N-CSR 1 morgangrowthfund.txt MORGAN GROWTH FUND UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-1685 Name of Registrant: VANGUARD MORGAN GROWTH FUND Address of Registrant: P.O. BOX 2600, VALLEY FORGE, PA 19482 Name and address of agent for service: R. GREGORY BARTON P.O. BOX 876 VALLEY FORGE, PA 19482 Registrant's telephone number, including area code: (610) 669-1000 Date of fiscal year end: September 30 Date of reporting period: October 1, 2002 - September 30, 2003 ITEM 1: Reports to Shareholders VANGUARD(R) MORGAN(TM) GROWTH FUND SEPTEMBER 30, 2003 [PICTURE] ANNUAL REPORT THE VANGUARD GROUP(R)LOGO HOW TO READ YOUR FUND REPORT This report contains information that can help you evaluate your investment. It includes details about your fund's return and presents data and analysis that provide insight into the fund's performance and investment approach. By reading the letter from Vanguard's chairman, John J. Brennan, you'll get an understanding of how the fund invests and how the market environment affected its performance. The statistical information that follows can help you understand how the fund's performance and characteristics stack up against those of similar funds and market benchmarks. It's important to keep in mind that any opinions expressed here are just that: informed opinions. They should not be considered promises or advice. These opinions, like the statistics, cover the period through the date on the cover of this report. The risks of investing in the fund are spelled out in the prospectus. Frequent updates on the fund's performance and information about some of its holdings are available on Vanguard.com. -------------------------------------------------------------------------------- CONTENTS 1 letter from the chairman 6 fund profile 7 glossary of investment terms 8 performance summary 9 your fund's after-tax returns 10 about your fund's expenses 11 financial statements 25 advantages of vanguard.com -------------------------------------------------------------------------------- SUMMARY * The Investor Shares of Vanguard Morgan Growth Fund returned 27.6% during the 12 months ended September 30, 2003. * The fund's return was on par with those of its average peer fund, the benchmark index, and the overall U.S. stock market. * The broad market endured great volatility before achieving a sustained rally in the second half of the fiscal year. * Almost all market segments and industrial sectors posted remarkable gains. Particularly strong were smaller growth stocks and issues in the volatile technology and utilities sectors. WANT LESS CLUTTER IN YOUR MAILBOX? JUST REGISTER WITH VANGUARD.COM AND OPT TO GET FUND REPORTS ONLINE. LETTER FROM THE CHAIRMAN FELLOW SHAREHOLDER, The financial markets were particularly volatile during the fiscal year ended September 30, 2003, with stocks hitting a six-year low at the start, then a series of peaks and valleys before beginning their remarkable rally in March. For the full 12 months, the Investor Shares of Vanguard Morgan Growth Fund returned 27.6% and the Admiral Shares 27.7%--stellar results in absolute terms and roughly on par with the fund's comparative measures. [PICTURES OF JOHN J. BRENNAN] As the adjacent table shows, your fund slightly outpaced both its primary benchmark--the Russell 3000 Growth Index, representing the growth issues among the 3,000 largest U.S. stocks--and the broad market as measured by the Wilshire 5000 Total Market Index. Morgan Growth slightly lagged the average multi-cap growth mutual fund, in part because your fund was relatively light on the priciest technology stocks, which strongly rebounded during the fiscal year. --------------------------------------------------------- 2003 TOTAL RETURNS FISCAL YEAR ENDED SEPTEMBER 30 --------------------------------------------------------- VANGUARD MORGAN GROWTH FUND Investor Shares 27.6% Admiral Shares 27.7 Russell 3000 Growth Index 26.9 Average Multi-Cap Growth Fund* 28.7 Wilshire 5000 Index 26.3 --------------------------------------------------------- *Derived from data provided by Lipper Inc. Details on changes in the fund's net asset value and on per-share distributions for the Investor and Admiral Shares can be found in the table on page 5. If you hold your shares in a taxable account, you may wish to review the fund's after-tax returns on page 9. 1 STOCKS REBOUNDED POWERFULLY AS THE BEAR RETREATED As the fiscal year got under way last October, U.S. stock prices rallied from their bear-market lows, then stalled in the face of investor apprehension about imminent military conflict with Iraq and the seeming creakiness of the national economy. Those concerns dissipated with the start of combat operations in March and the arrival of data suggesting that the economy was grinding into gear: reports of unexpected growth in corporate earnings and stronger-than-forecast advances in the gross domestic product. -------------------------------------------------------------------------------- ADMIRAL(TM)SHARES A lower-cost class of share available to many longtime shareholders and to those with significant investments in the fund. -------------------------------------------------------------------------------- Beginning in March, stocks surged, with the broad market, as represented by the Wilshire 5000 Index, returning a robust 26.3% for the 12 months. Both small- and large-capitalization stocks produced outstanding returns, though investors' renewed appetite for risk propelled small-caps higher. International markets also posted strong returns, which were enhanced for U.S.-based investors by a decline in the U.S. dollar relative to major currencies. RISK WAS REWARDED IN THE BOND MARKET A taste for risk was also apparent in the bond market. In general, the riskier the bond, the better the performance. The Lehman Brothers High Yield Bond Index, a benchmark of below-investment-grade bonds, returned a stunning 30%. Bonds with at least some degree of credit risk outperformed similar-maturity U.S. Treasury bonds, which have virtually no risk of default. The broad investment-grade market, as measured by the Lehman Aggregate Bond Index, returned 5.4%. -------------------------------------------------------------------------------- MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2003 ---------------------------------------- ONE THREE FIVE YEAR YEARS YEARS -------------------------------------------------------------------------------- STOCKS Russell 1000 Index (Large-caps) 25.1% -10.3% 1.5% Russell 2000 Index (Small-caps) 36.5 -0.8 7.5 Wilshire 5000 Index (Entire market) 26.3 -9.5 2.0 MSCI All Country World Index Free ex USA (International) 29.0 -7.4 2.1 -------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index 5.4% 8.9% 6.6% (Broad taxable market) Lehman Municipal Bond Index 3.9 7.7 5.7 Citigroup 3-Month Treasury Bill Index 1.2 2.7 3.7 ================================================================================ CPI Consumer Price Index 2.3% 2.2% 2.5% -------------------------------------------------------------------------------- 2 Most interest rates rose, making a small dent in bond prices and modestly reducing total returns. The yield of the benchmark 10-year Treasury note finished the fiscal year at 3.94%, up 35 basis points (0.35 percentage point) from September 30, 2002. In the shortest maturities, however, yields fell sharply, as the Federal Reserve Board reduced its target for short-term interest rates by 75 basis points. The yield of the 3-month Treasury bill declined 61 basis points, helping to push the yields of short-term vehicles such as money market funds below 1%. A REMARKABLE TURNAROUND FOR STOCK FUNDS Morgan Growth Fund's fiscal-year return reflected a remarkable turnaround in the equity markets after almost three years of decline. The fund enjoyed especially strong returns from stocks of software, Internet, and other tech companies that rebounded from their bear-market lows. Microsoft, Dell, Intel, and Cisco Systems, for example, produced big gains as the long freeze in corporate capital spending showed some signs of thawing. Cell-phone giant Nextel was another big winner. Overall, 10 out of 12 sectors in your fund posted double-digit gains, ranging up to a stunning 80% return for the utilities group (which includes telecommunication and cable companies). But it was technology that had the most impact on performance. These stocks--the fund's third-largest industry weighting, averaging roughly 16% of assets--returned 54%. ------------------------------------------------------------------ FUND ASSETS MANAGED SEPTEMBER 30, 2003 --------------------------- $ MILLION PERCENTAGE ------------------------------------------------------------------ Wellington Management Company, llp $1,397 37% Vanguard Quantitative Equity Group 1,115 30 Franklin Portfolio Associates, LLC 1,038 28 Cash Investments* 170 5 ------------------------------------------------------------------ Total $3,720 100% ------------------------------------------------------------------ * This cash is invested by The Vanguard Group in equity index products to simulate investment in stocks. Each advisor also may maintain a modest cash position. However, your fund avoided the sector's more speculative companies, which proved to be some of the strongest performers during the fiscal year. This positioning put your fund at a disadvantage relative to competing growth funds and kept Morgan Growth's tech returns a bit behind those of its benchmark index. In the Russell 3000 Growth Index, for example, technology issues had both a higher weighting (21%) and a higher return (+61%) than those in your fund. Nonetheless, the fund outperformed the index for the 12 months because of superior stock selection in other sectors. 