VANGUARD EQUITY INCOME FUND INC, 497, 1996-01-17

VANGUARD EQUITY INCOME FUND INC
497, 1996-01-17

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form N-1A

REGISTRATION STATEMENT (NO. 33-19446) UNDER THE
SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 11

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 13
VANGUARD EQUITY INCOME FUND, INC.
(Exact Name of Registrant as Specified in Charter)

P.O. Box 2600, Valley Forge, PA 19482
(Address of Principal Executive Office)
Registrant's Telephone Number (610) 669-1000
Raymond J. Klapinsky, Esquire
P.O. Box 876
Valley Forge, PA 19482

Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.

It is proposed that this registration statement become effective on
January 12, 1996, pursuant to paragraph(b) of Rule 485.

Registrant elects to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. Registrant filed
its Rule 24f-2 Notice for the year ended September 30, 1995 on
November 17, 1995.

<PAGE>
VANGUARD EQUITY INCOME FUND, INC.
CROSS REFERENCE SHEET
- ------------------------------------------------------------------------------
Form N-1A
Item Number Location in Prospectus
- ----------- ------------------------------------ --------------------------
Item 1. Cover Page Cover Page
Item 2. Synopsis Not Applicable
Item 3. Condensed Financial Information Financial Highlights
Item 4. General Description of Registrant Investment Objective;
Investment Limitations;
Investment Policies;
General Information
Item 5. Management of the Fund Management of the Fund
Item 6. Capital Stock and Other Securities Opening an Account and
Purchasing Shares; Selling
Your Shares; The Fund's
Share Price; Dividends,
Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered Cover Page, Opening an
Account and Purchasing
Shares
Item 8. Redemption or Repurchase Selling Your Shares
Item 9. Pending Legal Proceedings Not Applicable

- ------------------------------------------------------------------------------
Form N-1A Location in Statement
Item Number of Additional Information
- ----------- ------------------------------------ --------------------------
Item 10. Cover Page Cover Page
Item 11. Table of Contents Cover Page
Item 12. General Information and History Management of the Fund
Item 13. Investment Objective and Policies Investment Limitations
Item 14. Management of the Fund Management of the Fund;
Investment Advisory
Services
Item 15. Control Persons and Principal Holders
of Securities Management of the Fund
Item 16. Investment Advisory and Other Management of the Fund;
Services Investment Advisory
Services
Item 17. Brokerage Allocation Portfolio Transactions
Item 18. Capital Stock and Other Securities See Prospectus--General
Information
Item 19. Purchase, Redemption and Pricing of Purchase of Shares;
Securities Being Offered Redemption of Shares
Item 20. Tax Status See Prospectus--Dividends,
Capital Gains and Taxes
Item 21. Underwriters Not Applicable
Item 22. Calculations of Yield Quotations of
Money Market Fund Not Applicable
Item 23. Financial Statements Financial Statements

<PAGE>
- -------------------------------------------------------------------------------
Vanguard
EQUITY INCOME FUND

The Vanguard Group of Investment Companies
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482

Investor Information Department:
1-800-662-7447 (SHIP)

Client Services Department:
1-800-662-2739 (CREW)

Tele-Account for 24-Hour Access:
1-800-662-6273 (ON-BOARD)

Telecommunications Service for the Hearing-Impaired:
1-800-662-2738

Transfer Agent:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482

<PAGE>
P R O S P E C T U S
===============================================================================
A Member of The Vanguard Group
===============================================================================
PROSPECTUS--January 12, 1996
NEW ACCOUNT INFORMATION: Investor Information Department--1-800-662-7447 (SHIP)
SHAREHOLDER ACCOUNT SERVICES: Client Services Department--1-800-662-2739 (CREW)
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
Vanguard Equity Income Fund, Inc. (the "Fund") is an open-end
diversified investment company which seeks a high level of current
income by investing principally in dividend-paying equity securities.
In the selection of these securities, the Fund will also consider the
potential for capital appreciation.

The average income yield of the common stocks held by the Fund is
expected to be at least 50% greater than that of the Standard and
Poor's 500 Composite Stock Price Index ("S&P 500 Index"). It is also
anticipated that the Fund will have less price volatility than the
S&P 500 Index. There is no assurance that the Fund will achieve its
stated objective. Shares of the Fund are neither insured nor
guaranteed by any agency of the U.S. Government, including the FDIC.
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT
To open a regular (non-retirement) account, please complete and
return the Account Registration Form. If you need assistance in
completing this Form, please call the Investor Information
Department. To open an Individual Retirement Account (IRA), please
use a Vanguard IRA Adoption Agreement. To obtain a copy of this form,
call 1-800-662-7447, Monday through Friday, from 8:00 a.m. to 9:00
p.m., and Saturday, from 9:00 a.m. to 4:00 p.m. (Eastern time). The
minimum initial investment is $3,000, or $1,000 for Uniform
Gifts/Transfers to Minors Act accounts. The Fund is offered on a no-
load basis (i.e., there are no sales commissions or 12b-1 fees).
However, the Fund incurs expenses for investment advisory,
management, administrative and distribution services.
- -------------------------------------------------------------------------------
ABOUT THIS PROSPECTUS
This Prospectus is designed to set forth concisely the information
you should know about the Fund before you invest. It should be
retained for future reference. A "Statement of Additional
Information" containing additional information about the Fund has
been filed with the Securities and Exchange Commission. Such
Statement is dated January 12, 1996 and has been incorporated
by reference into this Prospectus. It may be obtained, without
charge, by writing to the Fund or by calling the Investor Information
Department.
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
Fund Expenses.......................................... 2
Financial Highlights................................... 2
Yield and Total Return................................. 3

FUND INFORMATION
Investment Objective................................... 4
Investment Policies.................................... 4
Investment Risks....................................... 5
Who Should Invest...................................... 6
Implementation of Policies............................. 6
Investment Limitations................................. 8
Management of the Fund................................. 8
Investment Adviser..................................... 9
Performance Record..................................... 12
Dividends, Capital Gains and Taxes..................... 12
The Share Price of the Fund............................ 14
General Information.................................... 14

SHAREHOLDER GUIDE
Opening an Account and Purchasing Shares............... 16
When Your Account Will Be Credited..................... 19
Selling Your Shares.................................... 19
Exchanging Your Shares................................. 22
Important Information About Telephone Transactions .... 23
Transferring Registration.............................. 24
Other Vanguard Services................................ 24
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- -------------------------------------------------------------------------------
<PAGE>
FUND EXPENSES
The following table illustrates all expenses and fees that you would
incur as a shareholder of the Fund. The expenses set forth below are
for the 1995 fiscal year.

Shareholder Transaction Expenses
----------------------------------------------------------------
Sales Load Imposed on Purchases........................... None
Sales Load Imposed on Reinvested Dividends................ None
Redemption Fees........................................... None
Exchange Fees............................................. None

Annual Fund Operating Expenses
----------------------------------------------------------------
Management & Administrative Expenses.............. 0.25%
Investment Advisory Fees.......................... 0.18
12b-1 Fees............................................... None
Other Expenses
Distribution Costs............................... 0.02%
Miscellaneous Expenses........................... 0.02
-----
Total Other Expenses..................................... 0.04%
-----
Total Operating Expenses................. 0.47%
=====

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

The following example illustrates the expenses that you would incur
on a $1,000 investment over various periods, assuming (1) a 5% annual
rate of return and (2) redemption at the end of each time period. As
noted in the table above, the Fund charges no redemption fees of any
kind.
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
$5 $15 $26 $59

This example should not be considered a representation of past or
future expenses or performance. Actual expenses may be higher or
lower than those shown.
- -------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following information on financial highlights for a share
outstanding throughout each period, insofar as it relates to each of
the five years in the period ended September 30, 1995, has
been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. This information should be read in
conjunction with the Fund's financial statements and notes
thereto, which, together with the remaining portions of the Fund's
1995 Annual Report to Shareholders, are incorporated by reference
in the Statement of Additional Information and this Prospectus, and
which appear, along with the report of Price Waterhouse LLP, in the
Fund's 1995 Annual Report to Shareholders. For a more complete
discussion of the Fund's performance, please see the Fund's
1995 Annual Report to Shareholders which may be obtained
without charge by writing to the Fund or by calling our Investor
Information Department at 1-800-662-7447.
<PAGE>
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------------------ Mar. 21, 1988+ to
1995 1994 1993 1992 1991 1990 1989 Sept. 30, 1988
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period........ $13.16 $14.62 $12.81 $12.14 $10.36 $13.07 $10.58 $10.00
------ ------ ------ ------ ------ ------ ------ ------

Investment Operations
Net Investment Income.... .60 .59 .59 .59 .65 .73 .76 .33
Net Realized and
Unrealized Gain (Loss)
on Investments......... 2.56 (.92) 1.81 .83 1.99 (2.77) 2.23 .49
------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations........... 3.16 (.33) 2.40 1.42 2.64 (2.04) 2.99 .82
- --------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment Income...... (.58) (.61) (.59) (.65) (.79) (.64) (.48) (.24)
Distributions from
Realized Capital Gains. (.09) (.52) -- (.10) (.07) (.03) (.02) --
------ ------ ------ ------ ------ ------ ------ ------
Total Distributions.... (.67) (1.13) (.59) (.75) (.86) (.67) (.50) (.24)
- --------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period............ $15.65 $13.16 $14.62 $12.81 $12.14 $10.36 $13.07 $10.58
====================================================================================================================
Total Return 24.77% (2.19)% 19.17% 12.26% 26.46% (16.25)% 28.85% 8.26%
====================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period
(Millions)............... $967 $901 $1,106 $778 $518 $353 $267 $28
Ratio of Expenses to
Average Net Assets....... .47%** .43% .40% .44% .46% .48% .44% .72%*
Ratio of Net Investment
Income to Average
Net Assets.............. 4.27% 4.41% 4.39% 4.74% 5.52% 5.67% 6.01% 4.82%*
Portfolio Turnover Rate 31% 18% 15% 13% 9% 5% 8% 3%

<FN>
*Annualized.
**Effective in fiscal 1995, does not include expense reductions from directed brokerage arrangements. The 1995 Ratio of Expenses
to Average Net Assets is .45% after including these reductions.
+Commencement of operations.
</TABLE>
- -------------------------------------------------------------------------------
YIELD AND TOTAL RETURN
From time to time the Fund may advertise its yield and total return.
Both yield and total return figures are based on historical earnings
and are not intended to indicate future performance. The "total
return" of the Fund refers to the average annual compounded rates of
return over one-, five-, and ten-year periods or the life of the Fund
(as stated in the advertisement) that would equate an initial amount
invested at the beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of all dividend
and capital gains distributions.

In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "thirty-day yield" of the
Fund is calculated by dividing the net investment income per share
earned during a thirty-day period by the net asset value per share on
the last day of the period. Net investment income includes interest
and dividend income earned on the Portfolio's securities; it is net
of all expenses and all recurring and nonrecurring charges that have
been applied to all shareholder accounts. The yield calculation
assumes that the net investment income earned over thirty days is
compounded monthly for six months and then annualized. Accounting
<PAGE>
methods used to calculate advertised yields are standardized for all
stock and bond mutual funds. However, yield accounting methods differ
from other accounting standards, and so the advertised thirty-day
yield may not fully reflect the income paid to your own account.
- -------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund seeks to provide a high level of income
The objective of the Fund is to provide a high level of current
income by investing principally in dividend-paying equity securities.
In the selection of these securities, the Fund will also consider the
potential for capital appreciation. The average income yield of the
Fund's common stocks is expected to be at least 50% greater than that
of the S&P 500 Index. It is also anticipated that the Fund will have
less price volatility than the S&P 500 Index. There is no assurance
that the Fund will achieve its objective.

