48 (.58) .63 .31
------ ------ ------ ------ ----------
TOTAL FROM INVESTMENT OPERATIONS.................. 1.76 2.93 (.17) 1.02 .39
- - ----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................ (.49) (.45) (.40) (.39) (.08)
Distributions from Realized Capital Gains........... (.12) (.05) -- (.03) --
------ ------ ------ ------ ----------
TOTAL DISTRIBUTIONS............................... (.61) (.50) (.40) (.42) (.08)
- - ----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........................ $13.92 $12.77 $10.34 $10.91 $10.31
================================================================================================================
TOTAL RETURN**........................................ 13.95% 28.64 (1.56)% 10.00% 3.69%
================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).................. $826 $590 $403 $367 $109
Ratio of Expenses to Average Net Assets............... 0.20% 0.20% 0.20% 0.20% 0.22%*
Ratio of Net Investment Income to Average Net
Assets.............................................. 3.69% 3.85% 3.86% 3.53% 3.76%*
Portfolio Turnover Rate............................... 37%++ 16% 16% 25% 17%
Average Commission Rate Paid.......................... $.0226 N/A N/A N/A N/A
</TABLE>

* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10. Subscription period for portfolio was from September 28, 1992, to
November 8, 1992, during which time all assets were held in money market
instruments. Performance measurement begins on November 9, 1992.
+ Commencement of operations.
++ Fund turnover rate excluding in-kind redemption was 30%.

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YIELD AND
TOTAL RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Fund (as stated in the advertisement) that
would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.

3
<PAGE> 6

In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Fund is calculated by dividing the net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Fund's securities; it is net
of all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The
yield calculation assumes that the net investment income
earned over 30 days is compounded monthly for six months
and then annualized. Methods used to calculate advertised
yields are standardized for all stock and bond mutual
funds. However, these methods differ from the accounting
methods used by the Fund to maintain its books and
records, and so the advertised 30-day yield may not fully
reflect the income paid to an investor's account or the
yield reported in the Fund's reports to shareholders.

Additionally, the Fund may compare its performance to a
number of indexes, including the Wilshire 5000, the Lehman
Brothers Aggregate Bond Index, and a composite of the two.

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INVESTMENT
OBJECTIVE

THE FUND SEEKS
TO TRACK THE
WILSHIRE 5000 AND THE
LEHMAN BROTHERS
INDEX The Fund is an open-end diversified investment company
that invests in a portfolio of common stocks and bonds.
The objective of the Fund is to replicate, with respect to
60% of its assets, the investment performance of the
Wilshire 5000 and, with respect to 40% of its assets, the
investment performance of the Lehman Brothers Aggregate
Bond Index ("Lehman Brothers Index"). There is no
assurance that the Fund will achieve its stated objective.

The Wilshire 5000 consists of all U.S. common stocks that
trade on a regular basis on the New York and American
Stock Exchanges and in the NASDAQ over-the-counter market.
The Lehman Brothers Index measures the total return
(capital change plus income) provided by a universe of
fixed-income securities, weighted by market value. The
securities included in the index generally have an
outstanding market value of at least $100 million, are of
investment grade quality and are readily available in the
marketplace.

The investment objective of the Fund is not fundamental
and so may be changed by the Board of Directors without
shareholder approval. However, shareholders would be
notified of any material change in the Fund's objective.
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INVESTMENT
POLICIES

THE FUND USES A
"PASSIVE" APPROACH
TO INVEST IN STOCKS
AND BONDS The Fund is not managed according to traditional methods
of "active" investment management, which involve the
buying and selling of securities based upon economic,
financial and market analysis and investment judgment.
Instead, the Fund, utilizing a "passive" or "indexing"
investment approach, will attempt to duplicate the
investment performance of the stock and bond markets
through statistical procedures. The Fund is managed
without regard to tax ramifications.

4
<PAGE> 7

Aggregate Bond Index (the "Lehman Brothers Index"). The
Fund may also invest in certain short-term fixed-income
securities such as cash reserves, although cash and cash
equivalents are normally expected to represent less than
1% of the Fund's assets.

The Fund's common stock portfolio is designed to have
investment characteristics that parallel those of the
Wilshire 5000. The Fund is expected to invest in
approximately 500 of the largest securities in the
Wilshire 5000 as measured by market capitalization and a
representative sample of the remainder. Typically, the
Fund will hold between 2,200 and 2,400 stocks, which are
selected primarily on the basis of market capitalization
and industry weightings.

The Fund's bond portfolio is designed to have investment
characteristics that parallel those of the Lehman Brothers
Index, a broad market-weighted index which encompasses
four major classes of investment grade fixed-income
securities in the United States: U.S. Treasury and agency
securities, corporate bonds, international
(dollar-denominated) bonds, and mortgage-backed
securities, with maturities greater than one year. The
Fund will invest in a representative sample of fixed-
income securities in the Lehman Brothers Index, which,
taken together, are expected to perform similarly to the
Index.

The Fund may, from time to time, substitute one type of
investment grade bond for another. For instance, the Fund
may hold more short-term corporate bonds (fewer short-term
U.S. Treasury bonds) than represented in the Index so as
to increase income. This corporate substitution strategy
will entail the assumption of additional credit risk;
however, substantial diversification within the corporate
sector should moderate issue-specific credit risk. In
addition, current investment policy restricts corporate
substitutions to issues with less than 4 years remaining
to maturity and in aggregate no more than 15% of net
assets. Overall, credit risk is expected to be very low
for the Fund.

The Fund may also invest up to 30% of its assets in stock
or bond futures contracts and options in order to invest
uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to minimize trading costs. The
Fund will not invest in futures contracts, options, or
cash reserves as part of a temporary defensive strategy,
such as lowering the Fund's investment allocation in
common stocks to protect against potential stock market
declines. The Fund intends to remain fully invested, to
the extent practicable, in a pool of securities which will
duplicate the investment characteristics of the Wilshire
5000 and Lehman Brothers Indexes. See "Implementation of
Policies" for a description of these and other investment
practices of the Fund.

The Fund is responsible for voting the shares of all
securities it holds.

These investment policies are not fundamental and so may
be changed by the Board of Directors without shareholder
approval. However, shareholders will be notified of any
material change in the Fund's policies.
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5
<PAGE> 8

INVESTMENT RISKS

INVESTORS ARE EXPOSED
TO STOCK MARKET AND
INTEREST RATE RISK As with any investment program, the Fund entails certain
risks. As a mutual fund investing 60% of its assets in
common stocks, the Fund is subject to STOCK MARKET
RISK -- i.e., the possibility that stock prices in general
will decline over short or even extended periods. The
stock market tends to be cyclical, with periods when stock
prices generally rise and periods when stock prices
generally decline.

To illustrate the volatility of stock prices, the
following table sets forth the extremes for U.S. stock
market returns as well as the average return for the
period from 1926 to 1996, as measured by the Standard &
Poor's 500 Composite Stock Price Index. (The Standard &
Poor's 500 Index is shown here, because the S&P 500 Index,
unlike the Wilshire 5000, has been in existence for all of
the periods shown.)

<TABLE>
<CAPTION>
AVERAGE ANNUAL U.S. STOCK MARKET RETURNS
(1926-1996)
OVER VARIOUS TIMES HORIZONS
--------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3% -12.5% - 0.9% + 3.1%
Average +12.7% +10.4% +10.8% +10.8%
</TABLE>

As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.8% for all 10-year periods from 1926 to 1996. The
return in individual years has varied from a low of -43.3%
to a high of +53.9%, reflecting the short-term volatility
of stock prices. Average return may not be useful for
forecasting future returns in any particular period, as
stock returns are quite volatile from year to year.
(Moreover, because the Fund invests in common stocks in
the Wilshire 5000, which includes large-, medium- and
small-capitalization companies, the Fund's stock holdings
may be more volatile than the results shown here.)

Since the Fund also invests in bonds, investors in the
Fund are also exposed to INTEREST RATE RISK -- i.e.,
fluctuations in the market value of bonds due to changing
interest rates. Bond prices are influenced primarily by
changes in the level of interest rates. When interest
rates rise, the prices of bonds generally fall;
conversely, when interest rates fall, bond prices
generally rise. While bonds normally fluctuate less in
price than stocks, there have been extended periods of
cyclical increases in interest rates that have caused
significant declines in bond prices. For example, bond
prices fell 48% from December 1976 to September 1981.
However, a decline in the market value of bonds may be
offset in whole or in part by the high level of income
that bonds provide.

To a limited extent, the Fund is also subject to credit
risk -- i.e., the likelihood that a bond issuer will fail
to make timely payments of interest and principal to the
Fund. Such CREDIT RISK is expected to be low, however, due
to the credit quality and diversification of the Fund's
bond investments.

6
<PAGE> 9

balance of common stock and bond investments, is expected
to entail less investment risk (and a potentially lower
return) than a mutual fund investing exclusively in common
stocks.
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WHO SHOULD
INVEST

INVESTORS SEEKING A
BALANCE BETWEEN
CURRENT INCOME AND
CAPITAL GROWTH
The Fund is designed for conservative investors seeking a
long-term investment offering both current income and the
potential for capital growth. By balancing its investments
among common stocks and bonds, the Fund is expected to
provide lower investment risk and share price volatility
than a mutual fund which invests exclusively in common
stocks. The Fund is thus suitable for investors who wish
to gain exposure to the potential capital growth provided
by the stock market, while limiting investment risk. Such
a balanced investment program might be particularly
well-suited to long-term investment objectives such as
retirement savings. The Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term market
movements. Investors who engage in excessive account
activity generate additional costs which are borne by all
of the Fund's shareholders. In order to minimize such
costs the Fund has adopted the following policies. The
Fund reserves the right to reject any purchase request
(including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally, the Fund has adopted exchange
privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Fund
reserves the right to suspend the offering of its shares.

The Fund also offers investors the advantage of a
"passive" approach to investing. These include low
investment costs, exceptional diversification among a wide
range of stocks and bonds, minimal portfolio turnover, and
relative predictability. Unlike other mutual funds, which
generally attempt to "beat" market averages with often
unpredictable results, the Fund seeks to "match" the
performance of its underlying indexes and thus is expected
to provide a highly predictable return relative to these
benchmarks.

However, shareholders should expect to be fully exposed to
the market risks inherent in investing in stocks and
bonds. As the prices of stocks and bonds may be volatile,
only investors able to tolerate short-term, possibly
substantial fluctuations in the value of their investment,
brought about by generally declining stock or bond prices,
should contemplate an investment in the Fund. The balanced
investment approach of the Fund tends to reduce exposure
to stock and bond market risks; it does not eliminate
them.

Investors may wish to reduce the potential risk of
investing in the Fund by purchasing shares on a regular,
periodic basis (dollar-cost averaging) rather than making
an investment in one lump sum.
- - --------------------------------------------------------------------------------

7
<PAGE> 10

IMPLEMENTATION
OF POLICIES The Fund utilizes a number of investment practices in an
effort to achieve its stated investment objective.

THE FUND INVESTS IN
A SAMPLE OF ALL U.S.
COMMON STOCKS The Fund's common stock investments will be selected from
securities included in the Wilshire 5000, an index of all
regularly and publicly traded U.S. common stocks that
trade on the New York and American Stock Exchanges and in
the NASDAQ over-the-counter market. Approximately 7,000
stocks, including large-, medium-, and
small-capitalization companies, are included in the
Wilshire 5000, which serves as a proxy for the complete
U.S. stock market.