3 The fund's underweighting of technology stocks--which, even after three years of decline, still sport some of the highest prices relative to earnings and book values--reflects the advisors' preference for growth stocks with moderate valuations. This can help our performance compared with other growth funds when the priciest stocks are slumping, but it can have the opposite effect when those stocks soar. During the past fiscal year, they soared, giving a slight edge to the average peer fund. As you know, three investment advisors manage your fund's assets, providing further diversification through differing management styles. The table on page 3 shows the percentage of assets managed by each advisor at the fiscal year-end. MODERATION AND LOW COSTS CAN GIVE AN EDGE OVER THE LONG RUN Over the past decade, your fund's pursuit of growth at a reasonable price has been well rewarded. As shown by the table below, Morgan Growth Fund's annualized return of 9.5% would have turned a hypothetical $10,000 investment into a final sum of $24,896--more than $3,000 higher than the results of the same investment in the average peer fund and the benchmark index. The result is even better when you consider that indexes, as theoretical entities, carry none of the real-world operating and transaction costs that a mutual fund must bear. ------------------------------------------------- TOTAL RETURNS TEN YEARS ENDED SEPTEMBER 30, 2003 ------------------------------------------------- FINAL VALUE OF AVERAGE A $10,000 ANNUAL INITIAL RETURN INVESTMENT ------------------------------------------------- Morgan Growth Fund Investor Shares 9.5% $24,896 Russell 3000 Growth Index 8.1 21,825 Average Multi-Cap Growth Fund 7.7 21,050 Wilshire 5000 Index 9.5 24,772 ------------------------------------------------- Our margin over our competitors is owed not only to the skill of our advisors but also to our significant cost advantage over similar mutual funds. On page 10 you'll find a table comparing Morgan Growth Fund's costs with the average cost of its competitors. When our expenses are so much lower, competitors have to generate a gross return higher than ours in order to match our net results--a difficult hurdle to overcome year after year. DIVERSIFICATION AND TRUST ARE KEY TO LONG-TERM SUCCESS The stock market's resurgence has been surprising in its strength, perhaps a fitting postscript to a bear market that was remarkable in both its depth and duration. But if the magnitude of change is 4 remarkable, the fact of change is not. Markets rarely follow a predictable path. The best response is to be prepared for anything. At the portfolio level, this is relatively simple: Select a mix of broadly diversified stock, bond, and money market funds consistent with your goals, time horizon, and risk tolerance, then stay the course. Such a mix gives you some protection from the market's worst-performing asset class--whichever it turns out to be in a given period--while allowing you to share in the rewards of the best-performing assets. We believe such an investment plan can be most productive when you work with an investment provider that embraces the values that are paramount at Vanguard. Serving the long-term investment needs of our clients is our single goal--one that is dictated by our mutual corporate structure, which channels all of our efforts toward the creation of wealth for our shareholders. We thank you for entrusting your assets to Vanguard. Sincerely, /S/JOHN J. BRENNAN John J. Brennan CHAIRMAN AND CHIEF EXECUTIVE OFFICER OCTOBER 10, 2003 -------------------------------------------------------------------------------- YOUR FUND'S PERFORMANCE AT A GLANCE SEPTEMBER 30, 2002-SEPTEMBER 30, 2003 DISTRIBUTIONS PER SHARE ----------------------------------------------- STARTING ENDING INCOME CAPITAL SHARE PRICE SHARE PRICE DIVIDENDS GAINS -------------------------------------------------------------------------------- Morgan Growth Fund Investor Shares $10.49 $13.34 $0.04 $0.00 Admiral Shares 32.58 41.40 0.18 0.00 -------------------------------------------------------------------------------- 5 FUND PROFILE AS OF 9/30/2003 This Profile provides a snapshot of the fund's characteristics, compared where indicated with both an appropriate market index and a broad market index. Key terms are defined on page 7. MORGAN GROWTH FUND ------------------------------------------------------------------------- PORTFOLIO CHARACTERISTICS COMPARATIVE BROAD FUND INDEX* INDEX** ------------------------------------------------------------------------- Number of Stocks 304 1,894 5,288 Median Market Cap $11.6B $41.2B $26.2B Price/Earnings Ratio 25.3x 27.8x 21.5x Price/Book Ratio 3.5x 4.2x 2.7x Yield 1.0% 1.6% Investor Shares 0.2% Admiral Shares 0.4% Return on Equity 19.1% 23.2% 19.9% Earnings Growth Rate 13.1% 10.6% 7.7% Foreign Holdings 6.3% 0.0% 0.8% Turnover Rate 91% -- -- Expense Ratio -- -- Investor Shares 0.50% Admiral Shares 0.36% Cash Investments 2% -- -- ------------------------------------------------------------------------- ------------------------------------------------------- TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) Microsoft Corp. 2.7% (software) American International Group, Inc. 1.6 (insurance) Dell Inc. 1.5 (computer hardware) Cisco Systems, Inc. 1.5 (computer hardware) Pfizer Inc. 1.4 (pharmaceuticals) International Business Machines Corp. 1.2 (computer hardware) AstraZeneca Group PLC ADR 1.2 (pharmaceuticals) First Data Corp. 1.1 (financial services) Forest Laboratories, Inc. 1.1 (pharmaceuticals) Intel Corp. 1.1 (electronics) ------------------------------------------------------- Top Ten 14.4% ------------------------------------------------------- ------------------------------------------------------------------------- VOLATILITY MEASURES COMPARATIVE BROAD FUND INDEX* FUND INDEX** ------------------------------------------------------------------------- R-Squared 0.97 1.00 0.96 1.00 BeTA 0.89 1.00 1.14 1.00 ------------------------------------------------------------------------- The "Ten Largest Holdings" excludes any temporary cash investments and equity index products. ------------------------------------------------------------------------- SECTOR DIVERSIFICATION (% OF PORTFOLIO) COMPARATIVE BROAD FUND INDEX* INDEX** ------------------------------------------------------------------------- Auto & Transportation 1% 2% 3% Consumer Discretionary 23 17 16 Consumer Staples 4 8 7 Financial Services 13 11 23 Health Care 21 24 14 Integrated Oils 0 0 3 Other Energy 2 1 2 Materials & Processing 2 2 4 Producer Durables 5 4 4 Technology 22 23 15 Utilities 3 2 7 Other 2 6 2 ------------------------------------------------------------------------- Cash Investments 2% -- -- ------------------------------------------------------------------------- ------------------------------------- INVESTMENT FOCUS STYLE Growth MARKET CAP Large ------------------------------------- VISIT OUR WEBSITE AT VANGUARD.COM FOR REGULARLY UPDATED FUND INFORMATION. *Russell 3000 Growth Index. **Wilshire 5000 Index. 6 GLOSSARY OF INVESTMENT TERMS BETA. A measure of the magnitude of a fund's past share-price fluctuations in relation to the ups and downs of a comparative index and an overall market index. Each index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. However, a fund's beta should be reviewed in conjunction with its R-squared (see definition below). The lower the R-squared, the less correlation there is between the fund and the benchmark, and the less reliable beta is as an indicator of volatility. -------------------------------------------------------------------------------- CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash equivalents"--highly liquid, short-term, interest-bearing securities. This figure does not include cash invested in futures contracts or other equity index products to simulate stock investment. -------------------------------------------------------------------------------- EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the past five years for the stocks now in a fund. -------------------------------------------------------------------------------- EXPENSE RATIO. The percentage of a fund's average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors. -------------------------------------------------------------------------------- FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks or American depositary receipts of companies based outside the United States. -------------------------------------------------------------------------------- MEDIAN MARKET CAP. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it. -------------------------------------------------------------------------------- PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds. -------------------------------------------------------------------------------- PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company's future growth. -------------------------------------------------------------------------------- R-SQUARED. A measure of how much of a fund's past returns can be explained by the returns from the market in general, as measured by a comparative index or an overall market index. If a fund's total returns were precisely synchronized with an index's returns, its R-squared would be 1.00. If the fund's returns bore no relationship to the index's returns, its R-squared would be 0. -------------------------------------------------------------------------------- RETURN ON EQUITY. The annual average rate of return generated by a company during the past five years for each dollar of shareholder's equity (net income divided by shareholder's equity). For a fund, the weighted average return on equity for the companies whose stocks it holds. -------------------------------------------------------------------------------- TURNOVER RATE. An indication of the fund's trading activity. Funds with high turnover rates incur higher transaction costs and are more likely to distribute capital gains (which are taxable to investors). -------------------------------------------------------------------------------- YIELD. A snapshot of a fund's income from interest and dividends. The yield, expressed as a percentage of the fund's net asset value, is based on income earned over the past 30 days and is