-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CQv4vDkBs3hE3kRQuXj8Aql5wgLMtU2iVNwotqNyjrD6wzHu5Qyayk3zvQDTrTt8 +H/xXDGqzFG6j6UuHUDrjw== 0000932471-03-000436.txt : 20030416 0000932471-03-000436.hdr.sgml : 20030416 20030416154642 ACCESSION NUMBER: 0000932471-03-000436 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 20030416 EFFECTIVENESS DATE: 20030416 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD INDEX FUNDS CENTRAL INDEX KEY: 0000036405 IRS NUMBER: 231999755 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-56846 FILM NUMBER: 03652634 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V26 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696295 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V26 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD INDEX TRUST DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST INDEX INVESTMENT TRUST DATE OF NAME CHANGE: 19800904 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD INDEX FUNDS/ DATE OF NAME CHANGE: 20011121 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD INDEX FUNDS CENTRAL INDEX KEY: 0000036405 IRS NUMBER: 231999755 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-02652 FILM NUMBER: 03652635 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V26 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696295 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V26 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD INDEX TRUST DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: FIRST INDEX INVESTMENT TRUST DATE OF NAME CHANGE: 19800904 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD INDEX FUNDS/ DATE OF NAME CHANGE: 20011121 485BPOS 1 vit485b.txt VANGUARD INDEX FUNDS 485B FILING - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-1A REGISTRATION STATEMENT (NO. 2-56846) UNDER THE SECURITIES ACT OF 1933 PRE-EFFECTIVE AMENDMENT NO. POST-EFFECTIVE AMENDMENT NO. 85 AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 86 VANGUARD INDEX FUNDS (EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST) P.O. BOX 2600, VALLEY FORGE, PA 19482 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) REGISTRANT'S TELEPHONE NUMBER (610) 669-1000 R. GREGORY BARTON, ESQUIRE P.O. BOX 876 VALLEY FORGE, PA 19482 IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE: ON APRIL 28, 2003 PURSUANT TO PARAGRAPH (B) OF RULE 485. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- VANGUARD(R) U.S. STOCK INDEX FUNDS Investor Shares & Admiral(TM) Shares . April 28, 2003 This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2002. VANGUARD TOTAL STOCK MARKET INDEX FUND VANGUARD 500 INDEX FUND VANGUARD EXTENDED MARKET INDEX FUND VANGUARD MID-CAP INDEX FUND VANGUARD SMALL-CAP INDEX FUND VANGUARD VALUE INDEX FUND VANGUARD SMALL-CAP VALUE INDEX FUND VANGUARD GROWTH INDEX FUND VANGUARD SMALL-CAP GROWTH INDEX FUND NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. VANGUARD U.S. STOCK INDEX FUNDS INVESTOR SHARES AND ADMIRAL SHARES PROSPECTUS APRIL 28, 2003 - -------------------------------------------------------------------------------- CONTENTS 1 AN INTRODUCTION TO INDEX FUNDS 42 DIVIDENDS, CAPITAL GAINS, AND TAXES 2 FUND PROFILES 43 SHARE PRICE 2 Vanguard Total Stock Market Index Fund 44 FINANCIAL HIGHLIGHTS 5 Vanguard 500 Index Fund 53 INVESTING WITH VANGUARD 9 Vanguard Extended Market Index Fund 53 Buying Shares 13 Vanguard Mid-Cap Index Fund 55 Converting Shares 17 Vanguard Small-Cap Index Fund 56 Redeeming Shares 21 Vanguard Value Index Fund 58 Exchanging Shares 25 Vanguard Small-Cap Value Index Fund 59 Other Rules You Should Know 28 Vanguard Growth Index Fund 61 Fund and Account Updates 32 Vanguard Small-Cap Growth Index Fund 62 Contacting Vanguard 35 MORE ON THE FUNDS 65 VIPER(R) SHARES 41 THE FUNDS AND VANGUARD GLOSSARY (inside back cover) 41 INVESTMENT ADVISER - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with each Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk/(R)/ explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHARE CLASS OVERVIEW This prospectus offers Investor Shares for all of the Funds as well as Admiral Shares for seven of the Funds. Please note that the Admiral Shares are NOT available to: o SIMPLE IRAs and 403(b)(7) custodial accounts; o Other retirement plan accounts receiving special administrative services from Vanguard; or o Accounts maintained by financial intermediaries, except in limited circumstances. Investor Shares and Admiral Shares of Vanguard Total Stock Market and Extended Market Index Funds can be converted into an exchange-traded class of shares known as VIPER Shares. A brief description of VIPER Shares and how to convert to them appears on pages 65-67 of this prospectus. A separate prospectus containing more information about VIPER Shares is available at Vanguard's website or by calling 1-866-499-8473 (1-866-499-VIPER). A separate prospectus offers Institutional Shares for all of the Funds (except the 500 Index Fund). Institutional Shares are for investors who do not require special employee benefit plan services and who are willing to invest a minimum of $10 million. The Funds' separate share classes have different expenses; as a result, their investment performances will differ. - -------------------------------------------------------------------------------- 1 AN INTRODUCTION TO INDEX FUNDS WHAT IS INDEXING? Indexing is an investment strategy for tracking, as closely as possible, the performance of a specified market benchmark, or "index." An index is an unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. There are many types of indexes. Some represent entire markets--such as the U.S. stock market or the U.S. bond market. Other indexes cover market segments--such as small-capitalization stocks or short-term bonds. An index fund holds all, or a representative sample, of the securities that make up its target index. Unlike actively managed funds, index (or "passively managed") funds do not buy and sell securities based on research and analysis. Rather, index funds simply attempt to mirror what the target index does, for better or worse. An index fund does not always perform exactly like its target index. Like all mutual funds, index funds have operating expenses and transaction costs. Market indexes do not, and therefore will usually have a slight performance advantage over funds that track them. INDEX FUNDS IN THIS PROSPECTUS Vanguard offers a variety of stock (both U.S. and international), bond, and balanced index funds. This prospectus provides information about the nine Vanguard U.S. Stock Index Funds. Eight of these Funds seek to track a particular segment of the U.S. stock market; the ninth Fund seeks to track the entire U.S. stock market. - -------------------------------------------------------------------------- FUND SEEKS TO TRACK - -------------------------------------------------------------------------- Vanguard Total Stock Market Index Fund The overall stock market Vanguard 500 Index Fund Large-cap stocks Vanguard Extended Market Index Fund Mid- and small-cap stocks Vanguard Mid-Cap Index Fund Mid-cap stocks Vanguard Small-Cap Index Fund Small-cap stocks Vanguard Value Index Fund Large-cap value stocks Vanguard Small-Cap Value Index Fund Small-cap value stocks Vanguard Growth Index Fund Large-cap growth stocks Vangaurd Small-Cap Growth Index Fund Small-cap growth stocks - -------------------------------------------------------------------------- On the following pages, you'll find profiles that summarize the key features of each Fund. Following the profiles, there is important additional information about the Funds. 2 FUND PROFILE-- VANGUARD(R) TOTAL STOCK MARKET INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of the overall stock market. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 5000 Total Market Index, which consists of all the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market. The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Index. For a description of the Fund's sampling technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 10.62 1994 -0.17 1995 35.79 1996 20.96 1997 30.99 1998 23.26 1999 23.81 2000 -10.57 2001 -10.97 2002 -20.96 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 21.51% (quarter ended December 31, 1998), and the lowest return for a quarter was -16.84% (quarter ended September 30, 2002). The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Investor Share class and that after-tax returns for Admiral Shares will differ. 3 In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- VANGUARD TOTAL STOCK MARKET INDEX FUND INVESTOR SHARES Return Before Taxes -20.96% -0.80% 8.60% Return After Taxes on Distributions -21.37 -1.38 7.77 Return After Taxes on Distributions -12.85 -0.83 6.87 and Sale of Fund Shares - -------------------------------------------------------------------------------- VANGUARD TOTAL STOCK MAREKT INDEX FUND ADMIRAL SHARES* Return Before Taxes -20.95% -- -- - -------------------------------------------------------------------------------- WILSHIRE 5000 INDEX (reflects no deduction for fees, expenses, or taxes) -20.86% -0.87% 8.74% - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. INVESTOR ADMIRAL SHARES SHARES -------- ------- SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None* None* Sales Charge (Load) Imposed on Reinvested None None Dividends: Redemption Fee: None None Account Maintenance Fee (for accounts under $10,000): $2.50/quarter** None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.18% 0.13% 12b-1 Distribution Fee: None None Other Expenses: 0.02% 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20% 0.15% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. ** If applicable, the account maintenance fee will be deducted from your quarterly distribution of the Fund's dividends. If your distribution is less than the fee, fractional shares may be automatically redeemed to make up the difference. 