VANGUARD EXPLORER FUND INC, PRER14A, 1998-03-31

VANGUARD EXPLORER FUND INC
PRER14A, 1998-03-31

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<PAGE> 1

IMPORTANT NEWS
FOR VANGUARD
SHAREHOLDERS

VANGUARD CONVERTIBLE SECURITIES FUND
VANGUARD EXPLORER FUND
VANGUARD HORIZON FUND
VANGUARD/MORGAN GROWTH FUND
VANGUARD/PRIMECAP FUND
VANGUARD SELECTED VALUE PORTFOLIO
VANGUARD SPECIALIZED PORTFOLIOS
VANGUARD STAR FUND/LIFESTRATEGY
AND TOTAL INTERNATIONAL PORTFOLIOS
VANGUARD TAX-MANAGED FUND
VANGUARD/TRUSTEES EQUITY FUND
VANGUARD VARIABLE INSURANCE FUND
VANGUARD WORLD FUND

Please Vote Immediately!

You can vote by mail, telephone, or our website . . .
details can be found on the enclosed proxy insert.

YOUR VANGUARD FUND WILL HOST A SPECIAL MEETING OF SHAREHOLDERS ON JUNE 30,
1998, AT OUR HEADQUARTERS IN MALVERN, PENNSYLVANIA. THE PURPOSE IS TO VOTE ON
SOME IMPORTANT PROPOSALS AFFECTING THE FUND.

THE FIRST FEW PAGES OF THIS BOOKLET SUMMARIZE VANGUARD'S PROPOSALS AND
EXPLAIN THE PROXY PROCESS-INCLUDING HOW TO CAST YOUR VOTES. BEFORE YOU VOTE,
PLEASE READ THE FULL TEXT OF THE PROXY STATEMENT FOR A COMPLETE UNDERSTANDING OF
OUR PROPOSALS.

PROPOSAL 1: REORGANIZATION INTO A DELAWARE BUSINESS TRUST

We want to reorganize your Fund into a Delaware business trust. Currently, your
Fund is organized as either a Maryland Corporation or a Pennsylvania business
trust.

WHY? We expect this administrative change to save most Funds (and, ultimately,
their shareholders) a substantial amount of money in state taxes each
year-$13,000 for Convertible Securities Fund, $172,000 for Explorer Fund,
$44,000 for Horizon Fund, $184,000 for Morgan Growth Fund, $471,000 for PRIMECAP
Fund, $525,000 for Specialized Portfolios, $94,000 for Tax-Managed Fund and
$931,000 for World Fund, at current asset levels. The savings realized would
reduce these Fund's expenses. STAR Fund/LifeStrategy and Total International
Portfolios, Trustees' Equity Fund, and Variable Insurance Fund would not realize
tax savings as a result of the change, but they would benefit from the
efficiency of being organized the same way as all other Vanguard Funds.
<PAGE> 2

KEY POINTS: The reorganization would not change your Fund's investment objective
or policies (except for any changes approved by shareholders under Proposal 2).
Your Fund also would keep the same Directors, officers, investment advisers, and
auditors.

PROPOSAL 2: SIX CHANGES TO INVESTMENT LIMITATIONS

We want to make a number of minor changes to the Vanguard Funds' fundamental
investment limitations. Not all of these changes relate to your Fund; you will
have the opportunity to vote separately on each change that does apply. Proposal
2a is the most important of these. It concerns an interfund lending program that
we would like to establish for all Funds. This program would permit your Fund to
borrow money from other Vanguard Funds as needed to make redemptions while
awaiting payment for securities that it has sold. In addition, your Fund could
lend its cash reserves to other Vanguard Funds to meet their temporary borrowing
needs.

WHY: Normally, your Fund has sufficient cash on hand to meet redemption
requests. If not, however, the Fund can either delay paying shareholders for up
to seven days-not an acceptable alternative-or pay them immediately by taking
out a temporary loan. A temporary loan through the interfund lending program
could be cheaper and easier for your Fund than borrowing from a bank. By lending
money to other Funds through this program, your Fund could earn a better rate of
interest on its cash reserves than it might receive from a bank.

KEY POINTS: The interfund lending program would feature a number of safeguards
to make sure it is fair and beneficial to all Vanguard Funds. One especially
important safeguard is this: No Fund could borrow or lend money in the program
unless it would get a more favorable interest rate than a typical bank would
offer.

PROPOSAL 3: SWITCH TO DOLLAR-BASED VOTING RIGHTS

We want to amend the Treasury Fund's Declaration of Trust to switch from
share-based voting rights to dollar-based voting rights. This is the type of
voting rights that all other Vanguard Funds propose to offer their shareholders
after reorganizing into Delaware business trust form. (See the description of
Proposal 1.)

WHY: When funds offer multiple portfolios-something that your Fund doesn't do
now, but may do in the future-the share prices of the different portfolios
typically diverge over time. If voting is share-based, owners of lower-priced
shares end up with a disproportionate amount of clout on issues voted at the
fund level. Dollar-based voting keeps shareholders' voting rights in proportion
with their relative financial interests.

KEY POINTS: The change to dollar-based voting rights will have no immediate
impact on your Fund, since it offers only one portfolio at this time.
<PAGE> 3

- Q&A-

Q. I'm a small investor. Why should I bother to vote?

A. Your vote makes a difference. If numerous shareholders just like you fail to
vote their proxies, your Fund may not receive enough votes to go forward with
its meeting. If this happens, we'll need to mail proxies again-a costly
proposition for your Fund!

Q. I've owned shares of Vanguard Funds for several years. Why is this the
first notice I've received about a shareholder meeting?

A. Unlike publicly traded companies, most mutual funds do not hold shareholder
meetings every year. Instead, they undertake this expensive process only when
significant issues requiring shareholder approval come up-such as your Fund's
plan to save on taxes by changing its form of organization. The last time all
Vanguard Funds held shareholder meetings was in 1993.

Q. Who gets to vote?

A. Any person who owned shares of your Fund on the "record date," which was
March 16, 1998, gets to vote-even if the investor later sold the shares.
Shareholders are entitled to cast one vote for each Fund share owned on the
record date.

Q. How can I vote?

A. You can vote in any one of four ways:

- Through the Internet at www.proxyvote.com (or by going to
www.vanguard.com and clicking on "Proxy Voting").

- By telephone, with a toll-free call to the number listed on
your proxy card.

- By mail, with the enclosed ballot.

- In person at the meeting.

We encourage you to vote by Internet or telephone, using the 12-digit "control"
number that appears on your proxy card. These voting methods will save your Fund
a good deal of money (no return-mail postage!). Whichever method you choose,
please take the time to read the full text of our proxy statement before you
vote.

Q. Is it hard to vote by Internet?

A. Not at all! If you have not yet visited Vanguard's website-at
www.vanguard.com-this is a great opportunity to check it out. Scan our website
and, when you're ready, click on the "Proxy Voting" link on our homepage to
access www.proxyvote.com (the voting location). Problems? Please call us at
1-800-891-5345.

Q. I plan to vote by mail. How should I sign my proxy card?

A. If you are an individual account owner, please sign exactly as your name
appears on the proxy card. Either owner of a joint account may sign the proxy
card, but the signer's name must exactly match one that appears on the card. You
should sign proxy cards for other types of accounts in a way that indicates your
authority (for instance, "John Brown, Custodian").

<PAGE> 4

NOTICE OF SPECIAL MEETING OF SHAREHOLDERS

Your Vanguard Fund will host a Special Meeting of Shareholders on TUESDAY,
JUNE 30, 1998, AT 9:30 A.M., EASTERN TIME. This will be a joint meeting for all
the Vanguard Funds listed above. It will be held at Vanguard's Malvern,
Pennsylvania headquarters, at 100 Vanguard Boulevard, in the Majestic Building.
At the meeting, we'll ask shareholders to vote on:

1. A proposal to reorganize your Fund into a Delaware business trust.

2. Six proposed changes to your Fund's fundamental investment limitations
(none of which would alter your Fund's current investment objective).

3. Any other business properly brought before the meeting.

By Order of the Board of Directors/Trustees
Raymond J. Klapinsky, Secretary
100 Vanguard Boulevard
Malvern, PA 19355

April 13, 1998

YOUR VOTE IS IMPORTANT!
YOU CAN VOTE EASILY AND QUICKLY BY TOLL-FREE TELEPHONE CALL, AT OUR WEBSITE, OR
BY MAIL. JUST FOLLOW THE SIMPLE INSTRUCTIONS THAT APPEAR ON YOUR ENCLOSED PROXY
CARD. PLEASE HELP YOUR FUND AVOID THE EXPENSE OF A FOLLOW UP MAILING BY VOTING
TODAY!

VANGUARD VARIABLE ANNUITY PLAN CONTRACT OWNERS

Please turn the page for important information about your voting rights.
<PAGE> 5

VANGUARD VARIABLE ANNUITY PLAN CONTRACT OWNERS

You have the right to instruct your annuity provider--either Providian Life &
Health Insurance Company, First Providian Life & Health Insurance Company or
Ameritas Life Insurance Company--on how to vote the Vanguard Variable Insurance
Fund shares held under your plan contract. You can issue voting instructions for
these shares by toll-free telephone call, at our website, or by mail. Just
follow the simple instructions that appear on your enclosed proxy card. Note
that your annuity provider will "shadow vote" any Fund shares for which contract
owners fail to provide voting instructions. This means that the uninstructed
shares will be voted in proportionately the same manner--either "For,"
"Against," or "Abstain"--as the instructed shares.
<PAGE> 6

SPECIAL MEETING OF SHAREHOLDERS
JUNE 30, 1998

PROXY STATEMENT

INTRODUCTION
------------
This is a combined proxy statement for the twelve Vanguard Funds listed at
the top of this page. We've divided the proxy statement into five parts:

<TABLE>
<C> <S>
Part 1-- An Overview begins on page 2.
Part 2-- Your Fund's Proposals--the longest part--also
begins on page 2.
Part 3-- More on Proxy Voting and Shareholder Meetings
begins on page *.
Part 4-- Fund Information begins on page *.
Part 5-- Director/Trustee Information begins on page *.
</TABLE>

Please be sure to read the entire proxy statement before casting your vote.
Questions? Call us at 1-800-891-5345 (individual investors) or 1-800-523-1188
(participants in company-sponsored retirement plans administered by Vanguard).
This proxy statement was first mailed to shareholders the week of April 13,
1998.