annualized, or projected forward for the coming year. The index yield is based on the current annualized rate of dividends paid on stocks in the index. -------------------------------------------------------------------------------- 7 PERFORMANCE SUMMARY All of the returns in this report represent past performance, which cannot be used to predict future returns that may be achieved by the fund. Note, too, that both share price and return can fluctuate widely. An investor's shares, when redeemed, could be worth more or less than their original cost. The returns shown do not reflect taxes that a shareholder would pay on fund distributions or on the redemption of fund shares. MORGAN GROWTH FUND -------------------------------------------------------------------------------- CUMULATIVE PERFORMANCE SEPTEMBER 30, 1993-SEPTEMBER 30, 2003 MORGAN GROWTH AVERAGE FUND INVESTOR WILSHIRE 5000 RUSSELL 3000 MULTI-CAP SHARES INDEX GROWTH INDEX GROWTH FUND* 199309 10000 10000 10000 10000 199312 10179 10182 10376 10170 199403 9767 9802 9922 9805 199406 9459 9726 9774 9324 199409 10092 10254 10541 10011 199412 10009 10175 10605 9913 199503 10830 11094 11572 10627 199506 12107 12130 12711 11784 199509 13349 13238 13894 13080 199512 13611 13884 14483 13249 199603 14454 14664 15266 13912 199606 15275 15310 16228 14772 199609 16037 15743 16738 15237 199612 16782 16829 17652 15678 199703 16620 16938 17557 14903 199706 19289 19799 20856 17290 199709 21991 21730 22613 19659 199712 21953 22095 22725 19132 199803 24845 25025 26096 21624 199806 25508 25513 27029 22105 199809 21323 22444 24256 18938 199812 26840 27272 30682 24412 199903 28036 28301 32449 25646 199906 30673 30510 33942 27537 199909 29242 28492 32665 26869 199912 35993 33697 41061 37190 200003 38520 34983 44056 42349 200006 37145 33414 42719 40154 200009 36497 33470 40462 41225 200012 31490 30026 31856 33073 200103 27029 26320 25325 25316 200106 29712 28287 27637 27417 200109 23514 23789 22105 20551 200112 27206 26731 25604 24474 200203 26704 26988 24953 23476 200206 22892 23585 20345 19477 200209 19508 19620 17193 16362 200212 20808 21155 18426 17151 200303 20529 20502 18196 17055 200306 23944 23885 20912 19896 200309 24896 24772 21825 21050 -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2003 ------------------------------------ FINAL VALUE ONE FIVE TEN OF A $10,000 YEAR YEARS YEARS INVESTMENT -------------------------------------------------------------------------------- Morgan Growth Fund Investor Shares 27.62% 3.15% 9.55% $24,896 Wilshire 5000 Index 26.25 1.99 9.50 24,772 Russell 3000 Growth Index 26.94 -2.09 8.12 21,825 Average Multi-Cap Growth Fund* 28.65 2.14 7.73 21,050 -------------------------------------------------------------------------------- FINAL VALUE ONE SINCE OF A $250,000 YEAR INCEPTION** INVESTMENT -------------------------------------------------------------------------------- Morgan Growth Fund Admiral Shares 27.73% -7.19% $209,317 Wilshire 5000 Index 26.25 -5.71 217,360 Russell 3000 Growth Index 26.94 -10.19 193,544 -------------------------------------------------------------------------------- ------------------------------------------------------------------- FISCAL-YEAR TOTAL RETURNS (%) SEPTEMBER 30, 1993-SEPTEMBER 30, 2003 MORGAN GROWTH RUSSELL FUND INVESTOR 3000 GROWTH SHARES INDEX 1994 0.9 5.4 1995 32.3 31.8 1996 20.1 20.5 1997 37.1 35.1 1998 -3.0 7.3 1999 37.1 34.7 2000 24.8 23.9 2001 -35.6 -45.4 2002 -17.0 -22.2 2003 27.6 26.9 ------------------------------------------------------------------- *Derived from data provided by Lipper Inc. **May 14, 2001. NOTE: See Financial Highlights tables on pages 19 and 20 for dividend and capital gains information. 8 YOUR FUND'S AFTER-TAX RETURNS This table presents returns for your fund both before and after taxes. The after-tax returns are shown in two ways: (1) assuming that an investor owned the fund during the entire period and paid taxes on the fund's distributions, and (2) assuming that an investor paid taxes on the fund's distributions and sold all shares at the end of each period. Calculations are based on the highest individual federal income tax and capital gains tax rates in effect at the times of the distributions and the hypothetical sales. State and local taxes were not considered. After-tax returns reflect the reduced tax rates on ordinary income and short-term capital gains that became effective as of January 1, 2003, and on long-term capital gains realized on or after May 6, 2003. However, they do not reflect the reduced rates on "qualified dividend income." The table shows returns for Investor Shares only; returns for other share classes will differ. Please note that your actual after-tax returns will depend on your tax situation and may differ from those shown. Also note that if you own the fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, this information does not apply to you. Such accounts are not subject to current taxes. Finally, keep in mind that a fund's performance--whether before or after taxes--does not indicate how it will perform in the future. -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED SEPTEMBER 30, 2003 ONE YEAR FIVE YEARS TEN YEARS ---------------------------------------- MORGAN GROWTH FUND INVESTOR SHARES Returns Before Taxes 27.62% 3.15% 9.55% Returns After Taxes on Distributions 27.45 1.21 6.91 Returns After Taxes on Distributions and Sale of Fund Shares 17.92 2.11 7.12 -------------------------------------------------------------------------------- 9 ABOUT YOUR FUND'S EXPENSES All mutual funds have operating expenses. These expenses include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund's gross income, directly reduce the investment return of the fund. A fund's expenses are expressed as a percentage of its net assets. This figure is known as the expense ratio. A HYPOTHETICAL EXAMPLE We believe it is important for you to understand the impact of costs on your investment. The following example illustrates the costs that you would incur over a 12-month period if you invested $10,000 in the fund, using the fund's actual return and operating expenses for the fiscal year ended September 30, 2003. The cost in dollars is calculated by applying the expense ratio to the average balance in the hypothetical account. For comparative purposes, we also list the average expense ratio for the fund's peer group, which is derived from data provided by Lipper Inc. -------------------------------------------------------------------------------- COST OF $10,000 FUND PEER GROUP* INVESTMENT IN FUND EXPENSE RATIO EXPENSE RATIO -------------------------------------------------------------------------------- MORGAN GROWTH FUND Investor Shares $57 0.50% 1.76% Admiral Shares 41 0.36 -- -------------------------------------------------------------------------------- *Average Multi-Cap Growth Fund. The fund does not charge transaction fees; these results apply whether or not you redeemed your investment at the end of the given period. Your actual costs may have been higher or lower, depending on the amount of your investment and your holding period. Peer-group ratio captures data through year-end 2002. You can find more information about the fund's expenses, including annual expense ratios for the past five years, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to the fund's prospectus. The prospectus presents hypothetical shareholder costs over various time periods based upon a $10,000 investment and a return of 5% a year. This standardized example, which appears in all mutual fund prospectuses, may be useful to you in comparing the costs of investing in different funds. 10 FINANCIAL STATEMENTS STATEMENT OF NET ASSETS This Statement provides a detailed list of the fund's holdings, including each security's market value on the last day of the reporting period. Securities are grouped and subtotaled by asset type (common stocks, bonds, etc.) and by industry sector. Other assets are added to, and liabilities are subtracted from, the value of Total Investments to calculate the fund's Net Assets. Finally, Net Assets are divided by the outstanding shares of the fund to arrive at its share price, or Net Asset Value (NAV) Per Share. At the end of the Statement of Net Assets, you will find a table displaying the composition of the fund's net assets. Because all income and any realized gains must be distributed to shareholders each year, the bulk of net assets consists of Paid-in Capital (money invested by shareholders). The amounts shown for Undistributed Net Investment Income and Accumulated Net Realized Gains usually approximate the sums the fund had available to distribute to shareholders as income dividends or capital gains as of the statement date, but may differ because certain investments or transactions may be treated differently for financial statement and tax purposes. Any Accumulated Net Realized Losses, and any cumulative excess of distributions over net income or net realized gains, will appear as negative balances. Unrealized Appreciation (Depreciation) is the difference between the market value of the fund's investments and their cost, and reflects the gains (losses) that would be realized if the fund were to sell all of its investments at their statement-date values. -------------------------------------------------------------------------------- MARKET VALUE* MORGAN GROWTH FUND SHARES (000) -------------------------------------------------------------------------------- COMMON STOCKS (92.9%)(1) -------------------------------------------------------------------------------- AUTO & TRANSPORTATION (0.8%) FedEx Corp. 120,500 $ 7,764 United Parcel Service, Inc. 112,100 7,152 * JetBlue Airways Corp. 100,300 6,115 Southwest Airlines Co. 247,500 4,381 * Ryanair Holdings PLC ADR 91,600 3,710 Harley-Davidson, Inc. 3,700 178 ------------- $ 29,300 ------------- CONSUMER DISCRETIONARY (22.3%) ADVERTISING AGENCIES (0.5%) Omnicom Group Inc. 169,300 12,164 * Lamar Advertising Co. Class A 210,000 6,161 CABLE TELEVISION SERVICES (1.2%) * Liberty