4 The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- Investor Shares $20 $64 $113 $255 Admiral Shares 15 48 85 192 - -------------------------------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES Dividends are distributed in March, Investor Shares--May be converted to June, September, and December; Admiral Shares if you meet certain account capital gains, if any, are balance and tenure requirements. distributed annually in December. Admiral Shares--May be converted to Investor Shares if you are no longer INVESTMENT ADVISER eligible for Admiral Shares The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION since inception Investor Shares--TotSt Admiral Shares--TotStAdml INCEPTION DATE Investor Shares--April 27, 1992 VANGUARD FUND NUMBER Admiral Shares--November 13, 2000 Investor Shares--85 Admiral Shares--585 NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 CUSIP NUMBER $24.1 billion Investor Shares--922908306 Admiral Shares--922908728 SUITABLE FOR IRAS Yes TICKER SYMBOL Investor Shares--VTSMX MINIMUM INITIAL INVESTMENT Admiral Shares--VTSAX Investor Shares--$3,000; $1,000 for IRAs and most custodial accounts for minors Admiral Shares--$250,000 - -------------------------------------------------------------------------------- 5 FUND PROFILE--VANGUARD(R) 500 INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's 500 Index, which is dominated by the stocks of large U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from large-cap stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 9.89 1994 1.18 1995 37.45 1996 22.88 1997 33.19 1998 28.62 1999 21.07 2000 -9.06 2001 -12.02 2002 -22.15 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 21.39% (quarter ended December 31, 1998), and the lowest return for a quarter was -17.22% (quarter ended September 30, 2002). 6 The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Investor Share class and that after-tax returns for Admiral Shares will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- VANGUARD 500 INDEX FUND INVESTOR SHARES Return Before Taxes -22.15% -0.61% 9.27% Return After Taxes on -22.62 -1.14 8.44 Distributions Return After Taxes on Distributions and Sale of Fund Shares -13.58 -0.67 7.44 - -------------------------------------------------------------------------------- VANGUARD 500 INDEX FUND ADMIRAL SHARES* Return Before Taxes -22.10% -- -- - -------------------------------------------------------------------------------- S&P 500 INDEX (reflects no deduction for fees, expenses, or taxes) -22.10% -0.59% 9.34% - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. 7 INVESTOR ADMIRAL SHARES SHARES -------- ------- SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None* None* Sales Charge (Load) Imposed on Reinvested None None Dividends: Redemption Fee: None None Account Maintenance Fee (for accounts under $10,000): $2.50/quarter** None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.16% 0.11% 12b-1 Distribution Fee: None None Other Expenses: 0.02% 0.01% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18% 0.12% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. ** If applicable, the account maintenance fee will be deducted from your quarterly distribution of the Fund's dividends. If your distribution is less than the fee, fractional shares may be automatically redeemed to make up the difference. The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - --------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------- Investor Shares $18 $58 $101 $230 Admiral Shares 12 39 68 154 - --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 8 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES Dividends are distributed quarterly Investor Shares--May be converted to in March, June, September, and Admiral Shares if you meet certain account December; capital gains, if any, balance and tenure requirements are distributed annually in December. Admiral Shares--May be converted to Investor Shares if you are no longer INVESTMENT ADVISER eligible for Admiral Shares The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION since inception Investor Shares--500 Admiral Shares--500Adml INCEPTION DATE Investor Shares--August 31, 1976 VANGUARD FUND NUMBER Admiral Shares--November 13, 2000 Investor Shares--40 Admiral Shares--540 NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 CUSIP NUMBER $68.1 billion Investor Shares--922908108 Admiral Shares--922908710 SUITABLE FOR IRAS Yes TICKER SYMBOL Investor Shares--VFINX MINIMUM INITIAL INVESTMENT Admiral Shares--VFIAX Investor Shares--$3,000; $1,000 for IRAs and most