The investment objective of the Fund is fundamental and so cannot be
changed without the approval of a majority of the Fund's
shareholders.
- -------------------------------------------------------------------------------
INVESTMENT POLICIES
The Fund invests in income-producing equity securities
Under normal circumstances, the Fund will invest at least 80% of its
assets in income-producing equity securities, including dividend-
paying common stocks and securities which are convertible into common
stocks. The Fund intends to invest in securities which generate
relatively high levels of dividend income and have the potential for
capital appreciation. These generally include common stocks of
established, high-quality U.S. corporations. In addition, the Fund
will seek to diversify its investments over a carefully selected list
of securities in order to moderate the risks inherent in equity
investments. The Fund is managed without regard to tax ramifications.

The Fund will invest in a company's securities following a
fundamental analysis of the issuing company. An important part of
this analysis will be the examination of the company's ability to
maintain its dividend. Over time, dividend income has proved to be an
important component of total return. For example, during the ten-year
period ended September 1995, reinvested dividend income
accounted for approximately 23% of the total return of the S&P
500 Index. Also, dividend income tends to be a more stable source of
total return than capital appreciation. While the price of a
company's common stock can be significantly affected by market
fluctuations and other short-term factors, its dividend level usually
has greater stability. For this reason, securities which pay a high
level of dividend income are generally less volatile in price than
securities which pay a low level of dividend income.

Although the Fund intends to invest primarily in equity securities,
it may invest up to 20% of its assets in certain cash investments and
certain short-term fixed income securities. See "Implementation of
Policies" for a description of these and other investment practices
of the Fund.

The Fund is responsible for voting the shares of all securities it
holds.
<PAGE>
These policies are not fundamental and so may be changed by the Board
of Directors without shareholder approval. However, shareholders
would be notified before any material change is made in the Fund's
policies.
- -------------------------------------------------------------------------------
INVESTMENT RISKS
Investors are exposed to the market risk of common stocks
As a mutual fund investing primarily in common stocks, the Fund is
subject to market risk--i.e., the possibility that stock prices in
general will decline over short or even extended periods. The stock
market tends to be cyclical, with periods when stock prices generally
rise and periods when stock prices generally decline.

To illustrate the volatility of stock prices, the following table
sets forth the extremes for U.S. stock market returns as well as the
average return for the period from 1926 to 1994, as measured
by the Standard & Poor's 500 Composite Stock Price Index:

Average Annual U.S. Stock Market Returns (1926-1994)
Over Various Time Horizons

1 Year 5 Years 10 Years 20 Years
------------------------------------------------
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.2 +10.2 +10.6 +10.7

As shown, common stocks have provided annual total returns (capital
appreciation plus dividend income) averaging +10.6% for all
10-year periods from 1926 to 1994. The return in individual years
has varied from a low of -43.3% to a high of +53.9%, reflecting the
short-term volatility of stock prices. Average return may not be
useful for forecasting future returns in any particular period, as
stock returns are quite volatile from year to year.

This table of U.S. stock market returns should not be viewed as a
representation of future returns from the Fund or the U.S. stock
market. The illustrated returns represent historical investment
performance, which may be a poor guide to future returns. Also, stock
market indexes such as the S&P 500 are based on unmanaged portfolios
of securities before transaction costs and other expenses. Such costs
will reduce the relative investment performance of the Fund and other
"real world" portfolios. Finally, the Fund is likely to differ in
portfolio composition from broad stock market averages, and so the
Fund's performance should not be expected to mirror the returns
provided by a specific index.

Investors are also exposed to manager risk
The Fund's investment adviser manages the Fund according to the
traditional methods of "active" investment management, which involve
the buying and selling of securities based upon economic, financial
and market analysis and investment judgement. Manager risk
refers to the possibility that the Fund's investment adviser may fail
to execute the Fund's investment strategy effectively. As a result,
the Fund may fail to achieve its stated objective.
- -------------------------------------------------------------------------------
<PAGE>
WHO SHOULD INVEST
Investors seeking current income and capital growth
The Fund is designed for investors who are seeking a high level of
current income and the potential for long-term capital appreciation
with lower investment risk and volatility than is normally available
from common stock funds. Because of the risk associated with common
stock investments, the Fund is intended to be a long-term investment
vehicle and is not designed to provide investors with a means of
speculating on short-term market movements. Investors who engage in
excessive account activity generate additional costs which are borne
by all of the Fund's shareholders. In order to minimize such costs,
the Fund has adopted the following policies. The Fund reserves the
right to reject any purchase request (including exchange purchases
from other Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management, either because of the
timing of the investment or previous excessive trading by the
investor. Additionally, the Fund has adopted exchange privilege
limitations as described in the section "Exchange Privilege
Limitations." Finally, the Fund reserves the right to suspend the
offering of its shares. While the Fund is intended to provide current
income and above average stability for an equity fund, it should be
considered part of a well rounded investment portfolio and not its
sole component.

Although the Fund may exhibit somewhat less volatility than most
other equity funds, the Fund should not be used as a short-term
investment vehicle. All equity portfolios, no matter how they are
structured, are influenced by price movements in the broad equity
market. Over the long term, however, it is anticipated that the
volatility of the Fund's total return (dividend income plus capital
appreciation) will be lower than that of most other equity funds and
the S&P 500 Index due to the emphasis on equities with above-average
dividend yields. Investors may wish to reduce the potential risk of
investing in the Fund by purchasing shares on a regular, periodic
basis (dollar-cost averaging) rather than making an investment in one
lump sum.

No assurance can be given that the Fund will attain its objective or
that shareholders will be protected from the risk of loss that is
inherent in equity investing. Investors should not consider the Fund
a complete investment program, but should also maintain holdings in
investments with different risk characteristics, such as bonds and
money market instruments. Investors may also wish to complement an
investment in the Fund with other types of common stock investments.
- -------------------------------------------------------------------------------
IMPLEMENTATION OF POLICIES
In addition to investing primarily in equity securities, the Fund
uses a number of other investment vehicles to achieve its objective.

The Fund may invest in short-term fixed income securities
Although it normally seeks to remain fully invested in equity
securities, the Fund may invest in certain short-term fixed income
securities. Such securities may be used to invest uncommitted cash
balances, to maintain liquidity to meet shareholder redemptions, or
to take a temporary defensive position against potential stock
market declines. These securities include: obligations of the United
States Government and its agencies or instrumentalities; commercial
paper, bank certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
<PAGE>
A repurchase agreement is a means of investing monies for a short
period. In a repurchase agreement, a seller--a U.S. commercial bank
or recognized U.S. securities dealer--sells securities to the Fund
and agrees to repurchase the securities at the Fund's cost plus
interest within a specified period (normally one day). In these
transactions, the securities purchased by the Fund will have a total
value equal to, or in excess of, the value of the repurchase
agreement, and will be held by the Fund's Custodian Bank until
repurchased.

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

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

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

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

Futures contracts and options pose certain risks
The primary risks associated with the use of futures contracts and
options are: (i) imperfect correlation between the change in market
value of the stocks held by the Fund and the prices of futures
contracts and options; and (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a
futures position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing in those contracts whose
price fluctuations are expected to resemble those of the Fund's
underlying securities. The risk that the Fund will be unable to close
out a futures position will be minimized by entering into such
transactions on a national exchange with an active and 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 future 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. When investing in futures contracts, the Fund will
segregate cash or cash equivalents in the amount of the underlying
obligation.

The Fund may lend its securities
The Fund may lend its investment securities to qualified
institutional investors for either short-term or long-term purposes
of realizing additional income. Loans of securities by the Fund will
<PAGE>
be collateralized by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The collateral
will equal at least 100% of the current market value of the loaned
securities. The Fund may borrow money, subject to the limits set
forth below, for temporary or emergency purposes, including the
meeting of redemption requests which might otherwise require the
untimely disposition of securities.

Portfolio turnover is not expected to exceed 100%
Although it generally seeks to invest for the long term, the Fund
retains the right to sell securities irrespective of how long they
have been held. It is anticipated that the annual portfolio turnover
of the Fund will not exceed 100%, exclusive of securities with
maturities less than one year. A turnover rate of 100% would occur,
for example, if all of the securities of the Fund were replaced
within one year.
- -------------------------------------------------------------------------------
INVESTMENT LIMITATIONS

The Fund has adopted certain fundamental limitations
The Fund has adopted certain limitations in an attempt to reduce its
exposure to specific situations. Some of these limitations are that
the Fund will not:

(a) invest more than 25% of its assets in any one industry;

(b) with respect to 75% of the value of its total assets,
purchase the securities of any issuer (except
obligations of the United States government and its
instrumentalities) if as a result the Fund would hold
more than 10% of the outstanding voting securities of
the issuer, or more than 5% of the value of the Fund's
total assets would be invested in the securities of such
issuer;
(c) engage in the business of underwriting securities issued
by other persons, except to the extent that the Fund may
technically be deemed to be an underwriter under the
Securities Act of 1933, as amended, in disposing of
investment securities;
(d) purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets would be
invested in securities that are illiquid;
(e) borrow money except from banks for temporary or
emergency purposes, and then only in an amount not in
excess of 15% of total assets taken at the lower of
their value or cost of its total assets; and
(f) pledge, mortgage or hypothecate any of its assets to an
extent greater than 5% of its total assets.

The investment limitations are considered at the time investment
securities are purchased. The investment limitations described here
and in the Statement of Additional Information may be changed only
with the approval of a majority of the Fund's shareholders.
- -------------------------------------------------------------------------------
MANAGEMENT OF THE FUND
Vanguard administers and distributes the Fund
The Fund is a member of The Vanguard Group of Investment Companies, a
family of more than 30 investment companies with more than 90
distinct investment portfolios and total assets in excess of
$170 billion. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. ("Vanguard"), the Fund and the other funds in
the Group obtain at cost virtually all of their corporate management,
administrative, shareholder accounting and distribution services.
Vanguard also provides investment advisory services on an at-cost
basis to certain Vanguard funds. As a result of Vanguard's unique
corporate structure, the Vanguard funds have costs substantially
lower than those of most competing mutual funds. In 1994, the
average expense ratio (annual
<PAGE>
costs including advisory fees divided by total net assets) for the
Vanguard funds amounted to approximately .30% compared to an average
of 1.05% for the mutual fund industry (data provided by Lipper
Analytical Services).

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

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

Vanguard also provides distribution and marketing services to the
Vanguard funds. The funds are available on a no-load basis, (i.e.,
there are no sales commissions or 12b-1 fees). However, each fund
bears a share of the Group's distribution costs.
- -------------------------------------------------------------------------------
INVESTMENT ADVISER
The Fund employs three investment advisers
The Fund currently has three investment advisers: Newell Associates
("Newell"), 525 University Avenue, Palo Alto, California 94301;
Spare, Kaplan, Bischel & Associates ("Spare/Kaplan") , 44
Montgomery Street, Suite 3500, San Francisco, California 94104; and
John A. Levin & Co., Inc. ("Levin"), One Rockefeller Plaza, 25th
Floor, New York, NY 10020. Prior to January 1, 1995, Newell was the
sole investment adviser to the Fund. Spare/Kaplan and Levin
were added as investment advisers effective January 1, 1995.