1
<PAGE> 7

PART 1--AN OVERVIEW

The Board of Directors/Trustees has sent you this proxy statement to ask
for your vote on several proposals affecting your Fund. This table summarizes
the proposals and how they apply to the twelve Vanguard Funds that have
scheduled a shareholder meeting for June 30, 1998.

<TABLE>
<CAPTION>
PROPOSAL FUNDS AFFECTED
-------- --------------
<C> <S> <C>
1. Reorganization into a Delaware
Business Trust All Funds
2. Investment Limitation Changes
a. Interfund lending program All Funds
b. Standard limits on borrowing money
pledging assets Convertible Securities Fund,
Explorer Fund, PRIMECAP
Fund, Morgan Growth Fund,
STAR Fund/LifeStrategy and
Total International
Portfolios, Variable
Insurance Fund, World Fund
c. Investments in securities owned by
affiliates Convertible Securities Fund,
PRIMECAP Fund, Specialized
Portfolios, STAR Fund/
LifeStrategy and Total
International Portfolios
d. Investments in unseasoned
companies Convertible Securities Fund,
Morgan Growth Fund,
Convertible Securities Fund,
STAR Fund/LifeStrategy and
Total International
Portfolios, Trustees' Equity
Fund, World Fund
e. Investments in cash reserves STAR Portfolio only
f. Standard limits on investments in
futures and options Tax-Managed Fund
</TABLE>

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

PART 2--YOUR FUND'S PROPOSALS

PROPOSAL 1. REORGANIZATION INTO A DELAWARE BUSINESS TRUST (ALL FUNDS)

The Board of Directors/Trustees has approved a plan to reorganize your Fund
into a Delaware business trust. THE PURPOSE OF THE REORGANIZATION IS TO REDUCE
THE AMOUNT OF STATE TAXES THAT THE VANGUARD FUNDS PAYS ANNUALLY. To proceed with
the reorganization plan, we need shareholder approval. The next

2
<PAGE> 8

few pages of this proxy statement discuss important details of the
reorganization plan, including the following:

- Why we want to reorganize your Fund.
- How we plan to accomplish the reorganization.
- How the reorganization will affect your Fund.
- How a Delaware business trust compares to your Fund's current legal
structure.
- How many shareholder votes we need to approve the reorganization.

A. WHY WE WANT TO REORGANIZE YOUR FUND

MOST FUNDS WILL PAY LESS TAXES AS BUSINESS TRUSTS. This is true of
Convertible Securities Fund, Explorer Fund, Horizon Fund, Morgan Growth Fund,
PRIMECAP Fund, Selected Value Portfolio, Specialized Portfolios, Tax-Managed
Fund and World Fund. Each of these Funds currently pays foreign franchise taxes
to the Commonwealth of Pennsylvania. This tax applies to these Funds because
they are headquartered in Pennsylvania and are "foreign" corporations--that is,
organized as corporations under the laws of a different state, Maryland. If
these Funds were instead organized in the form of a business trust (as many
mutual funds are), they would be exempt from the Pennsylvania foreign franchise
tax. As business trusts, these Funds would be subject to a different tax, the
Pennsylvania county personal property tax. However, Pennsylvania counties
generally have stopped assessing personal property taxes. This is because the
Pennsylvania Supreme Court is expected to declare the personal property tax
unconstitutional. (The U.S. Supreme Court declared a similar North Carolina tax
unconstitutional in 1996.) We believe it unlikely that the Vanguard Funds, as
reorganized, would become subject to the personal property tax in the
foreseeable future. If the personal property tax were reinstated, or any similar
state tax were imposed, we would re-evaluate the Funds' options at that time.

3
<PAGE> 9

The following table shows (i) the amount of Pennsylvania foreign franchise
taxes paid by your Fund for its last fiscal year; and (ii) the amount of
Pennsylvania personal property taxes that your Fund would have paid if it had
been organized as a business trust for the last fiscal year.

<TABLE>
<CAPTION>
LAST YEAR'S SAME BILL AS A
FUND PENNSYLVANIA TAX BILL BUSINESS TRUST
---- --------------------- --------------
<S> <C> <C>
Convertible Securities Fund $ 13,000 $0
Explorer Fund $172,000 $0
Horizon Fund $ 44,000 $0
Morgan Growth Fund $184,000 $0
PRIMECAP Fund $471,000 $0
Selected Value Portfolio $ 10,000 $0
Specialized Portfolios $525,000 $0
STAR Fund/LifeStrategy and
Total International
Portfolios $ 0 $0
Tax-Managed Fund $ 94,000 $0
Trustees' Equity Fund $ 0 $0
Variable Insurance Fund $ 0 $0
World Fund $931,000 $0
</TABLE>

"Last Year's Pennsylvania Tax Bill" is the approximate amount that we
expect to save your Fund ANNUALLY by reorganizing it into a Delaware business
trust. These anticipated savings are based on the size of your Fund during its
last fiscal year. If your Fund grows, so will the amount of its tax savings as a
business trust. Of course, the ONE-TIME costs of reorganizing will offset your
Fund's tax savings to a limited extent. These costs, which mostly relate to the
printing, mailing and tabulation of proxies, are estimated at $8,000 for
Convertible Securities Fund, $142,00 for Explorer Fund, $55,000 for Horizon
Fund, $105,000 for Morgan Growth Fund, $310,000 for PRIMECAP Fund, $385,000 for
Specialized Portfolios, $420,000 for STAR Fund/Lifestrategy and Total
International Portfolios, $21,000 for Tax-Managed Fund, $39,000 for Trustees'
Equity Fund, $78,000 for Variable Insurance Fund, $11,000 for Selected Value
Portfolio, and $646,000 for World Fund.

SOME FUNDS ARE ALREADY ORGANIZED AS BUSINESS TRUSTS. This is true of STAR
Fund/LifeStrategy and Total International Portfolios, Trustees' Equity Fund, and
Variable Insurance Fund. Each of these Funds is currently organized as a
PENNSYLVANIA business trust, and therefore pays no Pennsylvania foreign
franchise taxes. We propose to reorganize these Funds into DELAWARE business
trusts to take advantage of that state's more favorable mutual fund climate, and
to gain the administrative convenience of having it organized the same way as
all other Vanguard Funds. The change will not increase or decrease these Funds'
tax liability.

4
<PAGE> 10

DELAWARE LAW IS FAVORABLE TO MUTUAL FUNDS. We have proposed to reorganize
your Fund as a DELAWARE business trust because that state's business trust law
contains provisions that are well-suited to mutual funds. The "move" to Delaware
will be largely on paper; your Fund will continue to operate out of
Pennsylvania, just as it does now.

B. HOW WE PLAN TO ACCOMPLISH THE REORGANIZATION

AGREEMENT AND PLAN OF REORGANIZATION. The Board of Directors has approved
a written Agreement and Plan of Reorganization for your Fund. This document
spells out the terms and conditions that will apply to your Fund's
reorganization into a Delaware business trust.

THREE STEPS TO REORGANIZE. In essence, the reorganization will be a three-
step process. The first step is already taken: We have established a Delaware
business trust especially for your Fund. Prior to the reorganization, this trust
will issue a single share--to your Fund. Second, if this proposal is approved,
your Fund will transfer all of its assets and liabilities to the trust. As part
of this second step, the trust will open an account for each Fund shareholder.
The trust will then credit these accounts with the exact number of full and
fractional shares that each shareholder owned in the Fund on the reorganization
date. And third, we will dissolve your Fund's Maryland corporate entity.

EFFECTIVE AS SOON AS PRACTICABLE. If approved by shareholders, the
reorganization will take place as soon as feasible after your Fund receives the
necessary regulatory approvals and legal opinions. We think this could be
accomplished by October of 1998. However, at any time prior to the
reorganization, the Board of Directors may decide that it is in the best
interest of your Fund and its shareholders not to go forward with this project.
If that happens, your Fund will continue to operate as it is currently
organized.

C. HOW THE REORGANIZATION WILL AFFECT YOUR FUND

YOUR FUND'S INVESTMENT OBJECTIVE, POLICIES, INVESTMENT ADVISERS AND FISCAL
YEAR WILL STAY THE SAME. The reorganization will not change any of these.
However, we are asking shareholders to waive temporarily any existing investment
restrictions that would otherwise prohibit the reorganization. (For instance,
many mutual funds are prohibited from acquiring control of any company. As part
of the reorganization, however, your Fund would be acquiring control of the
newly-formed trust.) Your vote in favor of the reorganization will operate as a
temporary waiver of any such restrictions.

THE REORGANIZATION WILL HAVE NO IMPACT ON YOUR FUND'S SHARE PRICE. On the
day of the reorganization, the newly-formed trust's share price will be the same
as that of your Fund. The reorganization will not cause your Fund's share price
to go up or down, and you will own the same number of shares. Any declared but

5
<PAGE> 11

undistributed dividends or capital gains for your Fund will carry over in the
reorganization.