Media Corp. 3,055,600 30,464 * EchoStar Communications Corp. Class A 311,200 11,909 CASINOS & GAMBLING (1.4%) International Game Technology 1,187,000 33,414 Station Casinos, Inc. 186,200 5,698 GTECH Holdings Corp. 119,700 5,129 Harrah's Entertainment, Inc. 97,800 4,118 Mandalay Resort Group 69,100 2,737 COMMERCIAL INFORMATION SERVICES (0.2%) * AOL Time Warner Inc. 611,300 9,237 CONSUMER ELECTRONICS (1.9%) * Yahoo! Inc. 843,200 29,832 * Electronic Arts Inc. 304,900 28,120 * Excel PLC 600,000 6,604 * VeriSign, Inc. 328,800 4,429 CONSUMER PRODUCTS (0.2%) Gillette Co. 140,900 4,506 Alberto-Culver Co. Class B 27,300 1,606 COSMETICS (0.1%) Estee Lauder Cos. Class A 97,900 3,338 Avon Products, Inc. 3,300 213 EDUCATION--SERVICES (1.2%) * Apollo Group, Inc. Class A 410,000 27,072 * University of Phoenix 88,000 5,859 * DeVry, Inc. 193,200 4,571 * Career Education Corp. 91,700 4,154 ENTERTAINMENT (0.8%) Viacom Inc. Class B 591,800 22,665 * Fox Entertainment Group, Inc. Class A 319,300 8,937 11 -------------------------------------------------------------------------------- MARKET VALUE* MORGAN GROWTH FUND SHARES (000) -------------------------------------------------------------------------------- HOUSEHOLD EQUIPMENT & PRODUCTS (0.2%) Black & Decker Corp. 208,800 $ 8,467 JEWELRY, WATCHES & GEMS (0.1%) Tiffany & Co. 109,500 4,088 LEISURE TIME (0.1%) Callaway Golf Co. 347,900 4,965 MISCELLANEOUS BUSINESS & CONSUMER DISCRETIONARY (0.3%) E.W. Scripps Co. Class A 145,000 12,340 PUBLISHING--MISCELLANEOUS (0.1%) Meredith Corp. 83,400 3,851 John Wiley & Sons Class A 61,700 1,604 Publishing--Newspapers Tribune Co. 39,100 1,795 Radio & Television Broadcasters (1.2%) * Univision Communications Inc. 650,000 20,755 Clear Channel Communications, Inc. 407,254 15,598 * General Motors Corp. Class H 377,400 5,401 * Citadel Broadcasting Corp. 203,200 4,015 RENT LEASE SERVICES--CONSUMER (0.4%) * Rent-A-Center, Inc. 464,050 14,989 RESTAURANTS (0.7%) Outback Steakhouse 321,400 12,171 CBRL Group, Inc. 300,600 10,665 Ruby Tuesday, Inc. 124,500 3,002 RETAIL (8.2%) Wal-Mart Stores, Inc. 626,800 35,007 * Staples, Inc. 1,111,900 26,408 * Advance Auto Parts, Inc. 352,800 25,014 The Gap, Inc. 1,387,200 23,749 * Amazon.com, Inc. 452,700 21,893 Lowe's Cos., Inc. 390,800 20,283 Home Depot, Inc. 526,000 16,753 * Best Buy Co., Inc. 338,900 16,105 Dollar General Corp. 626,700 12,534 * Abercrombie & Fitch Co. 424,700 11,768 * Bed Bath & Beyond, Inc. 305,000 11,645 * Fisher Scientific International Inc. 276,200 10,962 * Chico's FAS, Inc. 284,600 8,720 * Williams-Sonoma, Inc. 297,700 8,032 CDW Corp. 125,000 7,218 Target Corp. 188,800 7,104 Blockbuster Inc. Class A 336,400 7,064 * BJ's Wholesale Club, Inc. 350,000 6,779 * Barnes & Noble, Inc. 222,000 5,641 Foot Locker, Inc. 300,300 4,865 * CarMax, Inc. 117,300 3,831 * Costco Wholesale Corp. 99,600 3,095 * Kohl's Corp. 53,200 2,846 * AutoZone Inc. 24,100 2,158 * Dollar Tree Stores, Inc. 58,600 1,963 SERVICES--COMMERCIAL (2.5%) * eBay Inc. 671,000 35,905 * InterActiveCorp 993,750 32,843 * Cendant Corp. 612,900 11,455 * Getty Images, Inc. 274,700 9,658 * Iron Mountain, Inc. 95,400 3,425 * Allied Waste Industries, Inc. 129,300 1,396 TEXTILES & Apparel Manufacturing (0.4%) * Coach, Inc. 116,200 6,345 * Burberry Group PLC 812,157 4,392 * Columbia Sportswear Co. 65,900 3,476 TOYS (0.6%) Mattel, Inc. 820,100 15,549 * Marvel Enterprises Inc. 274,400 6,105 ------------- $ 828,629 ------------- CONSUMER STAPLES (4.1%) PepsiCo, Inc. 820,500 37,604 The Procter & Gamble Co. 268,300 24,904 Hershey Foods Corp. 191,000 13,882 Coca-Cola Enterprises, Inc. 607,600 11,581 The Coca-Cola Co. 226,700 9,739 * Constellation Brands, Inc. Class A 302,400 9,220 Anheuser-Busch Cos., Inc. 178,800 8,822 * Metro AG 240,000 8,737 The Clorox Co. 147,700 6,775 Walgreen Co. 203,800 6,244 Colgate-Palmolive Co. 111,000 6,204 Sysco Corp. 146,100 4,779 * Dean Foods Co. 81,650 2,534 Sensient Technologies Corp. 81,500 1,712 ------------- $ 152,737 ------------- FINANCIAL SERVICES (12.3%) American International Group, Inc. 1,001,235 57,771 First Data Corp. 1,049,800 41,950 ACE Ltd. 848,700 28,075 Ambac Financial Group, Inc. 373,100 23,878 Fannie Mae 303,100 21,278 12 -------------------------------------------------------------------------------- MARKET VALUE* MORGAN GROWTH FUND SHARES (000) -------------------------------------------------------------------------------- Citigroup, Inc. 426,587 $ 19,414 Moody's Corp. 338,800 18,624 Doral Financial Corp. 396,200 18,621 * Affiliated Computer Services, Inc. Class A 380,800 18,541 H & R Block, Inc. 407,300 17,575 * SunGard Data Systems, Inc. 525,300 13,821 St. Paul Cos., Inc. 370,800 13,731 * Fiserv, Inc. 354,500 12,844 * Ameritrade Holding Corp. 1,070,900 12,048 First Tennessee National Corp. 281,700 11,961 American Express Co. 256,500 11,558 Synovus Financial Corp. 438,800 10,966 Federated Investors, Inc. 373,200 10,338 Countrywide Financial Corp. 117,500 9,198 New York Community Bancorp, Inc. 281,600 8,873 Everest Re Group, Ltd. 115,000 8,643 Commerce Bancorp, Inc. 171,900 8,236 Bank One Corp. 186,400 7,204 Fidelity National Financial, Inc. 234,702 7,055 Capital One Financial Corp. 87,700 5,002 Fifth Third Bancorp 88,900 4,931 SLM Corp. 107,700 4,196 Automatic Data Processing, Inc. 109,100 3,911 Progressive Corp. of Ohio 53,900 3,725 * Markel Corp. 13,800 3,685 Friedman, Billings, Ramsey Group, Inc. 206,700 3,566 Legg Mason Inc. 43,300 3,126 Freddie Mac 52,500 2,748 MBNA Corp. 92,800 2,116 * CheckFree Corp. 94,400 1,888 Franklin Resources Corp. 34,500 1,525 RenaissanceRe Holdings Ltd. 27,700 1,264 * Montpelier Re Holdings Ltd. 41,400 1,248 BlackRock, Inc. 22,900 1,122 * BOK Financial Corp. 26,700 1,006 Equifax, Inc. 30,400 677 * WellChoice Inc. 17,800 536 AFLAC Inc. 16,000 517 State Street Corp. 4,800 216 Cross Timbers Royalty Trust 962 20 ------------- $ 459,228 ------------- HEALTH CARE (20.9%) BIOTECH RESEARCH & Production (2.5%) * Amgen, Inc. 275,200 17,770 * Genzyme Corp.-General Division 375,600 17,372 * Chiron Corp. 250,000 12,923 * Cephalon, Inc. 268,500 12,330 * Celgene Corp. 242,600 10,512 Serono SA ADR 616,200 10,093 * Neurocrine Biosciences, Inc. 95,000 4,704 * Genentech, Inc. 50,400 4,039 * Biogen, Inc. 97,700 3,735 DRUGS & PHARMACEUTICALS (9.9%) Pfizer Inc. 1,707,140 51,863 AstraZeneca Group PLC ADR 1,023,300 44,411 * Forest Laboratories, Inc. 775,700 39,910 Johnson & Johnson 648,900 32,134 Eli Lilly & Co. 510,900 30,347 Abbott Laboratories 643,900 27,398 Aventis SA ADR 516,000 26,987 Merck & Co., Inc. 509,000 25,766 * MedImmune Inc. 575,500 18,997 Cardinal Health, Inc. 278,800 16,279 * Gilead Sciences, Inc. 174,500 9,760 Shionogi & Co. Ltd. 550,000 9,551 AmerisourceBergen Corp. 105,800 5,718 * SICOR, Inc. 246,600 4,754 Mylan Laboratories, Inc. 117,300 4,534 * Pharmaceutical Resources, Inc. 63,500 4,332 * Amylin Pharmaceuticals, Inc. 132,900 3,753 * Watson Pharmaceuticals, Inc. 90,000 3,752 Medicis Pharmaceutical Corp. 62,700 3,674 ICN Pharmaceuticals, Inc. 195,100 3,348 ELECTRONICS--MEDICAL SYSTEMS (0.6%) Medtronic, Inc. 254,300 11,932 Amersham PLC 1,016,233 8,746 * Varian Medical Systems, Inc. 14,500 833 HEALTH & PERSONAL CARE (1.4%) McKesson Corp. 984,600 32,777 * Anthem, Inc. 88,600 6,320 * Lincare Holdings, Inc. 96,300 3,529 Omnicare, Inc. 70,900 2,557 * Express Scripts Inc. 32,200 1,969 * Medco Health Solutions, Inc. 57,400 1,488 Health Care Facilities (0.1%) * Quest Diagnostics, Inc. 51,100 3,099 HCA Inc. 66,200 2,440 HEALTH CARE MANAGEMENT SERVICES (3.6%) * WellPoint Health Networks Inc. Class A 439,300 33,861 UnitedHealth Group Inc. 570,300 28,697 * Caremark Rx, Inc. 1,121,800 25,353 * AdvancePCS 310,112 14,132 * WebMD Corp. 1,312,188 11,705 13 -------------------------------------------------------------------------------- MARKET VALUE* MORGAN GROWTH FUND SHARES (000) -------------------------------------------------------------------------------- * Universal Health Services Class B 168,600 $ 8,337 * Health Net Inc. 244,700 7,750 * Mid Atlantic Medical Services, Inc. 106,800 5,493 MEDICAL & DENTAL INSTRUMENTS & SUPPLIES (2.4%) Guidant Corp. 305,600 14,317 * Edwards Lifesciences Corp. 425,000 11,509 Beckman Coulter, Inc. 234,100 10,661 * STERIS Corp. 458,500 10,555 Biomet, Inc. 306,100 10,288 C.R. Bard, Inc. 105,000 7,455 * Henry Schein, Inc. 126,600 7,178 * Zimmer Holdings, Inc. 108,100 5,956 Becton, Dickinson & Co. 154,400 5,577 DENTSPLY International Inc. 79,000 3,542 * Boston Scientific Corp. 36,600 2,335 MEDICAL SERVICES (0.4%) * Coventry Health Care Inc. 268,800 14,177 ------------- $ 775,314 ------------- OTHER ENERGY (1.9%) Pogo Producing Co. 310,300 14,050 Chesapeake Energy Corp. 1,239,700 13,364 Burlington Resources, Inc. 225,700 10,879 Schlumberger Ltd. 127,200 6,156 * FMC Technologies Inc. 252,100 5,400 EnCana Corp. 130,200 4,737 XTO Energy, Inc. 218,766 4,592 * Varco International, Inc. 226,700 3,833 EOG Resources, Inc. 90,000 3,757 Anadarko Petroleum Corp. 66,300 2,769 * National-Oilwell, Inc. 107,400 1,948 ------------- $ 71,485 ------------- MATERIALS & PROCESSING (1.4%) Freeport-McMoRan Copper & Gold, Inc. Class B 469,900 15,554 Sigma-Aldrich Corp. 202,700 10,528 * Pactiv Corp. 511,300 10,369 * Energizer Holdings, Inc. 254,900 9,373 Ball Corp. 74,800 4,039 Newmont Mining Corp. Holding Co. 86,000 3,362 ------------- $ 53,225 ------------- PRODUCER DURABLES (4.4%) * Applied Materials, Inc. 1,686,600 30,595 * Lexmark International, Inc. 256,000 16,131 D. R. Horton, Inc. 404,100 13,214 Centex Corp. 167,100 13,014 * Thermo Electron Corp. 587,100 12,740 * American Tower Corp. Class A 1,129,000 11,459 * Novellus Systems, Inc. 320,000 10,800 Lennar Corp. Class A 110,600 8,604 Rockwell Collins, Inc. 282,707 7,138 * Crown Castle International Corp. 710,000 6,681 * ASML Holding (New York) 400,000 5,252 * Polycom, Inc. 298,700 4,961 Illinois Tool Works, Inc. 60,400 4,002 Danaher Corp. 54,100 3,996 * United Defense Industries Inc. 139,800 3,969 * Xerox Corp. 384,400 3,944 * Alliant Techsystems, Inc. 72,500 3,484 The Boeing Co. 73,200 2,513 * LAM Research