VANGUARD EQUITY INCOME FUND INC, 485BPOS, 1999-01-19

VANGUARD EQUITY INCOME FUND INC
485BPOS, 1999-01-19

Previous: AURA SYSTEMS INC, 10-Q, 1999-01-19

Next: NUMED HOME HEALTH CARE INC, 8-K, 1999-01-19

<PAGE>

================================================================================
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. [X]
Post-Effective Amendment No. 16 [X]
and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
Amendment No. 18 [X]

VANGUARD EQUITY
INCOME FUND
(Exact Name of Registrant as Specified in Declaration of Trust)

P.O. Box 2600,
Valley Forge, PA 19482
(Address of Principal Executive Office)

Registrant's Telephone Number (610) 669-1000

R. Gregory Barton, Esquire
P.O. Box 876
Valley Forge, PA 19482

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 29, 1999, pursuant to paragraph(b) of Rule 485.

We have elected to register an indefinite number of shares pursuant to
Regulation 24f-2 under the Investment Company Act of 1940. We filed our Rule
24f-2 Notice for the year ended September 30, 1998 on December 24, 1998.

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

<PAGE>

VANGUARD EQUITY INCOME FUND

CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
Form N-1A
Item Number Location in Prospectus
<S> <C> <C>
Item 1. Front and Back Cover Pages ....................... Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments, Risks, and
Performance ...................................... Fund Profile
Item 3. Risk/Return Summary: Fee Table ................... Fee Table
Item 4. Investment Objectives, Principal Investment
Strategies, and Related Risks .................... A Word About Risk; Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund Performance....... Herein incorporated by reference to Regis-
trant's Annual Report to Shareholders dated
September 30, 1998 filed with the Securi-
ties & Exchange Commission's EDGAR sys-
tem on November 12, 1998.
Item 6. Management, Organization, and Capital
Structure ........................................ The Fund and Vanguard; Investment
Adviser
Item 7. Shareholder Information .......................... Share Price; Dividends, Capital Gains, and
Taxes; Investing with Vanguard.
Item 8. Distribution Arrangements ........................ Not Applicable
Item 9. Financial Highlights Information ................. Financial Highlights

Form N-1A Location in Statement
Item Number of Additional Information
Item 10. Cover Page and Table of Contents ................. Cover Page; Table of Contents
Item 11. Fund History ..................................... Description of the Trust
Item 12. Description of the Fund and its Investments Investment Policies; Description of the Trust;
and Risks ........................................ and Fundamental Investment Limitations
Item 13. Management of the Fund ........................... Management of the Trust
Item 14. Control Persons and Principal Holders of
Securities ....................................... Management of the Trust
Item 15. Investment Advisory and Other Services ........... Management of the Trust; Investment
Advisory Services
Item 16. Brokerage Allocation and Other Practices ......... Portfolio Transactions
Item 17. Capital Stock and Other Securities ............... Description of the Trust
Item 18. Purchase, Redemption, and Pricing of Shares ...... Purchase of Shares; Redemption of Shares;
and Share Price
Item 19. Taxation of the Fund ............................. Description of the Trust
Item 20. Underwriters ..................................... Not Applicable
Item 21. Calculation of Performance Data .................. Yield and Total Return
Item 22. Financial Statements ............................. Financial Statements
</TABLE>

<PAGE>

Vanguard Equity Income Fund

Prospectus
January 29, 1999

A Value Stock Mutual Fund

Contents

1 Fund Profile

3 Additional Information

3 A Word About Risk

3 Who Should Invest

4 Primary Investment Strategies

7 The Fund and Vanguard

7 Investment Advisers

8 Year 2000 Challenge

9 Dividends, Capital Gains, and Taxes

9 Share Price

11 Financial Highlights

12 Investing with Vanguard

12 Services and Account Features

13 Types of Accounts

13 Buying Shares

15 Redeeming Shares

18 Transferring Registration

18 Fund and Account Updates

Glossary (inside back cover)

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

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
<PAGE>

1
Fund Profile

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

INVESTMENT OBJECTIVE
The Fund is a stock fund that seeks to provide a relatively high level of
current income while achieving long-term growth in income and capital.

INVESTMENT STRATEGIES
The Fund invests primarily in dividend-paying common stocks of established,
large U.S. companies. Each stock is purchased when it is undervalued relative to
the stock's individual history and to the market. Generally, at the time of
purchase, the stocks are out of favor with the investment community.

PRIMARY RISKS
The Fund's total return, like stock prices generally, will fluctuate within a
wide range, so an investor could lose money over short or even long periods. The
Fund is also subject to:
[ ] Investment style risk, which is the chance that returns from large-
capitalization value stocks will trail returns from other asset classes or
the overall stock market.
[ ] Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.

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

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Annual Total Returns
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
26.50% -11.92% 25.38% 9.18% 14.65% -1.59% 37.34% 17.39% 31.17% 17.34%

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------
</TABLE>

During the period shown in the bar chart, the highest return for a calendar
quarter was 13.38% (quarter ending March 1991) and the lowest return for a
quarter was -15.12% (quarter ending September 1990).

- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1997
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Equity Income Fund 17.34% 19.55% 15.62%
S&P 500 Index 28.58 24.06 19.21
- --------------------------------------------------------------------------------

<PAGE>

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

PLAIN TALK ABOUT
Fund Expenses
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Equity Income Fund's expense ratio in fiscal year 1998 was
0.39%, or $3.90 per $1,000 of average net assets. The average growth equity
mutual fund currently has expenses of 1.44%, or $14.40 per $1,000 of average net
assets, according to Lipper, Inc., which reports on the mutual fund industry.

FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended September 30, 1998.

Shareholder Fees (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None

Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.36%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
Total Annual Operating Expenses: 0.39%

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

- --------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------------------------------
$40 $125 $219 $493
- --------------------------------------------------------------------------------

This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.

<PAGE>

3
Additional Information

Dividends and Capital Gains
Dividends are paid quarterly in March, June, September, and December; capital
gains, if any, are paid in December

Investment Advisers
Vanguard Equity Income Fund follows a multiadviser approach:
[ ] Newell Associates, Palo Alto, Calif., since inception
[ ] Spare, Kaplan, Bischel & Associates, San Francisco, Calif., since 1995
[ ] John A. Levin & Co., Inc., New York, N.Y., since 1995
[ ] Vanguard Core Management Group, Valley Forge, Pa., since 1998

Inception Date
March 21, 1988

Net Assets as of September 30, 1998
$2.38 billion

Suitable for IRAs
Yes

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

Newspaper Abbreviation
EqInc

Vanguard Fund Number
065

Cusip Number
921921102

Ticker Symbol
VEIPX

================================================================================
A Word About Risk

This prospectus describes the risks you would face as an investor in Vanguard
Equity Income Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard Equity Income Fund,
you should also take into account your personal tolerance for the daily
fluctuations of the stock market.
Look for this [FLAG GRAPHIC] symbol throughout the prospectus. It is used to
mark detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================

Who Should Invest

The Fund may be a suitable investment for you if:
[ ] You wish to add a value stock fund to your existing holdings, which could
include other stock investments as well as bond, money market, and
tax-exempt investments.
[ ] You are seeking a relatively high level of current income with potentially
lower share price volatility than most stock funds.
[ ] You are seeking growth of capital over the long term--at least five years.
[ ] You are willing to tolerate fluctuations in share price.

The Vanguard funds do not permit market-timing. Do not invest in this Fund if
you are a market-timer.

The Fund has adopted the following policies, among others, to discourage
short-term trading:
[ ] The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. This could be because of the timing of the
investment or because of a history of excessive trading by the investor.

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

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

[ ] There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the Investing with Vanguard section).
[ ] The Fund reserves the right to stop offering shares at any time.

Primary Investment Strategies

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

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

Market Exposure
The Fund's primary strategy is to invest mainly in dividend-paying common stocks
of established, large U.S. companies. Each stock is purchased when it is
undervalued relative to the stock's individual history and to the market.
Generally, at the time of purchase, the stocks are out of favor with the
investment community. These stocks are expected to produce a relatively high and
stable level of income and to have the potential for long-term capital
appreciation. The Fund may also invest in securities that are convertible to
common stocks. In the past, stocks with relatively high dividend yields have
tended to lag the overall stock market during rising markets, and to outperform
it during periods of flat or declining prices.

[FLAG GRAPHIC]
The Fund is subject to market risk, which is the possibility that stock prices
overall will decline over short or even long periods. Stock markets tend to move
in cycles, with periods of rising prices and periods of falling prices.

To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Composite Stock Price Index, a
widely used barometer of market activity. (Total returns con-
<PAGE>

sist of dividend income plus change in market price.) Note that the returns
shown do not include the costs of buying and selling stocks or other expenses
that a real-world investment portfolio would incur. Note, also, that the gap
between best and worst tends to narrow over the long term.

- --------------------------------------------------------------------------------
U.S. Stock Market Returns (1926-1997)
- --------------------------------------------------------------------------------
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 13.0 10.5 10.9 10.9
- --------------------------------------------------------------------------------

The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1997. You can see, for example, that while the average return on stocks
for all of the 5-year periods was 10.5%, returns for individual 5-year periods
ranged from a -12.5% average (from 1928 through 1932) to 23.9% (from 1950
through 1954). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular.
Finally, because Vanguard Equity Income Fund's holdings are not identical to
the S&P 500 Index or any other market index, the performance of the Fund will
not mirror the returns of any particular index.

PLAIN TALK ABOUT
Fund Diversification
In general, the more diversified a fund's stock holdings, the less likely it is
that a specific stock's poor performance will hurt the fund. One measure of a
fund's diversification is the percentage of its assets represented by its ten
largest holdings. The average U.S. equity mutual fund has about 30% of its
assets invested in its ten largest holdings, while some less-diversified mutual
funds have more than 50% of their assets invested in the stocks of just ten
companies.

[FLAG GRAPHIC]
The Fund is subject to investment style risk, which is the possibility that
returns from value stocks will trail returns from other asset classes or the
overall stock market. As a group, value stocks tend to go through cycles of
doing better - or worse - than common stocks in general. These periods have, in
the past, lasted for as long as several years.

