VANGUARD CONVERTIBLE SECURITIES FUND INC, N-30D, 1999-07-27

VANGUARD CONVERTIBLE SECURITIES FUND INC
N-30D, 1999-07-27

Previous: FEDERATED INCOME SECURITIES TRUST, 24F-2NT, 1999-07-27

Next: PUTNAM MASSACHUSETTS TAX EXEMPT INCOME FUND II, NSAR-B, 1999-07-27

VANGUARD
CONVERTIBLE
SECURITIES FUND

SEMIANNUAL
REPORT
MAY 31, 1999

[A MEMBER OF THE VANGUARD GROUP LOGO]

<PAGE>

AT VANGUARD, WE BELIEVE THAT TRADITION MATTERS

Our 9,000 crew members embrace the traditional values on which our success is
built, including integrity, hardwork, thrift, teamwork, and fair dealing on
behalf of our clients.

Our report cover pays homage to three anniversaries, each of great significance
to The Vanguard Group:

o The 200th anniversary of the Battle of the Nile, which commenced on August
1, 1798. HMS Vanguard, the victorious British flagship at the Nile, is our
namesake. And its motto--"Leading the way"--serves as a guiding principle
for our company.

o The 100th birthday, on July 23, 1998, of Walter L. Morgan, founder of
Wellington Fund, the oldest member of what became The Vanguard Group. Mr.
Morgan was friend and mentor to Vanguard founder John C. Bogle, and helped
to shape the standards and business principles that Mr. Bogle laid down for
Vanguard at its beginning nearly 25 years ago: a stress on balanced,
diversified investments; insistence on fair dealing and candor with
clients; and a focus on long-term investing. To our great regret, Mr.
Morgan died on September 2, 1998.

o The 70th anniversary, on December 28, 1998, of the incorporation of
Vanguard Wellington Fund. It is the nation's oldest balanced mutual fund,
and one of only a handful of funds created in the 1920s that are still in
operation.

Although Vanguard constantly tackles new challenges, adopts new technology, and
develops new services, we treasure the traditions and values that set us apart
in a crowded, competitive industry. And we salute our shareholders, whose
support and trust we strive to earn each and every day.

[COMPASS GRAPHIC]
CONTENTS

A MESSAGE TO OUR SHAREHOLDERS
1

THE MARKETS IN PERSPECTIVE
3

REPORT FROM THE ADVISER
5

PERFORMANCE SUMMARY
7

FUND PROFILE
8

FINANCIAL STATEMENTS
11

For an update on our Year 2000
preparedness, see page 19.

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

<PAGE>
FELLOW SHAREHOLDER,

[PHOTO]
John J. Brennan John C. Bogle
Chairman & CEO Senior Chairman

Vanguard Convertible Securities Fund's solid +10.6% return during the first half
of its fiscal year mirrored that of the average convertible securities fund, but
trailed the +13.2% return of its comparative index.
The table below presents the fund's total return (capital change plus
reinvested dividends) for the six months ended May 31, 1999, along with those of
the average competing fund and our unmanaged benchmark, the Credit Suisse First
Boston Convertible Securities Index. We also present the six-month returns of
the Standard & Poor's 500 Composite Stock Price Index, a widely used benchmark
for large-capitalization stocks, and the Lehman Brothers Aggregate Bond Index, a
recognized proxy for the taxable bond market.

- --------------------------------------------------------------------------------
TOTAL RETURNS
SIX MONTHS ENDED
MAY 31, 1999
- --------------------------------------------------------------------------------
Vanguard Convertible Securities Fund +10.6%
- --------------------------------------------------------------------------------
Average Convertible Securities Fund +10.6%
- --------------------------------------------------------------------------------
CS First Boston Convertibles Index +13.2%
- --------------------------------------------------------------------------------
S&P 500 Index +12.6%
Lehman Aggregate Bond Index - 0.8
- --------------------------------------------------------------------------------

The fund's return is based on an increase in net asset value from $11.10
per share on November 30, 1998, to $11.91 per share on May 31, 1999, and is
adjusted for dividends of $0.33 per share paid from net investment income. The
fund paid no capital gains during the period.

THE PERIOD IN REVIEW
Continued strong expansion of the U.S. economy helped boost stock prices but
also resulted in higher interest rates and lower bond prices during the six
months ended May 31. Led by a surge in consumer spending that was fueled by high
employment and rising incomes, the economy grew at an annualized rate of 6.0%
during the fourth quarter of 1998 and at a 4.3% rate during the first quarter of
1999.
The overall U.S. stock market, as measured by the Wilshire 5000 Equity
Index, gained +13.2% in the fiscal half-year. However, there were significant
divergences within the market. During the first four months of the period, the
stock market's advance was led by large-capitalization growth stocks--the group
that had dominated market performance for the past several years. During April
and May, there was a distinct shift in market leadership, as small-cap stocks
and value stocks--those characterized by below-average prices in relation to
such fundamental measures as book value, earnings, and dividends--outperformed
the large-cap growth issues. The strength of the U.S. economy and signs of
improvement in many foreign economies boosted prospects and share prices of such
value-stock sectors as energy, machinery, and basic materials producers. For the
half-year, returns on large- and small-cap stocks and on growth and value stocks
diverged by only 1 to 2 percentage points.
Bond prices declined during the six months as interest rates moved higher
in response to the economy's strength and to a worrisome inflation report in
May. Yields on U.S. Treasury bonds rose by 75 to 90 basis points (0.75 to 0.90
percentage point). The benchmark 30-year Treasury bond's yield rose from 5.06%
at the beginning of the fiscal year to 5.83% as of May 31. The Lehman Aggregate
Bond Index, which has an intermediate-term

1
<PAGE>
average maturity and is a good measure of the overall taxable bond market,
returned-0.8%, as a -3.8% price decline more than offset interest income of
+3.0%. Long-term bonds, which are most sensitive to changes in interest rates,
had larger declines (for instance, the Lehman Long Corporate AA or Better Index
returned -4.6%, as a price decline of -7.8% eclipsed a half-year's interest
income of +3.2%).