Corp. 27,700 614 Lennar Corp. Class B 3,100 232 ------------- $ 163,343 ------------- TECHNOLOGY (21.4%) COMMUNICATIONS TECHNOLOGY (4.0%) * Cisco Systems, Inc. 2,805,200 54,814 QUALCOMM Inc. 883,600 36,793 * UTStarcom, Inc. 373,500 11,881 * L-3 Communications Holdings, Inc. 232,200 10,043 * Network Associates, Inc. 575,000 7,912 Harris Corp. 183,100 6,553 * PanAmSat Corp. 383,300 5,550 * Juniper Networks, Inc. 311,100 4,642 Scientific-Atlanta, Inc. 119,200 3,713 * Corning, Inc. 215,400 2,029 * CIENA Corp. 61,500 363 COMPUTER SERVICES SOFTWARE & SYSTEMS (5.6%) Microsoft Corp. 3,596,400 99,944 * Symantec Corp. 413,400 26,052 * Citrix Systems, Inc. 956,200 21,113 * QLogic Corp. 413,000 19,415 * Intuit, Inc. 296,200 14,289 * Oracle Corp. 863,400 9,687 * PeopleSoft, Inc. 336,726 6,125 * Veritas Software Corp. 154,200 4,842 * Computer Sciences Corp. 86,800 3,261 * Red Hat, Inc. 309,300 3,124 Adobe Systems, Inc. 53,000 2,081 COMPUTER TECHNOLOGY (4.8%) * Dell Inc. 1,679,500 56,079 International Business Machines Corp. 516,400 45,614 * SanDisk Corp. 424,000 27,026 * Western Digital Corp. 1,007,700 12,989 * Storage Technology Corp. 508,000 12,263 * EMC Corp. 477,600 6,032 * Emulex Corp. 144,500 3,680 * Unisys Corp. 270,200 3,656 14 -------------------------------------------------------------------------------- MARKET VALUE* MORGAN GROWTH FUND SHARES (000) -------------------------------------------------------------------------------- * NVIDIA Corp. 183,600 $ 2,921 * Sun Microsystems, Inc. 698,000 2,310 * Zebra Technologies Corp. Class A 9,100 469 ELECTRONICS (1.1%) Samsung Electronics Co., Ltd. GDR 196,100 33,407 Sony Corp. ADR 252,900 8,801 ELECTRONICS--SEMICONDUCTORS/COMPONENTS (5.5%) Intel Corp. 1,429,700 39,331 * Analog Devices, Inc. 827,100 31,446 * Altera Corp. 1,352,000 25,553 * Taiwan Semiconductor Manufacturing Co., Ltd. 12,585,800 24,792 * Broadcom Corp. 613,400 16,329 * National Semiconductor Corp. 501,200 16,184 Texas Instruments, Inc. 378,000 8,618 PerkinElmer, Inc. 517,400 7,921 * Amkor Technology, Inc. 515,100 7,320 * Jabil Circuit, Inc. 277,100 7,218 * PMC Sierra Inc. 407,900 5,381 * OmniVision Technologies, Inc. 95,800 4,047 * MEMC Electronic Materials, Inc. 367,400 4,008 * Marvell Technology Group Ltd. 99,200 3,745 * Xilinx, Inc. 123,800 3,530 * LSI Logic Corp. 326,100 2,932 Microchip Technology, Inc. 44,500 1,065 SCIENTIFIC EQUIPMENT & SUPPLIES (0.4%) Applera Corp.-Applied Biosystems Group 617,000 13,765 ------------- $ 792,658 ------------- UTILITIES (2.9%) * Comcast Corp. Special Class A 737,800 21,795 * Nextel Communications, Inc. 1,062,800 20,927 * Cablevision Systems NY Group Class A 866,570 15,685 * Cox Communications, Inc. Class A 493,900 15,617 Kinder Morgan, Inc. 276,100 14,912 * Comcast Corp. Class A 278,000 8,585 * Sky Perfect Communications Inc. 4,500 5,438 * AT&T Wireless Services Inc. 503,100 4,115 * Sprint PCS 373,000 2,137 ------------- $ 109,211 ------------- OTHER (0.5%) 3M Co. 177,000 12,225 * Berkshire Hathaway Inc. Class B 2,190 5,466 * SPX Corp. 43,200 1,956 ------------- $ 19,647 ------------- -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $3,011,138) $ 3,454,777 -------------------------------------------------------------------------------- PREFERRED STOCK (0.8%) -------------------------------------------------------------------------------- The News Corp. Ltd. ADR Pfd. (Cost $28,512) 1,020,000 27,836 -------------------------------------------------------------------------------- TEMPORARY INVESTMENTS (8.1%)(1) -------------------------------------------------------------------------------- Vanguard Index Participation Equity Receipts- Total Stock Market 194,400 18,565 FACE AMOUNT (000) -------------- FEDERAL NATIONAL MORTGAGE ASSN. (2)0.98%, 10/1/2003 9,000 9,000 (2)1.04%, 10/30/2003 2,000 1,998 REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 1.09%, 10/1/2003 205,532 205,532 1.09%, 10/1/2003--Note G 67,791 67,791 -------------------------------------------------------------------------------- TOTAL TEMPORARY INVESTMENTS (Cost $304,939) 302,886 -------------------------------------------------------------------------------- TOTAL INVESTMENTS (101.8%) (Cost $3,344,589) 3,785,499 -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-1.8%) -------------------------------------------------------------------------------- Other Assets--Note C 58,273 Security Lending Collateral Payable to Brokers--Note G (67,791) Other Liabilities (56,431) ------------- (65,949) ------------- -------------------------------------------------------------------------------- NET ASSETS (100%) $ 3,719,550 ================================================================================ *See Note A in Notes to Financial Statements. *Non-income-producing security. (1) The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts and exchange-traded funds. After giving effect to these investments, the fund's effective common stock and temporary cash investment positions represent 97.4% and 3.6%, respectively, of net assets. See Note E in Notes to Financial Statements. (2) Securities with an aggregate value of $10,998,000 have been segregated as initial margin for open futures contracts. ADR--American Depositary Receipt. GDR--Global Depository Receipt. 15 ------------------------------------------------------------------- AMOUNT MORGAN GROWTH FUND (000) ------------------------------------------------------------------- AT SEPTEMBER 30, 2003, NET ASSETS CONSISTED OF: ------------------------------------------------------------------- Paid-in Capital $ 4,416,578 Undistributed Net Investment Income 4,514 Accumulated Net Realized Losses (1,139,037) Unrealized Appreciation (Depreciation) Investment Securities 440,910 Futures Contracts (3,415) ------------------------------------------------------------------- NET ASSETS $ 3,719,550 ------------------------------------------------------------------- Investor Shares--Net Assets Applicable to 249,575,802 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $ 3,329,292 ------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- INVESTOR SHARES $ 13.34 =================================================================== Admiral Shares--Net Assets Applicable to 9,425,773 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $ 390,258 ------------------------------------------------------------------- NET ASSET VALUE PER SHARE--- ADMIRAL SHARES $ 41.40 =================================================================== See Note E in Notes to Financial Statements for the tax-basis components of netassets. 16 STATEMENT OF OPERATIONS This Statement shows the types of income earned by the fund during the reporting period, and details the operating expenses charged to each class of its shares. These expenses directly reduce the amount of investment income available to pay to shareholders as income dividends. This Statement also shows any Net Gain (Loss) realized on the sale of investments, and the increase or decrease in the Unrealized Appreciation (Depreciation) of investments during the period. -------------------------------------------------------------------------------- MORGAN GROWTH FUND YEAR ENDED SEPTEMBER 30, 2003 (000) -------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends* $ 22,116 Interest 2,114 Security Lending 252 -------------------------------------------------------------------------------- Total Income 24,482 -------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B Basic Fee 3,612 Performance Adjustment (34) The Vanguard Group--Note C Management and Administrative Investor Shares 10,612 Admiral Shares 700 Marketing and Distribution Investor Shares 355 Admiral Shares 31 Custodian Fees 66 Auditing Fees 16 Shareholders' Reports and Proxies Investor Shares 199 Admiral Shares 2 Trustees' Fees and Expenses 5 -------------------------------------------------------------------------------- Total Expenses 15,564 Expenses Paid Indirectly--Note D (1,298) -------------------------------------------------------------------------------- Net Expenses 14,266 -------------------------------------------------------------------------------- NET INVESTMENT INCOME 10,216 -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold* 33,562 Futures Contracts 18,045 -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) 51,607 -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities 705,695 Futures Contracts 700 -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 706,395 -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 768,218 ================================================================================ * Dividend income and realized net gain (loss) from affiliated companies of the fund were $278,000 and $472,000, respectively. 