custodial accounts for minors Admiral Shares--$250,000 - -------------------------------------------------------------------------------- 9 FUND PROFILE-- VANGUARD(R) EXTENDED MARKET INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the investment return of small- and mid-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 4500 Completion Index, a broadly diversified index of stocks of small and medium-size U.S. companies. The Wilshire 4500 Index contains all of the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market, except those stocks included in the Standard & Poor's 500 Index. The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Wilshire 4500 Index. For a description of the Fund's sampling technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small- and mid-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 14.49 1994 -1.76 1995 33.80 1996 17.65 1997 26.73 1998 8.32 1999 36.22 2000 -15.55 2001 -9.13 2002 -18.06 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 29.54% (quarter ended December 31, 1999), and the lowest return for a quarter was -21.05% (quarter ended September 30, 2001). 10 The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Investor Share class and that after-tax returns for Admiral Shares will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- VANGUARD EXTENDED MARKET INDEX FUND INVESTOR SHARES Return Before Taxes -18.06% -1.49% 7.61% Return After Taxes on Distributions -18.36 -3.47 5.76 Return After Taxes on Distributions -11.09 -1.25 6.03 and Sale of Fund Shares - -------------------------------------------------------------------------------- VANGUARD EXTENDED MARKET INDEX FUND ADMIRAL SHARES* -18.02% -- -- - -------------------------------------------------------------------------------- WILSHIRE 4500 INDEX (reflects no deduction for fees, expenses, or taxes) -17.80% -1.57% 7.32% - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. 11 INVESTOR ADMIRAL SHARES SHARES -------- ------- SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None* None* Sales Charge (Load) Imposed on Reinvested None None Dividends: Redemption Fee: None None Account Maintenance Fee (for accounts under $10,000): $10/year** None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.23% 0.18% 12b-1 Distribution Fee: None None Other Expenses: 0.03% 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.26% 0.20% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. ** If applicable, the account maintenance fee will be deducted from your annual distribution of the Fund's dividends. If your distribution is less than the fee, fractional shares may be automatically redeemed to make up the difference. The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - --------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------- Investor Shares $27 $84 $146 $331 Admiral Shares 20 64 113 255 - --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 12 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES Distributed annually in December Investor Shares--May be converted to Admiral Shares if you meet certain account INVESTMENT ADVISER balance and tenure requirements The Vanguard Group, Valley Forge, Admiral Shares--May be converted to Pa., Investor Shares if you are no longer since inception eligible for Admiral Shares INCEPTION DATE NEWSPAPER ABBREVIATION Investor Shares--December 21, Investor Shares--Extnd 1987 Admiral Shares--ExtndAdml Admiral Shares--November 13, 2000 VANGUARD FUND NUMBER NET ASSETS (ALL SHARE CLASSES) AS Investor Shares--98 OF Admiral Shares--598 DECEMBER 31, 2002 $3.9 billion CUSIP NUMBER Investor Shares--922908207 SUITABLE FOR IRAS Admiral Shares--922908694 Yes TICKER SYMBOL MINIMUM INITIAL INVESTMENT Investor Shares--VEXMX Investor Shares--$3,000; $1,000 Admiral Shares--VEXAX for IRAs and most custodial accounts for minors Admiral Shares--$250,000 - -------------------------------------------------------------------------------- 13 FUND PROFILE--VANGUARD(R) MID-CAP INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of mid-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's MidCap 400 Index, which is made up of a group of medium-size U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from mid-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 15.32 2000 18.10 2001 -0.50 2002 -14.61 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 17.96% (quarter ended December 31, 2001), and the lowest return for a quarter was -16.56% (quarter ended September 30, 2002). 