PERFORMANCE OVERVIEW
As we noted earlier, the Convertible Securities Fund's +10.6% return during the
period matched that of the average convertible securities fund, but fell 2.6
percentage points shy of the +13.2% gain of its benchmark, the CS First Boston
Convertibles Index. The index return was boosted by the outsized gains of
several convertible issues tied to large-cap stocks. These issues account for a
significant slice of the index, but their characteristics make them trade more
like common stocks than true stock/bond hybrids--the type of convertible
securities our fund emphasizes. In a strong equity market--especially for
large-cap stocks--this made the index a very tough benchmark.
Our fund maintained its focus on convertibles whose yields are sufficient
to provide some protection in the event of a stock market downturn but that also
offer the opportunity for appreciation if the underlying stocks perform well.
Selecting convertibles with both fixed-income characteristics and the potential
for gains from equity appreciation is central to our adviser's strategy.

IN SUMMARY
The continuing bull market in stocks fueled a prosperous six months for Vanguard
Convertible Securities Fund. The stock market's gains in recent years--indeed,
during the past 17 years--have been extraordinary. We are grateful for this
bounty, but we remind you that one danger of dazzling returns is that they may
blind investors to the always-present risks of the stock market.
We believe that a balanced investment program--a mixture of stock funds,
bond funds, and money market funds in proportions suited to your investment
objectives, time horizon, and tolerance for risk--provides a time-tested way to
reap the rewards of investing while moderating the risks. Convertible
securities, by combining the capital-appreciation potential of stocks with a
solid fixed-income component, can play a useful role in such a balanced program.
Once you've constructed an investment plan that takes into consideration risks
as well as potential rewards, we advise you to stick with it.

/S/ /S/
John C. Bogle John J. Brennan
Senior Chairman Chairman and
Chief Executive Officer
June 23, 1999

2
<PAGE>

THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED MAY 31, 1999

Sentiment shifted on the world's financial markets during the six months ended
May 31, 1999. The period began amid lingering anxiety over the state of the
world economy. Japan was in recession, economic growth was only sluggish in
Europe, and many developing nations were crisis-ridden. The United States was
just about the sole bright spot.
However, as the period progressed and reports showed rapid growth in U.S.
business activity, there was an evident reduction in anxiety. Midway through the
period, leadership in the U.S. stock market shifted away from a relatively
narrow group of large growth stocks regarded as relatively recession-proof and
toward cyclical stocks that had been depressed by fears of recession and by
falling demand from overseas markets. As confidence in global economic growth
grew, interest rates rose and bond prices declined in the United States due to
expectations that the Federal Reserve Board would raise interest rates to ward
off a potential surge in inflation. Internationally, however, a growing
conviction that the worst was over led to solid gains for stock markets in Japan
and several emerging markets.

U.S. STOCK MARKETS
Stock prices climbed during the half-year, reflecting the healthy domestic
economy and investors' confidence in future growth of corporate profits. The
overall market, as measured by the Wilshire 5000 Index, rose 13.2% during the
period, while the S&P 500 Index, a barometer for large-capitalization stocks,
gained 12.6%.
- --------------------------------------------------------------------------------
TOTAL RETURNS
PERIODS ENDED MAY 31, 1999
---------------------------------------
6 MONTHS 1 YEAR 5 YEARS*
- --------------------------------------------------------------------------------
STOCKS
S&P 500 Index 12.6% 21.0% 25.9%
Russell 2000 Index 11.0 -2.7 13.6
Wilshire 5000 Index 13.2 17.7 23.8
MSCI EAFE Index 4.2 4.7 8.0
- --------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index -0.8% 4.4% 7.8%
Lehman 10 Year Municipal Bond Index 0.4 4.6 7.2
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 2.2 4.8 5.2
- --------------------------------------------------------------------------------
OTHER
Consumer Price Index 1.3% 2.1% 2.4%
- --------------------------------------------------------------------------------
*Annualized.

During the early part of the semiannual period, stock investors favored
large-cap growth stocks--a group perceived as less subject to harm during an
economic downturn. In the United States, the Federal Reserve had already cut
short-term rates by a total of 0.75 percentage point in the autumn. Foreign
central banks continued cutting rates into the new year to combat sluggish
economic conditions in Europe, Asia, and Latin America. Late in the semiannual
period, U.S. investors were rewarded for their earlier optimism with a series of
surprisingly strong gains in corporate earnings--a record percentage of
companies in the S&P 500 reported earnings that beat analysts' estimates.

3
<PAGE>

Throughout the period, U.S. consumers provided support for the global
economy: Spending by consumers continued to set records, and American households
on average spent nearly every dollar of income they earned. The upbeat mood
stemmed from a bright employment picture (unemployment hovered near 30-year
lows) and rising incomes.
Improved prospects for global economic growth propelled several formerly
lackluster areas of the stock market, particularly commodity-related companies
and "cyclical" companies such as machinery, chemical, and paper manufacturers.
Higher oil prices, boosted by firmer demand and by agreement among oil-producing
nations to limit production, revived the "other energy" and integrated-oils
sectors, which gained about 36% and 16%, respectively. Technology stocks, up 26%
for the six months, were the market's leaders, but most of the sector's gains
came during the first three months of the period. Consumer-staples companies,
beset by tough price competition and hurt by the stronger U.S. dollar in Europe,
were the worst-performing group in the half-year, down about 7%.