The proportion of the net assets of the Fund managed by each adviser
is established by the Board of Directors, and may be changed in the
future as circumstances warrant. Presently, Newell is responsible for
approximately 75% of the Fund's investments; Spare/Kaplan and
Levin are responsible for approximately 12.5% each.

The Fund has entered into investment advisory agreements with Newell,
Spare/Kaplan and Levin which provide that the advisers manage
the investment and reinvestment of the Fund's assets and continuously
review, supervise and administer the Fund's investment program. The
advisers discharge their responsibilities subject to the control of
the Officers and Directors of the Fund.

Newell Associates
The principal investment officer of Newell, Roger D. Newell, has
managed equity portfolios for more than thirty years, employing an
income-oriented equity strategy since 1975. The approach is based
upon an analysis of how a stock's yield, relative to the market,
varies over time. Newell's strategy asserts that relative yield is an
excellent guide to relative value. Newell is a California corporation
in which a controlling interest is owned by its Directors, Officers
and Investment Managers: Roger D. Newell, Robert A. Huret, Alan E.
Rothenberg and Patricia Kelly Lentini. Mr. Newell has been
responsible for overseeing the implementation of the firm's strategy
for the Fund since the Fund's inception in 1988.
<PAGE>
The Fund pays Newell an advisory fee at the end of each fiscal
quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the average month-end net
assets managed by Newell for the quarter:

Net Assets Rate
------------------ -----
First $250 million .200%
Next $500 million .150%
Next $250 million .100%
Over $1 billion .080%

For the fiscal year ended September 30, 1995, the Fund paid an
advisory fee to Newell, its sole investment adviser prior to January
1, 1995, equal to .18 of 1% of its total average net
assets.

Spare, Kaplan, Bischel & Associates
Anthony E. Spare, Chief Investment Officer, will have responsibility
for the portion of the Fund managed by Spare/Kaplan. Mr.
Spare has been associated with Spare/Kaplan since 1989.

The Fund pays Spare/Kaplan a basic advisory fee at the end of
each quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the average month-end assets of
the Fund managed by Spare/Kaplan for the quarter:

Net Assets Annual Rate
------------------ -----------
First $500 million 0.175%
Next $500 million 0.125%
Over $1 billion 0.10%

The basic fee paid to Spare/Kaplan, as provided above,
may be increased or decreased by applying an incentive/penalty
adjustment to the basic fee reflecting the investment performance of
the assets managed by Spare/Kaplan relative to the return of
the Standard and Poor's/BARRA Value Index ("Value Index"). Under the
incentive/penalty fee schedule, the fee payable to
Spare/Kaplan may represent as much as 120% or as little as 80%
of the basic fee, depending on the net investment performance of the
portfolio managed by Spare/Kaplan.

Under the rules of the Securities and Exchange Commission, the
incentive/penalty fee will not be fully operable until the quarter
ending December 31, 1997, and until that date, will be calculated
according to certain transition rules. The Fund's Statement of
Additional Information, which is available on request, provides a
detailed description of the incentive/penalty fee schedules for the
Fund's investment advisers and the applicable transition rules.

John A. Levin & Co., Inc.
Jeffrey A. Kigner and Melody P. Sarnell will have responsibility for
the portion of the Fund managed by Levin. Mr. Kigner and Ms. Sarnell
have been associated with Levin since 1984.
<PAGE>
The Fund pays Levin a basic advisory fee at the end of each quarter,
calculated by applying a quarterly rate, based on the following
annual percentage rates, to the average month-end assets of the Fund
managed by Levin for the quarter:

Net Assets Annual Rate
------------------- -----------
First $100 million 0.40%
Next $200 million 0.25%
Over $300 million 0.30%

The basic fee paid to Levin, as provided above, may be
increased or decreased by applying an incentive/penalty adjustment to
the basic fee reflecting the investment performance of the assets
managed by Levin relative to the return of the Standard and Poor's
500 Composite Stock Price Index ("S&P 500 Index"). Under the
incentive/penalty fee schedule, the basic fee payable to Levin may
represent as much as 140% or as little as 60% of the basic fee
depending on the investment performance of the equity investments
managed by Levin.

The investment advisory agreements with Newell, Spare, Kaplan and
Levin authorize each adviser to select brokers or dealers to execute
purchases and sales of the Fund's portfolio securities, and directs
the advisers to use their best efforts to obtain the best available
price and most favorable execution with respect to all transactions.
The full range and quality of brokerage services available are
considered in making these determinations.

The Fund has authorized the advisers to pay higher commissions in
recognition of brokerage services felt necessary for the achievement
of better execution, provided the advisers believe this to be in the
best interest of the Fund. Although the Fund does not market its
shares through intermediary brokers or dealers, the Fund may place
orders with qualified broker-dealers who recommend the Fund to
clients if the Officers of the Fund believe that the quality of the
transaction and the commission are comparable to what they would be
with other qualified brokerage firms.

The Fund's Board of Directors may, without the approval of
shareholders, provide for: (a) the employment of a new investment
adviser pursuant to the terms of a new advisory agreement either as a
replacement for an existing adviser or as an additional adviser; (b)
a change in the terms of an advisory agreement; and (c) the continued
employment of an existing adviser on the same advisory contract terms
where a contract has been assigned because of a change in control of
the adviser. Any such change will only be made upon not less than 30
days prior written notice to shareholders of the Fund which shall
<PAGE>
include substantially the information concerning the adviser that
would have normally been included in a proxy statement.
- -------------------------------------------------------------------------------
PERFORMANCE RECORD
The table below provides investment results for the Fund for one and
five years and since inception. The results shown represent "total
return" investment performance, which assumes the reinvestment of all
capital gains and income dividends for the indicated periods. Also
included is comparative information with respect to the unmanaged
Standard & Poor's 500 Composite Stock Price Index, a widely-used
barometer of stock market activity, and the Consumer Price Index, a
statistical measure of changes in the prices of goods and services.
The tables do not make any allowance for federal, state or local
income taxes, which shareholders must pay on a current basis.

The results should not be considered a representation of the total
return from an investment made in the Fund today. This information is
provided to help investors better understand the Fund and may not
provide a basis for comparison with other investments or mutual funds
which use a different method to calculate performance. Prior to
January 1, 1995 Newell Associates served as the Fund's sole
investment adviser.

Average Annual Return for Vanguard Equity Income Fund
Percentage Change
-------------------------------------------
Fiscal Periods Vanguard Equity S&P 500 Consumer
Ended 9/30/95 Income Fund Index Price Index
---------------- --------------- ------- -----------
1 Year +24.8% +29.7% +2.6%
5 Year +15.6 +17.2 +2.9
Lifetime* +12.4 +14.4 --

*March 21, 1988, to September 30, 1995.

- -------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS AND TAXES
The Fund pays quarterly dividends and any capital gains annually
The Fund expects to pay quarterly dividends from ordinary income.
Capital gains distributions, if any, will be made annually.

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

Dividend and capital gains distributions may be automatically
reinvested or received in cash. See "Choosing a Distribution Option"
for a description of these distribution methods.

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

Distributions paid by the Fund from long-term capital gains, whether
received in cash or reinvested in additional shares, are taxable as
long-term capital gains, regardless of the length of time you have
owned shares in the Fund. Capital gains distributions are made when
the Fund realizes net capital gains on sales of portfolio securities
during the year. The Fund does not seek to realize any particular
amount of capital gains during a year; rather, realized gains are a
by-product of portfolio management activities. Consequently, capital
gains distributions may be expected to vary considerably from year to
year; there will be no capital gains distributions in years when the
Fund realizes net capital losses.

Note that if you accept capital gains distributions in cash, instead
of reinvesting them in additional shares, you are in effect reducing
the capital at work for you in the Fund. Also, keep in mind that if
you purchase shares in the Fund shortly before the record date for a
dividend or capital gains distribution, a portion of your investment
will be returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or receiving them in
cash.

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

A capital gain or loss may be realized upon exchange or redemption
A sale of shares of the Fund is a taxable event and may result in a
capital gain or loss. A capital gain or loss may be realized from an
ordinary redemption of shares or an exchange of shares between two
mutual funds (or two portfolios of a mutual fund).
Dividend distributions, capital gains distributions, and capital
gains or losses from redemptions and exchanges may be subject to
state and local taxes.

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

The Fund has obtained a Certificate of Authority to do business as a
foreign corporation in Pennsylvania and does business and maintains
an office in that state. In the opinion of counsel, the shares of the
Fund are exempt from Pennsylvania personal property taxes.

The tax discussion set forth above is included for general
information only. Prospective investors should consult their own tax
<PAGE>
advisers concerning the tax consequences of an investment in the
Fund. The Fund is managed without regard to tax ramifications.
- -------------------------------------------------------------------------------
THE SHARE PRICE OF THE FUND
The Fund's share price or "net asset value" per share is determined
by dividing the total assets of the Fund, less all liabilities, by
the total number of shares outstanding. The net asset value is
calculated at the close of regular trading (generally 4:00 p.m.
Eastern time) each day the New York Stock Exchange is open for
trading.

Market values for securities listed on an exchange are based upon the
latest quoted sales prices for such securities. Securities not traded
on the valuation date are valued at the mean of the latest quoted bid
and ask prices. Securities not listed are valued at the latest quoted
bid price. Any foreign securities are valued at the latest quoted
sales price available before the time when assets are valued. Short-
term instruments (those with remaining maturities of 60 days or less)
are valued at cost, plus or minus any amortized discount or premium,
which approximates market value.

All prices of listed securities are taken from the exchange where the
security is primarily traded. Convertible bonds and other debt
instruments 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
but take into account institutional size trading in similar groups of
securities and any developments related to specific securities.
Securities for which market quotations are not readily available or
which are restricted as to sale and other assets are valued by such
methods as the Board of Directors deems in good faith to reflect fair
value.

The Fund's price per share can be found daily in the mutual fund
section of most major newspapers under the heading of
Vanguard.
- -------------------------------------------------------------------------------
GENERAL INFORMATION
The Fund is a Maryland corporation. The Fund's Articles of
Incorporation permit the Directors to issue 1,000,000,000 shares of
common stock, with a $.001 par value. The Board of Directors has the
power to designate one or more classes ("Portfolios") of shares of
common stock and to classify or reclassify any unissued shares with
respect to such Portfolios. Currently the Fund is offering one class
of shares.