Under normal circumstances, the Fund will invest 60% of
its net assets in common stocks included in the Wilshire
5000. In an effort to replicate the investment performance
of the Wilshire 5000, the Fund's common stock holdings
will include approximately 500 of the largest market
capitalization stocks in the Index and an additional
representative sample of the remaining stocks. The high
transaction costs and illiquidity of many of the smaller
stocks in the Wilshire 5000 make complete replication of
the Index's holdings impractical.

COMMON STOCKS ARE
SELECTED USING
OPTIMIZATION
TECHNIQUES
The stocks of the Wilshire 5000 included in the Fund are
selected using a statistical technique known as
"optimization." This process selects stocks for the Fund
so that various industry weightings, market
capitalizations, and fundamental characteristics (e.g.,
price-to-book, price-to-earnings, and debt-to-asset
ratios, as well as dividend yields) match those of the
Wilshire 5000. For instance, if 10% of the capitalization
of the Wilshire 5000 consists of utility companies with
relatively large market capitalizations, then the Fund's
stock holdings are constructed so that approximately 10%
of the Fund's stocks represent utilities with relatively
large capitalizations.

The Fund is not sponsored, endorsed, sold or promoted by
Wilshire Associates. Wilshire(R) and Wilshire 5000(R) are
registered service marks of Wilshire Associates.

THE FUND INVESTS
IN A SAMPLE OF ALL
U.S. INVESTMENT
GRADE DEBT Under normal circumstances, the Fund will invest 40% of
its net assets in fixed-income securities included in the
Lehman Brothers Index, an index of U.S. investment-grade,
fixed-income securities. More than 5,500 individual bond
issues, including U.S. Treasury and Government agency
securities, corporate debt obligations, and
mortgage-backed securities are included in the Lehman
Brothers Index.

The securities included in the Lehman Brothers Index in
which the Fund may invest generally meet the following
criteria, as defined by Lehman Brothers: an effective
maturity of not less than one year; an outstanding market
value of at least $100 million; investment grade
quality -- i.e., rated a minimum of Baa by Moody's
Investors Service, Inc., or BBB by Standard & Poor's
Corporation; and general availability in the marketplace.
If a security held in the Fund's portfolio is downgraded
to a rating below these minimum standards, the Fund may
continue to hold it until such time as the adviser deems
it most advantageous to dispose of the security.

BONDS ARE SELECTED
USING A STRATIFIED
SAMPLING TECHNIQUE The Fund will be unable to hold all of the individual
issues which comprise the Lehman Brothers Index because of
the large number of securities involved. Instead, the Fund
will hold a representative sample of the securities in the
Index, selecting a few issues to represent entire
"classes" or types of securities in the Index. The Fund

8
<PAGE> 11

will be constructed so as to approximately match the
composition of its benchmark index, after adjusting for
the corporate substitution policy described on page 5.

At the broadest level, and adjusted for the corporate
substitution strategy, the Fund will seek to hold
securities which reflect the weighting of the major asset
classes in the Lehman Brothers Index -- U.S. Treasury and
agency securities, corporate bonds, and mortgage-backed
securities. For example, if U.S. Treasury and agency
securities represent approximately 60% of the Index's
interest rate risk, then approximately 60% of the Fund's
interest rate risk will come from such securities.
Similarly, if corporate bonds represent 20% of the
interest rate risk of the Index, then they will represent
approximately 20% of the interest rate risk of the Fund.

THE FUND'S RETURNS Such a sampling technique is expected to be an effective
SHOULD BE CLOSELY means of substantially duplicating the income and capital
CORRELATED WITH ITS returns provided by each index. Over time, the correlation
UNDERLYING INDEXES between the performance of the Fund and its Indexes is
expected to be 0.95 or higher. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when
the net asset value of the Fund, including the value of
its dividend and capital gain distributions, increases or
decreases in exact proportion to changes in the Index
(without taking into consideration the effect of the
Fund's common stock holdings). The performance of the Fund
versus that of its respective index is monitored daily. If
a tracking error develops, the Fund is rebalanced to bring
it in line with the index.

Due to the use of sampling techniques, however, neither
the stock nor bond holdings of the Fund are expected to
track their target benchmarks with the degree of accuracy
that complete replication of the indexes would have
provided. The principal advantage of this sampling
approach is to provide an efficient means of investing in
a large universe of stocks and bonds. In particular, the
Fund is expected to provide exceptionally broad
diversification, and should operate at low costs due to
both its "passive" approach to portfolio management and
expected low portfolio turnover rate.

THE FUND MAY INVEST Although it normally seeks to remain substantially fully
IN SHORT-TERM MONEY invested in securities in the Indexes, the Fund may invest
MARKET INSTRUMENTS temporarily in certain short-term money market
instruments. Such securities may be used to invest
uncommitted cash balances or to maintain liquidity to meet
shareholder redemptions. Normally, the Fund may invest no
more than --% of its assets in short-term fixed income
securities. When taking a temporary defensive position,
however, the Fund may invest up to --% of its assets in
such securities. These securities include: obligations of
the United States Government and its agencies or
instrumentalities; commercial paper, bank certificates of
deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.

DERIVATIVE Derivatives are instruments whose values are linked to or
INVESTING derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.

9
<PAGE> 12

enter into futures contracts and options transactions only
to the extent that obligations under such contracts or
transactions represent not more than 20% of the Fund's
assets.

Futures contracts and options may be used for several
common fund management strategies: to maintain cash
reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher
investment returns when a specific futures contract is
priced more attractively than other futures contracts or
the underlying security or index.

The Portfolios may use futures contracts for bona fide
"hedging" purposes. In executing a hedge, a manager sells,
for example, stock index futures to protect against a
decline in the stock market. As such, if the market drops,
the value of the futures position will rise, thereby
offsetting the decline in value of the Fund's stock
holdings.

THE FUND MAY The Fund may also invest modestly in a fairly conservative
INVEST IN CMOS class of collateralized mortgage obligations (CMOs) which
feature a high degree of cash flow predictability and
moderate vulnerability to mortgage prepayment risk. To
reduce credit risk, Vanguard purchases these less risky
classes of collateralized mortgage obligations issued only
by agencies of the U.S. Government or privately-issued
collateralized mortgage obligations that carry
high-quality investment-grade ratings.

THE FUND MAY USE The Fund may utilize warrants, convertible securities and
WARRANTS, CONVERTIBLE swap agreements to a limited extent. The Fund's investment
SECURITIES AND SWAP in warrants will not exceed more than 5% of its assets (2%
AGREEMENTS with respect to warrants not listed on the New York or
American Stock Exchanges). Warrants, convertible
securities and swap agreements may be used for several
reasons: to simulate full investment in the underlying
index while retaining a cash balance for fund management
purposes, to facilitate trading, to reduce transaction
costs or to seek higher investment returns when a warrant,
convertible security or swap agreement is priced more
attractively than the underlying equity security or index.
While each of these securities can be used as leveraged
investments, the Fund may not use them to leverage its net
assets.

FUTURES CONTRACTS, The risk of loss associated with futures contracts in some
OPTIONS, WARRANTS, strategies can be substantial due both to the low margin
CONVERTIBLE deposits and the extremely high degree of
SECURITIES SWAP leverage involved in futures pricing. As a result, a
AGREEMENTS relatively small price movement in a futures contract may
POSE CERTAIN RISKS result in an immediate and substantial loss or gain.
However, the Fund will not use futures contracts, options,
warrants, convertible securities and swap agreements for
speculative purposes or to leverage its net assets.
Accordingly, the primary risks associated with the use of
futures contracts, options, warrants, convertible
securities and swap agreements by the Fund are: (i)
imperfect correlation between the change in market value
of the stocks held by a Fund and the prices of futures
contracts, options, warrants, convertible securities and
swap agreements; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting
inability to close a futures position prior to

10
<PAGE> 13

its maturity date. The risk of imperfect correlation will
be minimized by investing only in those contracts whose
behavior is expected to resemble that of a Fund's
underlying securities. The risk that a Fund will be unable
to close out a futures position will be minimized by
entering into such transactions on an exchange with an
active and liquid secondary market. However options,
warrants, convertible securities and swap agreements
purchased or sold over-the-counter may be less liquid than
exchange-traded securities. Illiquid securities, in
general, including swap agreements, may not represent more
than 15% of the net assets of the Fund.

Since there are no futures contracts traded on either the
Lehman Brothers Index or the Wilshire 5000, it will be
necessary for the Fund to utilize a composite of other
futures contracts to simulate the performance of each of
these Indexes. This process may magnify the "tracking
error" of the Fund's performance compared to that of the
Indexes due to lower correlation of the selected futures
with the Indexes. The investment adviser will attempt to
reduce this tracking error by investing in those futures
contracts whose behavior is expected to resemble that of
the underlying securities. There can be no assurance that
these selected futures will perfectly correlate with the
performance of the Indexes.

Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on
the change in market value of a specified index or asset.
In return, the other party agrees to make payments to the
first party based on the return of a different specified
index or asset. Although swap agreements entail the risk
that a party will default on its payment obligations
thereunder, the Fund will minimize this risk by entering
into agreements that mark to market no less frequently
than quarterly. Swap agreements also bear the risk that
the Fund will not be able to meet its obligation to the
counterparty. This risk will be mitigated by investing the
Fund in the specific asset for which it is obligated to
pay a return.

THE FUND MAY LEND
ITS SECURITIES
The Fund may lend its investment securities to qualified
institutional investors for either short-term or long-term
purposes of realizing additional income. Loans of
securities by the Fund will be collateralized by cash,
letters of credit, or securities issued or guaranteed by
the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the
loaned securities, and such loans may not exceed 33 1/3%
of the value of the Fund's net assets.

PORTFOLIO TURNOVER
IS NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Fund retains the right to sell securities irrespective
of how long they have been held. It is anticipated that
the annual portfolio turnover of the Fund will not exceed
100%. A turnover rate of 100% would occur, for example, if
all of the Fund's securities were replaced within one
year. A higher portfolio turnover rate will cause the Fund
to incur additional brokerage costs and may cause the Fund
to realize a higher level of capital gains or losses. See
"Dividends, Capital Gains and Taxes."

11
<PAGE> 14

bought or sold by the Fund. To the extent that the Fund
borrows money, the Fund may be leveraged; at such times,
the Fund may appreciate or depreciate in value more
rapidly than its benchmark indexes. The Fund will repay
any money borrowed in excess of 5% of the value of its net
assets prior to purchasing additional securities.

- - --------------------------------------------------------------------------------

INVESTMENT
LIMITATIONS The Fund has adopted certain limitations on its investment
practices. Specifically, the Fund will not:

THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS (a) with respect to 75% of its assets, purchase securities
of any issuer (except obligations of the U.S.
Government and its instrumentalities) if, as a result,
more than 5% of the value of the Fund's assets would
be invested in the securities of such issuer;
(b) with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one
industry;
(d) borrow money, except that the Fund may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the
value of the Fund's net assets. Whenever borrowing
exceeds 5% of the value of the Fund's net assets, the
Fund will not make any additional investments.