U.S. BOND MARKETS
For bond investors, the powerful economic expansion evident during the half-year
was too much of a good thing. Although the inflation rate did not get out of
hand--consumer prices rose 1.3% during the six months and were up 2.1% for the
twelve months ended May 31--investors were worried that low unemployment (4.2%
of the labor force in May) would trigger an acceleration in wages and push up
prices.
Yields on U.S. Treasury bonds, which had fallen during the summer and early
fall of 1998 as investors flocked to what they regarded as a haven from
instability in other markets, rose by three-quarters of a percentage point or
more. The yield of the 30-year Treasury bond rose 77 basis points, to 5.83% on
May 31 from 5.06% on November 30, 1998. The yield of the 10-year Treasury rose
91 basis points, to 5.62% from 4.71%. Short-term rates didn't rise as far:
Yields on 3-month T-bills were up on balance by only 15 basis points, to 4.63%
on May 31. Bond prices, which move in the opposite direction from interest
rates, fell. The Lehman Aggregate Bond Index, a benchmark for investment-grade
taxable bonds, declined 0.8% on a total-return basis, as bond prices declined an
average of 3.8%, outweighing the 3.0% in interest income for the period.
Municipal bonds suffered only modest price declines and outperformed
Treasury securities during the period--a switch from the previous six months,
when Treasuries were the strongest segment of the bond market.

INTERNATIONAL STOCK MARKETS
Most overseas stock markets generated positive returns during the six months,
despite lingering economic weakness in Asia and sluggish growth in most of
Europe's developed economies. However, the strong rise in the value of the U.S.
dollar against European currencies negated most of the advances in that region
for U.S. investors. Emerging markets generally rebounded strongly, having
suffered steep losses in 1997 and 1998.
Overall, the developed markets outside the United States gained 4.2% in
U.S.-dollar terms, as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (EAFE) Index. The biggest increases were in the
Pacific region and in emerging markets, where investors saw hopeful signs of
economic recovery. The MSCI Pacific Index rose 14.2% in U.S.-dollar terms,
despite a continuing recession in Japan. The MSCI Select Emerging Markets Free
Index climbed 19.0%. European stocks were up a scant 0.3% in dollar terms, as
gains of about 8% in local currencies were diminished by the dollar's rise
against the euro--a common currency adopted by 11 nations--and other regional
currencies.

4
<PAGE>

REPORT FROM THE ADVISER

The environment during the first half of Vanguard Convertible Securities Fund's
1999 fiscal year was generally rewarding. As reported in the Message to
Shareholders on page 1, the fund returned 10.6%. This was a very attractive
absolute return, although it lagged the return of the Credit Suisse First Boston
Convertible Securities Index, our unmanaged benchmark.
During the past six months, two major factors affected convertible
securities and our performance. These were, first, the general outperformance by
large-capitalization equities as compared with small- and mid-cap stocks, and,
second, the highly increased equity sensitivity of the convertible benchmarks,
including the CS First Boston Convertibles Index.
The first influence on convertible-security returns stemmed from the
diverging performance of various stock groups. For most of the half-year,
large-cap growth stocks remained the focus of most investors and outperformed
the small- and mid-cap equity sectors. Given the fact that most convertibles,
including many held by your fund, are issued by small- and mid-cap companies,
the underperformance by these stocks had a meaningful negative impact on your
fund's returns.
As to the second influence on performance, it is important to realize that
the composition of our primary benchmark has changed dramatically from its
historical makeup. Many of its top-weighted securities are from large-cap
companies, and thus the performance of the index was boosted by the strong
results for large-cap stocks. Unfortunately, many of these top-weighted
convertible holdings are also pure equity substitutes--convertibles that sell at
prices far above par with very negative yields to maturity--and clearly lack the
downside protection on which we insist. These prominent equities were stellar
performers for the period, and their convertibles gave the CS First Boston
Convertibles Index a big edge over convertible managers like us, who will not
own pure equity substitutes.
Overall, our principal strategy has been to take profits on highly
appreciated issues and reinvest the proceeds in securities that balance equity
appreciation potential with the strong fixed-income properties that provide
protection during a down stock market. Despite the equity market's recent
euphoria, we continue to heavily emphasize securities with downside protection.
We believe this is particularly important today with the average price/earnings
ratio for the stocks in the S&P 500 Index at record high levels.
- --------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
The adviser believes that a reasonable level of current income and long-term
growth in capital can be achieved by investing in a broadly diversified group of
convertible securities that provide attractive combinations of current income
and potential for price appreciation from their convertibility into common
stock.
- --------------------------------------------------------------------------------
We believe that valuations of convertible securities generally remain
attractive. New issuance of these securities continues at only a moderate pace,
a lack of supply that will keep upward pressure on the prices of issues with
significant call protection. In addition, forced conversions and redemptions
will persist,

5
<PAGE>

further increasing demand for outstanding issues. Overall, liquidity in the
convertible market keeps improving, with trading reasonably active since the
beginning of the year.
Your portfolio today is well diversified, with more than 80 issues
representing a wide variety of industry groups. Convertible bonds with
intermediate-term maturities continue to dominate our holdings and will remain
our primary focus. We will, as always, restrict our holdings to convertible
securities that deliver an attractive balance between upside potential and
downside protection.