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

The shares of the Fund are fully paid and nonassessable; have no
preferences as to conversion, exchange, dividends, retirement or
other features; and have no pre-emptive rights. Such shares have non-
cumulative voting rights, meaning that the holders of more than 50%
of the shares voting for the election of Directors can elect 100% of
the Directors if they so choose. A shareholder is entitled to one
vote for each full share held (and a fractional vote for each
fractional share held).
<PAGE>
All securities and cash are held by State Street Bank and Trust
Company, Boston, MA. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Fund's Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountants for the Fund and
will audit its financial statements annually. The Fund is not
involved in any litigation.
- -------------------------------------------------------------------------------
<PAGE>
SHAREHOLDER GUIDE
OPENING AN ACCOUNT AND PURCHASING SHARES
You may open a regular (non-retirement) account, either by mail or
wire. Simply complete and return an Account Registration Form and any
required legal documentation, indicating the amount you wish to
invest. Your purchase must be equal to or greater than the $3,000
minimum initial investment ($1,000 for Uniform Gifts/Transfers
to Minors Act accounts). You may open a new Individual Retirement
Account by mail (IRAs may not be opened by wire) using a Vanguard IRA
Adoption Agreement. Your purchase must be equal to or greater than
the $1,000 minimum initial investment requirement, but no more
than $2,000 if you are making a regular IRA contribution. Rollover
contributions are generally limited to the amount withdrawn within
the past 60 days from an IRA or other qualified retirement plan. If
you need assistance with the forms or have any questions about the
Fund, please call our Investor Information Department at 1-800-662-
7447. Note: For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts or powers of
attorney), please call us to determine which additional forms you may
need.

The Fund's shares are purchased at the next-determined net asset
value after your investment has been received. The Fund is offered on
a no-load basis (i.e., there are no sales commissions or 12b-1
fees).

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

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

Additional Investments
Subsequent investments may be made by mail ($100 minimum), wire
($1,000 minimum), exchange from another Vanguard Fund account, or
Vanguard Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or exchange
from another Vanguard Fund account. In some instances, contributions
may be made by wire or Vanguard Fund Express. Please call us for more
information on these options.
<PAGE>
Purchasing By Mail
Complete and sign the enclosed Account Registration Form
NEW ACCOUNT
Please include the amount of your initial investment, make your check
payable to The Vanguard Group-65, and mail to:

Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482

For express or registered mail, send to:

Vanguard Financial Center
455 Devon Park Drive
Wayne, PA 19087

ADDITIONAL INVESTMENTS TO EXISTING ACCOUNTS
Additional investments should include the Invest-by-Mail remittance
form attached to your Fund confirmation statements. Please make your
check payable to The Vanguard Group-65, write your account number on
your check and, using the return envelope provided, mail to the
address indicated on the Invest-by-Mail Form.

All written requests should be mailed to one of the addresses
indicated for new accounts. Do not send registered or express mail to
the post office box address.

Purchasing By Wire
Money should be wired to:
CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD

Before Wiring Please contact Client Services (1-800-662-2739)
VANGUARD EQUITY INCOME FUND
ACCOUNT NUMBER
ACCOUNT REGISTRATION

To assure proper receipt, please be sure your bank includes the name
of the Fund, the account number Vanguard has assigned to you and the
eight digit CoreStates number. If you are opening a new account, you
must contact our Client Services Department (1-800-662-2739) before
wiring funds. Also, please complete the Account Registration Form and
mail it to the "New Account" address above after completing your wire
arrangement. Note: Federal Funds wire purchase orders will be
accepted only when the Fund and Custodian Bank are open for business.

Purchasing By Exchange (from a Vanguard account)
You may open a new account or purchase additional shares by making an
exchange from an existing Vanguard account. However, the Fund
reserves the right to refuse any exchange purchase request. Please
call our Client Services Department at 1-800-662-2739 for assistance.
The new account will have the same registration as the existing
account.

Purchasing By Fund Express
Special Purchase and Automatic Investment
The Fund Express Special Purchase option lets you move money from
your bank account to your Vanguard account at your request. Or if you
choose the Automatic Investment option, money will be moved from your
bank account to your Vanguard account on the schedule (monthly,
bimonthly [every other month], quarterly or yearly) you select. To
establish these Fund Express options, please provide the appropriate
<PAGE>
information on the Account Registration Form. We will send you a
confirmation of your Fund Express service; please wait three weeks
before using the service.
- -------------------------------------------------------------------------------
CHOOSING A DISTRIBUTION OPTION
You must select one of three distribution options:

1. Automatic Reinvestment Option--Both dividends and capital gains
distributions will be reinvested in additional Fund shares. This
option will be selected for you automatically unless you specify
one of the other options.
2. Cash Dividend Option--Your dividends will be paid in cash and
your capital gains will be reinvested in additional Fund shares.
3. All Cash Option--Both dividend and capital gains distributions
will be paid in cash.

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

In addition, an option to invest your cash dividends and/or capital
gains distributions in another Vanguard Fund account is available.
Please call our Client Services Department (1-800-662-2739) for
information. You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please see "Other
Vanguard Services" for more information.
- -------------------------------------------------------------------------------
TAX CAUTION
Investors should ask about the timing of capital gains and dividend
distributions before investing
Under Federal tax laws, the Fund is required to distribute net
capital gains and dividend income to Fund shareholders. These
distributions are made to all shareholders who own Fund shares as of
the distribution's record date, regardless of how long the shares
have been owned. Purchasing shares just prior to the record date
could have a significant impact on your tax liability for the year.
For example, if you purchase shares immediately prior to the record
date of a sizable capital gain, you will be assessed taxes on the
amount of the capital gain distribution, even though you owned the
Fund shares for just a short period of time. (Taxes are due on the
distributions even if the dividend or gain is reinvested in
additional Fund shares.) While the total value of your investment
will be the same after the capital gain distribution--the amount of
the capital gain distribution will offset the drop in the net asset
value of the shares--you should be aware of the tax implications the
timing of your purchase may have.

Prospective investors should, therefore, inquire about potential
distributions before investing. The Fund's annual capital gains
distributions normally occur in December, while income dividends are
generally paid quarterly in March, June, September and December. For
additional information on distributions and taxes, see the section
titled "Dividends, Capital Gains, and Taxes."
<PAGE>
- -------------------------------------------------------------------------------
IMPORTANT ACCOUNT INFORMATION
Establishing Optional Services
The easiest way to establish optional Vanguard services on your
account is to select the options you desire when you complete your
Account Registration Form. If you wish to add shareholder options
later, you may need to provide Vanguard with additional information
and a signature guarantee. Please call our Client Services Department
(1-800-662-2739) for further assistance.

Signature Guarantees
For our mutual protection, we may require a signature guarantee on
certain written transaction requests. A signature guarantee verifies
the authenticity of your signature, and may be obtained from banks,
brokers or any other guarantor that Vanguard deems acceptable. A
signature guarantee cannot be provided by a notary public.

Certificates
Share certificates will be issued upon request. If a certificate is
lost, you may incur an expense to replace it.

Broker-Dealer Purchases
If you purchase shares in Vanguard Funds through a registered broker-
dealer or investment adviser, the broker-dealer or adviser may charge
a service fee.

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

Electronic Prospectus Delivery
If you would prefer to receive a prospectus for the Fund or any of
the Vanguard Funds in an electronic format, please call 1-800-231-
7870 for additional information. If you elect to do so, you may also
receive a paper copy of the prospectus, by calling 1-800-662-
7447.
- -------------------------------------------------------------------------------
WHEN YOUR ACCOUNT WILL BE CREDITED
Your trade date is the date on which your account is credited. If
your purchase is made by check, Federal Funds wire or exchange and is
received before the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time), your trade date is the
day of receipt. If your purchase is received after the close of the
Exchange, your trade date is the next business day. Your shares are
purchased at the net asset value determined on your trade date.

In order to prevent lengthy processing delays caused by the clearing
of foreign checks, Vanguard will only accept a foreign check which
has been drawn in U.S. dollars and has been issued by a foreign bank
with a United States correspondent bank. The name of the U.S.
correspondent bank must be printed on the face of the foreign check.
- -------------------------------------------------------------------------------
SELLING YOUR SHARES
You may withdraw any portion of the funds in your account by
redeeming shares at any time. (Please see Important Redemption
Information.) You generally may initiate a request by writing
or by telephoning. Your redemption proceeds are normally mailed
within two business days after the receipt of the request in Good
Order.
<PAGE>
Selling By Mail
Requests should be mailed to Vanguard Financial Center, Vanguard
Equity Income Fund, P.O. Box 1120, Valley Forge, PA 19482. (For
express or registered mail, send your request to Vanguard Financial
Center, Vanguard Equity Income Fund, 455 Devon Park Drive, Wayne, PA
19087.)

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

Definition of Good Order
Good Order means that the request includes the following:

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

If you have questions about this definition as it pertains to your
request, please call our Client Services Department at 1-800-662-
2739.

Selling By Telephone
To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at 1-800-662-
2739. The proceeds will be sent to you by mail. Please Note: As a
protection against fraud, your telephone mail redemption privilege
will be suspended for 10 calendar days following any expedited
address change to your account. An expedited address change is one
that is made by telephone, by Vanguard Online or, in writing,
without the signatures of all account owners. Please see
"Important Information About Telephone Transactions."

Selling By Fund Express
Automatic Withdrawal & Special Redemption
If you select the Fund Express Automatic Withdrawal option, money
will be automatically moved from your Vanguard Fund account to your
bank account according to the schedule you have selected. The Special
Redemption option lets you move money from your Vanguard account to
your bank account on your request. You may elect Fund Express on the
Account Registration Form, or call our Investor Information
Department at 1-800-662-7447 for a Fund Express application.

Selling By Exchange
You may sell shares by making an exchange into another Vanguard Fund
account. Please see "Exchanging Your Shares" for details.

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

Delivery of Redemption Proceeds
Redemption requests received by telephone prior to the regular close
of the New York Stock Exchange are processed on the day of receipt
and the redemption proceeds are normally sent on the following
business day.
<PAGE>
Redemption requests received by telephone after the close of regular
trading on the New York Stock Exchange (generally 4:00 p.m. Eastern
time) are processed on the business day following receipt and the
proceeds are normally sent on the second business day following
receipt.

All unpaid dividends credited to your account up to the date of
redemption will be included in the redemption check. Redemption
proceeds must be sent to you within seven days of receipt of your
request in Good Order.

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

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

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

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

Low Balance Fee and Minimum Account Balance Requirement
Due to the relatively high cost of maintaining smaller accounts,
the Fund will automatically deduct a $10 annual fee from non-
retirement accounts with balances falling below $2,500 ($1,000 for
Uniform Gifts/Transfers to Minors Act accounts). This fee deduction
will occur mid-year, beginning in 1996. The fee generally will be
waived for investors whose aggregate Vanguard assets exceed $50,000.
In addition, the Fund reserves the right to liquidate any non-
retirement account that is below the minimum initial investment
amount of $3,000. If at any time your total investment does not
have a value of at least $3,000, you may be notified that the value
of your account is below the Fund's minimum account balance
requirement. You would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds would be
promptly paid to the registered shareholder.

Vanguard will not liquidate your account if it has fallen below
$3,000 solely as a result of declining markets (i.e., a decline in a
Fund's net asset value).
<PAGE>
- -------------------------------------------------------------------------------
EXCHANGING YOUR SHARES
Should your investment goals change, you may exchange your shares of
Vanguard Equity Income Fund for those of other available Vanguard
Funds.
Exchanging By Telephone
Call Client Services at 1-800-662-2739
When exchanging shares by telephone, please have ready the Fund name,
account number, Social Security number or Employer Identification
number listed on the account, and the exact name and address in which
the account is registered. Only the registered shareowner may
complete such an exchange. Requests for telephone exchanges received
prior to the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the close of
business that same day. Requests received after 4:00 p.m. are
processed the next business day. Telephone exchanges are not accepted
into or from Vanguard Balanced Index Fund, Vanguard Index Trust,
Vanguard International Equity Index Fund and Vanguard Quantitative
Portfolios. If you experience difficulty in making a telephone
exchange, your exchange request may be made by regular or express
mail, and it will be implemented at the closing net asset value on
the date received by Vanguard provided the request is received in
Good Order.