Security Selection

Vanguard Equity Income Fund employs four investment advisers, each of whom
independently chooses and maintains a portfolio of common stocks for the Fund.
The Fund's Board of Trustees decides the proportion of net assets to be
managed by each adviser and it may change the proportions as circumstances
warrant.
Three of the four advisers use active investment management methods, which
means they buy and sell securities based on their judgments about companies and
their financial prospects, the prices of the securities, and the stock market
and the economy in general.
Although each of these advisers uses different processes to select securities
for its portion of the Fund's assets, each is committed to buying stocks that
produce above-average income and that, in the adviser's opinion, have the
potential for long-term capital growth.
Newell Associates, which is responsible for about 65% of the Fund's assets,
selects stocks of large, well-established dividend-paying U.S.-traded companies.
These stocks are purchased when their valuation levels are low based on the
firm's proprietary Relative Yield Strategy analysis and sold when valuation
levels are high based on that analysis.
Spare, Kaplan, Bischel & Associates, which is responsible for about 15% of
the Fund's assets, screens more than 7,000 stocks to find those with yields at
least 25% higher than that of the S&P 500 Index and market capitalizations
exceeding $1 billion. Stocks are then analyzed for their financial strength,
cash flow, and dividend yields in relation to historical norms.
John A. Levin & Co., Inc., which is responsible for about 15% of the Fund's
assets, selects stocks of companies with one or more of the following
attributes: a strong proprietary product or service; a low share price in
relation to cash flow or asset values; a new product or development or some
other unique situation that offers attractive prospects for long-term returns
and limited risk.

<PAGE>

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

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

The balance of the Vanguard Equity Income Fund's assets, about 5%, is held in
cash reserves and managed by Vanguard Core Management Group, which invests in
stock futures so that the cash reserve portion of the Fund's portfolio may
achieve the performance similar to that of common stocks. This strategy is
intended to keep the Fund more fully invested in common stocks while retaining
cash on hand to meet liquidity needs. See below for more details on the Fund's
policy on futures.
The Fund is generally managed without regard to tax ramifications.

[FLAG GRAPHIC]
The Fund is subject to manager risk, which is the possibility that the advisers
may do a poor job of selecting stocks.

Turnover Rate
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 23%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its net assets within a one-year period.)

Other Investment Policies and Risks
Besides investing in dividend-paying stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. To the extent that it
owns foreign stocks, the Fund is subject to (1) currency risk, which is the
possibility that Americans investing abroad could lose money because of a rise
in the value of the U.S. dollar versus foreign currencies; and (2) country risk,
which is the possibility that political events (such as a war), financial
problems (such as government default), or natural disasters (such as an
earthquake) will weaken a country's economy and cause investments in that
country to lose money.
The Fund invests, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial--in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. Rather, the Fund will keep separate cash reserves or
other liquid securities in the amount of the obligation underlying the futures
contract. The value of all futures contracts in which the Fund acquires an
interest cannot exceed 20% of total assets.
The reasons for which the Fund will invest in futures and options are:
[ ] To keep cash on hand to meet shareholder redemptions or other needs, while
simulating full investment in stocks.
[ ] To reduce the Fund's transaction costs by buying futures instead of actual
stocks when futures are favorably priced.
<PAGE>

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

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

The Fund and Vanguard
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than 100 distinct investment portfolios holding assets worth
more than $420 billion. All of the Vanguard funds share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.

Investment Advisers
The Fund uses four investment advisers who independently manage a percentage of
the Fund's assets, subject to the control of the Trustees and officers of the
Fund.
Newell Associates ("Newell"), 525 University Avenue, Palo Alto, CA 94301, is
an investment advisory firm founded in 1986. As of September 30, 1998, Newell
managed about $2.3 billion in assets. Newell's advisory fee is paid quarterly
and is based on certain annual percentage rates multiplied by the Fund's average
month-end assets managed by Newell for the quarter.
Spare, Kaplan, Bischel & Associates ("Spare Kaplan"), 44 Montgomery Street,
Suite 3500, San Francisco, CA 94104, is an investment advisory firm founded in
1989. As of September 30, 1998, Spare Kaplan managed about $392 million in
assets. Spare Kaplan's advisory fee is paid quarterly and is based on certain
annual percentage rates multiplied by the Fund's average month-end assets
managed by Spare Kaplan for the quarter. In addition, Spare Kaplan's advisory
fee is increased or decreased based on the cumulative investment performance of
the Fund over a trailing 36-month period as compared to the cumulative total
return of the Standard & Poor's/BARRA Value Index over the same period.
John A. Levin & Co., Inc. ("Levin"), One Rockefeller Plaza, 25th Floor, New
York, NY 10020, is an advisory firm founded in 1982. As of September 30, 1998,
Levin managed about $7.3 billion in assets. Levin's advisory fee is paid
quarterly and is based on certain annual percentage rates multiplied by the
Fund's average month-end assets managed by Levin for the quarter. In addition,
Levin's fee is increased or decreased based on the cumulative investment
performance of the Fund over a trailing 36-month period as compared to the
cumulative total return of the S&P 500 Index over the same period.
The Vanguard Group, Inc. (the "Group"), P.O. Box 2600, Valley Forge, PA
19482, provides investment advisory services to the Fund on an at-cost basis.
Vanguard Core Management Group serves as an investment adviser to several
Vanguard funds, and currently manages more than $120 billion in total assets.
Vanguard first began managing the cash portion of the Fund's assets in January
1998.

<PAGE>

PLAIN TALK ABOUT
The Fund's Advisers
The individuals primarily responsible for Vanguard Equity Income Fund are:
Roger D. Newell, Chairman and Chief Investment Officer of Newell Associates;
has worked in investment management since 1958, managing equity funds since
1959; with Newell since 1986; Fund Manager since 1988. B.A., University of
Minnesota; J.D., Harvard Law School; M.A., University of Minnesota.
Anthony E. Spare, Chairman and Chief Investment Officer of Spare, Kaplan,
Bischel & Associates; has worked in investment management, managing equity funds
since 1964; with Spare, Kaplan since 1989; Fund Manager since 1995. B.S., Tufts
University; M.B.A., Stanford University.
John A. Levin, Chairman and Chief Executive Officer of John A. Levin & Co.,
Inc., (Levin); has worked in investment management, managing equity funds since
1963; with Levin since 1982; Fund Manager since 1995. B.A., Yale University;
L.L.B., Yale University.
Jeffrey A. Kigner, Co-Chairman and Chief Investment Officer of John A. Levin
& Co., Inc., (Levin); has worked in investment management since 1983; with
Levin, managing equity funds since 1984; Fund Manager since 1995. B.S., New York
University; M.B.A., New York University Graduate School of Business.
George U. Sauter, Managing Director of Vanguard; has worked in investment
management since 1985, 11 years of primary responsibility for Vanguard Core
Management Group since 1987; A.B., Dartmouth College; M.B.A., University of
Chicago.

For the year ended September 30, 1998, the aggregate investment advisory fee
paid to the advisers was $3.6 million, which represented an effective annual
rate of 0.16% of the Fund's average net assets before a decrease of 0.02% based
on performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the advisers
may choose brokers who charge higher commissions. If more than one broker can
obtain the best available price and favorable execution of a transaction, then
the advisers are authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the advisers or the Fund. Also,
the Fund may direct the advisers to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreements or hire a new investment adviser, either as
a replacement for an existing adviser or as an additional adviser. However, any
such change will be communicated to shareholders in writing.

Year 2000 Challenge

The common practice in computer programming of using just two digits to
identify a year has resulted in the Year 2000 challenge throughout the
information technology industry. If unchanged, many computer applications and
systems could misinterpret dates occurring after December 31, 1999, leading to
errors or failure. Such failure could adversely affect a fund's operations,
including pricing, securities trading, and the servicing of shareholder
accounts.
The Vanguard Group is dedicated to providing uninterrupted, high- quality
performance from our computer systems before, during, and after 2000. In July
1998, we completed the renovation and initial testing of our internal systems.
Vanguard is diligently working with external partners, suppliers, and vendors,
including fund managers and other service providers, to assure that the systems
with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
<PAGE>

Dividends, Capital Gains, and Taxes

The Fund distributes to shareholders virtually all of its net income (interest
and dividends less expenses) as well as any capital gains realized from the sale
of its holdings. Income distributions generally occur in March, June, September,
and December; capital gains distributions generally occur in December. You can
receive distributions of income or capital gains in cash, or you can have them
automatically invested in more shares of the Fund. In either case, these
distributions are taxable to you. It is important to note that distributions of
dividends and capital gains that are declared in December--if paid to you by the
end of January--are taxed as if they had been paid to you in December.
Vanguard will send you a statement each year showing the tax status of all
your distributions. If you have chosen to receive dividend and/or capital gains
distributions in cash, and the postal or other delivery service is unable to
deliver checks to your address of record, we will change the distribution option
so that all dividends and other distributions are automatically invested in
additional shares. We will not pay interest on uncashed distribution checks.
[ ] The dividends and short-term capital gains that you receive are considered
ordinary income for tax purposes.
[ ] Any distributions of net long-term capital gains by the Fund are taxable
to you as long-term capital gains, no matter how long you've owned shares in
the Fund.
[ ] The Fund's advisers do not consider taxes when deciding to buy or sell
securities. Although the Fund does not seek to realize any particular amount
of capital gains during a year, such gains are realized from time to time as
by-products of its ordinary investment activities. Consequently,
distributions may vary considerably from year to year.
[ ] If you sell or exchange shares, any gain or loss you have is a taxable
event. This means that you may have a capital gain to report as income, or a
capital loss to report as a deduction, when you complete your federal income
tax return.
[ ] Distributions of dividends or capital gains, and capital gains or losses
from your sale or exchange of Fund shares, may be subject to state and local
income taxes as well.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing through a tax-deferred account such
as an IRA or a qualified employee benefit plan. You should consult your tax
adviser about the tax consequences of an investment in the Fund.