Oaktree Capital Management, LLC

June 10, 1999

6
<PAGE>

PERFORMANCE SUMMARY
CONVERTIBLE SECURITIES FUND

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

TOTAL INVESTMENT RETURNS: JUNE 17, 1986-MAY 31, 1999
- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND CS FIRST
BOSTON*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------
1986 -2.0% 1.8% -0.2% 1.6%
1987 -19.0 4.2 -14.8 -5.4
1988 11.4 7.4 18.8 16.5
1989 10.7 7.0 17.7 16.3
1990 -16.3 5.4 -10.9 -8.7
1991 21.7 7.5 29.2 24.6
1992 19.9 6.1 26.0 21.7
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND CS FIRST
BOSTON*
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- --------------------------------------------------------------------------------

1993 9.5% 4.4% 13.9% 19.2%
1994 -8.5 4.1 -4.4 -3.9
1995 11.9 5.2 17.1 24.0
1996 9.9 5.0 14.9 15.3
1997 10.6 4.2 14.8 15.4
1998 -6.4 4.2 -2.2 1.4
1999** 7.3 3.3 10.6 13.2
- --------------------------------------------------------------------------------
*CS First Boston Convertible Securities Index.
**Six months ended May 31, 1999.
See Financial Highlights table on page 16 for dividend and capital gains
information for the past five years.

AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED MARCH 31, 1999*
- --------------------------------------------------------------------------------
10 YEARS
INCEPTION ------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
Convertible Securities Fund 6/17/1986 -9.87% 8.68% 5.33% 5.25% 10.58%
- --------------------------------------------------------------------------------
*SEC rules require that we provide this average annual total return information
through the latest calendar quarter.

7
<PAGE>

FUND PROFILE
CONVERTIBLE SECURITIES FUND

This Profile provides a snapshot of the fund's characteristics as of May 31,
1999, compared where appropriate to an unmanaged index. Key elements of this
Profile are defined on pages 9 and 10.

FINANCIAL ATTRIBUTES
- ---------------------------------------------
Number of Securities 86
Yield 3.8%
Conversion Premium 25.6%
Average Weighted Maturity 5.2 years
Average Coupon 3.7%
Average Quality Ba
Average Duration 3.9 years
Foreign Holdings 12.1%
Turnover Rate 151%*
Expense Ratio 0.53%*
Cash Reserves 1.5%

*Annualized.

DISTRIBUTION BY CREDIT QUALITY (% OF BONDS)
- ---------------------------------------------
Aaa/AAA 0.0%
Aa/AA 8.3
A/A 2.9
Baa/BBB 19.4
Ba/BB 15.6
B/B 20.5
Less than B/B 7.4
Not Rated 25.9
- ---------------------------------------------
Total 100.0%

VOLATILITY MEASURES
- ---------------------------------------------
CONVERTIBLE
SECURITIES S&P 500
- ---------------------------------------------
R-Squared 0.68 1.00
Beta 0.66 1.00

TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
- ---------------------------------------------
Hewlett Packard Co. 3.8%
Jacor Communications, Inc. 3.5
Global Telesystems Inc. 3.1
Metamor Worldwide, Inc. 3.0
Solectron Corp. 2.9
WMX Technologies Inc. 2.6
Elan Finance Corp. 2.6
Union Pacific Capital Trust 2.5
Magna International Inc. 2.5
Tower Automotive Inc. 2.4
- ---------------------------------------------
Top Ten 28.9%

DISTRIBUTION BY MATURITY (% OF BONDS)
- ---------------------------------------------
Under 1 Year 3.6%
1-5 Years 41.6
5-10 Years 54.8
10-20 Years 0.0
20-30 Years 0.0
Over 30 Years 0.0
- ---------------------------------------------
Total 100.0%

8
<PAGE>

SECTOR DIVERSIFICATION (% OF PORTFOLIO)
- --------------------------------------------------------------------------------
MAY 31, 1998 MAY 31, 1999
--------------------------------------------------
CONVERTIBLE SECURITIES CONVERTIBLE SECURITIES
--------------------------------------------------
Auto & Transportation ........ 6.2% 8.4%
Consumer Discretionary ....... 24.2 20.7
Consumer Staples ............. 3.9 1.5
Financial Services ........... 8.9 5.1
Health Care .................. 11.5 16.6
Integrated Oils .............. 0.0 2.1
Other Energy ................. 3.0 6.6
Materials & Processing ....... 2.8 1.8
Producer Durables ............ 10.9 4.2
Technology ................... 14.7 22.2
Utilities .................... 12.2 10.8
Other ........................ 1.7 0.0
- --------------------------------------------------------------------------------

AVERAGE COUPON. The average interest rate paid on the securities held by a fund.
It is expressed as a percentage of face value.

AVERAGE DURATION. An estimate of how much a bond fund's share price will
fluctuate in response to a change in interest rates. To see how the price could
shift, multiply the fund's duration by the change in rates. If interest rates
rise by one percentage point, the share price of a fund with an average duration
of five years would decline by about 5%. If rates decrease by a percentage
point, the fund's share price would rise by 5%.

AVERAGE QUALITY. An indicator of credit risk, this figure is the average of the
ratings assigned to a fund's securities holdings by credit-rating agencies. The
agencies make their judgment after appraising an issuer's ability to meet its
obligations. Quality is graded on a scale, with Aaa or AAA indicating the most
creditworthy bond issuers.

