PART B


                       VANGUARD(R) MORGAN(TM) GROWTH FUND

                       STATEMENT OF ADDITIONAL INFORMATION

                                JANUARY 27, 2006


This Statement is not a prospectus but should be read in conjunction with the
Fund's current prospectus (dated January 27, 2006). To obtain, without charge,
the prospectus or the most recent Annual Report to Shareholders, which
contains the Fund's financial statements as hereby incorporated by reference,
please call:


                        INVESTOR INFORMATION DEPARTMENT:
                                  800-662-7447


                                TABLE OF CONTENTS


DESCRIPTION OF THE TRUST..............................................B-1
INVESTMENT POLICIES...................................................B-3
INVESTMENT LIMITATIONS................................................B-17
SHARE PRICE...........................................................B-18
PURCHASE AND REDEMPTION OF SHARES.....................................B-18
MANAGEMENT OF THE FUND ...............................................B-19
INVESTMENT ADVISORY SERVICES..........................................B-26
PORTFOLIO TRANSACTIONS................................................B-31
PROXY VOTING GUIDELINES...............................................B-32
FINANCIAL STATEMENTS..................................................B-37


                            DESCRIPTION OF THE TRUST


Vanguard Morgan Growth Fund (the Trust) was organized as a Delaware corporation
in 1968, was reorganized as a Maryland corporation in 1973, and then was
reorganized as a Delaware statutory trust in June 1998. Prior to its
reorganization as a Delaware statutory trust, the Trust was known as Vanguard
Morgan Growth Fund, Inc. The Trust is registered with the United States
Securities and Exchange Commission (the SEC) under the Investment Company Act of
1940 (the 1940 Act) as an open-end, diversified management investment company.
The Trust currently offers the following fund (and classes thereof):



FUND                                    SHARE CLASSES*
- -------------------------------------------------------------
Vanguard Morgan Growth Fund             Investor and Admiral
- -------------------------------------------------------------
*Individually, a class; collectively, the classes.


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


 The Fund described in this Statement of Additional Information is a member
fund. There are two types of "Vanguard funds," member funds and non-member
funds. Member funds jointly own The Vanguard Group, Inc. (Vanguard), contribute
to Vanguard's capital, and receive services at cost from Vanguard pursuant to a
Funds' Service Agreement. Non-member funds do not contribute to Vanguard's
capital, but they do receive services pursuant to special services agreements.
See "Management of the Fund" for more information.


SERVICE PROVIDERS

 CUSTODIAN. Citibank, N.A., 111 Wall Street, New York, NY 10005, serves as the
Fund's custodian. The custodian is responsible for maintaining the Fund's
assets, keeping all necessary accounts and records of Fund assets, and
appointing any foreign sub-custodians or foreign securities depositories.

                                     B-1


 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. PricewaterhouseCoopers LLP, Two
Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA, 19103-7042,
serves as the Fund's independent registered public accounting firm. The
independent registered public accounting firm audits the Fund's annual financial
statements and provides other related services.

 TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer agent and
dividend-paying agent is Vanguard, 100 Vanguard Boulevard, Malvern, PA 19355.


CHARACTERISTICS OF THE FUND'S SHARES


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


 SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a statutory 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 Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss as a result of a Fund obligation only if the Fund 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 the Fund are entitled to receive any
dividends or other distributions declared by the Fund. No shares of the Fund
have priority or preference over any other shares of the Fund with respect to
distributions. Distributions will be made from the assets of the Fund and will
be paid ratably to all shareholders of the Fund (or class) according to the
number of shares of the Fund (or class) held by shareholders on the record date.
The amount of dividends per share may vary between separate share classes of the
Fund based upon differences in the way that expenses are allocated between share
classes pursuant to a multiple class plan.


 VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (1) a
shareholder vote is required under the 1940 Act; (2) 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 the Fund or any class; (3)
the trustees determine that it is necessary or desirable to obtain a shareholder
vote; or (4) a certain type of merger or consolidation, share conversion, share
exchange, or sale of assets is proposed. 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 Fund's net
assets and to change any fundamental policy of the Fund. Unless otherwise
required by applicable law, shareholders of the Fund 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 or class affected by a particular matter are
entitled to vote on that matter. In addition, each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to that
class, and each class has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
another. Voting rights are noncumulative and cannot be modified without a
majority vote.


 LIQUIDATION RIGHTS. In the event that the Fund is liquidated, shareholders will
be entitled to receive a pro rata share of the Fund's net assets. In the event
that a class of shares is liquidated, shareholders of that class will be
entitled to receive a pro rata share of the Fund's net assets that are allocated
to that class. Shareholders may receive cash, securities, or a combination of
the two.

 PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Fund's
shares.

 CONVERSION RIGHTS. Fund shareholders may convert their shares into another
class of shares of the same Fund upon the satisfaction of any then applicable
eligibility requirements.

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

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

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

                                     B-2


TAX STATUS OF THE FUND

The Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code of 1986, as amended (the IRC).
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.

 Dividends received and distributed by the Fund on shares of stock of domestic
corporations may be eligible for the dividends-received deduction applicable to
corporate shareholders. Corporations must satisfy certain requirements in order
to claim the deduction. Capital gains distributed by the Fund are not eligible
for the dividends-received deduction.

                               INVESTMENT POLICIES

Some of the investment policies described below and in the Fund's prospectus set
forth percentage limitations on the Fund's investment in, or holdings of,
certain securities or other assets. Unless otherwise required by law, compliance
with these policies will be determined immediately after the acquisition of such
securities or assets. Subsequent changes in values, net assets, or other
circumstances will not be considered when determining whether the investment
complies with the Fund's investment policies and limitations.

 The following policies and explanations supplement the Fund's investment
objective and policies set forth in the prospectus. With respect to the
different investments discussed below, the Fund may acquire such investments to
the extent consistent with its investment objective and policies.

 BORROWING. A fund's ability to borrow money is limited by its investment
policies and limitations, by the 1940 Act, and by applicable exemptions,
no-action letters, interpretations, and other pronouncements by the SEC and its
staff, and any other regulatory authority having jurisdiction, from time to
time. Under the 1940 Act, a fund is required to maintain continuous asset
coverage (that is, total assets including borrowings, less liabilities exclusive
of borrowings) of 300% of the amount borrowed, with an exception for borrowings
not in excess of 5% of the fund's total assets made for temporary or emergency
purposes. Any borrowings for temporary purposes in excess of 5% of the fund's
total assets must maintain continuous asset coverage. If the 300% asset coverage
should decline as a result of market fluctuations or for other reasons, a fund
may be required to sell some of its portfolio holdings within three days
(excluding Sundays and holidays) to reduce the debt and restore the 300% asset
coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time.

 Borrowing will tend to exaggerate the effect on net asset value of any increase
or decrease in the market value of a fund's portfolio. Money borrowed will be
subject to interest costs that may or may not be recovered by earnings on the
securities purchased. A fund also may be required to maintain minimum average
balances in connection with a borrowing or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the cost
of borrowing over the stated interest rate.

 The SEC takes the position that other transactions that have a leveraging
effect on the capital structure of a fund or are economically equivalent to
borrowing can be viewed as constituting a form of borrowing by the fund for
purposes of the 1940 Act. These transactions can include entering into reverse
repurchase agreements, engaging in mortgage-dollar-roll transactions, selling
securities short (other than short sales "against-the-box"), buying and selling
certain derivatives (such as futures contracts), selling (or writing) put and
call options, engaging in sale-buybacks, entering into firm-commitment and
standby-commitment agreements, engaging in when-issued, delayed-delivery, or
forward-commitment transactions, and other trading practices that have a
leveraging effect on the capital structure of a fund or are economically
equivalent to borrowing (additional discussion about a number of these
transactions can be found below). A borrowing transaction will not be considered
to constitute the issuance of a "senior security" by a fund, and therefore such
transaction will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by a fund, if the fund (1) maintains an offsetting
financial position; (2) segregates liquid assets (with such liquidity determined
by the advisor in accordance with procedures established by the board of
trustees) equal (as determined on a daily mark-to-market basis) in value to the
fund's potential economic exposure under the borrowing transaction; or (3)
otherwise "covers" the transaction in


                                     B-3



accordance with applicable SEC guidance (collectively, "covers" the
transaction). A fund may have to buy or sell a security at a disadvantageous
time or price in order to cover a borrowing transaction. In addition, segregated
assets may not be available to satisfy redemptions or for other purposes.


 COMMON STOCK. Common stock represents an equity or ownership interest in an
issuer. Common stock typically entitles the owner to vote on the election of
directors and other important matters as well as to receive dividends on such
stock. In the event an issuer is liquidated or declares bankruptcy, the claims
of owners of bonds, other debt holders, and owners of preferred stock take
precedence over the claims of those who own common stock.

 CONVERTIBLE SECURITIES. Convertible securities are hybrid securities that
combine the investment characteristics of bonds and common stocks. Convertible
securities typically consist of debt securities or preferred stock that may be
converted (on a voluntary or mandatory basis) within a specified period of time
(normally for the entire life of the security) into a certain amount of common
stock or other equity security of the same or a different issuer at a
predetermined price. Convertible securities also include debt securities with
warrants or common stock attached and derivatives combining the features of debt
securities and equity securities. Other convertible securities with features and
risks not specifically referred to herein may become available in the future.
Convertible securities involve risks similar to those of both fixed income and
equity securities.

 The market value of a convertible security is a function of its "investment
value" and its "conversion value." A security's "investment value" represents
the value of the security without its conversion feature (i.e., a nonconvertible
fixed income security). The investment value may be determined by reference to
its credit quality and the current value of its yield to maturity or probable
call date. At any given time, investment value is dependent upon such factors as
the general level of interest rates, the yield of similar nonconvertible
securities, the financial strength of the issuer, and the seniority of the
security in the issuer's capital structure. A security's "conversion value" is
determined by multiplying the number of shares the holder is entitled to receive
upon conversion or exchange by the current price of the underlying security. If
the conversion value of a convertible security is significantly below its
investment value, the convertible security will trade like nonconvertible debt
or preferred stock and its market value will not be influenced greatly by
fluctuations in the market price of the underlying security. In that
circumstance, the convertible security takes on the characteristics of a bond,
and its price moves in the opposite direction from interest rates. Conversely,
if the conversion value of a convertible security is near or above its
investment value, the market value of the convertible security will be more
heavily influenced by fluctuations in the market price of the underlying
security. In that case, the convertible security's price may be as volatile as
that of common stock. Because both interest rate and market movements can
influence its value, a convertible security generally is not as sensitive to
interest rates as a similar fixed income security, nor is it as sensitive to
changes in share price as its underlying equity security. Convertible securities
are often rated below investment-grade or are not rated, and are generally
subject to a high degree of credit risk.

 While all markets are prone to change over time, the generally high rate at
which convertible securities are retired (through mandatory or scheduled
conversions by issuers or voluntary redemptions by holders) and replaced with
newly issued convertibles may cause the convertible securities market to change
more rapidly than other markets. For example, a concentration of available
convertible securities in a few economic sectors could elevate the sensitivity
of the convertible securities market to the volatility of the equity markets and
to the specific risks of those sectors. Moreover, convertible securities with
innovative structures, such as mandatory conversion securities and equity-linked
securities, have increased the sensitivity of the convertible securities market
to the volatility of the equity markets and to the special risks of those
innovations, which may include risks different from, and possibly greater than,
those associated with traditional convertible securities.

 DEBT SECURITIES. A debt security is a security consisting of a certificate or
other evidence of a debt (secured or unsecured) on which the issuing company or
governmental body promises to pay the holder thereof a fixed, variable, or
floating rate of interest for a specified length of time, and to repay the debt
on the specified maturity date. Some debt securities, such as zero coupon bonds,
do not make regular interest payments but are issued at a discount to their
principal or maturity value. Debt securities include a variety of fixed income
obligations, including, but not limited to, corporate bonds, government
securities, municipal securities, convertible securities, mortgage-backed
securities, and asset-backed securities. Debt securities include
investment-grade securities, non-investment-grade securities, and unrated
securities. Debt securities are subject to a variety of risks, such as interest
rate risk, income risk, call/ prepayment risk, inflation risk, credit risk, and
(in the case of foreign securities) country risk and currency risk.

                                     B-4


 DEBT SECURITIES -- NON-INVESTMENT-GRADE SECURITIES. Non-investment-grade
securities, also referred to as "high-yield securities" or "junk bonds," are
debt securities that are rated lower than the four highest rating categories by
a nationally recognized statistical rating organization (for example, lower than
Baa3 by Moody's Investors Service, Inc. or lower than BBB- by Standard & Poor's)
or are determined to be of comparable quality by the fund's advisor. These
securities are generally considered to be, on balance, predominantly speculative
with respect to capacity to pay interest and repay principal in accordance with
the terms of the obligation and will generally involve more credit risk than
securities in the investment-grade categories. Investment in these securities
generally provides greater income and increased opportunity for capital
appreciation than investments in higher quality securities, but they also
typically entail greater price volatility and principal and income risk.

 Analysis of the creditworthiness of issuers of high yield securities may be
more complex than for issuers of investment-grade securities. Thus, reliance on
credit ratings in making investment decisions entails greater risks for
high-yield securities than for investment-grade debt securities. The success of
a fund's advisor in managing high-yield securities is more dependent upon its
own credit analysis than is the case with investment-grade securities.

 Some high-yield securities are issued by smaller, less-seasoned companies,
while others are issued as part of a corporate restructuring, such as an
acquisition, merger, or leveraged buyout. Companies that issue high-yield
securities are often highly leveraged and may not have available to them more
traditional methods of financing. Therefore, the risk associated with acquiring
the securities of such issuers generally is greater than is the case with
investment-grade securities. Some high-yield securities were once rated as
investment-grade but have been downgraded to junk bond status because of
financial difficulties experienced by their issuers.

 The market values of high-yield securities tend to reflect individual issuer
developments to a greater extent than do investment-grade securities, which in
general react to fluctuations in the general level of interest rates. High-yield
securities also tend to be more sensitive to economic conditions than are
investment-grade securities. A projection of an economic downturn or of a
sustained period of rising interest rates, for example, could cause a decline in
junk bond prices because the advent of a recession could lessen the ability of a
highly leveraged company to make principal and interest payments on its debt
securities. If an issuer of high-yield securities defaults, in addition to
risking payment of all or a portion of interest and principal, a fund investing
in such securities may incur additional expenses to seek recovery.

 The secondary market on which high-yield securities are traded may be less
liquid than the market for investment-grade securities. Less liquidity in the
secondary trading market could adversely affect the ability of a fund to sell a
high-yield security or the price at which a fund could sell a high-yield
security, and could adversely affect the daily net asset value of fund shares.
When secondary markets for high-yield securities are less liquid than the market
for investment-grade securities, it may be more difficult to value the
securities because such valuation may require more research, and elements of
judgment may play a greater role in the valuation because there is less
reliable, objective data available.

 Except as otherwise provided in a fund's prospectus, if a credit-rating agency
changes the rating of a portfolio security held by a fund, the fund may retain
the portfolio security if the advisor deems it in the best interests of
shareholders.

 DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership
interests in a security or a pool of securities that have been deposited with a
"depository." Depositary receipts may be sponsored or unsponsored and include
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and
Global Depositary Receipts (GDRs). For ADRs, the depository is typically a U.S.
financial institution and the underlying securities are issued by a foreign
issuer. For other depositary receipts, the depository may be a foreign or a U.S.
entity, and the underlying securities may have a foreign or a U.S. issuer.
Depositary receipts will not necessarily be denominated in the same currency as
their underlying securities. Generally, ADRs are issued in registered form,
denominated in U.S. dollars, and designed for use in the U.S. securities
markets. Other depositary receipts, such as GDRs and EDRs, may be issued in
bearer form and denominated in other currencies, and are generally designed for
use in securities markets outside the U.S. Although the two types of depositary
receipt facilities (unsponsored or sponsored) are similar, there are differences
regarding a holder's rights and obligations and the practices of market
participants. A depository may establish an unsponsored facility without
participation by (or acquiescence of) the underlying issuer; typically, however,
the depository requests a letter of non-objection from the underlying issuer
prior to establishing the facility. Holders of unsponsored depositary receipts
generally bear all the costs of the facility. The depository usually charges
fees upon the deposit and withdrawal of the underlying securities, the
conversion of dividends into U.S. dollars or other currency, the disposition of
non-cash distributions, and the performance of other services. The depository of
an unsponsored facility

                                     B-5


frequently is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through voting rights to
depositary receipt holders with respect to the underlying securities.

