<PAGE> 1
A MESSAGE TO SHAREHOLDERS
FELLOW SHAREHOLDER:
Building on its strong performance in 1995, Vanguard/Morgan Growth Fund
continued to shine as the bull market in stocks marched on during the first
half of 1996. The Fund turned in a solid half-year return of +12.2%, exceeding
the results of its two primary benchmarks.
The table that follows compares the total return (capital change plus
reinvested dividends) of Morgan Growth Fund during the semi-annual period with
those of the two benchmarks we use to gauge our performance: the unmanaged
Standard & Poor's 500 Composite Stock Price Index and the average growth mutual
fund. During this brief period, we outpaced by a decent margin the results of
these tough competitive standards.
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURN
-----------------
SIX MONTHS ENDED
JUNE 30, 1996
- -------------------------------------------------------
<S> <C>
MORGAN GROWTH FUND +12.2%
- -------------------------------------------------------
AVERAGE GROWTH MUTUAL FUND +10.1%
STANDARD & POOR'S 500 STOCK INDEX +10.1
- -------------------------------------------------------
</TABLE>
The Fund's total return is based on net asset values of $14.09 per share on
December 31, 1995, and $15.44 on June 30, 1996, adjusted to take into account
the reinvestment of a carry-over distribution of $.35 per share from net
capital gains realized during 1995 and paid in March 1996.
THE PERIOD IN REVIEW
The U.S. stock market continued to surge upward during the first half of 1996,
albeit below the near-record pace that prevailed in 1995. Even so, the advance
was impressive, occurring as it did in the face of a sharp rise in long-term
interest rates.
While the stock market, as measured by the Standard & Poor's 500
Composite Stock Price Index, chalked up a +10.1% return from January through
June, the bond market slumped. Short-term interest rates rose only modestly,
with the rate on 90-day Treasury bills rising from 5.0% to 5.2% during the
first half of the year. The rate increase was steeper for long-term bonds, with
the yield on the benchmark long-term U.S. Treasury bond rising from 6.0% at the
beginning of the year to 7.0% at the end of June. The price of the 30-year
Treasury bond fell -12% during the period. The Lehman Aggregate Bond Index, a
benchmark for the overall bond market, provided a negative total return of
- -1.2% in the half year, earning income of 3.3% combined with a price decline of
- -4.5%.
The primary reason for the divergence in the returns of stocks and
bonds appears to be differing responses by equity and bond investors to the
surprising strength of the U.S. economy. Faster-than-expected economic growth
during the first half of 1996 led stock investors to anticipate accelerated
growth in corporate earnings, even as bond investors worried about higher
inflation. It remains to be seen whether the bull market in stocks can
continue in the face of higher interest rates, which may provide heightened
competition for investors' dollars at a time when common stocks offer
historically low dividend yields.
In this generous environment for common stocks, Morgan Growth Fund did
even better. We outpaced the Standard & Poor's 500 Index by a margin of 2.1
percentage points, due largely to two factors: beneficial sector weightings and
good stock selection. With regard to our sector weightings, we maintained a
substantial overweighting in the market-leading technology sector (26% of net
assets for the Fund versus 11% for the Index) but were sharply underweighted in
utility stocks (4% versus 12%), the market's worst-performing sector. Also
contributing to our positive margin over the Index was good overall stock
selection in virtually every sector of the stock market, with the notable
exception of our technology holdings.
We exceeded the performance of the average growth mutual fund by the
same 2.1-percentage-point margin, but for slightly different reasons. As we
have noted in the past, many of our competitors in the growth fund universe
hold significant portions of their assets in stocks with value characteristics
(low price/earnings ratios and high dividend yields).
(continued)
1
<PAGE> 2
While Morgan Growth Fund holds a modest portion of its assets in value-oriented
stocks, we maintain more of a "pure" growth portfolio than our typical
competitor. Given that growth stocks in general have been the market leaders
over the past six months, it is not surprising that we gained a slight edge
over our competitors.
IN SUMMARY
Six months ago in our Annual Report--following an extraordinarily bountiful
1995--we cautioned Morgan Growth Fund shareholders that "the financial markets
are never a 'one-way street.'" Despite the continued strength of the stock
market thus far in 1996, investors should be prepared for the inevitable rough
patches that surely lie ahead. Investors who understand that the long-term
rewards of investing in stocks go hand-in-hand with above-average interim
volatility are much more apt to "stay the course"--come what may--with their
long-term investment program. We recommend that you do the same.
We look forward to reporting to you on the Fund's full year results in
our Annual Report six months hence.
Sincerely,
/s/ JOHN C. BOGLE
John C. Bogle
Chairman of the Board
/s/ JOHN J. BRENNAN
John J. Brennan
President
July 25, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
2
<PAGE> 3
REPORT FROM WELLINGTON MANAGEMENT COMPANY
During the first half of the year, the stock market produced more good gains
driven by moderate earnings progress, strong mutual fund flows, and a high
level of merger and acquisition activity. Meanwhile, bond investors fretted
over a spike in food and energy prices, a tightening of labor markets, and
Federal Reserve policy. At the same time, the economy appears to have thrown
off its mid-cycle slowdown and has demonstrated good job growth, strong
consumer spending, and an apparent end to the lengthy inventory correction.
These factors would seem to provide the Fed with the ingredients needed to
tighten monetary policy fairly soon. However, we see no major engine of
reacceleration for the economy, and the consumer's financial position has
become stretched, as indicated by rising credit delinquencies and personal
bankruptcies.
The divergence that we have seen in the stock and bond markets also
impacted the performance of individual sectors within the stock market, as the
more cyclical commodity companies did poorly while the more stable consumer
stocks did well. Given the sluggish economy and strong dollar, we would
anticipate continued difficult profit comparisons over the next couple of
reporting periods. Unfortunately, the dichotomy between stocks and bonds is
quite worrisome for stocks overall. Therefore, even though the market seems to
be fairly priced on prospective earnings, stocks could come under pressure if
the Fed were to tighten monetary policy or if the consumer's buying binge runs
out of credit.