AVERAGE WEIGHTED MATURITY. The average length of time until securities held by a
fund reach maturity (or are called) and are repaid. In general, the longer the
average weighted maturity, the more a fund's share price will fluctuate in
response to changes in market interest rates.

9
<PAGE>

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

CASH RESERVES. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities.

CONVERSION PREMIUM. The average percentage by which the weighted average market
price of the convertible securities held by a fund exceeds the weighted average
market price of their underlying common stocks. For example, if a stock is
trading at $25 per share and a bond convertible into the stock is trading at a
price equivalent to $30 per share of stock, the conversion premium is 20% ($5 /
$25 = 20%).

DISTRIBUTION BY CREDIT QUALITY. This breakdown of a fund's securities by credit
rating can help in gauging the risk that returns could be affected by defaults
or other credit problems.

DISTRIBUTION BY MATURITY. An indicator of interest-rate risk. In general, the
higher the concentration of longer-maturity issues, the more a fund's share
price will fluctuate in response to changes in interest rates.

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

FOREIGN HOLDINGS. The percentage of a fund's net assets represented by
securities of companies based outside the United States.

NUMBER OF SECURITIES. An indicator of diversification. The more separate issues
a fund holds, the less susceptible it is to a price decline stemming from the
problems of a particular security.

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

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

TEN LARGEST HOLDINGS. The percentage of net assets that a fund has invested in
its ten largest holdings. As this percentage rises, a fund's returns are likely
to be more volatile because they are more dependent on the fortunes of a few
companies.

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

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

10
<PAGE>

FINANCIAL STATEMENTS
MAY 31, 1999 (UNAUDITED)

STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date. Any Accumulated Net Realized Losses, and any cumulative
excess of distributions over net income or net realized gains, will appear as
negative balances. Unrealized Appreciation (Depreciation) is the difference
between the market value of the fund's investments and their cost, and reflects
the gains (losses) that would be realized if the fund were to sell all of its
investments at their statement-date values.

- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
CONVERTIBLE SECURITIES FUND (000) (000)
- --------------------------------------------------------------------------------
CONVERTIBLE BONDS (70.9%)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (5.1%)
Magna International Inc.
4.875%, 2/15/2005 $ 4,055 $ 4,156
Offshore Logistics Inc.
6.00%, 12/15/2003 300 258
Tower Automotive Inc.
5.00%, 8/1/2004 3,810 4,039
----------
8,453
----------
CONSUMER DISCRETIONARY (17.0%)
(1)Amazon.com, Inc.
4.75%, 2/1/2009 2,000 1,880
Data Processing Resources Corp.
5.25%, 4/1/2005 365 274
IMAX Corp.
5.75%, 4/1/2003 415 484
(1)Interpublic Group Cos., Inc.
1.87%, 6/1/2006 2,545 2,192
Jacor Communications, Inc.
0.00%, 2/9/2018 10,470 5,745
Mail-Well, Inc.
5.00%, 11/1/2002 1,405 1,440
Merrill Lynch & Co./Time Warner
(Convertible into Time Warner)
0.25%, 5/10/2006 3,235 3,178
Metamor Worldwide, Inc.
2.94%, 8/15/2004 5,715 4,901
Scandinavian Broadcasting
System SA
7.00%, 12/1/2004 1,485 1,834

- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------
Triarc Cos. Inc.
0.00%, 2/9/2018 7,960 1,980
WMX Technologies Inc.
2.00%, 1/24/2005 3,975 4,273
----------
28,181
----------
CONSUMER STAPLES (0.4%)
Rite Aid Corp.
5.25%, 9/15/2002 650 653

FINANCIAL SERVICES (2.4%)
National Data Corp.
5.00%, 11/1/2003 1,830 1,975
(1)Security Capital U.S. Realty
2.50%, 5/22/2003 2,640 2,031
----------
4,006
----------
HEALTH CARE (16.3%)
(1)Alpharma, Inc.
3.00%, 6/1/2006 2,270 2,366
ALZA Corp.
5.00%, 5/1/2006 2,730 3,085
Athena Neurosciences Inc.
4.75%, 11/15/2004 745 769
Aviron
5.75%, 4/1/2005 650 578
Centocor, Inc.
4.75%, 2/15/2005 2,045 2,203
Concentra Managed Care, Inc.
4.50%, 3/15/2003 505 470
(1)Elan Finance Corp.
0.00%, 12/14/2018 8,340 4,233