Share Price

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

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

value of the Fund's investments and other assets, subtracting any of its
liabilities (debts), and then dividing by the number of Fund shares outstanding:

Total Assets - Liabilities
Net Asset Value = ------------------------------
Number of Shares Outstanding

Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A Note on Pricing: The Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Funds." Different newspapers use
different abbreviations of the Fund's name, but the most common is EqInc.
<PAGE>

Financial Highlights

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

<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Vanguard Equity Income Fund
Year Ended September 30,
---------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $22.28 $17.69 $15.65 $13.16 $14.62
- -------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .64 .64 .63 .60 .59
Net Realized and Unrealized Gain (Loss)
on Investments 1.44 5.17 2.18 2.56 (.92)
---------------------------------------------------
Total from Investment Operations 2.08 5.81 2.81 3.16 (.33)
---------------------------------------------------
Distributions
Dividends from Net Investment Income (.67) (.64) (.60) (.58) (.61)
Distributions from Realized Capital Gains (.89) (.58) (.17) (.09) (.52)
---------------------------------------------------
Total Distributions (1.56) (1.22) (.77) (.67) (1.13)
- -------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $22.80 $22.28 $17.69 $15.65 $13.16
=======================================================================================================

Total Return 9.54% 34.17% 18.22% 24.77% -2.19%
=======================================================================================================

Ratios/Supplemental Data
Net Assets, End of Year (Millions) $2,378 $1,948 $1,309 $967 $901
Ratio of Total Expenses to
Average Net Assets 0.39% 0.45% 0.42% 0.47% 0.43%
Ratio of Net Investment Income to
Average Net Assets 2.80% 3.25% 3.69% 4.27% 4.41%
Turnover Rate 23% 22% 21% 31% 18%
=======================================================================================================
</TABLE>

From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a measure of past dividend income. Total return includes both
past dividend income (assuming that it has been reinvested) plus realized and
unrealized capital appreciation (or depreciation). Neither yield nor total
return should be used to predict the future performance of a fund.

PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Fund began fiscal 1998 with a net asset value (price) of $22.28 per share.
During the year, the Fund earned $.64 per share from investment income (interest
and dividends) and $1.44 per share from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them.
Shareholders received $1.56 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The earnings ($2.08 per share) minus the distributions ($1.56 per share)
resulted in a share price of $22.80 at the end of the year. This was an increase
of $.52 per share (from $22.28 at the beginning of the year to $22.80 at the end
of the year). For a shareholder who reinvested the distributions in the purchase
of more shares, the total return from the Fund was 9.54% for the year.
As of September 30, 1998, the Fund had $2.38 million in net assets. For the
year, its expense ratio was 0.39% ($3.90 per $1,000 of net assets); and net
investment income amounted to 2.80% of its average net assets. It sold and
replaced securities valued at 23% of its net assets.

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

<PAGE>

Investing with Vanguard
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer. Booklets providing detailed information are available on the services
marked with a [BOOK GRAPHIC]. Please call us to request copies.

Services and Account Features

Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
Telephone Redemptions (Sales and Exchanges)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
Vanguard Direct Deposit Service(TM) [BOOK GRAPHIC]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
Vanguard Automatic Exchange Service(TM) [BOOK GRAPHIC]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
Vanguard Fund Express(TM) [BOOK GRAPHIC]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
Vanguard Dividend Express(TM) [BOOK GRAPHIC]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------

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

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

Access Vanguard(TM) www.vanguard.com [COMPUTER GRAPHIC]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through the website. We will then send to you, by mail, an account
access password that allows you to process the following financial and
administrative transactions online:
[ ] Open a new account.*
[ ] Buy, sell or exchange shares of most funds.
[ ] Change your name/address.
[ ] Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.

- --------------------------------------------------------------------------------
Investor Information Department: 1-800-662-7447 (SHIP) Text Telephone:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
Client Services Department: 1-800-662-2739 (CREW) Text Telephone: 1-800-662-2738
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
Services for Clients of Vanguard's Institutional Division: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
<PAGE>

Types of Accounts

Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
For One or More People
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
For Holding Personal Trust Assets [BOOK GRAPHIC]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
For Individual Retirement Accounts [BOOK GRAPHIC]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
For an Organization [BOOK GRAPHIC]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
For Third-Party Trustee Retirement Investments
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
Vanguard Prototype Plans
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------

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

Buying Shares

You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
Minimum Investment to . . .
open a new account
$3,000 (regular account); $1,000 (Traditional IRAs and Roth IRAs).

add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A Note on Low Balances
The Fund reserves the right to close any nonretirement account whose balance
falls below the minimum initial investment. The Fund will deduct a $10 annual
fee in June if your nonretirement account balance falls below $2,500. The fee is
waived if your total Vanguard account assets are $50,000 or more.
- --------------------------------------------------------------------------------
By Mail to . . . [ENVELOPE GRAPHIC]
open a new account
Complete and sign the application form and enclose your check.

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

Buying Shares (continued)

Make your check payable to: The Vanguard Group-D65
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.

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

For clients of Vanguard's Institutional Division . . .

First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
By Telephone to . . . [PHONE GRAPHIC]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same
registration (name, address, taxpayer identification number, and account type).

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

Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you've requested a telephone transaction and a confirmation
number has been assigned, the transaction cannot be revoked. We reserve the
right to refuse any purchase request.
- --------------------------------------------------------------------------------

By Wire to Open a New Account or Add to an Existing Account [WIRE GRAPHIC]
Call Client Services to arrange your wire transaction. Wire transactions are not
available for retirement accounts, except for asset transfers and direct
rollovers.

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

For credit to:
Account: 000112046
Vanguard Incoming Wire Account

In favor of:
Vanguard Equity Income Fund - 65
[Account number, or temporary number for a new account]
[Registered account owner/s]
[Registered address]
- --------------------------------------------------------------------------------

<PAGE>

You can redeem (that is, sell or exchange) shares purchased by check or
Vanguard Fund Express at any time. However, while your redemption request will
be processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
Keep in mind that if you buy or sell Fund shares through a registered
broker/dealer or investment adviser, the broker/dealer or adviser may charge you
a service fee.
- --------------------------------------------------------------------------------
A Note on Large Purchases
It is important that you call Vanguard before you invest a large dollar amount.
We must consider the interests of all Fund shareholders and so reserve the right
to refuse any purchase that will disrupt the Fund's operation or performance.
- --------------------------------------------------------------------------------

Redeeming Shares

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

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

*Proceeds sent to third parties require a signature guarantee; see footnote on
page 17.

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

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

- --------------------------------------------------------------------------------
Note: Once a redemption is processed and a confirmation number given, the
transaction cannot be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption (that is, either a sale or exchange of shares) from
your Fund account in any one of three ways: online, by telephone, or by mail.
- --------------------------------------------------------------------------------
Online Requests [COMPUTER GRAPHIC]
Access Vanguard at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through the website. We will then send you, by mail, an account access password
that will enable you to sell or exchange shares online (as well as perform other
transactions).
Note: The Vanguard funds whose shares you cannot exchange online or by
telephone are Vanguard U.S. Stock Index Funds, Vanguard Balanced Index Fund,
Vanguard International Stock Index Funds, Vanguard REIT Index Fund, Vanguard
Total International Stock Index Fund, and Vanguard Growth and Income Fund. These
funds do, however, permit online and telephone exchanges within IRAs and other
retirement accounts. If you sell shares of these funds online, you will receive
a redemption check at your address of record.
- --------------------------------------------------------------------------------
Telephone Requests [PHONE GRAPHIC]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.

<PAGE>

Redeeming Shares (continued)

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

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

- --------------------------------------------------------------------------------
Special information: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
[CHECKMARK GRAPHIC] The ten-digit account number.
[CHECKMARK GRAPHIC] The name and address exactly as registered on the account.
[CHECKMARK GRAPHIC] The primary Social Security or employer identification
number as registered on the account.
[CHECKMARK GRAPHIC] The Personal Identification Number, if applicable.
Please note that Vanguard will not be responsible for any account losses due
to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A Note on Unusual Circumstances
Vanguard reserves the right to revise or terminate the redemption privilege at
any time, without notice. In addition, Vanguard can stop selling shares or
postpone payment at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the U.S. Securities and Exchange
Commission. If you experience difficulty making a telephone redemption during
periods of drastic economic or market change, you can send us your request by
regular or express mail. Follow the instructions on selling or exchanging shares
by mail in this section.
- --------------------------------------------------------------------------------
Mail Requests [ENVELOPE GRAPHIC]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.

Vanguard Retirement Accounts:
For information on how to request distributions from:
[ ] Traditional IRAs and Roth IRAs--call Client Services.
[ ] SEP-DIRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.

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

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

<PAGE>

For clients of Vanguard's Institutional Division . . .

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

- --------------------------------------------------------------------------------
A Note on Large Redemptions
It is important that you call Vanguard before you redeem a large dollar amount.
We must consider the interests of all fund shareholders and so reserve the right
to delay delivery of your redemption proceeds--up to seven days--if the amount
will disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in kind, i.e., in securities, rather than in cash. If
payment is made in kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------

OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.
- --------------------------------------------------------------------------------
Check Redemptions
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
Exchange Redemptions
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------

FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:

Request in "Good Order"

All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
[CHECKMARK GRAPHIC] The Fund name and account number.
[CHECKMARK GRAPHIC] The amount of the transaction (in dollars or shares).
[CHECKMARK GRAPHIC] Signatures of all owners exactly as registered on the
account (for mail requests).
[CHECKMARK GRAPHIC] Signature guarantees (if required).*
[CHECKMARK GRAPHIC] Any supporting legal documentation that may be required.
[CHECKMARK GRAPHIC] Any outstanding certificates representing shares to be
redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most banks, credit unions,
and licensed brokers.

Transactions are processed at the next-determined share price after Vanguard has
received all required information.
- --------------------------------------------------------------------------------
Limits on Account Activity
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
[ ] You may make no more than two substantive "round trips" through the Fund
during any 12-month period.
[ ] Your round trips through the Fund must be at least 30 days apart.
[ ] The Fund may refuse a share purchase at any time, for any reason.
[ ] Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.

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

<PAGE>

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

The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
All Trades Final
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been received
and a confirmation number assigned.
- --------------------------------------------------------------------------------

Transferring Registration

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

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

For clients of Vanguard's Institutional Division . . .

Fund and Account Updates

STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the markets, a report
from the advisers, and the Fund's financial statements which include a listing
of the Fund's holdings.
To keep the Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When we find that two or
more Fund shareholders have the same last name and address, we send just one
Fund report to that address--instead of mailing separate reports to each
shareholder. If you want us to send separate reports, however, you may notify
our Investor Information Department at 1-800-662-7447.
- --------------------------------------------------------------------------------

<PAGE>

19
- --------------------------------------------------------------------------------
Confirmation Statement
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
Portfolio Summary [BOOK GRAPHIC]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
Fund Financial Reports
Mailed in December and June for this Fund.
- --------------------------------------------------------------------------------

Tax Statements
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
Average Cost Review Statement [BOOK GRAPHIC]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using the average cost single category method.
- --------------------------------------------------------------------------------

<PAGE>

(This page intentionally left blank.)

<PAGE>

Glossary of Investment Terms

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

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

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

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

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

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

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

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

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

Securities
Stocks, bonds, and other investment vehicles.