 Sponsored depositary receipt facilities are created in generally the same
manner as unsponsored facilities, except that sponsored depositary receipts are
established jointly by a depository and the underlying issuer through a deposit
agreement. The deposit agreement sets out the rights and responsibilities of the
underlying issuer, the depository, and the depositary receipt holders. With
sponsored facilities, the underlying issuer typically bears some of the costs of
the depositary receipts (such as dividend payment fees of the depository),
although most sponsored depositary receipts holders may bear costs such as
deposit and withdrawal fees. Depositories of most sponsored depositary receipts
agree to distribute notices of shareholder meetings, voting instructions, and
other shareholder communications and information to the depositary receipt
holders at the underlying issuer's request. The depository of an unsponsored
facility frequently is under no obligation to distribute shareholder
communications received from the issuer of the deposited security or to pass
through, to the holders of the receipts, voting rights with respect to the
deposited securities.

 For purposes of a fund's investment policies, investments in depositary
receipts will be deemed to be investments in the underlying securities. Thus, a
depositary receipt representing ownership of common stock will be treated as
common stock. Depository receipts do not eliminate all of the risks associated
with directly investing in the securities of foreign issuers.

 DERIVATIVES. A derivative is a financial instrument that has a value that is
based on--or "derived from"--the values of other assets, reference rates, or
indexes. Derivatives may relate to a wide variety of underlying references, such
as commodities, stocks, bonds, interest rates, currency exchange rates, and
related indexes. Derivatives include futures contracts and options on futures
contracts (see additional discussion below), forward-commitment transactions
(see additional discussion below), options on securities (see additional
discussion below), caps, floors, collars, swap agreements (see additional
discussion below), and other financial instruments. Some derivatives, such as
futures contracts and certain options, are traded on U.S. commodity and
securities exchanges, while other derivatives, such as swap agreements, are
privately negotiated and entered into in the over-the-counter (OTC) market. The
risks associated with the use of derivatives are different from, and possibly
greater than, the risks associated with investing directly in the securities,
assets, or market indexes on which the derivatives are based. Derivatives are
used by some investors for speculative purposes. Derivatives also may be used
for a variety of purposes that do not constitute speculation, such as hedging,
risk management, seeking to stay fully invested, seeking to reduce transaction
costs, seeking to simulate an investment in equity or debt securities or other
investments, seeking to add value by using derivatives to more efficiently
implement portfolio positions when derivatives are favorably priced relative to
equity or debt securities or other investments, and for other purposes. A fund
will not use derivatives for speculation or for the purpose of leveraging
(magnifying) investment returns. There is no assurance that any derivatives
strategy used by a fund's advisor will succeed.

 Derivative products are highly specialized instruments that require investment
techniques and risk analyses different from those associated with stocks, bonds,
and other traditional investments. The use of a derivative requires an
understanding not only of the underlying instrument but also of the derivative
itself, without the benefit of observing the performance of the derivative under
all possible market conditions.

 The use of a derivative involves the risk that a loss may be sustained as a
result of the insolvency or bankruptcy of the other party to the contract
(usually referred to as a "counterparty") or the failure of the counterparty to
make required payments or otherwise comply with the terms of the contract.
Additionally, the use of credit derivatives can result in losses if a fund's
advisor does not correctly evaluate the creditworthiness of the issuer on which
the credit derivative is based.

 Derivatives may be subject to liquidity risk, which exists when a particular
derivative is difficult to purchase or sell. If a derivative transaction is
particularly large or if the relevant market is illiquid (as is the case with
many OTC derivatives), it may not be possible to initiate a transaction or
liquidate a position at an advantageous time or price.

 Derivatives may be subject to pricing or "basis" risk, which exists when a
particular derivative becomes extraordinarily expensive relative to historical
prices or the prices of corresponding cash market instruments. Under certain
market conditions, it may not be economically feasible to initiate a transaction
or liquidate a position in time to avoid a loss or take advantage of an
opportunity.

                                     B-6


 Because many derivatives have a leverage component, adverse changes in the
value or level of the underlying asset, reference rate, or index can result in a
loss substantially greater than the amount invested in the derivative itself.
Certain derivatives have the potential for unlimited loss, regardless of the
size of the initial investment. A derivative transaction will not be considered
to constitute the issuance of a "senior security" by a fund, and therefore such
transaction will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by a fund, if the fund covers the transaction in
accordance with the requirements, and subject to the risks, described above
under the heading "Borrowing."

 Like most other investments, derivative instruments are subject to the risk
that the market value of the instrument will change in a way detrimental to a
fund's interest. A fund bears the risk that its advisor will incorrectly
forecast future market trends or the values of assets, reference rates, indexes,
or other financial or economic factors in establishing derivative positions for
the fund. If the advisor attempts to use a derivative as a hedge against, or as
a substitute for, a portfolio investment, the fund will be exposed to the risk
that the derivative will have or will develop imperfect or no correlation with
the portfolio investment. This could cause substantial losses for the fund.
Although hedging strategies involving derivative instruments can reduce the risk
of loss, they can also reduce the opportunity for gain or even result in losses
by offsetting favorable price movements in other fund investments. Many
derivatives, in particular OTC derivatives, are complex and often valued
subjectively. Improper valuations can result in increased cash payment
requirements to counterparties or a loss of value to a fund.

 EXCHANGE-TRADED FUNDS. A fund may purchase shares of exchange-traded funds
(ETFs), including ETF shares issued by other Vanguard funds. Typically, a fund
would purchase ETF shares for the same reason it would purchase (and as an
alternative to purchasing) futures contracts: to obtain exposure to all or a
portion of the stock or bond market. ETF shares enjoy several advantages over
futures. Depending on the market, the holding period, and other factors, ETF
shares can be less costly and more tax-efficient than futures. In addition, ETF
shares can be purchased for smaller sums, offer exposure to market sectors and
styles for which there is no suitable or liquid futures contract, and do not
involve leverage.

 Most ETFs are investment companies. Therefore, a fund's purchases of ETF shares
generally are subject to the limitations on, and the risks of, a fund's
investments in other investment companies, which are described below under the
heading "Other Investment Companies."

 An investment in an ETF generally presents the same primary risks as an
investment in a conventional fund (i.e., one that is not exchange traded) that
has the same investment objective, strategies, and policies. The price of an ETF
can fluctuate within a wide range, and a fund could lose money investing in an
ETF if the prices of the securities owned by the ETF go down. In addition, ETFs
are subject to the following risks that do not apply to conventional funds: (1)
the market price of the ETF's shares may trade at a discount to their net asset
value; (2) an active trading market for an ETF's shares may not develop or be
maintained; or (3) trading of an ETF's shares may be halted if the listing
exchange's officials deem such action appropriate, the shares are de-listed from
the exchange, or the activation of market-wide "circuit breakers" (which are
tied to large decreases in stock prices) halts stock trading generally.

 VIPER(R) Shares are exchange-traded shares that represent an interest in an
investment portfolio held by Vanguard index funds. "VIPER" stands for Vanguard
Index Participation Equity Receipts. Any fund that issues VIPER Shares may
repurchase those shares on the open market at the current market price if doing
so would be advantageous for the fund. A repurchase might be advantageous, for
example, because the VIPER Shares are more cost-effective than alternative
investments, are selling at a discount to net asset value, will cause the fund
to more closely track its index than alternative investments, or some
combination of the three. A fund that repurchases its VIPER Shares also may lend
those shares to qualified institutional borrowers as part of the fund's
securities lending activities. A fund's investments in VIPER Shares are also
subject to the descriptions, limitations, and risks described under the heading
"Other Investment Companies."


 FOREIGN SECURITIES. Foreign securities are equity or debt securities issued by
entities organized, domiciled, or with a principal place of business outside the
United States, such as foreign corporations and governments. Foreign securities
may trade in U.S. or foreign securities markets. A fund may make foreign
investments either directly by purchasing foreign securities or indirectly by
purchasing depositary receipts or depositary shares of similar instruments
(depositary receipts) for foreign securities (see discussion above). Depositary
receipts are securities that are listed on exchanges or quoted in OTC markets in
one country but represent shares of issuers domiciled in another country. Direct
investments in foreign securities may be made either on foreign securities
exchanges or in the OTC markets. Investing in foreign securities involves
certain special risk considerations that are not typically associated with
investing in securities of U.S. companies or governments.

                                     B-7


 Because foreign issuers are not generally subject to uniform accounting,
auditing, and financial reporting standards and practices comparable to those
applicable to U.S. issuers, there may be less publicly available information
about certain foreign issuers than about U.S. issuers. Evidence of securities
ownership may be uncertain in many foreign countries. As a result, there is a
risk that a fund's trade details could be incorrectly or fraudulently entered at
the time of the transaction, resulting in a loss to the fund. Securities of
foreign issuers are generally less liquid than securities of comparable U.S.
issuers. In certain countries, there is 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, war,
terrorism, nationalization, limitations on the removal of funds or other assets,
or diplomatic developments which could affect U.S. investments in those
countries. Although an advisor will endeavor to achieve most favorable execution
costs for a fund's portfolio transactions in foreign securities under the
circumstances, commissions (and other transaction costs) are generally higher
than those on U.S. securities. In addition, it is expected that the expenses for
custodian arrangements of the fund's foreign securities will be somewhat greater
than the expenses for a fund that invests primarily in domestic securities.
Certain foreign governments levy withholding taxes against dividend and interest
income from foreign securities. Although in some countries a portion of these
taxes is recoverable by the fund, the non-recovered portion of foreign
withholding taxes will reduce the income received from the companies making up a
fund.

 The value of the foreign securities held by a fund that are not U.S.
dollar-denominated may be significantly affected by changes in currency exchange
rates. The U.S. dollar value of a foreign security generally decreases when the
value of the U.S. dollar rises against the foreign currency in which the
security is denominated and tends to increase when the value of the U.S. dollar
falls against such currency (as discussed below, a fund may attempt to hedge its
currency risks). In addition, the value of fund assets may be affected by losses
and other expenses incurred in converting between various currencies in order to
purchase and sell foreign securities, and by currency restrictions, exchange
control regulation, currency devaluations, and political and economic
developments.

 FOREIGN SECURITIES -- EMERGING MARKET RISK. Investing in emerging market
countries involves certain risks not typically associated with investing in the
United States, and imposes risks greater than, or in addition to, risks of
investing in more developed foreign countries. These risks include, but are not
limited to, the following: greater risks of nationalization or expropriation of
assets or confiscatory taxation; currency devaluations and other currency
exchange rate fluctuations; greater social, economic, and political uncertainty
and instability (including amplified risk of war and terrorism); more
substantial government involvement in the economy; less government supervision
and regulation of the securities markets and participants in those markets;
controls on foreign investment and limitations on repatriation of invested
capital and on the fund's ability to exchange local currencies for U.S. dollars;
unavailability of currency hedging techniques in certain emerging market
countries; the fact that companies in emerging market countries may be smaller,
less seasoned, and newly organized companies; the difference in, or lack of,
auditing and financial reporting standards, which may result in unavailability
of material information about issuers; the risk that it may be more difficult to
obtain and/or enforce a judgment in a court outside the United States; and
greater price volatility, substantially less liquidity, and significantly
smaller market capitalization of securities markets. Also, any change in the
leadership or politics of emerging market countries, or the countries that
exercise a significant influence over those countries, may halt the expansion of
or reverse the liberalization of foreign investment policies now occurring and
adversely affect existing investment opportunities. Furthermore, high rates of
inflation and rapid fluctuations in inflation rates have had, and may continue
to have, negative effects on the economies and securities markets of certain
emerging market countries.

 FOREIGN SECURITIES -- FOREIGN CURRENCY TRANSACTIONS. The value in U.S. dollars
of a fund's non-dollar-denominated foreign securities may be affected favorably
or unfavorably by changes in foreign currency exchange rates and exchange
control regulations, and the fund may incur costs in connection with conversions
between various currencies. To seek to minimize the impact of such factors on
net asset values, a fund may engage in foreign currency transactions in
connection with its investments in foreign securities. A fund will not speculate
in foreign currency exchange and will enter into foreign currency transactions
only to attempt to "hedge" the currency risk associated with investing in
foreign securities. Although such transactions tend to minimize the risk of loss
that would result from a decline in the value of the hedged currency, they also
may limit any potential gain that might result should the value of such currency
increase.

 Currency exchange transactions may be conducted either on a spot (i.e., cash)
basis at the rate prevailing in the currency exchange market, or through forward
contracts to purchase or sell foreign currencies. A forward currency contract
involves an obligation to purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of the contract agreed upon
by the parties, at a price set at the time of the contract. These contracts are
entered into with

                                     B-8


large commercial banks or other currency traders who are participants in the
interbank market. Currency exchange transactions also may be effected through
the use of swap agreements or other derivatives. Currency exchange transactions
may be considered borrowings. A currency exchange transaction will not be
considered to constitute the issuance of a "senior security" by a fund for
purposes of the 1940 Act, and therefore such transaction will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by a
fund, if the fund covers the transaction in accordance with the requirements,
and subject to the risks, described above under the heading "Borrowing."

 By entering into a forward contract for the purchase or sale of foreign
currency involved in underlying security transactions, a fund may be able to
protect itself against part or all of the possible loss between trade and
settlement dates for that purchase or sale resulting from an adverse change in
the relationship between the U.S. dollar and such foreign currency. This
practice is sometimes referred to as "transaction hedging." In addition, when
the advisor reasonably believes that a particular foreign currency may suffer a
substantial decline against the U.S. dollar, a fund may enter into a forward
contract to sell an amount of foreign currency approximating the value of some
or all of its portfolio securities denominated in such foreign currency. This
practice is sometimes referred to as "portfolio hedging." Similarly, when the
advisor reasonably believes that the U.S. dollar may suffer a substantial
decline against a foreign currency, a fund may enter into a forward contract to
buy that foreign currency for a fixed dollar amount.

 A fund may also attempt to hedge its foreign currency exchange rate risk by
engaging in currency futures, options, and "cross-hedge" transactions. In
cross-hedge transactions, a fund holding securities denominated in one foreign
currency will enter into a forward currency contract to buy or sell a different
foreign currency (one that the advisor reasonably believes generally tracks the
currency being hedged with regard to price movements). The advisor may select
the tracking (or substitute) currency rather than the currency in which the
security is denominated for various reasons, including in order to take
advantage of pricing or other opportunities presented by the tracking currency
or because the market for the tracking currency is more liquid or more
efficient. Such cross-hedges are expected to help protect a fund against an
increase or decrease in the value of the U.S. dollar against certain foreign
currencies.

 A fund may hold a portion of its assets in bank deposits denominated in foreign
currencies, so as to facilitate investment in foreign securities as well as
protect against currency fluctuations and the need to convert such assets into
U.S. dollars (thereby also reducing transaction costs). To the extent these
monies are converted back into U.S. dollars, the value of the assets so
maintained will be affected favorably or unfavorably by changes in foreign
currency exchange rates and exchange control regulations.

 The forecasting of currency market movement is extremely difficult, and whether
any hedging strategy will be successful is highly uncertain. Moreover, it is
impossible to forecast with precision the market value of portfolio securities
at the expiration of a foreign currency forward contract. Accordingly, a fund
may be required to buy or sell additional currency on the spot market (and bear
the expense of such transaction) if its advisor's predictions regarding the
movement of foreign currency or securities markets prove inaccurate. In
addition, the use of cross-hedging transactions may involve special risks, and
may leave a fund in a less advantageous position than if such a hedge had not
been established. Because foreign currency forward contracts are privately
negotiated transactions, there can be no assurance that a fund will have
flexibility to roll-over a foreign currency forward contract upon its expiration
if it desires to do so. Additionally, there can be no assurance that the other
party to the contract will perform its services thereunder.

 FOREIGN SECURITIES -- FOREIGN INVESTMENT COMPANIES. Some of the countries in
which a fund may invest may not permit, or may place economic restrictions on,
direct investment by outside investors. Fund investments in such countries may
be permitted only through foreign government-approved or authorized investment
vehicles, which may include other investment companies. Such investments may be
made through registered or unregistered closed-end investment companies that
invest in foreign securities. Investing through such vehicles may involve
frequent or layered fees or expenses and may also be subject to the limitations
on, and the risks of, a fund's investments in other investment companies, which
are described below under the heading "Other Investment Companies."

 FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Futures contracts and
options on futures contracts are derivatives (see additional discussion above).
A futures contract is a standardized agreement between two parties to buy or
sell at a specific time in the future a specific quantity of a commodity at a
specific price. The commodity may consist of an asset, a reference rate, or an
index. A security futures contract relates to the sale of a specific quantity of
shares of a single equity security or a narrow-based securities index. The value
of a futures contract tends to increase and decrease in tandem with the value of
the underlying commodity. The buyer of a futures contract enters into an
agreement to purchase the underlying commodity on the settlement date and is
said to be "long" the contract. The

                                     B-9


seller of a futures contract enters into an agreement to sell the underlying
commodity on the settlement date and is said to be "short" the contract. The
price at which a futures contract is entered into is established either in the
electronic marketplace or by open outcry on the floor of an exchange between
exchange members acting as traders or brokers. Open futures contracts can be
liquidated or closed out by physical delivery of the underlying commodity or
payment of the cash settlement amount on the settlement date, depending on the
terms of the particular contract. Some financial futures contracts (such as
security futures) provide for physical settlement at maturity. Other financial
futures contracts (such as those relating to interest rates, foreign currencies
and broad-based securities indexes) generally provide for cash settlement at
maturity. In the case of cash settled futures contracts, the cash settlement
amount is equal to the difference between the final settlement price on the last
trading day of the contract and the price at which the contract was entered
into. Most futures contracts, however, are not held until maturity but instead
are "offset" before the settlement date through the establishment of an opposite
and equal futures position.

 The purchaser or seller of a futures contract is not required to deliver or pay
for the underlying commodity unless the contract is held until the settlement
date. However, both the purchaser and seller are required to deposit "initial
margin" with a futures commission merchant (FCM) when the futures contract is
entered into. Initial margin deposits are typically calculated as a percentage
of the contract's market value. If the value of either party's position
declines, that party will be required to make additional "variation margin"
payments to settle the change in value on a daily basis. This process is known
as "marking-to-market." A futures transaction will not be considered to
constitute the issuance of a "senior security" by a fund for purposes of the
1940 Act, and such transaction will not be subject to the 300% asset coverage
requirement otherwise applicable to borrowings by a fund, if the fund covers the
transaction in accordance with the requirements, and subject to the risks,
described above under the heading "Borrowing."

 An option on a futures contract (or futures option) conveys the right, but not
the obligation, to purchase (in the case of a call option) or sell (in the case
of a put option) a specific futures contract at a specific price (called the
"exercise" or "strike" price) any time before the option expires. The seller of
an option is called an option writer. The purchase price of an option is called
the premium. The potential loss to an option buyer is limited to the amount of
the premium plus transaction costs. This will be the case, for example, if the
option is held and not exercised prior to its expiration date. Generally, an
option writer sells options with the goal of obtaining the premium paid by the
option buyer. If an option sold by an option writer expires without being
exercised, the writer retains the full amount of the premium. The option writer,
however, has unlimited economic risk because its potential loss, except to the
extent offset by the premium received when the option was written, is equal to
the amount the option is "in-the-money" at the expiration date. A call option is
in-the-money if the value of the underlying futures contract exceeds the
exercise price of the option. A put option is in-the-money if the exercise price
of the option exceeds the value of the underlying futures contract. Generally,
any profit realized by an option buyer represents a loss for the option writer.

 A fund that takes the position of a writer of a futures option is required to
deposit and maintain initial and variation margin with respect to the option, as
described above in the case of futures contracts. A futures option transaction
will not be considered to constitute the issuance of a "senior security" by a
fund for purposes of the 1940 Act, and such transaction will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by a
fund, if the fund covers the transaction in accordance with the requirements,
and subject to the risks, described above under the heading "Borrowing."

 Each fund intends to comply with Rule 4.5 of the Commodity Futures Trading
Commission, under which a mutual fund is conditionally excluded from the
definition of the term "commodity pool operator." A fund will only enter into
futures contracts and futures options that are standardized and traded on a U.S.
or foreign exchange, board of trade, or similar entity, or quoted on an
automated quotation system.

 FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- RISKS. The risk of loss
in trading futures contracts and in writing futures options can be substantial,
because of the low margin deposits required, the extremely high degree of
leverage involved in futures and options pricing, and the potential high
volatility of the futures markets. As a result, a relatively small price
movement in a futures position may result in immediate and substantial loss (or
gain) to the investor. For example, if at the time of purchase, 10% of the value
of the futures contract is deposited as margin, a subsequent 10% decrease in the
value of the futures contract would result in a total loss of the margin
deposit, before any deduction for the transaction costs, if the account were
then closed out. A 15% decrease would result in a loss equal to 150% of the
original margin deposit if the contract were closed out. Thus, a purchase or
sale of a futures contract, and the writing of a futures option, may result in
losses in excess of the amount invested in the position. In the event of adverse
price movements, a fund would continue to be required to make daily cash
payments to maintain its

                                    B-10


required margin. In such situations, if the fund has insufficient cash, it may
have to sell portfolio securities to meet daily margin requirements (and
segregation requirements, if applicable) at a time when it may be
disadvantageous to do so. In addition, on the settlement date, a fund may be
required to make delivery of the instruments underlying the futures positions it
holds.

 A fund could suffer losses if it is unable to close out a futures contract or a
futures option because of an illiquid secondary market. Futures contracts and
futures options may be closed out only on an exchange which provides a secondary
market for such products. However, there can be no assurance that a liquid
secondary market will exist for any particular futures product at any specific
time. Thus, it may not be possible to close a futures or option position.
Moreover, most futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of future positions and subjecting some
futures traders to substantial losses. The inability to close futures and
options positions also could have an adverse impact on the ability to hedge a
portfolio investment or to establish a substitute for a portfolio investment.
Treasury futures are generally not subject to such daily limits.

 A fund bears the risk that its advisor will incorrectly predict future market
trends. If the advisor attempts to use a futures contract or a futures option as
a hedge against, or as a substitute for, a portfolio investment, the fund will
be exposed to the risk that the futures position will have or will develop
imperfect or no correlation with the portfolio investment. This could cause
substantial losses for the fund. While hedging strategies involving futures
products can reduce the risk of loss, they can also reduce the opportunity for
gain or even result in losses by offsetting favorable price movements in other
fund investments.

 A fund could lose margin payments it has deposited with its FCM, if, for
example, the FCM breaches its agreement with the fund or becomes insolvent or
goes into bankruptcy. In that event, the fund may be entitled to return of
margin owed to it only in proportion to the amount received by the FCM's other
customers, potentially resulting in losses to the fund.

 INTERFUND BORROWING AND LENDING. The SEC has granted an exemption permitting
the Vanguard funds to participate in Vanguard's interfund lending program. This
program allows the Vanguard funds to borrow money from and lend 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
typically available from a bank for a comparable transaction. In addition, a
Vanguard 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 overseeing the interfund lending program.

 OPTIONS. An option is a derivative (see additional discussion above). An option
on a security (or index) is a contract that gives the holder of the option, in
return for the payment of a "premium," the right, but not the obligation, to buy
from (in the case of a call option) or sell to (in the case of a put option) the
writer of the option the security underlying the option (or the cash value of
the index) at a specified exercise price prior to the expiration date of the
option. The writer of an option on a security has the obligation upon exercise
of the option (1) to deliver the underlying security upon payment of the
exercise price (in the case of a call option) or (2) to pay the exercise price
upon delivery of the underlying security (in the case of a put option). The
writer of an option on an index has the obligation upon exercise of the option
to pay an amount equal to the cash value of the index minus the exercise price,
multiplied by the specified multiplier for the index option. The multiplier for
an index option determines the size of the investment position the option
represents. Unlike exchange-traded options, which are standardized with respect
to the underlying instrument, expiration date, contract size, and strike price,
the terms of OTC options (options not traded on exchanges) generally are
established through negotiation with the other party to the option contract.
While this type of arrangement allows the purchaser or writer greater
flexibility to tailor an option to its needs, OTC options generally involve
greater credit risk than exchange-traded options, which are guaranteed by the
clearing organization of the exchanges where they are traded.


                                    B-11


 The buyer (or holder) of an option is said to be "long" the option, while the
seller (or writer) of an option is said to be "short" the option. A call option
grants to the holder the right to buy (and obligates the writer to sell) the
underlying security at the strike price. A put option grants to the holder the
right to sell (and obligates the writer to buy) the underlying security at the
strike price. The purchase price of an option is called the "premium." The
potential loss to an option buyer is limited to the amount of the premium plus
transaction costs. This will be the case if the option is held and not exercised
prior to its expiration date. Generally, an option writer sells options with the
goal of obtaining the premium paid by the option buyer, but that person could
also seek to profit from an anticipated rise or decline in option prices. If an
option sold by an option writer expires without being exercised, the writer
retains the full amount of the premium. The option writer, however, has
unlimited economic risk because its potential loss, except to the extent offset
by the premium received when the option was written, is equal to the amount the
option is "in-the-money" at the expiration date. A call option is in-the-money
if the value of the underlying position exceeds the exercise price of the
option. A put option is in-the-money if the exercise price of the option exceeds
the value of the underlying position. Generally, any profit realized by an
option buyer represents a loss for the option writer. The writing of an option
will not be considered to constitute the issuance of a "senior security" by a
fund for purposes of the 1940 Act, and such transaction will not be subject to
the 300% asset coverage requirement otherwise applicable to borrowings by a
fund, if the fund covers the transaction in accordance with the requirements,
and subject to the risks, described above under the heading "Borrowing."

 If a trading market in particular options were to become unavailable, investors
in those options (such as the funds) would be unable to close out their
positions until trading resumes, and they may be faced with substantial losses
if the value of the underlying interest moves adversely during that time. Even
if the market were to remain available, there may be times when options prices
will not maintain their customary or anticipated relationships to the prices of
the underlying interests and related interests. Lack of investor interest,
changes in volatility, or other factors or conditions might adversely affect the
liquidity, efficiency, continuity, or even the orderliness of the market for
particular options.

 A fund bears the risk that its advisor will not accurately predict future
market trends. If the advisor attempts to use an option as a hedge against, or
as a substitute for, a portfolio investment, the fund will be exposed to the
risk that the option will have or will develop imperfect or no correlation with
the portfolio investment. This could cause substantial losses for the fund.
While hedging strategies involving options can reduce the risk of loss, they can
also reduce the opportunity for gain or even result in losses by offsetting
favorable price movements in other fund investments. Many options, in particular
OTC options, are complex and often valued based on subjective factors. Improper
valuations can result in increased cash payment requirements to counterparties
or a loss of value to a fund.

 OTHER INVESTMENT COMPANIES. A fund may invest in other investment companies to
the extent permitted by applicable law or SEC exemption. Under the 1940 Act, a
fund generally may invest up to 10% of its assets in shares of investment
companies and up to 5% of its assets in any one investment company, as long as
the investment does not represent more than 3% of the voting stock of the
acquired investment company. The 1940 Act provides an exemption from these
restrictions for a fund-of-funds where the acquiring fund and any acquired funds
are part of the same group of investment companies and comply with various
conditions set forth in the Act. If a fund invests in other investment
companies, shareholders will bear not only their proportionate share of the
fund's expenses (including operating expenses and the fees of the advisor), but
also, indirectly, the similar expenses of the underlying investment companies.
Shareholders would also be exposed to the risks associated not only to the
investments of the fund but also to the portfolio investments of the underlying
investment companies. Certain types of investment companies, such as closed-end
investment companies, issue a fixed number of shares that typically trade on a
stock exchange or over-the-counter at a premium or discount to their net asset
value. Others are continuously offered at net asset value but also may be traded
in the secondary market.

 PREFERRED STOCK. Preferred stock represents an equity or ownership interest in
an issuer. Preferred stock normally pays dividends at a specified rate and has
precedence over common stock in the event the issuer is liquidated or declares
bankruptcy. However, in the event an issuer is liquidated or declares
bankruptcy, the claims of owners of bonds take precedence over the claims of
those who own preferred and common stock. Preferred stock, unlike common stock,
often has a stated dividend rate payable from the corporation's earnings.
Preferred stock dividends may be cumulative or non-cumulative, participating, or
auction rate. "Cumulative" dividend provisions require all or a portion of prior
unpaid dividends to be paid before dividends can be paid to the issuer's common
stock. "Participating" preferred stock may be entitled to a dividend exceeding
the stated dividend in certain cases. If interest rates rise, the fixed dividend
on preferred stocks may be less attractive, causing the price of such stocks to
decline. Preferred stock may have mandatory sinking fund provisions, as well as
provisions allowing the stock to be called or redeemed, which can limit the
benefit of a

                                    B-12


decline in interest rates. Preferred stock is subject to many of the risks to
which common stock and debt securities are subject.

 REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a
fund acquires a fixed income security (generally a security issued by the U.S.
government or an agency thereof, a banker's acceptance, or a certificate of
deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to
resell such security to the seller at an agreed upon price and date (normally,
the next business day). Because the security purchased constitutes collateral
for the repurchase obligation, a repurchase agreement may be considered a loan
that is collateralized by the security purchased. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by a
fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by a fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and be held by a custodian bank until repurchased. In
addition, the investment advisor will monitor a fund's repurchase agreement
transactions generally and will evaluate the creditworthiness of any bank,
broker, or dealer party to a repurchase agreement relating to a fund. The use of
repurchase agreements involves certain risks. One risk is the seller's ability
to pay the agreed-upon repurchase price on the repurchase date. If the seller
defaults, the fund may incur costs in disposing of the collateral, which would
reduce the amount realized thereon. If the seller seeks relief under the
bankruptcy laws, the disposition of the collateral may be delayed or limited.
For example, if the other party to the agreement becomes insolvent and subject
to liquidation or reorganization under the bankruptcy or other laws, a court may
determine that the underlying security is collateral for a loan by the fund not
within its control and therefore the realization by the fund on such collateral
may be automatically stayed. Finally, it is possible that the fund may not be
able to substantiate its interest in the underlying security and may be deemed
an unsecured creditor of the other party to the agreement.

 RESTRICTED AND ILLIQUID SECURITIES. Illiquid securities are securities that
cannot 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 a
fund's books. Illiquid securities may include a wide variety of investments,
such as: (1) repurchase agreements maturing in more than seven days; (2) OTC
options contracts and certain other derivatives (including certain swap
agreements); (3) fixed time deposits that are not subject to prepayment or do
not provide for withdrawal penalties upon prepayment (other than overnight
deposits); (4) participation interests in loans; (5) municipal lease
obligations; (6) commercial paper issued pursuant to Section 4(2) of the
Securities Act of 1933 (the 1933 Act); and (7) securities whose disposition is
restricted under the federal securities laws. Illiquid securities include
restricted, privately placed securities that, under the federal securities laws,
generally may be resold only to qualified institutional buyers. If a substantial
market develops for a restricted security (or other illiquid investment) held by
a fund, it may be treated as a liquid security, in accordance with procedures
and guidelines approved by the board of trustees. This generally includes
securities that are unregistered, that can be sold to qualified institutional
buyers in accordance with Rule 144A under the 1933 Act, or that are exempt from
registration under the 1933 Act, such as commercial paper. While a fund's
advisor monitors the liquidity of restricted securities on a daily basis, the
board of trustees oversees and retains ultimate responsibility for the advisor's
liquidity determinations. Several factors that the trustees consider in
monitoring these decisions include the valuation of a security, the availability
of qualified institutional buyers, brokers, and dealers that trade in the
security, and the availability of information about the security's issuer.

 REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund sells
a security to another party, such as a bank or broker-dealer, in return for cash
and agrees to repurchase that security at an agreed-upon price and time. Under a
reverse repurchase agreement, the fund continues to receive any principal and
interest payments on the underlying security during the term of the agreement.
Reverse repurchase agreements involve the risk that the market value of
securities retained by the fund may decline below the repurchase price of the
securities sold by the fund which it is obligated to repurchase. A reverse
repurchase agreement may be considered a borrowing transaction for purposes of
the 1940 Act. A reverse repurchase agreement transaction will not be considered
to constitute the issuance of a "senior security" by a fund, and such
transaction will not be subject to the 300% asset coverage requirement otherwise
applicable to borrowings by a fund, if the fund covers the transaction in
accordance with the requirements, and subject to the risks, described above
under the heading "Borrowing." A fund will enter into reverse repurchase
agreements only with parties whose creditworthiness has been reviewed and found
satisfactory by the advisor.