Neither the Fund nor Vanguard is responsible for the authenticity of
exchange instructions received by telephone. Investors bear the full
risk of any loss arising from unauthorized telephone exchanges. To
prohibit telephone exchanges on your account, please notify the Fund
in writing. Otherwise, the telephone exchange privilege will be
automatically established for your account.

Exchanging By Mail

Please be sure to include on your exchange request the name and
account number of your current Fund, the name of the Fund you wish to
exchange into, the amount you wish to exchange, and the signatures of
all registered account holders. Send your request to Vanguard
Financial Center, Vanguard Equity Income Fund, P.O. Box 1120, Valley
Forge, PA 19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard Equity Income Fund, 455 Devon
Park Drive, Wayne, PA 19087.)

Important Exchange Information
Before you make an exchange, you should consider the following:

* Please read the Fund's prospectus before making an exchange. For
a copy and for answers to any questions you may have, call our
Investor Information Department (1-800-662-7447).
* An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
* Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
* The shares to be exchanged must be on deposit and not held in
certificate form.
* New accounts are not currently accepted in Vanguard/Windsor Fund
or Vanguard/PRIMECAP Fund.
* The redemption price of shares redeemed by exchange is the net
asset value next determined after Vanguard has received the
required documentation in Good Order.
<PAGE>
* When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.

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

The exchange privilege is only available in states in which the
shares of the Fund are registered for sale. The Fund's shares are
currently registered for sale in all 50 states and the Fund intends
to maintain such registration.
- -------------------------------------------------------------------------------
EXCHANGE PRIVILEGE LIMITATIONS
The Fund's exchange privilege is not intended to afford shareholders
a way to speculate on short-term movements in the market.
Accordingly, in order to prevent excessive use of the exchange
privilege that may potentially disrupt the management of the Fund and
increase transaction costs, the Fund has established a policy of
limiting excessive exchange activity.

Exchange activity generally will not be deemed excessive if limited
to two substantive exchange redemptions (at least 30 days apart) from
the Fund during any twelve month period. Notwithstanding these
limitations, the Fund reserves the right to reject any purchase
request (including exchange purchases from other Vanguard portfolios)
that is reasonably deemed to be disruptive to efficient portfolio
management.
- -------------------------------------------------------------------------------
IMPORTANT INFORMATION ABOUT TELEPHONE TRANSACTIONS
The ability to initiate redemptions (except wire redemptions) and
exchanges by telephone is automatically established on your account
unless you request in writing that telephone transactions on your
account not be permitted.

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

1. Security Check. To request a transaction by telephone, the
caller must know (i) the name of the Fund; (ii) the 10-digit
account number; (iii) the exact name and address used in the
registration; and (iv) the Social Security or Employer
Identification number listed on the account.
2. Payment Policy. The proceeds of any telephone redemption by mail
will be made payable to the registered shareowner and mailed to
the address of record, only.

Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by telephone,
provided that reasonable security procedures have been followed.
Vanguard believes that the security procedures described above are
reasonable and that if such procedures are followed, you will bear
the risk of any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard fails to follow
reasonable security procedures, it may be liable for any losses
resulting from unauthorized or fraudulent telephone transactions on
your account.
<PAGE>
- -------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You may transfer the registration of any of your Fund shares to
another person by completing a transfer form and sending it to:
Vanguard Financial Center, P.O. Box 1110, Valley Forge, PA 19482,
Attention: Transfers Department. The request must be in Good Order.
To receive a transfer form and full instructions, please call our
Client Services Department (1-800-662-2739).
- -------------------------------------------------------------------------------
STATEMENTS AND REPORTS
Vanguard will send you a confirmation statement each time you
initiate a transaction in your account except for checkwriting
redemptions from Vanguard money market accounts. You will also
receive a comprehensive account statement at the end of each calendar
quarter. The fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar year.

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

Financial reports on the Fund will be mailed to you semi-annually,
according to the Fund's fiscal year-end.
- -------------------------------------------------------------------------------
OTHER VANGUARD SERVICES
For more information about any of these services, please call our
Investor Information Department at 1-800-662-7447.

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

Vanguard Automatic Exchange Service
Vanguard's Automatic Exchange Service allows you to move money
automatically among your Vanguard Fund accounts. For instance, the
service can be used to "dollar cost average" from a money market
portfolio into a stock or bond fund or to contribute to an IRA or
other retirement plan.

Vanguard Fund Express
Vanguard's Fund Express allows you to transfer money between your
Fund account and your account at a bank, savings and loan
association, or a credit union that is a member of the Automated
Clearing House (ACH) system. You may elect this service on the
Account Registration Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.

Special rules govern how your Fund Express purchases or redemptions
are credited to your account. In addition, some services of Fund
Express cannot be used with specific Vanguard Funds. For more
information, please refer to the Vanguard Fund Express brochure.
<PAGE>
Vanguard Dividend Express
Vanguard's Dividend Express allows you to transfer your dividends
and/or capital gains distributions automatically from your Fund
account, one business day after the Fund's payable date, to your
account at a bank, savings and loan association, or a credit union
that is a member of the Automated Clearing House (ACH) system.
You may elect this service on the Account Registration Form or call
our Investor Information Department (1-800-662-7447) for a Vanguard
Dividend Express application.

Vanguard Tele-Account
Vanguard's Tele-Account is a convenient, automated service that
provides share price, price change and yield quotations on Vanguard
Funds through any TouchTone[TM] telephone. This service also lets you
obtain information about your account balance, your last transaction,
and your most recent dividend or capital gains payment. To contact
Vanguard's Tele-Account service, dial 1-800-ON-BOARD (1-800-662-
6273). A brochure offering detailed operating instructions is
available from our Investor Information Department (1-800-662-7447).

PART B
VANGUARD EQUITY INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
January 12, 1996

This Statement is not a Prospectus but should be read in conjunction with
the Fund's current Prospectus (January 12, 1996). To obtain the
Prospectus please call:

Investor Information Department
1-800-662-7447

TABLE OF CONTENTS Page
Investment Limitations..................................... 1
Purchase of Shares......................................... 2
Redemption of Shares....................................... 2
Management of the Fund..................................... 3
Yield and Total Returns.................................... 5
Comparative Indexes........................................ 6
Investment Advisory Services............................... 7
Portfolio Transactions..................................... 11
Futures Contracts and Options.............................. 12
Financial Statements....................................... 14

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

1) Invest for the purpose of exercising control of management of any
company;
2) With respect to 75% of the value of its total assets, purchase the
securities of any issuer (except obligations of the United States
government and its instrumentalities) if as a result the Fund would
hold more than 10% of the outstanding voting securities of the
issuer, or more than 5% of the value of the Fund's total assets
would be invested in the securities of such issuer;
3) Invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of
assets approved by the Fund's shareholders or otherwise to the
extent permitted by Section 12 of the Investment Company Act of
1940. The Fund will invest only in investment companies which have
investment objectives and investment policies consistent with those
of the Fund;
4) Engage in the business of underwriting securities issued by other
persons, except to the extent that the Fund may technically be
deemed to be an underwriter under the Securities Act of 1933, as
amended, in disposing of investment securities;
5) Purchase or otherwise acquire any security if, as a result, more
than 15% of its net assets would be invested in securities that are
illiquid (included in this limitation is the Fund's investment in
The Vanguard Group, Inc.);
6) Invest in commodities, except that the Fund may invest in stock
futures contracts or stock options to the extent that not more than
5% of the Fund's assets are required as deposit to secure
obligations under futures contracts and not more than 20% of the
Fund's assets are invested in futures contracts and options at any
time or sell real estate although the Fund may purchase and sell
securities of companies which deal in real estate, or interests
therein;
7) Purchase securities on margin or sell any securities short except as
specified in investment limitation No. 6;
8) Make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the
limitation described in (5) above) which are either publicly
distributed or customarily purchased by institutional investors, and
(ii) by lending its securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent
with the Investment Company Act or the Rules and Regulations or
interpretations of the Securities and Exchange Commission
thereunder;
<PAGE>
9) Pledge, mortgage, or hypothecate any of its assets to an extent
greater than 5% of its total assets; and
10) Invest more than 25% of the value of its total assets in any one
industry. Utility companies will be divided according to their
services; for example, gas, gas transmission, electric and gas,
electric, and telephone will each be considered a separate industry.

Although not fundamental policies subject to shareholder vote, as long as
the Fund's shares are registered for sale in certain states, it will not (i)
invest in put, call, straddle or spread options except as permitted in
investment limitation No. 6, above, (ii) invest in interests in oil, gas or
other mineral exploration or development programs, (iii) invest more than 5%
of the assets of the Fund, at the time of investment, in the securities of any
issuers which have (with predecessors) a record of less than three years'
continuous operation, and (iv) purchase or retain any security if (i) one or
more officers, trustees or partners of the Fund or its investment adviser
individually own or would own, directly or beneficially, more than 1/2 of 1
per cent of the securities of such issuer, and (ii) in the aggregate such
persons own or would own more than 5% of such securities.
These investment limitations are considered at the time that portfolio
securities are purchased. Notwithstanding these limitations, the Fund may own
all or any portion of the securities of, or make loans to, or contribute to
the costs or other financial requirements of any company which will be wholly
owned by the Fund and one or more other investment companies and is primarily
engaged in the business of providing, at-cost, management, administrative,
distribution or related services to the Fund and other investment companies.
See "Management of the Fund."

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

REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an
emergency exists as defined by the Rules of the Commission as a result of
which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for
such other periods as the Commission may permit.
The Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during
any 90-day period to the lesser of $250,000 or 1% of the net assets of the
Fund at the beginning of such period. Such commitment is irrevocable without
the prior approval of the Commission. Redemptions in excess of the above
limits may be paid in whole or in part, in investment securities or in cash,
as the Directors may deem advisable; however, payment will be made wholly in
cash unless the Directors believe that economic or market conditions exist
which would make such a practice detrimental to the best interests of the
Fund. If redemptions are paid in investment securities, such securities will
be valued as set forth in the Prospectus under "Determining the Fund's share
price" and a redeeming shareholder would normally incur brokerage expenses if
he converted these securities to cash.
No charge is made by the Fund for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by the Fund.
<PAGE>
MANAGEMENT OF THE FUND