These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information are fundamental and may be changed only with
the approval of a majority of the Fund's shareholders.
- - --------------------------------------------------------------------------------

MANAGEMENT
OF THE FUND

VANGUARD ADMINISTERS
AND DISTRIBUTES THE
FUND
The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct portfolios and total assets in
excess of $250 billion. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Fund and the other funds in the Group obtain at cost
virtually all of their corporate management,
administrative, shareholder accounting and distribution
services. Vanguard also provides investment advisory
services on an at-cost basis to certain Vanguard funds. As
a result of Vanguard's unique corporate structure, the
Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1996, the average
expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds
amounted to approximately .29% compared to an average of
1.22% for the mutual fund industry (data provided by
Lipper Analytical Services).

The Officers of the Fund manage its day-to-day operations
and are responsible to the Fund's Board of Directors. The
Directors set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.

12
<PAGE> 15

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 net expenses, which are
allocated among the funds under methods approved by the
Board of Directors (Trustees) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.

Vanguard also provides distribution and marketing services
to the Vanguard funds. The funds are available on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees). However, each fund bears its share of the
Group's distribution costs.
- - --------------------------------------------------------------------------------

INVESTMENT
ADVISER

VANGUARD MANAGES
THE FUND'S
INVESTMENTS The Fund receives all investment advisory services on an
at-cost basis from Vanguard. Vanguard's Core Management
Group has primary responsibility for the Fund's stock
holdings, with Vanguard's Fixed Income Group having
primary responsibility for the Fund's fixed-income
investments. Both the Core Management and Fixed Income
Groups provide investment advisory services to a wide
range of other Vanguard funds. As of December 31, 1996,
total assets under management were $57 billion for the
Core Management Group and approximately $79 billion for
the Fixed Income Group. The Fund is not actively managed,
but is instead administered by the Core Management and
Fixed Income Groups using computerized, quantitative
techniques. Both the Core Management and Fixed Income
Groups are supervised by the Officers of the Fund.

Purchase of portfolio securities may be made either
directly from the issuer or from securities dealers. In
placing portfolio transactions, Vanguard uses its best
judgment to choose the broker most capable of providing
the brokerage services necessary to obtain the best
available price and most favorable execution at the lowest
commission rate. The full range and quality of brokerage
services available are considered in making these
determinations. In those instances where it is reasonably
determined that more than one broker can offer the
services needed to provide the best available price and
most favorable execution, consideration may be given to
those brokers which supply statistical information and
provide other services in addition to execution services
to the Fund. Fixed-income securities may be sold prior to
maturity if circumstances and considerations warrant and
if the Fund believes such dispositions are advisable.
- - --------------------------------------------------------------------------------

DIVIDENDS,
CAPITAL GAINS
AND TAXES

THE FUND PAYS
QUARTERLY DIVIDENDS The Fund will distribute substantially all of its net
investment income in the form of quarterly dividends.

The Fund's dividend and capital gains distributions may be
reinvested in additional shares or received in cash. See
"Choosing a Distribution Option" for a description of
these distribution methods.

THE FUND WILL ASSESS
A $10 ACCOUNT
MAINTENANCE FEE The Fund will automatically deduct a $10 annual account
maintenance fee at a rate of $2.50 per quarter from the
dividend income of each account. If the quarterly dividend
for the account is less than the fee to be deducted, the
Fund will redeem sufficient shares to make up the
difference. The Board of Directors reserves the right

13
<PAGE> 16

to change the annual account maintenance fee to reflect
the actual cost of maintaining smaller shareholder
accounts. For federal tax purposes, the account
maintenance fee does not reduce dividend income and is
treated as an investment expense by each shareholder
(deductible as a miscellaneous itemized deduction in the
case of individual investors). This fee will be waived for
shareholders with an account balance of $10,000 or more.

In order to satisfy certain requirements of the Tax Reform
Act of 1986, the Fund may declare special year-end
dividend and capital gains distributions during December.
Such distributions, if received by shareholders by January
31, are deemed to have been paid by the Fund and received
by shareholders on December 31 of the prior year.

The Fund intends to continue to qualify for taxation as a
"regulated investment company" under the Internal Revenue
Code so that it will not be subject to federal income tax
to the extent its income is distributed to shareholders.
Dividends paid by the Fund from net investment income and
net short-term capital gains, whether received in cash or
reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate investors,
dividends from net investment income will qualify in part
for the intercorporate dividends-received deduction.
However, the portion of the dividends so qualified depends
on the aggregate taxable qualifying dividend income
received by the Fund from domestic (U.S.) sources.

Distributions paid by the Fund from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time a shareholder has owned
shares in the Fund. Capital gains distributions are made
when the Fund realizes net capital gains on sales of
portfolio securities during the year. For the Fund,
realized capital gains are not expected to be a
predictable part of investment return.

The Fund will notify its shareholders annually as to the
tax status of dividend and capital gains distributions
paid by the Fund.

A CAPITAL GAIN OR LOSS
MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of the Fund is a taxable event and may
result in a capital gain or loss. A capital gain or loss
may be realized from an ordinary redemption of shares or
an exchange of shares between two mutual funds (or two
portfolios of a mutual fund).

Dividend distributions, capital gains distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.

The Fund is required to withhold 31% of taxable dividends,
capital gains distributions, and redemptions paid to
shareholders who have not complied with IRS taxpayer
identification regulations. A shareholder may avoid this
withholding requirement by certifying on the Account
Registration Form his/her proper Social Security or
Employer Identification number and by certifying that he
or she is not subject to backup withholding.

The Fund has obtained a Certificate of Authority to do
business as a foreign corporation in Pennsylvania and does
business and maintains an office in that

14
<PAGE> 17

state. In the opinion of counsel, the shares of the Fund
will be exempt from Pennsylvania personal property taxes.

The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Fund.
- - --------------------------------------------------------------------------------

THE SHARE PRICE OF
THE FUND The 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 per share 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 that are listed on a securities
exchange are valued at the last quoted sale price on the
day the valuation is made. Price information on listed
securities is taken from the exchange where the security
is primarily traded. Securities that are listed on an
exchange and which are not traded on the valuation date
are valued at the mean between the bid and ask prices.
Unlisted securities for which market quotations are
readily available are also valued at the mean of the bid
and ask prices.

Bond 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.

Short-term instruments (those with remaining maturities of
60 days or less) may be valued at cost, plus or minus any
amortized discount or premium, which approximates market.
Other securities, including restricted securities and
other securities for which no quotations are currently
available, are valued at fair market value, as determined
in good faith by the Board of Directors.

The Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of Vanguard Group.

- - --------------------------------------------------------------------------------

GENERAL
INFORMATION The Fund is a Maryland corporation. The Articles of
Incorporation permit the Directors to issue 1,000,000,000
shares of common stock, with a $.001 par value. The Board
of Directors has the power to designate one or more
classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect to
such series. Currently the Fund is offering shares of one
series.

The shares of the Fund are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive
rights. Such shares have non-cumulative voting rights,
meaning that the holders of more than 50% of the shares
voting for the election of Directors can elect 100% of the
Directors if they so choose.

15
<PAGE> 18

Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Director or Directors of the Fund if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Fund.

All securities and cash are held by CoreStates Bank, N.A.,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.

- - --------------------------------------------------------------------------------

16
<PAGE> 19

SHAREHOLDER GUIDE

OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement ($1,000 for Uniform
Gifts/Transfers to Minors Act accounts). You must open a
new Individual Retirement Account by mail (IRAs may not be
opened by wire) using a Vanguard IRA Adoption Agreement.
Your purchase must be equal to or greater than the $1,000
minimum initial investment requirement, but no more than
$2,000 if you are making a regular IRA contribution.
Rollover contributions are generally limited to the amount
withdrawn within the past 60 days from an IRA or other
qualified retirement plan. If you need assistance with the
forms or have any questions about the Fund, please call
our Investor Information Department (1-800-662-7447).
NOTE: For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts or
powers of attorney), please call us to determine which
additional forms you may need.

The Fund's shares are purchased at the next-determined net
asset value after your investment has been received in the
form of Federal Funds. See "When Your Account Will Be
Credited." The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees).

PURCHASE
RESTRICTIONS 1) Because of the risks associated with common stock and
bond investments, the Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term market
movements. Consequently, the Fund reserves the right to
reject any specific purchase (and exchange purchase)
request. The Fund also reserves the right to suspend the
offering of shares for a period of time.

2) Vanguard will not accept third-party checks to purchase
shares of the Fund. Please be sure your purchase check is
made payable to The Vanguard Group.

ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), written
exchange from another Vanguard Fund account ($100
minimum), or Vanguard Fund Express. Subsequent investments
to Individual Retirement Accounts may be made by mail
($100 minimum) or exchange from another Vanguard Fund
account. In some instances, contributions may be made by
wire or Vanguard Fund Express. Please call us for more
information on these options.
- - --------------------------------------------------------------------------------

17
<PAGE> 20

<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment on the include the Invest-by-Mail
Complete and sign the registration form, make your remittance form attached to your
enclosed Account check payable to The Vanguard Fund confirmation statements.
Registration Form Group-02, and mail to: Please make your check payable
to The Vanguard Group-02, write
VANGUARD FINANCIAL CENTER your account number on your
P.O. BOX 2600 check and, using the return
VALLEY FORGE, PA 19482-2600 envelope provided, mail to the
address indicated on the Invest-
by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087-1815 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
</TABLE>

- - --------------------------------------------------------------------------------

PURCHASING BY WIRE

Money should be
wired to:

BEFORE WIRING

Please contact
Client Services
(1-800-662-2739) CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD
VANGUARD BALANCED INDEX FUND
ACCOUNT NUMBER
ACCOUNT REGISTRATION

You should notify our Client Services Department of your
intended wire purchase, including the federal wire number
to be used, by 12:00 noon (Eastern time). To assure proper
receipt, please be sure your bank includes the name of the
Fund, the account number Vanguard has assigned to you and
the eight-digit CoreStates number. If you are opening a
new account, please complete the Account Registration Form
and mail it to the "New Account" address after completing
your wire arrangement. NOTE: Federal Funds wire purchase
orders will be accepted only when the Fund and Custodian
Bank are open for business.
- - --------------------------------------------------------------------------------

PURCHASING BY
EXCHANGE (from a
Vanguard account) Telephone exchanges are not accepted for Vanguard Balanced
Index Fund. You may, however, open an account by exchange
by providing the appropriate information on the Account
Registration Form. The new account will have the same
registration as the existing account. The Fund reserves
the right to refuse any exchange purchase request.
- - --------------------------------------------------------------------------------

PURCHASING BY
FUND EXPRESS

Automatic Investment The Fund Express Automatic Investment option, lets you
move money automatically from your bank account to your
Vanguard account on the schedule (monthly, bimonthly
[every other month], quarterly, semiannually, or annually)
you select. To establish this Fund Express option, please
provide the appropriate information on

18
<PAGE> 21

the Account Registration Form. We will send you a
confirmation of your Fund Express enrollment; please wait
two weeks before using the service.

- - --------------------------------------------------------------------------------

CHOOSING A
DISTRIBUTION
OPTION
You must select one of three distribution options:

1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.

2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.

3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.

You may change your option by calling our Client Services
Department (1-800-662-2739).