 SECURITIES LENDING. A fund may lend its investment securities to qualified
institutional investors (typically brokers, dealers, banks, or other financial
institutions) who may 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, a fund attempts to increase its net investment income through the
receipt of interest

                                    B-13


on the securities lent. Any gain or loss in the market price of the securities
lent that might occur during the term of the loan would be for the account of
the fund. If the borrower defaults on its obligation to return the securities
lent because of insolvency or other reasons, a fund could experience delays and
costs in recovering the securities lent or in gaining access to the collateral.
These delays and costs could be greater for foreign securities. If a fund is not
able to recover the securities lent, a fund may sell the collateral and purchase
a replacement investment in the market. The value of the collateral could
decrease below the value of the replacement investment by the time the
replacement investment is purchased. Cash received as collateral through loan
transactions may be invested in other eligible securities. Investing this cash
subjects that investment to market appreciation or depreciation.

 The terms and the structure and the aggregate amount of securities loans must
be consistent with the 1940 Act, and the rules or interpretations of the SEC
thereunder. These provisions limit the amount of securities a fund may lend to
33 1/3% of the fund's total assets, and require that (1) the borrower pledge and
maintain with the fund collateral consisting of cash, an irrevocable letter of
credit or securities issued or guaranteed by the U.S. government having at all
times not less than 100% of the value of the securities lent; (2) the borrower
add to such collateral whenever the price of the securities lent rises (i.e.,
the borrower "marks-to-market" on a daily basis); (3) the loan be made subject
to termination by the fund at any time; and (4) 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 lent
securities, and any increase in their market value. Loan arrangements made by
each 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. The advisor will consider the creditworthiness of
the borrower, among other things, in making decisions with respect to the
lending of securities, subject to oversight by the board of trustees. At the
present time, the SEC does not object if an investment company pays reasonable
negotiated fees in connection with lent securities, so long as such fees are set
forth in a written contract and approved by the investment company's trustees.
In addition, voting rights pass with the lent securities, but if a fund has
knowledge that a material event will occur affecting securities on loan, and in
respect of which the holder of the securities will be entitled to vote or
consent, the lender must be entitled to call the loaned securities in time to
vote or consent.


 SWAP AGREEMENTS. A swap agreement is a derivative (see additional discussion
above). A swap agreement is an agreement between two parties (counterparties) to
exchange payments at specified dates (periodic payment dates) on the basis of a
specified amount (notional amount) with the payments calculated with reference
to a specified asset, reference rate, or index.

 Examples of swap agreements include, but are not limited to, interest rate
swaps, credit default swaps, equity swaps, commodity swaps, foreign currency
swaps, index swaps, and total return swaps. Most swap agreements provide that
when the periodic payment dates for both parties are the same, payments are
netted, and only the net amount is paid to the counterparty entitled to receive
the net payment. Consequently, a fund's current obligations (or rights) under a
swap agreement will generally be equal only to the net amount to be paid or
received under the agreement, based on the relative values of the positions held
by each counterparty. Swap agreements allow for a wide variety of transactions.
For example, fixed rate payments may be exchanged for floating rate payments;
U.S. dollar-denominated payments may be exchanged for payments denominated in a
different currency; and payments tied to the price of one asset, reference rate,
or index may be exchanged for payments tied to the price of another asset,
reference rate, or index.

 An option on a swap agreement, also called a "swaption," is an option that
gives the buyer the right, but not the obligation, to enter into a swap on a
future date in exchange for paying a market-based "premium." A receiver swaption
gives the owner the right to receive the total return of a specified asset,
reference rate, or index. A payer swaption gives the owner the right to pay the
total return of a specified asset, reference rate, or index. Swaptions also
include options that allow an existing swap to be terminated or extended by one
of the counterparties.

 The use of swap agreements by a fund entails certain risks, which may be
different from, or possibly greater than, the risks associated with investing
directly in the securities and other investments that are the referenced asset
for the swap agreement. Swaps are highly specialized instruments that require
investment techniques, risk analyses, and tax planning different from those
associated with stocks, bonds, and other traditional investments. The use of a
swap requires an understanding not only of the referenced asset, reference rate,
or index but also of the swap itself, without the benefit of observing the
performance of the swap under all possible market conditions.

                                    B-14


 Swap agreements may be subject to liquidity risk, which exists when a
particular swap is difficult to purchase or sell. If a swap transaction is
particularly large or if the relevant market is illiquid (as is the case with
many OTC swaps), it may not be possible to initiate a transaction or liquidate a
position at an advantageous time or price, which may result in significant
losses. In addition, swap transactions may be subject to a fund's limitation on
investments in illiquid securities.

 Swap agreements may be subject to pricing risk, which exists when a particular
swap becomes extraordinarily expensive (or cheap) relative to historical prices
or the prices of corresponding cash market instruments. Under certain market
conditions, it may not be economically feasible to initiate a transaction or
liquidate a position in time to avoid a loss or take advantage of an opportunity
or to realize the intrinsic value of the swap agreement.

 Because some swap agreements have a leverage component, adverse changes in the
value or level of the underlying asset, reference rate, or index can result in a
loss substantially greater than the amount invested in the swap itself. Certain
swaps have the potential for unlimited loss, regardless of the size of the
initial investment. A leveraged swap transaction will not be considered to
constitute the issuance of a "senior security" by a fund, and such transaction
will not be subject to the 300% asset coverage requirement otherwise applicable
to borrowings by a fund, if the fund covers the transaction in accordance with
the requirements, and subject to the risks, described above under the heading
"Borrowing."


 Like most other investments, swap agreements are subject to the risk that the
market value of the instrument will change in a way detrimental to a fund's
interest. A fund bears the risk that its advisor will not accurately forecast
future market trends or the values of assets, reference rates, indexes, or other
economic factors in establishing swap positions for the fund. If the advisor
attempts to use a swap as a hedge against, or as a substitute for, a portfolio
investment, the fund will be exposed to the risk that the swap will have or will
develop imperfect or no correlation with the portfolio investment. This could
cause substantial losses for the fund. While hedging strategies involving swap
instruments can reduce the risk of loss, they can also reduce the opportunity
for gain or even result in losses by offsetting favorable price movements in
other fund investments. Many swaps, in particular OTC swaps, are complex and
often valued subjectively. Improper valuations can result in increased cash
payment requirements to counterparties or a loss of value to a fund.

 The use of a swap agreement also involves the risk that a loss may be sustained
as a result of the insolvency or bankruptcy of the counterparty or the failure
of the counterparty to make required payments or otherwise comply with the terms
of the agreement. Additionally, the use of credit default swaps can result in
losses if a fund's advisor does not correctly evaluate the creditworthiness of
the issuer on which the credit swap is based.

 The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect a fund's ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.

 TAX MATTERS -- FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. A fund is required
for federal income tax purposes to recognize as income for each taxable year its
net unrealized gains and losses on certain futures contracts as of the end of
the year as well as those actually realized during the year. In these 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. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term, depending on the holding period of the contract. Sales of futures
contracts that are intended to hedge against a change in the value of securities
held by a fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition. A fund may be required to defer the recognition of losses on one
position, such as futures contracts, to the extent of any unrecognized gains on
a related offsetting position held by the fund.

 In order for a fund to continue to qualify for federal income tax treatment as
a regulated investment company, at least 90% of its gross income for a taxable
year must be derived from qualifying income; i.e., dividends, interest, income
derived from loans of securities, gains from the sale of securities or of
foreign currencies, or other income derived with respect to the fund's business
of investing in securities or currencies. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.

 A fund will distribute to shareholders annually any net capital gains which
have been recognized for federal income tax purposes 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 distributions.

                                    B-15



 TAX MATTERS -- FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules
govern the federal income tax treatment of certain transactions denominated in 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: (1) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (2) the accruing of
certain trade receivables and payables; and (3) the entering into or acquisition
of any forward contract, futures contract, option, or similar financial
instrument if such instrument is not marked to market. The disposition of a
currency other than the U.S. dollar by a taxpayer whose functional currency is
the U.S. dollar is also treated as a transaction subject to the special currency
rules. However, foreign currency-related regulated futures contracts and
non-equity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary income 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 IRC and the Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the IRC. 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 a fund may make or enter into will be subject to the special
currency rules described above.


 TAX MATTERS -- FOREIGN TAX CREDIT. Foreign governments may withhold taxes on
dividends and interest paid with respect to foreign securities held by a fund.
Foreign governments may also impose taxes on other payments or gains with
respect to foreign securities. If, at the close of its fiscal year, more than
50% of a fund's total assets are invested in securities of foreign issuers, the
fund may elect to pass through foreign taxes paid, and thereby allow
shareholders to take a deduction or, if they meet certain holding period
requirements, a tax credit on their tax returns. If shareholders do not meet the
holding period requirements, they may still be entitled to a deduction for
certain gains that were actually distributed by the fund, but will also show the
amount of the available offsetting credit or deduction.

 TEMPORARY INVESTMENTS. A fund may take temporary defensive measures that are
inconsistent with the fund's normal fundamental or non-fundamental investment
policies and strategies in response to adverse market, economic, political, or
other conditions as determined by the advisor. Such measures could include, but
are not limited to, investments in (1) 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; (2) shares of other investment companies which have investment
objectives consistent with those of the fund; (3) repurchase agreements
involving any such securities; and (4) other money market instruments. There is
no limit on the extent to which the fund may take temporary defensive measures.
In taking such measures, the fund may fail to achieve its investment objective.

 WARRANTS. Warrants are instruments that give the holder the right, but not the
obligation, to buy an equity security at a specific price for a specific period
of time. Changes in the value of a warrant do not necessarily correspond to
changes in the value of its underlying security. The price of a warrant may be
more volatile than the price of its underlying security, and a warrant may offer
greater potential for capital appreciation as well as capital loss. Warrants do
not entitle a holder to dividends or voting rights with respect to the
underlying security and do not represent any rights in the assets of the issuing
company. A warrant ceases to have value if it is not exercised prior to its
expiration date. These factors can make warrants more speculative than other
types of investments.


 WHEN-ISSUED, DELAYED-DELIVERY, AND FORWARD-COMMITMENT TRANSACTIONS.
When-issued, delayed-delivery, and forward-commitment transactions involve a
commitment to purchase or sell specific securities at a predetermined price or
yield in which payment and delivery take place after the customary settlement
period for that type of security. Typically, no interest accrues to the
purchaser until the security is delivered. When purchasing securities pursuant
to one of these transactions, payment for the securities is not required until
the delivery date. However, the purchaser assumes the rights and risks of
ownership, including the risks of price and yield fluctuations and the risk that
the security will not be issued as anticipated. When a fund has sold a security
pursuant to one of these transactions, the fund does not participate in further

                                    B-16


gains or losses with respect to the security. If the other party to a
delayed-delivery transaction fails to deliver or pay for the securities, the
fund could miss a favorable price or yield opportunity or suffer a loss. A fund
may renegotiate a when-issued or forward-commitment transaction and may sell the
underlying securities before delivery, which may result in capital gains or
losses for the fund. When-issued, delayed-delivery, and forward-commitment
transactions will not be considered to constitute the issuance of a "senior
security" by a fund, and such transaction will not be subject to the 300% asset
coverage requirement otherwise applicable to borrowings by the fund, if the fund
covers the transaction in accordance with the requirements, and subject to the
risks, described above under the heading "Borrowing."

                             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 shares means
shares representing the lesser of: (1) 67% or more of the Fund's net assets
voted, so long as shares representing more than 50% of the Fund's net assets are
present or represented by proxy; or (2) more than 50% of the Fund's net assets.

 BORROWING. The Fund may borrow money for temporary or emergency purposes only
in an amount not to exceed 15% of the Fund's net assets. The Fund may borrow
money through banks, reverse repurchase agreements, 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 it may invest
in stock futures contracts and options. 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 stock futures contracts
or options at any time.

 DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not: (1)
purchase more than 10% of the outstanding voting securities of any one issuer;
or (2) 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 U.S. government, its agencies,
or instrumentalities.


 ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.


 INDUSTRY CONCENTRATION. 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 purposes of
controlling its management.

 INVESTMENT OBJECTIVE. The investment objective of the Fund may not be
materially changed without a shareholder vote.

 LOANS. The Fund may not lend money to any person except by purchasing fixed
income securities, by entering into repurchase agreements, by 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, or interests
therein.

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

 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 Fund from having an ownership interest
in Vanguard. As a part owner of Vanguard, 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 Fund" for more information.

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

                                    B-17


                                   SHARE PRICE

The Fund's share price, called its net asset value, or NAV, is calculated each
business day as of the close of regular trading on the New York Stock Exchange
(the Exchange), generally 4 p.m., Eastern time. NAV per share is computed by
dividing the net assets allocated to each share class by the number of Fund
shares outstanding for that class.

 The Exchange typically observes the following holidays: New Year's Day, Martin
Luther King Jr. Day, President's Day, Good Friday, Memorial Day, Independence
Day, Labor Day, Thanksgiving Day, and Christmas Day. Although the Fund expects
the same holidays to be observed in the future, the Exchange may modify its
holiday schedule or hours of operation at any time.

                        PURCHASE AND REDEMPTION OF SHARES

PURCHASE OF SHARES

The purchase price of shares of the Fund is the NAV per share next determined
after the purchase request is received in good order, as defined in the Fund's
prospectus. The NAV per share is calculated as of the close of regular trading
on the Exchange on each day the Exchange is open for business. A purchase order
received before the close of regular trading on the Exchange will be executed at
the NAV computed on the date of receipt; a purchase order received after the
close of regular trading on the Exchange will be executed at the NAV computed on
the first business day following the date of receipt.

REDEMPTION OF SHARES

The Fund may suspend redemption privileges or postpone the date of payment for
redeemed shares: (1) during any period that the Exchange is closed or trading on
the Exchange is restricted as determined by the SEC; (2) during any period when
an emergency exists, as defined by the SEC, as a result of which it is not
reasonably practicable for the Fund to dispose of securities it owns or to
fairly determine the value of its assets; and (3) for such other periods as the
SEC may permit.

 The Fund has filed a notice of election with the SEC to pay in cash all
redemption requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.

 If Vanguard determines that it would be detrimental to the best interests of
the remaining shareholders of the Fund to make payment wholly or partly in cash,
the Fund may pay the redemption price in whole or in part by a distribution in
kind of readily marketable securities held by the Fund in lieu of cash in
conformity with applicable rules of the SEC. Investors may incur brokerage
charges on the sale of such securities received in payment of redemptions.

 No charge is made by the Fund for redemptions. Shares redeemed may be worth
more or less than what was paid for them, depending on the market value of the
securities held by the Fund.

RIGHT TO CHANGE POLICIES

Vanguard reserves the right to (1) alter, add, or discontinue any conditions of
purchase, redemption, service, or privilege at any time without notice; (2)
accept initial purchases by telephone; (3) freeze any account and suspend
account services when Vanguard has received reasonable notice of a dispute
regarding the assets in an account, including notice of a dispute between the
registered or beneficial account owners or when we reasonably believe a
fraudulent transaction may occur or has occurred; (4) alter, impose,
discontinue, or waive any redemption fee, low-balance account fee, account
maintenance fee, or other fees charged to a group of shareholders; and (5)
redeem an account, without the owner's permission to do so, in cases of
threatening conduct or suspicious, fraudulent, or illegal activity. Changes may
affect all investors or only those in certain classes or groups. These actions
will be taken when, in the sole discretion of Vanguard management, we reasonably
believe they are deemed to be in the best interest of a fund.


INVESTING WITH VANGUARD THROUGH OTHER FIRMS

The Fund has authorized certain agents to accept on its behalf purchase and
redemption orders, and those agents are authorized to designate other
intermediaries to accept purchase and redemption orders on the Fund's behalf


                                    B-18



(collectively, Authorized Agents). The Fund will be deemed to have received a
purchase or redemption order when an Authorized Agent accepts the order in
accordance with the Fund's instructions. In most instances, a customer order
that is properly transmitted to an Authorized Agent will be priced at the Fund's
NAV next determined after the order is received by the Authorized Agent. If you
invest with Vanguard through another firm, you should review that firm's
policies relating to trading in the Vanguard funds.


 When intermediaries establish accounts in Vanguard funds for their clients, we
cannot always monitor the trading activity of individual clients. However, we
review trading activity at the omnibus level, and if we detect suspicious
activity, we will seek to investigate and take appropriate action. If necessary,
Vanguard may prohibit additional purchases of fund shares by an intermediary or
by certain of the intermediary's clients. Intermediaries may also monitor their
clients' trading activities in the Vanguard funds.