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

JOHN C. BOGLE, Chairman, Chief Executive Officer and
Director*(1)
Chairman, Chief Executive Officer, and Director of The Vanguard Group,
Inc., and of each of the investment companies in The Vanguard Group;
Director of The Mead Corporation and General Accident Insurance.
JOHN J. BRENNAN, President & Director*(1)
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Director
Chairman and Chief Executive Officer, Rhone-Poulenc Rorer, Inc.;
Director of Sun Company, Inc.
BARBARA BARNES HAUPTFUHRER, Director
Director of The Great Atlantic and Pacific Tea Company, ALCO Standard
Corp., Raytheon Company, Knight-Ridder, Inc., and Massachusetts Mutual
Life Insurance Co. and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Director
President, The Brookings Institution; Director of American Express
Bank, Ltd., The St. Paul Companies, Inc., and Scott Paper Co.
BURTON G. MALKIEL, Director
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation,
Baker Fentress & Co., The Jeffrey Co. and Southern New England
Communications Company.
ALFRED M. RANKIN, Jr., Director
Chairman, President and Chief Executive Officer of NACCO Industries,
Inc.; Director of The BFGoodrich Company, and The Standard Products
Company.
JOHN C. SAWHILL, Director
President and Chief Executive Officer, The Nature Conservancy;
formerly, Director and Senior Partner, McKinsey & Co.; and President,
New York University; Director of Pacific Gas and Electric Company and
NACCO Industries.
JAMES O. WELCH, Jr., Director
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc., and
Director of Kmart Corporation.
J. LAWRENCE WILSON, Director
Chairman and Chief Executive Officer of Rohm & Haas Company; Director
of Cummins Engine Company; and Trustee of Vanderbilt
University.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.;
Secretary of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
- ----------------
* Officers of the Fund are "interested persons" as defined in the
Investment Company Act of 1940.
(1) Effective February 1, 1996, Mr. Brennan will succeed Mr. Bogle as
Chief Executive Officer of the Fund, The Vanguard Group, Inc. and each
of the investment companies in the Vanguard Group. Mr. Bogle will
remain Chairman and Director of the Fund, The Vanguard Group, Inc. and
each of the investment companies in The Vanguard Group.
<PAGE>
Officers and Directors
The Fund's Officers, under the supervision of the Board of Directors,
manage the day-to-day operations of the Fund. The Directors, who are elected
annually by shareholders, set broad policies for the Fund and choose its
Officers. A list of the Directors and Officers of the Fund and a brief
statement of their present positions and principal occupations during the past
5 years is set forth in the Prospectus. As of September 30, 1995, the
Directors owned less than 1% of the Fund's outstanding shares.

The Vanguard Group
Vanguard Equity Income Fund, Inc. is a member of The Vanguard Group of
Investment Companies. Through their jointly-owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), the Fund and the other Funds in the Group obtain at
cost virtually all of their corporate management, administrative and
distribution services. Vanguard also provides investment advisory services on
an at-cost basis to certain of the Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment.
Each Fund pays a share of Vanguard's total expenses which are allocated among
the Funds under methods approved by the Board of Directors (Trustees) of each
Fund. In addition, each Fund bears its own direct expenses such as legal,
auditing and custodian fees. In order to generate additional revenues for
Vanguard and thereby reduce the Funds' expenses, Vanguard also provides
certain administrative services to other organizations.
The Fund's Officers are also Officers and employees of Vanguard. No
Officer or employee owns, or is permitted to own, any securities of any
external adviser for the Funds.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
amounts which each of the Funds have invested are adjusted from time to time
in order to maintain the proportionate relationship between each Fund's
relative net assets and its contribution to Vanguard's capital. At September
30, 1995 the Fund had contributed $117,000 to Vanguard,
representing .6% of Vanguard's capitalization. The Fund's Service
Agreement provides as follows: (a) each Vanguard Fund may invest up to
.40% of its current assets in Vanguard, and (b) there is no other limitation
on the amount that each Vanguard Fund 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 Funds by third parties. For the year ended September
30, 1995 such costs allocated to the Fund approximated
$2,225,000.

Distribution
Vanguard provides all distribution and marketing activities for the Funds
in the Group. Vanguard Marketing Corporation, a wholly-owned subsidiary of
Vanguard, acts as Sales Agent for the shares of the Funds in connection with
any sales made directly to investors in the states of Florida, Missouri, New
York, Ohio, Texas and such other states as it may be required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional
nature is allocated among the Funds based upon relative net assets. The
remaining one half of those expenses is allocated among the Funds based upon
each Fund's sales for the preceding 24 months relative to the total sales of
the Funds as a Group, provided, however, that no Fund's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of average distribution expense rate for the Group,
and that no Fund shall incur annual distribution expenses in excess of 20/100
of 1% of its average month-end net assets. The Group's marketing and
distribution expenses allocated to the Fund for the year ended September 30,
1995 was $185,000 or approximately .02% of its average month-end
net assets.

Investment Advisory Services
Vanguard provides investment advisory services to Vanguard Money Market
Reserves; Vanguard Institutional Money Market Portfolio; Vanguard Admiral
Funds; Vanguard Municipal Bond Fund; several Portfolios of Vanguard Fixed
<PAGE>
Income Securities Fund; Vanguard Institutional Index Fund; several Portfolios
of Vanguard Variable Insurance Fund; Vanguard Bond Index Fund; Vanguard
California Tax-Free Fund; Vanguard Florida Insured Tax-Free Fund; Vanguard New
Jersey Tax-Free Fund; Vanguard New York Insured Tax-Free Fund; Vanguard Ohio
Tax-Free Fund; Vanguard Pennsylvania Tax-Free Fund; Vanguard Balanced Index
Fund; Vanguard Index Trust; Vanguard International Equity Index Fund; Vanguard
Tax-Managed Fund; Aggressive Growth Portfolio of Vanguard Horizon Fund;
a portion of Vanguard/Windsor II; a portion of Vanguard/Morgan Growth Fund as
well as several indexed separate accounts. These services are provided on an
at-cost basis from a money management staff employed directly by Vanguard. The
compensation and other expenses of this staff are paid by the Funds utilizing
these services.

Remuneration of Directors and Officers
The Fund pays each Director (Trustee), who is not also an Officer, an
annual fee plus a proportionate share of travel and other expenses incurred in
attending Board meetings. Directors who are also Officers receive no
remuneration for their services as Directors. The Fund's Officers and
employees are paid by Vanguard which, in turn, is reimbursed by the Fund (and
each other Fund in the Group), for its proportionate share of Officers' and
employees' salaries and retirement benefits. During the year ended September
30, 1995, the remuneration paid by Vanguard to all Officers as a group
and allocated to the Fund, was approximately $32,200.
Directors who are not Officers are paid an annual fee based on the number
of years of service on the Board upon retirement. The fee is equal to $1,000
for each year of service (up to fifteen years) and each investment company
member of the Vanguard Group contributes a proportionate amount to this fee
based on its relative net assets. Under its retirement plan, Vanguard
contributes annually an amount equal to 10% of each eligible Officer's annual
compensation plus 5.7% of that part of an eligible Officer's compensation
during the year, if any, that exceeds the Social Security Taxable Wage Base
then in effect. Under its thrift plan, all eligible Officers are permitted to
make pre-tax contributions in an amount up to 4% of total compensation,
subject to federal tax limitations, which are matched by Vanguard on a 100%
basis. The Fund's proportionate share of retirement contributions made by
Vanguard under its retirement and thrift plans on behalf of all Officers of
the Fund, as a group, during the 1994 fiscal year was approximately
$900.
The following table provides detailed information with respect to the
amounts paid or accrued for the Directors for the fiscal year ended September
30, 1995.
<TABLE>
<CAPTION>
VANGUARD EQUITY INCOME FUND
COMPENSATION TABLE
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued As Annual Benefits From All Vanguard Funds
Names of Directors From Fund Part of Fund Expenses Upon Retirement Paid to Directors (2)
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>

John C. Bogle(1) -- -- -- --
John J. Brennan(1) -- -- -- --
Barbara Barnes Hauptfuhrer $411 $69 $15,000 $60,000
Robert E. Cawthorn $411 $58 $13,000 $60,000
Bruce K. MacLaury $445 $68 $12,000 $55,000
Burton G. Malkiel $411 $46 $15,000 $60,000
Alfred M. Rankin, Jr. $411 $36 $15,000 $60,000
John C. Sawhill $411 $43 $15,000 $60,000
James O. Welch, Jr. $411 $53 $15,000 $60,000
J. Lawrence Wilson $411 $38 $15,000 $60,000
<FN>
(1) As "Interested Directors," Messrs. Bogle and Brennan receive no compensation for their service as Directors.
(2) The amounts reported in this column reflect the total compensation paid to each Director for their service as Director or
Trustee of 34 Vanguard Funds (27 in the case of Mr. MacLaury).
</TABLE>
YIELD AND TOTAL RETURN
The yield of the Fund for the 30-day period ended September 30,
1995 was 3.99%. The yield of the Fund is calculated daily. The
average annual total return of the Fund for one and five years ended September
30, 1995, and since its inception on March 21, 1988, was +24.77%,
+15.60% and +12.41%, respectively.
Total return is computed by determining the average compounded rates of
return over the periods set forth above that would equate an initial amount
invested at the beginning of the period to the ending redeemable value of the
investment.
<PAGE>
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group,
Inc. or any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group,
including Vanguard Equity Income Fund, Inc., may from time to time, use one or
more of the following unmanaged indexes for comparative performance purposes.

Standard & Poor's 500 Composite Stock Price Index--is a well diversified list
of 500 companies representing the U.S. Stock Market.
Wilshire 5000 Equity Indexes--consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily listing pricing
is available.
Wilshire 4500 Equity Index--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard and Poor's 500 Index.
Russell 3000 Stock Index--a diversified portfolio of over 3,000 common stocks
accounting for over 90% of the market value of publicly traded stocks in
the U.S.
Russell 2000 Stock Index--a subset of approximately 2,000 of all the smallest
stocks contained in the Russell 3000; a widely used benchmark for small
capitalization common stocks.
Morgan Stanley Capital International EAFE Index--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on
the stock exchanges of countries in Europe, Australia and the Far East.
Goldman Sachs 100 Convertible Bond Index--currently includes 67 bonds and 33
preferreds. The original list of names was generated by screening for
convertible issues of 100 million or greater in market capitalization. The
index is priced monthly.
Salomon Brothers GNMA Index--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National
Mortgage Association.
Salomon Brothers High-Grade Corporate Bond Index--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value weighted,
total return index, including approximately 800 issues with maturities of
12 years or greater.
Salomon Brothers Broad Investment-Grade Bond--is a market-weighted index that
contains over 4,800 individually priced investment-grade corporate bonds
rated BBB or better, U.S. Treasury/agency issues and mortgages pass-through
securities.
Lehman Long-Term Treasury Bond--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--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 Index (20 year) Bond--is a yield index on current coupon
high grade general obligation municipal bonds.
Standard & Poor's Preferred Index--is a yield index based upon the average
yield of four high grade, non-callable preferred stock issues.
NASDAQ Industrial Index--is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not
include income.
<PAGE>
Composite Index--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
Composite Index--35% Standard & Poor's 500 Index and 65% Lehman Long-Term
Corporate Bond Index.
Composite Index--65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
Lehman Brothers Aggregate Bond Index--is a market weighted index that contains
over 4,000 individually priced U.S. Treasury, agency, corporate, and
mortgage pass-through securities corporate rated BBB- or better. The Index
has a market value of over $4 trillion.
Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index--is a
market weighted index that contains over 1,500 individually priced U.S.
Treasury, agency, and corporate investment grade bonds rated BBB- or better
with maturities between 1 and 5 years. The index has a market value of over
$1.3 trillion.
Lehman Brothers Mutual Fund Intermediate (5-10) Government/Corporate Index--is
a market weighted index that contains over 1,500 individually priced U.S.
Treasury, agency, and corporate securities rated BBB- or better with
maturities between 5 and 10 years. The index has a market value of over
$600 billion.
Lehman Brothers Mutual Fund Long (10+) Government/Corporate Index--is a market
weighted index that contains over 1,900 individually priced U.S. Treasury,
agency, and corporate securities rated BBB- or better with maturities
greater than 10 years. The index has a market value of over $900 billion.
Lipper Small Company Growth Fund Average--the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or
portfolio practice, limits its investments to companies on the basis of the
size of the company. From time to time, Vanguard may advertise using the
average performance and/or the average expense ratio of the small company
growth funds. (This fund category was first established in 1982. For years
prior to 1982, the results of the Lipper Small Company Growth category were
estimated using the returns of the Funds that constituted the Group at its
inception.)
Lipper Balanced Fund Average--an industry benchmark of average balanced
funds with similar investment objectives and policies, as measured by
Lipper Analytical Services, Inc.
Lipper Non-Government Money Market Fund Average--an industry benchmark
of average non-government money market funds with similar investment
objectives and policies, as measured by Lipper Analytical Services, Inc.
Lipper Government Money Market Fund Average--an industry benchmark of
average government money market funds with similar investment objectives
and policies, as measured by Lipper Analytical Services, Inc.
Lipper General Equity Fund Average--an industry benchmark of average
general equity funds with similar investment objectives and policies, as
measured by Lipper Analytical Services, Inc.
Lipper Fixed Income Fund Average--an industry benchmark of average fixed
income funds with similar investment objectives and policies, as measured
by Lipper Analytical Services, Inc.