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

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

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

Yield
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price. Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
these securities or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>

The Vanguard Group(R)

Post Office Box 2600
Valley Forge, PA 19482-2600

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

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

Statement of Additional Information (SAI)
The SAI provides more detailed information about the Fund.

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

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

The Vanguard Group
Investor Information
Department
P.O. Box 2600
Valley Forge, PA 19482-2600

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

Text Telephone:
1-800-952-3335

World Wide Web:
www.vanguard.com

E-mail:
[email protected]

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

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

Text Telephone:
1-800-662-2738

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

Fund's Investment Company Act
file number: 811-5445

P065N-01/29/1999
<PAGE>

Vanguard Equity Income Fund

Participant Prospectus
January 29, 1999

A Value Stock Mutual Fund

Contents

1 Fund Profile

3 Additional Information

3 A Word About Risk

3 Who Should Invest

4 Primary Investment Strategies

7 The Fund and Vanguard

7 Investment Advisers

8 Year 2000 Challenge

9 Dividends, Capital Gains, and Taxes

9 Share Price

10 Financial Highlights

11 Investing with Vanguard

11 Accessing Fund Information by Computer

Glossary (inside back cover)

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

Important Note
This prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version - for investors who would like to open a personal
investment account - can be obtained by calling Vanguard at 1-800-662-7447.

Fund Profile

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

INVESTMENT OBJECTIVE
The Fund is a stock fund that seeks to provide a relatively high level of
current income while achieving long-term growth in income and capital.

PRIMARY RISKS
The Fund's total return, like stock prices generally, will fluctuate within a
wide range, so an investor could lose money over short or even long periods. The
Fund is also subject to:

[ ] Investment style risk, which is the chance that returns from large-
capitalization value stocks will trail returns from other asset classes
or the overall stock market.

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

1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- ---------------------------------------------------------------------------------------------------------
</TABLE>

- --------------------------------------------------------------------------------
Average Annual Total Returns for Years Ended December 31, 1998
- --------------------------------------------------------------------------------
1 Year 5 Years 10 Years
- --------------------------------------------------------------------------------
Vanguard Equity Income Fund 17.34% 19.55% 15.62%
S&P 500 Index 28.58 24.06 19.21
- --------------------------------------------------------------------------------

<PAGE>

Annual Fund Operating Expenses (expenses deducted from the Fund's assets)
Management Expenses: 0.36%
12b-1 Distribution Fees: None
Other Expenses: 0.03%
-----
Total Annual Operating Expenses: 0.39%

This example should not be considered to represent actual expenses or
performance from the past or for the future. Actual future expenses may be
higher or lower than those shown.

<PAGE>

Additional Information

Dividends and Capital Gains
Dividends are paid quarterly in March, June, September, and December; capital
gains, if any, are paid in December

Investment Advisers
Vanguard Equity Income Fund follows a multiadviser approach:

[ ] Newell Associates, Palo Alto, Calif., since inception
[ ] Spare, Kaplan, Bischel & Associates, San Francisco, Calif., since 1995
[ ] John A. Levin & Co., Inc., New York, N.Y., since 1995
[ ] Vanguard Core Management Group, Valley Forge, Pa., since 1998

Inception Date
March 21, 1988

Net Assets as of September 30, 1998
$2.38 billion

Newspaper Abbreviation
EqInc

Vanguard Fund Number
065

Cusip Number
921921102

Ticker Symbol
VEIPX

================================================================================
A Word About Risk

This prospectus describes the risks you would face as an investor in Vanguard
Equity Income Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in Vanguard Equity Income Fund,
you should also take into account your personal tolerance for the daily
fluctuations of the stock market.
Look for this [FLAG GRAPHIC ]symbol throughout the prospectus. It is used to
mark detailed information about each type of risk that you would confront as a
shareholder of the Fund.
================================================================================

Who Should Invest

The Fund may be a suitable investment for you if:
[ ] You wish to add a value stock fund to your existing holdings, which could
include other stock investments as well as bond, money market, and tax-
exempt investments.
[ ] You are seeking a relatively high level of current income with potentially
lower share price volatility than most stock funds.
[ ] You are seeking growth of capital over the long term - at least five years.
[ ] You are willing to tolerate fluctuations in share price.

The Vanguard funds do not permit market-timing. Do not invest in this Fund if
you are a market-timer.

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

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

[ ] There is a limit on the number of times you can exchange into and out of the
Fund (see "Exchanges" in the Investing with Vanguard section).
[ ] The Fund reserves the right to stop offering shares at any time.

Primary Investment Strategies

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

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

[FLAG GRAPHIC]
The Fund is subject to investment style risk, which is the possibility
that returns from value stocks will trail returns from other asset classes
or the overall stock market. As a group, value stocks tend to go through
cycles of doing better - or worse than common stocks in general. These
periods have, in the past, lasted for as long as several years.

Security Selection
Vanguard Equity Income Fund employs four investment advisers, each of whom
independently chooses and maintains a portfolio of common stocks for the Fund.
The Fund's Board of Trustees decides the proportion of net assets to be
managed by each adviser and it may change the proportions as circumstances
warrant.
Three of the four advisers use active investment management methods, which
means they buy and sell securities based on their judgments about companies and
their financial prospects, the prices of the securities, and the stock market
and the economy in general. Although each of these advisers uses different
processes to select securities for its portion of the Fund's assets, each is
committed to buying stocks that produce above-average income and that, in the
adviser's opinion, have the potential for long-term capital growth.
Newell Associates, which is responsible for about 65% of the Fund's assets,
selects stocks of large, well-established dividend-paying U.S.-traded companies.
These stocks are purchased when their valuation levels are low based on the
firm's proprietary Relative Yield Strategy analysis and sold when valuation
levels are high based on that analysis.
Spare, Kaplan, Bischel & Associates, which is responsible for about 15% of
the Fund's assets, screens more than 7,000 stocks to find those with yields at
least 25% higher than that of the S&P 500 Index and market capitalizations
exceeding $1 billion. Stocks are then analyzed for their financial strength,
cash flow, and dividend yields in relation to historical norms.
John A. Levin & Co., Inc., which is responsible for about 15% of the Fund's
assets, selects stocks of companies with one or more of the following
attributes: a strong proprietary product or service; a low share price in
relation to cash flow or asset values; a new product or development or some
other unique situation that offers attractive prospects for long-term returns
and limited risk.

<PAGE>

The balance of the Vanguard Equity Income Fund's assets, about 5%,
is held in cash reserves and managed by Vanguard Core Management Group, which
invests in stock futures so that the cash reserve portion of the Fund's
portfolio may achieve the performance similar to that of common stocks. This
strategy is intended to keep the Fund more fully invested in common stocks while
retaining cash on hand to meet liquidity needs. See below for more details on
the Fund's policy on futures.
The Fund is generally managed without regard to tax ramifications.

[FLAG GRAPHIC]
The Fund is subject to manager risk, which is the possibility that the advisers
may do a poor job of selecting stocks.

Other Investment Policies and Risks
Besides investing in dividend-paying stocks, the Fund may make certain other
kinds of investments to achieve its objective.
Although the Fund typically does not make significant investments in
securities of companies based outside the United States, it reserves the right
to invest up to 20% of its assets in foreign securities. To the extent that it
owns foreign stocks, the Fund is subject to (1) currency risk, which is the
possibility that Americans investing abroad could lose money because of a rise
in the value of the U.S. dollar versus foreign currencies; and (2) country risk,
which is the possibility that political events (such as a war), financial
problems (such as government default), or natural disasters (such as an
earthquake) will weaken a country's economy and cause investments in that
country to lose money.
The Fund invests, to a limited extent, in stock futures and options
contracts, which are traditional types of derivatives. Losses (or gains)
involving futures can sometimes be substantial - in part because a relatively
small price movement in a futures contract may result in an immediate and
substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. Rather, the Fund will keep separate cash reserves or
other liquid securities in the amount of the obligation underlying the futures
contract. The value of all futures contracts in which the Fund acquires an
interest cannot exceed 20% of total assets.
The reasons for which the Fund will invest in futures and options are:
[ ] To keep cash on hand to meet shareholder redemptions or other needs, while
simulating full investment in stocks.
[ ] To reduce the Fund's transaction costs by buying futures instead of actual
stocks when futures are favorably priced.
<PAGE>

<PAGE>

For the year ended September 30, 1998, the aggregate investment
advisory fee paid to the advisers was $3.6 million, which represented an
effective annual rate of 0.16% of the Fund's average net assets before a
decrease of 0.02% based on performance.
The Fund has authorized the advisers to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions.
In the interest of obtaining better execution of a transaction, the advisers
may choose brokers who charge higher commissions. If more than one broker can
obtain the best available price and favorable execution of a transaction, then
the advisers are authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the advisers or the Fund. Also,
the Fund may direct the advisers to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Fund.
The Board of Trustees may, without prior approval from shareholders, change
the terms of the advisory agreements or hire a new investment adviser, either as
a replacement for an existing adviser or as an additional adviser. However, any
such change will be communicated to shareholders in writing.

Year 2000 Challenge

The common practice in computer programming of using just two digits to identify
a year has resulted in the Year 2000 challenge throughout the information
technology industry. If unchanged, many computer applications and systems could
misinterpret dates occurring after December 31, 1999, leading to errors or
failure. Such failure could adversely affect a fund's operations, including
pricing, securities trading, and the servicing of shareholder accounts.
The Vanguard Group is dedicated to providing uninterrupted, high-
quality performance from our computer systems before, during, and after 2000. In
July 1998, we completed the renovation and initial testing of our internal
systems. Vanguard is diligently working with external partners, suppliers, and
vendors, including fund managers and other service providers, to assure that the
systems with which we interact remain operational at all times.
In addition to taking every reasonable step to secure our internal systems
and external relationships, Vanguard is further developing contingency plans
intended to assure that unexpected systems failures will not adversely affect
the Fund's operations. Vanguard intends to monitor these processes through the
rollover of 1999 into 2000 and to quickly implement alternate solutions if
necessary.
However, despite Vanguard's efforts and contingency plans, noncompliant
computer systems could have a material adverse effect on the Fund's business,
operations, or financial condition. Additionally, the Fund's performance could
be hurt if a computer-system failure at a company or governmental unit affects
the price of securities the Fund owns.
<PAGE>

Dividends, Capital Gains, and Taxes

Share Price

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

Total Assets - Liabilities
Net Asset Value = ------------------------------
Number of Shares Outstanding

PLAIN TALK ABOUT
How to Read the Financial Highlights Table
The Fund began fiscal 1998 with a net asset value (price) of $22.28 per share.
During the year, the Fund earned $.64 per share from investment income (interest
and dividends) and $1.44 per share from investments that had appreciated in
value or that were sold for higher prices than the Fund paid for them.
Shareholders received $1.56 per share in the form of dividend and capital
gains distributions. A portion of each year's distributions may come from the
prior year's income or capital gains.
The earnings ($2.08 per share) minus the distributions ($1.56 per share)
resulted in a share price of $22.80 at the end of the year. This was an increase
of $.52 per share (from $22.28 at the beginning of the year to $22.80 at the end
of the year). For a shareholder who reinvested the distributions in the purchase
of more shares, the total return from the Fund was 9.54% for the year.
As of September 30, 1998, the Fund had $2.38 million in net
assets. For the year, its expense ratio was 0.39% ($3.90 per $1,000 of net
assets); and net investment income amounted to 2.80% of its average net assets.
It sold and replaced securities valued at 23% of its net assets.