YOUR FUND'S EXISTING DIRECTORS/TRUSTEES WILL BE REELECTED. Federal
securities laws require that at least one-half of your Fund's Directors/Trustees
be elected by shareholders. While your Fund more than meets this standard now,
that technically will not be true once it reorganizes as a trust. Rather than
call another shareholder meeting to vote on Trustees after the reorganization,
we will treat shareholder approval of this proposal as authorization to elect
your Fund's current Board members to the same positions with the trust. This
approach will avoid the considerable expense of printing, mailing and tabulating
more proxies after the reorganization. (Please refer to Part 5 of this proxy
statement for detailed information concerning your Directors/Trustees.)

YOUR FUND'S EXISTING INDEPENDENT AUDITORS WILL BE RATIFIED. We will treat
shareholder approval of the reorganization as ratification of your Fund's
existing independent auditors, Price Waterhouse, LLP.

Price Waterhouse is the independent auditor for all Vanguard Funds. In this
role, Price Waterhouse audits and certifies the Funds' financial statements.
Price Waterhouse also reviews the Funds' Annual Reports to Shareholders and
their filings with the U.S. Securities and Exchange Commission. Neither Price
Waterhouse nor any of its partners has any direct or material indirect financial
interest in the Vanguard Funds. If you wish to request the attendance of a Price
Waterhouse representative at the shareholder meeting, you should contact the
Fund's Secretary at 100 Vanguard Boulevard, Malvern, PA 19355.

THE REORGANIZATION IS CONDITIONED ON TAX FREE TREATMENT AT THE FEDERAL
LEVEL. We fully expect that the reorganization will have no federal income tax
consequences for you or your Fund. We will not proceed with the reorganization
until this point is confirmed by an IRS ruling or opinion of counsel. Following
the reorganization, from a tax standpoint, the adjusted basis of your Fund
shares will be the same as before. We do not expect shareholders to incur any
personal state or local taxes as a result of the reorganization, but you should
consult your own tax adviser to be sure.

VOTING RIGHTS WILL BE BASED ON THE DOLLAR AMOUNT OF YOUR INVESTMENT. After
the reorganization, your voting rights will become "dollar-based"--which is a
different voting rights system than your Fund uses now. Currently, all Vanguard
Funds provide shareholders with one vote for each share that they own. This
share-based system treats shareholders equitably so long as all shares of a
particular Fund have the same share price. However, fairness tends to erode when
a Fund offers more than one series of shares (we often refer to these as
"portfolios"), or more than one class of shares. The share prices of a Fund's
different portfolios inevitably diverge over time due to their different
investment programs. Similarly, the share prices of a Fund's different share
classes will deviate over time because of their different expense structures. As
a result, when

6
<PAGE> 12

issues are voted at the Fund level, the owners of lower-priced shares have
relatively greater voting clout than the owners of higher-priced shares. The
change to dollar-based voting will ensure that shareholders' voting rights
remain proportionate to their financial interests. Many Vanguard Funds currently
offer only one portfolio or class of shares, however, dollar-based voting rights
would apply to any additional portfolios or share classes that these Funds might
offer in the future.

YOUR FUND WILL STOP ISSUING SHARE CERTIFICATES AND WILL CONVERT ANY
OUTSTANDING SHARE CERTIFICATES TO RECORD ENTRY FORM. In today's financial
world, very few investors hold share certificates as physical evidence of their
mutual fund investments. Instead, investors' mutual fund holdings are maintained
and accounted for as "record entries" on the fund's computer system. The main
problems with share certificates are that:

- They present opportunities for theft, loss and fraud--and therefore offer
less protection to shareholders, rather than more.

- They're especially inconvenient--you must return your certificates to the
fund before your shares can be redeemed or exchanged.

In light of these downsides and the minimal demand for share certificates,
your Fund will stop issuing them after the reorganization. In addition, your
Fund will convert any outstanding share certificates to record entry form. This
will not happen automatically; we will arrange conversion details separately
with the Fund's certificate holders. (This change will have no effect on
Variable Insurance Fund, which doesn't currently issuer share certificates.)

D. HOW A DELAWARE BUSINESS TRUST COMPARES TO YOUR FUND'S CURRENT LEGAL
STRUCTURE

Federal securities laws have much to say about the way that mutual funds
operate, but they do not cover every aspect of a fund's existence. State law and
each fund's governing documents fill in most of the gaps. The following
discussion compares the state law and documents currently governing your Fund
with the state law and documents that will apply if it reorganizes as a Delaware
business trust. This discussion is not a comprehensive review of all technical
distinctions between the different legal structures. (You or your attorney would
need to review the laws and Fund documents first-hand for that sort of
analysis.) We simply want you to know how a Delaware business trust compares in
certain key areas to a Maryland corporation or Pennsylvania business trust--your
Fund's present legal structure.

SHAREHOLDER LIABILITY. Shareholders of a Fund organized as a Maryland
corporation generally have no personal liability for the Fund's obligations. By
contrast, shareholders of a Fund organized as a Pennsylvania business trust
theoretically could have this type of liability if the Fund had no remaining
assets

7
<PAGE> 13

to pay its obligations. A Delaware business trust offers shareholders
essentially the same amount of protection from personal liability as a Maryland
corporation.

DIRECTOR/TRUSTEE LIABILITY AND INDEMNIFICATION. With a Maryland
corporation, Directors cannot be held liable for their activities in that role
so long as they perform their duties in good faith, prudently and in the Fund's
best interests. The same is generally true for the Trustees of a Pennsylvania or
Delaware business trust, if so provided in the Fund's governing documents. Under
each legal structure, the Fund can indemnify its Directors/Trustees from claims
and expenses arising out of their service to the Fund--unless, that is, a
Director/ Trustee has acted improperly in a particular matter.

SHAREHOLDER VOTING RIGHTS AND MEETINGS. Under a Fund organized as a
Maryland corporation or a Pennsylvania business trust, shareholders' voting
rights currently are based on the number of shares that they own. As we
explained on page *, as a Delaware business trust, your Fund would shift to a
dollar-based voting rights system. As a Maryland corporation, a Fund generally
must call a shareholder meeting if one is requested in writing by investors
entitled to cast 25% or more of the Fund's votes. For a Pennsylvania business
trust, 20% is the required percentage. As Delaware business trusts, the funds
will adopt a 25% standard.

SHARE CERTIFICATES. Funds organized as Maryland corporations generally
issue share certificates to their investors upon request. Funds organized as
Pennsylvania or Delaware business trusts are not required to issue share
certificates. As explained on page *, following the reorganization, your Fund
will stop issuing share certificates and will convert any outstanding
certificates to record entry form.

E. HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE THE REORGANIZATION

To go forward with the reorganization, a majority of your Fund's
outstanding shares on April 13, 1998 must vote in favor of this proposal. YOUR
FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU APPROVE THE
REORGANIZATION.

PROPOSAL 2. SIX CHANGES TO FUNDAMENTAL INVESTMENT LIMITATIONS

2a. INTERFUND LENDING PROGRAM (ALL FUNDS)

We want to establish an interfund lending program for all Vanguard Funds,
including the ones that are not covered in this proxy statement. The program
will allow the Vanguard Funds to loan money to each other if--and only if--it
makes good financial sense to do so on both sides of the transaction. THE FUNDS
WILL NOT USE THIS PROGRAM TO LEVERAGE THEIR INVESTMENTS. The U.S. Securities and
Exchange Commission has granted permission for the Vanguard Funds to partici-

8
<PAGE> 14

pate in this program, subject to several conditions. We need shareholder
approval, as well. In the following paragraphs we explain these important
points:

- Why your Fund would want to borrow money.
- Why your Fund would want to lend money.
- How the interfund lending program will work.
- What safeguards will ensure fair and beneficial treatment of your Fund.
- What your Fund's new investment limitation will say.
- How many shareholder votes we need to approve the interfund lending
program.

YOUR FUND WOULD BORROW MONEY TO MEET REDEMPTION REQUESTS WHILE AWAITING THE
PROCEEDS OF SECURITIES SALES. Normally, your Fund has sufficient cash on hand
to satisfy all redemption requests. However, at times your Fund could be short
on cash while awaiting settlement of its securities trades (typically a three
business day process). While the law permits your Fund to defer redemption
payments for up to seven days, we know that shareholders prefer to be paid
immediately. This is the sole circumstance--and an unusual one, at that--under
which your Fund would want to borrow money.

YOUR FUND ROUTINELY LENDS MONEY TO BANKS--THROUGH REPURCHASE AGREEMENTS--TO
GENERATE INCOME ON ITS CASH RESERVES. All Funds--including your own--maintain
cash reserves to satisfy day-to-day redemption requests. Funds put their cash
reserves to work by entering into repurchase agreements with banks (and other
institutions, as well). In essence, these transactions are loans from the Fund
to a bank. The Fund acquires a short-term, high quality security from the bank,
who, in turn, agrees to buy that same security back from the Fund the next
day--at a higher price. The difference between the purchase and resale prices
represents the Fund's "interest" on the loan.

