VANGUARD SPECIALIZED PORTFOLIOS INC, 485APOS, 1999-03-29

VANGUARD SPECIALIZED PORTFOLIOS INC
485APOS, 1999-03-29

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<PAGE> 1

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-1A
REGISTRATION STATEMENT (NO. 2-88116) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. [X]

POST-EFFECTIVE AMENDMENT NO. 26

AND

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940

AMENDMENT NO. 28

VANGUARD SPECIALIZED FUNDS

(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)

POST OFFICE BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)

REGISTRANT'S TELEPHONE NUMBER (610) 669-1000

R. GREGORY BARTON, ESQUIRE

P.O. BOX 876
VALLEY FORGE, PA 19482

IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:

On May 28, 1999 pursuant to paragraph (a) 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 SHARES PURSUANT TO
REGULATION 24f-2 under the Investment Company Act of 1940. We filed our Rule
24f-2 Notice for the year ended January 31, 1999 on --.

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<PAGE> 2

VANGUARD SPECIALIZED FUNDS

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Front and Back Cover Pages........................... Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments, Risks and
Performance.......................................... Fund Profile
Item 3. Risk/Return Summary: Fee Table....................... Fee Table
Item 4. Investment Objectives, Principal Investment
Strategies, and Related Risks........................ A Word About Risk: Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund Performance.......... Herein incorporated by reference to
Registrant's Annual Report to
Shareholders dated January 31, 1999
filed with the Securities & Exchange
Commission's EDGAR system on --
Item 6. Management, Organization, and Capital Structure...... The Trust and Vanguard; Investment
Adviser
Item 7. Shareholder Information.............................. Share Price; Dividends, Capital
Gains, and Taxes; Investing with
Vanguard
Item 8. Distribution Arrangements............................ Not Applicable
Item 9. Financial Highlights Information..................... Financial Highlights

FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION

Item 10. Cover Page and Table of Contents..................... Cover Page; Table of Contents
Item 11. Fund History......................................... Description of the Trust
Item 12. Description of the Fund and its Investments and
Risks................................................ Investment Policies; Description of
the Trust; Fundamental Investment
Limitations
Item 13. Management of the Fund............................... Management of the Trust
Item 14. Control Persons and Principal Holders of
Securities........................................... Management of the Trust
Item 15. Investment Advisory and Other Services............... Investment Advisory Services
Item 16. Brokerage Allocation and Other Practices............. Not Applicable
Item 17. Capital Stock and Other Securities................... Description of the Trust
Item 18. Purchase, Redemption, and Pricing of Shares.......... Purchase of Shares; Redemption of
Shares; Share Price
Item 19. Taxation of the Fund................................. Description of the Trust
Item 20. Underwriters......................................... Not Applicable
Item 21. Calculations of Performance Data..................... Yield and Total Return
Item 22. Financial Statements................................. Financial Statements
</TABLE>

<PAGE> 3

VANGUARD SPECIALIZED FUNDS
Prospectus
May 28, 1999
A Group of Aggressive Growth Stock Mutual Funds

CONTENTS

1 AN INTRODUCTION TO VANGUARD SPECIALIZED FUNDS

1 FUND PROFILES

1 Vanguard Energy Fund

4 Vanguard Gold and Precious Metals Fund

7 Vanguard Health Care Fund

10 MORE ON THE FUNDS

10 INVESTMENT STRATEGIES AND POLICIES

17 THE FUNDS AND VANGUARD

17 INVESTMENT ADVISERS

18 YEAR 2000 CHALLENGE

19 DIVIDENDS, CAPITAL GAINS, AND TAXES

20 SHARE PRICE

21 FINANCIAL HIGHLIGHTS

23 INVESTING WITH VANGUARD

23 SERVICES AND ACCOUNT FEATURES

24 TYPES OF ACCOUNTS

24 BUYING SHARES

26 REDEEMING SHARES

30 TRANSFERRING REGISTRATION

30 FUND AND ACCOUNT UPDATES

GLOSSARY (inside back cover)

WHY READING THIS PROSPECTUS IS IMPORTANT

This prospectus explains the objective, risks, and strategies of three of the
five Vanguard Specialized Funds (Vanguard REIT Index Fund and Vanguard Utilities
Income Fund are offered through separate prospectuses). To highlight terms and
concepts important to mutual fund investors, we have provided "Plain Talk(R)"
explanations along the way. Reading the prospectus will help you to decide which
Fund, if any, is the right investment for you. We suggest that you keep it for
future reference.

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 4
1

AN INTRODUCTION TO VANGUARD SPECIALIZED FUNDS

This prospectus provides information about three of the five Vanguard
Specialized Funds (Vanguard REIT Index Fund and Vanguard Utilities Income Fund
are offered through separate prospectuses). Each of these Funds seeks to provide
investors with long-term capital appreciation, by investing in stocks
concentrated in a particular industry or group of related industries. Although
these Funds may provide current income to a limited extent, income is secondary
to the Funds' primary objective. Below you'll find profiles that summarize the
key features of each Fund. Additional information concerning the Funds appears
following the profiles.

FUND PROFILE--VANGUARD ENERGY FUND

The following profile provides you with a summary of the key features of
Vanguard Energy Fund.

INVESTMENT OBJECTIVE

The Fund is a stock fund that seeks to provide long-term capital appreciation.

INVESTMENT STRATEGIES

The Fund invests at least 80% of its assets in the stocks of companies engaged
in energy-related activities, such as production and transmission, the making of
component products, energy research, and energy conservation. For more
information on security selection, see page 15.

PRIMARY RISKS

THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:

- - Industry concentration risk, which is the chance that the Fund's returns
could be hurt significantly by problems affecting a particular industry.
Because more than 80% of the Fund's holdings typically are invested in the
energy and energy-related industries, the Fund's performance can be
significantly affected, for better or for worse, by developments in those
industries.

- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.

PERFORMANCE/RISK INFORMATION

The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual returns for
one, five and ten calendar years compare with those of a broad-based securities
market index and an industry-related market index. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.

ANNUAL TOTAL RETURNS

The Fund's year-to-date return as of the most recent calendar quarter ended
March 31, 1999, was -%.
<PAGE> 5
2
FUND PROFILE--VANGUARD ENERGY FUND (continued)

During the period shown in the bar chart, the highest return for a calendar
quarter was -% (quarter ended _____________ ) and the lowest return for a
quarter was - -% (quarter ended _____________ ).

AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Vanguard Energy Fund - % - % - %
Average Natural Resources Fund* - - -
S&P 500 Index - - -
*Source: Lipper, Inc.
</TABLE>

FEES AND EXPENSES

The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended January 31, 1999.

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: 1%*

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

*The 1% fee applies to shares redeemed (either by selling or exchanging to
another fund) within one year of purchase. The fee is withheld from redemption
proceeds and retained by the Fund. Shares held for one year or more are not
subject to the 1% fee.

The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ - $ - $ - $ -
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE> 6
3

ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS
Distributed annually in December

INVESTMENT ADVISER
Wellington Management Company, LLP, Boston, Mass., since inception

INCEPTION DATE
May 23, 1984

NET ASSETS AS OF JANUARY 31, 1999
$ - billion

SUITABLE FOR IRAs
Yes

MINIMUM INITIAL INVESTMENT
$3,000; $1,000 for IRAs and custodial accounts for minors

NEWSPAPER ABBREVIATION
Energy

VANGUARD FUND NUMBER
051

CUSIP NUMBER
921908109

TICKER SYMBOL
VGENX
<PAGE> 7
4

FUND PROFILE--VANGUARD GOLD AND PRECIOUS METALS FUND

The following profile provides you with a summary of the key features of
Vanguard Gold and Precious Metals Fund.

INVESTMENT OBJECTIVE

The Fund is a stock fund that seeks to provide long-term capital appreciation.

INVESTMENT STRATEGIES

The Fund invests at least 80% of its assets in the stocks of foreign and
domestic companies engaged in the exploration, mining, marketing, and
distribution of (and other activities related to) gold, silver, platinum,
diamonds or other precious and rare metals and minerals. Up to 100% of the
Fund's assets may be invested in foreign securities. The Fund may also invest up
to 20% of its assets directly in gold, silver, or other precious metal bullion
and coins. For more information on security selection, see page 15.

PRIMARY RISKS

THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:

- - Industry concentration risk, which is the chance that the Fund's returns
could be hurt significantly by problems affecting a particular industry.
Because more than 80% of the Fund's holdings typically are invested in the
gold, silver, and other precious metals industries, the Fund's performance
can be significantly affected, for better or for worse, by developments in
those industries.

- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.

- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.

- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.

PERFORMANCE/RISK INFORMATION

ANNUAL TOTAL RETURNS

The Fund's year-to-date return as of the most recent calendar quarter ended
March 31, 1999, was -%.

During the period shown in the bar chart, the highest return for a calendar
quarter was -% (quarter ended _____________ ) and the lowest return for a
quarter was - -% (quarter ended _____________ ).
<PAGE> 8
5

AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Vanguard Gold and Precious Metals Fund - % - % - %
Salomon World Gold Index* - - -
S&P 500 Index - - -
</TABLE>

*Morgan Stanley Capital International Gold Mines Index through December 31,
1994; Salomon World Gold Index thereafter.

FEES AND EXPENSES

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: 1%*

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

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ - $ - $ - $ -
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE> 9
6
FUND PROFILE--VANGUARD GOLD AND PRECIOUS METALS FUND (continued)

ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS
Distributed annually in December

INVESTMENT ADVISER
M&G Investment Management Limited, Minster Court, London, since inception

INCEPTION DATE
May 23, 1984

NET ASSETS AS OF JANUARY 31, 1999
$ - billion

SUITABLE FOR IRAs
Yes

MINIMUM INITIAL INVESTMENT
$3,000; $1,000 for IRAs and custodial accounts for minors

NEWSPAPER ABBREVIATION
Gold

VANGUARD FUND NUMBER
053

CUSIP NUMBER
921908208

TICKER SYMBOL
VGPMX
<PAGE> 10
7

FUND PROFILE--VANGUARD HEALTH CARE FUND

The following profile provides you with a summary of the key features of
Vanguard Health Care Fund.

THE FUND IS TEMPORARILY CLOSED TO NEW INVESTORS.

INVESTMENT OBJECTIVE

The Fund is a stock fund that seeks to provide long-term capital appreciation.

INVESTMENT STRATEGIES

The Fund invests at least 80% of its assets in the stocks of companies engaged
in the development, production, or distribution of products and services related
to the health care industry. These companies include, among others,
pharmaceutical firms, medical supply companies, and companies that operate
hospitals and other health care facilities. The Fund also considers companies
engaged in medical, diagnostic, biochemical, and other research and development.
For more information on security selection, see pages 15-16.

PRIMARY RISKS

THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:

- - Industry concentration risk, which is the chance that the Fund's returns
could be hurt significantly by problems affecting a particular industry.
Because more than 80% of the Fund's holdings typically are invested in
health care industries, the Fund's performance can be significantly
affected, for better or for worse, by developments in those industries.

- - Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.

PERFORMANCE/RISK INFORMATION

ANNUAL TOTAL RETURNS

The Fund's year-to-date return as of the most recent calendar quarter ended
March 31, 1999, was -%.

AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Vanguard Health Care Fund - % - % - %
Average Health Care Fund* - - -
S&P 500 Index - - -
</TABLE>

*Source: Lipper, Inc.

FEES AND EXPENSES

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: 1%*

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

*Shares purchased on or after April 19, 1999, are subject to a 1% redemption fee
if redeemed (either by selling or exchanging to another fund) within five years
of purchase. Shares purchased before April 19, 1999, are subject to a 1%
redemption fee if redeemed within one year of purchase. The fee is withheld
from redemption proceeds and retained by the Fund.

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C>
$ - $ - $ - $ -
</TABLE>

THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE> 12
9

ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS
Distributed annually in December

INVESTMENT ADVISER
Wellington Management Company, LLP, Boston, Mass., since inception

INCEPTION DATE
May 23, 1984

NET ASSETS AS OF JANUARY 31, 1999
$ - billion

SUITABLE FOR IRAs
Yes

MINIMUM INITIAL INVESTMENT
The Fund is temporarily closed to new investors; existing shareholders may,
however, invest up to $25,000 in an existing account during the temporary
closure. After the Fund reopens, the minimum initial investment will be $3,000
for traditional accounts, and $1,000 for IRAs and custodial accounts for
minors.

NEWSPAPER ABBREVIATION
HlthCare

VANGUARD FUND NUMBER
052

CUSIP NUMBER
921908307

TICKER SYMBOL
VGHCX
<PAGE> 13
10

MORE ON THE FUNDS

The following sections discuss other important features of the Vanguard
Specialized Funds, including investment strategies and policies, other
investment policies, turnover rate, and costs and market-timing. You will also
find information about the risks of each Fund throughout these sections.

INVESTMENT STRATEGIES AND POLICIES

This section explains the distinct strategies and policies that the investment
advisers use in pursuit of each Fund's objective. It also explains how the
advisers implement these strategies and policies. The Funds' Board of Trustees
oversees the management of the Funds, and may change investment strategies or
policies in the interest of shareholders.

MARKET EXPOSURE

The grid below shows, at a glance, the types of financial instruments purchased
by each Fund as either a primary or secondary investment strategy. Primary
investment strategies are expected to play the most important role in achieving
a Fund's investment objective. Secondary investment strategies will play a
lesser role, but are still expected to have a meaningful impact on a Fund's
risks and returns. Explanations of each type of financial instrument follow the
grid.

<TABLE>
<CAPTION>
ENERGY GOLD AND PRECIOUS HEALTH CARE
FUND METALS FUND FUND
------ ----------------- -----------
<S> <C> <C> <C>
Invests in U.S. stocks - - -

Emphasizes stocks of one industry or
related industries - - -

Emphasizes small company stocks - - N/A

Invests in foreign stocks * - *

Invests in forward currency
exchange contracts * * *

Invests in futures contracts * * *

Invests in cash reserves * * *
</TABLE>

- - Primary Focus * Secondary Focus

U.S. STOCKS

Each of the Funds invests in U.S. stocks as a primary investment strategy.
(Note: The Gold and Precious Metals Fund may also invest in foreign stocks as a
primary investment strategy; see below for a description of foreign stocks.)
Each Fund invests in a specific industry or group of related industries.

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

To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Composite Stock Price Index,
which is a widely used barometer of market activity. (Total returns consist of
dividend income plus change in market price.) Note that the returns shown do not
include the costs of buying and selling stocks or other expenses that a
<PAGE> 14
11

PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS

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

real-world investment portfolio would incur. Note, also, that the gap between
best and worst tends to narrow over the long term.

U.S. STOCK MARKET RETURNS (1926-1998)

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C>
Best 54.2% 24.1% 19.9% 17.7%
Worst -43.1 -12.4 -0.8 3.1
Average 13.1 10.7 11.0 11.0
</TABLE>

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1998. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 10.7%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 24.1% (from 1994
through 1998). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or these Funds in particular.

Keep in mind that the S&P 500 Index tracks mainly large-cap stocks.
Historically, industry-specific stocks such as those held by the Funds, as well
as small-cap stocks which are emphasized by several of the Funds, have been more
volatile than--and at times have performed quite differently from--the large-cap
stocks of the S&P 500 Index. This is due to several factors, including special
industry risks and less-certain growth and dividend prospects for smaller
companies.

[FLAG GRAPHIC] BECAUSE OF THEIR INVESTMENTS IN INDUSTRY-SPECIFIC STOCKS, THE
FUNDS ARE SUBJECT TO INDUSTRY CONCENTRATION RISK, WHICH IS THE
CHANCE THAT A FUND'S RETURNS COULD BE HURT SIGNIFICANTLY BY
PROBLEMS AFFECTING A PARTICULAR INDUSTRY. BECAUSE MORE THAN 80%
OF EACH FUND'S HOLDINGS TYPICALLY ARE INVESTED IN A SPECIFIC
INDUSTRY OR GROUP OF RELATED INDUSTRIES, THE FUND'S PERFORMANCE
CAN BE SIGNIFICANTLY AFFECTED, FOR BETTER OR WORSE, BY
DEVELOPMENTS IN THOSE INDUSTRIES.

- - The ENERGY FUND faces the risk that earnings and dividends of energy
companies will be greatly affected by changes in the prices and supplies of
oil and other energy fuels. Prices and supplies can fluctuate significantly
over short periods due to a variety of factors, including: changes in
international politics; policies of the Organization of Petroleum Exporting
Countries (OPEC); relationships among OPEC members and between OPEC and
oil-importing nations; energy conservation; the regulatory environment;
governmental tax policies; and the economic growth and stability of the main
energy-consuming countries.
<PAGE> 15
12

- - The GOLD AND PRECIOUS METALS FUND is subject to the risk of sharp price
volatility of gold and other precious metals, and of mining company shares.
Investments related to gold or other precious metals or minerals are
considered speculative and prices may fluctuate significantly over short
periods due to a variety of worldwide economic, financial, and political
factors, including: changes in inflation or expectations about inflation in
various countries; currency fluctuations; metal sales by governments,
central banks, or international agencies; investment speculation; changes in
industrial and commercial demand; and government prohibitions or
restrictions on the private ownership of certain precious metals.

In addition, political and economic conditions in gold-producing countries
may have a direct effect on the mining and distribution of gold, and
consequently, on its price. Currently there are only five major producers of
gold bullion. In order of magnitude, they are: South Africa, The United
States, Australia, Canada, and Russia. Because the Fund invests
substantially in the stocks of South African mining companies (-% of the
Fund's net assets as of January 31, 1999), events in South Africa can have a
significant impact on the Fund. These events can also pose certain risks to
the Fund's investments in other South African companies.

- - The HEALTH CARE FUND faces the risk that economic prospects of health care
companies may fluctuate dramatically due to changes in the regulatory and
competitive environment. A significant portion of health care services are
funded or subsidized by the government, so that changes in government
policies--at the state or federal level--may affect the demand for health
care products and services. Other risks include: the possibility that
regulatory approvals (which often entail lengthy application and testing
procedures) will not be granted for new drugs and medical products; lawsuits
against health care companies related to product liability issues; and the
rapid speed at which many health care products and services become obsolete.

SMALL COMPANY STOCKS

The Energy Fund and the Gold and Precious Metals Fund, in pursuing their
strategy of investing in industry-specific stocks, emphasize the stocks of
smaller companies.

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

FOREIGN STOCKS

The Gold and Precious Metals Fund may invest up to 100% of its assets in foreign
stocks, and so these stocks may be a primary strategy for the Fund. The Energy
Fund and the Health Care Fund may each invest up to 30% of their assets in
foreign stocks, which is a secondary investment strategy for these Funds. Such a
policy expands the investment opportunities available to the Funds, and may
result in improved diversification and performance.

[FLAG GRAPHIC] INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE AS RISKY, IF NOT
MORE RISKY, THAN U.S. STOCK INVESTMENTS. THE PRICES OF
INTERNATIONAL STOCKS AND THE PRICES OF U.S. STOCKS HAVE OFTEN
MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.

PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS

Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Generally, Vanguard defines large-capitalization (large-cap) funds as those
holding stocks of companies whose outstanding shares have a market value
exceeding $10 billion. Mid-cap funds hold stocks of companies with a market
value between $1 billion and $10 billion. Small-cap funds typically hold stocks
of companies with a market value of less than $1 billion.
<PAGE> 16
13

To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the Morgan Stanley Capital International
Europe, Australia, Far East (MSCI EAFE) Index, a widely used barometer of
international market activity. (Total returns consist of dividend income plus
change in market price.) Note, also, that the gap between best and worst tends
to narrow over the long term.

INTERNATIONAL STOCK MARKET RETURNS (1969-1998)

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 14.7 13.6 14.9 14.7
</TABLE>

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1998. Keep in mind that this was a particularly favorable period for
foreign markets. For instance, over 10-year periods, foreign stocks provided an
average return of 14.9%, compared to 11.0% for U.S. stocks (as measured by the
Standard & Poor's 500 Composite Stock Price Index) during the same time frame.
These average returns reflect past performance on international stocks; you
should not regard them as an indication of future returns from either foreign
markets as a whole or the Funds in particular.

Keep in mind, too, that because the Funds' holdings are not identical to the
MSCI EAFE Index or any other market index, the performance of the Funds will not
mirror the returns of any particular index.

Also note that the preceding chart does not take into account returns for
foreign stock markets as measured by the MSCI Select Emerging Markets Index, a
widely used barometer of less developed stock markets. Emerging markets can be
substantially more volatile than more developed foreign markets. In addition,
because the MSCI EAFE Index tracks the European and Pacific markets
collectively, the above returns do not reflect the variability of returns from
year to year for these markets individually, or the variability across these and
other geographic regions or market sectors. To illustrate this variability, the
following table shows returns for different international markets--as well as
the U.S. market for comparison--from 1990-1998, as measured by their respective
indexes. Note that the returns shown do not include the costs of buying and
selling stocks or other expenses that a real-world investment portfolio would
incur.

STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS

<TABLE>
<CAPTION>
EUROPEAN PACIFIC EMERGING U.S.
MARKET* MARKET* MARKETS* MARKETS
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1990 -% -% -% -%
1991 - - - -
1992 - - - -
1993 - - - -
1994 - - - -
1995 - - -** -
1996 - - - -
1997 - - - -
1998 - - - -
</TABLE>

* European market returns are measured by the MSCI Europe Index; Pacific
market returns are measured by the MSCI Pacific Free Index; Emerging markets
returns are measured by the MSCI Select Emerging Markets Index; and U.S.
market returns are measured by the Standard & Poor's 500 Composite Stock
Price Index.

** The inception date of the MSCI Select Emerging Markets Index was May 4,
1994; returns shown for 1990-1994 are measured by the MSCI Emerging
Markets Free Index.
<PAGE> 17
14

PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING

Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stock may not be as liquid as the stock of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from a foreign investment.

PLAIN TALK ABOUT
DERIVATIVES

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

Keep in mind, however, that these average returns reflect past performance
of the various indexes; you should not consider them as an indication of future
returns from the indexes, or from any of the Funds in particular.

[FLAG GRAPHIC] THE GOLD AND PRECIOUS METALS FUND AND, TO A MUCH LESSER EXTENT,
THE ENERGY AND HEALTH CARE FUNDS ARE SUBJECT TO COUNTRY RISK
AND CURRENCY RISK. COUNTRY RISK IS THE CHANCE THAT POLITICAL
EVENTS (SUCH AS A WAR), FINANCIAL PROBLEMS (SUCH AS GOVERNMENT
DEFAULT), OR NATURAL DISASTERS (SUCH AS AN EARTHQUAKE) WILL
WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT
COUNTRY TO LOSE MONEY. CURRENCY RISK IS THE CHANCE THAT A
"STRONGER" U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS
INVESTING OVERSEAS. GENERALLY, WHEN THE DOLLAR RISES IN VALUE
AGAINST A FOREIGN CURRENCY, YOUR INVESTMENT IN THAT COUNTRY
LOSES VALUE BECAUSE ITS CURRENCY IS WORTH FEWER U.S. DOLLARS.

FOREIGN CURRENCY EXCHANGE CONTRACTS

Each Fund may purchase foreign currency exchange contracts to help protect their
holdings against unfavorable short-term changes in exchange rates. A foreign
currency exchange contract is an agreement to buy or sell a country's currency
at a specific price on a specific date, usually 30, 60, or 90 days in the
future. In other words, the contract guarantees an exchange rate on a given
date. Managers of funds that invest in foreign stocks use these contracts to
guard against sudden, unfavorable changes in U.S. dollar/foreign currency
exchange rates. These contracts will not prevent the Funds' securities from
falling in value during foreign market downswings. The advisers will use foreign
currency exchange contracts to eliminate some of the uncertainty of foreign
exchange rates. The Funds will not enter into such contracts for speculative
purposes.

The transition to a common European currency--the "euro"--which began on
January 1, 1999, is one form of country risk that the Funds face. Although the
euro conversion should have no immediate impact on a Fund's share price, it may
cause uncertainty in European financial markets. If there are difficulties with
the euro conversion, a Fund's European holdings could be adversely affected.

FUTURES, OPTIONS, AND OTHER DERIVATIVES

Each of the Funds may invest in stock futures and options contracts, which are
traditional types of derivatives. Losses (or gains) involving futures contracts
can sometimes be substantial--in part because a relatively small price
movement in a futures contract may result in an immediate and substantial loss
(or gain) for a fund. These Funds will not use futures for speculative purposes
or as leveraged investments that magnify the gains or losses of an investment.
The value of all futures and options contracts in which a Fund acquires an
interest cannot exceed 20% of total assets.
<PAGE> 18
15

The reasons for which a Fund will invest in futures and options are:

- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.

- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.

CASH RESERVES

Each Fund may, from time to time, take temporary defensive measures--such as
holding cash reserves without limit--that are inconsistent with the Fund's
primary investment strategies, in response to adverse market, economic,
political, or other conditions. In taking such measures, a Fund may not achieve
its investment objective.

SECURITY SELECTION

Each Fund's adviser selects stocks from a specific industry or group or related
industries to achieve the Fund's objective.

ENERGY FUND. The investment strategy of the Fund is designed to provide
returns that are broadly representative of the energy sector. To achieve this,
the Fund invests in the stocks of companies engaged in the following
energy-related activities: the production, transmission, marketing, control, and
measurement of energy or energy fuels; the making of component products for such
activities; energy research or experimentation; and activities related to energy
conservation and pollution control. These activities may involve newer sources
of energy, such as geothermal, nuclear, and solar power, as well as more
traditional sources of energy, such as oil, natural gas, and coal. As new
sources of energy are developed and current methods of exploiting and developing
energy are advanced, then companies in these new areas will also be considered
for the Energy Fund. However, the Fund will not purchase the stocks of electric
utility companies, although it may invest in natural gas distributors and
natural gas pipeline concerns.

In selecting stocks, the adviser uses a "bottom up" approach, where stocks
are chosen based on the adviser's estimate of fundamental investment value.
Because the energy sector often has large write-offs for exploration charges,
fundamental investment value is often determined by cash flow and asset
valuations in addition to earnings valuations.

GOLD AND PRECIOUS METALS FUND. The investment strategy of the Fund is
designed to provide returns that are broadly representative of the gold and
precious metals sector. To achieve this, the Fund focuses on stocks of foreign
and domestic companies engaged in the exploration, mining, fabrication,
processing, or marketing and distribution of gold, silver, platinum, diamonds,
or other precious and rare metals and minerals. The Fund may commit up to 100%
of its assets in foreign stocks.

In addition, up to 20% of the Fund's assets may be invested directly in
gold, silver, and other precious metal bullion and coins. Bullion and coins for
the Fund will only be bought from and sold to banks (both U.S. and foreign), and
dealers who are members--or affiliated with members--of a regulated U.S.
commodities exchange. Gold, silver, or other precious metal bullion will not be
purchased in any form that is not readily marketable. Coins will not be bought
for their numismatic value, and will not be considered for the Fund if they
cannot be bought and sold in an active market. Any bullion or coins bought by
the Fund will be delivered to and stored with a qualified custodian bank in the
U.S. Keep in mind that bullion and coins do not generate income--they offer
only the potential for capital appreciation or depreciation, and may subject the
Fund to higher custody and transaction costs than those normally associated with
the ownership of stocks. Investments relating to gold and other precious metals
or minerals are considered speculative.

In selecting stocks for the Fund, the adviser emphasizes quality companies
with attractive reserve positions and sound operations. The adviser also looks
to maintain geographic diversity in the Fund.

HEALTH CARE FUND. The investment strategy of the Fund is designed to provide
returns that are broadly representative of the health care sector. The Fund's
adviser strives for a balanced representation in the health-care field,
searching for the best values in the various subsectors of the industry. To
achieve this, the Fund invests in the stocks of companies engaged in the
development, production, or distribution of products and services related to the
treatment or prevention of diseases and other medical infirmities. Companies in
these fields include, but are not limited to: pharmaceutical firms; companies
that design, manufacture, or sell medical supplies, equipment, and support
<PAGE> 19
16

PLAIN TALK ABOUT
THE COSTS OF INVESTING

Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.

PLAIN TALK ABOUT
THE FUNDS'
REDEMPTION FEE

The Vanguard Specialized Funds charge a redemption fee on shares that are
redeemed (including those redeemed by exchanging to another Vanguard fund)
before they have been held for one year (and in some cases, before they have
been held for five years). The Funds are intended for long-term investors, and
this redemption fee ensures that the costs associated with short-term trading
are borne by the investors making the transactions--and not by those
shareholders investing in the Funds for the long term.

At Vanguard, all fees are paid directly to the fund itself (unlike a sales
charge or load, which--for many fund companies--ends up in the pocket of the
sponsor, adviser, or sales representative).

services; and companies that operate hospitals and other health care facilities.
The Fund will also consider companies engaged in medical, diagnostic,
biochemical, and biotechnological research and development.

In selecting stocks, the adviser uses a "bottom up" approach, where stocks
are chosen based on the adviser's estimate of fundamental investment value. The
adviser looks for high-quality balance sheets, able management, and new product
potential that will lead to above-average growth in revenues and earnings.

The Funds are generally managed without regard to tax ramifications.

[FLAG GRAPHIC] EACH FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY
THAT THE ADVISER MAY DO A POOR JOB OF SELECTING THE SECURITIES,
ASSET CLASSES OR COUNTRIES IN WHICH THE FUND INVESTS.

COSTS AND MARKET-TIMING

Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, Vanguard Specialized Funds have adopted the following policies, among
others, designed to discourage short-term trading:

- - Each Fund reserves the right to reject any purchase request into any of the
Funds--including exchanges from other Vanguard funds--that it regards as
disruptive to the efficient management of the Funds. This could be because
of the timing of the investment or because of a history of excessive trading
by the investor.

- - There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).

- - The Energy Fund and the Gold and Precious Metals Fund each impose a 1%
redemption fee on shares that are redeemed by any method within one year of
purchase. The Health Care Fund imposes a 1% redemption fee on shares
redeemed by any method within five years of purchase, if those shares were
purchased on or after April 19, 1999; shares purchased before April 19,
1999, are subject to a 1% redemption fee if redeemed within one year of
purchase.

- - The Funds reserve the right to stop offering shares at any time.

THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE FUNDS
IF YOU ARE A MARKET-TIMER.
<PAGE> 20
17

PLAIN TALK ABOUT
TURNOVER RATE

Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all aggressive growth stock
funds is approximately -%, according to Morningstar, Inc.

TURNOVER RATE

Although the Funds seek to invest for the long term, each retains the right to
sell securities regardless of how long the securities have been held. The Funds'
average turnover rates for the past five years are as follows: -% for the Energy
Fund, -% for the Gold and Precious Metals Fund, and -% for the Health Care Fund.
(A turnover rate of 100% would occur, for example, if a Fund sold and replaced
securities valued at 100% of its total net assets within a one-year period.)

THE FUNDS AND VANGUARD

Vanguard Specialized Funds are members of The Vanguard Group, a family of more
than 35 investment companies with more than 100 distinct investment portfolios
holding assets worth more than $- billion. All of the Vanguard funds share in
the expenses associated with business operations, such as personnel, office
space, equipment, and advertising.

Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.

INVESTMENT ADVISERS

The Funds employ two external investment advisers. Wellington Management
Company, LLP, serves as the adviser to the Energy and Health Care Funds. M&G
Investment Management Limited serves as adviser to the Gold and Precious Metals
Fund. The advisers manage the Funds subject to the control of the Funds'
Trustees and officers.

Wellington Management Company, LLP (WMC), 75 State Street, Boston, MA 02109,
is an investment advisory firm founded in 1928. As of January 31, 1999, it
managed more than $- billion in assets.

Under the advisory agreement, the Energy and Health Care Funds, along with
Vanguard Utilities Fund (also part of Vanguard Specialized Funds but offered
through a separate prospectus) are required to pay WMC a quarterly fee based on
certain annual percentage rates applied to each Fund's average month-end assets
for each quarter. In addition, once the fee is calculated for the three Funds
under this formula, the total fee will be reduced so that the fee paid by the
Utilities Fund does not exceed 0.08%. For the fiscal year ended January 31,
1999, the advisory fees represented an effective annual rate of -% for the
Energy Fund and -% for the Health Care Fund.

M&G Investment Management Limited (M&G), 3 Minster Court, Great Tower
Street, London, England EC3RXH, is an advisory firm and a wholly owned
subsidiary of the M&G Group, an independent group of companies that began

PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
<PAGE> 21
18

PLAIN TALK ABOUT
THE FUNDS' ADVISERS

The individual primarily responsible for overseeing the Energy Fund's
investments is:

ERNST H. VON METZSCH, CFA, Senior Vice President of Wellington Management
Company, LLP; Fund Manager since its inception in 1984; has worked in investment
management since 1970; M.Sc., University of Leiden, Holland; Ph.D., Harvard
University.

The individual primarily responsible for overseeing the Gold and Precious
Metals Fund's investments is:

GRAHAM E. FRENCH, Investment Manager at M&G Investment Management Limited;
Fund Manager since 1996; Assistant Fund Manager from 1991 through 1996; has
worked in investment management since 1988; BSC, Durham University.

The individual primarily responsible for overseeing the Health Care Fund's
investments is:

EDWARD P. OWENS, CFA, Senior Vice President of Wellington Management
Company, LLP; Fund Manager since its inception in 1984; has worked in investment
management since 1974; BS, University of Virginia; MBA, Harvard Business School.

providing investment services when it launched Great Britain's first unit trust
(mutual fund) in 1931. As of January 31, 1999, M&G managed more than $- billion
in assets.

M&G's advisory fee is paid quarterly. This fee is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. For the fiscal year ended January 31, 1999, the advisory fees
represented an effective annual rate of -%.

The Funds have authorized the advisers to choose brokers or dealers to
handle the purchase and sale of securities for the Funds, and to get the best
available price and most favorable execution from these brokers with respect to
all transactions. Also, the Funds may direct the advisers to use a particular
broker for certain transactions in exchange for commission rebates or research
services provided to the Funds.

YEAR 2000 CHALLENGE

The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.

The Vanguard Group is dedicated to providing uninterrupted, high-quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.

In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Funds' operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.

However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on a Fund's business,
operations, or financial condition. Additionally, a Fund's performance could be
hurt if a computer-system failure at a company or governmental unit affects the
price of securities the Fund owns.
<PAGE> 22
19

DIVIDENDS, CAPITAL GAINS, AND TAXES

Each Fund distributes to shareholders virtually all of its net income (interest
and dividends less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition,
the Funds may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year.

You can receive distributions of income or capital gains in cash, or you can
have them automatically invested in more shares of a Fund. In either case, these
distributions are taxable to you. It is important to note that distributions of
dividends and capital gains that are declared in December--if paid to you by
the end of January--are taxed as if they had been paid to you in December.

Vanguard will send you a statement each year showing the tax status of all
your distributions. If you have chosen to receive dividend and/or capital gains
distributions in cash, and the postal or other delivery service is unable to
deliver checks to your address of record, we will change the distribution option
so that all dividends and other distributions are automatically invested in
additional shares. We will not pay interest on uncashed distribution checks.

- - The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.

- - Any distributions of net long-term capital gains by a Fund are taxable to you
as long-term capital gains, no matter how long you've owned shares in the
Fund. Long-term capital gains may be taxed at different rates depending on
how long the Fund held the securities.

- - Although the Funds do not seek to realize any particular amount of capital
gains during a year, such gains are realized from time to time as by-products
of its ordinary investment activities. Consequently, distributions may vary
considerably from year to year.

- - If you sell or exchange shares, any gain or loss you have is a taxable event.
This means that you may have a capital gain to report as income, or a capital
loss to report as a deduction, when you complete your federal income tax
return.

- - Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Fund shares, may be subject to state and local
income taxes as well.

- - Foreign governments may withhold taxes on dividends and interest paid, while
imposing taxes on other payments or gains, with respect to foreign
securities. If you meet certain holding-period requirements, an offsetting
tax credit or deduction may be available. If you do not meet these
requirements, you may still be entitled to a deduction for certain foreign
taxes.

The tax information in this prospectus is provided as general information
and will not apply to you if you are investing through a tax-deferred account
such as an IRA or a qualified employee benefit plan. (Non-U.S. investors may be
subject to U.S. withholding and estate tax.) You should consult your tax adviser
about the tax consequences of an investment in the Fund.

PLAIN TALK ABOUT

DISTRIBUTIONS

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

PLAIN TALK ABOUT

"BUYING A DIVIDEND"

Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
<PAGE> 23
20

IMPORTANT NOTE: By law, each Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.

SHARE PRICE

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

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

Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.

A NOTE ON PRICING: Each Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees. The
Funds also may use fair value pricing if the value of a security held by a Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which such security is traded. In these situations,
prices used by a Fund to calculate its net asset value may differ from quoted or
published prices for the underlying securities.

Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations for each Fund, but the most common are ENERGY, GOLD,
and HLTHCARE.
<PAGE> 24
21

FINANCIAL HIGHLIGHTS

The following financial highlights tables are intended to help you understand
each Fund's financial performance since inception, and certain information
reflects financial results for a single Fund share in each case. The total
returns in each table represent the rate that an investor would have earned or
lost each year on an investment in the Fund (assuming reinvestment of all
dividends and distributions, and complete redemption at the end of the year).
The information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, whose report--along with
each Fund's financial statements--is included in the Funds' most recent annual
report to shareholders. You may have the annual report sent to you without
charge by contacting Vanguard.

PLAIN TALK ABOUT

HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

This explanation uses the Energy Fund as an example. The Fund began fiscal 1998
with a net asset value (price) of $- per share. During the year, the Fund earned
$ - per share from investment income (interest and dividends) and $ - per share
from investments that had appreciated in value or that were sold for higher
prices than the Fund paid for them.