In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- - --------------------------------------------------------------------------------

TAX CAUTION

INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING
Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the distribution's
record date, regardless of how long the shares have been
owned. Purchasing shares just prior to the record date
could have a significant impact on your tax liability for
the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain or
income dividend distribution, you will be assessed taxes
on the amount of the capital gain and/or dividend
distribution later paid even though you owned the Fund
shares for just a short period of time. (Taxes are due on
the distributions even if the dividend or gain is
reinvested in additional Fund shares.) While the total
value of your investment will be the same after the
distribution -- the amount of the distribution will offset
the drop in the net asset value of the shares -- you
should be aware of the tax implications the timing of your
purchase may have.

Prospective investors should, therefore, inquire about
potential distributions before investing. The Fund's
annual capital gains distribution normally occurs in
December, while income dividends are generally paid
quarterly in March, June, September and December. For
additional information on distributions and taxes, see the
section titled "Dividends, Capital Gains and Taxes."
- - --------------------------------------------------------------------------------

19
<PAGE> 22

IMPORTANT
INFORMATION

ESTABLISHING OPTIONAL
SERVICES
The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO
ADD OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD WITH
ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE
CALL OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR
FURTHER ASSISTANCE.

SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantors that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY PUBLIC.

CERTIFICATES Share certificates will not be available for the Fund.

BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.

CANCELLING TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.

ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- - --------------------------------------------------------------------------------

WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal Funds
wire or exchange, and is received by the close of regular
trading of the New York Stock Exchange (generally 4:00
p.m. Eastern time), your trade date is the day of receipt.
If your purchase is received after the close of the
Exchange, your trade date is the next business day. Shares
of the Fund are purchased at the net asset value
determined on your trade date.

In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- - --------------------------------------------------------------------------------

SELLING YOUR
SHARES You may withdraw any portion of the funds in your account
by redeeming shares at any time. You generally may
initiate a request by writing or by telephoning. Your
redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order.
- - --------------------------------------------------------------------------------

SELLING BY MAIL
Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD BALANCED INDEX FUND, P.O. BOX 1120, VALLEY FORGE,
PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Balanced
Index Fund, 455 Devon Park Drive, Wayne, PA 19087.)

20
<PAGE> 23

The redemption price of shares will be the Fund's net
asset value next determined after Vanguard has received
all required documents in Good Order.
- - --------------------------------------------------------------------------------

DEFINITION OF
GOOD ORDER
GOOD ORDER means that the request includes the following:

1. The account number and Fund name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations, trusts,
and certain other accounts.

IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739).
- - --------------------------------------------------------------------------------

SELLING BY
TELEPHONE
To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
PLEASE NOTE: As a protection against fraud, your telephone
mail redemption privilege will be suspended for 15
calendar days following any expedited address change to
your account. An expedited address change is one that is
made by telephone, by Vanguard Online, or, in writing,
without the signatures of all account owners. Please see
"Important Information About Telephone Transactions."

- - --------------------------------------------------------------------------------

SELLING BY FUND
EXPRESS

Automatic
Withdrawal
With the Fund Express Automatic Withdrawal option, money
will be moved automatically from your Vanguard Fund
account to your bank account according to the schedule you
have selected. You may elect Fund Express on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Fund Express
application.
- - --------------------------------------------------------------------------------

SELLING BY
EXCHANGE You may sell shares of the Fund by making an exchange into
another Vanguard Fund account. Please see "Exchanging Your
Shares" for details.
- - --------------------------------------------------------------------------------

IMPORTANT REDEMPTION
INFORMATION
Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
- - --------------------------------------------------------------------------------

DELIVERY OF
REDEMPTION
PROCEEDS
Redemption requests received by telephone prior to the
regular close of the New York Stock Exchange (generally
4:00 p.m. Eastern time), are processed on the day of
receipt and the redemption proceeds are normally sent on
the following business day.

Redemption requests received by telephone after the close
of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.

Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order, except as
described above in "Important Redemption Information."

21
<PAGE> 24

If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard. The Fund reserves the right to revise or
terminate the telephone redemption privilege at any time.

The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.

If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution
in kind of readily marketable securities.
- - --------------------------------------------------------------------------------

VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
- - --------------------------------------------------------------------------------

LOW BALANCE FEE AND
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund will automatically deduct a $10 annual
fee from non-retirement accounts with balances falling
below $2,500 ($500 for Uniform Gifts/Transfers to Minors
Act accounts). The fee generally will be waived for
investors whose aggregate Vanguard assets exceed $50,000.

In addition, the Fund reserves the right to liquidate any
non-retirement account that is below the minimum initial
investment amount of $3,000. If at any time your total
investment does not have a value of at least $3,000, you
may be notified that your account is below the Fund's
minimum account balance requirement. You would then be
allowed 60 days to make an additional investment before
the account is liquidated. Proceeds would be paid promptly
to the registered shareholder.

Vanguard will not liquidate your account if it has fallen
below $3,000 solely as a result of declining markets
(i.e., a decline in a Fund's net asset value).
- - --------------------------------------------------------------------------------

EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange your
shares of Vanguard Balanced Index Fund for those of other
available Vanguard Funds. Exchanges to or from the Fund
may be made only by mail. TELEPHONE EXCHANGES BETWEEN NON-
RETIREMENTS ACCOUNTS ARE NOT ACCEPTED FOR THE FUND.
- - --------------------------------------------------------------------------------

EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Fund, the name of
the Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD BALANCED INDEX FUND, P.O. BOX 1120, VALLEY FORGE,
PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Balanced
Index Fund, 455 Devon Park Drive, Wayne, PA 19087.)
- - --------------------------------------------------------------------------------

22
<PAGE> 25

IMPORTANT EXCHANGE Before you make an exchange, you should consider the
INFORMATION following:

- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).

- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.

- Exchanges are accepted only if the registrations and the
taxpayer identification numbers of the two accounts are
identical.

- New accounts are not currently accepted in
Vanguard/Windsor Fund.

- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received all required documentation in Good Order.

- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.

Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to revise
or terminate its provisions, limit the amount of or reject
any exchange, as deemed necessary, at any time.

- - --------------------------------------------------------------------------------

EXCHANGE The Fund's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive
exchange activity.

Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from the Fund during any twelve-month
period. Notwithstanding these limitations, the Fund
reserves the right to reject any purchase request
(including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management.
- - --------------------------------------------------------------------------------

IMPORTANT The ability to initiate redemptions (except wire
INFORMATION ABOUT redemptions) by telephone is automatically established on
TELEPHONE your account unless you request in writing that telephone
TRANSACTIONS transactions on your account not be permitted.

To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:

1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
and address used in the registration; and (iv) the
Social Security or employer identification number
listed on the account.

2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record only.

23
<PAGE> 26

Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account.

- - --------------------------------------------------------------------------------

TRANSFERRING You may transfer the registration of any of your Fund
REGISTRATION shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT.
The request must be in Good Order. To obtain a transfer
form, please call our Client Services Department
(1-800-662-2739).
- - --------------------------------------------------------------------------------

STATEMENTS AND Vanguard will send you a confirmation statement each time
REPORTS you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.

Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account during
the calendar year, using the average cost single category
method. This service is available for most taxable
accounts opened since January 1, 1986. In general,
investors who redeemed shares from a qualifying Vanguard
account may expect to receive their Average Cost Statement
along with their Fund Summary Statement. Please call our
Client Services Department (1-800-662-2739) for
information.

Financial reports on the Fund will be mailed to you
semiannually, according to the Fund's fiscal year-end.
- - --------------------------------------------------------------------------------

OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Information Department at
1-800-662-7447.

VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S.
DEPOSIT SERVICE Government checks (including Social Security and military
pension checks) and private payroll checks may be
automatically deposited into your Vanguard Fund account.
Separate brochures and forms are available for direct
deposit of U.S. Government and private payroll checks.

VANGUARD AUTOMATIC Vanguard's Automatic Exchange Service allows you to move
EXCHANGE SERVICE money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or
to contribute to an IRA or other retirement plan. Please
contact our Client Services Department at 1-800-662-2739
for additional information.

VANGUARD FUND Vanguard's Fund Express allows you to transfer money
EXPRESS between your Fund account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service

24
<PAGE> 27

on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.

Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.

VANGUARD DIVIDEND Vanguard's Dividend Express allows you to transfer your
EXPRESS dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our
Investor Information Department (1-800-662-7447) for a
Vanguard Dividend Express application.

VANGUARD Vanguard's Tele-Account is a convenient, automated service
TELE-ACCOUNT that provides share price, price change and yield
quotations on Vanguard Funds through any TouchTone(TM)
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. In
addition, you may perform investment exchanges of Vanguard
Fund shares and redemptions by check using Tele-Account.
To contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).

COMPUTER ACCESS

VANGUARD ONLINE Vanguard Online allows you to obtain information via your
KEYWORD: VANGUARD personal computer on Fund share price, yield, and total
return. Vanguard Online is offered through America Online
(AOL). To establish an AOL account, call 1-800-238-6336.

VANGUARD ON THE Vanguard sponsors an education-oriented website offering
WORLD WIDE WEB news and information about Vanguard Funds and services, as
HTTP:// well as interactive, easy-to-use investment planning
WWW.VANGUARD.COM tools.

- - --------------------------------------------------------------------------------

25
<PAGE> 28

[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 29

[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 30

- - --------------------------------------------------------------------------------

<TABLE>
<S> <C> <C>
P002 [LOGO]
LOGO [VANGUARD BALANCED INDEX FUND LOGO]
--------------------------- P R O S P E C T U S
THE VANGUARD GROUP
Vanguard Financial Center MARCH 28, 1997
P.O. Box 2600 [VANGUARD LOGO]
Valley Forge, PA 19482

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

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

TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)

TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738

TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
</TABLE>

- - --------------------------------------------------------------------------------
<PAGE> 31

- - --------------------------------------------------------------------------------

================================================================================

LOGO
A Member of The Vanguard Group
================================================================================

PROSPECTUS -- MARCH 28, 1997

- - --------------------------------------------------------------------------------

FUND INFORMATION: PARTICIPANT SERVICES -- 1-800-523-1188
- - --------------------------------------------------------------------------------

IMPORTANT NOTE This Prospectus is intended exclusively for participants
in employer-sponsored retirement or savings plans, such as
tax-qualified pension and profit-sharing plans and 401(k)
thrift plans, as well as 403(b) custodial accounts for
non-profit educational and charitable organizations.
Another version of this Prospectus, containing information
on how to open a personal investment account with the
Fund, is available for individual investors. To obtain a
copy of that version of the Prospectus, please call
1-800-662-7447.
- - --------------------------------------------------------------------------------

OPENING AN
ACCOUNT The Fund is an investment option under a retirement or
savings program sponsored by your employer. The
administrator of your retirement plan 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, please contact
Participant Services at 1-800-523-1188. If you have any
questions about your plan account, contact your plan
administrator or the organization that provides
recordkeeping services for your plan.
- - --------------------------------------------------------------------------------

- - --------------------------------------------------------------------------------

TABLE OF CONTENTS

<TABLE>
<S> <C> <C>
Page Page Page
Fund Expenses .................... 2 Investment Risks ................ 5 Dividends, Capital Gains and
Financial Highlights ............. 3 Who Should Invest ................ 7 Taxes .......................... 13
Yield and Total Return ........... 3 Implementation of Policies........ 7 The Share Price of the
FUND INFORMATION Investment Limitations ........... 11 Fund ........................... 13
Investment Objective ........... 4 Management of the Fund ........... 12 General Information .............. 14
Investment Policies .............. 4 Investment Adviser ............... 12 Service Guide .................... 15
</TABLE>

- - --------------------------------------------------------------------------------

- - --------------------------------------------------------------------------------
<PAGE> 32

FUND EXPENSES The following table illustrates ALL expenses and fees that
a shareholder of the Fund would incur. The expenses and
fees set forth in the table are for the 1996 fiscal year.