17 STATEMENT OF CHANGES IN NET ASSETS This Statement shows how the fund's total net assets changed during the two most recent reporting periods. The Operations section summarizes information detailed in the Statement of Operations. The amounts shown as Distributions to shareholders from the fund's net income and capital gains may not match the amounts shown in the Operations section, because distributions are determined on a tax basis and may be made in a period different from the one in which the income was earned or the gains were realized on the financial statements. The Capital Share Transactions section shows the net amount shareholders invested in or redeemed from the fund. Distributions and Capital Share Transactions are shown separately for each class of shares. -------------------------------------------------------------------------------- MORGAN GROWTH FUND ------------------------------ YEAR ENDED SEPTEMBER 30, ------------------------------ 2003 2002 (000) (000) -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 10,216 $ 12,926 Realized Net Gain (Loss) 51,607 (450,112) Change in Unrealized Appreciation (Depreciation) 706,395 (92,789) -------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 768,218 (529,975) -------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income Investor Shares (9,196) (17,878) Admiral Shares (1,363) (1,945) REALIZED CAPITAL GAIN Investor Shares -- -- Admiral Shares -- -- -------------------------------------------------------------------------------- Total Distributions (10,559) (19,823) -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS--NOTE H Investor Shares 274,295 (203,031) Admiral Shares 72,897 34,676 -------------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 347,192 (168,355) -------------------------------------------------------------------------------- Total Increase (Decrease) 1,104,851 (718,153) -------------------------------------------------------------------------------- NET ASSETS Beginning of Period 2,614,699 3,332,852 -------------------------------------------------------------------------------- End of Period $ 3,719,550 $ 2,614,699 ================================================================================ 18 FINANCIAL HIGHLIGHTS This table summarizes the fund's investment results and distributions to shareholders on a per-share basis for each class of shares. It also presents the Total Return and shows net investment income and expenses as percentages of average net assets. These data will help you assess: the variability of the fund's net income and total returns from year to year; the relative contributions of net income and capital gains to the fund's total return; how much it costs to operate the fund; and the extent to which the fund tends to distribute capital gains. The table also shows the Portfolio Turnover Rate, a measure of trading activity. A turnover rate of 100% means that the average security is held in the fund for one year.
MORGAN GROWTH FUND INVESTOR SHARES -------------------------------------------------------------------------------------------------------------------------- YEAR ENDED JAN. 1, YEAR ENDED SEPTEMBER 30, 2001, TO DECEMBER 31, --------------------- SEPT. 30, --------------------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001* 2000 1999 1998 -------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $ 10.49 $ 12.71 $ 17.08 $ 22.92 $ 19.72 $ 17.54 -------------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .04 .049 .06 .16 .14 .18 Net Realized and Unrealized Gain (Loss) on Investments 2.85 (2.194) (4.38) (2.90) 6.29 3.61 -------------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 2.89 (2.145) (4.32) (2.74) 6.43 3.79 -------------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.04) (.075) -- (.15) (.15) (.18) Distributions from Realized Capital Gains -- -- (.05) (2.95) (3.08) (1.43) -------------------------------------------------------------------------------------------------------------------------- Total Distributions (.04) (.075) (.05) (3.10) (3.23) (1.61) -------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 13.34 $ 10.49 $ 12.71 $ 17.08 $ 22.92 $ 19.72 ========================================================================================================================== TOTAL RETURN 27.62% -17.04% -25.33% -12.51% 34.10% 22.26% ========================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $ 3,329 $ 2,369 $ 3,066 $ 4,661 $ 5,066 $ 3,555 Ratio of Total Expenses to Average Net Assets 0.50% 0.48% 0.43%** 0.40% 0.42% 0.44% Ratio of Net Investment Income to Average Net Assets 0.31% 0.37% 0.49%** 0.73% 0.71% 0.96% Portfolio Turnover Rate 91% 104% 53% 94% 65% 81% ========================================================================================================================== * The fund's fiscal year-end changed from December 31 to September 30, effective September 30, 2001. **Annualized.
19 FINANCIAL HIGHLIGHTS (CONTINUED) MORGAN GROWTH FUND ADMIRAL SHARES -------------------------------------------------------------------------------- YEAR ENDED MAY 14* TO SEPTEMBER 30, SEPT. 30, ------------------ ------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001** -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $32.58 $39.44 $50.00 -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .17 .20 .12 Net Realized and Unrealized Gain (Loss) on Investments 8.83 (6.79) (10.68) -------------------------------------------------------------------------------- Total from Investment Operations 9.00 (6.59) (10.56) -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.18) (.27) -- Distributions from Realized Capital Gains -- -- -- -------------------------------------------------------------------------------- Total Distributions (.18) (.27) -- -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 41.40 $ 32.58 $ 39.44 ================================================================================ TOTAL RETURN 27.73% -16.90% -21.12% ================================================================================ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $ 390 $ 246 $ 267 Ratio of Total Expenses to Average Net Assets 0.36% 0.36% 0.36%+ Ratio of Net Investment Income to Average Net Assets 0.45% 0.49% 0.56%+ Portfolio Turnover Rate 91% 104% 53% ================================================================================ *Inception. **The fund's fiscal year-end changed from December 31 to September 30, effective September 30, 2001. +Annualized. SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 20 NOTES TO FINANCIAL STATEMENTS Vanguard Morgan Growth Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. The fund offers two classes of shares, Investor Shares and Admiral Shares. Investor Shares are available to any investor who meets the fund's minimum purchase requirements. Admiral Shares are designed for investors who meet certain administrative, servicing, tenure, and account-size criteria. A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements. 1. SECURITY VALUATION: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund's pricing time but after the close of the securities' primary markets, are valued by methods deemed by the board of trustees to represent fair value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value. 2. FUTURES CONTRACTS: The fund uses S&P 500 and S&P MidCap 400 Index futures contracts to a limited extent, with the objective of maintaining full exposure to the stock market while maintaining liquidity. The fund may purchase or sell futures contracts to achieve a desired level of investment, whether to accommodate portfolio turnover or cash flows from capital share transactions. The primary risks associated with the use of futures contracts are imperfect correlation between changes in market values of stocks held by the fund and the prices of futures contracts, and the possibility of an illiquid market. Futures contracts are valued at their quoted daily settlement prices. The aggregate principal amounts of the contracts are not recorded in the financial statements. Fluctuations in the value of the contracts are recorded in the Statement of Net Assets as an asset (liability) and in the Statement of Operations as unrealized appreciation (depreciation) until the contracts are closed, when they are recorded as realized futures gains (losses). 3. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard Group, transfers uninvested cash balances to a pooled cash account, which is invested in repurchase agreements secured by U.S. government securities. Securities pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. 4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements. 5. DISTRIBUTIONS: Distributions to shareholders are recorded on the ex-dividend date. 6. OTHER: Dividend income is recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. 21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses), shareholder reporting, and proxies. Marketing and distribution expenses are allocated to each class of shares based on a method approved by the board of trustees. Income, other non-class-specific expenses, and gains and losses on investments are allocated to each class of shares based on its relative net assets. B. Wellington Management Company, llp, and Franklin Portfolio Associates, LLC, each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the advisor. The basic fees of each advisor are subject to quarterly adjustments based on performance for the preceding three years relative to the Growth Fund Stock Index, an index of the equity holdings of the largest growth stock mutual funds, for periods prior to September 1, 2002, and their new benchmarks, the Russell 3000 Growth Index for Wellington Management Company, llp, and the Russell Midcap Growth Index for Franklin Portfolio Associates, LLC, beginning September 1, 2002. Both benchmark changes will be fully phased in by September 2005. The Vanguard Group provides investment advisory services to a portion of the fund on an at-cost basis; the fund paid Vanguard advisory fees of $684,000 for the year ended September 30, 2003. For the year ended September 30, 2003, the aggregate investment advisory fee represented an effective annual basic rate of 0.11% of the fund's average net assets before a decrease of $34,000 based on performance. C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At September 30, 2003, the fund had contributed capital of $633,000 to Vanguard (included in Other Assets), representing 0.02% of the fund's net assets and 0.63% of Vanguard's capitalization. The fund's trustees and officers are also directors and officers of Vanguard. D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund's management and administrative expenses. For the year ended September 30, 2003, these arrangements reduced the fund's expenses by $1,298,000 (an annual rate of 0.04% of average net assets). E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. For tax purposes, at September 30, 2003, the fund had $10,110,000 of ordinary income available for distribution. The fund had available realized losses of $1,142,454,000 to offset future net capital gains of $786,337,000 through September 30, 2010, and $356,117,000 through September 30, 2011. At September 30, 2003, net unrealized appreciation of investment securities for tax purposes was $440,910,000, consisting of unrealized gains of $555,882,000 on securities that had risen in value since their purchase and $114,972,000 in unrealized losses on securities that had fallen in value since their purchase. 