Shareholders received $- per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.

The earnings ($ - per share) minus the distributions ($ - per share) resulted
in a share price of $ - at the end of the year. This was an increase of $ - per
share (from $- at the beginning of the year to $ - at the end of the year). For
a shareholder who reinvested the distributions in the purchase of more shares,
the total return from the Fund was - % for the year.

As of January 31, 1999, the Fund had $ - billion in net assets. For the year,
its expense ratio was - % ($ - per $1,000 of net assets); and net investment
income amounted to - % of its average net assets. It sold and replaced
securities valued at - % of its net assets.

FINANCIAL HIGHLIGHTS TABLE TO COME

From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund. You should
also bear in mind that our published yield and total return figures do not
normally take into account any taxes that investors must pay on their earnings.
<PAGE> 25
22

FINANCIAL HIGHLIGHTS TABLE TO COME

"Standard & Poor's(R)," "S&P(R)," S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE> 26
23

INVESTING WITH VANGUARD

Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?

Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.

The following sections of the prospectus briefly explain the many services we
offer. Booklets providing detailed information are available on the services
marked with a [BOOK GRAPHIC]. Please call us to request copies.

SERVICES AND ACCOUNT FEATURES

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.

TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for these Funds unless you notify us otherwise.

VANGUARD DIRECT DEPOSIT SERVICE(TM) [BOOK GRAPHIC]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.

VANGUARD AUTOMATIC EXCHANGE SERVICE(TM) [BOOK GRAPHIC]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.

VANGUARD FUND EXPRESS(R) [BOOK GRAPHIC]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.

VANGUARD DIVIDEND EXPRESS(TM) [BOOK GRAPHIC]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.

VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK GRAPHIC]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.

ACCESS VANGUARD(TM) www.vanguard.com [PC GRAPHIC]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:

- - Open a new account.*

- - Buy, sell, or exchange shares of most funds.

- - Change your name/address.

- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).

*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.

NOTE: HEALTH CARE FUND WEB TRANSACTIONS
During the closed period, it will not be possible to purchase Health Care Fund
shares through Vanguard's website. However, shareholders may continue to redeem
Fund shares online.

INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335 Call Vanguard for information on our funds, fund services, and
retirement accounts, and to request literature.

CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.

SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
<PAGE> 27
24

TYPES OF ACCOUNTS

Individuals and institutions can establish a variety of accounts with Vanguard.

FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.

FOR HOLDING PERSONAL TRUST ASSETS [BOOK GRAPHIC]
Invest assets held in an existing personal trust.

FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK GRAPHIC]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).

FOR AN ORGANIZATION [BOOK GRAPHIC]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.

FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.

VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.

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

BUYING SHARES

You buy your shares at a Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.

MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).

NOTE: VANGUARD HEALTH CARE FUND IS TEMPORARILY CLOSED TO NEW INVESTORS;
EXISTING SHAREHOLDERS MAY, HOWEVER, INVEST UP TO $25,000 IN AN EXISTING ACCOUNT
DURING THE TEMPORARY CLOSURE.

add to an existing account
$100 by mail or exchange; $1,000 by wire.

A NOTE ON LOW BALANCES
The Funds reserve the right to close any nonretirement account whose balance
falls below the minimum initial investment. Each Fund will deduct a $10 annual
fee in June if your nonretirement account balance falls below $2,500. The fee is
waived if your total Vanguard account assets are $50,000 or more.

BY MAIL TO . . . [ENVELOPE GRAPHIC]
open a new account
Complete and sign the application form and enclose your check.
<PAGE> 28
25

BUYING SHARES (continued)

add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.

Make your check payable to: The Vanguard Group-(insert appropriate Fund
number; see below)
Vanguard Energy Fund-51
Vanguard Gold and Precious Metals Fund-53
Vanguard Health Care Fund-52
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

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

IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.

BY TELEPHONE TO . . . [PHONE GRAPHIC]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type).

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

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

*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.

NOTE: HEALTH CARE FUND
During the closed period, it will not be possible to purchase Health Care Fund
shares through Vanguard Tele-Account service. However, shareholderes may
continue to redeem Fund shares using this electronic method.

IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
<PAGE> 29
26

BUYING SHARES (continued)

BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE GRAPHIC]
Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.

Wire to:
FRB ABA 021001088
Marine Midland Bank, New York

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard Energy Fund - 51
Vanguard Gold and Precious Metals Fund - 53
Vanguard Health Care Fund - 52
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]

You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.

A NOTE ON LARGE PURCHASES

It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt a Fund's operation or performance.

REDEEMING SHARES

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

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

*May require a signature guarantee; see footnote on page 29.

When Exchanging Shares:

- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.

In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
<PAGE> 30
27

REDEEMING SHARES (continued)

A NOTE ON REDEMPTION FEES

The Energy Fund and the Gold and Precious Metals Fund each impose a 1% fee on
shares that are redeemed by any method within one year of purchase. For the
Health Care Fund, shares purchased on or after April 19, 1999, are subject to a
1% redemption fee if redeemed within five years of purchase; shares purchased
before April 19, 1999, are subject to a 1% redemption fee if redeemed within one
year of purchase. Note: Currently, redemption fees do not apply to Fund shares
held through Vanguard's separate recordkeeping system for employee benefit plan
accounts, due to certain economies associated with these accounts. However, the
Funds reserve the right to impose redemption fees on their shares at any time if
warranted by the Funds' future costs of processing redemptions from these
accounts.

NOTE: Once a redemption is processed and a confirmation number given, the
transaction CANNOT be canceled.

HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.

ONLINE REQUESTS [PC GRAPHIC]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).

NOTE: The Vanguard funds whose shares you cannot exchange online or by
telephone are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND,
VANGUARD INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, VANGUARD
TOTAL INTERNATIONAL STOCK INDEX FUND, and VANGUARD GROWTH AND INCOME FUND. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.

TELEPHONE REQUESTS [PHONE GRAPHIC]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from these Funds to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.

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

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

SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.

We reserve the right to refuse a telephone redemption if the caller is unable to
provide:

[CHECKMARK GRAPHIC] The ten-digit account number.

[CHECKMARK GRAPHIC] The name and address exactly as registered on the account.

[CHECKMARK GRAPHIC] The primary Social Security or employer identification
number as registered on the account.

[CHECKMARK GRAPHIC] The Personal Identification Number, if applicable.

Please note that Vanguard will not be responsible for any account losses due to
telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
<PAGE> 31
28

A NOTE ON UNUSUAL CIRCUMSTANCES

Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.

MAIL REQUESTS [ENVELOPE GRAPHIC]

All Account Types Except Retirement:

Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.

Vanguard Retirement Accounts:

For information on how to request distributions from:

- - Traditional IRAs and Roth IRAs--call Client Services.

- - SEP - IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.

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

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1120 455 Devon Park Drive
Valley Forge, PA 19482-1120 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division ...

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

A NOTE ON LARGE REDEMPTIONS

It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the
amount will disrupt a Fund's operation or performance.

If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.

OPTIONS FOR REDEMPTION PROCEEDS

You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.

CHECK REDEMPTIONS

Normally, Vanguard will mail your check within two business days of a
redemption.

EXCHANGE REDEMPTIONS

As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
<PAGE> 32
29

REDEEMING SHARES (continued)

FOR OUR MUTUAL PROTECTION

For your best interests and ours, Vanguard applies these additional requirements
to redemptions:

Request in "Good Order"

All redemption requests must be received by Vanguard in "good order." This means
that your request must include:

[CHECKMARK GRAPHIC] The Fund name and account number.

[CHECKMARK GRAPHIC] The amount of the transaction (in dollars or shares).

[CHECKMARK GRAPHIC] Signatures of all owners exactly as registered on the
account (for mail requests).

[CHECKMARK GRAPHIC] Signature guarantees (if required).*

[CHECKMARK GRAPHIC] Any supporting legal documentation that may be required.

[CHECKMARK GRAPHIC] Any outstanding certificates representing shares to be
redeemed.

*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most banks, credit unions,
and licensed brokers.

TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.

LIMITS ON ACCOUNT ACTIVITY

Because excessive account transactions can disrupt management of a Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:

- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH EACH OF THE
FUNDS during any 12-month period.

- - Your round trips through the Fund must be at least 30 days apart.

- - A Fund may refuse a share purchase at any time, for any reason.

- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.

A "round trip" is a redemption from one of the Funds followed by a purchase back
into the same Fund. Also, "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of that Fund.

RETURN YOUR SHARE CERTIFICATES

Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:

The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815

ALL TRADES FINAL

Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
<PAGE> 33
30

TRANSFERRING REGISTRATION

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

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

For clients of Vanguard's Institutional Division . . .

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

FUND AND ACCOUNT UPDATES

STATEMENTS AND REPORTS

We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.

In addition, you will receive financial reports about your Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, and the Fund's financial statements which include a listing
of the Fund's holdings.

To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address -- instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Investor Information Department at 1-800-662-7447.

CONFIRMATION STATEMENT

Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.

PORTFOLIO SUMMARY [BOOK GRAPHIC]

FUND FINANCIAL REPORTS

Mailed in March and September for these Funds.

TAX STATEMENTS

Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.

AVERAGE COST REVIEW STATEMENT [BOOK GRAPHIC]

Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
<PAGE> 34
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 35
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 36
GLOSSARY OF INVESTMENT TERMS

CAPITAL GAINS DISTRIBUTION

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

CASH RESERVES

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

COMMON STOCK

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

COUNTRY RISK

The possibility that events such as political or financial troubles or natural
disasters will weaken a country's economy.

CURRENCY RISK

The possibility that an American's foreign investment will lose money because of
unfavorable currency exchange rates.

DIVIDEND INCOME

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

EXPENSE RATIO

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

GROWTH STOCK FUND

A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, the
prices of growth stocks often are relatively high in comparison to revenue,
earnings, book value, and dividends.

INDUSTRY CONCENTRATION

Focusing on the securities of a specific industry (such as energy, gold and
precious metals, or health care).

INVESTMENT ADVISER

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

NET ASSET VALUE (NAV)

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

PRICE/EARNINGS (P/E) RATIO

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

PRINCIPAL

The amount of your own money you put into an investment.

SECURITIES

Stocks, bonds, money market instruments, and other investment vehicles.

TOTAL RETURN

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

VALUE FUND

A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison to such factors as revenue, earnings, book value, and dividends.

VOLATILITY

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

YIELD

Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 37
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600

FOR MORE INFORMATION

If you'd like more information about Vanguard Specialized Funds, the following
documents are available free upon request:

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS

Additional information about the Funds' investments is available in the Funds'
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Funds' performance during the most recent fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI provides more detailed information about the Funds.

The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.

To receive a free copy of the latest annual or semiannual report or the SAI, or
to request additional information about the Funds or other Vanguard funds,
please contact us as follows:

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

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

TEXT TELEPHONE:
1-800-952-3335

WORLD WIDE WEB:
www.vanguard.com

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

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

TEXT TELEPHONE:
1-800-662-2738

INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)

You can review and copy information about the Funds (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Funds are also available on the SEC's website (www.sec.gov), or you
can receive copies of this information, for a fee, by writing the Public
Reference Section, Securities and Exchange Commission, Washington, DC
20549-6009.

Funds' Investment Company Act file number: 811-3916

P051N-05/28/1999

<PAGE> 38

VANGUARD UTILITIES INCOME FUND

Prospectus
May 28, 1999
A Growth and Income Mutual Fund

CONTENTS

1 FUND PROFILE

2 ADDITIONAL INFORMATION

3 A WORD ABOUT RISK

3 WHO SHOULD INVEST

3 PRIMARY INVESTMENT STRATEGIES

8 THE FUND AND VANGUARD

8 INVESTMENT ADVISER

9 YEAR 2000 CHALLENGE

9 DIVIDENDS, CAPITAL GAINS, AND TAXES

10 SHARE PRICE

11 FINANCIAL HIGHLIGHTS

12 INVESTING WITH VANGUARD

12 SERVICES AND ACCOUNT FEATURES

13 TYPES OF ACCOUNTS

13 BUYING SHARES

15 REDEEMING SHARES

18 TRANSFERRING REGISTRATION

18 FUND AND ACCOUNT UPDATES

GLOSSARY (inside back cover)

WHY READING THIS PROSPECTUS IS IMPORTANT

This prospectus explains the objective, risks, and strategies of Vanguard
Utilities Income Fund. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.

<PAGE> 39
1

FUND PROFILE

The following profile summarizes key features of Vanguard Utilities Income Fund.

INVESTMENT OBJECTIVE

The Fund seeks to provide a high level of current income and moderate long-term
capital growth and income.

INVESTMENT STRATEGIES

The Fund invests at least 75% of its assets in common stocks of utility
companies. The remainder of the Fund's assets are invested in utility bonds
rated BBB or better by Standard & Poor's Corporation or Baa by Moody's Investors
Service, Inc.

PRIMARY RISKS

THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:

- - Utilities industry risk, which is the chance that utility stock and bond
prices will fall due to industry-specific developments.

- - Interest rate risk, which is the chance that utility stock and bond prices
will fall because of rising interest rates.

- - Manager risk, which is the possibility that the adviser will do a poor job
of selecting securities.

PERFORMANCE/RISK INFORMATION

The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one and
five calendar years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.

- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
The Fund's year-to-date return as of the most recent calendar quarter ended
March 31, 1999, was o%.
- --------------------------------------------------------------------------------

During the period shown in the bar chart, the highest return for a calendar
quarter was -% (quarter ended ___________) and the lowest return for a quarter
was - -% (quarter ended ___________).

- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Vanguard Utilities Income Fund -% -% -%
Utilities Composite Index** - - -
</TABLE>

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

* May 15, 1992.

** Utilities Composite Index consists of 80% Equity Blend and 20% Shearson
Lehman Long-Term Utility Bond Index. The equity blend is made up of 40%
Standard & Poor's Utilities Index, 40% Standard & Poor's Telephone Index,
and 20% Lehman Utility Bond Index.
- --------------------------------------------------------------------------------
<PAGE> 40
2

PLAIN TALK ABOUT
THE COSTS OF INVESTING

PLAIN TALK ABOUT
FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Utilities Income Fund's expense ratio in fiscal year 1999 was
- -%, or $- per $1,000 of average net assets. The average [growth] equity mutual
fund had expenses in 1998 of -%, or $- per $1,000 of average net assets,
according to Lipper Inc., which reports on the mutual fund industry.

FEES AND EXPENSES

SHAREHOLDER FEES (fees paid directly from your investment)

<TABLE>
<S> <C>
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>

ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
<TABLE>
<S> <C>
Management Expenses: -%
12b-1 Distribution Fees: None
Other Expenses: -%
TOTAL ANNUAL FUND OPERATING EXPENSES: -%
</TABLE>

<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
$- $- $- $-
</TABLE>

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

ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS

Dividends are distributed quarterly in March, June, September, and December;
capital gains, if any, are distributed annually in December

INVESTMENT ADVISER

Wellington Management Company, LLP, Boston, Mass., since inception

INCEPTION DATE

May 15, 1992

NET ASSETS AS OF JANUARY 31, 1999

$- billion

SUITABLE FOR IRAs

Yes

MINIMUM INITIAL INVESTMENT

$3,000; $1,000 for IRAs and custodial accounts for minors

NEWSPAPER ABBREVIATION

Utility

VANGUARD FUND NUMBER

057

CUSIP NUMBER

921908604

TICKER SYMBOL

VGSUX
<PAGE> 41
3

A WORD ABOUT RISK

This prospectus describes the risks you would face as an investor in Vanguard
Utilities Income Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard Utilities Income
Fund, you should also take into account your personal tolerance for the daily
fluctuations of the stock market.

Look for this [Flag Graphic] symbol throughout the prospectus. It is used to
mark detailed information about each type of risk that you would confront as a
shareholder of the Fund.

WHO SHOULD INVEST

The Fund may be a suitable investment for you if:

- - You are seeking a simple, low-cost way to diversify your stock, bond, and
money market investments with indirect exposure to the utilities industry.

- - You are seeking a stock fund that offers the potential for above-average
income.

- - You are seeking growth of capital over the long term -- at least five
years.

- - You are seeking an investment that performs differently from a diversified
stock or bond fund.

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

The Fund has adopted the following policies, among others, to discourage
short-term trading:

- - The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds -- that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of
the investment or because of a history of excessive trading by the
investor.

- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).

- - The Fund reserves the right to stop offering shares at any time.

PRIMARY INVESTMENT STRATEGIES

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

PLAIN TALK ABOUT
COSTS AND MARKET-TIMING

Some investors try to profit from market-timing -- switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
<PAGE> 42
4

PLAIN TALK ABOUT
UTILITY STOCKS AND BONDS
Utility stocks and bonds are issued by companies engaged in the generation,
transmission, or distribution of electricity, telecommunications, gas, or water.
Of these companies, telephone and electric utilities dominate the utility stock
and bond markets. Historically, utilities have been subject to strict regulatory
oversight. In recent years, however, changes in the regulatory climate have
allowed utilities to provide products and services outside their traditional
geographic areas, leading to increased competition and expanded prospects for
growth. The Fund seeks to take advantage of the favorable opportunities expected
to arise from these changes in regulation.

MARKET EXPOSURE

The Fund invests at least 75% of its assets in the common stocks of utility
companies; the remaining assets are invested in utility bonds.

[FLAG GRAPHIC] THE FUND IS SUBJECT TO UTILITIES INDUSTRY RISK, WHICH IS THE
POSSIBILITY THAT UTILITY STOCK AND BOND PRICES WILL FALL DUE
TO INDUSTRY-SPECIFIC DEVELOPMENTS.

Because of its emphasis on utility stocks and bonds, the Fund's performance
is strongly linked to the ups and downs of the utilities industry. In general,
utilities are affected by a variety of factors. Changing regulation is one of
the key risks, since regulators, largely at the state level, control utility
revenues and costs and therefore may limit utility profits and dividends paid to
investors. Also, regulators may restrict a utility company's access to new
markets, thereby diminishing the company's long-term prospects. Individual
sectors of the utilities industry are subject to additional risks:

- - Electric utilities may be burdened by unexpected increases in fuel and
other operating costs. They may also be adversely affected when long-term
interest rates rise, since long-term borrowings are used to finance most
utility investments; rising rates lead to higher financing costs, as well
as reduced earnings. In addition, utilities are increasingly being called
upon by regulators to bear the added, heavy costs of environmental
compliance, nuclear waste clean-up, and safety regulation -- costs that may
not be fully recovered by an increase in revenues.

- - Telephone utilities continue to be affected by technological development
leading to increased competition, as well as changing regulation of
long-distance telephone service and other telecommunication businesses.
While certain companies have benefited from the new competitive climate,
others have not, and it is possible that increased competition in the
future may hinder the growth of more traditionally oriented telephone
companies.

- - Certain gas transmission and distribution utilities have been moving to
diversify into oil and gas exploration and development, making investment
returns more sensitive to energy prices.