During the first half of the year, we added a wide diversity of new
names to the portfolio. At the same time, we continued to take funds out of the
technology sector. While technology still has significant long-term growth
potential, the weakening of the major industrial economies around the world,
when combined with the significant amount of capital that has poured into the
technology area, makes us less sanguine nearer-term. As a result, the majority
of the key eliminations from the portfolio were in the technology group. In
several cases we took substantial gains, such as with Ericsson, Shiva, and
Motorola. Other technology sales were due to disappointing fundamentals such
as Sensormatic and Cheyenne Software.
The new stocks in the portfolio are spread across seven of our ten
major groups. There is no common theme, other than we continue to try to
emphasize those companies that can either show impressive double-digit earnings
gains during this period of volatile economic activity or have strong hidden
potential looking out to next year. The largest number of new purchases went
into the health-care sector and the media sector. In health care, we added the
classic growth stock, Abbott Labs, as well as three companies with future
potential, Eisai, Magellan Health Services, and Warner-Lambert. Eisai is a
Japanese pharmaceutical firm with a very promising Alzheimer's drug, Aricept.
Magellan is the country's leading provider of mental health care, an industry
nearing the end of a decade-long shakeout. Warner-Lambert has an exciting
pipeline of new drug entities, spearheaded by the firm's oral anti-diabetic,
Troglitazone.
In the media sector, we added a number of new holdings, with a special
emphasis on broadcasting. The passage of the Telecom Reform Bill has
accelerated the consolidation of radio and television broadcasting, the most
fragmented media business in the world. New positions were established in Jacor
Communications, the third largest independent radio operator in the country,
the Providence Journal, a leading independent TV company and newspaper
publisher, and Chancellor Broadcasting, a recent IPO. Also in the media arena,
we added Liberty Media, the leading purveyor of cable networks, an area of
increasing interest now that we can see the enormous growth potential of direct
satellite TV delivery.
Respectfully,
Robert D. Rands, Senior Vice President
Portfolio Manager
Wellington Management Company
July 19, 1996
3
<PAGE> 4
REPORT FROM FRANKLIN PORTFOLIO ASSOCIATES
The economy continued on a slow upward path during the first half of the year.
Long Treasuries rose in yield, with the twelve-month low for the price of the
30-year U.S. Treasury bond occurring in early June. (Subsequent lows have been
seen in early July.) The Standard & Poor's 500 Index rose during the six-month
period, but was flat in June. The domestic political scene appeared to become
more cloudy, and uncertainty over the Russian election increased as the quarter
closed. A major factor contributing to economic uncertainty at June's end was
the doubt as to the future course of interest rates. Fear of rate increases
continually dampened market expectations.
Day-to-day volatility in the marketplace seemed to increase during the
first half of our fiscal year. Some fundamental weaknesses surfaced in the
technology sector, and uncertainty over future earnings increased.
We think that the new political equilibrium, with a focus on keeping
the government's share of the economy at lower levels, continues to hold. The
cacophony surrounding the November election campaigns is increasing to an
unpleasant level.
The dollar was strong against major currencies in the first half of
the year. The rest of the world continues to be in the economic doldrums. The
U.S. economy may indeed be the force needed to rekindle world growth.
In the U.S. equity market, particular strength in the first half was
shown by energy-related issues, retailers, automotive issues, and leisure
stocks. Weakness was shown in metals, telephone and electric utilities, and
chemical issues. Smaller issues performed in line with larger stocks in the
first half. The Russell 2000 (a small-stock index) outperformed the Russell
1000 (a large-stock index) in the second quarter after lagging it in the first
quarter.
We continue to view equities as being slightly on the "rich" side in
valuations. We offer the caveat that market timing is not, in our view, an
ingredient of most successful investment strategies. "Staying the course" with
a well-chosen investment mix suits most investors' needs and temperaments.
We have managed part of the Vanguard/Morgan Growth Fund for over six
years. We are ahead of the benchmark for the year-to-date period. Our
measurement since inception is also ahead of the benchmark, but not to the
degree that we internally target. We take solace from the fact that performance
comparisons for both short and long time periods show us to have a favorable
competitive position within the peer group of Morningstar growth funds. This
table summarizes our record:
<TABLE>
<CAPTION>
- -----------------------------------------------------
FRANKLIN/MORGAN SUB-PORTFOLIO
VERSUS MORNINGSTAR GROWTH FUNDS
-----------------------------------
THROUGH 6/30/96
- -----------------------------------------------------
<S> <C>
LAST 5 YEARS 87TH OUT OF 319
LAST 3 YEARS 93RD OUT OF 489
LAST 1 YEAR 381ST OUT OF 836
YEAR TO DATE 247TH OUT OF 907
- -----------------------------------------------------
</TABLE>
Source: Morningstar, Inc.
Our strategy is to build a margin of superiority by trying to achieve many
small positive differences in performance rather than a few big ones. This
strategy leads to our being fully invested at all times. As a result, the
market value of our portion of the portfolio is almost certain to decline in a
sustained bear market for equities. Our strategy is more compatible with the
needs of long-term investors than with those of speculators. We look forward to
the remainder of 1996 with considerable optimism.