 For those Vanguard funds that charge purchase or redemption fees,
intermediaries will be asked to assess purchase or redemption fees on
shareholder and participant accounts and remit these fees to the funds. The
application of purchase and redemption fees and frequent-trading policies may
vary among intermediaries. There are no assurances that Vanguard will
successfully identify all intermediaries or that intermediaries will properly
assess purchase or redemption fees or administer frequent- trading policies.

 For funds to which fees apply, intermediaries will be expected to begin to
assess purchase and redemption fees within the next year. Intermediaries may be
provided additional time if needed to address systems issues. If you invest with
Vanguard through an intermediary, please read that firm's materials carefully to
learn of any other rules or fees that may apply.


                             MANAGEMENT OF THE FUND

VANGUARD

The Fund is part of the Vanguard group of investment companies, which consists
of more than 130 funds. Through their jointly-owned subsidiary, Vanguard, the
funds 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 several of the Vanguard funds.


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

 The funds' officers are also officers and employees of Vanguard.

 Vanguard, Vanguard Marketing Corporation, the funds' advisors, and the funds
have adopted Codes of Ethics designed to prevent employees who may have access
to nonpublic information about the trading activities of the funds (access
persons) from profiting from that information. The Codes permit access persons
to invest in securities for their own accounts, including securities that may be
held by a fund, but place substantive and procedural restrictions on the trading
activities of access persons. For example, the Codes require that access persons
receive advance approval for most securities trades to ensure that there is no
conflict with the trading activities of the funds. The Codes also limit the
ability of Vanguard employees to engage in short-term trading of Vanguard funds.

 Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement, which was approved by the shareholders of each of the funds.
The Amended and Restated Funds' Service Agreement provides as follows: (1) each
Vanguard fund may be called upon to invest up to 0.40% of its current net assets
in Vanguard, and (2) there is no other limitation on the dollar amount that each
Vanguard fund may contribute to Vanguard's capitalization. The amounts that each
fund has invested are adjusted from time to time in order to maintain the
proportionate relationship between each fund's relative net assets and its
contribution to Vanguard's capital.

 As of September 30, 2005, the Fund contributed $669,000 to Vanguard, which
represented 0.01% of the Fund's net assets and was 0.67% of Vanguard's
capitalization.


 MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the funds by third parties.

                                    B-19


 DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
Vanguard, provides all distribution and marketing activities for the funds. 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.
The funds' trustees review and approve the amount to be spent annually on
distribution activities, as well as the manner and amount to be spent on each
fund. The trustees also determine whether to organize new investment companies.

 One half of the distribution expenses of a marketing and promotional nature is
allocated among the funds based upon their relative net assets. The remaining
half of those expenses is allocated among the funds based upon each fund's sales
for the preceding 24 months relative to the total sales of the funds as a group,
provided, however, that no fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
the average distribution expense rate for Vanguard, and that no fund shall incur
annual distribution expenses in excess of 0.20 of 1% of its average month-end
net assets.

 During the fiscal years ended September 30, 2003, 2004, and 2005, the Fund paid
the following approximate amounts of Vanguard's management and administrative
(including transfer agency), distribution, and marketing expenses: $11,698,000,
$13,876,000, and $15,135,000, respectively.


 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 and are not
reflected in these totals.

OFFICERS AND TRUSTEES

The Fund is governed by the board of trustees to the Trust and a single set of
officers. The officers manage the day-to-day operations of the Fund under the
direction of the Fund's board of trustees. The trustees set broad policies for
the Fund; select investment advisors; monitor fund operations, performance, and
costs; nominate and select new trustees; and elect fund officers. Each trustee
serves the Fund until its termination; until the trustee's retirement,
resignation, or death; or as otherwise specified in the Trust's organizational
documents. Any trustee may be removed at a meeting of shareholders by a vote
representing two-thirds of the total net asset value of all shares of the Fund.
Each trustee also serves as a director of Vanguard.

 The following chart 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.




                                                                                            
                                              VANGUARD
                         POSITION(S)          FUNDS' TRUSTEE/     PRINCIPAL OCCUPATION(S)AND OUTSIDE DIREC- NUMBER OF VANGUARD FUNDS
NAME, YEAR OF BIRTH      HELD WITH FUNDS      OFFICER SINCE       TORSHIPS DURING THE PAST FIVE YEARS    OVERSEEN BY TRUSTEE/OFFICER
- -------------------      ---------------      --------------      --------------------------            ---------------------------
INTERESTED TRUSTEE
John J. Brennan*         Chairman of the      May 1987            Chairman of the Board, Chief                                  133
(1954)                   Board, Chief                             Executive Officer, and Director
                         Executive Officer,                       (Trustee) of Vanguard, and each of
                         and Trustee                              the investment companies served by
                                                                  Vanguard.

- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Charles D. Ellis         Trustee              January 2001        Applecore Partners (pro bono ventures in                      133
(1937)                                                            education); Senior Advisor to Greenwich
                                                                  Associates (international business strategy
                                                                  consulting); Successor Trustee of Yale
                                                                  University; Overseer of the Stern School of
                                                                  Business at New York University; Trustee of
                                                                  the Whitehead Institute for Biomedical
                                                                  Research.



*Officers of the Fund are "interested persons" as defined in the 1940 Act.

                                      B-20





                                                                                            
                                              VANGUARD
                         POSITION(S)          FUNDS' TRUSTEE/     PRINCIPAL OCCUPATION(S)AND OUTSIDE DIREC- NUMBER OF VANGUARD FUNDS
NAME, YEAR OF BIRTH      HELD WITH FUNDS      OFFICER SINCE       TORSHIPS DURING THE PAST FIVE YEARS    OVERSEEN BY TRUSTEE/OFFICER
- -------------------      ---------------      --------------      --------------------------            ---------------------------
Rajiv L. Gupta           Trustee              December 2001       Chairman and Chief Executive Officer                          133
(1945)                                                            of Rohm and Haas Co. (chemicals) since
                                                                  October 1999; Board Member of American
                                                                  Chemistry Council; Director of Tyco International, Ltd.
                                                                  (diversified manufacturing and services) since
                                                                  2005; Trustee of Drexel University and Chemical
                                                                  Heritage Foundation.

JoAnn Heffernan Heisen   Trustee              July 1998           Corporate Vice President & Chief Global Diversity Officer     133
(1950)                                                            (since January 2006); Vice President, Chief Information
                                                                  Officer (1997-2005), and Member of the Executive Committee
                                                                  of Johnson & Johnson (pharmaceuticals/consumer products);
                                                                  Director of the University Medical Center at Princeton
                                                                  and Women's Research and Education Institute.

Andre F. Perold          Trustee              December 2004       George Gund Professor of Finance and Banking, Harvard Business 133
(1952)                                                            School since 2000; Senior Associate Dean, Director of Faculty
                                                                  Recruiting, and Chair of Finance Faculty, Harvard Business
                                                                  School; Director and Chairman of Unx, Inc. (equities trading
                                                                  firm) since 2003; Director of registered investement companies
                                                                  advised by Merril Lynch Investment Managers and affiliates
                                                                  (1985-2004), Genbel Securities Limited (South African financial
                                                                  services firm) (1999-2003), Gensec Bank (199-2003), Sanlam Ltd.
                                                                  (South African insurance company)(2001-2003), and Stockback, Inc.
                                                                  (credit card firm)(2000-2002).

Alfred M. Rankin, Jr.    Trustee              January 1993        Chairman, President, Chief Executive Officer,                 133
(1941)                                                            and Director of NACCO Industries, Inc.(forklift
                                                                  trucks/housewares/lignite); Director of
                                                                  Goodrich Corporation (industrial products/
                                                                  aircraft systems and services). Director of
                                                                  Standard Products Company (supplier for
                                                                  automotive industry) until 1998.

J. Lawrence Wilson       Trustee              April 1985          Retired Chairman and Chief Executive Officer                  133
(1936)                                                            of Rohm and Haas Co. (chemicals); Director of
                                                                  Cummins Inc. (diesel engines), MeadWestvaco
                                                                  Corp. (packaging products), and Amerisource
                                                                  Bergen Corp. (pharmaceutical distribution);
                                                                  Trustee of Vanderbilt University and Culver
                                                                  Educational Foundation.
- -----------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
Heidi Stam*              Secretary            July 2005           Principal of Vanguard since November 1997; and General        133
(1956)                                                            Counsel of Vanguard since July 2005; Secretary of Vanguard, and
                                                                  of each of the investment companies served by Vanguard since
                                                                  July 2005.

Thomas J. Higgins*       Treasurer            July 1998           Principal of Vanguard; Treasurer of each of the               133
(1957)                                                            investment companies served by Vanguard since July 1998.

*Officers of the Fund are "interested persons" as defined in the 1940 Act.




                                    B-21



 Mr. Ellis is a Senior Advisor to Greenwich Associates, a firm that consults on
business strategy to professional financial services organizations in markets
around the world. A large number of financial service providers, including
Vanguard, subscribe to programs of research-based consulting. During 2004 and
2005, Vanguard paid Greenwich subscription fees amounting to less than $400,000.
Vanguard's subscription rates are similar to those of other subscribers.

 Board Committees: The Trust's board has the following committees:

- - Audit Committee: This committee oversees the accounting and financial
 reporting policies, the systems of internal controls, and the independent
 audits of the Fund and Vanguard. All independent trustees serve as members of
 the committee. The committee held two meetings during the Fund's last fiscal
 year.

- - Compensation Committee: This committee oversees the compensation programs
 established by the Fund and Vanguard for the benefit of their employees,
 officers, and trustees/directors. All independent trustees serve as members of
 the committee. The committee held three meetings during the Fund's last fiscal
 year.

- - Nominating Committee: This committee nominates candidates for election to
 Vanguard's board of directors and the board of trustees of each fund
 (collectively, the Vanguard boards). The committee also has the authority to
 recommend the removal of any director or trustee from the Vanguard boards. All
 independent trustees serve as members of the committee. The committee held
 three meetings during the Fund's last fiscal year.


 The Nominating Committee will consider shareholder recommendations for trustee
nominees. Shareholders may send recommendations to Mr. Wilson, Chairman of the
Committee.

TRUSTEES' OWNERSHIP OF FUND SHARES

All trustees allocate their investments among the various Vanguard funds based
on their own investment needs. The following table shows each trustee's
ownership of shares of the Fund and of all Vanguard funds served by the trustee
as of December 31, 2004. As a group, the funds' trustees and officers own less
than 1% of the outstanding shares of each class of each fund.




                                                          
                                                 DOLLAR RANGE OF   AGGREGATE DOLLAR RANGE OF
                                                     FUND SHARES        VANGUARD FUND SHARES
FUND                                   TRUSTEE  OWNED BY TRUSTEE            OWNED BY TRUSTEE
- --------------------------------------------------------------------------------------------
Vanguard Morgan Growth Fund    John J. Brennan     Over $100,000               Over $100,000
                              Charles D. Ellis              None               Over $100,000
                                Rajiv L. Gupta              None               Over $100,000
                        JoAnn Heffernan Heisen              None               Over $100,000
                            Burton G. Malkiel*              None               Over $100,000
                               Andre F. Perold              None               Over $100,000
                         Alfred M. Rankin, Jr.  $50,001-$100,000               Over $100,000
                            J. Lawrence Wilson              None               Over $100,000


*Mr. Malkiel retired from the Fund's board effective June 30, 2005.


TRUSTEE COMPENSATION


The same individuals serve as trustees of all Vanguard funds and each fund pays
a proportionate share of the trustees' compensation. The funds also employ their
officers on a shared basis; however, officers are compensated by Vanguard, not
the funds.


 INDEPENDENT TRUSTEES. The funds compensate their independent trustees (i.e.,
the ones who are not also officers of the funds) in three ways:

- - 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.

- - The independent trustees are reimbursed for the travel and other expenses that
 they incur in attending board meetings.

- - Upon retirement (after attaining age 65 and completing five years of service),
 the independent trustees who began their service prior to January 1, 2001,
 receive a retirement benefit under a separate account arrangement. As of
 January 1, 2001, the opening balance of each eligible trustee's separate
 account was generally equal to the net

                                    B-22


 present value of the benefits he or she had accrued under the trustees' former
 retirement plan. Each eligible trustee's separate account will be credited
 annually with interest at a rate of 7.5% until the trustee receives his or her
 final distribution. Those independent trustees who began their service on or
 after January 1, 2001, are not eligible to participate in the plan.

 "INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in this
capacity. He is, however, paid in his role as officer of Vanguard.

 COMPENSATION TABLE. The following table provides compensation details for each
of the trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund for each trustee. In addition, the table shows
the total amount of benefits that we expect each trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each trustee by all Vanguard funds.

                          VANGUARD MORGAN GROWTH FUNDS
                          TRUSTEES' COMPENSATION TABLE






                                                                        
                                       PENSION OR RETIREMENT
                            AGGREGATE       BENEFITS ACCRUED        ACCRUED ANNUAL  TOTAL COMPENSATION
                         COMPENSATION             AS PART OF            RETIREMENT   FROM ALL VANGUARD
                                 FROM                   THIS            BENEFIT AT          FUNDS PAID
TRUSTEE                  THIS FUND(1)      FUND'S EXPENSES(1)   JANUARY 1, 2005(2)      TO TRUSTEES(3)
- -------                --------------      ------------------   ------------------      --------------
John J. Brennan                  None               None                 None                 None
Charles D. Ellis               $1,108                N/A                  N/A             $117,600
Rajiv L. Gupta                  1,108                N/A                  N/A              120,000
JoAnn Heffernan Heisen          1,108                $29               $4,300              120,000
Burton G. Malkiel(4)            1,016                 49               12,000               60,000
Andre F. Perold(5)                830                N/A                  N/A              117,600
Alfred M. Rankin, Jr.           1,108                 34                6,600              120,000
J. Lawrence Wilson              1,268                 37                9,000              138,000

(1) The amounts shown in this column are based on the Fund's fiscal year
ended September 30, 2005.
(2)Each trustee is eligible to receive retirement benefits only after completing
at least 5 years (60 consecutive months) of service as a trustee for the Vanguard funds.
The annual retirement benefit will be paid in monthly installments, beginning with the month
following the trustee's retirement from service, and will cease after 10 years of payments (120 monthly
installments). Trustees who began their service on or after January 1, 2001, are not eligible to
participate in the retirement benefit plan.
(3)The amounts reported in this column reflect the total compensation paid to each trustee for
his or her service as trustee of 133 Vanguard funds (130 in the case of Mr. Malkiel) for the 2005 calendar year.
(4) Mr. Malkiel retired from the Fund's board effective June 30, 2005.
(5)Mr. Perold became a member of the Fund's board effective December 2004.




As of December 31,2005, the trustees and executive officers of the funds owned,
in the aggregate, less than 1% of each class of each fund's outstanding shares.

 As of December 31, 2005, those listed below owned of record 5% or more of each
class' outstanding shares:

Vanguard Morgan Growth Fund--Admiral Shares: Argosy & Co., N. Quincy, MA
(5.54%); Fidelity Investments Institutional Operations Co. Inc., Covington, KY
(11.25%).


PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES

INTRODUCTION

Vanguard and the Boards of Trustees of the Vanguard funds (the Boards) have
adopted Portfolio Holdings Disclosure Policies and Procedures (Polices and
Procedures) to govern the disclosure of the portfolio holdings of each Vanguard
fund. Vanguard and the Boards considered each of the circumstances under which
Vanguard fund portfolio holdings may be disclosed to different categories of
persons under the Policies and Procedures. Vanguard and the Boards also
considered actual and potential material conflicts that could arise in such
circumstances between the interests of Vanguard fund's shareholders, on the one
hand, and those of the fund's investment advisor, distributor, or any affiliated
person of the fund, its investment advisor, or its distributor, on the other.
After giving due consideration to such matters and after the exercise of their
fiduciary duties and reasonable business judgment, Vanguard and the Boards
determined that the Vanguard funds have a legitimate business purpose for
disclosing portfolio holdings to the persons described in


                                    B-23



each of the circumstances set forth in the Policies and Procedures and that the
Policies and Procedures are reasonably designed to ensure that disclosure of
portfolio holdings and information about portfolio holdings is in the best
interests of fund shareholders and appropriately address the potential for
material conflicts of interest.