THE NEW PROGRAM WILL LET VANGUARD MATCH THE BORROWING AND LENDING NEEDS OF
DIFFERENT FUNDS--TO EVERYONE'S BENEFIT. On a given day, some Vanguard Funds may
wish to meet redemptions by borrowing money from banks, and other Vanguard Funds
may wish to generate additional income by lending money to banks. Under the
interfund lending program, Vanguard could match borrowing Funds with lending
Funds. Vanguard would then arrange loans between the matched Funds, in keeping
with a master loan agreement and the SEC's conditions for this program. By
dealing with each other instead of banks, the Funds will be able to borrow money
more cheaply and loan money more profitably. This is because (i) there will be
no bank fees for these transactions, and (ii) we will have eliminated the banks'
spread--that is, the difference between the rates that they typically charge
borrowers and pay lenders. In addition, the interfund lending program will allow
the Funds to forego the otherwise prudent--but expensive--step of maintaining a
committed line of credit with a bank to cover any emergency borrowing needs. (We
estimate that, altogether, the Vanguard Funds will save more than $800,000
annually by eliminating the need for a committed line of credit.)
9
<PAGE> 15

INTERFUND LOANS WILL PRESENT VERY LITTLE CREDIT RISK. When it lends money
to another Fund, your Fund would be subject to credit risk--the possibility that
the other Fund might fail to repay the loan. But your Fund faces this same type
of risk when it lends money to a bank, through a repurchase agreement. And we
believe that the risk is extremely small in both cases. Below we describe
various safeguards designed to minimize the credit risk of interfund loans.

THESE SAFEGUARDS ARE IN PLACE TO ENSURE FAIR AND BENEFICIAL TREATMENT OF
ALL VANGUARD FUNDS. No Vanguard Fund will be permitted to borrow or lend
through the program unless it gets a more favorable interest rate than is
available from a typical bank. Other important protections for your Fund include
these points:

(i) Interfund loan rates will be determined by a pre-established formula
based on quotations from independent banks.

(ii) Funds that borrow money must fully secure their interfund loans OR
have total assets at least 10 times greater than the amount of the
loan.

(iii) Equity Funds will be permitted to loan no more than 5% of their net
assets through the interfund lending program; bond Funds could lend
no more than 7.5%; and money market Funds could lend no more than
10%.

(iv) All interfund loans will be very short-term. They must be repaid
within the time it takes for securities trades to settle, not to
exceed seven days.

(v) No Fund can use the interfund lending program to borrow an amount
larger than 125% of its total net cash redemptions for the preceding
seven calendar days.

(vi) A lending Fund may call in its loans on one business day's notice to
the borrowing Fund.

(vii) Each Fund will continue to maintain non-committed loan arrangements
with banks to provide for situations where an interfund loan is not
possible or beneficial.

(viii) Each Fund's Board of Directors/Trustees will monitor the interfund
lending program to make sure that the interfund loan rate formula
and the Fund's participation in the program continue to be
appropriate.

YOUR FUND WILL ADOPT A NEW INVESTMENT POLICY TO PROVIDE FOR INTERFUND
LOANS. Your Fund's existing investment policies on borrowing and lending do not
allow for interfund loans. If shareholders approve this proposal, we'll adopt a
new investment policy which states that your Fund can borrow and lend money
through the interfund loan program so long as it complies with SEC conditions.

10
<PAGE> 16

We'll designate this new policy as "fundamental," meaning that your Fund will
not be able to change it in the future without shareholder approval.

HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE INTERFUND
LENDING. Shareholders of each Fund's separate portfolios (if any) will vote
separately on this proposal. Each Fund or portfolio's participation in the
interfund lending program must be approved by the lesser of (i) a majority of
the Fund or portfolio's outstanding shares on April 13, 1998, or (ii) 67% of the
shares voted, so long as more than 50% of the shares actually vote. YOUR FUND'S
BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU APPROVE THE INTERFUND LENDING
PROGRAM.

2b. BORROWING MONEY AND PLEDGING ASSETS (CONVERTIBLE SECURITIES FUND, EXPLORER
FUND, MORGAN GROWTH FUND, PRIMECAP FUND, TRUSTEES' EQUITY FUND, VARIABLE
INSURANCE FUND, WORLD FUND)

We want to establish standard limits on (i) the total amount of money that
each Vanguard Fund can borrow from all sources and (ii) the assets that each
Fund can pledge to secure any loans. This proposal ties in with proposal 2a.,
concerning the interfund lending program. BY STANDARDIZING THE FUNDS' BORROWING
AND PLEDGE LIMITS, WE EXPECT TO SIMPLIFY VANGUARD'S ADMINISTRATION OF THE
INTERFUND LENDING PROGRAM. As you can see from the following table, currently
there is a good deal of variation in the Funds' stated borrowing and pledge
limitations:

<TABLE>
<CAPTION>
FUND BORROWING LIMIT PLEDGE LIMIT
---- --------------- ------------
<S> <C> <C>
Convertible Securities Fund 10% of total 5% of total assets
assets
Explorer Fund 15% of net assets 10% of total assets
Morgan Growth Fund 10% of net assets 5% of total assets
PRIMECAP Fund 10% of net assets 5% of total assets
STAR Fund/LifeStrategy and 5% of assets, 5% of assets at
Total International taken at the market value
Portfolios lower of market
value or cost
Trustees' Equity Fund 10% of net assets No stated limit
Variable Insurance Fund 15% of net assets 5% of total assets
World Fund 10% of total 15% of total assets
assets
</TABLE>

The Funds' different investment objectives do not explain the variations in
their borrowing and pledge limits. Rather, these variations arise from the fact
that many different attorneys and regulators have worked with the Funds over the
years. We would like to realign these Funds' limits with the other Vanguard
Funds by establishing a uniform 15% OF NET ASSETS limitation on any money
borrowed or assets pledged. Any future changes to this policy would require
shareholder approval. Keep in mind that borrowing money and pledging assets
11
<PAGE> 17

are not integral parts of your Fund's investment program. As we explained in the
interfund lending discussion, your Fund would borrow money only to meet
redemptions while awaiting the proceeds of securities sales.

HOW MANY SHAREHOLDER VOTES WE NEED TO APPROVE THE 15% BORROWING AND PLEDGE
LIMIT. Shareholders of each Fund's separate portfolios (if any) will vote
separately on this proposal. Each Fund's or portfolio's adoption of the 15%
borrowing and pledge limit must be approved by the lesser of (i) a majority of
the Fund's or portfolio's outstanding shares on April 13, 1998, or (ii) 67% of
the shares voted, so long as more than 50% of the shares actually vote. YOUR
FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU APPROVE THE STANDARD
BORROWING AND PLEDGE LIMITS.

2c. INVESTMENTS IN SECURITIES OWNED BY AFFILIATES (CONVERTIBLE SECURITIES
FUND, PRIMECAP FUND, SPECIALIZED PORTFOLIOS, STAR FUND/LIFESTRATEGY
AND TOTAL INTERNATIONAL PORTFOLIOS, WORLD FUND)

We want to eliminate your Fund's policy of avoiding investments in
securities issued by companies whose securities are owned in certain amounts by
Directors, officers, and key advisory personnel. THIS POLICY IS
WELL-INTENTIONED, BUT WRONGLY FOCUSED AND UNNECESSARY FOR YOUR FUND. Having
originated many years ago with now obsolete state securities laws, which were
intended to prevent conflicts of interest in the management of mutual funds, the
policy substantially states that your Fund will not:

Purchase or retain any security if (i) one or more officers,
directors or partners of the Fund or its investment adviser
individually owns or would own, directly or beneficially, more
than 1/2 of 1 percent of the securities of such issuer, and (ii)
in the aggregate such persons own or would own or would own more
than 5% of such securities.

Confused? You're not alone. Preventing conflicts of interest in fund
management is, of course, a critically important objective. However, we believe
that your Fund's Code of Ethics is the best way to accomplish this objective.
The Code of Ethics, which has been adopted in accordance with SEC rules,
restricts the private investment activities of Directors, officers, key advisory
personnel and a wide range of Vanguard employees. Our Code of Ethics supplements
management's separate fiduciary obligation to act with the Fund's best interests
at heart. It places the burden of avoiding potential conflicts squarely on those
who would stand to gain by inappropriately influencing or benefiting from your
Fund's investment program. The current policy takes the opposite approach--it
potentially restricts your Fund's investments. In other words, the current
policy subordinates your Fund's investment interests to those of its Directors,
officers and key advisory personnel. We believe that this is wrong.
12
<PAGE> 18

HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THE POLICY CONCERNING
INVESTMENTS IN SECURITIES OWNED BY AFFILIATES. Shareholders of each Fund's
separate portfolios (if any) will vote separately on this proposal. Each Fund's
or portfolio's elimination of this policy will require approval by the lesser of
(i) a majority of the Fund's or portfolio's outstanding shares on April 13,
1998, or (ii) 67% of the shares voted, so long as more than 50% of the shares
actually vote. YOUR FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU VOTE
TO ELIMINATE THIS POLICY.

2d. INVESTMENTS IN UNSEASONED COMPANIES (CONVERTIBLE SECURITIES FUND,
MORGAN GROWTH FUND, STAR FUND/LIFESTRATEGY AND TOTAL INTERNATIONAL
PORTFOLIOS, TRUSTEES' EQUITY FUND, WORLD FUND)

We want to eliminate your Fund's policy for not investing more than 5% of
its assets in securities issued by companies that have fewer than three years
operating history, taking into account any predecessors. Like the investment
policy discussed in proposal 2c above, this "unseasoned companies" policy
originated many years ago with now obsolete state securities laws.

FOR MOST FUNDS, THE UNSEASONED COMPANIES POLICY IS UNDULY RESTRICTIVE. Each
Fund adheres to a carefully crafted investment strategy, under which its
investment advisers analyze many factors in determining whether to purchase or
sell a company's securities. Age would normally be one of these factors, in that
less seasoned companies may involve greater than average investment risks.
However, we believe that it is preferable to manage your Fund's investment risks
based on an overall assessment of the financial prospectus of particular
companies. By contrast, the current policy requires your Fund to use issuer age
as a sort of "litmus test" in the investment process.