Respectfully,
Franklin Portfolio Associates
July 8, 1996
4
<PAGE> 5
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD/MORGAN GROWTH FUND for the 25-year period ended June 30, 1996. During
the period illustrated, stock prices fluctuated widely; these results should
not be considered a representation of the dividend income or capital gain or
loss that may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA* TOTAL INVESTMENT RETURN**
- -------------------------------------------------------------------------------------------------------------------
Morgan Growth Fund S&P 500
Value with Income ----------------------------- -------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1972 $9.18 $.48 $.07 $ 9.81 +20.7% +1.1% +21.8% +19.0%
- -------------------------------------------------------------------------------------------------------------------
1973 7.11 .27 .09 7.94 -20.0 +0.8 -19.2 -14.7
- -------------------------------------------------------------------------------------------------------------------
1974 4.74 -- .11 5.38 -33.4 +1.1 -32.3 -26.3
- -------------------------------------------------------------------------------------------------------------------
1975 6.62 -- .13 7.69 +39.7 +3.4 +43.1 +37.1
- -------------------------------------------------------------------------------------------------------------------
1976 7.77 -- .11 9.16 +17.4 +1.7 +19.1 +23.8
- -------------------------------------------------------------------------------------------------------------------
1977 8.18 -- .15 9.85 + 5.2 +2.2 + 7.4 - 7.2
- -------------------------------------------------------------------------------------------------------------------
1978 9.35 .11 .21 11.75 +16.1 +3.2 +19.3 + 6.5
- -------------------------------------------------------------------------------------------------------------------
1979 9.47 1.13 .29 13.96 +15.3 +3.5 +18.8 +18.4
- -------------------------------------------------------------------------------------------------------------------
1980 12.36 -- .31 18.81 +30.5 +4.2 +34.7 +32.4
- -------------------------------------------------------------------------------------------------------------------
1981 11.05 .45 .29 17.90 - 7.1 +2.3 - 4.8 - 4.9
- -------------------------------------------------------------------------------------------------------------------
1982 12.01 1.31 .30 22.86 +24.1 +3.6 +27.7 +21.5
- -------------------------------------------------------------------------------------------------------------------
1983 13.84 1.04 .25 29.34 +25.8 +2.6 +28.4 +22.5
- -------------------------------------------------------------------------------------------------------------------
1984 11.45 1.39 .31 27.56 - 8.1 +2.0 - 6.1 + 6.3
- -------------------------------------------------------------------------------------------------------------------
1985 13.82 .60 .25 35.91 +27.5 +2.8 +30.3 +31.8
- -------------------------------------------------------------------------------------------------------------------
1986 11.50 2.88 .43 38.72 + 4.2 +3.6 + 7.8 +18.7
- -------------------------------------------------------------------------------------------------------------------
1987 9.39 2.45 .20 40.67 + 3.3 +1.7 + 5.0 + 5.3
- -------------------------------------------------------------------------------------------------------------------
1988 10.27 .98 .24 49.75 +19.8 +2.5 +22.3 +16.6
- -------------------------------------------------------------------------------------------------------------------
1989 11.72 .59 .28 61.03 +19.9 +2.8 +22.7 +31.7
- -------------------------------------------------------------------------------------------------------------------
1990 10.40 .80 .34 60.11 - 4.4 +2.9 - 1.5 - 3.1
- -------------------------------------------------------------------------------------------------------------------
1991 12.20 .86 .29 77.73 +26.3 +3.0 +29.3 +30.5
- -------------------------------------------------------------------------------------------------------------------
1992 12.65 .52 .18 85.15 + 8.1 +1.4 + 9.5 + 7.6
- -------------------------------------------------------------------------------------------------------------------
1993 12.01 1.35 .18 91.39 + 5.9 +1.4 + 7.3 +10.1
- -------------------------------------------------------------------------------------------------------------------
1994 11.36 .31 .14 89.87 - 2.9 +1.2 - 1.7 + 1.3
- -------------------------------------------------------------------------------------------------------------------
1995 14.09 1.16 .15 122.20 +34.6 +1.4 +36.0 +37.6
- -------------------------------------------------------------------------------------------------------------------
1996 (6/30) 15.44 .35 -- 137.14 +12.2 0.0 +12.2 +10.1
- -------------------------------------------------------------------------------------------------------------------
CUMULATIVE TOTAL +1,601.5% +1,621.2%
- -------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +12.3% +12.3%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Adjusted for the 3-for-2 stock split, February 3, 1979.
**Includes reinvestment of income dividends and any capital gains distributions
for both the Fund and the Index.
Note: The initial net asset value was $8.06 on December 31, 1971, the beginning
of the period illustrated. No adjustment has been made for income taxes payable
by shareholders on reinvested income dividends and capital gains distributions.
5
<PAGE> 6
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS (unaudited)
June 30, 1996
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS (92.3%)
- ----------------------------------------------------------------------------
BASIC MATERIALS (5.6%)
- ----------------------------------------------------------------------------
Air Products & Chemicals, Inc. 300,000 $ 17,325
Aluminum Co. of America 12,400 711
Barrick Gold Corp. 13,900 377
Cabot Corp. 287,400 7,041
Champion International Corp. 97,700 4,079
Consolidated Papers 2,500 130
Dow Chemical Co. 11,300 859
E.I. du Pont de Nemours & Co. 11,300 894
Ecolab, Inc. 13,200 436
Engelhard Corp. 200,000 4,600
Freeport-McMoRan, Inc. 8,000 284
* Kentucky Electric Steel, Inc. 20,300 165
Kimberly-Clark Corp. 209,100 16,153
Lyondell Petrochemical Co. 7,700 186
Monsanto Co. 374,000 12,155
Morton International, Inc. 416,300 15,507
Norsk Hydro AS ADR 160,600 7,849
Nucor Corp. 2,900 147
Phelps Dodge Corp. 70,000 4,366
Rayonier Inc. 12,200 464
Temple-Inland Inc. 35,700 1,669
Terra Industries, Inc. 22,400 277
* Titanium Metals Corp. 160,000 4,140
Union Carbide Corp. 13,700 545
Vulcan Materials Co. 3,800 226
* WHX Corp. 31,000 283
Weyerhaeuser Co. 6,500 276
-------------
SECTOR TOTAL 101,144
-------------
- ----------------------------------------------------------------------------
CAPITAL GOODS & CONSTRUCTION (5.9%)
- ----------------------------------------------------------------------------
Abitibi-Price, Inc. 78,300 1,067
AGCO Corp. 30,000 833
The Boeing Co. 14,700 1,281
Browning-Ferris Industries, Inc. 22,500 653
Caterpillar, Inc. 15,200 1,030
Deere & Co. 8,900 356
Dover Corp. 15,800 729
* Fore Systems, Inc. 340,000 12,240
General Dynamics Corp. 11,600 719
General Electric Co. 321,400 27,801
* General Instrument 275,000 7,941
Ingersoll-Rand Co. 18,900 827
* International Rectifier Corp. 33,000 532
Johnson Controls, Inc. 5,200 361
NACCO Industries, Inc. Class A 13,400 742
* Owens Corning 11,700 503
Parker Hannifin Corp. 136,250 5,774
* Republic Industries, Inc. 787,200 22,927
Rockwell International Corp. 16,500 945
TRW, Inc. 7,000 629
Texas Industries, Inc. 28,500 1,956
The Timkin Co. 12,600 488
The Toro Co. 103,800 3,438
* UCAR International, Inc. 130,000 5,411
United Technologies Corp. 13,700 1,576
* Varity Corp. 5,700 274
WMX Technologies Inc. 37,600 1,230
York International Corp. 100,000 5,175
-------------
SECTOR TOTAL 107,438
-------------
- ----------------------------------------------------------------------------
CONSUMER CYCLICALS (13.3%)
- ----------------------------------------------------------------------------
Aaron Rents, Inc. Class B 11,200 141
American Greetings Corp. Class A 10,500 286
* AutoZone, Inc. 135,000 4,691
* Bed Bath & Beyond, Inc. 110,000 2,901
* Burlington Industries, Inc. 800 11
Bush Industries, Inc. 18,600 632
Carnival Corp. Class A 34,500 996
* Chancellor Broadcasting Co.