<TABLE>
<CAPTION>
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
-----------------------------------------------------------------------------------
Sales Load Imposed on Purchases............................... None
Sales Load Imposed on Reinvested Dividends.................... None
Redemption Fees............................................... None
Exchange Fees................................................. None
ANNUAL FUND OPERATING EXPENSES
-----------------------------------------------------------------------------------
Management & Administrative Expenses.......................... 0.12%
Investment Advisory Fees...................................... 0.01
12b-1 Fees.................................................... None
Other Expenses
Distribution Costs.......................................... 0.02%
Miscellaneous Expenses...................................... 0.05
----
Total Other Expenses.......................................... 0.07
------
TOTAL FUND OPERATING EXPENSES........................ 0.20%
======
</TABLE>

The purpose of this table is to assist you in
understanding the various costs and expenses that an
investor would bear directly or indirectly as a
shareholder in the Fund.

The following example illustrates the expenses that you
would incur on a $1,000 investment over various periods,
assuming (1) a 5% annual rate of return and (2) redemption
at the end of each period.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$2 $ 6 $11 $ 26
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.

- - --------------------------------------------------------------------------------

2
<PAGE> 33

FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, have been audited by Price
Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read
in conjunction with the Fund's financial statements and
notes thereto which, together with the remaining portions
of the Fund's 1996 Annual Report to Shareholders, are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the report of Price Waterhouse LLP, in the
Fund's 1996 Annual Report to Shareholders. For a more
complete discussion of the Fund's performance, please see
the Fund's 1996 Annual Report to Shareholders, which may
be obtained without charge by writing to the Fund or by
calling Participant Services at 1-800-523-1188.

<TABLE>
<CAPTION>
SEPT. 28+
YEAR ENDED DECEMBER 31, TO DEC. 31,
1996 1995 1994 1993 1992
- - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................... $12.77 $10.34 $10.91 $10.31 $10.00
------ ------ ------ ------ ----------
INVESTMENT OPERATIONS
Net Investment Income................................. .50 .45 .41 .39 .08
Net Realized and Unrealized Gain (Loss) on
Investments......................................... 1.26 2.48 (.58) .63 .31
------ ------ ------ ------ ---------
TOTAL FROM INVESTMENT OPERATIONS.................... 1.76 2.93 (.17) 1.02 .39
- - -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.................. (.49) (.45) (.40) (.39) (.08)
Distributions from Realized Capital Gains............. (.12) (.05) -- (.03) --
------ ------ ------ ------ ---------
TOTAL DISTRIBUTIONS................................. (.61) (.50) (.40) (.42) (.08)
- - -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......................... $13.92 $12.77 $10.34 $10.91 $10.31
=================================================================================================================
TOTAL RETURN**.......................................... 13.95% 28.64% (1.56)% 10.00% 3.69%
=================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).................... $826 $590 $403 $367 $109
Ratio of Expenses to Average Net Assets................. 0.20% 0.20% 0.20% 0.20% 0.22%*
Ratio of Net Investment Income to Average Net Assets.... 3.69% 3.85% 3.86% 3.53% 3.76%*
Portfolio Turnover Rate................................. 37%++ 16% 16% 25% 17%
Average Commission Rate Paid............................ $.0226 N/A N/A N/A N/A
</TABLE>

* Annualized.

**Subscription period for portfolio was from September 28, 1992, to November 8,
1992, during which time all assets were held in money market instruments.
Performance measurement begins on November 9, 1992.

+ Commencement of operations.

++ Fund turnover rate excluding in-kind redemptions was 30%.

- - --------------------------------------------------------------------------------

YIELD AND TOTAL
RETURN From time to time the Fund may advertise its yield and
total return. Both yield and total return figures are
based on historical earnings and are not intended to
indicate future performance. The "total return" of the
Fund refers to the average annual compounded rates of
return over one-, five- and ten-year periods or for the
life of the Fund (as stated in the advertisement) that
would equate an initial amount invested at the beginning
of a stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.

3
<PAGE> 34

In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of the Fund is calculated by dividing the net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on the Fund's securities; it is net
of all expenses and all recurring and nonrecurring charges
that have been applied to all shareholder accounts. The
yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months
and then annualized. Methods used to calculate advertised
yields are standardized for all stock and bond mutual
funds. However, these methods differ from the accounting
methods used by the Fund to maintain its books and
records, and so the advertised 30-day yield may not fully
reflect the income paid to an investor's account.

Additionally, the Fund may compare its performance to a
number of indexes, including the Wilshire 5000, the Lehman
Brothers Aggregate Bond Index, and a composite of the two.

- - --------------------------------------------------------------------------------

INVESTMENT
OBJECTIVE

INVESTMENT
POLICIES

Under normal circumstances, the Fund will invest 60% of
its net assets in a portfolio of common stocks selected to
track the Wilshire 5000 and 40% of its net assets in a
portfolio of investment-grade bonds designed to track the
Lehman Brothers Index. The Fund may also invest in certain
short-term fixed income securities such as cash reserves,
although cash and cash equivalents are normally expected
to represent less than 1% of the Fund's assets.

4
<PAGE> 35

The Fund is responsible for voting the shares of all
securities it holds.

INVESTMENT
RISKS

5
<PAGE> 36

To a limited extent, the Fund is also subject to CREDIT
RISK -- i.e., the likelihood that a bond issuer will fail
to make timely payments of interest and principal to the
Fund. Such credit risk is expected to be low, however, due
to the credit quality and diversification of the Fund's
bond investments.

From time to time, the stock and bond markets may
fluctuate independently of one another. In other words, a
decline in the stock market may in certain instances be
offset by a rise in the bond market, or vice versa. As a
result, the Fund, with its balance of common stock and
bond investments, is expected to entail less investment
risk (and a potentially lower return) than a mutual fund
investing exclusively in common stocks.
- - --------------------------------------------------------------------------------

6
<PAGE> 37

WHO SHOULD INVEST

INVESTORS SEEKING A
BALANCE BETWEEN
CURRENT INCOME AND
CAPITAL GROWTH The Fund is designed for conservative investors seeking a
long-term investment offering both current income and the
potential for capital growth. By balancing its investments
among common stocks and bonds, the Fund is expected to
provide lower investment risk and share price volatility
than a mutual fund which invests exclusively in common
stocks. The Fund is thus suitable for investors who wish
to gain exposure to the potential capital growth provided
by the stock market, while limiting investment risk. Such
a balanced investment program might be particularly
well-suited to long-term investment objectives such as
retirement savings. The Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term market
movements. Investors who engage in excessive account
activity generate additional costs which are borne by all
of the Fund's shareholders. In order to minimize such
costs the Fund has adopted the following policies. The
Fund reserves the right to reject any purchase request
(including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the
timing of the investment or previous excessive trading by
the investor. Additionally, the Fund reserves the right to
suspend the offering of its shares.

IMPLEMENTATION OF
POLICIES The Fund utilizes a number of investment practices in an
effort to achieve its stated investment objective.

THE FUND INVESTS IN A
SAMPLE OF ALL U.S.
COMMON STOCKS The Fund's common stock investments will be selected from
securities included in the Wilshire 5000, an index of all
regularly and publicly traded U.S. common stocks that
trade on the New York and American Stock Exchanges and in
the NASDAQ over-the-counter market. Approximately 7,000
stocks, including large-, medium-, and
small-capitalization companies, are included in the
Wilshire 5000 Index, which serves as a proxy for the
complete U.S. stock market.

7
<PAGE> 38

COMMON STOCKS ARE
SELECTED USING
OPTIMIZATION
TECHNIQUES The stocks of the Wilshire 5000 included in the Fund are
selected using a statistical technique known as
"optimization." This process selects stocks for the Fund
so that various industry weightings, market
capitalizations, and fundamental characteristics (e.g.,
price-to-book, price-to-earnings, and debt-to-asset
ratios, as well as dividend yields) match those of the
Wilshire 5000. For instance, if 10% of the capitalization
of the Wilshire 5000 consists of utility companies with
relatively large market capitalizations, then the Fund's
stock holdings are constructed so that approximately 10%
of the Fund's stocks represent utilities with relatively
large capitalizations. The Fund is not sponsored,
endorsed, sold or promoted by Wilshire Associates.
Wilshire(R) and Wilshire 5000(R) are registered service
marks of Wilshire Associates.

8
<PAGE> 39

Similarly, if corporate bonds represent 20% of the
interest rate risk of the Index, then they will represent
approximately 20% of the interest rate risk of the Fund.

THE FUND'S RETURNS Such a sampling technique is expected to be an effective
SHOULD BE CLOSELY means of substantially duplicating the income and capital
CORRELATED WITH ITS returns provided by each index. Over time, the correlation
UNDERLYING INDEXES between the performance of the Fund and its indexes is
expected to be 0.95 or higher. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when
the net asset value of the Fund, including the value of
its dividend and capital gain distributions, increases or
decreases in exact proportion to changes in the Index
(without taking into consideration the effect of the
Fund's common stock holdings). The performance of the Fund
versus that of its respective index is monitored daily. If
a tracking error develops, the Fund is rebalanced to bring
it in line with the index.

THE FUND MAY The Fund may invest in futures contracts and options, but
INVEST IN DERIVATIVE only to a limited extent. Specifically, the Fund may enter
SECURITIES into futures contracts provided that not more than 5% of
its assets are required as a futures contract deposit; in
addition, the Fund may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of the Fund's assets.

9
<PAGE> 40

specific futures contract is priced more attractively than
other futures contracts or the underlying security or
index.

The Fund may use futures contracts for bona fide "hedging"
purposes. In executing a hedge, a manager sells, for
example, stock index futures to protect against a decline
in the stock market. As such, if the market drops, the
value of the futures position will rise, thereby
offsetting the decline in value of the Fund's stock
holdings.

FUTURES CONTRACTS, The risk of loss associated with futures contracts in some
OPTIONS, WARRANTS, strategies can be substantial due both to the low margin
CONVERTIBLE deposits required and the extremely high degree of
SECURITIES AND SWAP leverage involved in futures pricing. As a result, a
AGREEMENTS POSE relatively small price movement in a futures contract may
CERTAIN RISKS result in an immediate and substantial loss or gain.
However, the Fund will not use futures contracts, options,
warrants, convertible securities and swap agreements for
speculative purposes or to leverage its net assets.
Accordingly, the primary risks associated with the use of
futures contracts, options, warrants, convertible
securities and swap agreements by the Fund are: (i)
imperfect correlation between the change in market value
of the stocks held by a Fund and the prices of futures
contracts, options, warrants, convertible securities and
swap agreements; and (ii) possible lack of a liquid
secondary market for a futures contract and the resulting
inability to close a futures position prior to its
maturity date. The risk of imperfect correlation will be
minimized by investing only in those contracts whose
behavior is expected to resemble that of a Fund's
underlying securities. The risk that a Fund will be unable
to close out a futures position will be minimized by
entering into such transactions on an exchange with an
active and liquid secondary market. However options,
warrants, convertible securities and swap agreements
purchased or sold over-the-counter may be less liquid than
exchange-traded securities. Illiquid securities, in
general, including swap agreements, may not represent more
than 15% of the net assets of the Fund.