- - The water utility sector is highly fragmented, so most water-supply
companies find themselves in mature markets with little potential for
growth.

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

To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Composite Stock Price Index, a
widely used barometer of market activity. (Total returns consist of dividend
income plus change in market price.) Note that the returns shown do not include
the costs of buying and selling stocks or other expenses that a real-world
investment portfolio would incur. Note, also, that the gap between best and
worst tends to narrow over the long term.
<PAGE> 43
5

U.S. STOCK MARKET RETURNS (1926-1998)

<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best 54.2% 24.1% 19.9% 17.7%
Worst -43.1 -12.5 -0.8 3.1
Average 13.1 10.7 11.0 11.0
</TABLE>

The Fund is expected to exhibit less volatility than stocks found in the S&P
500 Index, or the stock market as a whole. Historically, utilities stocks have
been one of the least volatile sectors of the stock market. In addition, the
Fund's bond holdings help to further dampen stock market risk, since stocks and
bonds tend to move in opposite directions.

[FLAG GRAPHIC] THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE
POSSIBILITY THAT CHANGES IN INTEREST RATES COULD HURT UTILITY
STOCK AND BOND PERFORMANCE.

In general, bond prices fall when interest rates rise. Because the Fund
invests in bonds, changes in interest rates will have a significant impact on
the value of the Fund's assets. In addition, utility stocks -- more so than
other stock market sectors -- are often influenced by trends in interest rates,
rather than price movements in the stock market. This combination of interest
rate-sensitive stocks and bonds means that the Fund may at times move in the
same direction as the bond market, rising and falling as interest rates change,
independent of the stock market.

SECURITY SELECTION

Wellington Management Company, LLP, adviser to the Fund, selects stocks and
bonds issued by various companies in the utilities industry.

[FLAG GRAPHIC] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE POSSIBILITY
THAT THE ADVISER COMPANY WILL DO A POOR JOB OF SELECTING
SECURITIES.

At least 75% of the Fund's assets is invested in high-yielding stocks of
companies in the business of generating, transmitting, or distributing
electricity, telecommunications, gas, or water. Such investments will be
selected on the basis of fundamental analysis to identify those securities that
the adviser believes will provide both current income and the potential for
growth in income and capital over time. Of the various utilities, the telephone
and electric company sectors dominate the Fund's stock investments.

The Fund's remaining assets are invested in utility bonds rated BBB or better
by Standard & Poor's Corporation, or Baa or better by Moody's Investors Service,
Inc. The Fund may also invest in bonds issued by foreign governments, agencies,
or instrumentalities, or by companies domiciled outside the United States; these
bonds, however, must be valued in U.S. dollars and rated A or better. The
telephone and electric utility sectors also dominate the Fund's bond
investments, since the market for utility bonds is dominated by telephone and
electric utility issuers.

A breakdown of the Fund's stock and bond holdings as of January 31, 1999
follows.
<PAGE> 44
6

<TABLE>
<CAPTION>
UTILITY STOCK DISTRIBUTION
---------------------------------------------------------------------------
TYPE OF STOCK PERCENTAGE OF FUND
------------- ------------------

<S> <C>
Electric -%
Telephone -
Natural Gas -
Energy -
Technology -
Miscellaneous -
Basic Materials -
---
Total 100%
===
</TABLE>

<TABLE>
<CAPTION>
UTILITY BOND DISTRIBUTION
---------------------------------------------------------------------------
TYPE OF BOND PERCENTAGE OF FUND
------------- ------------------
<S> <C>
Electric -%
Telephone -
Gas -
---
Total 100%
===
</TABLE>

The Fund is generally managed without regard to tax ramifications.

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

TURNOVER RATE

Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about -%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)

PLAIN TALK ABOUT
TURNOVER RATE

Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all domestic stock funds is
approximately 85%, according to Morningstar, Inc.
<PAGE> 45
7

OTHER INVESTMENT POLICIES AND RISKS

Besides investing in utility stocks and bonds, the Fund may make certain other
kinds of investments to achieve its objective.

The Fund may invest up to 30% of its equity assets in foreign securities. All
or a portion of these foreign securities may be in the form of American
Depository Receipts (ADRs) or European Depository Receipts (EDRs). ADRs are
receipts typically issued by a U.S. bank or trust company that evidence
ownership of underlying securities issued by a foreign corporation. EDRs are
receipts issued in Europe that evidence a similar ownership arrangement.
Generally, ADRs are designed for trading in the United States securities markets
and EDRs are designed for trading in European securities markets.

The Fund may enter into forward foreign currency contracts, which help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward currency contract is an agreement to buy or sell a country's currency at
a specific price on a specific date, usually 30, 60, or 90 days in the future.
In other words, the contract guarantees an exchange rate on a given date.
Managers of funds that invest in foreign investments use these contracts to
guard against sudden, unfavorable changes in U.S. dollar/foreign currency
exchange rates. These contracts will not prevent the fund's securities from
falling in value during foreign market downswings. WMC will use forward currency
exchange contracts to eliminate some of the uncertainty of foreign exchange
rates.

To the extent that it owns foreign securities, the Fund is subject to (1)
country risk, which is the possibility that political events (such as a war),
financial problems (such as government default), or natural disasters (such as
an earthquake) will weaken a country's economy and cause investments in that
country to lose money; and (2) currency risk, which is the possibility that
Americans investing abroad could lose money because of a rise in the value of
the U.S. dollar versus foreign currencies.

The transition to a common European currency -- the "euro" -- which began on
January 1, 1999 is one form of country risk that the Fund faces. Although the
euro conversion should have no immediate impact on the Fund's share price, it
may cause uncertainty in European financial markets. If there are difficulties
with the euro conversion, the Fund's European holdings could be adversely
affected.

The Fund may also invest, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial -- in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures and options contracts in which
the Fund acquires an interest cannot exceed 20% of its total assets.

The reasons for which the Fund will invest in futures and options are:

- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.

- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced. The Fund may, from time to time, take temporary
defensive measures -- such as holding cash reserves without limit -- that
are inconsistent with the Fund's primary investment strategies, in response
to adverse market, economic, political, or other conditions. In taking such
measures, the Fund may not achieve its investment objective.

PLAIN TALK ABOUT
DERIVATIVES

Wellington Management Company, LLP is an investment advisory firm founded in
1928. As of January 31, 1999, WMC managed more than $- billion in assets,
including all or part of 14 Vanguard funds. The managers responsible for
overseeing the implementation of WMC's strategy for Vanguard Utilities Income
Fund are:

EARL E. MCEVOY, Senior Vice President and Partner of WMC; has worked in
investment management since 1972; has managed portfolio investments since 1978;
with WMC since 1978; has advised the Fund since 1997; B.A. from Dartmouth
College, M.B.A. from Columbia Business School.

MARK J. BECKWITH, Vice President of WMC; has worked in investment
management since 1981; has managed portfolio investments since 1989; with WMC
since 1995; has advised the Fund since 1996; B.S. from Fairfield University,
M.S. from Stanford University.

THE FUND AND VANGUARD

The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 distinct investment funds holding assets worth more
than $- billion. All of the Vanguard funds share in the expenses associated with
business operations, such as personnel, office space, equipment, and
advertising.

Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.

INVESTMENT ADVISER

The Fund employs Wellington Management Company, LLP, (WMC), 75 State Street,
Boston, MA 02109, as its investment adviser. WMC manages the Fund subject to the
control of the Trustees and officers of the Fund.

WMC's advisory fee is paid quarterly. This fee is based on the total assets
of Vanguard Utilities Income Fund and the total assets of two other Vanguard
Specialized Funds managed by WMC. The three Funds pay WMC an aggregate fee
calculated by applying certain annual percentage rates to the average month-end
net assets of the three Funds for each quarter.

Once the aggregate advisory fee to WMC is calculated for Vanguard Utilities
Income Fund and the two other funds, the total fee is reduced in order that the
advisory fee paid by Vanguard Utilities Income Fund does not exceed 0.08%.

For the fiscal year ended January 31, 1999, the investment advisory fee paid
to WMC represented an effective annual rate of -% of the Fund's average net
assets.

The Fund has authorized WMC to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.

In the interest of obtaining better execution of a transaction, WMC may
choose brokers who charge higher commissions. If more than one broker can obtain
the best available price and favorable execution of a transaction, then WMC is
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to WMC or the Fund. Also, the Fund may direct WMC
to use a particular broker for certain transactions in exchange for commission
rebates or research services provided to the Fund.

PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreement or hire a new investment adviser, either as
a replacement for WMC or as an additional adviser. However, any such change will
be communicated to shareholders in writing.

YEAR 2000 CHALLENGE

In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.

However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.

DIVIDENDS, CAPITAL GAINS, AND TAXES

The Fund distributes to shareholders virtually all of its net income (interest
and dividends less expenses) as well as any capital gains realized from the sale
of its holdings. Income distributions generally occur in March, June, September,
and December; capital gains distributions generally occur in December. In
addition, the Fund may occasionally be required to make supplemental dividend or
capital gains distributions at some other time during the year. You can receive
distributions of income or capital gains in cash, or you can have them
automatically invested in more shares of the Fund. In either case, these
distributions are taxable to you. It is important to note that distributions of
dividends and capital gains that are declared in December -- if paid to you by
the end of January -- are taxed as if they had been paid to you in December.

PLAIN TALK ABOUT
DISTRIBUTIONS

PLAIN TALK ABOUT
"BUYING A DIVIDEND"

Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received -- even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
<PAGE> 48
10

- - The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.

- - Any distributions of net long-term capital gains by the Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in
the Fund.

- - Although the Fund does not seek to realize any particular amount of capital
gains during a year, such gains are realized from time to time as
by-products of its ordinary investment activities. Consequently,
distributions may vary considerably from year to year.

- - If you sell or exchange shares, any gain or loss you have is a taxable
event. This means that you may have a capital gain to report as income, or
a capital loss to report as a deduction, when you complete your federal
income tax return.

- - Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and
local income taxes as well.

IMPORTANT NOTE: By law, the Fund must withhold 31% of your taxable
distributions and any redemption proceeds if you do not provide your correct
taxpayer identification number, or certify that it is correct, or if the IRS
instructs the Fund to do so.

SHARE PRICE

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

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

A NOTE ON PRICING: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.

The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is UTILITY.
<PAGE> 49
11

FINANCIAL HIGHLIGHTS

The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose report --
along with the Fund's financial statements -- is included in the Fund's most
recent annual report to shareholders. You may have the annual report sent to you
without charge by contacting Vanguard.

FINANCIAL HIGHLIGHTS TABLE TO COME

PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Fund began fiscal 1999 with a net asset value (price) of $- per share.
During the year, the Fund earned $- per share from investment income (interest
and dividends) and $- per share from investments that had appreciated in value
or that were sold for higher prices than the Fund paid for them.

Shareholders received $- per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.

The earnings ($- per share) minus the distributions ($- per share) resulted
in a share price of $- at the end of the year. This was an increase of $- per
share (from $- at the beginning of the year to $- at the end of the year). For
a shareholder who reinvested the distributions in the purchase of more shares,
the total return from the Fund was -% for the year.

As of January 31, 1999, the Fund had $- billion in net assets. For the year,
its expense ratio was -% ($- per $1,000 of net assets); and net investment
income amounted to -% of its average net assets. It sold and replaced
securities valued at -% of its net assets.

"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE> 50
12

INVESTING WITH VANGUARD

Are you looking for the most convenient way to open or add money to a
Vanguard account? Obtain instant access to fund information? Establish an
account for a minor child or for your retirement savings?

Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.

The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK GRAPHIC]. Please call us to request copies.

SERVICES AND ACCOUNT FEATURES

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.

TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)

Automatically set up for this Fund unless you notify us otherwise.

VANGUARD DIRECT DEPOSIT SERVICE(TM) [BOOK GRAPHIC]

Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.

VANGUARD AUTOMATIC EXCHANGE SERVICE(TM) [BOOK GRAPHIC]

Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.

VANGUARD FUND EXPRESS(R) [BOOK GRAPHIC]

Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.

VANGUARD DIVIDEND EXPRESS(TM) [BOOK GRAPHIC]

Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.

VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD)[BOOK GRAPHIC]

Toll-free 24-hour access to Vanguard fund and account information -- as well as
some transactions -- by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange fund shares.

ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER GRAPHIC]

You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:

- - Open a new account.*

- - Buy, sell, or exchange shares of most funds.

- - Change your name/address.

- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).

* Only current Vanguard shareholders can open a new account online, by
exchanging shares from other existing Vanguard accounts.

INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) Text Telephone:
1-800-952-3335 Call Vanguard for information on our funds, fund services, and
retirement accounts, and to request literature.

CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.

TYPES OF ACCOUNTS

Individuals and institutions can establish a variety of accounts with Vanguard.

FOR ONE OR MORE PEOPLE

Open an account in the name of one (individual) or more (joint tenants) people.

FOR HOLDING PERSONAL TRUST ASSETS [BOOK GRAPHIC]

Invest assets held in an existing personal trust.

FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK GRAPHIC]

Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).

FOR AN ORGANIZATION [BOOK GRAPHIC]

Open an account as a corporation, partnership, endowment, foundation, or other
entity.

FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS

Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.

VANGUARD PROTOTYPE PLANS

Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.

A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS

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

BUYING SHARES

You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.

MINIMUM INVESTMENT TO . . .

open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).

add to an existing account
$100 by mail or exchange; $1,000 by wire.

A NOTE ON LOW BALANCES

The Fund reserves the right to close any nonretirement account whose balance
falls below the minimum initial investment. The Fund will deduct a $10 annual
fee in June if your nonretirement account balance falls below $2,500. The fee is
waived if your total Vanguard account assets are $50,000 or more.

BY MAIL TO . . . [ENVELOPE GRAPHIC]

open a new account
Complete and sign the application form and enclose your check.

add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
<PAGE> 52
14

Buying Shares (continued)

Make your check payable to: The Vanguard Group - 57
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.

<TABLE>
<S> <C>
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815
</TABLE>

For clients of Vanguard's Institutional Division . . .

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

IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.

BY TELEPHONE TO . . . [TELEPHONE GRAPHIC]

open a new account
Call Vanguard Tele-Account* 24 hours a day -- or Client Services during business
hours -- to exchange from another Vanguard fund account with the same
registration (name, address, taxpayer identification number, and account type).

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

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

*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.

IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.

BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE GRAPHIC]

Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.

Wire to:
FRB ABA 021001088
Marine Midland Bank, New York

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard Utilities Income Fund - 57
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
<PAGE> 53
15

A NOTE ON LARGE PURCHASES

REDEEMING SHARES

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

When Selling Shares:

- - Vanguard sends the redemption proceeds to you or a designated third party.*

- - You can sell all or part of your Fund shares at any time.

* May require a signature guarantee; see footnote on page 17.

When Exchanging Shares:

- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.

- - You must meet the receiving fund's minimum investment requirements.

- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.

NOTE: Once a redemption is processed and a confirmation number given, the
transaction CANNOT be canceled.

HOW TO REQUEST A REDEMPTION

You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.

ONLINE REQUESTS [COMPUTER GRAPHIC]

ACCESS VANGUARD at www.vanguard.com

You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).

TELEPHONE REQUESTS [TELEPHONE GRAPHIC]

All Account Types Except Retirement:

Call Vanguard Tele-Account 24 hours a day -- or Client Services during business
hours -- to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
<PAGE> 54
16

REDEEMING SHARES (continued)

Retirement Accounts:

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

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

We reserve the right to refuse a telephone redemption if the caller is unable
to provide:

[CHECK MARK GRAPHIC] The ten-digit account number.

[CHECK MARK GRAPHIC] The name and address exactly as registered on the
account.

[CHECK MARK GRAPHIC] The primary Social Security or employer identification
number as registered on the account.

[CHECK MARK GRAPHIC] The Personal Identification Number, if applicable.

Please note that Vanguard will not be responsible for any account losses due
to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.

A NOTE ON UNUSUAL CIRCUMSTANCES

MAIL REQUESTS [ENVELOPE GRAPHIC]

All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.

Vanguard Retirement Accounts:
For information on how to request distributions from:

- - Traditional IRAs and Roth IRAs -- call Client Services.

- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans -- call Individual Retirement Plans at
1-800-662-2003.

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

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1120 455 Devon Park Drive
Valley Forge, PA 19482-1120 Wayne, PA 19087-1815
<PAGE> 55
17

For clients of Vanguard's Institutional Division...

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

A NOTE ON LARGE REDEMPTIONS

It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds -- up to seven days -- if the
amount will disrupt the Fund's operation or performance.

OPTIONS FOR REDEMPTION PROCEEDS

You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.

CHECK REDEMPTIONS

Normally, Vanguard will mail your check within two business days of a
redemption.

EXCHANGE REDEMPTIONS

As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.

FOR OUR MUTUAL PROTECTION

For your best interests and ours, Vanguard applies these additional requirements
to redemptions:

REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:

[CHECK MARK GRAPHIC] The Fund name and account number.

[CHECK MARK GRAPHIC] The amount of the transaction (in dollars or shares).

[CHECK MARK GRAPHIC] Signatures of all owners exactly as registered on the
account (for mail requests).

[CHECK MARK GRAPHIC] Signature guarantees (if required).*

[CHECK MARK GRAPHIC] Any supporting legal documentation that may be required.

[CHECK MARK GRAPHIC] Any outstanding certificates representing shares to be
redeemed.

TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.

LIMITS ON ACCOUNT ACTIVITY

Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:

- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.

- - Your round trips through the Fund must be at least 30 days apart.

- - The Fund may refuse a share purchase at any time, for any reason.

- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.

A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also, "round trip" covers transactions accomplished by any combination
of methods, including transactions conducted by check, wire, or exchange to/from
another Vanguard fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
<PAGE> 56
18

REDEEMING SHARES (continued)
RETURN YOUR SHARE CERTIFICATES

The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815

ALL TRADES FINAL

Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.

TRANSFERRING REGISTRATION

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

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1100 455 Devon Park Drive
Valley Forge, PA 19482-1100 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

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

FUND AND ACCOUNT UPDATES

STATEMENTS AND REPORTS

We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.

In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, and the Fund's financial statements which include a listing
of the Fund's holdings.

To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address -- instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Investor Information Department at 1-800-662-7447.

CONFIRMATION STATEMENT

Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.

PORTFOLIO SUMMARY [BOOK GRAPHIC]

Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
<PAGE> 57

FUND FINANCIAL REPORTS

Mailed in March and September for this Fund.

TAX STATEMENTS

Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.

AVERAGE COST REVIEW STATEMENT [BOOK GRAPHIC]

Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
<PAGE> 58
(This page intentionally left blank.)
<PAGE> 59
GLOSSARY OF INVESTMENT TERMS

ACTIVE MANAGEMENT

An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.

CAPITAL GAINS DISTRIBUTION

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

CASH RESERVES

COMMON STOCK

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

DISTRIBUTIONS

Payments to shareholders of dividend income, capital gains, and return of
capital generated by the fund's investment activities and distribution policies,
after expenses.