Class A 99,600 3,113
Chrysler Corp. 34,600 2,145
Comcast Corp. Class A Special 30,300 553
* CompUSA, Inc. 328,000 11,193
* Detroit Diesel Corp. 80,000 1,550
The Walt Disney Co. 114,044 7,171
* Donna Karan International Inc. 16,400 459
Dow Jones & Co., Inc. 18,100 756
The Dun & Bradstreet Corp. 10,800 675
Eastman Kodak Co. 15,300 1,190
Eaton Corp. 13,500 791
* Federated Department Stores 111,300 3,798
Fila Holding SPA ADR 75,000 6,469
Gannett Co., Inc. 15,300 1,082
Gaylord Entertainment Class A 290,602 8,210
General Motors Corp. 34,600 1,812
* Genesco, Inc. 86,000 667
Genuine Parts Co. 1,200 55
The Goodyear Tire & Rubber Co. 15,100 729
* Gucci Group NV-
NY Registered Shares 134,800 8,695
* The Gymboree Corp. 172,000 5,203
Harman International
Industries, Inc. 12,390 610
Home Depot, Inc. 160,000 8,640
Innovex, Inc. 9,500 163
* ITT Corp. 80,000 5,300
Kellwood Co. 4,800 88
* King World Productions, Inc. 195,800 7,122
La Quinta Inns Inc. 16,500 553
Leggett & Platt, Inc. 6,200 172
* Liberty Media Group Class A 350,000 9,275
Luxottica Group SPA ADR 700 51
May Department Stores Co. 325,000 14,219
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------
<S> <C> <C>
Maytag Corp. 16,200 $ 338
McDonald's Corp. 327,900 15,329
Media General, Inc. Class A 4,600 171
* Mirage Resorts, Inc. 45,600 2,462
National Service Industries, Inc. 13,900 544
New York Times Co. Class A 20,000 653
Newell Co. 108,700 3,329
News Corp. Ltd. Pfd. ADR 450,000 9,000
* Office Depot, Inc. 126,300 2,573
J.C. Penney Co., Inc. 18,000 945
* Planet Hollywood International,
Inc. Class A 4,500 121
* Players International, Inc. 19,900 194
Premark International, Inc. 13,200 244
* Providence Journal Co. 187,500 2,882
* Quaker Fabric Corp. 29,900 254
* Rainforest Cafe, Inc. 63,000 3,134
* Revco Drug Stores, Inc. 40,100 957
Rite Aid Corp. 300,000 8,925
Ross Stores, Inc. 23,300 810
* Ryan's Family Steak Houses, Inc. 900 8
* Saks Holdings, Inc. 85,400 2,914
* Scholastic Corp. 90,000 5,580
E.W. Scripps Co. 70,000 3,264
Sears, Roebuck & Co. 800 39
A.O. Smith Corp. 19,200 480
* The Sports Authority, Inc. 104,200 3,413
Springs Industries Inc. Class A 11,100 561
* Staples, Inc. 490,500 9,503
Tandy Corp. 56,900 2,696
Times Mirror Co. Class A 20,200 879
* Tommy Hilfiger Corp. 131,500 7,052
Tribune Co. 39,400 2,861
* Ultratech Stepper, Inc. 123,500 2,300
VF Corp. 5,600 334
* Viacom International Class A 20,000 763
* Viacom International Class B 333,647 12,971
* Waban, Inc. 39,900 953
Wal-Mart Stores, Inc. 298,600 7,577
Washington Post Co. Class B 3,200 1,037
Wendy's International, Inc. 43,800 815
---------------
SECTOR TOTAL 241,032
---------------
- ----------------------------------------------------------------------------
CONSUMER STAPLES (5.5%)
- ----------------------------------------------------------------------------
American Stores Co. 21,500 887
Anheuser-Busch Co., Inc. 13,400 1,005
Archer-Daniels-Midland Co. 478,557 9,152
CPC International, Inc. 10,800 778
Campbell Soup Co. 13,500 952
The Clorox Co. 4,200 372
Gillette Co. 100,000 6,238
Great Atlantic & Pacific Tea
Co., Inc. 5,000 164
H.J. Heinz Co. 15,000 456
IBP, Inc. 26,600 735
* The Kroger Co. 22,800 901
Libbey, Inc. 3,000 83
PepsiCo, Inc. 880,100 31,134
Philip Morris Cos., Inc. 79,500 8,268
Procter & Gamble Co. 14,800 1,341
Ralston-Ralston Purina Group 105,000 6,733
* Revlon, Inc. 240,000 6,990
* Safeway, Inc. 373,700 12,332
Sara Lee Corp. 115,800 3,749
* Starbucks Corp. 215,000 6,047
* Tupperware Corp. 13,200 557
UST Inc. 17,100 585
---------------
SECTOR TOTAL 99,459
---------------
- ----------------------------------------------------------------------------
ENERGY (4.4%)
- ----------------------------------------------------------------------------
Atlantic Richfield Co. 9,500 1,126
* Atwood Oceanics, Inc. 500 22
British Petroleum Co. PLC ADR 100,500 10,741
Burlington Resources, Inc. 130,000 5,590
* CalEnergy Inc. 33,300 849
* Global Industrial Technologies, Inc. 27,700 443
Halliburton Co. 24,900 1,382
* Nabors Industries, Inc. 355,800 5,782
Noble Affiliates, Inc. 180,000 6,795
PanEnergy Corp. 118,700 3,902
Phillips Petroleum Co. 1,800 75
* Santa Fe Energy Resources, Inc. 4,400 52
Schlumberger Ltd. 100,400 8,459
Sonat Offshore Drilling Co. 14,000 707
Texaco, Inc. 11,300 948
USX-Marathon Group 44,100 888
Union Pacific Resources
Group, Inc. 134,700 3,603
Union Texas Petroleum
Holdings, Inc. 58,800 1,147
Unocal Corp. 290,000 9,788
Valero Energy Corp. 239,700 5,993
Vastar Resources, Inc. 285,000 10,651
* Western Atlas Inc. 13,800 803
---------------
SECTOR TOTAL 79,746
---------------
- ----------------------------------------------------------------------------
FINANCIAL (12.8%)
- ----------------------------------------------------------------------------
Ace, Ltd. 290,000 13,630
AFLAC, Inc. 204,150 6,099
Alex Brown, Inc. 12,000 678
Alliance Capital Management LP 22,300 535
Allied Group, Inc. 5,000 216
American Express Co. 186,600 8,327
American International Group, Inc. 97,732 9,639
American Re Corp. 326,800 14,665
Bank of Boston Corp. 19,842 982
</TABLE>
7
<PAGE> 8
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------
<S> <C> <C>
BankAmerica Corp. 203,700 $ 15,430
Barnett Banks, Inc. 44,000 2,684
Bear Stearns Co., Inc. 400,785 9,469
Beneficial Corp. 2,700 152
W.R. Berkley Corp. 1,600 67
CIGNA Corp. 11,800 1,391
CMAC Investment Corp. 14,600 840
* CNA Financial Corp. 55,400 5,706
Central Reserve Life Corp. 1,300 11
Chase Manhattan Corp. 98,768 6,975