14 The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Investor Share class and that after-tax returns for Admiral Shares will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD MID-CAP INDEX FUND INVESTOR SHARES Return Before Taxes -14.61% 5.07% Return After Taxes on Distributions -15.12 3.22 Return After Taxes on Distributions and Sale of Fund Shares -8.77 3.36 - -------------------------------------------------------------------------------- VANGUARD MID-CAP INDEX FUND ADMIRAL SHARES** Return Before Taxes -14.55% -- - -------------------------------------------------------------------------------- S&P MIDCAP 400 INDEX (reflects no deduction for fees, expenses, or taxes) -14.51% 4.69% - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. ** Average annual total returns from November 12, 2001--the inception date of the Admiral Shares--through December 31, 2002, were -6.78% for Vanguard Mid-Cap Index Fund Admiral Shares and -6.04% for the S&P MidCap 400 Index. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. 15 INVESTOR ADMIRAL SHARES SHARES -------- ------- SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None* None* Sales Charge (Load) Imposed on Reinvested None None Dividends: Redemption Fee: None None Account Maintenance Fee (for accounts under $10,000): $10/year** None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.23% 0.16% 12b-1 Distribution Fee: None None Other Expenses: 0.03% 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.26% 0.18% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. ** If applicable, the account maintenance fee will be deducted from your annual distribution of the Fund's dividends. If your distribution is less than the fee, fractional shares may be automatically redeemed to make up the difference. The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - --------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------- Investor Shares $27 $84 $146 $331 Admiral Shares 18 58 101 230 - --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 16 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES Distributed annually in December Investor Shares--May be converted to Admiral Shares if you meet certain account INVESTMENT ADVISER balance and tenure requirements The Vanguard Group, Valley Forge, Admiral Shares--May be converted to Pa., Investor Shares if you are no longer since inception eligible for Admiral Shares INCEPTION DATE NEWSPAPER ABBREVIATION Investor Shares--May 21, 1998 Investor Shares--MidCp Admiral Shares--November 12, 2001 Admiral Shares--MidCpAdml NET ASSETS (ALL SHARE CLASSES) VANGUARD FUND NUMBER AS OF DECEMBER 31, 2002 Investor Shares--859 $3.3 billion Admiral Shares--5859 CUSIP NUMBER SUITABLE FOR IRAS Investor Shares--922908843 Yes Admiral Shares--922908645 MINIMUM INITIAL INVESTMENT TICKER SYMBOL Investor Shares--$3,000; $1,000 Investor Shares--VIMSX for IRAs and most custodial Admiral Shares--VIMAX accounts for minors Admiral Shares--$250,000 - -------------------------------------------------------------------------------- 17 FUND PROFILE--VANGUARD(R) SMALL-CAP INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of small-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Russell 2000 Index, which is made up of the stocks of smaller U.S. companies. The Russell 2000 Index is made up of the 2,000 smallest companies from a list of the 3,000 largest U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 18.70 1994 -0.51 1995 28.74 1996 18.12 1997 24.59 1998 -2.61 1999 23.13 2000 -2.67 2001 3.10 2002 -20.02 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 20.88% (quarter ended December 31, 2001), and the lowest return for a quarter was -21.37% (quarter ended September 30, 2002). 18 The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Investor Share class and that after-tax returns for Admiral Shares will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- VANGUARD SMALL-CAP INDEX FUND INVESTOR SHARES Return Before Taxes -20.02% -0.76% 7.97% Return After Taxes on Distributions -20.40 -2.55 6.08 Return After Taxes on Distributions and Sale of Fund Shares -12.29 -0.85 6.14 - -------------------------------------------------------------------------------- VANGUARD SMALL-CAP INDEX FUND ADMIRAL SHARES* Return Before Taxes -19.95% -- -- - -------------------------------------------------------------------------------- RUSSELL 200O INDEX (reflects no deduction for fees, expenses, or taxes) -20.48% -1.36% 7.16% - -------------------------------------------------------------------------------- * Average annual total returns from November 13, 2000--the inception date of the Admiral Shares--through December 31, 2002, were -7.84% for Vanguard Sma--Cap Index Fund Admiral Shares and -5.86% for the Russell 2000 Index. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. 