INVESTMENT ADVISORY SERVICES
The Fund currently has three investment advisers: Newell Associates
("Newell"), 525 University Avenue, Palo Alto, California 94301; Spare, Kaplan,
Bischel & Associates ("Spare/Kaplan"), 44 Montgomery Street, Suite 3500,
San Francisco, California 94104; and John A. Levin & Co., Inc. ("Levin"), One
Rockefeller Plaza, 25th Floor, New York, NY 10020. Prior to January 1, 1995,
Newell was the sole investment adviser to the Fund. Spare/Kaplan and
Levin were added as investment advisers effective January 1, 1995. The Fund has
entered into investment advisory agreements with Newell, Spare/Kaplan and
Levin which provide that the advisers manage the investment and reinvestment
of the Fund's assets and continuously review, supervise and administer the
Fund's investment program. The advisers discharge their responsibilities
subject to the control of the Officers and Directors of the Fund.
The proportion of the net assets of the Fund managed by each adviser is
established by the Board of Directors, and may be changed in the future as
circumstances warrant. Presently, Newell is responsible for approximately 75%
of the Fund's investment; Spare/Kaplan and Levin are responsible for
approximately 12.5% each.
<PAGE>
Newell Associates. The Fund pays Newell an advisory fee at the end of
each fiscal quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the average month-end net assets managed
by Newell for the quarter:

Net Assets Annual Rate
------------------ -----------
First $250 million............................... .200%
Next $500 million................................ .150%
Next $250 million................................ .100%
Over $1 billion.................................. .080%

The agreement will continue until April 30, 1996, and will be
renewable thereafter for successive one-year periods, only if each renewal is
specifically approved by a vote of the Fund's Board of Directors, including
the affirmative votes of a majority of the Directors who are not parties to
the contract or "interested persons" (as defined in the Investment Company Act
of 1940) of any such party, cast in person at a meeting called for the purpose
of considering such approval. In addition, the question of continuance shall
be effected only if approved by the affirmative vote of a majority of the
outstanding voting securities of the Fund. The agreement is automatically
terminated if assigned, and may be terminated without penalty at any time (1)
by vote of the Board of Directors of the Fund on 60 days' written notice to
Newell, or (2) by Newell upon 90 days' written notice to the Fund.
Spare, Kaplan, Bischel & Associates. The Fund pays Spare/Kaplan a
basic advisory fee at the end of each quarter, calculated by applying a
quarterly rate, based on the following annual percentage rates, to the average
month-end assets of the Fund managed by Spare/Kaplan
("Spare/Kaplan Portfolio") for the quarter:

Net Assets Annual Rate
------------------ -----------
First $500 million.............................. 0.175%
Next $500 million............................... 0.125%
Over $1 billion................................. 0.10%

The basic fee may be increased or decreased by applying an
incentive/penalty adjustment to the basic fee reflecting the investment
performance of the assets managed by Spare/Kaplan relative to the return
of the Standard and Poor's/BARRA Value Index ("Value Index"), an index which
includes stocks in the S&P 500 Index with lower than average ratios of market
price to book value.
The following table sets forth the incentive/penalty fee rates payable by
the Fund to Spare/Kaplan under the new investment advisory agreement:

Three Year Performance Performance Fee
Differential vs. the Value Index Adjustment*
-------------------------------- ---------------------
Less than 3%...................... -.20 x Basic Fee
Between 3% and 6%................. 0 x Basic Fee
More than 6%...................... 0.20 x Basic Fee

*For purposes of this calculation, the Basic Fee is calculated
by applying a quarterly rate based on the Annual Basic Fee
Rate using average assets over the same period over which the
performance is measured.

Until the quarter ending December 31, 1997, the incentive/penalty
fee for Spare/Kaplan will be calculated according to the following
transition rules:
(a) October 1, 1995 through December 31, 1997. Beginning with the
quarter ending December 31, 1995, and until the quarter ending December 31,
1997, the incentive/penalty fee will be computed based upon a comparison of
the investment performance of the Spare/Kaplan Portfolio and that of the
Value Index over the number of months that have elapsed between January 1,
1995 and the end of the quarter for which the fee is computed. The number of
percentage points by which the investment performance of the Spare/Kaplan
Portfolio must exceed or fall below the investment record of the Value Index
shall increase proportionately from two and one, respectively, for the twelve
months ending December 31, 1995, to six and three, respectively, for the
thirty-six months ending December 31, 1997.
(b) On and After December 31, 1997. For the quarter ending
December 31, 1997 and thereafter, the period used to calculate the
incentive/penalty fee shall be the 36 months preceding the end of the quarter
for which the fee is being computed and the number of percentage points used
shall be six and three.
<PAGE>
The investment performance of the Spare/Kaplan Portfolio, for any
period, expressed as a percentage of the "Spare/Kaplan Portfolio Unit
Value" at the beginning of such period, will be the sum of: (i) the change in
the Spare/Kaplan Portfolio Unit Value during such period; (ii) the unit
value of the Fund's cash distributions from the Spare/Kaplan Portfolio's
net investment income and realized net capital gains (whether long-term or
short-term) having an ex-dividend date occurring within such period; and
(iii) the unit value of capital gains taxes paid or accrued during such period
by the Fund for undistributed realized long-term capital gains realized from
the Spare/Kaplan Portfolio.
The "Spare/Kaplan Portfolio Unit Value" will be determined by
dividing the total net assets of the Spare/Kaplan Portfolio by a given
number of units. On the initial date of the agreement, the number of units in
the Spare/Kaplan Portfolio will equal the total shares outstanding of
the Fund. After such initial date, as assets are added to or withdrawn from
the Spare/Kaplan Portfolio, the number of units of the
Spare/Kaplan Portfolio will be adjusted based on the unit value of the
Spare/Kaplan Portfolio on the day such changes are executed.
The investment record of the Value Index will be calculated monthly by
(i) multiplying the total return for the month (change in market price plus
dividends) of each stock included in the Value Index by its weighings in the
Value Index at the beginning of the month, and (ii) adding the values
discussed in (i). For any period, therefore, the investment record of the
Value Index will be the compounded monthly returns of the Value Index.
For the purposes of determining the incentive/penalty fee adjustment, the
net assets managed by Spare/Kaplan will be averaged over the same
period as the investment performance of those assets and the investment
record of the Value Index are computed.
In the event of termination of this Agreement, the fee provided in this
Section shall be computed on the basis of the period ending on the last
business day on which this Agreement is in effect subject to a pro rata
adjustment based on the number of days elapsed in the current fiscal quarter
as a percentage of the total number of days in such quarter.
In April 1972, the Securities and Exchange Commission ("Commission")
issued Release No. 7113 under the Investment Company Act of 1940 to call
attention of directors and investment advisers to certain factors which must
be considered in connection with investment company incentive fee
arrangements. One of these factors is to "avoid basing significant fee
adjustments upon random or insignificant differences" between the investment
performance of a fund and that of the particular index with which it is being
compared. The Release provides that "preliminary studies (of the Commission
staff) indicate that as a `rule of thumb' the performance difference should be
at least 10 percentage points" annually before the maximum performance
adjustment may be made. However, the Release also states that "because of the
preliminary nature of these studies, the Commission is not recommending, at
this time, that any particular performance difference exist before the maximum
fee adjustment may be made." The Release concludes that the directors of a
fund "should satisfy themselves that the maximum performance adjustment will
be made only for performance differences that can reasonably be considered
significant." The Board of Directors of the Fund has fully considered the
Release and believes that the performance adjustments as included in the
proposed agreement are entirely appropriate although not within the 10
percentage points per year range suggested in the Release. Under the Fund's
investment advisory agreement, the maximum performance adjustment is made at a
difference of 6 percentage points from the performance of the index over a
thirty-six month period, which would effectively be the equivalent of
approximately 2 percentage points difference per year.
John A. Levin & Co., Inc. The Fund pays Levin a basic advisory fee at the
end of each quarter, calculated by applying a quarterly rate, based on the
following annual percentage rates, to the average month-end assets of the Fund
managed by Levin ("Levin Portfolio") for the quarter:

Net Assets Annual Rate
------------------ -----------
First $100 million............................... 0.40%
Next $200 million................................ 0.25%
Over $300 million................................ 0.30%

The basic fee paid to Levin, as provided above, may be increased or
decreased by applying an incentive/penalty adjustment to the basic fee
reflecting the investment performance of the Levin Portfolio relative to the
return of the Standard and Poor's 500 Composite Stock Price Index ("S&P 500
Index"), an index which emphasizes large capitalization companies.
<PAGE>
The following table sets forth the incentive/penalty fee rates payable by
the Fund to Levin under the new investment advisory agreement:

Three Year Performance Performance Fee
Differential vs. the S&P 500 Index Adjustment*
---------------------------------- --------------------
Less than 0%........................ -.4 x Basic Fee
Between 0% and 3%................... -.2 x Basic Fee
Between 3% and 6%................... 0 x Basic Fee
Between 6% and 9%................... .2 x Basic Fee
More than 9%........................ .4 x Basic Fee