11
<PAGE>

- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
CONVERTIBLE SECURITIES FUND (000) (000)
- --------------------------------------------------------------------------------
NCS HealthCare, Inc.
5.75%, 8/15/2004 1,810 1,192
Omnicare, Inc.
5.00%, 12/1/2007 3,180 2,882
Quadramed Corp.
5.25%, 5/1/2005 800 492
(1) Roche Holdings, Inc.
0.00%, 4/20/2010 1,320 769
0.00%, 5/6/2012 3,690 1,813
(1)Sepracor Inc.
7.00%, 12/15/2005 4,120 3,605
Total Renal Care Holdings
5.625%, 7/15/2006 3,010 2,528
----------
26,985
----------
INTEGRATED OILS (2.0%)
PennzEnergy Co.
4.95%, 8/15/2008 3,335 3,377
----------
OTHER ENERGY (2.6%)
Pride International, Inc.
6.25%, 2/15/2006 1,315 1,302
SEACOR Holdings, Inc.
5.375%, 11/15/2006 3,055 2,975
----------
4,277
----------
PRODUCER DURABLES (3.7%)
(1)Solectron Corp.
0.00%, 1/27/2019 9,170 4,791
Xerox Corp.
0.57%, 4/21/2018 2,140 1,335
----------
6,126
----------
TECHNOLOGY (16.8%)
Amkor Technology, Inc.
5.75%, 5/1/2003 3,140 2,967
(1)Atmel Corp.
0.00%, 4/21/2018 7,825 2,768
Bea Systems, Inc.
4.00%, 6/15/2005 675 642
(1)Citrix Systems, Inc.
0.00%, 3/22/2019 6,720 2,705
Comverse Technology, Inc.
4.50%, 7/1/2005 970 1,650
(1)Conexant Systems, Inc.
4.25%, 5/1/2006 1,610 1,694
(1)Doubleclick Inc.
4.75%, 3/15/2006 475 636
Gilat Satellite Networks Ltd.
6.50%, 6/3/2004 530 730
Hewlett Packard Co.
0.00%, 10/14/2017 10,260 6,355
(1)LSI Logic Corp.
4.25%, 3/15/2004 2,280 3,138
Morgan Stanley Dean Witter/
Sun Microsystems, Inc. (Convertible
into Sun Microsystems, Inc.)
0.00%, 5/30/2006 1,740 1,660
(1)Sanmina Corp.
4.25%, 5/1/2004 2,550 2,824
----------
27,769
----------
- --------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- --------------------------------------------------------------------------------
UTILITIES (4.6%)
AES Corp.
4.50%, 8/15/2005 1,735 1,939
(1)Bell Atlantic Financial Services
4.25%, 9/15/2005 3,260 3,358
Morgan Stanley Dean Witter/
WorldCom (Convertible into
WorldCom)
0.00%, 3/2/2006 2,280 2,226
----------
7,523
----------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE BONDS
(Cost $114,374) 117,350
- --------------------------------------------------------------------------------

SHARES
- --------------------------------------------------------------------------------
CONVERTIBLE PREFERRED STOCKS (27.6%)
- --------------------------------------------------------------------------------
AUTO & TRANSPORTATION (3.2%)
Union Pacific Capital Trust 6.25%
Cvt. Pfd. 80,300 4,196
Federal-Mogul Financial Trust
7.00% Cvt. Pfd. 20,200 1,111
----------
5,307
----------
CONSUMER DISCRETIONARY (3.3%)
Big Flower Press Trust I 6.00%
Cvt. Pfd. 39,500 2,405
Kmart Financing 7.75% Cvt. Pfd. 31,600 1,768
Metromedia International
Group, Inc. 7.25% Cvt. Pfd. 36,400 1,310
----------
5,483
----------
CONSUMER STAPLES (1.1%)
Suiza Capital Trust II
5.50% Cvt. Pfd. 49,200 1,820
----------
ENERGY (4.0%)
o Apache Corp. 6.50% Cvt. Pfd. 70,600 2,440
Pogo Trust I 6.50% Cvt. Pfd. 41,100 2,065
Devon Finance Trust $3.25
Cvt. Pfd. 35,200 2,042
----------
6,547
----------
FINANCIAL SERVICES (2.6%)
CNB Capital Trust I 6.00%
Cvt. Pfd. 80,700 2,083
Conseco Finance Trust IV 7.00%
Cvt. Pfd. 43,400 1,777
Innkeepers USA Trust 8.625%
Cvt. Pfd. 27,300 490
----------
4,350
----------
MATERIALS & PROCESSING (1.7%)
Sealed Air Corp. $2.00 Cvt. Pfd. 26,900 1,621
International Paper Co. 5.25%
Cvt. Pfd. 24,500 1,274
----------
2,895
----------
PRODUCER DURABLES (0.5%)
Kaufman & Broad Home Corp.
8.25% Cvt. Pfd. 89,600 745
----------
12
<PAGE>

- --------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- --------------------------------------------------------------------------------
TECHNOLOGY (5.1%)
(1)oGlobal Telesystems Inc. 7.25%
Cvt. Pfd. 81,000 5,052
Loral Space & Communications
Ltd. 6.00% Cvt. Pfd. 36,700 1,734
Cellnet Data Systems 7.00%
Cvt. Pfd. 50,700 995
Unisys Corp. $3.75 Cvt. Pfd. 11,215 719
----------
8,500
----------
UTILITIES (6.1%)
Winstar Communications, Inc.
7.00% Cvt. Pfd. 55,700 3,258
CalEnergy Capital Trust II
6.25% Cvt. Pfd. 45,500 2,241
o Adelphia Communications Corp.
5.50% Cvt. Pfd. 7,600 1,649
ICG Communications, Inc.
6.75% Cvt. Pfd. 30,900 1,506
Intermedia Communications, Inc.
7.00% Cvt. Pfd. 54,100 1,373
----------
10,027
----------
- --------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(Cost $43,848) 45,674
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (6.7%)
- --------------------------------------------------------------------------------
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
4.83%, 6/1/1999 $5,678 5,678
4.83%, 6/1/1999--Note F 5,359 5,359
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $11,037) 11,037
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (105.2%)
(Cost $169,259) 174,061
- --------------------------------------------------------------------------------

- --------------------------------------------------------------------------------
MARKET
VALUE*
(000)
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-5.2%)
- --------------------------------------------------------------------------------
Other Assets--Note C $4,504
Payables for Investment
Securities Purchased (7,368)
Security Lending Collateral
Payable to Brokers--Note F (5,359)
Other Liabilities (380)
----------
(8,603)
- --------------------------------------------------------------------------------
NET ASSETS (100%)
- --------------------------------------------------------------------------------
Applicable to 13,887,297 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $165,458
================================================================================
NET ASSET VALUE PER SHARE $11.91
================================================================================
*See Note A in Notes to Financial Statements.
oNon-Income-Producing Security. New issue that has not paid a dividend as of
May 31, 1999.
(1)Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be sold in transactions exempt from
registration, normally to qualified institutional buyers. At May 31, 1999,
the aggregate value of these securities was $45,855,000, representing 27.7%
of net assets.