Financial Highlights

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

<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Vanguard Equity Income Fund
Year Ended September 30,
----------------------------------------------------
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $22.28 $17.69 $15.65 $13.16 $14.62
- ----------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income .64 .64 .63 .60 .59
Net Realized and Unrealized Gain (Loss)
on Investments 1.44 5.17 2.18 2.56 (.92)
----------------------------------------------------
Total from Investment Operations 2.08 5.81 2.81 3.16 (.33)
----------------------------------------------------
Distributions
Dividends from Net Investment Income (.67) (.64) (.60) (.58) (.61)
Distributions from Realized Capital Gains (.89) (.58) (.17) (.09) (.52)
----------------------------------------------------
Total Distributions (1.56) (1.22) (.77) (.67) (1.13)
- ----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $22.80 $22.28 $17.69 $15.65 $13.16
====================================================================================================

Total Return 9.54% 34.17% 18.22% 24.77% -2.19%
====================================================================================================

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

<PAGE>

Investing with Vanguard

The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
[ ] If you have any questions about the Fund or Vanguard, including the Fund's
investment objective, strategies, or risks, contact Vanguard's Participant
Services Center, toll-free, at 1-800-523-1188.
[ ] If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.

Investment Options and Allocations
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.

Transactions
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.

Exchanges
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits exchange activity to no more than four substantive "round
trips" through the Fund (at least 90 days apart) during any 12-month period. A
"round trip" is a redemption from the Fund followed by a purchase back into the
Fund. "Substantive" means a dollar amount that Vanguard determines, in its sole
discretion, could adversely affect management of the Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
[ ] Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
[ ] Make sure to read that fund's prospectus. Contact Participant Services,
toll-free, at 1-800-523-1188 for a copy.
[ ] Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.

Accessing Fund Information by Computer
- --------------------------------------------------------------------------------
Vanguard on the World Wide Web www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>

(This page intentionally left blank.)

<PAGE>

Glossary of Investment Terms

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

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

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

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

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

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

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

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

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

Securities
Stocks, bonds, and other investment vehicles.

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

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

The Vanguard Group(R)

Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900

For More Information

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

Statement of Additional Information (SAI)
The SAI provides more detailed information about the Fund.

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

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

The Vanguard Group
Participant Services Center
P.O. Box 2900
Valley Forge, PA 19482-2900

Telephone:
1-800-523-1188

Text Telephone:
1-800-523-8004

World Wide Web:
www.vanguard.com

E-mail:
[email protected]

Fund's Investment Company Act
file number: 811-5445

I065N-01/29/1999
<PAGE>

PART B

VANGUARD EQUITY INCOME FUND

(the "Trust")

STATEMENT OF ADDITIONAL INFORMATION
January 29, 1999

This Statement is not a Prospectus but should be read in conjunction with
the Trust's current Prospectus (January 29, 1999). To obtain the Prospectus,
and the Annual Report to Shareholders, containing the Trust's financial
statements, which are hereby incorporated by reference, please call:

Investor Information Department
1-800-662-7447

TABLE OF CONTENTS

Page
-----
Description of the Trust ................................................ B-1
Investment Policies ..................................................... B-3
Fundamental Investment Limitations ...................................... B-9
Purchase of Shares ...................................................... B-10
Redemption of Shares .................................................... B-10
Share Price ............................................................. B-10
Management of the Trust ................................................. B-12
Yield and Total Returns ................................................. B-15
Investment Advisory Services ............................................ B-17
Portfolio Transactions .................................................. B-21
Financial Statements .................................................... B-22
Comparative Indexes ..................................................... B-22

DESCRIPTION OF THE TRUST

Organization

The Trust was organized as a Maryland corporation in 1987 and was
reorganized as a Delaware business trust in May, 1998. Prior to its
reorganization as a Delaware business trust, the Trust was known as Vanguard
Equity Income Fund, Inc. The Trust is registered with the United States
Securities and Exchange Commission under the Investment Company Act of 1940
(the "1940 Act") as an open-end, diversified management investment company. It
currently offers an investor share class of a single fund: Vanguard Equity
Income Fund (the "Fund").

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

Service Providers

Custodian. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, serves as the Fund's custodian. The custodian is
responsible for maintaining the Fund's assets and keeping all necessary
accounts and records.

B-1
<PAGE>

Independent Accountants. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Trust's independent public
accountants. The accountants audit the Trust's financial statements and
provides other related services.

Transfer and Dividend-Paying Agent. The Trust's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.

Characteristics of the Trust's Shares

Restrictions on Holding or Disposing of Shares. There are no restrictions
on the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Trust or any of its Funds. The
Trust or any of its Funds may be terminated by reorganization into another
mutual fund or by liquidation and distribution of the assets of the affected
fund. Unless terminated by reorganization or liquidation, the Trust and its
Funds will continue indefinitely.

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

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

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

Liquidation Rights. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the net assets of applicable Funds of
the Trust.

Preemptive Rights. There are no preemptive rights associated with the
Trust.

Conversion Rights. There are no conversion rights associated with the
Trust.

Redemption Provisions. The Trust's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.

B-2

<PAGE>

Sinking Fund Provisions. The Trust has no sinking fund provisions.

Calls or Assessment. The Trust's shares are fully paid and non-assessable.

Tax Status of the Trust

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

INVESTMENT POLICIES

The following policies supplement the Fund's investment objectives and
policies set forth in the Prospectus.

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. Assets
committed to futures contracts will be segregated to the extent required by
law.

Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery.
Closing out an open futures position is done by taking an opposite position
("buying" a contract which has previously been "sold," "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 the 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

B-3
<PAGE>

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 bona fide hedging purposes. Regulations of the CFTC
applicable to the Fund require that all of its futures transactions constitute
bona fide hedging transactions except to the extent that the aggregate initial
margins and premiums required to establish any non-hedging positions do not
exceed five percent of the value of the Fund.

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 and Options. 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 Fund'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 Fund'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 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. The Fund will minimize
the risk that it will be unable to close out a futures contract by only
entering into futures which are traded on national futures exchanges and for
which there appears to be a liquid secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the Futures Contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out.

B-4

<PAGE>

A 15% decrease would result in a loss equal to 150% of the original margin
deposit if the contract were closed out. Thus, a purchase or sale of a futures
contract may result in losses in excess of the amount invested in the contract.
However, because the futures strategies of the Fund are engaged in only for
hedging purposes, the Advisers do 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 the 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 futures 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. It is anticipated that
any net gain realized from the closing out of futures contracts will be
considered qualifying income for purposes of the 90% requirement.

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.

B-5
<PAGE>

Repurchase Agreements. The Fund along with other members of the Vanguard
Group may invest in repurchase agreements with commercial banks, brokers or
dealers either for defensive purposes due to market conditions or to generate
income from its excess cash balances. A repurchase agreement is an agreement
under which the Fund acquires a money market instrument (generally a security
issued by the U.S. Government or an agency thereof, a banker's acceptance or a
certificate of deposit) from a commercial bank, broker or dealer, subject to
resale to the seller at an agreed upon price and date (normally, the next
business day). A repurchase agreement may be considered a loan collateralized
by securities. The resale price reflects an agreed upon interest rate effective
for the period the instrument is held by the Fund and is unrelated to the
interest rate on the underlying instrument. In these transactions, the
securities acquired by the Fund (including accrued interest earned thereon)
must have a total value in excess of the value of the repurchase agreement and
are held by a custodian bank until repurchased. In addition, the Trust's Board
of Trustees will monitor repurchase agreement transactions generally and will
establish guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker or dealer party to a repurchase agreement.

Lending of Securities. The Fund may lend its investment securities to
qualified institutional investors (typically brokers, dealers, banks or other
financial institutions) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to
deliver securities or completing arbitrage operations. By lending its
investment securities, the Fund attempts to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. The terms and the structure and the
aggregate amount of such loans must be consistent with the Investment Company
Act of 1940, and the Rules and Regulations or interpretations of the Securities
and Exchange Commission (the "Commission") thereunder. These provisions limit
the amount of securities the Fund may lend to 33 1/3% of the Fund's total
assets, and require that (a) the borrower pledge and maintain with the Fund
collateral consisting of cash, an irrevocable letter of credit or securities
issued or guaranteed by the United States Government having at all times not
less than 100% of the value of the securities loaned, (b) the borrower add to
such collateral whenever the price of the securities loaned rises (i.e., the
borrower "marks to the market" on a daily basis), (c) the loan be made subject
to termination by the Fund at any time and (d) the Fund receive reasonable
interest on the loan (which may include the Fund's investing any cash
collateral in interest bearing short-term investments), any distribution on the
loaned securities and any increase in their market value. Loan arrangements
made by the Fund will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which presently require the
borrower, after notice, to redeliver the securities within the normal
settlement time of three business days. All relevant facts and circumstances,
including the creditworthiness of the broker, dealer or institution, will be
considered in making decisions with respect to the lending of securities,
subject to review by the Trust's Board of Trustees.

At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in written contract and approved
by the investment company's Trustees. In addition, voting rights pass with the
loaned securities, but if a material event will occur affecting an investment
on the loan, the loan must be called and the securities voted.

B-6

<PAGE>

Vanguard Interfund Lending Program. The SEC has issued an exemptive order
permitting the Fund to participate in Vanguard's interfund lending program.
This program allows the Vanguard funds to borrow money from and loan money to
each other for temporary or emergency purposes. The program is subject to a
number of conditions, including the requirement that no fund may borrow or lend
money through the program unless it receives a more favorable interest rate
than is available from a typical bank for a comparable transaction. In
addition, a fund may participate in the program only if and to the extent that
such participation is consistent with the fund's investment objective and other
investment policies. The Boards of Trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the SEC's exemptive order.