Until the quarter ending December 31, 1997, the incentive/penalty
fee for Levin will be calculated according to the following transition rules:
(a) October 1, 1995 through December 31, 1997. Beginning with the
quarter ending December 31, 1995, and until the quarter ending December 31,
1997, the incentive/penalty fee will be computed based upon a comparison of
the investment performance of the assets managed by Levin and that of the S&P
500 Index over the number of months that have elapsed between January 1, 1995
and the end of the quarter for which the fee is computed. The number of
percentage points by which the investment performance of the Levin Portfolio
must exceed or fall below the investment record of the S&P 500 Index shall
increase proportionately from three, two, one, and zero, respectively, for the
twelve months ending December 31, 1995, to nine, six, three, and zero for the
thirty-six months ending December 31, 1997.
(b) On and After December 31, 1997. For the quarter ending
December 31, 1997 and thereafter, the period used to calculate the
incentive/penalty fee shall be the 36 months preceding the end of the quarter
for which the fee is being computed and the number of percentage points used
shall be nine, six, three, and zero.
The investment performance of the Levin Portfolio, for any period,
expressed as a percentage of the "Levin Portfolio Unit Value" at the beginning
of such period, will be the sum of: (i) the change in the Levin Portfolio Unit
Value during such period; (ii) the unit value of the Fund's cash distributions
from the Levin Portfolio's net investment income and realized net capital
gains (whether long-term or short-term) having an ex-dividend date occurring
within such period; and (iii) the unit value of capital gains taxes paid or
accrued during such period by the Fund for undistributed realized long-term
capital gains realized from the Levin Portfolio.
The "Levin Portfolio Unit Value" will be determined by dividing the total
net assets of the Levin Portfolio by a given number of units. On the initial
date of the agreement, the number of units in the Levin Portfolio will equal
the total shares outstanding of the Fund. After such initial date, as assets
are added to or withdrawn from the Levin Portfolio, the number of units of the
Levin Portfolio will be adjusted based on the unit value of the Levin
Portfolio on the day such changes are executed.
The investment record of the S&P 500 Index will be calculated monthly by
(i) multiplying the total return for the month (change in market price plus
dividends) of each stock included in the S&P 500 Index by its weighings in the
S&P 500 Index at the beginning of the month, and (ii) adding the values
discussed in (i). For any period, therefore, the investment record of the S&P
500 Index will be the compounded monthly returns of the S&P 500 Index.
For the purposes of determining the incentive/penalty fee adjustment, the
net assets managed by Levin will be averaged over the same period as the
investment performance of those assets and the investment record of the S&P
500 Index are computed.
The formula used to determine the performance adjustments differs from
the view taken by the staff of the Commission. For a more detailed
discussion, see page 9. The Board of Directors of the Fund believes
that the performance adjustments, as included in the proposed agreement with
Levin are appropriate although not within the 10 percentage point per year
range suggested in Release No. 7113. Under the proposed agreement, the maximum
performance adjustment is made at a difference of approximately 3 percentage
points per year.
In the event of termination of this Agreement, the fee provided in this
Section shall be computed on the basis of the period ending on the last
business day on which this Agreement is in effect subject to a pro rata
adjustment based on the number of days elapsed in the current fiscal quarter
as a percentage of the total number of days in such quarter.
<PAGE>
The Fund's Board of Directors may, without the approval of shareholders,
provide for:

A. The employment of a new investment adviser pursuant to the terms
of a new advisory agreement, either as a replacement for an existing
adviser or as an additional adviser.
B. A change in the terms of an advisory agreement.
C. The continued employment of an existing adviser on the same
advisory contract terms where a contract has been assigned because of a
change in control of the adviser.

Any such change will only be made upon not less than 30 days' prior
written notice to shareholders, which shall include the information concerning
the adviser that would have normally been included in a proxy statement.
For the years ended September 30, 1993, 1994 and 1995, the Fund
paid advisory fees to Newell, its sole investment adviser prior to January 1,
1995, of $1,445,000, $1,470,000 and $1,181,085, respectively.

Description of the Advisers
Newell Associates. Newell is a California corporation of which 90% of
its outstanding shares are owned by its directors and officers. The directors
of the corporation and the offices they currently hold are: Roger D. Newell,
Chairman & President, Robert A. Huret, Vice Chairman and Alan E. Rothenberg,
Director. Newell Associates is a General Partner of Relative Yield Associates,
a California Limited Partnership.
Spare, Kaplan, Bischel & Associates. Spare, Kaplan, Bischel &
Associates is a California corporation founded in 1989, provides investment
advisory services primarily to institutions. The investment approach utilized
by

Spare/Kaplan is a relative yield approach. Anthony E. Spare, Chief
Investment Officer, is responsible for the portion of the Fund's assets
managed by Spare/Kaplan.
John A. Levin & Co. Inc. John A. Levin & Co. Inc. is a Delaware
corporation founded in 1982, provides investment advisory services primarily
to institutions and several partnerships. The investment process at Levin
emphasizes indentifying investment value through fundamental research. John A.
Levin, a founding principal and President of Levin, Melody P. Sarnell, and
Jeffrey A. Kigner, portfolio managers, are responsible for managing the
portion of the Fund's assets managed by Levin.

PORTFOLIO TRANSACTIONS
The investment advisory agreements authorize the Advisers (with the
approval of the Fund's Board of Directors) to select the brokers or dealers
that will execute the purchases and sales of portfolio securities for the Fund
and direct the Advisers to use their best efforts to obtain the best available
price and most favorable execution as to all transactions for the Fund. The
Advisers have 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 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 Fund and/or the Adviser. The Adviser considers such information useful in
the performance of its obligations under the agreement, but is unable to
determine the amount by which such services may reduce its expenses.
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 Fund's Board of Directors, each Adviser may
cause the Fund to pay a broker-dealer which furnishes brokerage and research
services a higher commission than that which might be charged by another
broker-dealer for effecting the same transaction; provided that such
commission is deemed reasonable in terms of either that particular transaction
or the overall responsibilities of the Adviser to the Fund.
Currently, it is the Fund's policy that each Adviser may at times pay
higher commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. The Adviser will only pay such higher
commissions if it believes this to be in the best interest of the Fund. Some
brokers or dealers who may receive such higher commissions in recognition of
brokerage services related to execution of securities transactions are also
providers of research information to the Adviser and/or the Fund. However,
each Adviser has informed the Fund that it will not pay higher commission
rates specifically for the purpose of obtaining research services.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be through such firms.
However, the Fund may place portfolio orders with qualified broker-dealers who
recommend the Fund to other clients, or who act as agent in the purchase of
the Fund's shares for their clients, and may, when a number of brokers and
dealers can provide comparable best price and execution on a particular
transaction, consider the sale of Fund shares by a broker or dealer in
selecting among qualified broker-dealers.
Some securities considered for investment by the Fund may also be
appropriate for other clients served by each Adviser. If purchase or sale of
<PAGE>
securities consistent with the investment policies of the Fund and one or more
of these other clients serviced by the Adviser are considered at or about the
same time, transactions in such securities will be allocated among the Fund
and such other clients in a manner deemed equitable by the Adviser. During the
fiscal years ended September 30, 1993, 1994 and 1995 the Fund paid
$623,642, $517,200 and $987,000, respectively, in brokerage
commissions.

FUTURES CONTRACTS AND OPTIONS
The Fund may enter into futures contracts, options, and options on
futures contracts for the purpose of remaining fully invested and reducing
transactions costs. Futures contracts provide for the future sale by one party
and purchase by another party of a specified amount of a specific security at
a specified future time and at a specified price. Futures contracts which are
standardized as to maturity date and underlying financial instrument are
traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government Agency.
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," "selling" a
contract previously "purchased") in an identical contract to terminate the
position. Brokerage commissions are incurred when a futures contract is bought
or sold.
Futures traders are required to make a good faith margin deposit in cash
or government securities with a broker or custodian to initiate and maintain
open positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be
changed. Brokers may establish deposit requirements which are higher than the
exchange minimums. Futures contracts are customarily purchased and sold on
margin that 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 value of the underlying securities. The Fund intends
to use futures contracts only for bonafide hedging purposes. Regulations of
the CFTC applicable to the Portfolio require that all of its futures
transactions constitute bonafide hedging transactions.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of the Fund to fluctuations in the
market value of its securities, the use of futures contracts may be a more
effective means of hedging this exposure. While the Fund will incur commission
expenses in both opening and closing out futures positions, these costs are
lower than transaction costs incurred in the purchase and sale of the
underlying securities.

Restrictions on the Use of Futures Contracts
The Fund will not enter into futures contract transactions to the extent
that, immediately thereafter, the sum of its initial margin deposits on open
contracts exceeds 5% of the market value of the Portfolio's total assets. In
addition, the Fund will not enter into futures contracts to the extent that
its outstanding obligations to purchase securities under these contracts would
exceed 20% of the Portfolio's total assets.

Risk Factors in Futures Transactions
Positions in futures may be closed out only on an Exchange which provides
a secondary market for such futures. However, there can be no assurance that a
<PAGE>
liquid secondary market will exist for any particular futures contract at any
specific time. Thus, it may not be possible to close a futures position. In
the event of adverse price movements, the Fund would continue to be required
to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make
delivery of the instruments underlying the futures contracts it holds. The
inability to close options and futures positions also could have an adverse
impact on the ability to effectively hedge.
A 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. Additionally, the
Fund incurs the risk that the adviser may incorrectly predict stock market and
interest rate trends. However, because the futures strategies of the Portfolio
are engaged in only for hedging purposes, the Adviser does not believe that
the Fund is subject to the risks of loss frequently associated with futures
transactions. The Fund would presumably have sustained comparable losses if,
instead of the futures contract, it had invested in the underlying financial
instrument and sold it after the decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
also possible that the Fund could both lose money on futures contracts and
also experience a decline in value of its portfolio securities. There is also
the risk of loss by the Fund of margin deposits in the event of bankruptcy of
a broker with whom the Fund has an open position in a futures contract or
related option.
Most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no trades may be made on that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses, because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days
with little or no trading, thereby preventing prompt liquidation of future
positions and subjecting some futures traders to substantial losses.

Federal Tax Treatment of Futures Contracts
The Fund is required for Federal income tax purposes to recognize
as income for each taxable year its net unrealized gains and losses on futures
contracts held as of the end of the year as well as those actually realized
during the year. In most cases, any gain or loss recognized with respect to a
futures contract is considered to be 60% long-term capital gain or loss and
40% short-term capital gain or loss, without regard to the holding period of
the contract. Furthermore, sales of futures contracts which are intended to
hedge against a change in the value of securities held by the Fund may affect
the holding period of such securities and, consequently, the nature of the
gain or loss on such securities upon disposition. The Fund may be required to
defer the recognition of losses on futures contracts to the extent of any
unrecognized gains on related positions held by the Fund.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, and gains from the
sale of securities or foreign currencies, or other income derived with respect
to its business of investing in such securities or currencies. In addition,
gains realized on the sale or other disposition of securities held for less
than three months must be limited to less than 30% of the Fund's annual gross
income. It is anticipated that any net gain realized from the closing out of
futures contracts will be considered gain from the sale of securities and
therefore be qualifying income for purposes of the 90% requirement. In order
to avoid realizing excessive gains on securities held less than three months,
the Fund may be required to defer the closing out of futures contracts beyond
the time when it would otherwise be advantageous to do so. It is anticipated
that unrealized gains on futures contracts, which have been open for less than
three months as of the end of the Fund's fiscal year and which are recognized
for tax purposes, will not be considered gains on securities held less than
three months for the purpose of the 30% test.
<PAGE>
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes including
unrealized gains at the end of the Fund's fiscal year on futures
transactions. Such distributions will be combined with distributions of
capital gains realized on the Fund's other investments and shareholders will
be advised on the nature of the payments.

FINANCIAL STATEMENTS
Vanguard Equity Income Fund's financial statements for the year ended
September 30, 1995, including the financial highlights for each of the
five fiscal years in the period ended September 30, 1995, appearing in
the Vanguard Equity Income Fund, Inc. 1995 Annual Report to
Shareholders, and the report thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Fund's 1995 Annual Report to
Shareholders is enclosed with this Statement of Additional Information. For a
more complete discussion of the Fund's performance, please see the Fund's
1995 Annual Report to Shareholders, which can be obtained without
charge.