 The Boards exercise continuing oversight of the disclosure of Vanguard fund
portfolio holdings by (1) overseeing the implementation and enforcement of the
Policies and Procedures, the Code of Ethics, and the Policies and Procedures
Designed to Prevent the Misuse of Inside Information (collectively, the
portfolio holdings governing policies) by the Chief Compliance Officer of
Vanguard and the Vanguard funds; (2) considering reports and recommendations by
the Chief Compliance Officer concerning any material compliance matters (as
defined in Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Investment
Advisers Act of 1940) that may arise in connection with any portfolio holdings
governing policies; and (3) considering whether to approve or ratify any
amendment to any portfolio holdings governing policies. Vanguard and the Boards
reserve the right to amend the Policies and Procedures at any time and from time
to time without prior notice in their sole discretion. For purposes of the
Policies and Procedures, the term "portfolio holdings" means the equity and debt
securities (e.g., stocks and bonds) held by a Vanguard fund and does not mean
the cash investments, derivatives, and other investment positions (collectively,
other investment positions) held by the fund.


ONLINE DISCLOSURE OF TEN LARGEST STOCK HOLDINGS

Each of the Vanguard equity funds and Vanguard balanced funds generally will
seek to disclose their ten largest stock portfolio holdings and the percentages
that each of these ten largest stock portfolio holdings represent of the fund's
total assets (collectively, ten largest stock holdings) as of the most recent
calendar-quarter-end online at www.vanguard.com in the "Holdings" section of the
fund's Profile page, 15 calendar days after the end of the calendar quarter.
Online disclosure of the ten largest stock holdings is made to all categories of
persons, including individual investors, institutional investors,
intermediaries, third-party service providers, rating and ranking organizations,
affiliated persons of a Vanguard fund, and all other persons.


ONLINE DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS


Each of the Vanguard funds, excluding Vanguard money market funds, will seek to
disclose their complete portfolio holdings as of the most recent
calendar-quarter-end online at www.vanguard.com in the "Holdings" section of the
fund's Profile page, 30 calendar days after the end of the calendar quarter.
Online disclosure of complete portfolio holdings is made to all categories of
persons, including individual investors, institutional investors,
intermediaries, third-party service providers, rating and ranking organizations,
affiliated persons of a Vanguard fund, and all other persons. A Principal or
Senior Analyst in Vanguard's Portfolio Review Department will review complete
portfolio holdings before online disclosure is made as described above and,
after consultation with a Vanguard fund's investment advisor, may withhold any
portion of the fund's complete portfolio holdings from online disclosure as
described above when deemed to be in the best interest of the fund.


DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO SERVICE PROVIDERS SUBJECT TO
CONFIDENTIALITY AND TRADING RESTRICTIONS


Vanguard, for legitimate business purposes, may disclose the complete portfolio
holdings of a Vanguard fund at times it deems necessary and appropriate to
rating and ranking organizations, financial printers, proxy voting service
providers, pricing information vendors, third-parties that deliver analytical,
statistical, or consulting services, and other third parties that provide
services (collectively, Service Providers) to Vanguard, Vanguard subsidiaries,
and/or the Vanguard funds. Disclosure of complete portfolio holdings to a
Service Provider is conditioned on the Service Provider being subject to a
written agreement imposing a duty of confidentiality, including a duty not to
trade on the basis of any material nonpublic information. The frequency with
which complete portfolio holdings may be disclosed to a Service Provider, and
the length of the lag, if any, between the date of the information and the date
on which the information is disclosed to the Service Provider, is determined
based on the facts and circumstances, including, without limitation, the nature
of the portfolio holdings information to be disclosed, the risk of harm to the
funds and their shareholders, and the legitimate business purposes served by
such disclosure. The frequency of disclosure to a Service Provider varies and
may be as frequent as daily, with no lag. Disclosure of Vanguard fund complete
portfolio holdings by Vanguard to a Service Provider must be authorized by a
Vanguard fund officer or a Principal in Vanguard's Portfolio Review or Legal
Departments. Any disclosure of Vanguard fund complete portfolio holdings to a
Service Provider as described above may also include a list of the other
investment positions comprising the fund, such as cash investments and
derivatives.


                                    B-24



 As of December 31, 2005, Vanguard fund complete portfolio holdings are
disclosed to the following Service Providers as part of ongoing arrangements
that serve legitimate business purposes: Alcom Printing Group Inc., Apple Press
Ltd., Automatic Data Processing, Inc., Brown Brothers Harriman & Co., FactSet
Research Systems Inc., Intelligencer Printing Company, Investment Technology
Group, Inc., McMunn Associates Inc., Moore Wallace Inc., Pitney Bowes Management
Services, Reuters America Inc., Triune Color Corporation, and Tursack Printing
Inc.


DISCLOSURE OF COMPLETE PORTFOLIO HOLDINGS TO VANGUARD AFFILIATES AND CERTAIN
FIDUCIARIES SUBJECT TO CONFIDENTIALITY AND TRADING RESTRICTIONS


Vanguard fund complete portfolio holdings may be disclosed between and among the
following persons (collectively, Affiliates and Fiduciaries) for legitimate
business purposes within the scope of their official duties and
responsibilities, subject to such persons' continuing legal duty of
confidentiality and legal duty not to trade on the basis of any material
nonpublic information, as such duties are imposed under the Code of Ethics, the
Policies and Procedures Designed to Prevent the Misuse of Inside Information, by
agreement, or under applicable laws, rules, and regulations: (1) persons who are
subject to the Code of Ethics or the Policies and Procedures Designed to Prevent
the Misuse of Inside Information; (2) an investment advisor, distributor,
administrator, transfer agent, or custodian to a Vanguard fund; (3) an
accounting firm, an auditing firm, or outside legal counsel retained by
Vanguard, a Vanguard subsidiary, or a Vanguard fund; (4) an investment advisor
to whom complete portfolio holdings are disclosed for due diligence purposes
when the advisor is in merger or acquisition talks with a Vanguard fund's
current advisor; and (5) a newly hired investment advisor or sub-advisor to whom
complete portfolio holdings are disclosed prior to the time it commences its
duties.

 The frequency with which complete portfolio holdings may be disclosed between
and among Affiliates and Fiduciaries, and the length of the lag, if any, between
the date of the information and the date on which the information is disclosed
between and among the Affiliates and Fiduciaries, is determined by such
Affiliates and Fiduciaries based on the facts and circumstances, including,
without limitation, the nature of the portfolio holdings information to be
disclosed, and the risk of harm to the funds and their shareholders, and the
legitimate business purposes served by such disclosure. The frequency of
disclosure between and among Affiliates and Fiduciaries varies and may be as
frequent as daily, with no lag. Any disclosure of Vanguard fund complete
portfolio holdings to any Affiliates and Fiduciaries as described in the
preceding text may also include a list of the other investment positions
comprising the fund, such as cash investments and derivatives. Disclosure of
Vanguard fund complete portfolio holdings or investment positions by Vanguard,
Vanguard Marketing Corporation, or a Vanguard fund to Affiliates and Fiduciaries
must be authorized by a Vanguard fund officer or a Principal of Vanguard. As of
December 31, 2005, Vanguard fund complete portfolio holdings are disclosed to
the following Affiliates and Fiduciaries as part of ongoing arrangements that
serve legitimate business purposes: Vanguard and each investment advisor,
custodian, and independent registered public accounting firm identified in this
Statement of Additional Information.

DISCLOSURE OF PORTFOLIO HOLDINGS AS REQUIRED BY APPLICABLE LAW

Vanguard fund portfolio holdings (whether partial portfolio holdings or complete
portfolio holdings) and other investment positions comprising a fund shall be
disclosed to any person as required by applicable laws, rules, and regulations.
Examples of such required disclosure include, but are not limited to, disclosure
of Vanguard fund portfolio holdings (1) in a filing or submission with the SEC
or another regulatory body; (2) in connection with seeking recovery on defaulted
bonds in a federal bankruptcy case; (3) in connection with a lawsuit; or (4) as
required by court order. Disclosure of portfolio holdings or other investment
positions by Vanguard, Vanguard Marketing Corporation, or a Vanguard fund as
required by applicable laws, rules, and regulations must be authorized by a
Vanguard fund officer or a Principal of Vanguard.

DISCLOSURE OF PORTFOLIO HOLDINGS TO BROKER-DEALERS IN THE NORMAL COURSE OF
MANAGING A FUND'S ASSETS

An investment advisor, administrator, or custodian for a Vanguard fund may, for
legitimate business purposes within the scope of their official duties and
responsibilities, disclose portfolio holdings (whether partial portfolio
holdings or complete portfolio holdings) and other investment positions
comprising the fund to one or more broker-dealers during the course of, or in
connection with, normal day-to-day securities and derivatives transactions with
or through such broker-dealers subject to the broker-dealer's legal obligation
not to use or disclose material nonpublic information concerning the funds'
portfolio holdings, other investment positions, securities transactions, or
derivatives transactions without the consent of the funds or their agents. The
Vanguard funds have not given their consent to any such use or


                                    B-25


disclosure and no person or agent of Vanguard is authorized to give such consent
except as approved in writing by the fund Boards. Disclosure of portfolio
holdings or other investment positions by Vanguard to broker-dealers must be
authorized by a Vanguard fund officer or a Principal of Vanguard.

DISCLOSURE OF NON-MATERIAL INFORMATION

The Policies and Procedures permit Approved Vanguard Representatives to disclose
any views, opinions, judgments, advice or commentary, or any analytical,
statistical, performance, or other information, in connection with or relating
to a Vanguard fund or its portfolio holdings and/or other investment positions
(collectively, commentary and analysis) or any changes in the portfolio holdings
of a Vanguard fund that occurred after the most recent calendar-quarter-end
(recent portfolio changes) to any person if (1) such disclosure serves a
legitimate business purpose; (2) such disclosure does not effectively result in
the disclosure of the complete portfolio holdings of any Vanguard fund (which
can be disclosed only in accordance with the Policies and Procedures); and (3)
such information does not constitute material nonpublic information. Disclosure
of commentary and analysis or recent portfolio changes by Vanguard, Vanguard
Marketing Corporation, or a Vanguard fund must be authorized by a Vanguard fund
officer or a Principal of Vanguard.

 An Approved Vanguard Representative must make a good faith determination
whether the information constitutes material nonpublic information, which
involves an assessment of the particular facts and circumstances. Vanguard
believes that in most cases recent portfolio changes that involve a few or even
several securities in a diversified portfolio or commentary and analysis would
be immaterial and would not convey any advantage to a recipient in making an
investment decision concerning a Vanguard fund. Nonexclusive examples of
commentary and analysis about a Vanguard fund include (1) the allocation of the
fund's portfolio holdings and other investment positions among various asset
classes, sectors, industries, and countries; (2) the characteristics of the
stock and bond components of the fund's portfolio holdings and other investment
positions; (3) the attribution of fund returns by asset class, sector, industry,
and country; and (4) the volatility characteristics of the fund. An Approved
Vanguard Representative may in its sole discretion determine whether to deny any
request for information made by any person, and may do so for any reason or no
reason. "Approved Vanguard Representatives" include Vanguard fund officers,
Vanguard fund portfolio managers, and other individuals employed by or
associated with Vanguard or a subsidiary of Vanguard who have been authorized by
a Principal in Vanguard's Portfolio Review Department to disclose recent
portfolio changes and/or commentary and analysis in accordance with the Policies
and Procedures.

PROHIBITIONS ON DISCLOSURE OF PORTFOLIO HOLDINGS

No person is authorized to disclose Vanguard fund portfolio holdings or other
investment positions (whether online at www.vanguard.com, in writing, by fax, by
e-mail, orally, or by other means) except in accordance with the Policies and
Procedures. In addition, no person is authorized to make disclosure pursuant to
the Policies and Procedures if such disclosure is otherwise unlawful under the
antifraud provisions of the federal securities laws (as defined in Rule 38a-1
under the 1940 Act). Furthermore, Vanguard's management, in its sole discretion,
may determine not to disclose portfolio holdings or other investment positions
comprising a Vanguard fund to any person who would otherwise be eligible to
receive such information under the Policies and Procedures, or may determine to
make such disclosures publicly as provided by the Policies and Procedures.

PROHIBITIONS ON RECEIPT OF COMPENSATION OR OTHER CONSIDERATION

The Policies and Procedures prohibit a Vanguard fund, its investment advisor,
and any other person to pay or receive any compensation or other consideration
of any type for the purpose of obtaining disclosure of Vanguard fund portfolio
holdings or other investment positions. "Consideration" includes any agreement
to maintain assets in the fund or in other investment companies or accounts
managed by the investment advisor or by any affiliated person of the investment
advisor.


                          INVESTMENT ADVISORY SERVICES

The Trust currently uses three investment advisors:

- - Franklin Portfolio Associates, LLC, One Boston Place, Boston, MA 02108, an
 investment advisory firm founded in 1982, provides investment advisory services
 for a portion of the Fund's assets.


                                    B-26


- - Vanguard, 100 Vanguard Boulevard, Malvern, PA 19355, which began operations in
 1975, provides investment advisory services for a portion of the Fund's assets.

- - Wellington Management Company, LLP, 75 State Street, Boston, MA 02109, an
 investment advisory firm founded in 1928, provides investment advisory services
 for a portion of the Fund's assets.

For funds that are advised by independent third-party advisory firms
unaffiliated with Vanguard, Vanguard hires investment advisory firms, not
individual portfolio managers, to provide investment advisory services to such
funds. Vanguard negotiates each advisory agreement, which contains advisory fee
arrangements, on an arms-length basis with the advisory firm. Each advisory
agreement is reviewed annually by each fund's board of trustees, taking into
account numerous factors, which include, without limitation, the nature, extent,
and quality of the services provided, investment performance, and fair market
value of services provided. Each advisory agreement is between the fund and the
advisory firm, not between the fund and the portfolio manager. The structure of
the advisory fee paid to each unaffiliated investment advisory firm is described
in the following sections. In addition, each firm has established policies and
procedures designed to address the potential for conflicts of interest. Each
firm's compensation structure and management of potential conflicts of interest
is summarized by the advisory firm in the following sections for the period
ended September 30, 2005.

 During the fiscal years ended September 30, 2003, 2004, and 2005, the Fund
incurred aggregate investment advisory fees of $3,612,000 (before a
performance-based decrease of $34,000), $4,000,000 (before a performance-based
increase of $628,000), and $4,692,000 (before a performance-based increase of
$106,000), respectively.

I. FRANKLIN PORTFOLIO ASSOCIATES, LLC

Franklin Portfolio Associates, is a Maryland limited liability company, which is
an indirect, wholly-owned subsidiary of Mellon Financial Corporation. Franklin
Portfolio Associates is a professional investment counseling firm which
specializes in the management of common stock funds through the use of
quantitative investment models.

 The Fund entered into an investment advisory agreement with Franklin Portfolio
Associates to manage the investment and reinvestment of the portion of the
Fund's assets that the Fund's board of trustees determines to assign to Franklin
Portfolio Associates (the Franklin Portfolio). In this capacity, Franklin
Portfolio Associates continuously reviews, supervises, and administers the
Franklin Portfolio. Franklin Portfolio Associates discharges its
responsibilities subject to the supervision and oversight of Vanguard's
Portfolio Review Group and the officers and trustees of the Fund. Vanguard's
Portfolio Review Group is responsible for recommending changes in a fund's
advisory arrangements to the fund's board of trustees, including changes in the
amount of assets allocated to each advisor, and whether to hire, terminate, or
replace an advisor.

 Under this agreement, the Fund pays Franklin Portfolio Associates, at the end
of each of the Fund's fiscal quarters, a basic fee calculated by applying a
quarterly rate, based on certain annual percentage rates, to the Franklin
Portfolio's average month-end net assets for the quarter. The basic fee will be
increased or decreased by applying a performance fee adjustment based on the
investment performance of the Franklin Portfolio relative to the investment
performance of the Russell Midcap Growth Index (the Index). The investment
performance of the Franklin Portfolio will be based on its cumulative total
return over a trailing 36-month period ending with the applicable quarter,
compared with the cumulative total return of the Index for the same period.

A. OTHER ACCOUNTS MANAGED

John S. Cone managed a portion of the Morgan Growth Fund, which, as of September
30, 2005, held assets of $5.6 billion. As of September 30, 2005, Mr. Cone also
managed three other registered investment companies with total assets of $9.6
billion (including one with total assets of $7.2 billion where the advisory fee
was based on account performance) and 17 other accounts with total assets of
$4.1 billion (including one with total assets of $157 million where the advisory
fee was based on account performance).