FOR STAR FUND/LIFESTRATEGY AND TOTAL INTERNATIONAL PORTFOLIOS, THE
UNSEASONED COMPANIES POLICY IS SIMPLY IRRELEVANT. These portfolios operate as
"funds of funds," meaning that they invest solely in other Vanguard Funds.
Because the portfolios do not invest in companies (other than mutual funds), the
question of whether a company has greater or fewer than three years operating
history is moot.

HOW MANY SHAREHOLDER VOTES WE NEED TO ELIMINATE THE POLICY CONCERNING
INVESTMENTS IN UNSEASONED COMPANIES. Shareholders of each Fund's separate
portfolios will vote separately on this proposal. Each Fund's or portfolio's
elimination of the policy will require approval by the lesser of (i) a majority
of the Fund's or portfolio's outstanding shares on April 13, 1998, or (ii) 67%
of the shares voted, so long as more than 50% of the shares actually vote. YOUR
FUND'S BOARD OF DIRECTORS/TRUSTEES RECOMMENDS THAT YOU VOTE TO ELIMINATE THIS
POLICY.

13
<PAGE> 19

2e. INVESTMENTS IN CASH RESERVES (STAR PORTFOLIO ONLY)

We want to amend your Fund's current policies by adding Vanguard's
Short-Term Corporate Portfolio as a permissible investment for your Fund's cash
reserves. WE EXPECT THIS CHANGE TO MARGINALLY INCREASE YOUR FUND'S EARNINGS AT
VERY LITTLE ADDITIONAL RISK. Let's review your Fund's special structure--it's a
"fund of funds"--and then we'll explain the Short-Term Corporate Portfolio.

As a "fund of funds," STAR Portfolio invests its assets exclusively in ten
other Vanguard Funds. Your Fund's current policies require it to allocate its
assets among the underlying funds as follows:

- 60%-70% in specified VANGUARD EQUITY FUNDS--Windsor Fund, Windsor II,
Explorer Fund, Morgan Growth Fund, U.S. Growth Portfolio, PRIMECAP Fund,
and 500 Portfolio.

- 20%-30% in specified VANGUARD BOND FUNDS--GNMA Portfolio and Long-Term
Corporate Portfolio.

- 10%-20% AS CASH RESERVES in Vanguard's Prime Portfolio.

If shareholders approve this proposal, your Fund will be permitted to
invest all or part of its cash reserves--constituting 10%-20% of its assets--in
the Short-Term Corporate Portfolio. This Portfolio focuses its investments on
short-term corporate debt securities, at least 70% of which are high grade.
Unlike the Prime Portfolio, the Short-Term Corporate Portfolio is NOT a money
market fund. While the Prime Portfolio's paramount objective is to maintain a
stable share price, the Short-Term Corporate Portfolio accepts minimal share
price fluctuation in order to achieve slightly higher income yields. For
example, as of March 30, 1998, the seven-day average yield for the Prime
Portfolio was %; for the Short-Term Corporate Portfolio, the comparable
figure was %.

We believe that your Fund will modestly improve its earnings on cash
reserves by investing in the Short-Term Corporate Portfolio. At the same time,
we see the proposed change as presenting very little additional risk to your
Fund. Because cash reserves are a permanent part of your Fund's investment
program, its investments in the Short-Term Corporate Portfolio would be
long-term in nature. Under these circumstances, your Fund normally could afford
to ride through any day-to-day fluctuations in the Portfolio's share
price--fluctuations that should be minimal any way, due to the Portfolio's
policy of maintaining an average-weighted maturity of one to three years. In
fact, Vanguard's other "funds of funds"--the LifeStrategy Portfolios--already
invest their cash reserves in the Short-Term Corporate Portfolio.

HOW MANY SHAREHOLDER VOTES WE NEED TO CHANGE THE PORTFOLIO'S CASH RESERVES
POLICY. The change will require approval by the lesser of (i) a majority of the
Portfolio's outstanding shares on April 13, 1998, or (ii) 67% of the shares
voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD

14
<PAGE> 20

OF TRUSTEES RECOMMENDS THAT YOU VOTE TO APPROVE THE NEW CASH RESERVES POLICY.

2f. INVESTMENTS IN FUTURES AND OPTIONS (TAX-MANAGED FUND)

We want to amend your Fund's current policy concerning investments in
futures and options. Your Fund already has the ability to invest in futures and
options, however, it's subject to stricter percentage limits on these activities
than other Vanguard Funds. WHILE THERE ARE NO PLANS TO INCREASE YOUR FUND'S
INVESTMENTS IN FUTURES AND OPTIONS, WE'D LIKE TO MAKE ITS POLICY ON THESE
INVESTMENTS CONSISTENT WITH OTHER VANGUARD FUNDS. In the following paragraphs we
explain these important points:

- How futures and options work.
- How your Fund uses bond futures and options.
- What special risks are involved with futures and options.
- What your Fund's revised futures and options policy would say as compared
to the current policy.
- How many shareholder votes we need to approve the revised futures and
options policy.

Throughout this discussion, we'll use the simple term "futures and options"
to describe (i) stock and bond futures contracts, (ii) stock and bond options,
and (iii) options on stock and bond futures contracts.

FUTURES AND OPTIONS ARE WAYS TO LOCK IN A STOCK OR BOND PRICE, OR
PARTICIPATE IN THE PRICE MOVEMENT OF A STOCK OR BOND. These instruments are
really contracts. With a futures contract, you agree to buy or sell a specified
stock or bond at a specified price on a specified date. Option contracts are
similar, but more flexible. They give you a right--but not the obligation--to
buy or sell a specified stock or bond at a specified price during a specified
period of time. In both cases, any earnings are measured by the amount of any
increase in the value of the underlying securities over the life of the
contract. On the other hand, potential losses are measured differently under the
two strategies. With futures, your losses will match any negative price swings
in the underlying securities. By contrast, with options, potential losses are
limited to the amount that you've paid for the contract.

LIKE OTHER VANGUARD FUNDS, YOUR FUND USES FUTURES AND OPTIONS FOR THREE
PRINCIPAL REASONS, NONE OF WHICH INVOLVES SPECULATION. Cash management is the
first--and most important--reason your Fund uses futures and options. By
purchasing futures or options, the Fund can participate in the earnings of an
underlying stock or bond--without actually putting up the cash to acquire these
securities. This strategy helps the Fund maintain sufficient cash on hand to
meet daily redemption requests. In addition, during periods of particular
uncertainty in the marketplace, it buys the Fund time in deciding how to commit
its cash.

15
<PAGE> 21

Hedging is the second reason your Fund uses futures and options. That is, the
Fund can protect itself against price declines in securities that it already
owns, or intends to purchase, by locking in prices with futures or options. More
favorable pricing is the third reason your Fund uses futures and options.
Sometimes, it's possible to acquire futures or options at better prices, or for
lower transaction costs, than the underlying securities. In these cases, the
Fund might choose to buy futures or options instead of the underlying
securities.

FUTURES INVOLVE SPECIAL RISKS--CONTROLLABLE ONES, IN OUR VIEW. Futures
raise four particular concerns for investors. These concerns (which do not apply
to options) revolve around liquidity, leverage, price correlation, and risk of
loss. Permit us to explain:

- LIQUIDITY. When buying a futures contract, there's no guarantee that
you'll be able to close it out prior to the specified settlement date. To
minimize the risk of being stuck holding an unwanted futures contract,
your Fund buys futures only if (i) they are traded on a national
securities exchange, and (ii) they appear to have a liquid secondary
market.

- LEVERAGE. Relatively small fluctuations in the price of underlying
securities can generate substantial losses for futures traders. This is
because futures trading is so leveraged; you typically can buy futures
contracts with a margin deposit of 5%, or even less. YOUR FUND
COUNTERACTS THE LEVERAGE INHERENT IN FUTURES TRADING BY ALWAYS SETTING
ASIDE CASH OR OTHER LIQUID ASSETS IN THE AMOUNT OF ITS NET FUTURES
OBLIGATIONS.

- PRICE CORRELATION. The whole point of hedging with futures is to mimic
the investment returns of securities that the investor either holds, or
intends to buy. Sometimes, however, futures prices do not rise and fall
in sync with the targeted securities. If this happens, the investor's
hedging strategy may fall through, to an extent.

- RISK OF LOSS. Losses from trading futures are potentially unlimited.
Gains and losses on trading futures (and options) depend on the portfolio
managers ability to predict the direction of stock and bond markets and
other economic factors.

YOUR FUND WILL INCREASE ITS PERCENTAGE LIMITS ON INVESTMENTS IN FUTURES AND
OPTIONS TO MATCH OTHER VANGUARD FUNDS. Other Vanguard Funds are permitted to
invest in futures and options so long as: (i) the sum of its initial margin
deposits on open futures contracts does not exceed 5% of a Fund's total assets;
and (ii) the sum of its outstanding futures and options obligations does not
exceed 20% of a Fund's total assets. However, for your Fund, the applicable
limits are 3% of total assets and 5% of total assets, respectively. If
shareholders approve this proposal, we'll amend your Fund's futures and options
limits to match other Vanguard Funds. This change will permit--but certainly not
require--the Fund to invest a greater amount of its assets in futures and
options. We do not expect to increase the Fund's futures and options investments
at any
16
<PAGE> 22

time in the foreseeable future--this really is just a matter of conforming your
Fund to a Vanguard standard. Also, the three reasons that your Fund uses futures
and options--cash management, hedging, and more favorable pricing--will remain
the same. The revised policy will be designated as "fundamental," meaning that
your Fund will not be able to change it in the future without shareholder
approval.