DIVIDEND INCOME

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

EXPENSE RATIO

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

FUND DIVERSIFICATION

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

INDUSTRY CONCENTRATION

Focusing on the securities of a specific industry (such as real estate,
technology, or utilities).

MUTUAL FUND

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

PRINCIPAL

The amount of your own money you put into an investment.

TOTAL RETURN

VOLATILITY

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

YIELD

Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 60
[SHIP GRAPHIC]

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

FOR MORE INFORMATION

If you'd like more information about Vanguard Utilities Income Fund, the
following documents are available free upon request:

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS

Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders. In these reports, you will find a
discussion of the market conditions and investment strategies that significantly
affected the Fund's performance during the most recent fiscal year.

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI provides more detailed information about the Fund.

The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.

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

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

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

TEXT TELEPHONE:
1-800-952-3335

WORLD WIDE WEB:
www.vanguard.com

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

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

TEXT TELEPHONE:
1-800-662-2738

INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)

You can review and copy information about the Fund (including the SAI) at the
SEC's Public Reference Room in Washington, D.C. To find out more about this
public service, call the SEC at 1-800-SEC-0330. Reports and other information
about the Fund are also available on the SEC's website (www.sec.gov), or you can
receive copies of this information, for a fee, by writing the Public Reference
Section, Securities and Exchange Commission, Washington, DC 20549-6009.

Fund's Investment Company Act file number: 811-3916

P057N - 05/28/1999

<PAGE> 61

VANGUARD REIT INDEX FUND

Prospectus
May 28, 1999

A Real Estate Stock Mutual Fund

Contents

1 Fund Profile

3 Additional Information

3 An Introduction to Index Funds

4 A Word About Risk

4 Who Should Invest

5 Primary Investment Strategies

8 The Fund and Vanguard

8 Investment Adviser

8 Year 2000 Challenge

9 Dividends, Capital Gains, and Taxes

10 Share Price

11 Financial Highlights

12 Investing with Vanguard

12 Services and Account Features

13 Types of Accounts

13 Buying Shares

15 Redeeming Shares

18 Transferring Registration

18 Fund and Account Updates

Glossary (inside back cover)

- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT

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

FUND PROFILE

The following profile summarizes key features of Vanguard REIT Index Fund.

INVESTMENT OBJECTIVE

The Fund is a stock index fund that seeks to provide a high level of income and
moderate long-term capital growth.

INVESTMENT STRATEGIES

The Fund invests at least 98% of its assets in stocks issued by real estate
investment trusts (known as "REITs"), in an attempt to parallel the investment
performance of the Morgan Stanley REIT Index. The Fund's remaining assets are
invested in cash reserves.

PRIMARY RISKS

THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
fund is also subject to:

- - Real estate industry risk, which is the chance that property values will fall
due to a variety of factors, such as a decline in rental rates.

- - Interest rate risk, which is the chance that changes in interest rates will
hurt real estate values.

PERFORMANCE/RISK INFORMATION

The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual returns for one
calendar year and since inception compare with those of a broad-based securities
market index. Keep in mind that the Fund's past performance does not indicate
how it will perform in the future.

- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------

[BAR GRAPH]

The Fund's year-to-date return as of the most recent calendar quarter
ended March 31, 1999, was -%.

During the period shown in the bar chart, the highest return for a calendar
quarter was -% (quarter ended ___________) and the lowest return for a quarter
was - -% (quarter ended ___________).

AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard REIT Index Fund -% -%

Morgan Stanley REIT Index - -

*May 13, 1996.
- --------------------------------------------------------------------------------
<PAGE> 63
2

PLAIN TALK ABOUT
THE COSTS OF INVESTING

PLAIN TALK ABOUT
FUND EXPENSES

All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard REIT Index Fund's expense ratio in fiscal year 1999 was - %,
or $ - per $1,000 of average net assets. The average growth equity mutual fund
had expenses in 1998 of - %, or $ - per $1,000 of average net assets, according
to Lipper, Inc., which reports on the mutual fund industry.

FEES AND EXPENSES

SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: 1%*

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

- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$- $- $- $-

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

PLAIN TALK ABOUT
VANGUARD'S REDEMPTION FEES

The Vanguard REIT fund charges a redemption fee on shares that are redeemed
(including those redeemed by exchanging to another Vanguard fund) before they
have been held for one year. Unlike a sales charge or load paid to a broker or
fund management company, the redemption fee is paid directly to the fund to
offset the costs of buying and selling securities. The fee, which is intended to
discourage short-term trading, ensures that short-term investors pay their share
of the fund's transaction costs and that long-term investors do not subsidize
the activities of short-term traders.
<PAGE> 64
3

ADDITIONAL INFORMATION

DIVIDENDS AND CAPITAL GAINS

Distributions are paid in March, June, September, and December. These
distributions may include dividends and capital gains (which are taxable) and
a return of capital (which is generally nontaxable). Dividends are distributed
in March, June, September, and December; capital gains are distributed
annually in December

INVESTMENT ADVISER

Vanguard Core Management Group, Valley Forge, Pa., since inception

INCEPTION DATE

May 13, 1996

NET ASSETS AS OF JANUARY 31, 1999

$- billion

SUITABLE FOR IRAS

Yes

MINIMUM INITIAL INVESTMENT

$3,000; $1,000 for IRAs and custodial accounts for minors

NEWSPAPER ABBREVIATION

REIT

VANGUARD FUND NUMBER

123

CUSIP NUMBER

921908703

TICKER SYMBOL

VGSIX

AN INTRODUCTION TO INDEX FUNDS

WHAT IS INDEXING?

An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. An index (or "passively
managed") fund tries to match, as closely as possible, the performance of an
established target index. The fund does this by holding all, or a representative
sample, of the securities in the index.

Index funds may seek to track indexes that hold a certain type of stock --
such as growth or value, small-cap or large-cap, or those from just one industry
- -- or they may seek to track indexes that consist of a broader range of stocks
- -- for example, the entire U.S. stock market.

Index funds are not actively managed by investment advisers who buy and sell
securities based on research and analysis, in an attempt to outperform the
market as a whole. Rather, index funds simply mirror what the target index does,
for better or worse.

WHY INVEST IN INDEX FUNDS?

Index funds appeal to many investors for a number of reasons:

- - Simplicity. Indexing is a straightforward market-matching strategy.

- - Diversification. Indexes generally cover a wide variety of companies and
industries.

- - Relative performance predictability. An index fund is expected to closely
parallel the performance of its target index.

- - Low cost. Index funds do not have many of the expenses of an actively managed
fund -- such as research -- and they keep trading activity, and thus
brokerage commissions, to a minimum.

- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust the number of
shares it holds to reflect a change in its target index, the fund's turnover
rate -- and thus its realization of taxable capital gains -- is usually very
low.

KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION COSTS;
A MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND -- WHILE EXPECTED TO TRACK ITS
TARGET INDEX AS CLOSELY AS POSSIBLE -- WILL TYPICALLY BE UNABLE TO MATCH THE
PERFORMANCE OF THE INDEX EXACTLY.
<PAGE> 65
4

- --------------------------------------------------------------------------------
A WORD ABOUT RISK

This prospectus describes the risks you would face as an investor in Vanguard
REIT Index Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard REIT Index Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.

Look for this [FLAG GRAPHIC] symbol throughout the prospectus. It is used to
mark detailed information about each type of risk that you would confront as a
shareholder of the Fund.

PLAIN TALK ABOUT
COSTS AND MARKET-TIMING

WHO SHOULD INVEST

The Fund may be a suitable investment for you if:

- - You are seeking a simple, low-cost way to diversify your stock, bond, and
money market investments with indirect exposure to real estate.

- - You are seeking a stock fund that offers the potential for above-average
income.

- - You are seeking some growth of capital over the long term -- at least five
years.

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

The Fund has adopted the following policies, among others, to discourage
short-term trading:

- - The Fund reserves the right to reject any purchase request -- including
exchanges from other Vanguard funds -- that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.

- - The Fund imposes a 1% redemption fee on shares that are redeemed by any
method within one year of purchase.

- - There is a limit on the number of times you can exchange into and out of the
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).

- - The Fund reserves the right to stop offering shares at any time.

- - Telephone and online exchanges are not permitted for non-IRA accounts.

PLAIN TALK ABOUT
REITs

Rather than owning properties directly -- which can be costly and difficult to
convert into cash when needed --some investors buy shares in a company that owns
and manages real estate. This company is known as a real estate investment
trust, or REIT. Unlike corporations, REITs do not have to pay income taxes if
they meet certain Internal Revenue Code requirements. To qualify, a REIT must
distribute at least 95% of its taxable income to its shareholders and receive at
least 75% of that income from rents, mortgages, and sales of property. REITs
offer investors greater liquidity and diversification than direct ownership of a
handful of properties, as well as greater income potential than an investment in
common stocks. Like any investment in real estate, however, a REIT's performance
depends on several factors, such as its ability to find tenants for its
properties, to renew leases, and to finance property purchases and renovations.
<PAGE> 66
5

PLAIN TALK ABOUT
TYPES OF REITS

An equity REIT, which owns properties, generates income from rental and lease
payments and offers the potential for growth from property appreciation. Equity
REITs also provide occasional capital gains from the sale of property. A
mortgage REIT makes loans to commercial real estate developers. Mortgage REITs
earn interest income and are subject to credit risk (that is, the chance that a
developer will fail to repay a loan). A hybrid REIT holds properties and
mortgages.

PRIMARY INVESTMENT STRATEGIES

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

MARKET EXPOSURE

The Fund intends to remain at least 98% invested in the stocks of real estate
investment trusts (REITs); the remaining assets will be invested in cash
reserves to maintain liquidity for shareholder redemptions.

[FLAG GRAPHIC] THE FUND IS SUBJECT TO REAL ESTATE INDUSTRY RISK, WHICH IS THE
CHANCE THAT A REIT'S PROPERTIES COULD FALL IN VALUE.

Because of its emphasis on REIT stocks, the Fund's performance is strongly
linked to the ups and downs of the real estate market. In general, real estate
values are affected by a variety of factors, including supply and demand for
properties; the economic health of the country as well as different regions; and
the strength of specific industries that rent properties. Ultimately, an
individual REIT's performance depends on the types and locations of the
properties it owns and on how well the REIT manages its properties. For
instance, rental income could decline because of extended vacancies, increased
competition from nearby properties, tenants' failure to pay rent, or incompetent
management. Property values could decrease because of overbuilding,
environmental liabilities, uninsured damages caused by natural disasters, loss
of IRS status as a qualified REIT, a general decline in the neighborhood, losses
due to casualty or condemnation, increases in property taxes, or changes in
zoning laws.

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

PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS

Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization.
Generally, Vanguard defines large-capitalization (large-cap) funds as those
holding stocks of companies whose outstanding shares have a market value
exceeding $10 billion. Mid-cap funds hold stocks of companies with a market
value between $1 billion and $10 billion. Small-cap funds typically hold stocks
of companies with a market value of less than $1 billion.
<PAGE> 67
6

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

U.S. STOCK MARKET RETURNS (1926 - 1998)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 54.2% 24.1% 19.9% 17.7%
Worst - 43.1 - 12.4 - 0.8 3.1

Average 13.1 10.7 11.0 11.0
- --------------------------------------------------------------------------------

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1998. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 10.7%, returns for individual 5-year periods
ranged from a - 12.4% average (from 1928 through 1932) to 24.1% (from 1994
through 1998). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.

REITs in the Morgan Stanley REIT Index tend to be small or medium-size
companies; their market capitalizations generally range from $75 million to $4
billion. Like small-cap stocks in general, REIT stocks can be more volatile than
- -- and at times will perform differently from -- the large-cap stocks found in
the S&P 500 Index.

In addition, because small-cap stocks are typically less liquid than
large-cap stocks, REIT stocks may sometimes experience greater share-price
fluctuations than the stocks of larger companies. Historically, however, the
significant amount of dividend income provided by REITs has tended to soften the
impact of this volatility.

[FLAG GRAPHIC] THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE
POSSIBILITY THAT CHANGES IN INTEREST RATES COULD HURT REIT PERFORMANCE.

In general, during periods of high interest rates, REITs may lose some of
their appeal for investors who may be able to obtain higher yields from other
income-producing investments, such as long-term bonds. Higher interest rates
also mean that financing for property purchases and improvements is more costly
and difficult to obtain.

SECURITY SELECTION

Vanguard REIT Index Fund employs an indexing, or passively managed, investment
approach. The Fund's adviser, Vanguard Core Management Group, invests at least
98% of the Fund's assets in an attempt to parallel the performance of the Fund's
target benchmark, the Morgan Stanley REIT Index.

The Fund holds each stock contained in the Morgan Stanley REIT Index in
roughly the same proportions as in the Index itself. For example, if 5% of the
Morgan Stanley REIT Index were made up of the stock of a specific REIT, the Fund
would invest the same percentage of its noncash assets in that stock.

The Morgan Stanley REIT Index is made up of the stocks of all publicly traded
equity REITs (except health-care REITs) that meet certain criteria. For example,
to be included in the Index, a REIT must have a total market capitalization of
at least $100 million and have enough shares and trading volume to be considered
liquid. In line with the Index, Vanguard REIT Index Fund invests in equity REITs
only.

As of January 31, 1999, - equity REITs were included in the Index. The Index
is rebalanced every calendar quarter, as well as each time that a REIT is
removed from the Index because the REIT's market capitalization falls below $75
million; or because of other changes in the REIT's status; or because of
corporate activity such as a merger, acquisition, leveraged buyout, bankruptcy,
IRS removal of REIT status, fundamental change in business, or change in shares
outstanding.
<PAGE> 68
7

PLAIN TALK ABOUT
TURNOVER RATE

Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all domestic stock funds is
approximately 85%, according to Morningstar, Inc.

Stocks in the Morgan Stanley REIT Index represent a broadly diversified range
of property types and regions. The Index's makeup, as of January 31, 1999,
follows.

- --------------------------------------------------------------------------------
PROPERTY TYPES PERCENTAGE OF FUND
- --------------------------------------------------------------------------------
Retail -

Residential Apartments -

Office -

Industrial -

Hotels -

Diversified -
- --------------------------------------------------------------------------------

The Fund is generally managed without regard to tax ramifications.

TURNOVER RATE

Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have
been held. The Fund's average turnover rate since inception has been about - %.
(A turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)

OTHER INVESTMENT POLICIES AND RISKS

Besides investing in common stocks of REITs, the Fund may make certain other
kinds of investments to achieve its objective.

The Fund may invest, to a limited extent, in foreign securities.

The Fund may also invest, to a limited extent, in stock futures and
options contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial -- in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The value of all futures contracts in which the Fund
acquires an interest cannot exceed 20% of its total assets. To the extent that
such contracts are utilized, the Fund will not have 98% of its assets invested
in REIT stocks. However, such contracts will only be utilized to mirror the
performance of the Index.

The reasons for which the Fund will invest in futures and options are:

- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.

PLAIN TALK ABOUT
DERIVATIVES

PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE

- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.

Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Fund generally is managed without regard to tax ramifications.

THE FUND AND VANGUARD

Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.

PLAIN TALK ABOUT
THE FUND'S ADVISER

Vanguard Core Management Group provides investment advisory services to many
Vanguard funds. As of January 31, 1999, the Group managed more than $- billion
in total assets. The individual responsible for overseeing the REIT Index Fund's
investments is:

GEORGE U. SAUTER, Managing Director of Vanguard; has worked in investment
management since 1985; primary responsibility for Vanguard Core Management since
1987; A.B., Dartmouth College; M.B.A., University of Chicago.

INVESTMENT ADVISER

Vanguard Core Management Group (the Group), P.O. Box 2600, Valley Forge, PA
19482, provides advisory services on an at-cost basis to Vanguard REIT Index
Fund. For the fiscal year ended January 31, 1999, the advisory fees represented
an effective annual rate of _____% of the Fund's average net assets.

The Fund has authorized the Group to choose brokers or dealers to handle the
purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions. The Fund may direct the Group to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Fund.

YEAR 2000 CHALLENGE

The common practice in computer programming of using just two digits
to identify a year has resulted in the Year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading to
errors or failure. Such failure could adversely affect a fund's operations,
including pricing, securities trading, and the servicing of shareholder
accounts.

In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.

DIVIDENDS, CAPITAL GAINS, AND TAXES

Each March, June, September, and December, Vanguard REIT Index Fund
will provide shareholders with virtually all of the distributions it receives
from its REIT investments; such distributions may include return of capital and
capital gains distributions. The Fund may also realize gains on the sale of its
REIT investments; distributions of these gains, if any, will be included in the
December distribution. In addition, the Fund may occasionally be required to
make supplemental dividend or capital gains distributions at some other time
during the year. You can receive distributions of income or capital gains in
cash, or you can have them automatically invested in more shares of the Fund.
In either case, these distributions are taxable to you (to the extent they are
not return of capital). It is important to note that distributions of dividends
and capital gains that are declared in December -- if paid to you by the end of
January -- are taxed as if they had been paid to you in December.

Vanguard will send you a statement each year showing the tax status of all
your distributions. REITs do not provide complete information about the
taxability of their distributions until after the calendar year-end. As a
result, Vanguard cannot determine how much of the Fund's annual distributions is
taxable for shareholders until after the traditional January 31 deadline for
issuing Forms 1099-DIV (1099). Therefore, we will request permission each year
from the Internal Revenue Service (IRS) for an extension. IF OUR REQUEST IS
APPROVED, WE EXPECT TO MAIL FORMS 1099 TO VANGUARD REIT INDEX FUND SHAREHOLDERS
WITH NONRETIREMENT ACCOUNTS IN FEBRUARY.

If you have chosen to receive dividend and/or capital gains distributions in
cash, and the postal or other delivery service is unable to deliver checks to
your address of record, we will change the distribution option so that all
dividends and other distributions are automatically invested in additional
shares. We will not pay interest on uncashed distribution checks.

- - The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.

- - Any distributions of net long-term capital gains by the Fund are taxable to
you as long-term capital gains, no matter how long you've owned shares in the
Fund.

- - Although the Fund does not seek to realize any particular amount of capital
gains during a year, such gains are realized from time to time as by-products
of its ordinary investment activities. Consequently, distributions may
vary considerably from year to year.

PLAIN TALK ABOUT
DISTRIBUTIONS

PLAIN TALK ABOUT
RETURN OF CAPITAL

The Internal Revenue Code requires a REIT to distribute at least 95% of its
taxable income to investors. In many cases, however, because of "noncash"
expenses such as property depreciation, an equity REIT's cash flows will exceed
its taxable income. The REIT may distribute this excess cash to offer a more
competitive yield (in other words, provide investors with a higher
distribution). This portion of the distribution is classified as a return of
capital.
<PAGE> 71
10

- - Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Fund shares, may be subject to state and local
income taxes as well.

- - Any dividends distributed by REITs -- and funds that invest in REITs -- are
not eligible for the dividends-received deduction for corporations.