The Chubb Corp. 24,100 1,202
Citicorp 26,700 2,206
Dean Witter Discover & Co. 22,400 1,282
A.G. Edwards & Sons, Inc. 471,000 12,776
The Equitable Cos. 45,100 1,122
Federal Home Loan Mortgage Corp. 19,500 1,667
Federal National Mortgage Assn. 317,200 10,626
First Bank System, Inc. 110,000 6,380
First Union Corp. 10,300 627
Great Western Financial Corp. 415,753 9,926
Green Tree Financial Corp. 33,800 1,056
* Gryphon Holdings, Inc. 42,000 614
Household International, Inc. 124,100 9,432
Lehman Brothers Holdings, Inc. 16,800 416
Lincoln National Corp. 7,900 365
MBNA Corp. 173,850 4,955
MGIC Investment Corp. 65,000 3,648
Mellon Bank Corp. 18,200 1,037
Merrill Lynch & Co., Inc. 26,800 1,745
Mid Ocean Ltd. 5,900 242
The Money Store 59,100 1,285
Morgan Stanley Group, Inc. 54,200 2,663
North American Mortgage Co. 13,400 233
Norwest Corp. 130,700 4,558
Orion Capital Corp. 19,600 1,000
PNC Bank Corp. 30,100 895
PaineWebber Group, Inc. 34,100 810
Partnerre Ltd. 2,800 84
Penncorp Financial Group Inc. 150,600 4,782
Providian Corp. 21,300 913
Republic New York Corp. 15,100 940
SAFECO Corp. 4,900 173
Salomon, Inc. 211,800 9,319
State Street Boston Corp. 72,000 3,672
Student Loan Marketing Assn. 18,200 1,347
Transamerica Corp. 149,400 12,101
Travelers Group Inc. 361,350 16,487
UnionBanCal Corp. 11,900 625
USLIFE Corp. 15,700 516
Westpac Banking Corp. Ltd. ADR 27,800 626
-------------
SECTOR TOTAL 231,849
-------------
- ----------------------------------------------------------------------------
HEALTH CARE (10.2%)
- ----------------------------------------------------------------------------
Abbott Laboratories 180,100 7,834
Baxter International, Inc. 33,100 1,564
* Beverly Enterprises Inc. 450,000 5,400
* Biomet, Inc. 235,000 3,319
Bristol-Myers Squibb Co. 14,800 1,332
Cardinal Health, Inc. 134,100 9,672
Columbia/HCA Healthcare Corp. 128,500 6,859
* Conmed Corp. 8,200 217
Eisai Ltd. ADR 365,000 6,935
* Elan Corp. PLC ADR 99,000 5,655
* FHP International Corp. 160,000 4,380
* Forest Laboratories, Inc. 58,900 2,275
* Foundation Health Co. 27,200 976
* Genetics Institute Inc
Depository Shares 104,800 6,576
Hafslund Nycomed ADR Class B 162,017 1,035
* Health Management Associates
Class A 176,625 3,577
* Healthcare & Retirement Corp. 83,250 1,977
* HealthCare Compare Corp. 17,100 831
* Humana, Inc. 15,000 268
* Insite Vision, Inc. 60,000 345
Johnson & Johnson 283,600 14,038
* Lincare Holdings Inc. 15,400 601
* Living Centers of America, Inc. 9,000 309
* Magellan Health Services Corp. 200,000 4,300
Medtronic, Inc. 402,200 22,523
* Nycomed ASA--ADR Class B 46,917 663
Pfizer, Inc. 286,400 20,442
* Phycor, Inc. 165,000 6,229
Rhone-Poulenc Rorer, Inc. 250,000 16,781
Schering-Plough Corp. 106,000 6,652
* Sierra Health Services 22,400 706
Stryker Corp. 15,500 351
* Tenet Healthcare Corp. 50,900 1,088
United Healthcare Corp. 30,000 1,515
* Utah Medical Products, Inc. 30,600 383
* Vencor, Inc. 250,000 7,625
Warner-Lambert Co. 90,000 4,950
Zeneca Group ADR 69,781 4,692
-------------
SECTOR TOTAL 184,875
-------------
- ----------------------------------------------------------------------------
TECHNOLOGY (26.1%)
- ----------------------------------------------------------------------------
COMMUNICATION EQUIPMENT (1.1%)
* Cellular Communications Series A 11,900 628
* Network Equipment Technologies 51,400 1,092
Nokia Corp. Pfd. ADR 235,000 8,695
* U.S. Robotics Corp. 111,800 9,531
COMPUTER RELATED (7.3%)
* Adaptec, Inc. 110,500 5,221
* Cisco Systems, Inc. 757,700 42,905
* COMPAQ Computer Corp. 243,400 11,987
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------
<S> <C> <C>
* Digital Equipment Corp. 31,900 $ 1,436
* EMC Corp. 147,100 2,740
* Gateway 2000 Inc. 26,700 904
Hewlett-Packard Co. 327,300 32,607
International Business
Machines Corp. 123,100 12,187
* Seagate Technology 150,800 6,786
* Sun Microsystems, Inc. 283,900 16,679
COMPUTER SERVICES (1.1%)
Automatic Data Processing, Inc. 3,200 124
* Banctec, Inc. 40,700 824
* Black Box Corp. 11,300 263
Computer Associates
International, Inc. 7,100 506
* Computer Sciences Corp. 175,000 13,081
* Electronics for Imaging, Inc. 85,000 5,897
COMPUTER SOFTWARE (6.5%)
* America Online, Inc. 70,000 3,045
* Baan Co. NV 230,000 7,820
* BISYS Group, Inc. 160,000 5,980
* BMC Software, Inc. 125,000 7,438
* Cabletron Systems, Inc. 13,700 940
* Cadence Design Systems, Inc. 29,550 997
* Compuware Corp. 103,900 4,078
* DST Systems, Inc. 134,500 4,304
First Data Corp. 90,000 7,166
* Geoworks 153,000 5,279
HBO and Co. 214,800 14,499
* Komag, Inc. 183,000 4,781
* McAfee Associates, Inc. 142,350 6,975
* Microsoft Corp. 65,000 7,800
* Objective Systems Integrators, Inc. 15,000 544
* Oracle Corp. 31,300 1,232
* Parametric Technology Corp. 220,000 9,515
* Peoplesoft Inc. 110,000 7,810
* Policy Management Systems Corp. 150,000 7,500
* Stac, Inc. 9,700 105
* Sterling Software, Inc. 100,000 7,700
ELECTRONIC COMPONENTS & INSTRUMENTS (3.7%)
AMP, Inc. 35,000 1,404
* Analog Devices, Inc. 244,400 6,232
* Applied Materials, Inc. 215,800 6,555
Augat, Inc. 26,400 505
Avnet, Inc. 170,900 7,199
* Checkpoint Systems, Inc. 180,000 6,188
* Cypress Semiconductor Corp. 569,300 6,832
* Esterline Technologies Corp. 28,200 705
* FSI International, Inc. 61,800 765
* Geotek Industries, Inc. 85,000 1,158
* Hadco Corp. 31,800 668
Harris Corp. 10,500 641
* KEMET Corp. 19,500 390
* Oak Industries, Inc. 77,500 2,296
Philips Electronics NV 155,800 5,083
* SCI Systems, Inc. 126,200 5,127