HOW MANY SHAREHOLDER VOTES WE NEED TO ADOPT STANDARD LIMITS ON THE FUND'S
INVESTMENTS IN FUTURES AND OPTIONS. Shareholders of the Fund's separate
portfolios will vote separately on this proposal. Each portfolio's approval of
the revised policy will require approval by the lesser of (i) a majority of the
portfolio's outstanding shares on April 13, 1998, or (ii) 67% of the shares
voted, so long as more than 50% of the shares actually vote. YOUR FUND'S BOARD
OF DIRECTORS RECOMMENDS THAT YOU VOTE TO APPROVE THE NEW POLICY.

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

PART 3--MORE ON PROXY VOTING AND SHAREHOLDER MEETINGS

This section provides information on a number of topics relating to proxy
voting and shareholder meetings.

PROXY SOLICITATION METHODS. Your Fund will solicit shareholder proxies in
a variety of ways. All shareholders who are entitled to vote will receive these
proxy materials by mail. In addition, Vanguard employees and officers may
solicit shareholder proxies in person, by telephone or through the Internet. We
may also arrange for an outside firm, Shareholder Communications Corporation, to
solicit shareholder votes by telephone on the Fund's behalf. This procedure,
which is expected to cost the Fund approximately $4 per shareholder vote, will
be employed only after all more cost-effective means of soliciting shareholder
votes have been exhausted.

PROXY SOLICITATION COSTS. Your Fund will pay all costs of soliciting
proxies from its own shareholders, including costs relating to the printing,
mailing and tabulation of proxies. By voting immediately, you can help your Fund
avoid the considerable expense of a second solicitation.

QUORUM. In order for the shareholder meeting to forward, your Fund must
achieve a quorum. This means that a majority of your Fund's shares must be
represented at the meeting--either in person or by proxy. All returned proxies
count towards a quorum, regardless of how they are voted ("For," "Against" or
"Abstain"). Your Fund will count broker non-votes towards a quorum, but not
towards the approval of any proposals. (Broker non-votes are shares for which
(i) the underlying owner has not voted and (ii) the broker holding the shares
does not have discretionary authority to vote on the particular matter.)

17
<PAGE> 23

REVOKING YOUR PROXY. You may revoke your proxy at any time up until voting
results are announced at the shareholder meeting. You can do this by writing to
your Fund's Secretary, Raymond J. Klapinsky, at 100 Vanguard Boulevard, Malvern,
PA 19355 or by voting in person at the meeting. In addition, you can revoke a
prior proxy simply by voting again--using your original proxy card, by toll-free
telephone call, or at our website.

SHAREHOLDER PROPOSALS. Any shareholder proposals to be included in the
proxy statement for your Fund's next annual or special meeting must be received
by the Fund within a reasonable period of time prior to that meeting. Your Fund
has no current plans to hold an annual or special meeting in 1999.

NOMINEE ACCOUNTS. Upon request, the Vanguard Funds will reimburse nominees
for their reasonable expenses in forwarding proxy materials to beneficial owners
of the Funds' shares. Please submit invoices for our review to Vanguard
Financial Center, P.O. Box 2600, Valley Forge, PA 19482.

ANNUAL/SEMI ANNUAL REPORTS. Your Fund's most recent annual and semi annual
reports to shareholders are available at no cost. To request a report, please
call us toll-free at 1-800-662-2739 or write us at Vanguard Financial Center,
P.O. Box 2600, Valley Forge, PA 19482.

LITIGATION. Your Fund is not involved in any litigation.

OTHER MATTERS. At this point, we know of no other business to be brought
before the shareholder meeting. However, if any other matters do come up, we
will use our best judgment to vote on your behalf. If you object to our voting
other matters on your behalf, please tell us so in writing before the meeting.

THE VANGUARD GROUP, INC. Your Fund is a member of The Vanguard Group,
Inc., the only mutual mutual fund company. Vanguard is owned jointly by the
Funds it oversees (and therefore by the shareholders of those Funds). Vanguard
provides the Funds--more than 95 distinct investment portfolios--with their
corporate management, administrative and distribution services on an at-cost
basis.

18
<PAGE> 24

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

PART 4--FUND INFORMATION

This section contains background information about your Fund and its
investment adviser(s).

A. YOUR FUND (AS OF MARCH , 1998)

<TABLE>
<CAPTION>
FUND NET ASSETS OUTSTANDING 5%
FUND NAME INCEPTION ($000) SHARES OWNERS*
--------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C>
CONVERTIBLE SECURITIES
FUND 1986
EXPLORER FUND 1967
HORIZON FUND
Aggressive Growth 1995
Asset Allocation 1995
Capital Opportunity 1995
Global Equity 1995
MORGAN GROWTH FUND 1968
PRIMECAP FUND 1984
SPECIALIZED PORTFOLIOS
Energy 1984
Gold and Precious
Metals 1984
Health Care 1984
Utilities Income 1992
SELECTED VALUE
PORTFOLIO 1996
STAR FUND
STAR 1985
LifeStrategy Income 1994
LifeStrategy
Conservative Growth 1994
LifeStrategy Moderate
Growth 1994
LifeStrategy Growth 1994
Total International 1996
TAX-MANAGED FUND
Balanced 1994
Growth and Income 1994
Capital Appreciation 1994
TRUSTEES' EQUITY FUND
International 1983
U.S. 1980
</TABLE>

19
<PAGE> 25

<TABLE>
<CAPTION>
FUND NET ASSETS OUTSTANDING 5%
FUND NAME INCEPTION ($000) SHARES OWNERS*
--------- --------- ---------- ----------- -------
<S> <C> <C> <C> <C>
VARIABLE INSURANCE
FUND
Money Market 1991
High-Grade Bond 1991
High Yield Bond 1996
Balanced 1991
Equity Income 1993
Equity Index 1991
Growth 1993
Small Company Growth 1996
International 1994
WORLD FUND
International Growth 1981
U.S. Growth 1959
</TABLE>

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

*SEC rules require each Fund to tell you name and address of any person known to
be the beneficial owner of more than 5% of the Fund's (or a portfolio's)
outstanding shares. The Fund must also tell you how many shares such persons own
and what percentage of the Fund (or portfolio) these shares represent.

B. YOUR FUND'S INVESTMENT ADVISER(S)

<TABLE>
<CAPTION>
FUND NAME ADVISER NAME AND ADDRESS
--------- ------------------------
<S> <C>
CONVERTIBLE SECURITIES FUND Oaktree Capital Management
550 South Hope Street, 22nd Floor
Los Angeles. CA 90071
EXPLORER FUND Granahan Investment Management, Inc.
(3 ADVISERS) 275 Wyman Street
Waltham, MA 02154
Wellington Management Company, LLP
75 State Street
Boston, MA 02109
The Vanguard Group, Inc.
100 Vanguard Boulevard
Malvern, PA 19355
</TABLE>

20
<PAGE> 26

<TABLE>
<CAPTION>
FUND NAME ADVISER NAME AND ADDRESS
--------- ------------------------
<S> <C>
HORIZON FUND
Aggressive Growth The Vanguard Group, Inc.
Global Asset Allocation Strategic Investment Management
1001 19th Street North, 16th Floor
Arlington, VA 22209
Capital Opportunity PRIMECAP Management Company
225 South Lake Avenue
Pasadena, CA 91101
Global Equity Marathon Asset Management Limited
115 Shaftesbury Avenue, London
MORGAN GROWTH FUND Wellington Management Company, LLP
(3 ADVISERS) Franklin Portfolio Associates, LLC
Two International Place
Boston, MA 02109
The Vanguard Group, Inc.
PRIMECAP FUND PRIMECAP Management Company
SPECIALIZED PORTFOLIOS
Energy Wellington Management Company, LLP
Health Care Same
Utilities Income Same
Gold and Precious Metals M&G Investment Management Limited
3 Minister Court, Great Tower Street
London, England EC3R 7XH
REIT Index The Vanguard Group, Inc.
SELECTED VALUE PORTFOLIO Barrow, Hanley, Mewhinney & Strauss
One McKinney Plaza
3232 McKinney Avenue, 15th Floor
Dallas, TX 75204
STAR FUND
STAR The Vanguard Group, Inc. (see above)
LifeStrategy Income Same
LifeStrategy Conservative Same
Growth
LifeStrategy Moderate Growth Same
LifeStrategy Growth Same
</TABLE>

21
<PAGE> 27

<TABLE>
<CAPTION>
FUND NAME ADVISER NAME AND ADDRESS
--------- ------------------------
<S> <C>
TAX-MANAGED FUND
Balanced Same
Growth and Income Same
Capital Appreciation Same
TRUSTEES' EQUITY FUND
International Value UBS International Investment London
Limited
Triton Court, 14 Finsbury Square
London, England EC2A 1PD
U.S. Portfolio Geewax Terker & Company
99 Starr Street
Phoenixville, PA 19460
VARIABLE INSURANCE FUND
Money Market The Vanguard Group, Inc.
High-Grade Bond Same
High Yield Bond Wellington Management Company, LLP
Balanced Same
Equity Income Newell Associates
525 University Avenue
Palo Alto, CA 94301
Equity Index The Vanguard Group, Inc.
Growth Lincoln Capital Management Company
200 South Wacker Drive
Chicago, IL 60606
Small Company Growth Granahan Investment Management Company
International Schroder Capital Management
International, Inc.
33 Gutter Lane
London, England EC2V 8AS
WORLD FUND
International Growth Same
U.S. Growth Lincoln Capital Management Company
</TABLE>

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

PART 5--DIRECTOR/TRUSTEE INFORMATION

Your "yes" vote on the reorganization proposal (see page 2) will be treated
as a vote to elect each of your Fund's current Directors/Trustees to the
position of Trustee with the newly-organized Delaware business trust. Following
the

22
<PAGE> 28

reorganization, the Trustees will serve until the next election or until their
terms are for some reason terminated.