- --------------------------------------------------------------------------------
AT MAY 31, 1999, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- --------------------------------------------------------------------------------
Paid in Capital $158,740 $11.43
Undistributed Net
Investment Income 1,157 .08
Accumulated Net
Realized Gains 759 .05
Unrealized Appreciation--Note E 4,802 .35
- --------------------------------------------------------------------------------
NET ASSETS $165,458 $11.91
================================================================================

13
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period.

- --------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND
SIX MONTHS ENDED MAY 31, 1999
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $1,373
Interest 3,007
Security Lending 38
----------
Total Income 4,418
----------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 349
Performance Adjustment (185)
The Vanguard Group--Note C
Management and Administrative 240
Marketing and Distribution 16
Custodian Fees 17
Auditing Fees 4
Shareholders' Reports 9
----------
Total Expenses 450
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME 3,968
- --------------------------------------------------------------------------------
REALIZED NET GAIN ON INVESTMENT SECURITIES SOLD 2,166
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
OF INVESTMENT SECURITIES 10,771
- --------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $16,905
================================================================================

14
<PAGE>

STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Convertible Securities Fund
-----------------------------------------
Six Months Year
Ended Ended
May 31, 1999 Nov. 30, 1998
(000) (000)
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
<S> <C> <C>
Net Investment Income $3,968 $8,146
Realized Net Gain (Loss) 2,166 (1,376)
Change in Unrealized Appreciation (Depreciation) 10,771 (10,995)
----------------------------------
Net Increase (Decrease) in Net Assets Resulting from Operations 16,905 (4,225)
----------------------------------
DISTRIBUTIONS
Net Investment Income (4,920) (8,273)
Realized Capital Gain -- (16,111)
----------------------------------
Total Distributions (4,920) (24,384)
----------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 13,426 40,843
Issued in Lieu of Cash Distributions 4,083 21,712
Redeemed (36,166) (50,920)
----------------------------------
Net Increase (Decrease) from Capital Share Transactions (18,657) 11,635
- ---------------------------------------------------------------------------------------------------------------------------
Total Decrease (6,672) (16,974)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 172,130 189,104
----------------------------------
End of Period $165,458 $172,130
===========================================================================================================================
1Shares Issued (Redeemed)
Issued 1,186 3,441
Issued in Lieu of Cash Distributions 377 1,873
Redeemed (3,185) (4,337)
----------------------------------
Net Increase (Decrease) in Shares Outstanding (1,622) 977
===========================================================================================================================
</TABLE>

15
<PAGE>

FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CONVERTIBLE SECURITIES FUND
YEAR ENDED NOVEMBER 30,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED ------------------------------------------------------------
THROUGHOUT EACH PERIOD MAY 31, 1999 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.10 $13.01 $13.07 $12.03 $10.94 $12.89
- ---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .27 .52 .53 .43 .52 .53
Net Realized and Unrealized Gain (Loss)
on Investments .87 (.77) 1.17 1.29 1.26 (1.04)
Total from Investment Operations 1.14 (.25) 1.70 1.72 1.78 (.51)
DISTRIBUTIONS
Dividends from Net Investment Income (.33) (.54) (.47) (.54) (.51) (.53)
Distributions from Realized Capital Gains -- (1.12) (1.29) (.14) (.18) (.91)
Total Distributions (.33) (1.66) (1.76) (.68) (.69) (1.44)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.91 $11.10 $13.01 $13.07 $12.03 $10.94
- ---------------------------------------------------------------------------------------------------------------------------

TOTAL RETURN 10.59% -2.16% 14.81% 14.88% 17.10% -4.35%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $165 $172 $189 $170 $172 $175
Ratio of Total Expenses to
Average Net Assets 0.53%* 0.73% 0.67% 0.69% 0.75% 0.73%
Ratio of Net Investment Income to
Average Net Assets 4.71%* 4.36% 4.29% 3.43% 4.63% 4.68%
Portfolio Turnover Rate 151%* 186% 182% 97% 46% 52%
===========================================================================================================================
*Annualized.
</TABLE>

16
<PAGE>

NOTES TO FINANCIAL STATEMENTS
Vanguard Convertible Securities Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company, or mutual fund.

A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Bonds are valued using the latest bid prices or using valuations based
on a matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Temporary cash investments are valued at cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the Board of Trustees to represent fair value.
2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a Pooled Cash Account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
5. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date the securities are bought or sold.
Costs used to determine realized gains (losses) on the sale of investment
securities are those of the specific securities sold. Discounts on debt
securities purchased are accreted to interest income over the lives of the
respective securities.

B. Oaktree Capital Management, LLC, provides investment advisory services to the
fund for a fee calculated at an annual percentage rate of average net assets.
The basic fee is subject to quarterly adjustments based on performance relative
to the Credit Suisse First Boston Convertible Securities Index. For the six
months ended May 31, 1999, the advisory fee represented an effective annual rate
of 0.41% of the fund's average net assets before a decrease of $185,000 (0.22%)
based on performance.

C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the Board of Trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At May 31, 1999, the fund had contributed capital of $28,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.04% of Vanguard's capitalization. The fund's Trustees and officers are
also Directors and officers of Vanguard.