The portion of your distributions that is classified as a return of capital
is generally not taxable to you. However, when you receive a return of capital,
your cost basis (that is, the adjusted cost of your investment, which is used to
determine a capital gain or loss) is decreased by the amount of the return of
capital. This, in turn, will affect the capital gain or loss you realize when
you sell or exchange any of your Vanguard REIT Index Fund shares.

Two other important tax considerations about return of capital:

- - If you do not reinvest your distributions (that is, you receive your
distributions in cash), your original investment in the Fund will be reduced
by the amount of return of capital and capital gains included in the
distribution.

- - A return of capital is generally not taxable to you; however, any return of
capital distribution would be taxable as a capital gain once your cost basis
is reduced to zero (which could happen if you do not reinvest your
distributions, and return of capital in those distributions is significant).

The tax information in this prospectus is provided as general information and
will not apply to you if you are investing through a tax-deferred account such
as an IRA or a qualified employee benefit plan. (Non-U.S. investors may be
subject to U.S. withholding and estate tax.) You should consult your tax adviser
about the tax consequences of an investment in the Fund.

SHARE PRICE

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

The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Index Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is REIT.
<PAGE> 72
11

PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE

The Fund began fiscal 1999 with a net asset value (price) of $- per share.
During the year, the Fund earned $- per share from investment income (interest
and dividends) and $ - per share from investments that had appreciated in value
or that were sold for higher prices than the Fund paid for them.

Shareholders received $- per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.

As of January 31, 1999, the Fund had $ - billion in net assets. For the year,
its expense ratio was - % ($ per $1,000 of net assets); and net investment
income amounted to - % of its average net assets. It sold and replaced
securities valued at - % of its net assets.

FINANCIAL HIGHLIGHTS

The following financial highlights table is intended to help you understand the
Fund's financial performance since inception, and certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned or lost each year on an
investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose report --
along with the Fund's financial statements -- is included in the Fund's most
recent annual report to shareholders. You may have the annual report sent to you
without charge by contacting Vanguard.

<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
VANGUARD REIT INDEX FUND
YEAR ENDED JANUARY 31, MAY 13, 1996,* TO
----------------------
1999 1998 JAN. 31, 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD - $ 12.64 $ 10.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .590 .341
Net Realized and Unrealized Gain (Loss)
on Investments - 1.520 2.659
-----------------------------------
Total from Investment Operations - 2.110 3.000
-----------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income - (.590) (.341)
Distributions from Realized Capital Gains - (.086) (.005)
Return of Capital - (.094) (.014)
-----------------------------------
Total Distributions - (.770) (.360)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD - $ 13.98 $ 12.64
================================================================================

TOTAL RETURN** - 17.08% 30.33%
================================================================================

RATIOS/SUPPLEMENTAL DATA

Net Assets, End of Period (Millions) - $ 1,317 $ 655

Ratio of Total Expenses to
Average Net Assets - 0.24% 0.36%+

Ratio of Net Investment Income to
Average Net Assets - 4.66% 5.55%+

Portfolio Turnover Rate - 2% 0%
================================================================================
</TABLE>

* Inception.

** Total return figures do not reflect the 1% fee assessed on redemptions of
shares held for less than one year.

+ Annualized.

"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.

Vanguard REIT Index Fund is not sponsored, sold, promoted, or endorsed by Morgan
Stanley. The Morgan Stanley REIT Index is the exclusive property of Morgan
Stanley and is a service mark of Morgan Stanley Group Inc.
<PAGE> 73
12

INVESTING WITH VANGUARD

Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.

SERVICES AND ACCOUNT FEATURES

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------

TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)

Automatically set up for this Fund unless you notify us otherwise.
NOTE: Limitations do apply; see page 15.
- --------------------------------------------------------------------------------

VANGUARD DIRECT DEPOSIT SERVICE(TM) [BOOK GRAPHIC]

Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------

VANGUARD AUTOMATIC EXCHANGE SERVICE(TM) [BOOK GRAPHIC]

Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------

VANGUARD FUND EXPRESS(R) [BOOK GRAPHIC]

VANGUARD DIVIDEND EXPRESS(TM) [BOOK GRAPHIC]

Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------

VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK GRAPHIC]

ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER GRPAHIC]

- - Open a new account.*

- - Buy, sell, or exchange shares of most funds.

- - Change your name/address.

- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).

*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------

INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335

Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------

CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-662-2738

Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------

SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102

Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
<PAGE> 74
13

TYPES OF ACCOUNTS

Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------

FOR ONE OR MORE PEOPLE

Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------

FOR HOLDING PERSONAL TRUST ASSETS [BOOK GRAPHIC]

Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------

FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK GRAPHIC]

FOR AN ORGANIZATION [BOOK GRAPHIC]

Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------

FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS

Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------

VANGUARD PROTOTYPE PLANS

Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------

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

A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS

BUYING SHARES

MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).

add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------

A NOTE ON LOW BALANCES

By Mail to . . . [ENVELOPE GRAPHIC]
open a new account
Complete and sign the application form and enclose your check.

add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form.
- --------------------------------------------------------------------------------
<PAGE> 75
14

BUYING SHARES (continued)

Make your check payable to: The Vanguard Group - 123
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2600 455 Devon Park Drive
Valley Forge, PA 19482-2600 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

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

- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------

BY TELEPHONE TO . . . [PHONE GRAPHIC]

open a new account

add to an existing account

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

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

*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.

- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
- --------------------------------------------------------------------------------

BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE GRAPHIC]

Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.

Wire to:
FRB ABA 021001088
Marine Midland Bank, New York

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard REIT Index Fund - 123
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------
<PAGE> 76
15

- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES

REDEEMING SHARES

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

When Selling Shares:

- - Vanguard sends the redemption proceeds to you or a designated third party.*

- - You can sell all or part of your Fund shares at any time.

*May require a signature guarantee; see footnote on page 17.

When Exchanging Shares:

- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.

- - You must meet the receiving fund's minimum investment requirements.

- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.

- --------------------------------------------------------------------------------
NOTE: Once a redemption is processed and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------

HOW TO REQUEST A REDEMPTION

You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
- --------------------------------------------------------------------------------

ONLINE REQUESTS [COMPUTER GRAPHIC]

ACCESS VANGUARD at www.vanguard.com

NOTE: The Vanguard funds whose shares you cannot exchange online or by
telephone are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND,
VANGUARD INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, VANGUARD
TOTAL INTERNATIONAL STOCK INDEX FUND, AND VANGUARD GROWTH AND INCOME FUND. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.
- --------------------------------------------------------------------------------

TELEPHONE REQUESTS [PHONE GRAPHIC]

All Account Types Except Retirement:

Call Vanguard Tele-Account 24 hours a day -- or Client Services during business
hours -- to sell shares.

Retirement Accounts:

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

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
<PAGE> 77
16

REDEEMING SHARES (continued)

- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------

We reserve the right to refuse a telephone redemption if the caller is unable
to provide:

[CHECK MARK] The ten-digit account number.

[CHECK MARK] The name and address exactly as registered on the account.

[CHECK MARK] The primary Social Security or employer identification number as
registered on the account.

[CHECK MARK] The Personal Identification Number, if applicable.

Please note that Vanguard will not be responsible for any account losses due
to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------

A NOTE ON UNUSUAL CIRCUMSTANCES

MAIL REQUESTS [ENVELOPE GRAPHIC]

All Account Types Except Retirement:

Vanguard Retirement Accounts:

For information on how to request distributions from:

- - Traditional IRAs and Roth IRAs -- call Client Services.

- - SEP - IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans -- call Individual Retirement Plans at
1-800-662-2003.

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

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1120 455 Devon Park Drive
Valley Forge, PA 19482-1120 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division...

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
<PAGE> 78
17

- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS

It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds -- up to seven days -- if the
amount will disrupt the Fund's operation or performance.

OPTIONS FOR REDEMPTION PROCEEDS

You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.
- --------------------------------------------------------------------------------

CHECK REDEMPTIONS

Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------

EXCHANGE REDEMPTIONS

As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------

FOR OUR MUTUAL PROTECTION

For your best interests and ours, Vanguard applies these additional requirements
to redemptions:

REQUEST IN "GOOD ORDER"

All redemption requests must be received by Vanguard in "good order." This means
that your request must include:

[CHECK MARK] The Fund name and account number.

[CHECK MARK] The amount of the transaction (in dollars or shares).

[CHECK MARK] Signatures of all owners exactly as registered on the account (for
mail requests).

[CHECK MARK] Signature guarantees (if required).*

[CHECK MARK] Any supporting legal documentation that may be required.

[CHECK MARK] Any outstanding certificates representing shares to be redeemed.

TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------

LIMITS ON ACCOUNT ACTIVITY

Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:

- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.

- - Your round trips through the Fund must be at least 30 days apart.

- - The Fund may refuse a share purchase at any time, for any reason.

- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.

REDEEMING SHARES (continued)

- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES

The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------

ALL TRADES FINAL

TRANSFERRING REGISTRATION

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

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1100 455 Devon Park Drive
Valley Forge, PA 19482-1100 Wayne, PA 19087-1815

For clients of Vanguard's Institutional Division . . .

FUND AND ACCOUNT UPDATES

STATEMENTS AND REPORTS

We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.

CONFIRMATION STATEMENT

Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------

PORTFOLIO SUMMARY [BOOK GRAPHIC]

- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS

Mailed in March and September for this Fund.
- --------------------------------------------------------------------------------

TAX STATEMENTS

Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------

AVERAGE COST REVIEW STATEMENT [BOOK GRAPHIC]

Issued annually for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE> 81
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE> 82
GLOSSARY OF INVESTMENT TERMS

ACTIVE MANAGEMENT

CAPITAL GAINS DISTRIBUTION

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

CASH RESERVES

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

COMMON STOCK

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

COST BASIS

The adjusted cost of an investment, used to determine a capital gain or loss for
tax purposes.

DISTRIBUTIONS

Payments to shareholders of dividend income, capital gains, and return of
capital generated by the fund's investment activities and distribution policies,
after expenses.

DIVIDEND INCOME

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

EXPENSE RATIO

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

FIXED-INCOME SECURITIES

Investments, such as bonds, that have a fixed payment schedule. While the level
of income offered by these securities is predetermined, their prices may
fluctuate.

FUND DIVERSIFICATION

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

INDUSTRY CONCENTRATION

Focusing on the securities of a specific industry (such as real estate,
technology, or utilities).

LIQUIDITY

The degree of a security's marketability (that is, how quickly the security can
be sold at a fair price and converted to cash).

MUTUAL FUND

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

PASSIVE MANAGEMENT

A low-cost investment strategy in which a mutual fund tries to match -- rather
than outperform -- a particular market index. Also known as indexing.

PRINCIPAL

The amount of your own money you put into an investment.

REAL ESTATE INVESTMENT TRUST (REIT)

A company that owns and manages a fund of properties, mortgages, or both.

RETURN OF CAPITAL

A nontaxable portion of distributions. In general, the cost basis of an
investment is reduced when a return of capital is distributed, deferring taxes
until the investment is sold.

TOTAL RETURN

VOLATILITY

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

YIELD

Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 83
[VANGUARD LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600

FOR MORE INFORMATION

If you'd like more information about Vanguard REIT Index Fund, the following
documents are available free upon request:

ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS

STATEMENT OF ADDITIONAL INFORMATION (SAI)

The SAI provides more detailed information about the Fund.

The current annual and semiannual reports and the SAI are incorporated by
reference into (and are thus legally a part of) this prospectus.

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

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

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

TEXT TELEPHONE:
1-800-952-3335

WORLD WIDE WEB:
www.vanguard.com

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

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

TEXT TELEPHONE:
1-800-662-2738

INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC)

Fund's Investment Company Act
file number: 811-3916

Distributor.

P123N - 05/28/1999

<PAGE> 84

PART B

VANGUARD SPECIALIZED FUNDS

(THE "TRUST")

STATEMENT OF ADDITIONAL INFORMATION

MAY 28, 1999

This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectuses (dated May 28, 1999). To obtain a Prospectus or
an additional Annual Report to Shareholders, which contains the Funds' Financial
Statements as hereby incorporated by reference, please call the Investor
Information Department:

1-800-662-7447

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of the Trust.................................... B-1
Investment Policies......................................... B-3
Fundamental Investment Limitations.......................... B-8
Management of the Trust..................................... B-10
Investment Advisory Services................................ B-13
Securities Transactions..................................... B-14
Purchase of Shares.......................................... B-15
Redemption of Shares........................................ B-16
Share Price................................................. B-16
Performance Measures........................................ B-17
Yield and Total Return...................................... B-19
Financial Statements........................................ B-21
</TABLE>

DESCRIPTION OF THE TRUST

ORGANIZATION

The Trust was organized as a Pennsylvania business trust in 1983, and then
reorganized as a Maryland corporation in 1986. It reorganized again as a
Delaware business trust in June 1998. Prior to its reorganization as a Delaware
business trust, the Trust was known as Vanguard Specialized Portfolios, Inc. The
Trust is registered with the United States Securities and Exchange Commission
under the Investment Company Act of 1940 (the "1940 Act") as an open-end,
diversified management investment company. It currently offers the following
funds (all investor share class):

Vanguard Energy Fund

Vanguard Gold and Precious Metals Fund

Vanguard Health Care Fund

Vanguard Utilities Income Fund

Vanguard REIT Index Fund

(individually, a "Fund"; collectively, the "Funds")

The Trust has the ability to offer additional funds or classes of shares. There
is no limit on the number of full and fractional shares that the Trust may issue
for a single fund or class of shares.

B-1
<PAGE> 85

SERVICE PROVIDERS

CUSTODIANS. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, The Chase Manhattan Bank, N.A., 4 Chase MetroTech
Center, Brooklyn, New York 11245, and First Union National Bank, PA4943, 530
Walnut Street, Philadelphia, Pennsylvania 19106, serve as the Trust's
custodians. The custodians are responsible for maintaining the Funds' assets and
keeping all necessary accounts and records.

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

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

CHARACTERISTICS OF THE TRUST'S SHARES

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

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

DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such funds. No shares have
priority or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.

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

LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of applicable funds of
the Trust.

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

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

B-2
<PAGE> 86

REDEMPTION PROVISIONS. The Trust's redemption provisions are described in
its current prospectuses and elsewhere in this Statement of Additional
Information.

SINKING FUND PROVISIONS. The Trust has no sinking fund provisions.

CALLS OR ASSESSMENT. The Trust's shares, when issued, are fully paid and
non-assessable.

TAX STATUS OF THE TRUST

Each Fund of the Trust qualifies as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. This special tax status means that a
Fund will not be liable for federal tax on income and capital gains distributed
to shareholders. In order to preserve its tax status, each Fund of the Trust
must comply with certain requirements. If a Fund fails to meet these
requirements in any taxable year, it will be subject to tax on its taxable
income at corporate rates, and all distributions from earnings and profits,
including any distributions of net tax-exempt income and net long-term capital
gains, will be taxable to shareholders as ordinary income. In addition, the Fund
could be required to recognize unrealized gains, pay substantial taxes and
interest, and make substantial distributions before regaining its tax status as
a regulated investment company.

INVESTMENT POLICIES

The following policies supplement the Trust's investment objectives and
policies set forth in the Prospectuses.

FOREIGN INVESTMENTS. As indicated in the Prospectuses, each Fund may
include foreign securities to a certain extent. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.

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

FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are generally
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the marking-to-market rules
applicable to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. The Treasury Department issued regulations under which
certain transactions subject to the special currency rules that are part of a
"section 988 hedging transaction" (as defined in the Internal Revenue Code of
1986, as amended, and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated

B-3
<PAGE> 87

consistently for purposes of the Code. Any gain or loss attributable to the
foreign currency component of a transaction engaged in by a Fund which is not
subject to the special currency rules (such as foreign equity investments other
than certain preferred stocks) will be treated as capital gain or loss and will
not be segregated from the gain or loss on the underlying transaction. It is
anticipated that some of the non-U.S. dollar-denominated investments and foreign
currency contracts the Funds may make or enter into will be subject to the
special currency rules described above.

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

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

Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from foreign companies held by the Funds. However, these
foreign withholding taxes are not expected to have a significant impact on the
Funds, since each Fund seeks long-term capital appreciation and any income
should be considered incidental.

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

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

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

TURNOVER RATE. While the rate of turnover is not a limiting factor when
management deems changes appropriate, it is anticipated that each Fund's annual
turnover rate will not normally exceed 100% (25% for Vanguard REIT Index Fund).
A turnover rate of 100% would occur if all of the Fund's securities, exclusive
of U.S. Government securities and other securities whose maturities at the time
of acquisition are one year or less, were replaced within the period of one
year. Turnover rates may vary greatly from year to year as well as within a
particular year and may also be affected by cash requirements for redemptions of
each Fund's shares and by requirements which enable the Trust to receive certain
favorable tax treatments. The turnover rates will, of course, depend in large
part on the level of purchases and redemptions of shares of each Fund. Higher
turnover can result in corresponding increases in brokerage costs to the Funds
and their shareholders.

B-4
<PAGE> 88

FUTURES CONTRACTS. Each Fund may enter into futures contracts, options,
and options on futures contracts for several reasons: to maintain cash reserves
while remaining fully invested, to facilitate trading, to reduce transaction
costs, or to seek higher investment returns when a futures contract is priced
more attractively than the underlying equity security or index. 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 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 margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. Each Fund's margin deposits will be placed in a
segregated account maintained by the Fund's custodian bank. A margin deposit is
intended to assure completion of the contract (delivery or acceptance of the
underlying security) if it is not terminated prior to the specified delivery
date. Minimal initial margin requirements are established by the futures
exchange and may be changed. Brokers may establish deposit requirements which
are higher than the exchange minimums. Futures contracts are customarily
purchased and sold on margin which may range upward from less than 5% of the
value of the contract being traded.

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

Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. A 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 a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
a 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. A Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of its total assets. In addition, a Fund will not enter into futures
contracts to the extent

B-5
<PAGE> 89

that its outstanding obligations to purchase securities under these contracts
would exceed 20% of the its 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, a 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, a 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.

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

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the 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. However, because the futures
strategies of the Fund are engaged in only for hedging purposes, the Adviser
does not believe that the Funds are subject to the risks of loss frequently
associated with futures transactions. A 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 a 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 a Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by a Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund has an open position in a futures contract or related option.
Additionally, investments in futures contracts and options involve the risk that
the investment advisers will incorrectly predict stock market and interest rate
trends.

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. Each 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 a Fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities

B-6
<PAGE> 90

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 a 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
foreign currencies or other income derived with respect to the Fund's business
of investing in securities or currencies. It is anticipated that any net gain
realized from the closing out of futures contracts will be considered qualifying
income for purposes of the 90% requirement.

A 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 transactions.

REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements with
commercial banks, brokers or dealers either for defensive purposes due to market
conditions or to generate income from its excess cash balances. A repurchase
agreement is an agreement under which the Fund acquires a fixed-income security
(generally a security issued by the U.S. Government or an agency thereof, a
banker's acceptance or a certificate of deposit) from a commercial bank, broker
or 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 a custodian bank until repurchased. In addition, the
Trust's Board of Trustees will monitor each Fund's repurchase agreement
transactions generally and will establish guidelines and standards for review by
the investment adviser of the creditworthiness of any bank, broker or dealer
party to a repurchase agreement with any Fund of the Trust.

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 realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that the Fund may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Trust's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.

LENDING OF SECURITIES. Each Fund may lend its securities on a short-term
basis or long-term basis to qualified institutional investors (typically
brokers, dealers, banks or other financial institutions) who need to borrow
securities in order to complete certain transactions, such as covering short
sales, avoiding failures to deliver securities or completing arbitrage
operations. By lending its securities, the Fund will be attempting to increase
its net investment income through the receipt of interest on the loan. Any gain
or loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Fund. The terms, the structure
and the aggregate amount of such loans must be consistent with the Investment
Company Act of 1940 and the Rules and Regulations or interpretations of the
Securities and Exchange Commission (the "Commission") thereunder. These
provisions limit the amount of securities a fund may lend to 33 1/3% of the
Fund's total assets, and require that (a) the borrower pledge and maintain with
the Fund collateral consisting of cash, an irrevocable letter of credit or
securities issued or guaranteed by the United States Government having a value
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 receives
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

B-7
<PAGE> 91

market value. Loan arrangements made by a 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 Trust's Board of Trustees.

At the present time, the Staff of the Commission does not object if an
investment company pays reasonably negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.

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

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

FOREIGN TAX CREDIT. Foreign governments may withhold taxes on dividends
and interest paid with respect to foreign securities. Foreign governments may
also impose taxes on other payments or gains with respect to foreign securities.
If, at the close of its fiscal year, more than 50% of a fund's total assets are
invested in securities of foreign issuers, the fund may elect to pass through
foreign taxes paid, and thereby allow shareholders to take a tax credit or
deduction on their tax returns. If shareholders meet certain holding period
requirements with respect to fund shares, an offsetting tax credit may be
available. If shareholders do not meet the holding period requirements, they may
still be entitled to a deduction for certain foreign taxes. In either case, a
shareholder's tax statement will show more taxable income or capital gains than
were actually distributed by the fund, but will also show the amount of the
available offsetting credit or deduction.

FUNDAMENTAL INVESTMENT LIMITATIONS

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

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

B-8
<PAGE> 92

COMMODITIES. Each Fund may not invest in commodities or commodity
contracts, except that it may invest in forward foreign currency exchange
transactions, and that each Fund may invest in futures contracts and options. No
more than 5% of each Fund's assets may be used as initial margin deposit for
futures contracts, and no more than 20% of each Fund's assets may be invested in
stock futures contracts or options at any time. The Gold and Precious Metals
Fund may also invest in bullion as described in the prospectus.

DIVERSIFICATION. With respect to 75% of its total assets, each Fund may
not: (i) purchase more than 10% of the outstanding voting securities of any one
issuer, or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.

ILLIQUID SECURITIES. Each Fund may not acquire any security if, as a
result, more than 15% of its net assets would be invested in securities that are
illiquid.

INDUSTRY CONCENTRATION. Each Fund may not invest less than 25% of its
total assets in securities of issuers principally engaged in activities denoted
by the Fund.

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

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

LOANS. Each Fund may not lend money to any person except by purchasing
fixed income securities that are publicly distributed or customarily purchased
by institutional investors, or by lending its portfolio securities.

MARGIN. Each Fund may not purchase securities on margin or sell securities
short (unless by virtue of its ownership of other securities it has a right to
obtain at no added cost, securities equivalent in kind and amount to the
securities sold), except as permitted by the Fund's investment policies relating
to commodities.

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

PUTS AND CALLS. Each Fund may not invest in puts or calls, or combinations
thereof, except as permitted by the Fund's investment policies relating to
commodities.

REAL ESTATE. Each Fund (with the exception of the REIT Index Fund, which
may invest 100% of its assets in real estate investment trusts) may not invest
directly in real estate, although it may invest in securities of companies that
deal in real estate, or interests therein.

SENIOR SECURITIES. Each Fund may not issue senior securities, except as
permitted by the 1940 Act.

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

The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.

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

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<PAGE> 93

MANAGEMENT OF THE TRUST

OFFICERS AND TRUSTEES

The Officers of the Trust manage its day-to-day operations and are
responsible to the Trust's Board of Trustees. The Trustees set broad policies
for the Trust and choose its Officers. The following is a list of the Trustees
and Officers of the Trust and a statement of their present positions and
principal occupations during the past five years. As a group, the Trust's
Trustees and Officers own less than 1% of the outstanding shares of each Fund of
the Trust. Each Trustee also serves as a Director of The Vanguard Group, Inc.,
and as a Trustee of each of the 36 investment companies administered by Vanguard
(35 in the case of Mr. Malkiel and 28 in the case of Mr. MacLaury). The mailing
address of the Trustees and Officers of the Trust is Post Office Box 876, Valley
Forge, Pennsylvania 19482.

JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*

Senior Chairman and Director of The Vanguard Group, Inc., and Trustee of each of
the investment companies in The Vanguard Group; Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).

JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer and Trustee*

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

JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee

Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson and Johnson (Pharmaceuticals/Consumer Products); Director of Johnson
& Johnson*MERCK Consumer Pharmaceuticals Co., Women First HealthCare, Inc.
(Research and Education Institution), Recording for the Blind and Dyslexic, The
Medical Center at Princeton, and Women's Research and Education Institute.

BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee

President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.

BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee

Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Southern New
England Telecommunications Co.

ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee

Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/Coal/Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber Products
Company).

JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee

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

JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee

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

J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee

Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director of
Cummins Engine Co. (Diesel Engine Company), and The Mead Corp. (Paper Products);
and Trustee of Vanderbilt University.

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<PAGE> 94

RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*

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

THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*

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

ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*

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

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

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

THE VANGUARD GROUP

The Trust is a member of The Vanguard Group of Investment Companies, which
consists of more than 35 investment companies (the "Trusts"). Vanguard employs a
supporting staff of management personnel needed to provide the requisite
services to the Trusts and also furnishes the Trusts with necessary office
space, furnishings and equipment. Each Trust pays its share of Vanguard's net
expenses which are allocated among the Trusts under procedures approved by the
Trustees of each Trust. In addition, each Trust bears its own direct expenses
such as legal, auditing and custodian fees.

The Officers of the Trust and the Vanguard Trusts are also Officers and
employees of Vanguard. No Officer or employee is permitted to own any securities
of any external adviser for the Vanguard Trusts.

Vanguard 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 similar to, and in many
cases more restrictive than, those recommended by a blue ribbon panel of mutual
fund industry executives.

Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the Trusts.
The amounts which each of the Trusts have invested are adjusted from time to
time in order to maintain the proportionate relationship between each Trust's
relative net assets and its contribution to Vanguard's capital. At January 31,
1999, each Fund had contributed capital to Vanguard representing -- % of each
Fund's net assets. The total amount contributed by the Trust was $ -- , which
represented -- % of Vanguard's capitalization. The Amended and Restated Funds'
Service Agreement provides as follows: (a) each Vanguard Trust may be called
upon to invest up to .40% of its current assets in Vanguard, and (b) there is no
other limitation on the dollar amount that each Vanguard Trust may contribute to
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 Vanguard Trusts by third parties.

DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the Trusts in the Group. The principal distribution expenses are for
advertising, promotional materials and marketing personnel. Distribution
services may also include organizing and offering to the public, from time to
time, one or more new investment companies which will become members of The
Vanguard Group. The Trustees and Officers of Vanguard determine the amount to be
spent annually on distribution activities, the manner and amount to be spent on
each Fund, and whether to organize new investment companies.

One half of the distribution expenses of a marketing and promotional nature
is allocated among the Vanguard Trusts based upon their relative net assets. The
remaining one half of these expenses is allocated among the Vanguard Trusts
based upon each Trust's sales for the preceding 24 months relative to the total
sales of the Trusts as a group. Provided, however, that no Trust's aggregate
quarterly rate of contribution for distribution expenses of a marketing and
promotional nature shall exceed 125% of the average distribution

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<PAGE> 95

expense rate for The Vanguard Group, and that no Trust shall incur annual
distribution expenses in excess of 20/100 of 1% of its average month-end net
assets.

During the fiscal years ended January 31, 1997, 1998, and 1999, the Funds
incurred the following approximate amounts of The Vanguard Group's management
(including transfer agency), distribution and marketing expenses.

<TABLE>
<CAPTION>
FUND 1997 1998 1999
---- -------- -------- --------
<S> <C> <C> <C>
Energy Fund.......................................... $ -- $ -- $ --
Gold and Precious Metals Fund........................ -- -- --
Health Care Fund..................................... -- -- --
Utilities Income Fund................................ -- -- --
REIT Index Fund...................................... -- -- --
</TABLE>

INVESTMENT ADVISORY SERVICES. Vanguard provides the REIT Index Fund of
Vanguard Specialized Funds, as well as several other Vanguard Trusts, with
investment advisory services. 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 Trusts utilizing these
services.

During the fiscal years ended January 31, 1997, 1998, and 1999, the REIT
Index Fund incurred approximately $--, $--, and $--, respectively, of Vanguard's
expenses relating to investment advisory services.

TRUSTEE COMPENSATION

The individuals in the following table serve as Trustees of all Vanguard
Trusts, and each Trust pays a proportionate share of the Trustees' compensation.
The Trusts employ their officers on a shared basis, as well. However, officers
are compensated by The Vanguard Group, Inc., not the Trusts.

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

- The independent Trustees receive an annual fee for their service to the
Trusts, which is subject to reduction based on absences from scheduled
Board meetings.

- The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.

- Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.

"INTERESTED" TRUSTEES. The Trusts' interested Trustees -- Messrs. Bogle
and Brennan -- receive no compensation for their service in that capacity.
However, they are paid in their role as officers of The Vanguard Group, Inc.

COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. For the Trust, we list the amounts paid as compensation
and accrued as retirement benefits by the Trust for each Trustee. In addition,
the table shows the total amount of benefits that we expect each Trustee to
receive from

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<PAGE> 96

all Vanguard Trusts upon retirement, and the total amount of compensation paid
to each Trustee by all Vanguard Trusts. All information shown is for the fiscal
year ended January 31, 1999.

VANGUARD SPECIALIZED FUNDS

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM ALL
COMPENSATION AS PART OF BENEFITS VANGUARD TRUSTS
NAMES OF TRUSTEES FROM TRUST TRUST EXPENSES UPON RETIREMENT PAID TO TRUSTEES(1)
----------------- ------------ --------------------- ---------------- -------------------
<S> <C> <C> <C> <C>
John C. Bogle None None None None
John J. Brennan None None None None
Barbara Barnes
Hauptfuhrer(2) $ -- $ -- $ -- $ --
JoAnn Heffernan Heisen $ -- $ -- $ -- $ --
Robert E. Cawthorn(2) $ -- $ -- $ -- $ --
Bruce K. MacLaury $ -- $ -- $ -- $ --
Burton G. Malkiel $ -- $ -- $ -- $ --
Alfred M. Rankin, Jr. $ -- $ -- $ -- $ --
John C. Sawhill $ -- $ -- $ -- $ --
James O. Welch, Jr. $ -- $ -- $ -- $ --
J. Lawrence Wilson $ -- $ -- $ -- $ --
</TABLE>

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

(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 36 Vanguard Trusts (35 in
the case of Mr. Malkiel; 28 in the case of Mr. MacLaury).

(2) Mr. Cawthorn and Mrs. Hauptfuhrer have retired from the Trust's Board,
effective May 31, 1998, and December 31, 1998, respectively.

TRUSTEES' RETIREMENT FEES. A Retirement Plan for Trustees has been
implemented to provide a fee to retired Trustees equal to $1,000 per year of
service on the Board, up to 15 years of service. This fee will remain in place
subsequent to the Trustee's retirement for a period of 10 years or until a
retired Trustee's death.

INVESTMENT ADVISORY SERVICES

INVESTMENT ADVISORY AGREEMENT WITH WELLINGTON MANAGEMENT COMPANY, LLP. The
Trust employs Wellington Management Company, LLP ("WMC") under an investment
advisory agreement to manage the investment and reinvestment of the assets of
the Trust's Energy, Health Care, and Utilities Income Funds and to continuously
review, supervise and administer each Fund's investment program. WMC discharges
its responsibilities subject to the control of the officers and Trustees of the
Trust.

Under the investment advisory agreement, the three Funds are required to
pay the Adviser an aggregate fee at the end of each fiscal quarter, calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the aggregate average month-end net assets of the Portfolios for the quarter:

<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ----
<S> <C>
First $500 million.......................................... 0.150%
Next $500 million........................................... 0.125%
Next $1 billion............................................. 0.100%
Next $1 billion............................................. 0.075%
Over $3 billion............................................. 0.050%
</TABLE>

The advisory fee is based on the total assets of the Funds and is allocated
to each Fund based on the relative net assets of each. In addition, once the
advisory fee to WMC is calculated for the three Funds under this schedule, the
total fee will be reduced in order that the advisory fee paid by the Utilities
Income Fund does not exceed 0.08%.

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<PAGE> 97

During the fiscal years ended January 31, 1997, 1998, and 1999, the Funds
paid the following amounts in advisory fees to WMC.

<TABLE>
<CAPTION>
FUND 1997 1998 1999
- ---- -------- -------- --------
<S> <C> <C> <C>
Energy Fund.......................................... $ -- $ -- $ --
Health Care Fund..................................... -- -- --
Utilities Income Fund................................ -- -- --
</TABLE>

Prior to May 1, 1996, these fees were paid pursuant to the terms of a
previous investment advisory agreement, which called for a higher rate of fees.

DESCRIPTION OF WMC. WMC is a Massachusetts limited liability partnership,
of which the following persons are managing partners: Robert W. Doran, Duncan M.
McFarland, and John R. Ryan.

INVESTMENT ADVISORY AGREEMENT WITH M & G GROUP P.L.C. The Trust has also
entered into an investment advisory agreement with M & G Investment Management
Limited ("M & G"), to manage the assets of the Gold and Precious Metals Fund.
Under this agreement M & G manages the investment and reinvestment of the assets
of the Gold and Precious Metals Fund and continuously renews, supervises and
administers the Fund's investment program. M & G will discharge its
responsibilities subject to the control of the officers and Trustees of the
Trust.

DESCRIPTION OF M & G. M & G is a wholly-owned subsidiary of the M & G
Group P.L.C. M & G Group P.L.C. is a public company whose shares are quoted on
the London Stock Exchange. The Esmee Fairbairn Charitable Trust owns 32% of
total shares outstanding. The remaining shares are held by individuals,
nominees, pension plans and M & G employees.

The Gold and Precious Metals Fund will pay M & G a fee at the end of each
fiscal quarter, calculated by applying a quarterly rate, based on the following
annual percentage rates, to the aggregate average month-end net assets of the
Fund for the quarter:

<TABLE>
<CAPTION>
NET ASSETS RATE
---------- ----
<S> <C>
First $100 million.......................................... 0.30%
Next $150 million........................................... 0.20%
Next $250 million........................................... 0.15%
Over $500 million........................................... 0.10%
</TABLE>

During the fiscal years ended January 31, 1997, 1998 and 1999, the Gold and
Precious Metals Fund paid advisory fees of $1,054,000, $826,000, and $--,
respectively, to M & G which represented an effective annual rate of .-- of 1%
after giving effect to a fee waiver of $-- (.05 of 1%), .20 of 1%, and -- of 1%,
respectively, of average net assets. These fees were paid pursuant to the terms
of a previous investment advisory agreement, which called for a higher rate of
fees.

THE VANGUARD GROUP furnishes investment advisory services to the REIT Index
Portfolio on an at-cost basis.

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

The current agreements will be renewable for successive one-year periods,
only if each renewal is specifically approved by a vote of the Trust's Board of
Trustees, including the affirmative votes of a majority of the Trustees who are
not parties to the agreement or "interested persons" (as defined in the 1940
Act) of any such party cast in person at a meeting called for the purpose of
considering such approval. The agreement is automatically terminated if
assigned, and may be terminated by any Fund without penalty, at any time, (1)
either by vote of the Board of Trustees on sixty (60) days' written notice to
WMC or M & G, or (2) by WMC or M & G upon ninety (90) days' written notice to
the Trust.

SECURITIES TRANSACTIONS

The investment advisory agreements with WMC and M & G authorize the
investment advisers (with the approval of the Trust's Board of Trustees) to
select the brokers or dealers that will execute the purchases and

B-14
<PAGE> 98

sales of securities for the Funds and directs the investment adviser to use its
best efforts to obtain the best available price and most favorable execution
with respect to all transactions for the Funds. Each investment adviser has
undertaken to execute each investment transaction at a price and commission
which provides the most favorable total cost or proceeds reasonably obtainable
under the circumstances.

In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain best available price and most favorable execution.
The full range and quality of brokerage services available will be considered in
making these determinations. In those instances where it is reasonably
determined that more than one broker can offer the brokerage services needed to
obtain the best available price and most favorable execution, consideration may
be given to those brokers which supply investment research and statistical
information, and provide other services in addition to execution services to the
Trust and/or the investment adviser. Each investment adviser considers the
investment services it receives useful in the performance of its obligations
under the agreement but is unable to determine the amount by which such services
may reduce its expenses.

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

Currently, it is the Trust's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the Trust.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to the investment adviser and/or the Trust.
However, the investment advisers have informed the Trust that they generally
will not pay higher commission rates specifically for the purpose of obtaining
research services.

During the fiscal years ended January 31, 1997, 1998, and 1999, the Funds
paid the following amounts in brokerage commissions.

Some securities considered for investment by one Fund may also be
appropriate for the other Funds and the other Trusts and/or clients served by
the investment advisers. If purchase or sale of securities consistent with the
investment policies of a Fund, the other Funds and/or one or more of these other
Trusts or clients are considered at or about the same time, transactions in such
securities will be allocated among the Funds and the several Trusts and clients
in a manner deemed equitable by the respective investment adviser. Although
there will be no specified formula for allocating such transactions, the
allocation methods used, and the results of such allocations, will be subject to
periodic review by the Trust's Board of Trustees.

PURCHASE OF SHARES

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

B-15
<PAGE> 99

TRADING SHARES THROUGH CHARLES SCHWAB

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

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

REDEMPTION OF SHARES

The Trust may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the rules of the Commission as a
result of which it is not reasonably practicable for the Trust 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.

For the Energy, Gold and Precious Metals, and REIT Index Funds, a
redemption fee of 1% of the value of shares redeemed will be deducted from the
redemption proceeds if shares held for less than one year are redeemed. For the
Health Care Fund, shares purchased on or after April 19, 1999 are subject to a
1% redemption fee if redeemed within five years of purchase. Shares purchased
before April 19, 1999 are subject to a 1% redemption fee if redeemed within one
year of purchase. The fee is withheld from redemption proceeds and retained by
the Fund. Any redemption may be more or less than the shareholder's cost
depending on the market value of the securities held by a Fund. In the event of
an early redemption due to a shareholder's death, all redemption fees will be
waived. In order to substantiate the death, a certified copy of the death
certificate must be provided.