19 INVESTOR ADMIRAL SHARES SHARES -------- ------- SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None* None* Sales Charge (Load) Imposed on Reinvested None None Dividends: Redemption Fee: None None Account Maintenance Fee (for accounts under $10,000): $10/year** None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.24% 0.15% 12b-1 Distribution Fee: None None Other Expenses: 0.03% 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27% 0.18% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. ** If applicable, the account maintenance fee will be deducted from your annual distribution of the Fund's dividends. If your distribution is less than the fee, fractional shares may be automatically redeemed to make up the difference. The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - --------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------- Investor Shares $28 $87 $152 $343 Admiral Shares 18 58 101 230 - --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 20 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES Distributed annually in December Investor Shares--May be converted to Admiral Shares if you meet certain account INVESTMENT ADVISER balance and tenure requirements The Vanguard Group, Valley Forge, Admiral Shares--May be converted to Pa., Investor Shares if you are no longer since 1989 eligible for Admiral Shares INCEPTION DATE NEWSPAPER ABBREVIATION Investor Shares--October 3, 1960 Investor Shares--SmCap Admiral Shares--November 13, 2000 Admiral Shares-SmCapAdml CUSIP NUMBER SUITABLE FOR IRAS Investor Shares--922908702 Yes Admiral Shares--922908686 MINIMUM INITIAL INVESTMENT TICKER SYMBOL Investor Shares--$3,000; $1,000 Investor Shares--NAESX for IRAs and most custodial Admiral Shares--VSMAX accounts for minors Admiral Shares--$250,000 - -------------------------------------------------------------------------------- 21 FUND PROFILE--VANGUARD(R) VALUE INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization value stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's 500/Barra Value Index, which includes those stocks of the S&P 500 Index with lower-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from large-cap value stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 18.35 1994 -0.73 1995 36.94 1996 21.86 1997 29.77 1998 14.64 1999 12.57 2000 6.08 2001 -11.88 2002 -20.91 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 17.50% (quarter ended December 31, 1998), and the lowest return for a quarter was -20.45% (quarter ended September 30, 2002). 22 The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Investor Share class and that after-tax returns for Admiral Shares will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- VANGUARD VALUE INDEX FUND INVESTOR SHARES Return Before Taxes -20.91% -0.93% 9.27% Return After Taxes on -21.52 -2.72 7.41 Distributions Return After Taxes on Distributions and Sale of Fund Shares -12.82 -1.10 7.15 - -------------------------------------------------------------------------------- VANGUARD VALUE INDEX FUND ADMIRAL SHARES* Return Before Taxes -20.85% -- -- - -------------------------------------------------------------------------------- S&P 500/BARRA VALUE INDEX (reflects no deduction for fees, expenses, or taxes) -20.85% -0.85% 9.39% - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. 23 INVESTOR ADMIRAL SHARES SHARES -------- ------- SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None* None* Sales Charge (Load) Imposed on Reinvested None None Dividends: Redemption Fee: None None Account Maintenance Fee (for accounts under $10,000): $2.50/quarter** None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.20% 0.12% 12b-1 Distribution Fee: None None Other Expenses: 0.03% 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.23% 0.15% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. ** If applicable, the account maintenance fee will be deducted from your quarterly distribution of the Fund's dividends. If your distribution is less than the fee, fractional shares may be automatically redeemed to make up the difference. The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - --------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------- Investor Shares $24 $74 $130 $293 Admiral Shares 15 48 85 192 - --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 24 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES Dividends are distributed quarterly Investor Shares--May be converted to March, June, September, and December; Admiral Shares if you meet certain account capital gains, if any, are balance and tenure requirements distributed annually in December. Admiral Shares--May be converted to Investor Shares if you are no longer INVESTMENT ADVISER eligible for Admiral Shares The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION since inception Investor Shares--Value Admiral Shares--ValAdml INCEPTION DATE Investor Shares--November 2, 1992 VANGUARD FUND NUMBER Admiral Shares--November 13, 2000 Investor Shares--06 Admiral Shares--506 NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 CUSIP NUMBER $3.2 billion Investor Shares--922908405 Admiral Shares--922908678 SUITABLE FOR IRAS Yes TICKER SYMBOL Investor