Temporary Investments. The Fund may take temporary defensive measures that
are inconsistent with the Fund's normal investment strategies in response to
adverse market, economic, political or other conditions. Such measures could
include investments in (a) highly liquid short-term fixed income securities
issued by or on behalf of municipal or corporate issuers, obligations of the
U.S. Government and its agencies, commercial paper, and bank certificates of
deposit; (b) shares of other investment companies which have investment
objectives consistent with those of the Fund; (c) repurchase agreements
involving any such securities; and (d) other money market instruments. There is
no limit on the extent to which the Fund may take temporary defensive measure.
In taking such measures, the Fund may fail to achieve its investment objective.

Foreign Investments. As indicated in the Prospectus, the Fund may invest
up to 20% of its assets in securities of foreign companies. Investors should
recognize that investing in foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies.

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

Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument if such instrument is not marked to market. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules. However,
foreign currency-related regulated futures contracts and nonequity options are
generally not subject to the special currency rules if they are or would be
treated as sold for their

B-7
<PAGE>

fair market value at year-end under the marking-to-market rules applicable to
other futures contracts unless an election is made to have such currency rules
apply. With respect to transactions covered by the special rules, foreign
currency gain or loss is calculated separately from any gain or loss on the
underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. The Treasury Department issued regulations under which
certain transactions subject to the special currency rules that are part of a
"section 988 hedging transaction" (as defined in the Internal Revenue Code of
1986, as amended, and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated consistently for purposes of the
Code. Any gain or loss attributable to the foreign currency component of a
transaction engaged in by a Fund which is not subject to the special currency
rules (such as foreign equity investments other than certain preferred stocks)
will be treated as capital gain or loss and will not be segregated from the
gain or loss on the underlying transaction. It is anticipated that some of the
non-U.S. dollar-denominated investments and foreign currency contracts the Fund
may make or enter into will be subject to the special currency rules described
above.

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

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

Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income the Trust receives from its foreign investments.

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

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

If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures
and guidelines approved by the Fund's Board of Trustees. This generally
includes securities that are unregistered that can be sold to qualified
institutional buyers in accordance

B-8

<PAGE>

with Rule 144A under the 1933 Act. While the Fund's investment adviser
determines the liquidity of restricted securities on a daily basis, the Board
oversees and retains ultimate responsiblity for the adviser's decisions.
Several factors the Board considers in monitoring these decisions include the
valuation of a security, the availability of qualified institutional buyers,
and the availability of information about the security's issuer.

FUNDAMENTAL INVESTMENT LIMITATIONS

The Fund is subject to the following fundamental investment limitations,
which cannot be changed in any material way without the approval of the holders
of a majority of the Fund's shares. For these purposes, a "majority" of the
Fund's shares means shares representing the lesser of: (i) 67% or more of the
Fund's net asset value, so long as shares representing more than 50% of the
Fund's net assets value are present or represented by proxy; or (ii) more than
50% of the Fund's net asset value.

Borrowing. The Fund may not borrow money, except for temporary or
emergency purposes in an amount not exceeding 15% of the Fund's net assets. The
Fund may borrow money through banks, or Vanguard's interfund lending program
only, and must comply with all applicable regulatory conditions. The Fund may
not make any additional investments whenever its outstanding borrowings exceed
5% of net assets.

Commodities. The Fund may not invest in commodities, except that the Fund
may invest in stock futures contracts, stock options and options on stock
futures contracts. No more than 5% of the Fund's total assets may be used as
initial margin deposit for futures contracts, and no more than 20% of the
Fund's total assets may be invested in futures contracts or options at any
time.

Diversification. With respect to 75% of its total assets, the Fund may
not: (i) purchase more than 10% of the outstanding voting securities of any one
issuer, or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.

Industry Concentration. The Fund may not invest more than 25% of its total
assets in any one industry.

Investing for Control. The Fund may not invest in a company for the
purpose of controlling its management.

Investment Companies. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.

Loans. The Fund may not lend money to any person except by purchasing
fixed income securities that are publicly distributed, lending its portfolio
securities, or through Vanguard's interfund lending program.

Margin. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.

Pledging assets. The Fund may not pledge, mortgage or hypothecate more
than 15% of its net assets.

Real Estate. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate.

Senior securities. The Fund may not issue senior securities, except in
compliance with the 1940 Act.

B-9
<PAGE>

Underwriting. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.

None of these limitations prevents the Trust from participating in The
Vanguard Group ("Vanguard"). Because the Trust is a member of the Group, the
Fund may own securities issued by Vanguard, make loans to Vanguard, and
contribute to Vanguard's costs or other financial requirements. See "Management
of the Trust" for more information.

The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.

PURCHASE OF SHARES

The Trust 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 Trust, 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.

Trading Shares through Charles Schwab

The Fund has authorized Charles Schwab & Co., Inc. ("Schwab") to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on the Fund's behalf subject to those terms and
conditions. Under this arrangement, the Fund will be deemed to have received a
purchase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with the Fund's instructions.
Customer orders that are properly transmitted to the Fund by Schwab, or if
applicable, Schwab's authorized designee, will be priced as follows:

Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on the
Fund's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on the Fund's net
asset value calculated at the close of trading that day.

REDEMPTION OF SHARES

The Trust may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Commission, (ii)
during any period when an emergency exists as defined by the rules of the
Commission as a result of which it is not reasonably practicable for the 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.

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.

B-10

<PAGE>

SHARE PRICE

The Fund's share price or "net asset value" per share is calculated by
dividing the total assets of the Trust, less all liabilities, by the total
number of shares outstanding. The net asset value is determined as of the close
of the New York Stock Exchange (the "Exchange") generally 4:00 p.m. Eastern
time on each day that the Exchange is open for trading.

Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted
sales price on the day the valuation is made. Such securities which are not
traded on the valuation date are valued at the mean of the bid and ask prices.
Price information on exchange-listed securities is taken from the exchange
where the security is primarily traded. Any foreign securities are valued at
the latest quoted sales price available before the time when assets are valued.
Securities may be valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market value of such
securities.

Short-term instruments (those acquired with remaining maturities of 60
days or less) may be valued at cost, plus or minus any amortized discount or
premium, which approximates market value.

Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific
securities.

Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as
the Board of Trustees deems in good faith to reflect fair value.

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

B-11
<PAGE>

MANAGEMENT OF THE TRUST

TRUSTEES AND OFFICERS

The Officers of the Trust manage its day-to-day operations and are
responsible to the Trust's Board of Trustees. The Trustees set broad policies
for the Trust and choose its Officers. The following is a list of Trustees and
Officers of the Trust and a statement of their present positions and principal
occupations during the past five years. As a group, the Trust's Trustees and
Officers own less than 1% of the outstanding shares of the Trust. Each Trustee
also serves as a Director of The Vanguard Group, Inc., and as a Trustee of each
of the 36 investment companies administered by Vanguard (35 in the case of Mr.
Malkiel and 28 in the case of Mr. MacLaury). The mailing address of the
Trustees and Officers of the Trust is Post Office Box 876, Valley Forge, PA
19482.

JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*
Senior Chairman and Director of The Vanguard Group, Inc., and Trustee of each
of the investment companies in The Vanguard Group. Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).

JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.

JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive
Committee of Johnson and Johnson (Pharmaceuticals/Consumer Products); Director
of Johnson & Johnson*MERCK Consumer Pharmaceuticals Co., Women First
HealthCare, Inc. (Research and Education Institution), Recording for the Blind
and Dyslexic, The Medical Center at Princeton, and Women's Research and
Education Institute.

BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.

BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress
& Co. (Investment Management), The Jeffrey Co. (Holding Company), and Southern
New England Telecommunications Co.

ALFRED M. RANKIN, Jr., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/ Coal/Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/ Chemicals), and The Standard Products Co. (Rubber
Products Company).

JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries (Machinery/ Coal/Appliances), and Newfield Exploration
Co. (Energy); formerly, Director and Senior Partner of McKinsey & Co., and
President of New York University.

B-12

<PAGE>

JAMES O. WELCH, Jr., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.

J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director
of Cummins Engine Co. (Diesel Engine Company), and The Mead Corp. (Paper
Products); and Trustee of Vanderbilt University.

RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.

THOMAS J. HIGGINS. (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.

ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.

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

The Vanguard Group

Vanguard Equity Income Fund is a member of The Vanguard Group of
Investment Companies, which consists of more than 35 investment companies (the
"Trusts"). Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Trust and the other Trusts in The Vanguard 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 Trusts.

Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Trusts and also
furnishes the Trusts with necessary office space, furnishings and equipment.
Each Trust pays a share of Vanguard's total expenses which are allocated among
the Trusts under methods approved by the Board of Trustees of each Trust. In
addition, each Trust bears its own direct expenses such as legal, auditing and
custodian fees. In order to generate additional revenues for Vanguard and
thereby reduce the Trusts' expenses, Vanguard also provides certain
administrative services to other organizations.

The Trust'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 Trusts.

Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
Officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines similar to, and in many
cases more restrictive than, those recommended by a blue ribbon panel of mutual
fund industry executives.

Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the Trusts.
The amounts which each of the Trusts have

B-13
<PAGE>

invested are adjusted from time to time in order to maintain the proportionate
relationship between each Trust's relative net assets and its contribution to
Vanguard's capital. At September 30, 1998, the Trust had contributed $462,000
to Vanguard, representing 0.02% of Vanguard's capitalization. The Amended and
Restated Funds' Service Agreement provides as follows: (a) each Vanguard Trust
may invest up to .40% of its current assets in Vanguard, and (b) there is no
other limitation on the dollar amount that each Vanguard Trust may contribute
to Vanguard's capitalization.

Management

Corporate management and administrative services include: (1) executive
staff; (2) accounting and financial; (3) legal and regulatory; (4) shareholder
account maintenance; (5) monitoring and control of custodian relationships; (6)
shareholder reporting; and (7) review and evaluation of advisory and other
services provided to the Trusts by third parties. For the year ended September
30, 1998, such costs allocated to the Trust approximated $4,944,000.