There are no redemption fees associated with the Utilities Income Fund.

SHARE PRICE

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

Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. 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.

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

Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into

B-16
<PAGE> 100

account institutional-size transactions in similar groups of securities as well
as any developments related to specific securities.

Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market available at the time the Fund is
valued. If events which materially affect the value of a Fund's investments
occur after the close of the securities markets on which such securities are
primarily traded, those investments may be valued by such methods as the Board
of Trustees deems in good faith to reflect fair value.

In determining the Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indices. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available, the rate
of exchange will be determined in accordance with policies established in good
faith by the Board of Trustees.

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

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

PERFORMANCE MEASURES

Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member trusts of The Vanguard Group of Investment Companies.

Each of the investment company members of The Vanguard Group, including
Vanguard Specialized Funds may, from time to time, use one or more of the
following unmanaged indices for comparative performance purposes.

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

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

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

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

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

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.

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

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

B-17
<PAGE> 101

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

MORGAN STANLEY REIT INDEX -- consist of approximately 125 stocks of equity Real
Estate Investment Trusts (REITs). REITs in the index meet size and liquidity
criteria specified by Morgan Stanley. The index had a market value of $--
billion as of January, 1999.

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.

MERRILL LYNCH DRD-ELIGIBLE INDEX -- includes preferred stock issues which are
eligible for the corporate dividends-received-deduction.

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

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

COMPOSITE INDEX -- 40% S&P Utilities Index, 40% S&P Telephone Index, and 20%
Lehman Utility Bond 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.

RUSSELL 2000 STOCK INDEX -- consists of the smallest 2,000 stocks within the
Russell 3000; a widely-used benchmark for small capitalization common stocks.

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 BBB- 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 $1.6 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 $700 billion.

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

B-18
<PAGE> 102

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

LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper, 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 Trusts that
constituted the Group at its inception.)

RUSSELL 3000 INDEX -- consists of approximately the 3,000 largest stocks of
U.S.-domiciled companies commonly traded on the New York and American Stock
Exchanges or the NASDAQ over-the-counter market, accounting for over 90% of the
market value of publicly traded Stocks in the U.S.

Advertisements which refer to the use of the Trust as a potential
investment for Individual Retirement Accounts may quote a total return based
upon compounding of dividends on which it is presumed no Federal income tax
applies.

In assessing such comparisons of yields, an investor should keep in mind
that the composition of the investments in the reported averages is not
identical to the Trust's Fund and that the items included in the calculations of
such averages may not be identical to the formula used by the Trust to calculate
its yield. In addition there can be no assurance that the Trust will continue
its performance as compared to such other averages.

YIELD AND TOTAL RETURN

The yield* of each Fund of the Trust for the 30-day period ended January
31, 1999 was as follows:

<TABLE>
<S> <C>
Energy Fund.......................................... --%
Gold and Precious Metals Fund........................ --%
Health Care Fund..................................... --%
Utilities Income Fund................................ --%
Vanguard REIT Index Fund............................. --%
</TABLE>

-------------------------------
*Yield is calculated daily.

The average annual total return of each Fund of the Trust for the one-,
five- and ten-year periods ended January 31, 1999 was as follows:

<TABLE>
<CAPTION>
ONE YEAR ENDED FIVE YEARS ENDED TEN YEARS ENDED
JANUARY 31, 1999 JANUARY 31, 1999 JANUARY 31, 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
Energy Fund............................. --% --% --%
Gold and Precious Metals Fund........... --% --% --%
Health Care Fund........................ --% --% --%
Utilities Income Fund................... --% --% --%*
Vanguard REIT Index Fund................ --% --%* --
</TABLE>

--------------------
*Since inception: Inception for Vanguard REIT Index Portfolio, May 13,
1996; Inception for Utilities Income Portfolio, May 15, 1992.

Total return is computed by finding the average compounded rate of return
over the one-year period set forth above that would equate an initial amount
invested at the beginning of the period to the ending redeemable value of the
investment.

B-19
<PAGE> 103

AVERAGE ANNUAL TOTAL RETURN

Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years, or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compounded rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):

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

Where:

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

CUMULATIVE TOTAL RETURN

Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):

C = (ERV/P)-1

Where:

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

SEC YIELDS

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

YIELD = 2[((a-b)/cd+1)(6)-1]

Where:

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

B-20
<PAGE> 104

FINANCIAL STATEMENTS

The Trust's financial statements as of and for the year ended January 31,
1999 appearing in the Vanguard Specialized Funds' Annual Report to Shareholders,
and the report thereon of PricewaterhouseCoopers LLP, independent accountants,
also appearing therein, are incorporated by reference in this Statement of
Additional Information. For a more complete discussion of the performance,
please see the Trust's Annual Report to Shareholders, which may be obtained
without charge.

B-21
<PAGE> 105

PART C

VANGUARD SPECIALIZED FUNDS

OTHER INFORMATION

ITEM 23. EXHIBITS

(a) Declaration of Trust*

(b) By-Laws*

(d) Investment Advisory Contracts*

(e) Not Applicable

(f) Reference is made to the section entitled "Management of the Trust"
in the Registrant's Statement of Additional Information

(g) Custodian Agreements*

(h) Amended and Restated Funds' Service Agreement*

(i) Legal Opinion*

(j) Consent of Independent Accountants**

(k) Not Applicable

(l) Not Applicable

(m) Not Applicable

(n) Financial Data Schedules+

(o) Not Applicable

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

* Filed Previously

** To Be Filed By Amendment

+ Filed Herewith

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

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

ITEM 25. INDEMNIFICATION

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

ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER

Wellington Management Company LLP, 75 State Street, Boston, MA 02109, is a
Massachusetts limited liability partnership, of which the following persons are
managing partners: Robert W. Doran, Duncan M. McFarland, and John R. Ryan.

Wellington Management Company, LLP ("Wellington Management") is an
investment adviser registered under the Investment Advisers Act of 1940, as
amended (the "Advisers Act"). The list required by this Item 26 of officers and
partners of Wellington Management, together with any information as to any
business, profession, vocation or employment of a substantial nature engaged in
by such officers and partners during

C-1
<PAGE> 106

the past two years, is incorporated herein by reference from Schedules B and D
of form ADV filed by Wellington Management pursuant to the Advisers Act (SEC
File No. 801-15908).

M&G Investment Management Limited ("M&G") is an investment adviser
registered under the Advisers Act. The list required by this Item 26 of officers
and directors of M&G, together with any information as to any business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by M&G pursuant to the
Advisers Act (SEC File No. (801-21981).

ITEM 27. PRINCIPAL UNDERWRITERS

(a) Not Applicable

(b) Not Applicable

ITEM 28. 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., Valley Forge, Pennsylvania 19482; and the Registrant's
Custodians: State Street Bank and Trust Company, 225 Franklin Street, Boston,
Massachusetts 02105 for the Health Care, Energy, and Utilities Income Funds;
Chase Manhattan Bank, N.A., 4 Chase MetroTech Center, Brooklyn, New York 11245
for the Gold and Precious Metals Fund; and First Union National Bank, PA4943,
530 Walnut Street, Philadelphia, Pennsylvania 19106 for the REIT Index Fund.

ITEM 29. MANAGEMENT SERVICES

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

ITEM 30. UNDERTAKINGS

Not Applicable

C-2
<PAGE> 107

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it has duly
caused this Post-Effective Amendment to this Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the Town of
Valley Forge and the Commonwealth of Pennsylvania, on the 29th day of March,
1999.

VANGUARD SPECIALIZED FUNDS

BY: (Heidi Stam) John J. Brennan, Chairman 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: (Heidi Stam)

John C. Bogle*, Senior Chairman of the Board and Trustee

March 29, 1999

BY: (Heidi Stam)

John J. Brennan*, Chairman, Chief Executive Officer and Trustee

March 29, 1999

BY: (Heidi Stam)

JoAnn Heffernan Heisen*, Trustee

March 29, 1999

BY: (Heidi Stam)

Bruce K. MacLaury*, Trustee

March 29, 1999

BY: (Heidi Stam)

Barton G. Malkiel*, Trustee

March 29, 1999

BY: (Heidi Stam)

Alfred M. Rankin, Jr.*, Trustee

March 29, 1999

BY: (Heidi Stam)

John C. Sawhill*, Trustee

March 29, 1999

BY: (Heidi Stam)

James O. Welch, Jr.*, Trustee

March 29, 1999

BY: (Heidi Stam)

J. Lawrence Wilson*, Trustee

March 29, 1999

BY: (Heidi Stam)

Thomas J. Higgins*, Treasurer and Principal

Financial Officer and Accounting Officer

March 29, 1999

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

<PAGE> 108

INDEX TO EXHIBITS

<TABLE>
<S> <C>
Financial Data Schedules.................................... EX-99.BN
</TABLE>

<PAGE> 1
[ARTICLE] 6
[RESTATED]
[CIK] 0000734383
[NAME] VANGUARD SPECIALIZED FUNDS
[SERIES]
[NUMBER] 01
[NAME] VANGUARD ENERGY FUND
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] JAN-31-1999
[PERIOD-START] FEB-01-1998
[PERIOD-END] JAN-31-1999
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 788685
[INVESTMENTS-AT-VALUE] 775802
[RECEIVABLES] 63820
[ASSETS-OTHER] 140
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 839762
[PAYABLE-FOR-SECURITIES] 59833
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 19600
[TOTAL-LIABILITIES] 79433
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 788736
[SHARES-COMMON-STOCK] 44305
[SHARES-COMMON-PRIOR] 48072
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 379
[ACCUMULATED-NET-GAINS] (15145)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (12883)
[NET-ASSETS] 760329
[DIVIDEND-INCOME] 16315
[INTEREST-INCOME] 2329
[OTHER-INCOME] 144
[EXPENSES-NET] 4122
[NET-INVESTMENT-INCOME] 14666
[REALIZED-GAINS-CURRENT] 470
[APPREC-INCREASE-CURRENT] (231896)
[NET-CHANGE-FROM-OPS] (216760)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 15275
[DISTRIBUTIONS-OF-GAINS] 18471
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 13075
[NUMBER-OF-SHARES-REDEEMED] 18532
[SHARES-REINVESTED] 1690
[NET-CHANGE-IN-ASSETS] 330156
[ACCUMULATED-NII-PRIOR] 243
[ACCUMULATED-GAINS-PRIOR] 2843
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 688
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 4159
[AVERAGE-NET-ASSETS] 1003509
[PER-SHARE-NAV-BEGIN] 22.68
[PER-SHARE-NII] 0.33
[PER-SHARE-GAIN-APPREC] (5.08)
[PER-SHARE-DIVIDEND] 0.35
[PER-SHARE-DISTRIBUTIONS] 0.42
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 17.16
[EXPENSE-RATIO] 0.41
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>

<PAGE> 1
[ARTICLE] 6
[RESTATED]
[CIK] 0000734383
[NAME] VANGUARD SPECIALIZED FUNDS
[SERIES]
[NUMBER] 02
[NAME] VANGUARD HEALTH CARE FUND
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] JAN-31-1999
[PERIOD-START] FEB-01-1998
[PERIOD-END] JAN-31-1999
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 6811795
[INVESTMENTS-AT-VALUE] 10016731
[RECEIVABLES] 49239
[ASSETS-OTHER] 1589
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 10067559
[PAYABLE-FOR-SECURITIES] 153697
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 29520
[TOTAL-LIABILITIES] 183217
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 6419561
[SHARES-COMMON-STOCK] 101563
[SHARES-COMMON-PRIOR] 63765
[ACCUMULATED-NII-CURRENT] 7231
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 246418
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 3211132
[NET-ASSETS] 9884342
[DIVIDEND-INCOME] 56774
[INTEREST-INCOME] 45614
[OTHER-INCOME] 651
[EXPENSES-NET] 24491
[NET-INVESTMENT-INCOME] 78548
[REALIZED-GAINS-CURRENT] 417148
[APPREC-INCREASE-CURRENT] 1684504
[NET-CHANGE-FROM-OPS] 2180200
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 74779
[DISTRIBUTIONS-OF-GAINS] 253199
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 42315
[NUMBER-OF-SHARES-REDEEMED] 8032
[SHARES-REINVESTED] 3515
[NET-CHANGE-IN-ASSETS] 5164523
[ACCUMULATED-NII-PRIOR] 3458
[ACCUMULATED-GAINS-PRIOR] 82473
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 4847
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 24825
[AVERAGE-NET-ASSETS] 6958112
[PER-SHARE-NAV-BEGIN] 74.02
[PER-SHARE-NII] 0.86
[PER-SHARE-GAIN-APPREC] 26.36
[PER-SHARE-DIVIDEND] 0.84
[PER-SHARE-DISTRIBUTIONS] 3.08
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 97.32
[EXPENSE-RATIO] 0.36
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>

<PAGE> 1
[ARTICLE] 6
[RESTATED]
[CIK] 0000734383
[NAME] VANGUARD SPECIALIZED FUNDS
[SERIES]
[NUMBER] 03
[NAME] VANGUARD GOLD AND PRECIOUS METALS FUND
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] JAN-31-1999
[PERIOD-START] FEB-01-1998
[PERIOD-END] JAN-31-1999
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 410376
[INVESTMENTS-AT-VALUE] 306433
[RECEIVABLES] 4313
[ASSETS-OTHER] 56
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 310802
[PAYABLE-FOR-SECURITIES] 0
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 983
[TOTAL-LIABILITIES] 983
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 507467
[SHARES-COMMON-STOCK] 46867
[SHARES-COMMON-PRIOR] 43496
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 3099
[ACCUMULATED-NET-GAINS] (90606)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (103943)
[NET-ASSETS] 309819
[DIVIDEND-INCOME] 6046
[INTEREST-INCOME] 632
[OTHER-INCOME] 110
[EXPENSES-NET] 2486
[NET-INVESTMENT-INCOME] 4302
[REALIZED-GAINS-CURRENT] (36317)
[APPREC-INCREASE-CURRENT] (6079)
[NET-CHANGE-FROM-OPS] (38094)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 4222
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 19282
[NUMBER-OF-SHARES-REDEEMED] 16479
[SHARES-REINVESTED] 568
[NET-CHANGE-IN-ASSETS] (17499)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] (53432)
[OVERDISTRIB-NII-PRIOR] 4036
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 712
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2486
[AVERAGE-NET-ASSETS] 323823
[PER-SHARE-NAV-BEGIN] 7.53
[PER-SHARE-NII] 0.10
[PER-SHARE-GAIN-APPREC] (0.93)
[PER-SHARE-DIVIDEND] 0.09
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 6.61
[EXPENSE-RATIO] 0.77
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>

<PAGE> 1
[ARTICLE] 6
[RESTATED]
[CIK] 0000734383
[NAME] VANGUARD SPECIALIZED FUNDS
[SERIES]
[NUMBER] 06
[NAME] VANGUARD UTILITIES INCOME FUND
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] JAN-31-1999
[PERIOD-START] FEB-01-1998
[PERIOD-END] JAN-31-1999
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 747392
[INVESTMENTS-AT-VALUE] 962407
[RECEIVABLES] 12345
[ASSETS-OTHER] 161
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 974913
[PAYABLE-FOR-SECURITIES] 6158
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 17072
[TOTAL-LIABILITIES] 23230
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 715722
[SHARES-COMMON-STOCK] 58486
[SHARES-COMMON-PRIOR] 46704
[ACCUMULATED-NII-CURRENT] 1862
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 19084
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 215015
[NET-ASSETS] 951683
[DIVIDEND-INCOME] 22449
[INTEREST-INCOME] 8296
[OTHER-INCOME] 84
[EXPENSES-NET] 2895
[NET-INVESTMENT-INCOME] 27934
[REALIZED-GAINS-CURRENT] 65412
[APPREC-INCREASE-CURRENT] 52370
[NET-CHANGE-FROM-OPS] 145716
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 29408
[DISTRIBUTIONS-OF-GAINS] 53436
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 16838
[NUMBER-OF-SHARES-REDEEMED] 9519
[SHARES-REINVESTED] 4463
[NET-CHANGE-IN-ASSETS] 252746
[ACCUMULATED-NII-PRIOR] 7652
[ACCUMULATED-GAINS-PRIOR] 8158
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 550
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 3060
[AVERAGE-NET-ASSETS] 796692
[PER-SHARE-NAV-BEGIN] 14.97
[PER-SHARE-NII] 0.55
[PER-SHARE-GAIN-APPREC] 2.35
[PER-SHARE-DIVIDEND] 0.59
[PER-SHARE-DISTRIBUTIONS] 1.01
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 16.27
[EXPENSE-RATIO] 0.38
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>

<PAGE> 1
[ARTICLE] 6
[RESTATED]
[CIK] 0000734383
[NAME] VANGUARD SPECIALIZED FUNDS
[SERIES]
[NUMBER] 07
[NAME] VANGUARD REIT INDEX FUND
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] YEAR
[FISCAL-YEAR-END] JAN-31-1999
[PERIOD-START] FEB-01-1998
[PERIOD-END] JAN-31-1999
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 974828
[INVESTMENTS-AT-VALUE] 905651
[RECEIVABLES] 5490
[ASSETS-OTHER] 161
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 911302
[PAYABLE-FOR-SECURITIES] 692
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 6338
[TOTAL-LIABILITIES] 7030
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1013567
[SHARES-COMMON-STOCK] 83683
[SHARES-COMMON-PRIOR] 94214
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] 333
[ACCUMULATED-NET-GAINS] (39785)
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] (69177)
[NET-ASSETS] 904272
[DIVIDEND-INCOME] 58582
[INTEREST-INCOME] 996
[OTHER-INCOME] 1083
[EXPENSES-NET] 2943
[NET-INVESTMENT-INCOME] 57718
[REALIZED-GAINS-CURRENT] (39785)
[APPREC-INCREASE-CURRENT] (236893)
[NET-CHANGE-FROM-OPS] (218960)
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 57832
[DISTRIBUTIONS-OF-GAINS] 0
[DISTRIBUTIONS-OTHER] 12496
[NUMBER-OF-SHARES-SOLD] 29719
[NUMBER-OF-SHARES-REDEEMED] 45501
[SHARES-REINVESTED] 5251
[NET-CHANGE-IN-ASSETS] (412460)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] 219
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 53
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 2943
[AVERAGE-NET-ASSETS] 1111129
[PER-SHARE-NAV-BEGIN] 13.98
[PER-SHARE-NII] 0.666
[PER-SHARE-GAIN-APPREC] (3.026)
[PER-SHARE-DIVIDEND] 0.666
[PER-SHARE-DISTRIBUTIONS] 0
[RETURNS-OF-CAPITAL] 0.144
[PER-SHARE-NAV-END] 10.81
[EXPENSE-RATIO] 0.26
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>