10
<PAGE> 41

the Indexes due to lower correlation of the selected
futures with the Indexes. The investment adviser will
attempt to reduce this tracking error by investing in
those futures contracts whose behavior is expected to
resemble that of the underlying securities. There can be
no assurance that these selected futures will perfectly
correlate with the performance of the Indexes.

THE FUND MAY LEND
ITS SECURITIES The Fund may lend its investment securities to qualified
institutional investors for either short-term or long-term
purposes of realizing additional income. Loans of
securities by the Fund will be collateralized by cash,
letters of credit, or securities issued or guaranteed by
the U.S. Government or its agencies. The collateral will
equal at least 100% of the current market value of the
loaned securities, and such loans may not exceed 33 1/3%
of the value of the Fund's securities.

PORTFOLIO TURNOVER
IS NOT EXPECTED TO
EXCEED 100% Although it generally seeks to invest for the long term,
the Fund retains the right to sell securities irrespective
of how long they have been held. It is anticipated that
the annual portfolio turnover of the Fund will not exceed
100%. A turnover rate of 100% would occur, for example, if
all of the Fund's securities were replaced within one
year. A higher portfolio turnover rate will cause the Fund
to incur additional brokerage costs. Ordinarily,
securities will be sold only to reflect certain
administrative changes in an index (including mergers or
changes in the composition of an index) or to accommodate
cash flows into or out of the Fund while maintaining the
similarity of the Fund to its benchmark index.

THE FUND MAY
BORROW MONEY The Fund may borrow money from a bank but only for
temporary or emergency purposes. The Fund would borrow
money to meet redemption and purchase needs prior to the
settlement of securities already bought or sold or in the
process of being bought or sold by the Fund. To the extent
that the Fund borrows money, the Fund may be leveraged; at
such times, the Fund may appreciate or depreciate in value
more rapidly than its benchmark indexes. The Fund will
repay any money borrowed in excess of 5% of the value of
its assets prior to purchasing additional securities.

- - --------------------------------------------------------------------------------

INVESTMENT
LIMITATIONS

THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS The Fund has adopted certain limitations on its investment
practices. Specifically, the Fund will not:

(a) with respect to 75% of its assets, purchase securities
of any issuer (except obligations of the U.S.
Government and its instrumentalities) if, as a result,
more than 5% of the value of the Fund's assets would
be invested in the securities of such issuer;

(b) with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer;

11
<PAGE> 42

(d) borrow money, except that the Fund may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the
value of the Fund's net assets. Whenever borrowing
exceeds 5% of the value of the Fund's net assets, the
Fund will not make any additional investments.

MANAGEMENT
OF THE FUND

VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUND The Fund is a member of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies
with more than 90 distinct portfolios and total assets in
excess of $250 billion. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Fund and the other funds in the Group obtain at cost
virtually all of their corporate management,
administrative, shareholder accounting and distribution
services. Vanguard also provides investment advisory
services on an at-cost basis to certain Vanguard funds. As
a result of Vanguard's unique corporate structure, the
Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1996, the average
expense ratio (annual costs including advisory fees
divided by total net assets) for the Vanguard funds
amounted to approximately .29% compared to an average of
1.22% for the mutual fund industry (data provided by
Lipper Analytical Services).

INVESTMENT
ADVISER

12
<PAGE> 43

were $57 billion for the Core Management Group and
approximately $79 billion for the Fixed Income Group. The
Fund is not actively managed, but is instead administered
by the Core Management and Fixed Income Groups using
computerized, quantitative techniques. Both the Core
Management and Fixed Income Groups are supervised by the
Officers of the Fund.

DIVIDENDS,
CAPITAL GAINS
AND TAXES

THE FUND PAYS
QUARTERLY DIVIDENDS The Fund will distribute substantially all of its net
investment income in the form of quarterly dividends. In
order to satisfy certain requirements of the Tax Reform
Act of 1986, the Fund may declare special year-end
dividend and capital gains distributions during December.
All dividend and capital gains distributions are
automatically reinvested in additional shares of the Fund.

If you utilize the Fund as an investment option in an
employer-sponsored retirement savings plan, dividend and
capital gains distributions from the Fund ordinarily will
not be subject to current taxation, but will accumulate on
a tax-deferred basis. In general, employer-sponsored
retirement and savings plans are governed by complex tax
rules. If you participate in such a plan, consult your
plan administrator, your plan's Summary Plan Description,
or a professional tax adviser regarding the tax
consequences of your participation in the plan and of any
plan contributions or withdrawals.
- - --------------------------------------------------------------------------------

THE SHARE PRICE
OF THE FUND The 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 per share 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.

13
<PAGE> 44

which market quotations are readily available are also
valued at the mean of the bid and ask prices.

The Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of Vanguard Group.

- - --------------------------------------------------------------------------------

All securities and cash are held by CoreStates Bank, N.A.,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Fund's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP, serves as independent
accountants for the Fund and will audit its financial
statements annually. The Fund is not involved in any
litigation.
- - --------------------------------------------------------------------------------

14
<PAGE> 45

SERVICE GUIDE

PARTICIPATING IN
YOUR PLAN The Fund is available as an investment option in your
retirement or savings plan. The administrator of your plan
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, including the
Fund's investment objective, policies, risk
characteristics or historical performance, please contact
Vanguard's Institutional Participant Services
1-800-523-1188.

If you have questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
- - --------------------------------------------------------------------------------

INVESTMENT OPTIONS,
ALLOCATIONS AND
PAYROLL CHANGES You may be permitted to elect different investment
options, alter the amounts contributed to your plan, or
change how contributions are allocated among your
investment options in accordance with your plan's specific
provisions. See your plan administrator or employee
benefits office for more details.
- - --------------------------------------------------------------------------------

TRANSACTIONS IN
FUND SHARES Contributions, exchanges or redemptions of the Fund's
shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the contribution, exchange or redemption and the
appropriate signatures and monies have been received by
Vanguard.

Vanguard must consider the interests of all Portfolio
shareholders. Therefore, for institutional investors who
are not participants in a retirement or savings plan, we
reserve the right to:

- Delay or reject any purchase or exchange request that
may disrupt the Portfolio's operation or performance.

- Revise or terminate the exchange privilege or limit the
amount of an exchange, at any time, without notice.

- Take up to seven days to deliver your redemption
proceeds.

- Pay redemption proceeds--in whole or in part--through a
distribution in kind of readily marketable securities.

- - --------------------------------------------------------------------------------

MAKING EXCHANGES Your plan may allow you to exchange monies from one
investment option to another. Check with your plan
administrator for details on the rules governing exchanges
in your plan. Certain investment options, particularly
company stock or investment contracts, may be subject to
unique restrictions.

Before making an exchange, you should consider the
following:

- If you are making an exchange to another Vanguard Fund,
please read the Fund's prospectus. Contact Participant
Services at 1-800-523-1188 for a copy.

- Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
- - --------------------------------------------------------------------------------

15
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<PAGE> 48

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<PAGE> 49

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<PAGE> 50

<TABLE>
- - --------------------------------------------------------------------------------
<S> <C>
VANGUARD LOGO FLAG LOGO
--------------------------- VANGUARD LOGO
THE VANGUARD GROUP I N S T I T U T I O N A L
Vanguard Financial Center P R O S P E C T U S
P.O. Box 2900 MARCH 28, 1997
Valley Forge, PA 19482 VANGUARD LOGO
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
I002
</TABLE>

- - --------------------------------------------------------------------------------
<PAGE> 51

PART B

VANGUARD BALANCED INDEX FUND, INC.

STATEMENT OF ADDITIONAL INFORMATION

MARCH 28, 1997

This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated March 28, 1997). To obtain the Prospectus
please call:

VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................................... 1
Investment Limitations.................................................................... 4
Yield and Total Return.................................................................... 6
Purchase of Shares........................................................................ 6
Redemption of Shares...................................................................... 6
Management of the Fund.................................................................... 7
Portfolio Transactions.................................................................... 9
Financial Statements...................................................................... 10
Performance Measures...................................................................... 10
Appendix A -- Description of Bond Ratings................................................. 12
Appendix B -- Historical Performance One-Year Total Returns............................... 12
</TABLE>

INVESTMENT OBJECTIVE AND POLICIES

REPURCHASE AGREEMENTS Vanguard Balanced Index Fund, Inc. (the "Fund") may
invest in repurchase agreements with commercial banks, brokers or dealers to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which the Fund acquires a money market instrument (generally a
security issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a Federal Reserve member bank with
minimum assets of at least $2 billion or a registered securities dealer, subject
to resale to the seller at an agreed upon price and date (normally, the next
business day). A repurchase agreement may be considered a loan collateralized by
securities. The resale price reflects an agreed upon interest rate effective for
the period the instrument is held by the Fund and is unrelated to the interest
rate on the underlying instrument. In these transactions, the securities
acquired by the Fund (including accrued interest earned thereon) must have a
total value in excess of the value of the repurchase agreement and are held by
the Fund's custodian bank until repurchased. In addition, the Fund's Board of
Directors will monitor the Fund's repurchase agreement transactions generally
and will establish guidelines and standards for review of the creditworthiness
of any bank, broker or dealer party to a repurchase agreement with the Fund. No
more than an aggregate of 15% of the Fund's net assets, at the time of
investment, will be invested in repurchase agreements having maturities longer
than seven days and securities subject to legal or contractual restrictions on
resale, for which there are no readily available market quotations. From time to
time, the Fund's Board of Directors may determine that certain restricted
securities known as Rule 144A securities are liquid and not subject to the 15%
limitation described above.

The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and therefore the Fund may not be able to substantiate its interest
in the underlying security and

1
<PAGE> 52

may be deemed an unsecured creditor of the other party to the agreement. While
the Fund's management acknowledges these risks, it is expected that they can be
controlled through careful monitoring procedures.

LENDING OF SECURITIES The Fund may lend its securities to qualified
institutional investors 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 portfolio
securities, the 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 Fund may lend its portfolio securities to qualified
brokers, dealers, banks or other financial institutions, so long as the terms,
the structure and the aggregate amount of such loans are not inconsistent with
the Investment Company Act of 1940, or the Rules and Regulations or
interpretations of the Securities and Exchange Commission (the "Commission")
thereunder, which currently require that (a) the borrower pledge and maintain
with the Fund collateral consisting of cash, a letter of credit issued by a
domestic U.S. bank, 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
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 rules 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 Fund's Board of
Directors.

FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS The Fund may enter into futures contracts,
warrants, options on futures contracts, convertible securities and swap
agreements for the purpose of simulating full investment in the underlying
Indexes and reducing 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 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 at the Fund's custodian bank to the extent
required by law.

Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are 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," or "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 initial margin deposit in
cash or 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 with deposits
that may range upward from less than 5% of the value of the contract being
traded. The Fund's initial margin requirement is ordinarily in the form of U.S.
Treasury securities. These securities are segregated in a separate custody
account at the Fund's custodian bank; they are not delivered to the futures
dealer.