* Silicon Valley Group, Inc. 214,000 4,013
Sony Corp. ADR 110,200 7,287
* Teradyne, Inc. 259,800 4,482
OFFICE EQUIPMENT (.2%)
Moore Corp. Ltd. 62,500 1,180
Pitney Bowes, Inc. 20,500 979
Wallace Computer Services, Inc. 6,300 376
Xerox Corp. 32,400 1,733
SEMICONDUCTORS (1.0%)
* Chips & Technologies, Inc. 249,700 2,403
Intel Corp. 104,800 7,690
* LAM Research Corp. 30,300 784
* Maxim Integrated Products, Inc. 20,600 559
* Novellus Systems, Inc. 4,800 173
Texas Instruments, Inc. 124,200 6,194
TELECOMMUNICATIONS (5.2%)
* American Radio Systems Corp. 140,000 6,020
* Ascend Communications, Inc. 420,000 23,573
* Canwest Global
Communications Corp. 100,000 2,725
* Cascade Communications Corp. 180,000 12,240
* Intercel, Inc. 200,000 4,000
* International Cabletel, Inc. 180,000 5,310
* Jacor Communications Inc. 125,000 3,859
Lucent Technologies, Inc. 170,500 6,458
* MobileMedia Corp. 345,000 4,097
* PanAmSat Corp. 182,000 5,233
Tele Danmark AS ADR 23,100 585
Vodafone Group PLC ADR 300,000 11,062
* Westell Technologies, Inc. 261,200 10,186
--------------
SECTOR TOTAL 474,550
--------------
- ----------------------------------------------------------------------------
TRANSPORT & SERVICES (2.4%)
- ----------------------------------------------------------------------------
* AMR Corp. 69,400 6,315
Arkansas Best Corp. 1,700 13
CSX Corp. 24,000 1,158
Canadian Pacific Ltd. 479,100 10,540
Delta Air Lines, Inc. 57,700 4,789
Pittston Burlington Group 114,000 2,465
Southwest Airlines Co. 335,000 9,757
* Swift Transportation Co., Inc. 120,500 2,290
* UAL Corp. 18,800 1,010
Werner Enterprises, Inc. 200,000 5,150
--------------
SECTOR TOTAL 43,487
--------------
- ----------------------------------------------------------------------------
UTILITIES (4.0%)
- ----------------------------------------------------------------------------
ALLTEL Corp. 27,600 849
Ameritech Corp. 22,000 1,306
Bell Atlantic Corp. 17,900 1,141
British Telecommunications PLC 153,300 8,240
</TABLE>
9
<PAGE> 10
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- ----------------------------------------------------------------------------
<S> <C> <C>
Consolidated Edison Co. of
New York, Inc. 4,800 $ 140
Edison International 32,200 568
GTE Corp. 22,200 993
General Public Utilities Corp. 15,800 557
MCI Communications Corp. 626,000 15,963
NorAm Energy Corp. 60,000 653
NYNEX Corp. 29,300 1,392
Ohio Edison Co. 5,800 127
Pacific Gas & Electric Co. 135,800 3,157
Public Service Co. of New Mexico 250,300 5,131
SBC Communications Inc. 21,400 1,054
Sprint Corp. 284,400 11,945
Telefonica de Espana ADR 241,100 13,291
Unicom Corp. 257,600 7,180
--------------
SECTOR TOTAL 73,687
--------------
- ----------------------------------------------------------------------------
MISCELLANEOUS (2.1%)
- ----------------------------------------------------------------------------
American Financial Group, Inc. 236,200 7,116
* Corrections Corp. of America 125,200 8,764
Interpublic Group of Cos., Inc. 12,500 586
Loews Corp. 154,000 12,147
Manpower Inc. 105,600 4,145
Olsten Corp. 103,200 3,032
PHH Corp. 52,100 2,970
Pittway Corp. Class A 600 28
Servicemaster LP 19,050 437
--------------
SECTOR TOTAL 39,225
--------------
- ----------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $1,231,741) 1,676,492
- ----------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (7.3%)
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Face
Amount
(000)
-----------
<S> <C> <C>
U.S. TREASURY BILL--Note E
5.02%, 7/11/96 $ 300 300
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account 5.35%, 7/1/96 131,638 131,638
- ---------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $131,938) 131,938
- ---------------------------------------------------------------------------
TOTAL INVESTMENTS (99.6%)
(Cost $1,363,679) 1,808,430
- ---------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Market
Value
(000)+
- ---------------------------------------------------------------------------
<S> <C>
OTHER ASSETS AND LIABILITIES (.4%)
- ---------------------------------------------------------------------------
Other Assets--Notes C and F $ 63,080
Liabilities--Note F (54,992)
----------
8,088
- ---------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------
Applicable to 117,623,453 outstanding
$.10 par value shares
(authorized 150,000,000 shares) $1,816,518
- ---------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $15.44
===========================================================================
</TABLE>
+See Note A to Financial Statements.
*Non-Income Producing Security.
ADR--American Depository Receipt.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
AT JUNE 30, 1996, NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
---------- ------
<S> <C> <C>
PAID IN CAPITAL $1,300,018 $11.05
UNDISTRIBUTED NET
INVESTMENT INCOME 7,748 .07
ACCUMULATED NET
REALIZED GAINS 63,981 .54
UNREALIZED APPRECIATION
--NOTE E:
INVESTMENT SECURITIES 444,751 3.78
FUTURES CONTRACTS 20 --
- ---------------------------------------------------------------------------
NET ASSETS $1,816,518 $15.44
- ---------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1996
(000)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,533
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,047
- --------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,580
- --------------------------------------------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,395