D. During the six months ended May 31, 1999, the fund purchased $125,495,000 of
investment securities and sold $145,586,000 of investment securities, other than
temporary cash investments. At November 30, 1998, the fund had available a
capital loss carryforward of $1,465,000 to offset future net capital gains
through November 30, 2006.

17
<PAGE>

E. At May 31, 1999, net unrealized appreciation of investment securities for
financialreporting and federal income tax purposes was $4,802,000, consisting of
unrealized gains of $10,825,000 on securities that had risen in value since
their purchase and $6,023,000 in unrealized losses on securities that had fallen
in value since their purchase.

F. The market value of securities on loan to broker/dealers at May 31, 1999, was
$5,197,000, for which the fund held cash collateral of $5,359,000. Cash
collateral received is invested in repurchase agreements.

18
<PAGE>

NOTICE TO SHAREHOLDERS ABOUT Y2K

As is well known by now, the approaching calendar change to 2000 has posed a
challenge to many computer systems worldwide. Computers that are not modified
could interpret "00" as 1900 rather than 2000 and produce errors in
date-dependent calculations, including bond interest payments, stock trade
settlements, retirement benefits, and other financial transactions.

OUR APPROACH
Vanguard has taken this challenge seriously. We have had a Year 2000 Project
under way since 1996 to fulfill our responsibility to safeguard our business
relationships and the security of our investors' accounts.
Our internal systems are Year 2000-compliant. They have been renovated and
thoroughly tested and are ready for the date change. As for the external systems
that connect with ours, we have been working for many months with clients,
business partners, and providers of products and services to assess their
compliance. We have analyzed the external services we require and have developed
contingency plans--including provision for alternative providers where
appropriate.
On New Year's Day, our telephone centers will be staffed and ready for
shareholder calls. However, we expect the volume of inquiries over the New
Year's weekend to be high, and we encourage shareholders to check their accounts
via our website or automated telephone systems, which offer much greater service
capacity and efficiency. This will also help our live representatives to provide
a higher level of service to those with specific transaction or other
service-related needs.

WHAT YOU CAN DO
We assure you we will protect our shareholders' records, so account records will
not be lost. Nevertheless, keeping copies of current records is always
advisable. You should keep at least your third-quarter statement and any
confirmations you receive from us between October 1, 1999, and year-end.
If you are a registered user of Access Vanguard(TM) (www.vanguard.com), you
can retrieve this information through the secure "Your Accounts" section and
print copies for your files. If you are not registered for Access Vanguard and
wish to have this flexibility, you should register as soon as possible so that
you can receive your password and become familiar with this service before the
New Year's weekend. Likewise, you may need personal identification numbers to
use our automated telephone services: Vanguard Tele-Account(R) for individual
investors (1-800-662-6273) and The VOICE(TM) Network for participants in
employer-sponsored retirement plans (1-800-523-1188).
Our Year 2000 Project's primary goal from the start has been to prepare our
systems for business as usual on behalf of our shareholders into 2000 and
beyond. We remain confident we will meet that goal, and we look forward to
serving you in the years to come.

19
<PAGE>
THE VANGUARD FAMILY OF FUNDS

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

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

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

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

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

*Offers Institutional Shares.

20
<PAGE>

TRUSTEES AND OFFICERS

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

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

JOANN HEFFERNAN HEISEN
Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson
& Johnson; Director of Johnson & JohnsonoMerck
Consumer Pharmaceuticals Co., Women First
HealthCare, Inc., Recording for the Blind and
Dyslexic, The Medical Center at Princeton, and
Women's Research and Education Institute.

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

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

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

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

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

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

OTHER FUND OFFICERS

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

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

OTHER VANGUARD OFFICERS

R. GREGORY BARTON
Managing Director, Legal Department.

ROBERT A. DISTEFANO
Managing Director, Information Technology.

JAMES H. GATELY
Managing Director, Individual Investor Group.

KATHLEEN C. GUBANICH
Managing Director, Human Resources.

IAN A. MACKINNON
Managing Director, Fixed Income Group.

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

MICHAEL S. MILLER
Managing Director, Planning and Development.

RALPH K. PACKARD
Managing Director and Chief Financial Officer.

GEORGE U. SAUTER
Managing Director, Core Management Group.

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

<PAGE>

VANGUARD MILESTONES

[GRAPHIC]
The Vanguard Group is
named for HMS Vanguard,
Admiral Horatio Nelson's flagship
at the Battle of the Nile on
August 1, 1798. Our founder,
John C. Bogle, chose the name
after reading Nelson's inspiring
tribute to his fleet: "Nothing could
withstand the squadron . . .
with the judgment of the captains,
together with their valour, and that
of the officers and men of every
description, it was absolutely irresistible."

[GRAPHIC]
Walter L. Morgan, founder of
Wellington Fund, the nation's
oldest balanced mutual fund
and forerunner of today's family
of some 100 Vanguard funds,
celebrated his 100th birthday on
July 23, 1998. Mr. Morgan,
a true investment pioneer, died
six weeks later on September 2.

[GRAPHIC]
Wellington Fund,
The Vanguard Group's oldest fund,
was incorporated by Mr. Morgan
70 years ago, on December 28, 1928.
The fund was named after
the Duke of Wellington,
whose forces defeated
Napoleon Bonaparte at the
Battle of Waterloo in 1815.

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

WORLD WIDE WEB
www.vanguard.com

FUND INFORMATION
1-800-662-7447

INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739

INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036

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