Shares--VIVAX MINIMUM INITIAL INVESTMENT Admiral Shares--VVIAX Investor Shares--$3,000; $1,000 for IRAs and most custodial accounts for minors Admiral Shares--$250,000 - -------------------------------------------------------------------------------- 25 FUND PROFILE-- VANGUARD(R) SMALL-CAP VALUE INDEX FUND The Fund seeks to track the performance of a benchmark index that measures the invest ment return of small-capitalization value stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's SmallCap 600/Barra Value Index, which includes those stocks of the S&P SmallCap 600 Index with lower-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small-cap value stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 3.35 2000 21.88 2001 13.70 2002 -14.20 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 21.37% (quarter ended December 31, 2001), and the lowest return for a quarter was -22.50% (quarter ended September 30, 2002). 26 The table shows how the average annual total returns of the Investor Shares compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Investor Share class and that after-tax returns for another share class will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD SMALL-CAP VALUE INDEX FUND INVESTOR SHARES Return Before Taxes -14.20% 1.59% Return After Taxes on Distributions -15.24 -0.30 Return After Taxes on Distributions and Sale -8.46 0.41 of Fund Shares - -------------------------------------------------------------------------------- S&P SMALLCAP 600/BARRA VALUE INDEX (reflects no deduction for fees, expenses, or taxes) -14.47% 0.95% - -------------------------------------------------------------------------------- *Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. 27 SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None Account Maintenance Fee (for accounts under $10,000): $10/year** ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.24% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. ** If applicable, the account maintenance fee will be deducted from your annual distribution of the Fund's dividends. If your distribution is less than the fee, fractional shares may be automatically redeemed to make up the difference. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $28 $87 $152 $343 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT Distributed annually in December $3,000; $1,000 for IRAs and most custodial accounts for minors INVESTMENT ADVISER The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION Pa., SmVal since inception VANGUARD FUND NUMBER INCEPTION DATE 860 May 21, 1998 CUSIP NUMBER NET ASSETS (ALL SHARE CLASSES) AS 922908793 OF DECEMBER 31, 2002 TICKER SYMBOL $1.5 billion VISVX SUITABLE FOR IRAS Yes - -------------------------------------------------------------------------------- 28 FUND PROFILE--VANGUARD(R) GROWTH INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization growth stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's 500/Barra Growth Index, which includes those stocks of the S&P 500 Index with higher-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. In addition, the Fund's performance could be hurt disproportionately by a decline in the prices of just a few stocks. This is because, compared with other mutual funds, the Fund invests a greater percentage of assets in the stocks of fewer companies. The Fund's performance could also be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from large-cap growth stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 1.53 1994 2.89 1995 38.06 1996 23.74 1997 36.34 1998 42.21 1999 28.76 2000 -22.21 2001 -12.93 2002 -23.68 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 24.64% (quarter ended December 31, 1998), and the lowest return for a quarter was -17.50% (quarter ended March 31, 2001). 29 The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Investor Share class and that after-tax returns for Admiral Shares will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- VANGUARD GROWTH INDEX FUND INVESTOR SHARES Return Before Taxes -23.68% -1.09% 8.70% Return After Taxes on Distributions -23.99 -1.53 8.05 Return After Taxes on Distributions and Sale of Fund Shares -14.53 -0.94 7.09 - -------------------------------------------------------------------------------- VANGUARD GROWTH INDEX FUND ADMIRAL SHARES Return Before Taxes -23.62% -- -- - -------------------------------------------------------------------------------- S&P500/BARRA GROWTH INDEX (reflects no deduction for fees, expenses, or taxes) -23.59% -1.08% 8.79% - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares or Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. 