This section provides detailed information about the individual
Directors/Trustees. The information presented includes:

- The backgrounds and qualifications of the Directors/Trustees.
- The identity of your Fund's principal executive officers.
- How many Fund shares are owned by management.
- How often the Board and its committees meet.
- How Directors/Trustees are compensated.

A. THE BACKGROUNDS AND QUALIFICATIONS OF DIRECTORS/TRUSTEES

Except as otherwise noted, the individuals listed below currently serve as
Directors/Trustees of The Vanguard Group, Inc. and all Vanguard Funds. The
mailing of address of the Directors/Trustees is P.O. Box 876, Valley Forge, PA
19482.

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING THE
NAME AGE LAST 5 YEARS AND OTHER DIRECTORSHIPS
---- --- ------------------------------------
<S> <C> <C>
John C. Bogle(1) 68 Senior Chairman of the Board and
Director of The Vanguard Group, Inc.,
and all Vanguard Funds; Director of
The Mead Corporation, General
Accident Insurance Company, and
Chris-Craft Industries, Inc.
John J. Brennan(1) 43 Chairman of the Board, Director,
President and Chief Executive Officer
of The Vanguard Group, Inc., and all
Vanguard Funds
Robert E. Cawthorn 62 Chairman Emeritus and Director of
Rhone-Poulenc Rorer, Inc.; Managing
Director of Global Health Care
Partners/DLJ Merchant Banking
Partners; Director of Sun Company,
Inc., and Westinghouse Electric Corp.
Barbara Barnes Hauptfuhrer 69 Director of The Great Atlantic and
Pacific Tea Co., IKON Office
Solutions, Inc., Raytheon Co.,
Knight-Ridder, Inc., Massachusetts
Mutual Life Insurance Co., and Ladies
Professional Golf Association;
Trustee Emerita of Wellesley College
Bruce K. MacLaury(3) 66 President Emeritus of The Brookings
Institution; Director of American
Express Bank Ltd., The St. Paul
Companies, Inc., and National Steel
Corp.
</TABLE>

23
<PAGE> 29

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION DURING THE
NAME AGE LAST 5 YEARS AND OTHER DIRECTORSHIPS
---- --- ------------------------------------
<S> <C> <C>
Burton G. Malkiel(2) 65 Chemical Bank Chairman's Professor of
Economics, Princeton University;
Director of Prudential Insurance Co.
of America, Amdahl Corp., Baker
Fentress & Co., The Jeffrey Co., and
Southern New England
Telecommunications Co.
Alfred M. Rankin, Jr. 56 Chairman, President, and Chief
Executive Officer of NACCO
Industries, Inc.; Director of NACCO
Industries, The BFGoodrich Co., and
the Standard Products Co.
John C. Sawhill 61 President and Chief Executive Officer
of The Nature Conservancy; formerly,
Director and Senior Partner of
McKinsey & Co. and President of New
York University; Director of Pacific
Gas and Electric Co., Procter &
Gamble Co., and NACCO Industries
James O. Welch, Jr. 66 Retired Chairman of Nabisco Brands,
Inc.; retired Vice Chairman and
Director of RJR Nabisco; Director of
TECO Energy, Inc., and Kmart Corp.
J. Lawrence Wilson 61 Chairman and Chief Executive Officer of
Rohm & Haas Co.; Director of Cummins
Engine Co., and The Mead Corporation;
Trustee of Vanderbilt University
</TABLE>

- ---------------
(1) Messrs. Bogle and Brennan are considered "interested persons" because they
serve as Fund officers, as well as Directors/Trustees.
(2) Mr. Malkiel does not serve as a Director of Vanguard Equity Income Fund.
(3) Mr. MacLaury does not serve as a Director/Trustee of Vanguard Municipal Bond
Fund or the Vanguard State Tax-Free Funds.

24
<PAGE> 30

B. PRINCIPAL EXECUTIVE OFFICERS

The following individuals are the principal executive officers of The
Vanguard Group, Inc., and all Vanguard Funds. Each principal executive officer
has held substantially the same position with the Funds for the last five years
or more (except that Mr. Brennan succeeded Mr. Bogle as Chairman of the Board on
January 31, 1998). Their mailing address is P.O. Box 876, Valley Forge, PA
19482.

<TABLE>
<CAPTION>
NAME AGE OFFICE
---- --- ------
<S> <C> <C>
John C. Bogle 68 Senior Chairman of the Board
John J. Brennan 43 Chairman of the Board, President and
Chief Executive Officer
Raymond J. Klapinsky 59 Secretary
Richard F. Hyland 60 Treasurer
Karen E. West 51 Controller
</TABLE>

C. FUND SHARES OWNED BY DIRECTORS/TRUSTEES

Messrs. Bogle and Brennan each have invested substantially all of their
assets in the Vanguard Funds. The independent Directors/Trustees are also
committed to investing a significant portion of their assets in the Funds. All
Directors/Trustees allocate their investments among more than 95 Vanguard Funds
based on their own investment needs. Their aggregate Vanguard investments
totaled over $79.5 million as of December 31, 1997. The total amount of Fund
shares beneficially owned by each Director/Trustee as of that date, along with
the year in which each individual became a Director/Trustee of the Vanguard
Funds appears below. As of December 31, 1997, the Directors/Trustees and
officers owned less than 1% of each Fund's total outstanding shares.

JOHN C. BOGLE (1966)
Explorer Fund--22,837 shares; Horizon Fund-Global Asset Allocation
Portfolio--2,543 shares; Morgan Growth Fund--1,269 shares [7,924 shares];
PRIMECAP Fund--[24,106 shares]; Specialized Portfolios-Gold and Precious Metals
Portfolio--3,335 shares; Tax Managed Fund (TMF)-Balanced Portfolio--116,566
shares [78,812 shares]; TMF-Capital Appreciation Portfolio--20,667 shares
[76,960 shares]; Trustees Equity Fund-U.S. Growth Portfolio--16,541 shares
[16,541 shares]; World Fund (WF)-International Growth Portfolio--7,080 shares;
WF-U.S. Growth Portfolio--7,666 shares [15,623 shares]; all Vanguard
Funds--1,655,037 shares [701,163 shares] NOTE: The bracketed amounts represent
shares held by charitable and related trusts created by Mr. Bogle, in which he
disclaims ownership, control or voting power.

25
<PAGE> 31

JOHN J. BRENNAN (1987)
Explorer Fund--5,170 shares; Horizon Fund-Capital Opportunity
Portfolio--1,862 shares; Morgan Growth Fund--7,071 shares; PRIMECAP Fund--3,588
shares; STAR Fund-Total International Portfolio--10,676 shares; Tax Managed
Fund-Growth and Income Portfolio--16,773 shares; Trustees Equity
Fund-International Value Portfolio--374 shares; Variable Insurance Fund Balanced
Portfolio--908 shares; World Fund (WF)-International Growth Portfolio--6,445
shares; WF-U.S. Growth Portfolio--2,911 shares; all Vanguard Funds--684,779
shares.

ROBERT E. CAWTHORN (1992)
Specialized Portfolios-REIT Index Portfolio--16,835 shares; STAR Fund-STAR
Portfolio--38,208 shares; Trustees Equity Fund-International Value
Portfolio--4,894 shares; all Vanguard Funds--8,369,629 shares.

BARBARA B. HAUPTFUHRER (1972)
Convertible Securities Fund--756 shares; Explorer Fund--695 shares; Morgan
Growth Fund--3,445 shares; PRIMECAP Fund--2,724 shares; Specialized
Portfolios-Gold and Precious Metals Portfolio--525 shares; STAR Fund-STAR
Portfolio--19,797 shares; STAR Fund-Total International Portfolio--902 shares;
Trustees Equity Fund-International Value Portfolio--3,592 shares; World Fund-
International Growth Portfolio--717 shares; all Vanguard Funds--1,910,269
shares.

BRUCE K. MACLAURY (1989)
All Vanguard Funds--20,373 shares.

BURTON G. MALKIEL (1977)
Trustees Equity Fund-International Value Portfolio--1,804 shares; all
Vanguard Funds--520,104 shares.

ALFRED M. RANKIN, JR. (1992)
Explorer Fund--3,788 shares; PRIMECAP Fund--3,615 shares; World
Fund-International Growth Portfolio--3,220 shares; all Vanguard Funds--436,834
shares.

JOHN C. SAWHILL (1991)
Horizon Fund (HF)-Aggressive Growth Portfolio--11,785 shares; HF-Capital
Opportunity Portfolio--1,005 shares; HF-Global Asset Allocation Portfolio--5,710
shares; HF-Global Equity Portfolio--5,849 shares; Tax Managed Fund-Capital
Appreciation Portfolio--15,969 shares; all Vanguard Funds--790,828 shares.

26
<PAGE> 32

JAMES O. WELCH, JR. (1971)
Explorer Fund--1,275 shares; Morgan Growth Fund--1,362 shares; PRIMECAP
Fund--39,897 shares; World Fund (WF)-International Growth Portfolio--3,087
shares; WF-U.S. Growth Portfolio--3,376 shares; all Vanguard Funds--144,797
shares.

J. LAWRENCE WILSON (1985)
Horizon Fund-Global Equity Portfolio--10,902 shares; Specialized
Portfolios-REIT Index Portfolio--36,250 shares; STAR Fund-STAR Portfolio--
10,487 shares; Tax Managed Fund-Capital Appreciation Portfolio--8,891 shares;
all Vanguard Funds--311,590 shares.