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

2
<PAGE> 53

payments are made to and from the futures broker for as long as the contract
remains open. The Fund expects to earn interest income on its initial 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 in the value of securities otherwise held for investment
purposes 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 prices of underlying securities. The Fund intends to use futures contracts
only for bona fide hedging purposes.

Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions. The Fund will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase. As evidence of this hedging interest, the Fund expects
that approximately 75% of its futures contract purchases will be "completed,"
that is, equivalent amounts of related securities will have been purchased or
are being purchased by the Fund upon sale of open futures contracts.

Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.

RESTRICTIONS ON THE USE OF FUTURES CONTRACTS The 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 the market
value of the Fund's total assets.

RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts 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, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the 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. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge.

The 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 extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as 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 invested in the contract. The Fund also bears the risk that
the adviser will incorrectly predict future stock market trends. However,
because the futures strategies of the Fund are engaged in only for hedging
purposes, the Adviser does not believe that the Fund is subject to the risks of
loss frequently associated with futures transactions. The Fund would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.

Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of

3
<PAGE> 54

its portfolio securities. There is also the risk of loss by the Fund of margin
deposits in the event of bankruptcy of a broker with whom the Fund has an open
position in a futures contract or related option.

Most futures exchanges limit the amount of fluctuation permitted in 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 The Fund is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most 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 the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. A 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 the 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, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Fund's annual gross income. It is anticipated
that any net gain realized from the closing out of futures contracts will be
considered gain from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In order to avoid realizing excessive gains
on securities held less than three months, the Fund may be required to defer the
closing out of futures contracts beyond the time when it would otherwise be
advantageous to do so. Unrealized gains on futures contracts, which have been
open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on sales of
securities held less than three months for the purpose of the 30% test.

The 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 Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the distributions.

INVESTMENT LIMITATIONS

The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of the
Fund (as defined in the Investment Company Act of 1940). The Fund may not:

1) invest in commodities or purchase real estate, although it may purchase
and sell securities of companies which deal in real estate or interests
therein, and the Fund may purchase and sell stock index and interest
rate futures contracts and options;

2) purchase securities on margin or sell securities short (the deposit or
payment by the Fund of initial or variation margin in order to engage
in futures contract is not considered the purchase of a security on
margin);

3) with respect to 75% of its total assets, purchase more than 10% of the
outstanding voting securities of any company;

4
<PAGE> 55

4) with respect to 75% of the Fund's total assets, invest more than 5% of
the value of its total assets in the securities of any single issuer
except obligations of the U.S. Government and its instrumentalities;

5) borrow money, except that the Fund may borrow from banks (or through
reverse repurchase agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
which might otherwise require the untimely disposition of securities,
in an amount not exceeding 15% of the value of the Fund's net assets
(including the amount borrowed and the value of any outstanding reverse
repurchase agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of the Fund's net assets, the Fund
will not make any additional investments;

6) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of the value of its total assets;

7) issue senior securities. Collateral arrangements with regard to initial
and variation margin on interest-rate futures contracts shall not be
considered issuance of a senior security;

8) engage in the business of underwriting securities issued by other
persons except to the extent that the Fund may be deemed to be an
underwriter under the Securities Act of 1933, as amended, in disposing
of investment securities;

9) purchase or acquire securities if more than 15% of its net assets would
be invested in securities that are illiquid (including the Fund's
investment in The Vanguard Group, Inc.);

10) invest for the purpose of controlling management of any company;

11) invest its assets in securities of other investment companies except by
purchase in the open market involving only customary broker's
commissions or as part of a merger, consolidation, reorganization or
purchase of assets approved by the Fund's shareholders or as provided
for by the Investment Company Act of 1940, and any regulations
thereunder, including any interpretation of, or exemptive relief
provided by, the Securities and Exchange Commission;

12) have dealings on behalf of the fund with Officers and Directors of the
Fund, except for the purchase or sale of securities on an agency or
commission basis;

13) make loans to any Officers, Directors or employees of the Fund;

14) invest in assessable securities or securities involving unlimited
liability on the part of the holders thereof;

15) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, which are either publicly
distributed or customarily purchased by institutional investors) and
(ii) by lending its securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with
the Investment Company Act of 1940 or the Rules and Regulations or
interpretations of the Commission thereunder;

16) invest directly in oil, gas or other mineral exploration or development
programs.

The investment limitations set forth above are considered at the time that
the Fund purchases securities. Notwithstanding these limitations, the Fund may
own all or any portion of the securities of, or make loans to, or contribute to
the costs or other financial requirements of any company which will be wholly
owned by the Fund and one or more other investment companies and is primarily
engaged in the business of providing, at-cost, management, administrative,
distribution or related services to the Fund and other investment companies. See
"The Vanguard Group." As non-fundamental policies, the Fund will not (i)
purchase or retain securities of an issuer if those officers and directors of
the Fund and/or its Investment Adviser owning more than 1/2 of 1% of such
securities together own more than 5% of such securities; or (ii) invest more
than 5% of total assets in securities of companies which have (with
predecessors) a record of less than three years' continuous operation.

5
<PAGE> 56

YIELD AND TOTAL RETURN

Yields are calculated daily and premiums and discounts on asset-backed
securities are not amortized.

Total return is computed by finding the average compounded rates of return
over the one-year and since inception periods that would equate an initial
amount invested at the beginning of the periods to the ending redeemable value
of the investment.

The yield of the Fund for the 30 days ended December 31, 1996 was 3.64%.
The total return of the Fund for the fiscal year ended December 31, 1996 and
since November 9, 1992 (Subscription period September 28, 1992 through November
8, 1992) was +13.95%* and 12.79%*.

*Performance figures are not adjusted for the $10 annual account maintenance
fee.

PURCHASE OF SHARES

The 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 as well as redemption fees for certain fiduciary
accounts or under circumstances where certain economies can be achieved in sales
of the Fund's shares. The Fund reserves the right to require investors
purchasing shares in the amount of $10 million or more to pay a transaction fee
to offset the transaction costs associated with purchases of securities by the
Fund as a result of such investor's purchases.

REDEMPTION OF SHARES

The 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 Securities and Exchange
Commission (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.

The 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. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors believe that economic or market conditions exist which would make such
a practice detrimental to the best interests of the Fund. If redemptions are
paid in investment securities, such securities will be valued as set forth in
the Prospectus under "The Fund's Share Price" and a redeeming shareholder would
normally incur brokerage expenses if he converted these securities to cash.

No charge is made by the Fund for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by the Fund.

6
<PAGE> 57

MANAGEMENT OF THE FUND

DIRECTORS AND OFFICERS

The Officers of the Fund manage its day-to-day operations and are
responsible to the Fund's Board of Directors. The Directors set broad policies
for each Fund and choose its Officers. The following is a list of the Directors
and Officers of the Fund and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Directors and Officers of the Fund is Post Office Box 876, Valley Forge, PA
19482.

JOHN C. BOGLE, Chairman and Director*

Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group; Director of The Mead
Corporation, General Accident Insurance and Chris-Craft Industries, Inc.

JOHN J. BRENNAN, President, Chief Executive
Officer & Director*

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

ROBERT E. CAWTHORN, Director

Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Director of
Sun Company, Inc; and Director of Westinghouse Electric Corporation.

BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company, ALCO Standard
Corp., Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual Life
Insurance Co. and Trustee Emerita of Wellesley College.

BRUCE K. MACLAURY, Director

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

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

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

JOHN C. SAWHILL, Director

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

JAMES O. WELCH, JR., Director

Retired Chairman of Nabisco Brands Inc. and retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corporation.

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

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

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

KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
- - ---------------

*Officers of the Fund are "interested persons" as defined in the Investment
Company Act of 1940.

THE VANGUARD GROUP The Fund is a member of the Vanguard Group of
Investment Companies which consists of more than 30 investment companies.

7
<PAGE> 58

Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group 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 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 net expenses which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.

The Fund's 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.

The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. 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 substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.

The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
Funds' Service Agreement provides for the following arrangement: (1) each
Vanguard Fund may invest a maximum of 0.40% of its assets in Vanguard and (2)
there is no restriction on the maximum cash investment that the Vanguard Funds
may make in Vanguard. The amounts which each of the Funds has 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. At December 31, 1996, the Fund had contributed capital of $71,000 to
Vanguard, representing .4% 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. During the
year ended December 31, 1996, the Fund paid approximately $812,000 in management
and administration expenses.

DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.

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 Group. The Directors 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 Group, and that no Fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets. During the year ended December 31, 1996 the Fund paid approximately
$162,000 in distribution and marketing expenses.

INVESTMENT ADVISORY SERVICES Vanguard provides investment advisory
services to the Fund; Vanguard Municipal Bond Fund, Vanguard Bond Index Fund,
Vanguard Money Market Reserves, Vanguard Treasury Fund, several Portfolios of
Vanguard Variable Insurance Funds, several Portfolios of Vanguard Fixed Income
Securities Fund, Vanguard California Tax-Free Fund, Vanguard Florida Insured
Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard New Jersey
Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard Pennsylvania Tax-Free Fund,
Vanguard International Equity Index Fund, Vanguard Admiral Funds, Vanguard Index
Trust, Vanguard Institutional Index Fund, Vanguard Tax-Managed Fund, the REIT
Index Portfolio of

8
<PAGE> 59

Vanguard Specialized Portfolios, the Aggressive Growth Portfolio of Vanguard
Horizon Fund, the Total International Portfolio of Vanguard STAR Fund, a portion
of the assets of Vanguard/Windsor II Fund, a portion of Vanguard/Morgan Growth
Fund as well as several indexed separate accounts. 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. During the fiscal year ended December 31, 1996, the
Fund paid approximately $53,000 of Vanguard's expenses relating to investment
advisory services.

REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund and each other Fund in the Group, for
its proportionate share of Officers' and employees' salaries and retirement
benefits. For the year ended December 31, 1996, the Fund's share of such
compensation was approximately $20,394.

Directors who are not Officers are paid an annual fee upon retirement equal
to $1,000 for each year of service on the Board. Under its retirement plan,
Vanguard contributes annually an amount equal to 10% of each Officer's annual
compensation plus 5.7% of that part of the Officer's compensation during the
year, if any, that exceeds the Social Security Taxable Wage Base then in effect.
For the year ended December 31, 1996, the Fund's share of such expenses was
approximately $600.

The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended December 31,
1996.

VANGUARD BALANCED INDEX FUND
COMPENSATION TABLE

<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF DIRECTORS FROM FUND PART OF FUND EXPENSES UPON RETIREMENT PAID TO DIRECTORS(2)
- - --------------------------- ------------ --------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $223 $35 $15,000 $65,000
Robert E. Cawthorn $223 $29 $13,000 $65,000
Bruce K. MacLaury $242 $33 $12,000 $60,000
Burton G. Malkiel $223 $23 $15,000 $65,000
Alfred M. Rankin, Jr. $223 $18 $15,000 $65,000
John C. Sawhill $223 $22 $15,000 $65,000
James O. Welch, Jr. $223 $27 $15,000 $65,000
J. Lawrence Wilson $223 $19 $15,000 $65,000
</TABLE>

(1) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation
for their service as Directors.