B. MATERIAL CONFLICTS OF INTEREST


While not viewed as material, Franklin Portfolio Associates recognizes the
potential for conflicts of interest in the management of performance fee
portfolios side by side with nonperformance fee portfolios or in the management
of an affiliate's portfolio side by side with a non-affiliated portfolio.
Franklin Portfolio Associates has policies and procedures in place to address
such potential conflicts.

                                    B-27


C. DESCRIPTION OF COMPENSATION


A portfolio manager's cash compensation is comprised primarily of a market-based
salary and an incentive compensation plan (annual and long-term incentive).
Funding for the Franklin Portfolio Associates Annual Incentive Plan and
Long-Term Incentive Plan is through a predetermined fixed percentage of overall
company profitability. Therefore, all bonus awards are based initially on
Company performance. The investment professionals are eligible to receive annual
cash bonus awards from the incentive compensation plan. Annual awards are
granted in March, for the prior calendar year. Individual awards for investment
professionals are discretionary, based on product performance relative to both
benchmarks and peer comparisons and goals established at the beginning of each
calendar year. Goals are to a substantial degree based on investment
performance, including performance for one- and three-year periods. Also
considered in determining individual awards are team participation and general
contributions to Franklin Portfolio Associates.

 All portfolio managers are also eligible to participate in the Franklin
Portfolio Associates Long-Term Investment Plan. This plan provides for an annual
award, payable in deferred cash that cliff vests after three years, with an
interest rate equal to the average year over year earnings growth of Franklin
Portfolio Associates (capped at 20% per year). Management has discretion with
respect to actual participation and award size.

Mellon Elective Deferred Compensation Plan
- ------------------------------------------

Portfolio managers whose compensation exceeds certain levels may elect to defer
portions of their base salaries and/or incentive compensation pursuant to
Mellon's elective deferred compensation plan.


D. OWNERSHIP OF SECURITIES

As of September 30, 2005, Mr. Cone owned no shares of the Morgan Growth Fund.

II. VANGUARD

Vanguard provides investment advisory services on an at-cost basis for a portion
of the Fund's assets. Vanguard's Quantitative Equity Group is supervised by the
officers of the funds.

A. OTHER ACCOUNTS MANAGED

James P. Stetler managed a portion of the Morgan Growth Fund, which, as of
September 30, 2005, held assets of $5.6 billion. As of September 30, 2005, Mr.
Stetler managed two other registered investment companies with total assets of
$4.8 billion and no other pooled investment vehicles.

B. MATERIAL CONFLICTS OF INTEREST

At Vanguard, individual portfolio managers may manage multiple accounts for
multiple clients. In addition to mutual funds, these other accounts may include
separate accounts, collective trusts, or offshore funds. Vanguard manages
potential conflicts between funds or with other types of accounts through
allocation policies and procedures, internal review processes and oversight by
directors and independent third parties. Vanguard has developed trade allocation
procedures and controls to ensure that no one client, regardless of type, is
intentionally favored at the expense of another. Allocation policies are
designed to address potential conflicts in situations where two or more funds or
accounts participate in investment decisions involving the same securities.

C. DESCRIPTION OF COMPENSATION

As of September 30, 2005, a Vanguard portfolio manager's compensation generally
consists of base salary, bonus, and payments under Vanguard's long-term
incentive compensation program. In addition, portfolio managers are eligible for
the standard retirement benefits and health and welfare benefits available to
all Vanguard employees. Also, certain portfolio managers may be eligible for
additional retirement benefits under several supplemental retirement plans that
Vanguard adopted in the 1980's to restore dollar-for-dollar the benefits of
management employees that had been cut back solely as a result of tax law
changes. These plans are structured to provide the same retirement benefits as
the standard retirement benefits.

 In the case of portfolio managers responsible for managing multiple Vanguard
funds or accounts, the method used to determine their compensation is the same
for all funds and investment accounts.


                                    B-28



 A portfolio manager's base salary is determined by the manager's experience and
performance in the role, taking into account the ongoing compensation benchmark
analyses performed by the Vanguard Human Resources Department. A portfolio
manager's base salary is generally a fixed amount that may change as a result of
an annual review, upon assumption of new duties, or when a market adjustment of
the position occurs.

 A portfolio manager's bonus is determined by a number of factors. One factor is
gross, pre-tax performance of the fund relative to expectations for how the fund
should have performed, given its objective, policies, strategies and
limitations, and the market environment during the measurement period. This
performance factor is not based on the amount of assets held in the fund's
portfolio. For the portion of the Morgan Growth Fund managed by Vanguard, the
performance factor depends on how successfully the portfolio manager outperforms
these expectations and maintains the risk parameters of the Fund over a
three-year period. Additional factors include the portfolio manager's
contributions to the investment management functions within the sub-asset class,
contributions to the development of other investment professionals and
supporting staff, and overall contributions to strategic planning and decisions
for the investment group. The target bonus is expressed as a percentage of base
salary. The actual bonus paid may be more or less than the target bonus, based
on how well the manager satisfies the objectives stated above. The bonus is paid
on an annual basis.

 Under the long-term incentive compensation program, all full-time employees
receive a payment from Vanguard's long term incentive compensation plan based on
their years of service, job level and, if applicable, management
responsibilities. Each year, Vanguard's independent directors determine the
amount of the long term incentive compensation award for that year based on the
investment performance of the Vanguard funds relative to competitors and
Vanguard's operating efficiencies in providing services to the Vanguard funds.

D. OWNERSHIP OF SECURITIES

Vanguard employees, including portfolio managers, allocate their investments
among the various Vanguard funds based on their own individual investment needs
and goals. Vanguard employees as a group invest a sizeable portion of their
personal assets in Vanguard funds. As of October 31, 2005, Vanguard employees
collectively invested $1.39 billion in Vanguard funds. John J. Brennan, Chairman
and Chief Executive Officer of Vanguard and the Vanguard funds, and George U.
Sauter, Managing Director and Chief Investment Officer, invest substantially all
of their personal financial assets in Vanguard funds.

 As of September 30, 2005, Mr. Stetler owned no shares of the Fund.

III. WELLINGTON MANAGEMENT COMPANY, LLP

Wellington Management Company, LLP (Wellington Management) is a professional
investment advisory firm that provides services to investment companies,
employee benefits plans, endowment foundations, and other institutions. The firm
was founded in 1928, and is organized as a Massachusetts limited liability
partnership.

 Wellington Management and its predecessor organizations have provided
investment advisory services to investment companies since 1928 and to
investment counseling clients since 1960. Robert D. Rands, Senior Vice President
of Wellington Management, has served as portfolio manager of the Fund since
1994, and Paul E. Marrkand, Vice President of Wellington Management, has been
involved in portfolio management and securities analysis of the Fund since 2005.

 The Fund entered into an investment advisory agreement with Wellington
Management to manage the investment and reinvestment of a portion of the Fund's
assets that the Fund's board of trustees determines to assign to Wellington
Management (the Wellington Management Portfolio). In this capacity, Wellington
Management continuously reviews, supervises, and administers the Wellington
Management Portfolio. Wellington Management discharges its responsibilities
subject to the supervision and oversight of Vanguard's Portfolio Review Group
and the officers and trustees of the Fund. Vanguard's Portfolio Review Group is
responsible for recommending changes in a fund's advisory arrangements to the
fund's board of trustees, including changes in the amount of assets allocated to
each advisor, and whether to hire, terminate, or replace an advisor.

 Under this agreement, the Fund pays Wellington Management, at the end of each
of the Fund's fiscal quarters, a basic fee calculated by applying a quarterly
rate, based on certain annual percentage rates, to the Wellington Management
Portfolio's average month-end net assets for the quarter. The basic fee will be
increased or decreased by applying a performance fee adjustment based on the
investment performance of the Wellington Management Portfolio relative to the
investment performance of the Russell 3000 Growth Index (the Index). The
investment performance of the


                                    B-29



Wellington Management Portfolio will be based on its cumulative return over a
trailing 36-month period ending with the applicable quarter, compared with the
cumulative total return of the Index for the same period.

A. OTHER ACCOUNTS MANAGED

Robert Rands managed a portion of the Fund, which, as of September 30, 2005,
held assets of $5.6 billion. As of September 30, 2005, Mr. Rands also managed
two other registered investment companies with total assets of $1.4 billion;
nine other pooled investment vehicles with total assets of $631 million,
including five where the advisory firm's fee was based on account performance
with total assets of $255 million, and 23 other accounts with total assets of
$175 million.

 Paul E. Marrkand managed a portion of the Fund, which, as of September 30,
2005, held assets of $5.6 billion. As of September 30, 2005, Mr. Marrkand also
managed 13 other accounts with total assets of $1.3 million.

B. MATERIAL CONFLICTS OF INTEREST

Individual investment professionals at Wellington Management manage multiple
portfolios for multiple clients. These accounts may include mutual funds,
separate accounts (assets managed on behalf of institutions such as pension
funds, insurance companies, foundations), bank common trust accounts, and hedge
funds. The investment professionals primarily responsible for the day-to-day
management of the Fund (Investment Professionals) generally manage portfolios in
several different investment styles. These portfolios may have investment
objectives, strategies, time horizons, tax considerations and risk profiles that
differ from those of the Fund. The Investment Professionals make investment
decisions for the Fund based on the investment objectives, policies, practices,
benchmarks, cash flows, tax and other relevant investment considerations
applicable to that portfolio. Consequently, the Investment Professionals may
purchase or sell securities, including IPOs, for one portfolio and not another
portfolio, and the performance of securities purchased for the Fund may vary
from the performance of securities purchased for other portfolios. The
Investment Professionals or other investment professionals at Wellington
Management may place transactions on behalf of other accounts that are directly
or indirectly contrary to investment decisions made on behalf of the Fund, or
make investment decisions that are similar to those made for the Fund, both of
which have the potential to adversely impact the Fund depending on market
conditions. For example, the Investment Professionals may purchase a security in
one portfolio while appropriately selling that same security in another
portfolio. In addition, some of these portfolios have fee structures, including
performance fees, that are or have the potential to be higher, in some cases
significantly higher, than the fees paid by the Fund to Wellington Management.
Mr. Rands also manages hedge funds, which pay performance allocations to
Wellington Management or its affiliates. Because incentive payments are tied to
revenues earned by Wellington Management, and where noted, to the performance
achieved by the manager in each account, the incentives associated with any
given fund may be significantly higher or lower than those associated with other
accounts managed by a given Investment Professional. Finally, the Fund's
Investment Professionals may hold shares or investments in the other pooled
investment vehicles and/or other accounts identified above.


 Wellington Management's goal is to meet its fiduciary obligation to treat all
clients fairly and provide high quality investment services to all of its
clients. Wellington Management has adopted and implemented policies and
procedures, including brokerage and trade allocation policies and procedures
that it believes address the conflicts associated with managing multiple
accounts for multiple clients. In addition, Wellington Management monitors a
variety of areas, including compliance with primary fund guidelines, the
allocation of IPOs, and compliance with the firm's Code of Ethics, and places
additional investment restrictions on Investment Professionals who manage hedge
funds and certain other accounts. Furthermore, senior investment and business
personnel at Wellington Management periodically review the performance of
Wellington Management's Investment Professionals. Although Wellington Management
does not track the time an Investment Professional spends on a single portfolio,
Wellington Management does periodically assess whether an Investment
Professional has adequate time and resources to effectively manage the
Investment Professional's various client mandates.

C. DESCRIPTION OF COMPENSATION

The Fund pays Wellington Management a fee based on the assets under management
of the Fund as set forth in the Investment Advisory Agreement between Wellington
Management and the Fund. Wellington Management pays its investment professionals
out of its total revenues and other resources, including the advisory fees
earned with respect to the Fund. The following information relates to the period
ended September 30, 2005.


                                    B-30


 Wellington Management's compensation structure is designed to attract and
retain high-caliber investment professionals necessary to deliver high quality
investment management services to its clients. Wellington Management's
compensation of the Investment Professionals includes a base salary and
incentive components. The base salary for Mr. Rands, a partner of Wellington
Management, is determined by the Managing Partners of the firm. Mr. Rands' base
salary is generally a fixed amount that may change as a result of an annual
review. The base salary for Mr. Marrkand is determined by his experience and
performance in his respective roles. Mr. Marrkand's base salary is reviewed
annually and may be adjusted based on the recommendation of his business
manager, using guidelines established by Wellington Management's Compensation
Committee, which has final oversight responsibility for base salaries for
employees of the firm. The Investment Professionals are eligible to receive an
incentive payment based on the revenues earned by Wellington Management from the
Fund managed by the Investment Professional and generally each other portfolio
managed by such Investment Professional. With respect to the Fund, the overall
revenues to Wellington Management vary with the performance of the Fund relative
to the Russell 3000 Growth Index over rolling three-year periods. Each
Investment Professional's incentive payment relating to the Fund is tied to the
same index, over one- and three-year periods, with the greatest emphasis on
three-year results. Wellington Management applies similar incentive structures
(although the benchmarks or peer groups, time periods, and rates may differ) to
other portfolios managed by the Investment Professionals, including portfolios
with performance fees. Portfolio-based incentives across all portfolios managed
by an Investment Professional can, and typically do, represent a significant
portion of an Investment Professional's overall compensation; incentive
compensation varies significantly by individual and can vary significantly from
year to year. Some Investment Professionals are also eligible for bonus payments
based on their overall contribution to Wellington Management's business
operations. Senior management at Wellington Management may reward individuals as
it deems appropriate based on factors other than portfolio performance. Each
partner of Wellington Management is also eligible to participate in a
partner-funded tax qualified retirement plan, the contributions to which are
made pursuant to an actuarial formula, as a partner of the firm.

D. OWNERSHIP OF SECURITIES

As of September 30, 2005, Mr. Rands owned shares of the Fund within the
$500,001-$1,000,000 range and Mr. Marrkand owned shares of the Fund within the
$100,001-$500,000 range.

IV. DURATION AND TERMINATION OF INVESTMENT ADVISORY ARRANGEMENTS

The Fund's current agreements with its unaffiliated advisors are renewable for
successive one-year periods only if (1) each renewal is approved by a vote of
the Fund's board of trustees, including the affirmative votes of a majority of
the 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, or (2) each renewal is
specifically approved by a vote of a majority of the Fund's outstanding voting
securities. An agreement is automatically terminated if assigned, and may be
terminated without penalty at any time either (1) by vote of the board of
trustees of the Fund on sixty (60) days' written notice to the advisor, (2) by a
vote of a majority of the Fund's outstanding voting shares, or (3) by the
advisor upon ninety (90) days' written notice to the Fund.

 The Fourth Amended and Restated Funds' Service Agreement, which governs the
at-cost investment advisory services provided to the Fund (with respect to the
Fund's assets managed by Vanguard), will continue in full force and effect until
terminated or amended by mutual agreement of the Fund and Vanguard.


                             PORTFOLIO TRANSACTIONS

The advisor decides which securities to buy and sell on behalf of the Fund and
then selects the brokers or dealers that will execute the trades on an agency
basis or the dealers with whom the trades will be effected on a principal basis.
For each trade, the advisor mush select a broker-dealer that it believes will
provide "best execution." Best execution does not mean the lowest possible
spread or commission rate. In seeking best execution, the SEC has said that an
advisor should consider the full range of a broker-dealer's services. The
factors considered by the advisor in seeking best execution include, but are not
limited to, the broker-dealer's execution capability, clearance and settlement
services, commission rate, trading expertise, willingness and ability to commit
capital, ability to provide anonymity, financial responsibility, reputation and
integrity, responsiveness, access to underwritten offerings and secondary
markets, and access to company management, as well as the value of any research
provided by the broker-dealer. In assessing which

                                    B-31


broker-dealer can provide best execution for a particular trade, the advisor
also may consider the timing and size of the order and available liquidity and
current market conditions.

 The agreements also incorporate the concepts of Section 28(e) of the Securities
Exchange Act of 1934 by providing that, subject to the approval of the Fund's
board of trustees, the advisors may cause the Fund to pay a broker-dealer which
furnishes brokerage and research services a higher commission than that which
might be charged by another broker-dealer for effecting the same transaction,
provided that such commission is deemed reasonable in terms of either that
particular transaction or the overall responsibilities of the advisors to the
Fund.

 Currently, it is the Fund's policy that each advisor may at times pay higher
commissions in recognition of brokerage services felt necessary for the
achievement of better execution of certain securities transactions that
otherwise might not be available. An advisor 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 an advisor and/or the Fund. However, the
Fund has informed the advisors not to pay higher commission rates specifically
for the purpose of obtaining research services.