22 At September 30, 2003, the aggregate settlement value of open futures contracts expiring in December 2003 and the related unrealized depreciation were: -------------------------------------------------------------------------------- (000) ---------------------------------------- AGGREGATE UNREALIZED NUMBER OF SETTLEMENT APPRECIATION FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION) -------------------------------------------------------------------------------- S&P 500 Index 440 $109,351 $(2,487) S&P MidCap 400 Index 166 42,359 (928) -------------------------------------------------------------------------------- Unrealized depreciation on open futures contracts is required to be treated as realized loss for tax purposes. F. During the year ended September 30, 2003, the fund purchased $2,965,290,000 of investment securities and sold $2,722,196,000 of investment securities, other than temporary cash investments. G. The market value of securities on loan to broker/dealers at September 30, 2003, was $66,305,000, for which the fund held cash collateral of $67,791,000. The fund invests cash collateral received in repurchase agreements, and records a liability for the return of the collateral, during the period the securities are on loan. H. Capital share transactions for each class of shares were:
---------------------------------------------------------------------------------------------------------- YEAR ENDED SEPTEMBER 30, ---------------------------------------------------------- 2003 2002 ------------------------- -------------------------- AMOUNT SHARES AMOUNT SHARES (000) (000) (000) (000) ---------------------------------------------------------------------------------------------------------- INVESTOR SHARES Issued $ 584,982 50,131 $ 321,942 24,326 Issued in Lieu of Cash Distributions 8,854 786 17,165 1,185 Redeemed (319,541) (27,088) (542,138) (40,937) ---------------------------------------------------------- Net Increase (Decrease)--Investor Shares 274,295 23,829 (203,031) (15,426) ---------------------------------------------------------- ADMIRAL SHARES Issued 107,923 2,849 82,658 1,961 Issued in Lieu of Cash Distributions 1,265 36 1,823 41 Redeemed (36,291) (1,004) (49,805) (1,234) ---------------------------------------------------------- Net Increase (Decrease)--Admiral Shares 72,897 1,881 34,676 768 ----------------------------------------------------------------------------------------------------------
23 REPORT OF INDEPENDENT AUDITORS To the Shareholders and Trustees of Vanguard Morgan Growth Fund: In our opinion, the accompanying statement of net assets and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Vanguard Morgan Growth Fund (the "Fund") at September 30, 2003, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at September 30, 2003 by correspondence with the custodian and broker, provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP PHILADELPHIA, PENNSYLVANIA OCTOBER 31, 2003 -------------------------------------------------------------------------------- SPECIAL 2003 TAX INFORMATION (UNAUDITED) FOR VANGUARD MORGAN GROWTH FUND This information for the fiscal year ended September 30, 2003, is included pursuant to provisions of the Internal Revenue Code. For corporate shareholders, 100% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction. The fund intends to distribute the maximum amount of qualified dividend income allowable. The amount of qualified dividend income distributed by the fund will be provided to individual shareholders on their 2003 Form 1099-DIV. -------------------------------------------------------------------------------- 24 INVESTING IS FAST, EASY, AND SECURE ON VANGUARD.COM If you're like many Vanguard investors, you believe in planning and taking control of your own investments. Vanguard.com(R) was built for you--and it keeps getting better. research and plan your investments with confidence Use our PLANNING & ADVICE and RESEARCH FUNDS & STOCKS sections to: * Determine what asset allocation might best suit your needs--by taking our Investor Questionnaire. * Find out how much to save for retirement and your children's college education-- by using our planning tools. * Learn how to achieve your goals--by reading our PlainTalk(R) investment guides. * Find your next fund--by using the Compare Funds, Compare Costs, and Narrow Your Fund Choices tools. * Look up fund price, performance history, and distribution information--in a snap. invest and manage accounts with ease LOG ON TO VANGUARD.COM TO: * See what you own (at Vanguard and elsewhere) and how your investments are doing. * Elect to receive online statements, fund reports (like this one), prospectuses, and tax forms. * Analyze your portfolio's holdings and performance. * Open new accounts, buy and sell shares, and exchange money between funds--securely and easily. * Sign up to receive electronic newsletters from Vanguard informing you of news on our funds, products, and services, as well as on investing and the financial markets. Find out what Vanguard.com can do for you. Log on today! 25 CAPITALIZE ON YOUR IRA Are you taking full advantage of your individual retirement account? You really should be. The contribution limits on IRAs were recently raised, making these tax-deferred accounts more powerful options for retirement savers. Here's how you can exploit your IRA--and improve your chances of having the retirement of your dreams. CONTRIBUTE THE MAXIMUM AMOUNT EACH YEAR It may be an obvious point, but if you invest as much in your IRA as the law allows--currently $3,000 per tax year if you are under age 50 and $3,500 if you are age 50 or over--you will increase the odds of meeting your retirement goals. "Max out" every year you can. MAKE IT AUTOMATIC Put your IRA on autopilot by taking advantage of Vanguard's Automatic Investment Plan. Your IRA contributions will be deducted from your bank account on a schedule of your choosing, making retirement investing a healthy habit. CONSIDER COST The owners of low-cost investments keep a larger portion of their gross returns than the owners of high-cost investments. Over the long term, avoiding costlier mutual funds and brokerage commissions could significantly boost your retirement savings. Our low costs are one reason a Vanguard IRA(R) is such a smart choice. REQUEST A DIRECT ROLLOVER WHEN YOU CHANGE JOBS Don't spend your retirement assets before you've retired. When you change jobs, roll your 401(k) or other employer-sponsored retirement plan assets directly into your IRA. If you have questions about your IRA, want to transfer an IRA from another institution to Vanguard, or need help with any other IRA transaction, call our Retirement Resource Center at 1-800-205-6189 or visit Vanguard.com. You can open or fund your IRA on our website and have a confirmation in your hand within minutes. 26 THE VANGUARD(R) FAMILY OF FUNDS STOCK FUNDS 500 Index Fund Calvert Social Index Fund Capital Opportunity Fund Capital Value Fund Convertible Securities Fund Developed Markets Index Fund Dividend Growth Fund Emerging Markets Stock Index Fund Energy Fund Equity Income Fund European Stock Index Fund Explorer(TM) Fund Extended Market Index Fund Global Equity Fund Growth and Income Fund Growth Equity Fund Growth Index Fund Health Care Fund Institutional Developed Markets Index Fund Institutional Index Fund Institutional Total Stock Market Index Fund International Explorer(TM) Fund International Growth Fund International Value Fund Mid-Cap Growth Fund Mid-Cap Index Fund Morgan(TM) Growth Fund Pacific Stock Index Fund Precious Metals Fund PRIMECAP Fund REIT Index Fund Selected Value Fund Small-Cap Growth Index Fund Small-Cap Index Fund Small-Cap Value Index Fund Strategic Equity Fund Tax-Managed Capital Appreciation Fund Tax-Managed Growth and Income Fund Tax-Managed International Fund Tax-Managed Small-Cap Fund Total International Stock Index Fund Total Stock Market Index Fund U.S. Growth Fund U.S. Value Fund Value Index Fund Windsor(TM) Fund Windsor(TM) II Fund BALANCED FUNDS Asset Allocation Fund Balanced Index Fund LifeStrategy(R) Conservative Growth Fund LifeStrategy(R) Growth Fund LifeStrategy(R) Income Fund LifeStrategy(R) Moderate Growth Fund STAR(R) Fund Tax-Managed Balanced Fund Wellesley(R) Income Fund Wellington(TM) Fund BOND FUNDS GNMA Fund High-Yield Corporate Fund High-Yield Tax-Exempt Fund Inflation-Protected Securities Fund Institutional Total Bond Market Index Fund Insured Long-Term Tax-Exempt Fund Intermediate-Term Bond Index Fund Intermediate-Term Corporate Fund Intermediate-Term Tax-Exempt Fund Intermediate-Term Treasury Fund Limited-Term Tax-Exempt Fund Long-Term Bond Index Fund Long-Term Corporate Fund Long-Term Tax-Exempt Fund Long-Term Treasury Fund Short-Term Bond Index Fund Short-Term Corporate Fund Short-Term Federal Fund Short-Term Tax-Exempt Fund Short-Term Treasury Fund State Tax-Exempt Bond Funds (California, Florida, Massachusetts, New Jersey, New York, Ohio, Pennsylvania) Total Bond Market Index Fund MONEY MARKET FUNDS Admiral(TM) Treasury Money Market Fund Federal Money Market Fund Prime Money Market Fund State Tax-Exempt Money Market Funds (California, New Jersey, New York, Ohio, Pennsylvania) Tax-Exempt Money Market Fund Treasury Money Market Fund VARIABLE ANNUITY Balanced Portfolio Capital Growth Portfolio Diversified Value Portfolio Equity Income Portfolio Equity Index Portfolio Growth Portfolio High Yield Bond Portfolio International Portfolio Mid-Cap Index Portfolio Money Market Portfolio REIT Index Portfolio Short-Term Corporate Portfolio Small Company Growth Portfolio Total Bond Market Index Portfolio Total Stock Market Index Portfolio For information about Vanguard funds and annuities, including charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send money. THE PEOPLE WHO GOVERN YOUR FUND The trustees of your mutual fund are there to see that the fund is operated and managed in your best interests since, as a shareholder, you are a part owner of the fund. Your fund trustees also serve on the board of directors of The Vanguard Group, Inc., which is owned by the Vanguard funds and provides services to them on an at-cost basis. A majority of Vanguard's board members are independent, meaning that they have no affiliation with Vanguard or the funds they oversee, apart from the sizable personal investments they have made as private individuals. Our independent board members bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of