Distribution

Vanguard Marketing Corporation, a wholly-owned subsidiary of The Vanguard
Group, Inc., provides all distribution and marketing activities for the Trusts
in the Group. The principal distribution expenses are for advertising,
promotional materials and marketing personnel. Distribution services may also
include organizing and offering to the public, from time to time, one or more
new investment companies which will become members of The Vanguard Group. The
Trustees and Officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each Trust, and
whether to organize new investment companies.

One half of the distribution expenses of a marketing and promotional
nature is allocated among the Trusts based upon relative net assets. The
remaining one half of those expenses is allocated among the Trusts based upon
each Trust's sales for the preceding 24 months relative to the total sales of
the Trusts as a Group, provided, however, that no Trust's aggregate quarterly
rate of contribution for distribution expenses of a marketing and promotional
nature shall exceed 125% of average distribution expense rate for The Vanguard
Group, and that no Trust shall incur annual distribution expenses in excess of
20/100 of 1% of its average month-end net assets. The Vanguard Group's
marketing and distribution expenses allocated to the Trust for the year ended
September 30, 1998, was $499,000 or approximately 0.02% of its average
month-end net assets.

Investment Advisory Services

Vanguard provides investment advisory services from Vanguard's Core
Management Group. 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 and Trusts utilizing these
services.

Trustee Compensation

The individuals in the following table serve as Trustees of all Vanguard
Trusts, and each Trust pays a proportionate share of the Trustees'
compensation. The Trusts employ their officers on a shared basis, as well.
However, officers are compensated by the Vanguard Group, Inc., not the Trusts.

Independent Trustees. The Trusts compensate their independent Trustees --
that is, the ones who are not also officers of the Trust -- in three ways:

B-14

<PAGE>

o The independent Trustees receive an annual fee for their service to the
Funds, which is subject to reduction based on absences from scheduled
Board meetings.

o The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.

o Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.

"Interested" Trustees. The Trusts' interested Trustees --Messrs. Bogle and
Brennan -- receive no compensation for their service in that capacity. However,
they are paid in their role as officers of The Vanguard Group, Inc.

Compensation Table. The following table provides compensation details for
each of the Trustees. For the Trust, we list the amounts paid as compensation
and accrued as retirement benefits by the Trust for each Trustee. In addition,
the table shows the total amount of benefits that we expect each Trustee to
receive from all Vanguard Trusts upon retirement, and the total amount of
compensation paid to each Trustee by all Vanguard Trusts. All information shown
is for the fiscal year ended September 30, 1998:

VANGUARD EQUITY INCOME FUND
COMPENSATION TABLE

<TABLE>
<CAPTION>
Aggregate Pension or Retirement Estimated Total Compensation
Compensation Benefits Accrued As Annual Benefits From All Vanguard Trusts
Names of Trustees From Trust Part of Trust Expenses Upon Retirement Paid to Trustees (1)
- -------------------------------- -------------- ------------------------ ----------------- -------------------------
<S> <C> <C> <C> <C>
John C. Bogle .................. -- -- -- --
John J. Brennan ................ -- -- -- --
Barbara Barnes Hauptfuhrer (2). $586 $79 $15,000 $75,000
JoAnn Heffernan Heisen ......... $147 $34 $15,000 $18,750
Robert E. Cawthorn (2) ......... $391 $53 $ 6,000 $50,000
Bruce K. MacLaury .............. $621 $60 $12,000 $70,000
Alfred M. Rankin, Jr. .......... $586 $42 $15,000 $75,000
John C. Sawhill ................ $586 $53 $15,000 $75,000
James O. Welch, Jr. ............ $586 $61 $15,000 $75,000
J. Lawrence Wilson ............. $586 $44 $15,000 $75,000
</TABLE>

(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 35 Vanguard Trusts (28
in the case of Mr. MacLaury).

(2) Mr. Cawthorn and Mrs. Hauptfuhrer have retired from the Trust's Board,
effective May 31, 1998 and December 31, 1998, respectively.

YIELD AND TOTAL RETURNS

The yield of the Fund for the 30-day period ended September 30, 1998 was
2.87%. The yield is calculated daily. The average annual total return of the
Fund for one, five, and ten years ended September 30, 1998, was 9.54%, 16.22%
and 14.49%, 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.

B-15
<PAGE>

Average Annual Total Return

Average annual total return is the average annual compounded rate of
return for the periods of one year, five years, ten years or the life of the
Fund, all ended on the last day of a recent month. Average annual total return
quotations will reflect changes in the price of the Fund's shares and assume
that all dividends and capital gains distributions during the respective
periods were reinvested in Fund shares.

Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):

T = (ERV/P)1/n-1

Where:
T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.

Cumulative Total Return

Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that
all dividends and capital gains distributions during the period were reinvested
in Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):

C = (ERV/P)-1

Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.

SEC Yields

Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to
the following formula:

YIELD = [((a-b)/cd+1)6-1]

Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.

B-16

<PAGE>

INVESTMENT ADVISORY SERVICES

The Fund currently has four 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; John A. Levin & Co., Inc. ("Levin"), One
Rockefeller Plaza, 25th Floor, New York, NY 10020; and The Vanguard Group,
Inc., Post Office Box 2600, Valley Forge, PA 19482. 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 Vanguard Group,
Inc. was added as an adviser effective January 16, 1998. The Trust 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 Trustees of the Fund.

The proportion of the net assets of the Fund managed by each adviser is
established by the Board of Trustees, and may be changed in the future as
circumstances warrant. Presently, Newell is responsible for approximately 70%
of the Fund's investment; Spare/Kaplan and Levin are responsible for
approximately 15% each. Vanguard's advisory role is limited; it currently
manages just the Fund's cash reserves, which normally represent about 5% of the
Fund's assets.

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%

Spare, Kaplan, Bischel & Associates. The Fund pays Spare/Kaplan a basic
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 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 ............... 0.100%

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.

B-17
<PAGE>

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.

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 Commission issued Release No. 7113 under the 1940 Act
to call attention of trustees 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

B-18

<PAGE>

"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
trustees 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 Trustees 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 Trust's
investment advisory agreement with Spare/Kaplan, the maximum performance
adjustment for an incentive fee is made at a difference of +6 percentage points
from the performance of the index over a thirty-six month period. The maximum
performance adjustment for a penalty fee is made at a difference of less than
+3 percentage points from the performance of the index over a thirty-six month
period. On a per year basis, these maximum adjustments effectively would occur
at differences from the index of +2 percentage points and less than +1
percentage point, respectively.

John A. Levin & Co., Inc. The Fund pays Levin a basic 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 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.

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% ....................... -0.40 X Basic Fee
Between 0% and 3% .................. -0.20 X Basic Fee
Between 3% and 6% .................. 0 X Basic Fee
Between 6% and 9% .................. 0.20 X Basic Fee
More than 9% ....................... 0.40 X Basic Fee

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.

B-19
<PAGE>

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
pages 18-19. The Board of Trustees 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 Trust's investment advisory agreement with Levin, the
maximum performance adjustment for an incentive fee is made at a difference of
+9 percentage points from the performance of the index over a thirty-six month
period. The maximum performance adjustment for a penalty fee is made at a
difference of less than +0 percentage points from the performance of the index
over a thirty-six month period. On a per year basis, these maximum adjustments
effectively would occur at differences from the index of +3 percentage points
and less than +0 percentage point, respectively.

The Fund's Board of Trustees 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 be communicated to shareholders in writing.

For the fiscal year ended September 30, 1996, the Fund incurred an
aggregate advisory fee of $2,151,000 before a decrease of $191,000 based on
performance. For the fiscal year ended September 30, 1997, the Fund incurred an
aggregate advisory fee of $2,739,000 before a decrease of $287,000 based on
performance. For the fiscal year ended September 30, 1998, the Fund incurred an
aggregate advisory fee of $3,587,000 before a decrease of $370,000 based on
performance. The Vanguard Group, Inc. provides investment advisory services to
the Trust on an at-cost basis.

B-20

<PAGE>

Description of the Advisers

Newell Associates. Newell Associates, a California corporation, was
founded in 1986 to provide investment management services to institutions.
Newell Associates uses its proprietary Relative Yield Strategy to determine
when stocks are undervalued and, therefore, candidates for purchase or
overvalued and, therefore, candidates for sale. The officers of the corporation
are: Roger D. Newell, Chairman, Robert A. Huret, Vice Chairman and Jennifer C.
Newell, President.

Spare, Kaplan, Bischel & Associates. Spare, Kaplan, Bischel & Associates,
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, Chairman and 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, which commenced operations in
1982, provides investment advisory services to institutional and private
clients, including registered investment trusts and several private investment
partnerships. The investment process at Levin emphasizes identifying investment
value through fundamental research. John A. Levin, the founding principal and
Chairman and Chief Executive Officer of Levin, and Jeffrey A. Kigner,
Co-Chairman and Chief Investment Officer of Levin, are responsible for managing
the portion of the Fund's assets managed by Levin. Levin is an indirect
subsidiary of Baker, Fentress & Company, a registered closed-end investment
company listed on the New York Stock Exchange.

DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS

The Trust's current agreements are renewable for successive one-year
periods, only if each renewal is specifically approved by a vote of the Fund's
Board of Trustees, including the affirmative votes of a majority of Trustees
who are not parties to the contract or "interested persons" (as defined in the
1940 Act) of any such party, cast in person at a meeting called for the purpose
of considering such approval. The agreement is automatically terminated if
assigned, and may be terminated without penalty at any time (1) by vote of the
Board of Trustees of the Fund on 60 days' written notice to the adviser, or (2)
by the adviser upon 90 days' written notice to the Fund.

PORTFOLIO TRANSACTIONS

The investment advisory agreements authorize the Advisers (with the
approval of the Trust's Board of Trustees) 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

B-21
<PAGE>

services in addition to execution services to the Trust and/or the Adviser.
Each 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 Trust's Board of Trustees, each Adviser may cause the
Trust to pay a broker-dealer which furnishes brokerage 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 Trust.

Currently, it is the Trust'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. Each 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 generally will not pay higher commission
rates solely for the purpose of obtaining research services.

Some securities considered for investment by the Fund may also be
appropriate for other clients served by each Adviser. If purchase or sale of
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, 1996, 1997 and 1998, the Fund paid $777,606,
$1,097,967, and $1,404,979, respectively, in brokerage commissions.

FINANCIAL STATEMENTS

Vanguard Equity Income Fund's financial statements for the year ended
September 30, 1998, including the financial highlights for each of the five
fiscal years in the period ended September 30, 1998, appearing in the Vanguard
Equity Income Fund, 1998 Annual Report to Shareholders, and the report thereon
of PricewaterhouseCoopers LLP, independent accountants, also appearing therein,
are incorporated by reference in this Statement of Additional Information. For
a more complete discussion of the performance, please see the Trust's Annual
Report to Shareholders, which may be obtained without charge.