Performance Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . (80) 1,315
-------
The Vanguard Group--Note C
Management and Administrative . . . . . . . . . . . . . . . . . . . . . . 2,776
Marketing and Distribution . . . . . . . . . . . . . . . . . . . . . . . . 146 2,922
-------
Taxes (other than income taxes) . . . . . . . . . . . . . . . . . . . . . . . 55
Custodian Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Auditing Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Shareholders' Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Annual Meeting and Proxy Costs . . . . . . . . . . . . . . . . . . . . . . . 16
Directors' Fees and Expenses . . . . . . . . . . . . . . . . . . . . . . . . 3
- --------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,451
Expenses Paid Indirectly--Note C . . . . . . . . . . . . . . . . . . (50)
- --------------------------------------------------------------------------------------------------------------------
Net Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,401
- --------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . 8,179
- --------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . 63,986
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
- --------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . 64,046
- --------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119,374
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
- --------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . 119,405
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . . $191,630
====================================================================================================================
</TABLE>
11
<PAGE> 12
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
SIX MONTHS ENDED Year Ended
JUNE 30, 1996 December 31, 1995
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,179 $ 13,934
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,046 142,881
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . . 119,405 220,579
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . 191,630 377,394
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . . . -- (14,339)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . . . (39,148) (110,668)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . . (39,148) (125,007)
- -------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (1)
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 251,114 235,407
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . . . 37,719 118,797
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (95,895) (210,296)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . 192,938 143,908
- -------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . 345,420 396,295
- -------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period . . . . . . . . . . . . . . . . . . . . . . . . . . 1,471,098 1,074,803
- -------------------------------------------------------------------------------------------------------------------
End of Period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,816,518 $1,471,098
===================================================================================================================
(1)Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,114 16,895
Issued in Lieu of Cash Distributions . . . . . . . . . . . . . . . . 2,601 8,675
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,516) (15,754)
- -------------------------------------------------------------------------------------------------------------------
13,199 9,816
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 13
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
SIX MONTHS ENDED -------------------------------------------------
For a Share Outstanding Throughout Each Period JUNE 30, 1996 1995 1994 1993 1992 1991
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD . . . . . . $14.09 $11.36 $12.01 $12.65 $12.20 $10.40
------ ------ ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . .07 .15 .14 .18 .18 .29
Net Realized and Unrealized Gain
(Loss) on Investments . . . . . . . . . . . 1.63 3.89 (.34) .71 .97 2.66
------ ------ ------ ------ ------ -------
TOTAL FROM INVESTMENT OPERATIONS . . . 1.70 4.04 (.20) .89 1.15 2.95
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . -- (.15) (.14) (.18) (.18) (.29)
Distributions from Realized Capital Gains . . (.35) (1.16) (.31) (1.35) (.52) (.86)
------ ------ ------ ------ ------ -------
TOTAL DISTRIBUTIONS . . . . . . . . . . (.35) (1.31) (.45) (1.53) (.70) (1.15)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD . . . . . . . . . $15.44 $14.09 $11.36 $12.01 $12.65 $12.20
=====================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . +12.23% +35.98% -1.67% +7.32% +9.54% +29.33%
- ---------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Period (Millions) . . . . . . $1,817 $1,471 $1,075 $1,135 $1,116 $957
Ratio of Total Expenses to Average Net Assets . . .53%* .49% .50% .49% .48% .46%
Ratio of Net Investment Income
to Average Net Assets . . . . . . . . . . . . .97%* 1.10% 1.15% 1.36% 1.51% 2.36%
Portfolio Turnover Rate . . . . . . . . . . . . . 61%* 76% 84% 72% 64% 52%
Average Commission Rate Paid . . . . . . . . . . $.0331+ N/A N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
+Represents total commissions paid on portfolio securities divided by the total
number of shares purchased or sold on which commissions were charged. This
disclosure is required by the SEC beginning in 1996.