 Some securities that are considered for investment by the Fund may also be
appropriate for other Vanguard funds or for other clients served by the
advisors. If such securities are compatible with the investment policies of the
Fund and one or more of an advisor's other clients, and are considered for
purchase or sale at or about the same time, then transactions in such securities
will be aggregated by the advisor and the purchased securities or sale proceeds
will be allocated among the participating Vanguard funds and the other
participating clients of the advisor in a manner deemed equitable by the
advisor. Although there may be no specified formula for allocating such
transactions, the allocation methods used, and the results of such allocations,
will be subject to periodic review by the Fund's board of trustees.

 During the fiscal years ended September 30, 2003, 2004, and 2005, the Fund paid
the following amounts in brokerage commissions: $6,239,000, $8,314,000, and
$7,553,000, respectively.


                             PROXY VOTING GUIDELINES

The Board of Trustees (the Board) of each Vanguard fund that invests in stocks
has adopted proxy voting procedures and guidelines to govern proxy voting by the
fund. The Board has delegated oversight of proxy voting to the Proxy Oversight
Committee (the Committee), comprised of senior officers of Vanguard, a majority
of whom are also officers of each Vanguard fund, and subject to the operating
procedures and guidelines described below. The Committee reports directly to the
Board. Vanguard is subject to these guidelines to the extent the guidelines call
for Vanguard to administer the voting process and implement the resulting voting
decisions, and for that purpose have been approved by the Board of Directors of
Vanguard.

 The overarching objective in voting is simple: to support proposals and
director nominees that maximize the value of a fund's investments--and those of
fund shareholders--over the long term. While the goal is simple, the proposals
the funds receive are varied and frequently complex. As such, the guidelines
adopted by the Board provide a rigorous framework for assessing each proposal.
Under the guidelines, each proposal must be evaluated on its merits, based on
the particular facts and circumstances as presented.

 For ease of reference, the procedures and guidelines often refer to all funds,
however, our processes and practices seek to ensure that proxy voting decisions
are suitable for individual funds. For most proxy proposals, particularly those
involving corporate governance, the evaluation will result in the same position
being taken across all of the funds and the funds voting as a block. In some
cases, however, a fund may vote differently, depending upon the nature and
objective of the fund, the composition of its portfolio, and other factors.

 The guidelines do not permit the Board to delegate voting responsibility to a
third party that does not serve as a fiduciary for the funds. Because many
factors bear on each decision, the guidelines incorporate factors the Committee
should consider in each voting decision. A fund may refrain from voting if that
would be in the fund's and its shareholders' best interests. These circumstances
may arise, for example, when the expected cost of voting exceeds the expected
benefits of voting, or exercising the vote results in the imposition of trading
or other restrictions.


                                    B-32



 In evaluating proxy proposals, we consider information from many sources,
including but not limited to the investment advisor for the fund, management or
shareholders of a company presenting a proposal, and independent proxy research
services. We will give substantial weight to the recommendations of the
company's board, absent guidelines or other specific facts that would support a
vote against management. In all cases, however, the ultimate decision rests with
the members of the Proxy Oversight Committee, who are accountable to the fund's
Board.

 While serving as a framework, the following guidelines cannot contemplate all
possible proposals with which a fund may be presented. In the absence of a
specific guideline for a particular proposal (e.g., in the case of a
transactional issue or contested proxy), the Committee will evaluate the issue
and cast the fund's vote in a manner that, in the Committee's view, will
maximize the value of the fund's investment, subject to the individual
circumstances of the fund.


I. THE BOARD OF DIRECTORS

A. ELECTION OF DIRECTORS


Good governance starts with a majority-independent board, whose key committees
are comprised entirely of independent directors. As such, companies should
attest to the independence of directors who serve on the Compensation,
Nominating, and Audit committees. In any instance in which a director is not
categorically independent, the basis for the independence determination should
be clearly explained in the proxy statement.

 While the funds will generally support the board's nominees, the following
factors will be taken into account in determining each fund's vote:







FACTORS FOR APPROVAL                                   FACTORS AGAINST APPROVAL
- --------------------                                   ------------------------
                                                    
Nominated slate results in board comprised of a        Nominated slate results in board comprised of a majority of non-
majority of independent directors.                     independent directors.

All members of Audit, Nominating, and Compensation     Audit, Nominating, and/or Compensation committees include non-
committees are independent of management.              independent members.

                                                       Incumbent board member failed to attend at least 75% of meetings in the
                                                       previous year.

                                                       Actions of committee(s) on which nominee serves are inconsistent with
                                                       other guidelines (e.g., excessive option grants, substantial non-audit fees,
                                                       lack of board independence).


B. CONTESTED DIRECTOR ELECTIONS

In the case of contested board elections, we will evaluate the nominees'
qualifications, the performance of the incumbent board, as well as the rationale
behind the dissidents' campaign, to determine the outcome that we believe will
maximize shareholder value.

C. CLASSIFIED BOARDS

The funds will generally support proposals to declassify existing boards
(whether proposed by management or shareholders), and will block efforts by
companies to adopt classified board structures, in which only part of the board
is elected each year.


II. APPROVAL OF INDEPENDENT AUDITORS

The relationship between the company and its auditors should be limited
primarily to the audit, although it may include certain closely related
activities that do not, in the aggregate, raise any appearance of impaired
independence. The funds will generally support management's recommendation for
the ratification of the auditor, except in instances where audit and
audit-related fees make up less than 50% of the total fees paid by the company
to the audit firm. We will evaluate on a case-by-case basis instances in which
the audit firm has a substantial non-audit relationship with the company
(regardless of its size relative to the audit fee) to determine whether
independence has been compromised.


                                    B-33


III. COMPENSATION ISSUES

A. STOCK-BASED COMPENSATION PLANS

Appropriately designed stock-based compensation plans, administered by an
independent committee of the board and approved by shareholders, can be an
effective way to align the interests of long-term shareholders and the interests
of management, employees, and directors. Conversely, the funds oppose plans that
substantially dilute their ownership interest in the company, provide
participants with excessive awards, or have inherently objectionable structural
features.


 An independent compensation committee should have significant latitude to
deliver varied compensation to motivate the company's employees. However, we
will evaluate compensation proposals in the context of several factors (a
company's industry, market capitalization, competitors for talent, etc.) to
determine whether a particular plan or proposal balances the perspectives of
employees and the company's other shareholders. We will evaluate each proposal
on a case-by-case basis, taking all material facts and circumstances into
account.

  The following factors will be among those considered in evaluating these
proposals.







FACTORS FOR APPROVAL                                                     FACTORS AGAINST APPROVAL
- --------------------                                                     ------------------------
                                                                      
Company requires senior executives to hold a minimum amount of company   Total potential dilution (including all stock-based plans)
stock (frequently expressed as a multiple of salary).                    shares outstanding.

Company requires stock acquired through option exercise to be held for   Annual option grants have exceeded 2% of shares
a certain period of time.                                                outstanding.

Compensation program includes performance-vesting awards, indexed        Plan permits repricing or replacement of options without
options or other performance-linked grants.                              shareholder approval.

Concentration of option grants to senior executives is limited           Plan provides for the issuance of reload options.
(indicating that the plan is very broad-based).

Stock-based compensation is clearly used as a substitute for cash in     Plan contains automatic share replenishment (evergreen)fea-
delivering market-competitive total pay.                                 ture




B. BONUS PLANS


Bonus plans, which must be periodically submitted for shareholder approval to
qualify for deductibility under Section 162(m) of the Internal Revenue Code,
should have clearly defined performance criteria and maximum awards expressed in
dollars. Bonus plans with awards that are excessive, in both absolute terms and
relative to a comparative group, generally will not be supported.


C. EMPLOYEE STOCK PURCHASE PLANS


The funds will generally support the use of employee stock purchase plans to
increase company stock ownership by employees, provided that shares purchased
under the plan are acquired for no less than 85% of their market value and that
shares reserved under the plan comprise less than 5% of the outstanding shares.


D. EXECUTIVE SEVERANCE AGREEMENTS (GOLDEN PARACHUTES)

While executives' incentives for continued employment should be more significant
than severance benefits, there are instances--particularly in the event of a
change in control--in which severance arrangements may be appropriate. Severance
benefits triggered by a change in control that do not exceed three times an
executive's salary and bonus may generally be approved by the compensation
committee of the board without submission to shareholders. Any such arrangement
under which the beneficiary receives more than three times salary and bonus--or
where severance is guaranteed absent a change in control--should be submitted
for shareholder approval.


IV. CORPORATE STRUCTURE AND SHAREHOLDER RIGHTS


The exercise of shareholder rights, in proportion to economic ownership, is a
fundamental privilege of stock ownership that should not be unnecessarily
limited. Such limits may be placed on shareholders' ability to act by corporate
charter or by-law provisions, or by the adoption of certain takeover provisions.
In general, the market for corporate control should be allowed to function
without undue interference from these artificial barriers.

 The funds' positions on a number of the most commonly presented issues in this
area are as follows:


                                    B-34


A. SHAREHOLDER RIGHTS PLANS (POISON PILLS)

A company's adoption of a so-called poison pill effectively limits a potential
acquirer's ability to buy a controlling interest without the approval of the
target's board of directors. Such a plan, in conjunction with other takeover
defenses, may serve to entrench incumbent management and directors. However, in
other cases, a poison pill may force a suitor to negotiate with the board and
result in the payment of a higher acquisition premium.

 In general, shareholders should be afforded the opportunity to approve
shareholder rights plans within a year of their adoption. This provides the
board with the ability to put a poison pill in place for legitimate defensive
purposes, subject to subsequent approval by shareholders. In evaluating the
approval of proposed shareholder rights plans, we will consider the following
factors:






                                            
FACTORS FOR APPROVAL                           FACTORS AGAINST APPROVAL
- --------------------                           ------------------------
Plan is relatively short-term (3-5 years).     Plan is long term (>5 years).

Plan requires shareholder approval             Renewal of plan is automatic or does not require shareholder approval.
for renewal.

Plan incorporates review by a committee        Ownership trigger is less than 15%.
of independent directors at least
every three years (so-called TIDE
provisions).

Plan includes permitted bid/qualified offer    Classified board.
feature (chewable pill) that mandates
shareholder vote in certain situations.

Ownership trigger is reasonable (15-20%).      Board with limited independence.

Highly independent, non-classified board.



B. CUMULATIVE VOTING

The funds are generally opposed to cumulative voting under the premise that it
allows shareholders a voice in director elections that is disproportionate to
their economic investment in the corporation.


C. SUPERMAJORITY VOTE REQUIREMENTS

The funds support shareholders' ability to approve or reject matters presented
for a vote based on a simple majority. Accordingly, the funds will support
proposals to remove supermajority requirements and oppose proposals to impose
them.


D. RIGHT TO CALL MEETINGS AND ACT BY WRITTEN CONSENT


The funds support shareholders' right to call special meetings of the board (for
good cause and with ample representation) and to act by written consent. The
funds will generally vote for proposals to grant these rights to shareholders
and against proposals to abridge them.


E. CONFIDENTIAL VOTING


The integrity of the voting process is enhanced substantially when shareholders
(both institutions and individuals) can vote without fear of coercion or
retribution based on their votes. As such, the funds support proposals to
provide confidential voting.


F. DUAL CLASSES OF STOCK

We are opposed to dual class capitalization structures that provide disparate
voting rights to different groups of shareholders with similar economic
investments. We will oppose the creation of separate classes with different
voting rights and will support the dissolution of such classes.

V. CORPORATE AND SOCIAL POLICY ISSUES

Proposals in this category, initiated primarily by shareholders, typically
request that the company disclose or amend certain business practices. The Board
generally believes that these are "ordinary business matters" that are primarily
the responsibility of management and should be evaluated and approved solely by
the corporation's board of directors. Often, proposals may address concerns with
which the Board philosophically agrees, but absent a compelling economic impact
on shareholder value (e.g., proposals to require expensing of stock options),
the funds will typically abstain from voting on these proposals. This reflects
the belief that regardless of our philosophical perspective on the issue, these


                                    B-35



decisions should be the province of company management unless they have a
significant, tangible impact on the value of a fund's investment and management
is not responsive to the matter.


VI. VOTING IN FOREIGN MARKETS

Corporate governance standards, disclosure requirements, and voting mechanics
vary greatly among the markets outside the United States in which the funds may
invest. Each fund's votes will be used, where applicable, to advocate for
improvements in governance and disclosure by each fund's portfolio companies. We
will evaluate issues presented to shareholders for each fund's foreign holdings
in the context with the guidelines described above, as well as local market
standards and best practices. The funds will cast their votes in a manner
believed to be philosophically consistent with these guidelines, while taking
into account differing practices by market. In addition, there may be instances
in which the funds elect not to vote, as described below.


 Many foreign markets require that securities be "blocked" or reregistered to
vote at a company's meeting. Absent an issue of compelling economic importance,
we will generally not subject the fund to the loss of liquidity imposed by these
requirements.

 The costs of voting (e.g., custodian fees, vote agency fees) in foreign markets
may be substantially higher than for U.S. holdings. As such, the fund may limit
its voting on foreign holdings in instances where the issues presented are
unlikely to have a material impact on shareholder value.

VII. VOTING ON A FUND'S HOLDINGS OF OTHER VANGUARD FUNDS

Certain Vanguard funds (owner funds) may, from time to time, own shares of other
Vanguard funds (underlying funds). If an underlying fund submits a matter to a
vote of its shareholders, votes for and against such matters on behalf of the
owner funds will be cast in the same proportion as the votes of the other
shareholders in the underlying fund.

VIII. THE PROXY VOTING GROUP

The Board has delegated the day-to-day operations of the funds' proxy voting
process to the Proxy Voting Group, which the Committee oversees. While most
votes will be determined, subject to the individual circumstances of each fund,
by reference to the guidelines as separately adopted by each of the funds, there
may be circumstances when the Proxy Voting Group will refer proxy issues to the
Committee for consideration. In addition, at any time, the Board has the
authority to vote proxies, when, in the Board's or the Committee's discretion,
such action is warranted.


 The Proxy Voting Group performs the following functions: (1) managing proxy
voting vendors; (2) reconciling share positions; (3) analyzing proxy proposals
using factors described in the guidelines; (4) determining and addressing
potential or actual conflicts of interest that may be presented by a particular
proxy; and (5) voting proxies. The Proxy Voting Group also prepares periodic and
special reports to the Board, and any proposed amendments to the procedures and
guidelines.

IX. THE PROXY OVERSIGHT COMMITTEE

The Board, including a majority of the independent trustees, appoints the
members of the Committee who are senior officers of Vanguard, a majority of whom
are also officers of each Vanguard fund.


 The Committee does not include anyone whose primary duties include external
client relationship management or sales. This clear separation between the proxy
voting and client relationship functions is intended to eliminate any potential
conflict of interest in the proxy voting process. In the unlikely event that a
member of the Committee believes he or she might have a conflict of interest
regarding a proxy vote, that member must recuse him or herself from the
committee meeting at which the matter is addressed, and not participate in the
voting decision.

 The Committee works with the Proxy Voting Group to provide reports and other
guidance to the Board regarding proxy voting by the funds. The Committee has an
obligation to conduct its meetings and exercise its decision-making authority
subject to the fiduciary standards of good faith, fairness and Vanguard's Code
of Ethics. The Committee shall authorize proxy votes that the Committee
determines, in its sole discretion, to be in the best interests of each fund's
shareholders. In determining how to apply the guidelines to a particular factual
situation, the Committee may not take into account any interest that would
conflict with the interest of fund shareholders in maximizing the value of their
investments.


                                    B-36


 The Board may review these procedures and guidelines and modify them from time
to time. The procedures and guidelines are available on Vanguard's website at
www.vanguard.com.

 You may obtain a free copy of a report that details how the funds voted the
proxies relating to the portfolio securities held by the funds for the prior
12-month period ended June 30 by logging on to Vanguard's internet site, at
www.vanguard.com, or the SEC's website at www.sec.gov.

                              FINANCIAL STATEMENTS

The Fund's Financial Statements for the fiscal year ended September 30, 2005,
appearing in the Fund's 2005 Annual Report to Shareholders, and the report
thereon of PricewaterhouseCoopers LLP, an independent registered public
accounting firm, also appearing therein, are incorporated by reference in this
Statement of Additional Information. For a more complete discussion of the
Fund's performance, please see the Fund's Annual and Semiannual Reports to
Shareholders, which may be obtained without charge.


                                    B-37



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