COMPARATIVE INDEXES

Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member trusts of The Vanguard Group of Investment Companies.

Each of the investment company members of The Vanguard Group, including
Vanguard Equity Income Fund, 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--contains the stocks of 500
of the largest domestic companies.

Standard & Poor's MidCap 400 Index--is composed of 400 medium sized domestic
stocks.

B-22
<PAGE>

Standard & Poor's SmallCap 600/BARRA Value Index--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.

Standard & Poor's SmallCap 600/BARRA Growth Index--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.

Russell 1000 Value Index--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.

Wilshire 5000 Equity Index--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily 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--composed of the 2,000 smallest securities in the
Russell 3000, representing approximately 7% of the Russell 3000 total market
capitalization.

Russell 2000(R) Value Index--contains stocks from the Russell 2000 Index with a
less-than-average growth orientation.

Morgan Stanley Capital International EAFE Index--is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia, Asia and the Far East.

Goldman Sachs 100 Convertible Bond Index--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.

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 Index--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 Index--is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.

B-23
<PAGE>

Merrill Lynch Corporate & Government Bond Index--consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.

Lehman Corporate (Baa) Bond Index--all publicly offered fixed rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.

Lehman Brothers Long-term Corporate Bond Index--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed- rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.

Bond Buyer Municipal Bond Index--is a yield index on current coupon high grade
general obligation municipal bonds.

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.

Composite Index--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.

Composite Index--65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.

Composite Index--65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, and 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).

Lehman Long-Term Corporate AA or Better Bond Index--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.

Lehman Brothers Aggregate Bond Index--is a market weighted index that contains
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 $1.6
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 $700
billion.

Lehman Brothers 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

B-24
<PAGE>

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.

B-25
<PAGE>

PART C
VANGUARD EQUITY INCOME FUND
OTHER INFORMATION

Item 23. Exhibits

Exhibit Description
(a) .......... Declaration of Trust*
(b) .......... By-Laws*
(c) .......... Not Applicable
(d) .......... Investment Advisory Contracts*
(e) .......... Not Applicable
(f) .......... Reference is made to the section entitled "Management of the
Trust" in the Registrant's Statement of Additional Information
(g) .......... Custodian Agreement*
(h) .......... Amended and Restated Fund's Service Agreement*
(i) .......... Legal Opinion*
(j) .......... Consent of Independent Accountants+
(k) .......... Not Applicable
(l) .......... Not Applicable
(m) .......... Not Applicable
(n) .......... Financial Data Schedule+
(o) .......... Not Applicable

- ------------
* Filed Previously

+ Filed Herewith

Item 24. Persons Controlled by or under Common Control with Registrant

Registrant is not controlled by or under common control with any person.

Item 25. Indemnification

The Registrant's organizational documents contain provisions indemnifying
Trustees and Officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and Officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or Officer. However, this provision does not cover any liability to
which a Trustee or Officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and
Officers from any liability arising out of their past or present service in
that capacity. Among other things, this provision excludes any liability
arising by reason of willful misfeasance, bad faith, gross negligence, or the
reckless disregard of the duties involved in the conduct of the Trustee's or
Officer's office with the Registrant.

C-1
<PAGE>

Item 26. Business and Other Connections of Investment Adviser

Newell Associates ("Newell"), is an investment adviser registered under
the Investment Advisers Act of 1940, as amended (the "Advisers Act"). The list
required by this Item 26 of officers and directors of Newell, together with any
information as to any business profession, vocation or employment of a
substantial nature engaged in by such officers and directors during the past
two years, is incorporated herein by reference from Schedules B and D of form
ADV filed by Newell pursuant to the Advisers Act (SEC File No. 801-26949).

Spare, Kaplan, Bischel & Associates ("Spare/Kaplan"), is an investment
adviser registered under the Advisers Act. The list required by this Item 26 of
officers and directors of Spare/Kaplan, together with any information as to any
business profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated
herein by reference from Schedules B and D of form ADV filed by Spare/Kaplan
pursuant to the Advisers Act (SEC File No. 801-35258).

John A. Levin & Co., Inc. ("Levin"), is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
directors of Levin, together with any information as to any business
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated herein by
reference from Schedules B and D of form ADV filed by Levin pursuant to the
Advisers Act (SEC File No. 801-18010).

The Vanguard Group, Inc. ("Vanguard") is an investment adviser registered
under the Advisers Act. The list required by this Item 26 of officers and
directors of Vanguard, together with any information as to any business
profession, vocation or employment of substantial nature engaged in by such
officers and directors during the past two years, is incorporated herein by
reference from Schedules B and D of Form ADV filed by Vanguard pursuant to the
Advisers Act (SEC File No. 801-11953).

Item 27. Principal Underwriters

(a) Not Applicable

(b) Not Applicable

Item 28. Location of Accounts and Records

The books, accounts and other documents required by Section 31(a) under
the 1940 Act and the rules promulgated thereunder will be maintained in the
physical possession of Registrant; Registrant's Transfer Agent, The Vanguard
Group, Inc., Valley Forge, Pennsylvania 19482; and the Registrant's Custodian,
State Street Bank and Trust Company, Boston, Massachusetts 02105.

Item 29. Management Services

Other than as set forth under the description of The Vanguard Group in
Part B of this Registration Statement, the Registrant is not a party to any
management-related service contract.

Item 30. Undertakings

Not Applicable.

C-2
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the town of Valley Forge and the Commonwealth of Pennsylvania,
on the 19th day of January 1999.

VANGUARD EQUITY INCOME FUND

(Heidi Stam)
By:________________________________________
John J. Brennan*,
Chairman and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.

(Heidi Stam) Chairman and Trustee January 19, 1999
- ------------------------------
John C. Bogle*

(Heidi Stam) President, Chief Executive January 19, 1999
- ------------------------------ Officer and Trustee
John J. Brennan*

(Heidi Stam) Trustee January 19, 1999
- ------------------------------
JoAnn Hefferman Heisen*

(Heidi Stam) Trustee January 19, 1999
- ------------------------------
Bruce K. MacLaury*

(Heidi Stam) Trustee January 19, 1999
- ------------------------------
Alfred M. Rankin, Jr.*

(Heidi Stam) Trustee January 19, 1999
- ------------------------------
John C. Sawhill*

(Heidi Stam) Trustee January 19, 1999
- ------------------------------
James O. Welch, Jr.*

(Heidi Stam) Trustee January 19, 1999
- ------------------------------
J. Lawrence Wilson*

(Heidi Stam) Treasurer and Principal January 19, 1999
- ------------------------------ Financial Officer
Thomas J. Higgins* and Accounting Officer

- ------------
*By Power of Attorney. See 1933 Act File No. 333-63579, filed on December 4,
1998. Incorporated by Reference.

C-3
<PAGE>

INDEX TO EXHIBITS

Consent of Independent Accountants ........................... EX-99.BJ

Financial Data Schedule ...................................... EX-99.BN

<PAGE>

Exhibit-99.BJ

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 16 to the registration statement on Form N-1A the "Registration
Statement" of our report dated October 30, 1998, relating to the financial
statements and financial highlights appearing in the September 30, 1998 Annual
Report to Shareholders of Vanguard Equity Income Fund, which are also
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the
Prospectuses and under the headings "Financial Statements" and "Service
Providers -- Independent Accountants" in the Statement of Additional
Information.

PricewaterhouseCoopers LLP
Philadelphia, PA
January 14, 1999

[ARTICLE] 6
[RESTATED]
[CIK] 0000826473
[NAME] VANGUARD EQUITY INCOME FUND
[SERIES]
[NUMBER] 01
[NAME] VANGUARD EQUITY INCOME FUND
[MULTIPLIER] 1,000
[CURRENCY] US
<TABLE>
<S> <C>
[PERIOD-TYPE] 12-MOS
[FISCAL-YEAR-END] SEP-30-1998
[PERIOD-START] OCT-01-1997
[PERIOD-END] SEP-30-1998
[EXCHANGE-RATE] 1
[INVESTMENTS-AT-COST] 1,695,348
[INVESTMENTS-AT-VALUE] 2,382,972
[RECEIVABLES] 12,769
[ASSETS-OTHER] 462
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 2,396,203
[PAYABLE-FOR-SECURITIES] 10,486
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 8,186
[TOTAL-LIABILITIES] 18,672
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 1,607,629
[SHARES-COMMON-STOCK] 104,283
[SHARES-COMMON-PRIOR] 87,450
[ACCUMULATED-NII-CURRENT] 5,315
[OVERDISTRIBUTION-NII] 0
[ACCUMULATED-NET-GAINS] 76,504
[OVERDISTRIBUTION-GAINS] 0
[ACCUM-APPREC-OR-DEPREC] 688,083
[NET-ASSETS] 2,377,531
[DIVIDEND-INCOME] 63,399
[INTEREST-INCOME] 9,199
[OTHER-INCOME] 26
[EXPENSES-NET] 8,720
[NET-INVESTMENT-INCOME] 63,904
[REALIZED-GAINS-CURRENT] 84,810
[APPREC-INCREASE-CURRENT] 36,596
[NET-CHANGE-FROM-OPS] 185,310
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 65,293
[DISTRIBUTIONS-OF-GAINS] 78,880
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 29,627
[NUMBER-OF-SHARES-REDEEMED] 18,560
[SHARES-REINVESTED] 5,766
[NET-CHANGE-IN-ASSETS] 429,521
[ACCUMULATED-NII-PRIOR] 15,636
[ACCUMULATED-GAINS-PRIOR] 79,824
[OVERDISTRIB-NII-PRIOR] 0
[OVERDIST-NET-GAINS-PRIOR] 0
[GROSS-ADVISORY-FEES] 3,217
[INTEREST-EXPENSE] 0
[GROSS-EXPENSE] 8,927
[AVERAGE-NET-ASSETS] 2,280,683
[PER-SHARE-NAV-BEGIN] 22.28
[PER-SHARE-NII] 0.64
[PER-SHARE-GAIN-APPREC] 1.44
[PER-SHARE-DIVIDEND] 0.67
[PER-SHARE-DISTRIBUTIONS] 0.89
[RETURNS-OF-CAPITAL] 0
[PER-SHARE-NAV-END] 22.80
[EXPENSE-RATIO] 0.39
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>