(2) The amounts reported in this column reflect the total compensation paid to
each Director for their service as Director or Trustee of 34 Vanguard Funds
(33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).

PORTFOLIO TRANSACTIONS

In placing portfolio transactions, Vanguard uses 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 are 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 will be given to
those brokers which supply statistical information and provide other services in
addition to execution services to the Fund.

Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider the sale of Fund shares by a broker or dealer in selecting
among broker-dealers.

During the fiscal years ended December 31, 1995 and 1996 the Fund paid
approximately $36,219 and $80,605 in brokerage commissions.

9
<PAGE> 60

FINANCIAL STATEMENTS

The Fund's financial statements for the year ended December 31, 1996,
including the financial highlights for each of the respective periods presented,
appearing in the Vanguard Balanced Index Fund's 1996 Annual Report to
Shareholders, and the report thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Fund's 1996 Annual Report to
Shareholders is enclosed with this Statement of Additional Information.

PERFORMANCE MEASURES

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 Balanced Index Fund, may from time to time, use one or more of the
following unmanaged indexes for comparative performance purposes.

STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.

WILSHIRE 5000 EQUITY INDEX -- consists of more than 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.

RUSSELL 3000 STOCK INDEX -- a diversified portfolio of approximately 3,000
common stocks accounting for over 90% of the market value of publicly traded
stocks in the U.S.

RUSSELL 2000 STOCK INDEX -- a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000, a widely-used benchmark for small
capitalization common stocks.

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, Australasia 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 LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 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 1 year and with more than $25 million outstanding. This index
includes over 1,000 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 $50 million
principal outstanding and maturity greater than 10 years.

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

10
<PAGE> 61

STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield for four high-grade, non-callable 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 and 25% Standard & Poor's Utilities 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.

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

LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.

LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.

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

LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)

LIPPER BALANCED FUND AVERAGE -- an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.

LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.

LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE -- an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Analytical Services, Inc.

LIPPER GENERAL EQUITY FUND AVERAGE -- an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.

LIPPER FIXED INCOME FUND AVERAGE -- an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.

11
<PAGE> 62

APPENDIX A -- DESCRIPTION OF BOND RATINGS

Excerpts from Moody's Investors Service, Inc. description of its four
highest preferred bond ratings:

AAA -- judged to be the best quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds;
A -- possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; BAA -- considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.

Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and 3 indicates a
ranking toward the lower end of the category.

Excerpts from Standard & Poor's Corporation description of its four highest
stock ratings:

AAA -- highest grade obligations. Capacity to pay interest and repay
principal is extremely strong; AA -- also qualify as high grade obligations, a
very strong capacity to pay interest and repay principal and differs from
AAA -- issues only in small degree; A -- regarded as upper medium grade. They
have a strong capacity to pay interest and repay principal although they are
somewhat more susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment.

Standard & Poor's applies indicators "+", no character and "-" to its
rating categories. The indicators show relative standing within the major rating
categories.

APPENDIX B -- HISTORICAL PERFORMANCE ONE-YEAR TOTAL RETURNS*

<TABLE>
<CAPTION>
LEHMAN BROTHERS BALANCED
WILSHIRE AGGREGATE PORTFOLIO
5000 BOND INDEX (60/40)**
-------- --------------- ---------
<S> <C> <C> <C>
1987................................................. 2.27 2.76 3.91
1988................................................. 17.94 7.89 13.87
1989................................................. 29.17 14.53 23.30
1990................................................. -6.18 8.96 -0.11
1991................................................. 34.20 16.00 26.90
1992................................................. 8.97 7.40 8.41
1993................................................. 11.28 9.75 10.72
1994................................................. -0.06 -2.92 -1.15
1995................................................. 36.45 18.47 29.03
1996................................................. 21.21 3.63 14.01
Cumulative........................................... 293.20 125.47 222.74
Annualized........................................... 14.67 8.47 12.43
</TABLE>

* These total return figures are based on historical earnings and are not
intended to indicate future performance.

** A hypothetical portfolio for which 60% of its assets track the Wilshire 5000
and 40% of its assets track the Lehman Brothers Aggregate Bond Index. Assumes
monthly rebalancing to 60/40 mix.

12
<PAGE> 63

PART C
VANGUARD BALANCED INDEX FUND, INC.
OTHER INFORMATION

ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS

The Registrant's audited Financial Statements for the year ended December
31, 1996, including the financial highlights for each of the respective periods
presented, appearing in the Vanguard Balanced Index Fund's 1996 Annual Report to
Shareholders and inserts thereto, and the reports thereon of Price Waterhouse
LLP, independent accountants, also appearing therein, are incorporated by
reference in the Statement of Additional Information. The financial statements
included in the Annual Report are:

1. Statement of Net Assets as of December 31, 1996.

2. Statement of Operations for the year ended December 31, 1996.

3. Statement of Changes in Net Assets for the years ended December 31,
1995, and December 31, 1996.

4. Financial Highlights for each respective period ended December 31, 1996.

5. Notes to Financial Statements.
6. Report of Independent Accountants.

(B) EXHIBITS

1. Articles of Incorporation**
2. By-Laws of Registrant**
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
8. Form of Custody Agreement**
9. Form of Vanguard Service Agreement**
10. Opinion of Counsel**
11. Consent of Independent Accountants*
12. Financial Statements -- reference is made to (a) above
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Schedule for Computation of Performance Quotations*
27. Financial Data Schedule*
- - ---------------
* Filed herewith
** Previously filed.

ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT

Registrant is not controlled by or under common control with any person.
The Officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting
Part A and in the Statement of Additional Information constituting Part B of
this Registration Statement.

ITEM 26. NUMBER OF HOLDERS OF SECURITIES

As of December 31, 1996 there were 29,666 shareholders of the Fund.

<PAGE> 64

ITEM 27. INDEMNIFICATION

Reference is made to Article XI of Registrant's Articles of Incorporation.

Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to trustees, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a trustee, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.

ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Registrant
and the other Funds in the Group. See the information concerning The Vanguard
Group set forth in Parts A and B.

ITEM 29. PRINCIPAL UNDERWRITERS

(a) None

(b) Not Applicable

ITEM 30. LOCATION OF ACCOUNTS AND RECORDS

The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodian, CoreStates Bank,
Philadelphia, PA.

ITEM 31. MANAGEMENT SERVICES

Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described in
Part B hereof under "Management of the Fund", the Registrant is not a party to
any management-related service contract.

ITEM 32. UNDERTAKINGS

Annual meetings will not be held except as required by the Investment
Company Act of 1940 or other applicable law. Registrant undertakes to comply
with the provisions of Section 16(c) of the 1940 Act in regard to shareholders'
rights to call a meeting of shareholders for the purpose of voting on the
removal of Directors and to assist in shareholder communications in such
matters, to the extent required by law.

Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
<PAGE> 65

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and 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 21st day of March, 1997.

VANGUARD BALANCED INDEX FUND, INC.

BY: (Raymond J. Klapinsky) John J. Brennan*, President and Chief Executive
Officer

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: (Raymond J. Klapinsky)
John C. Bogle*, Chairman of the Board and Director

March 21, 1997

BY: (Raymond J. Klapinsky)
John J. Brennan*, President, Director and Chief Executive Officer

March 21, 1997

BY: (Raymond J. Klapinsky)
Robert E. Cawthorn*, Director

March 21, 1997

BY: (Raymond J. Klapinsky)
Barbara B. Hauptfuhrer*, Director

March 21, 1997

BY: (Raymond J. Klapinsky)
Bruce K. MacLaury*, Director

March 21, 1997

BY: (Raymond J. Klapinsky)
Burton G. Malkiel*, Director

March 21, 1997

BY: (Raymond J. Klapinsky)
Alfred M. Rankin, Jr.*, Director

March 21, 1997

BY: (Raymond J. Klapinsky)
John C. Sawhill*, Director

March 21, 1997

BY: (Raymond J. Klapinsky)
James O. Welch, Jr.*, Director

March 21, 1997

BY: (Raymond J. Klapinsky)
J. Lawrence Wilson*, Director

March 21, 1997

BY: (Raymond J. Klapinsky)
Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer

March 21, 1997

*By Power of Attorney. See File Number 2-14336, January 23, 1990. Incorporated
by Reference.
<PAGE> 66

INDEX TO EXHIBITS

<TABLE>
<S> <C>
Accountant's Consent................................................................. EX-99.B11
Schedule for Computation of Performance Quotations................................... EX-99.B16
Financial Data Schedule.............................................................. EX-27
</TABLE>

<PAGE> 1

EX-99.B11

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 8 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated January 31, 1997, relating to the financial
statements and financial highlights appearing in the December 31, 1996 Annual
Report to Shareholders of Vanguard Balanced Index Fund, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the headings "Financial Highlights" and "General
Information" in the Prospectuses and "Financial Statements" in the Statement of
Additional Information.

PRICE WATERHOUSE LLP
Philadelphia, PA

March 20, 1997

<PAGE> 1

EX-99.B16

SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD BALANCED INDEX FUND, INC.

1. Average Annual Total Return (As of December 31, 1996)
P (1 + T)n = ERV

<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +13.95%
N = 1
ERV = $1,139.50
P = $1,000
T = +12.79%
N = *
ERV = $1,646.00
</TABLE>

*Since inception September 28, 1992

2. YIELD (30 Days Ended December 31, 1996)

Yield = 2[(a - b +1)6-1]
---------------------------
c x d

<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $2,530,877.47
b = $131,604.060
c = 56,758,079.395
d = $14.04
Yield = 3.64%
</TABLE>

<ARTICLE> 6
<CIK> 0000889519
<NAME> VANGUARD BALANCED INDEX FUND, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 679,322
<INVESTMENTS-AT-VALUE> 815,749
<RECEIVABLES> 31,794
<ASSETS-OTHER> 1,195
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 848,738
<PAYABLE-FOR-SECURITIES> 16,820
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,675
<TOTAL-LIABILITIES> 22,495
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 682,164
<SHARES-COMMON-STOCK> 59,367
<SHARES-COMMON-PRIOR> 46,202
<ACCUMULATED-NII-CURRENT> 1,089
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 6,270
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 136,720
<NET-ASSETS> 826,243
<DIVIDEND-INCOME> 7,693
<INTEREST-INCOME> 18,316
<OTHER-INCOME> 0
<EXPENSES-NET> 1,326
<NET-INVESTMENT-INCOME> 24,683
<REALIZED-GAINS-CURRENT> 18,388
<APPREC-INCREASE-CURRENT> 46,006
<NET-CHANGE-FROM-OPS> 89,077
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 26,003
<DISTRIBUTIONS-OF-GAINS> 6,552
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 25,404
<NUMBER-OF-SHARES-REDEEMED> 14,458
<SHARES-REINVESTED> 2,219
<NET-CHANGE-IN-ASSETS> 236,128
<ACCUMULATED-NII-PRIOR> 565
<ACCUMULATED-GAINS-PRIOR> 879
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 53
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,326
<AVERAGE-NET-ASSETS> 669,557
<PER-SHARE-NAV-BEGIN> 12.77
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> 1.26
<PER-SHARE-DIVIDEND> 0.49
<PER-SHARE-DISTRIBUTIONS> 0.12
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.92
<EXPENSE-RATIO> 0.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0

</TABLE>