13
<PAGE> 14
NOTES TO FINANCIAL STATEMENTS
Vanguard/Morgan Growth Fund is registered under the Investment Company Act of
1940 as a diversified open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; securities not traded are valued
at the mean of the latest quoted bid and asked prices. Securities not
listed are valued at the latest quoted bid prices. Temporary cash
investments acquired over sixty days to maturity are valued utilizing the
latest quoted bid prices and on the basis of a matrix system (which
considers such factors as security prices, yields, maturities, and
ratings), both as furnished by independent pricing services. Other
temporary cash investments are valued at amortized cost which approximates
market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. REPURCHASE AGREEMENTS: The Fund, along with other members of The Vanguard
Group, transfers uninvested cash balances into a Pooled Cash Account, the
daily aggregate of which is invested in repurchase agreements secured by
U.S. Government obligations. Securities pledged as collateral for
repurchase agreements are held by a custodian bank until maturity of each
repurchase agreement. Provisions of each agreement require that the market
value of this collateral is sufficient in the event of default: however, in
the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings.
4. FUTURES: The Fund utilizes Standard & Poor's 500 Index futures contracts to
a limited extent, to increase its exposure to the stock market. The primary
risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the Fund and
the prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued based upon their quoted daily settlement
prices. Fluctuations in the values of futures contracts are recorded as
unrealized appreciation (depreciation) until terminated, at which time
realized gains (losses) are recognized. Unrealized appreciation
(depreciation) related to open futures contracts is required to be treated
as realized gain (loss) for Federal income tax purposes.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
B. Under the terms of investment advisory contracts, the Fund pays Wellington
Management Company, Franklin Portfolio Associates, and Husic Capital Management
investment advisory fees calculated at an annual percentage rate of average net
assets of the Fund. The basic fees of each adviser are subject to quarterly
adjustments based on performance relative to the Growth Fund Stock Index. For
the six months ended June 30, 1996, the aggregate investment advisory fee
represented an effective annual base rate of .17 of 1% of average net assets,
before a decrease of $80,000 (an annual rate of .01 of 1%) based on
performance. The basic fee reflects a fee waiver of $32,000 for the period
January 1, 1996 to March 31, 1996.
14
<PAGE> 15
The Vanguard Group also provides investment advisory services to a portion of
the Fund on an at-cost basis.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the Fund under methods approved by the Board of Directors. At June 30, 1996,
the Fund had contributed capital of $188,000 to Vanguard (included in Other
Assets), representing .9% of Vanguard's capitalization. The Fund's directors
and officers are also directors and officers of Vanguard.
Vanguard has requested the Fund's investment advisers to direct certain
portfolio trades, subject to obtaining the best price and execution, to brokers
who have agreed to rebate or credit to the Fund a portion of the commissions
generated. Such rebates or credits are used solely to reduce the Fund's
administrative expenses. For the six months ended June 30, 1996, directed
brokerage arrangements reduced the Fund's expenses by $50,000 (an annual rate
of .01 of 1% of average net assets).
D. During the six months ended June 30, 1996, the Fund made purchases of
$617,621,000 and sales of $469,953,000 of investment securities other than U.S.
Government securities and temporary cash investments.
E. At June 30, 1996, net unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes aggregated $444,751,000, of
which $472,368,000 related to appreciated securities and $27,617,000 related to
depreciated securities.
At June 30, 1996, the aggregate settlement value of open Standard & Poor's 500
Index futures contracts expiring in September 1996, the related unrealized
appreciation, and the market value of securities deposited as initial margin
for those contracts were $1,692,000, $20,000, and $300,000, respectively.
F. The market value of securities on loan to broker/dealers at June 30, 1996,
was $17,536,000 for which the Fund had received cash collateral of $17,695,000.
15
<PAGE> 16
THE VANGUARD FAMILY OF FUNDS
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Admiral Funds
U.S. Treasury Money
Market Portfolio
Vanguard Money Market Reserves
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Admiral Funds
Vanguard Fixed Income
Securities Fund
Vanguard Preferred Stock Fund
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard Convertible
Securities Fund
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard/Windsor Fund
Vanguard/Windsor II
BALANCED FUNDS
Vanguard Asset Allocation Fund
Vanguard LifeStrategy Portfolios
Income Portfolio
Conservative Growth Portfolio
Moderate Growth Portfolio
Growth Portfolio
Vanguard STAR Portfolio
Vanguard/Wellesley Income Fund
Vanguard/Wellington Fund
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
Vanguard Specialized Portfolios
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
Total Stock Market Portfolio
500 Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard International Equity
Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
Vanguard Bond Index Fund
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center Valley Forge, Pennsylvania 19482
New Account Information: Shareholder Account Services:
1 (800) 662-7447 1 (800) 662-2739
This Report has been prepared for shareholders and may be distributed
to others only if preceded or accompanied by a current prospectus.
All Funds in the Vanguard Family are offered by prospectus only.
Q262-6/96
VANGUARD
MORGAN
GROWTH FUND
SEMI-ANNUAL REPORT
JUNE 30, 1996