D. BOARD AND COMMITTEE MEETINGS

During 1997, your Fund's Board of Directors/Trustees held 11 meetings.

Your Board has a standing Compensation, Nomination and Audit Committee,
which consists of all Directors/Trustees who are not "interested persons" of the
Fund (that is, all but Messrs. Bogle and Brennan). During 1997, the Committee
held 2 meetings. The Committee's role is to:

1. Evaluate the performance of your Fund's officers and employees.

2. Develop and approve the compensation arrangements for your Fund's
officers and employees.

3. Interview, evaluate and recommend to shareholders candidates for
election your Fund's Board of Directors/Trustees. (The Committee will
consider shareholder nominations for Director/Trustee; please write to
Mr. Wilson, Chairman of the Committee.)

4. Select your Fund's independent accountants and review their fees.

5. Oversee your Fund's internal controls.

Following the reorganization, your Fund's Board of Trustees will form a
similar committee.

E. DIRECTOR/TRUSTEE COMPENSATION

The same individuals serve as Directors/Trustees of all Vanguard Funds, and
each Fund pays a proportionate share of the Directors'/Trustees' compensation.
The Funds employ their officers on a shared basis, as well. However, officers
are compensated by The Vanguard Group, Inc., not the Funds. The reorganization
(Proposal 1) will not change the compensation arrangements described in this
section.

27
<PAGE> 33

INDEPENDENT DIRECTORS/TRUSTEES. The Funds compensate their independent
Directors/Trustees--that is, the ones who are not also officers of the Fund--in
three ways:

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

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

"INTERESTED" DIRECTORS/TRUSTEES. The Funds' interested Directors/
Trustees--Messrs. Bogle and Brennan--receive no compensation for their service
in that capacity. However, they are paid by The Vanguard Group, Inc. for
services that include their role as officers of the Funds.

COMPENSATION TABLES. The following tables provide compensation details for
each of the Directors/Trustees. For each Fund covered in this proxy statement,
we list the amounts paid as compensation and accrued as retirement benefits by
that Fund for each Director/Trustee. In addition, the last table shows the total
amount of benefits that we expect each Director/Trustee to receive from all
Vanguard Funds upon retirement, and the total amount of compensation paid to
each Director/Trustee by all Vanguard Funds. All information shown in this
section relates to each Fund's most recent fiscal year.

<TABLE>
<CAPTION>
CONVERTIBLE SECURITIES
FUND EXPLORER FUND
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
-------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn $53 $6 $796 $ 96
Hauptfuhrer $53 $8 $796 $115
MacLaury $58 $8 $846 $109
Malkiel $53 $5 $801 $ 77
Rankin $53 $4 $796 $ 60
Sawhill $53 $5 $796 $ 72
Welch $53 $6 $796 $ 88
Wilson $53 $4 $796 $ 64
</TABLE>

28
<PAGE> 34

<TABLE>
<CAPTION>
HORIZON FUND MORGAN GROWTH FUND
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
-------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn $190 $23
Hauptfuhrer $190 $27
MacLaury $200 $27
Malkiel $191 $18
Rankin $190 $14
Sawhill $190 $17
Welch $190 $21
Wilson $190 $15
</TABLE>

<TABLE>
<CAPTION>
PRIMECAP FUND SPECIALIZED PORTFOLIOS
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
-------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn $1,562 188$
Hauptfuhrer $1,562 225$
MacLaury $1,659 215$
Malkiel $1,572 151$
Rankin $1,576 119$
Sawhill $1,562 141$
Welch $1,562 173$
Wilson $1,562 125$
</TABLE>

<TABLE>
<CAPTION>
STAR FUND TAX-MANAGED FUND
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
-------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn
Hauptfuhrer
MacLaury
Malkiel
Rankin
Sawhill
Welch
Wilson
</TABLE>

29
<PAGE> 35

<TABLE>
<CAPTION>
TRUSTEES' EQUITY FUND VARIABLE INSURANCE FUND
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
-------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn $648 $78
Hauptfuhrer $648 $94
MacLaury $692 $89
Malkiel $653 $63
Rankin $648 $49
Sawhill $648 $58
Welch $648 $72
Wilson $648 $52
</TABLE>

<TABLE>
<CAPTION>
SELECTED VALUE PORTFOLIO WORLD FUND
DIRECTORS/ AGGREGATE ACCRUED PENSION/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS COMPENSATION RETIREMENT BENEFITS
-------- ------------ ------------------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None None None
Brennan None None None None
Cawthorn $40 $5 $3,670 $441
Hauptfuhrer $40 $6 $3,670 $530
MacLaury $45 $5 $3,909 $506
Malkiel $41 $4 $3,696 $356
Rankin $40 $3 $3,670 $279
Sawhill $40 $4 $3,670 $331
Welch $40 $5 $3,670 $407
Wilson $40 $3 $3,670 $294
</TABLE>

<TABLE>
<CAPTION>
ALL VANGUARD FUNDS(1)
DIRECTORS/ AGGREGATE ACCRUED PENSION/
TRUSTEES COMPENSATION RETIREMENT BENEFITS
-------- ------------ -------------------
<S> <C> <C> <C> <C>
Bogle None None
Brennan None None
Cawthorn $13,000 $70,000
Hauptfuhrer $15,000 $70,000
MacLaury $12,000 $65,000
Malkiel $15,000 $70,000
Rankin $15,000 $70,000
Sawhill $15,000 $70,000
Welch $15,000 $70,000
Wilson $15,000 $70,000
</TABLE>

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

(1) All Directors/Trustees serve as such for 35 Vanguard Funds, except for
Messrs. Malkiel and MacLaury, who serve on the Boards of 34 and 28 Vanguard
Funds, respectively.

30
<PAGE> 36
VOTE BY TOUCH-TONE PHONE OR THE INTERNET
- ---- -- ----- ---- ----- -- --- --------
[SHIP LOGO]
The VANGUARD Group (R)
CALL TOLL-FREE: 1-800-690-6903 OR VISIT OUR WEBSITE
WWW.VANGUARD.COM OR WWW.PROXYVOTE.COM

12-DIGIT CONTROL NUMBER:

(See enclosed insert for further instructions to vote by phone/internet)

Please detach at perforation before mailing

("FUND")
PROXY SOLICITED BY THE BOARD OF DIRECTORS

By my signature below, I appoint John J. Brennan, J. Lawrence Wilson and
Raymond J. Klapinsky as my attorneys to vote all Fund shares that I am entitled
to vote at the Special Meeting of Shareholders to be held in the Majestic
Building, Room 118A, Vanguard Financial Center, 100 Vanguard Boulevard,
Malvern, PA on June 30, 1998 at 9:30 A.M., E.T. and at any adjournments of the
meeting. Any one or more of Messrs. Brennan, Wilson and Klapinsky may vote my
shares, and they may appoint substitutes to vote my shares on their behalf. I
instruct Messrs. Brennan, Wilson and Klapinsky to vote this proxy as specified
on the reverse side, and I revoke any previous proxies that I have executed. I
acknowledge receipt of the Fund's Notice of Special Meeting of Shareholders and
proxy statement.

PLEASE SIGN, DATE AND RETURN PROMPTLY
IN ENCLOSED ENVELOPE IF YOU ARE NOT
VOTING BY PHONE OR INTERNET

Date -------------------------
NOTE: Please sign exactly as your
name appears on this proxy. When
signing in a fiduciary capacity, such
as executor, administrator, trustee,
attorney, guardian, etc., please so
indicate. Corporate and partnership
proxies should be signed by an
authorized person indicating the
person's title.
-------------------------------------

-------------------------------------
Signature(s)(and Title(s), if applicable)
CONTINUED ON REVERSE SIDE
VAN-PH3
<PAGE> 37
Please refer to the Proxy Statement discussion of these proposals.
THE PROXY WILL BE VOTED FOR THE PROPOSALS IF YOU DO NOT SPECIFY OTHERWISE.
---
Your appointed attorneys will vote any other matters that arise at the meeting
in accordance with their best judgment.
THE BOARD OF DIRECTORS/TRUSTEES RECOMMENDS A VOTE FOR EACH OF THE FOLLOWING:
---

Please detach at perforation before mailing.

Please vote by checking the appropriate box(es) below.

FOR AGAINST ABSTAIN
<S> <C> <C> <C>
1. To reorganize the Fund into a Delaware business trust. (All Funds) [ ] [ ] [ ] 1.

2. To change the Fund's fundamental investment limitations with regards to:

(a) The interfund lending program. (All Funds) [ ] [ ] [ ] 2a.

(b) Borrowing money and pledging assets. (Convertible Securities Fund, Explorer Fund, [ ] [ ] [ ] 2b.
PRIMECAP Fund, Morgan Growth Fund, STAR Fund/LifeStrategy and Total International
Portfolios, Variable Insurance Fund, World Fund)

(c) Investments in securities owned by affiliates. (Convertible Securities Fund, PRIMECAP Fund, [ ] [ ] [ ] 2c.
Specialized Portfolios, STAR Fund/LifeStrategy and Total International Portfolios)

(d) Investments in unseasoned companies. (Convertible Securities Fund, Morgan Growth Fund, [ ] [ ] [ ] 2d.
STAR Fund/LifeStrategy and Total International Portfolios, Trustees' Equity Fund, World
Fund)

(e) Investments in cash reserves. (STAR Portfolio, only) [ ] [ ] [ ] 2e.

(f) Investments in futures and options. (Tax-Managed Fund, only) [ ] [ ] [ ] 2f.

PLEASE SIGN ON REVERSE SIDE VAN-PH3
</TABLE>