------------------------------------------------------------------------------------------------------------ POSITION(S) HELD WITH NAME FUND (NUMBER OF (YEAR OF BIRTH) VANGUARD FUNDS TRUSTEE/OFFICER OVERSEEN BY SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------ JOHN J. BRENNAN* Chairman of the Chairman of the Board, Chief Executive Officer, and Director/Trustee (1954) Board, Chief of The Vanguard Group, Inc., and of each of the investment companies May 1987 Executive Officer, served by The Vanguard Group. and Trustee (112) ------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES CHARLES D. ELLIS Trustee The Partners of '63 (pro bono ventures in education); Senior Advisor (1937) (112) to Greenwich Associates (international business strategy consulting); January 2001 Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. ------------------------------------------------------------------------------------------------------------ RAJIV L. GUPTA Trustee Chairman and Chief Executive Officer (since October 1999), Vice (1945) (112) Chairman (JanuarySeptember 1999), and Vice President (prior to December 2001 September 1999) of Rohm and Haas Co. (chemicals); Director of Technitrol, Inc. (electronic components), and Agere Systems (communications components); Board Member of the American Chemistry Council; and Trustee of Drexel University. ------------------------------------------------------------------------------------------------------------ JOANN HEFFERNAN Trustee Vice President, Chief Information Officer, and Member of the HEISEN (112) Executive Committee of Johnson & Johnson (pharmaceuticals/consumer (1950) products); Director of the Medical Center at Princeton and Women's July 1998 Research and Education Institute. ------------------------------------------------------------------------------------------------------------ BURTON G. MALKIEL TRUSTEE Chemical Bank Chairman's Professor of Economics,Princeton University; (1932) (110) Director of Vanguard Investment Series plc (Irish invest-ment fund) May 1977 (since November 2001), Vanguard Group (Ireland)Limited (Irish investment management firm)(since November 2001),Prudential Insurance Co. of America, BKF Capital (investment management), The Jeffrey Co. (holding company), and NeuVis, Inc.(software company). ------------------------------------------------------------------------------------------------------------
the funds. Among board members' responsibilities are selecting investment advisors for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers. Each trustee serves a fund until its termination; or until the trustee's retirement, resignation, or death; or otherwise as specified in the fund's organizational documents. Any trustee may be removed at a shareholders' meeting by a vote representing two-thirds of the net asset value of all shares of the fund together with shares of other Vanguard funds organized within the same trust. The table on these two pages shows information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.
POSITION(S) HELD WITH NAME FUND (NUMBER OF (YEAR OF BIRTH) VANGUARD FUNDS TRUSTEE/OFFICER OVERSEEN BY SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------ Alfred M. Rankin, Jr. Trustee Chairman, President, Chief Executive Officer, and Director of NACCO (1941) (112) Industries, Inc. (forklift trucks/housewares/lignite); Director of January 1993 Goodrich Corporation (industrial products/aircraft systems and services); Director of Standard Products Company (supplier for the automotive industry) until 1998. ------------------------------------------------------------------------------------------------------------ J. Lawrence Wilson Trustee Retired Chairman and Chief Executive Officer of Rohm and Haas Co. (1936) (112) (chemicals); Director of Cummins Inc. (diesel engines), The Mead April 1985 Corp. (paper products), and AmerisourceBergen Corp. (pharmaceuti-cal distribution); Trustee of Vanderbilt University. ------------------------------------------------------------------------------------------------------------ EXECUTIVE OFFICERS* R. Gregory Barton Secretary Managing Director and General Counsel of The Vanguard Group, Inc.; (1951) (112) Secretary of The Vanguard Group and of each of the investment June 2001 companies served by The Vanguard Group. ------------------------------------------------------------------------------------------------------------ Thomas J. Higgins Treasurer Principal of The Vanguard Group, Inc.; Treasurer of each of the (1957) (112) investment companies served by The Vanguard Group. July 1998 ------------------------------------------------------------------------------------------------------------ *Officers of the funds are "interested persons" as defined in the Investment Company Act of 1940. More information about the trustees is in the Statement of Additional Information, available from The Vanguard Group. ------------------------------------------------------------------------------------------------------------ VANGUARD SENIOR MANAGEMENT TEAM MORTIMER J. BUCKLEY, Information Technology. MICHAEL S. MILLER, Planning and Development. JAMES H. GATELY, Investment Programs and Services. RALPH K. PACKARD, Finance. KATHLEEN C. GUBANICH, Human Resources. GEORGE U. SAUTER, Chief Investment Officer. F. WILLIAM MCNABB, III, Client Relationship Group. ------------------------------------------------------------------------------------------------------------ JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996. ------------------------------------------------------------------------------------------------------------
[SHIP] [THE VANGUARD GROUP(R) LOGO] POST OFFICE BOX 2600 VALLEY FORGE, PA 19482-2600 Vanguard, The Vanguard Group, Vanguard.com, Vanguard IRA, Admiral, Explorer, Morgan, LifeStrategy, PlainTalk, STAR, Wellesley, Wellington, Windsor, and the ship logo are trademarks of The Vanguard Group, Inc. S&P 500 and S&P MidCap 400 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds. Calvert Social Index is a trademark of Calvert Group, Ltd., and has been licensed for use by The Vanguard Group, Inc. Vanguard Calvert Social Index Fund is not sponsored, endorsed, sold, or promoted by Calvert Group, Ltd., and Calvert Group, Ltd., makes no representation regarding the advisability of investing in the fund. All other marks are the exclusive property of their respective owners. ABOUT OUR COVER The photographs that appear on the cover of this report are copyrighted by Michael Kahn. FOR MORE INFORMATION This report is intended for the fund's shareholders. It may not be distributed to prospective investors unless it is preceded or accompanied by the current fund prospectus. To receive a free copy of the prospectus or the Statement of Additional Information, or to request additional information about the fund or other Vanguard funds, please contact us at one of the adjacent telephone numbers or by e-mail through Vanguard.com(R). Prospectuses may also be viewed online. All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc., unless otherwise noted. WORLD WIDE WEB www.vanguard.com FUND INFORMATION 1-800-662-7447 DIRECT INVESTOR ACCOUNT SERVICES 1-800-662-2739 INSTITUTIONAL INVESTOR SERVICES 1-800-523-1036 TEXT TELEPHONE 1-800-952-3335 (C) 2003 THE VANGUARD GROUP, INC. ALL RIGHTS RESERVED. VANGUARD MARKETING CORPORATION, DISTRIBUTOR. Q260 112003 ITEM 2: Code of Ethics. The Board of Trustees has adopted a code of ethics that applies to the principal executive officer, principal financial officer, principal accounting officer or controller of the Registrant and The Vanguard Group, Inc., and to persons performing similar functions. ITEM 3: Audit Committee Financial Expert. All of the members of the Audit Committee have been determined by the Registrant's Board of Trustees to be Audit Committee Financial Experts. The members of the Audit Committee are: Charles D. Ellis, Rajiv L. Gupta, JoAnn Heffernan Heisen, Burton G. Malkiel, Alfred M. Rankin, Jr., and J. Lawrence Wilson. All Audit Committee members are independent under applicable rules. ITEM 4: Not applicable. ITEM 5: Not applicable. ITEM 6: Reserved. ITEM 7: Not applicable. ITEM 8: Reserved. ITEM 9: CONTROLS AND PROCEDURES. (a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant's Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report. (b) Internal Control Over Financial Reporting. There were no significant changes in Registrant's internal control over financial reporting or in other factors that could significantly affect this control subsequent to the date of the evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. ITEM 10: EXHIBITS. The following exhibits are attached hereto: (a) code of ethics (b) certifications Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VANGUARD MORGAN GROWTH FUND BY:_____________(signature)________________ (HEIDI STAM) JOHN J. BRENNAN* CHIEF EXECUTIVE OFFICER Date: November 20, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. VANGUARD MORGAN GROWTH FUND BY:_____________(signature)________________ (HEIDI STAM) JOHN J. BRENNAN* CHIEF EXECUTIVE OFFICER Date: November 20, 2003 VANGUARD MORGAN GROWTH FUND BY:_____________(signature)________________ (HEIDI STAM) THOMAS J. HIGGINS* TREASURER Date: November 20, 2003 *By Power of Attorney. See File Number 2-57689, filed on December 26, 2002. Incorporated by Reference.