30 INVESTOR ADMIRAL SHARES SHARES -------- ------- SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None* None* Sales Charge (Load) Imposed on Reinvested None None Dividends: Redemption Fee: None None Account Maintenance Fee (for accounts under $10,000): $2.50/quarter** None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.20% 0.12% 12b-1 Distribution Fee: None None Other Expenses: 0.03% 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.23% 0.15% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. ** If applicable, the account maintenance fee will be deducted from your quarterly distribution of the Fund's dividends. If your distribution is less than the fee, fractional shares may be automatically redeemed to make up the difference. The following examples are intended to help you compare the cost of investing in the Fund's Investor Shares or Admiral Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - --------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - --------------------------------------------------------- Investor Shares $24 $74 $130 $293 Admiral Shares 15 48 85 192 - --------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 31 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES Dividends are distributed quarterly Investor Shares--May be converted to in March, June, September, and Admiral Shares if you meet certain balance December; capital gains, if any, and tenure requirements are distributed annually in December Admiral Shares--May be converted to Investor Shares if you are no longer INVESTMENT ADVISER eligible for Admiral Shares The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION since inception Investor Shares--Growth Admiral Shares--GrwthAdml INCEPTION DATE Investor Shares--November 2, 1992 VANGUARD FUND NUMBER Admiral Shares--November 13, 2000 Investor Shares--09 Admiral Shares--509 NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 CUSIP NUMBER $7.5 billion Investor Shares--922908504 Admiral Shares--922908660 SUITABLE FOR IRAS Yes TICKER SYMBOL Investor Shares--VIGRX MINIMUM INITIAL INVESTMENT Admiral Shares--VIGAX Investor Shares--$3,000; $1,000 for IRAs and most custodial accounts for minors Admiral Shares--$250,000 - -------------------------------------------------------------------------------- 32 FUND PROFILE-- VANGUARD(R) SMALL-CAP GROWTH INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of small-capitalization growth stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's SmallCap 600/Barra Growth Index, which includes those stocks of the S&P SmallCap 600 Index with higher-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small-cap growth stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 19.80 2000 1.59 2001 -0.78 2002 -15.41 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 20.69% (quarter ended December 31, 1999), and the lowest return for a quarter was -17.50% (quarter ended September 30, 2001). 33 The table shows how the average annual total returns of the Investor Shares compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Investor Share class and that after-tax returns for another share class will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD SMALL-CAP GROWTH INDEX FUND INVESTOR SHARES Return Before Taxes -15.41% -0.60% Return After Taxes on Distributions -15.50 -1.00 Return After Taxes on Distributions and Sale of Fund Shares -9.46 -0.59 - -------------------------------------------------------------------------------- S&P SMALLCAP 600/BARRA GROWTH INDEX (relfects no deduction for fees, expenses, or taxes) -15.36% -0.97% - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. 34 SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None Account Maintenance Fee (for accounts under $10,000): $10/year** ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.24% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. ** If applicable, the account maintenance fee will be deducted from your annual distribution of the Fund's dividends. If your distribution is less than the fee, fractional shares may be automatically redeemed to make up the difference. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $28 $87 $152 $343 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT Distributed annually in December $3,000; $1,000 for IRAs and most custodial accounts for minors INVESTMENT ADVISER The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION Pa., SmGth since inception VANGUARD FUND NUMBER INCEPTION DATE 861 May 21, 1998 CUSIP NUMBER NET ASSETS (ALL SHARE CLASSES) AS 922908827 OF DECEMBER 31, 2002 TICKER SYMBOL $492 million VISGX SUITABLE FOR IRAS Yes - -------------------------------------------------------------------------------- 35 MORE ON THE FUNDS This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that each Fund uses in pursuit of its objective. The Funds' board of trustees, which oversees the Funds' management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. ADVANTAGES OF INDEX FUNDS Index funds typically have the following characteristics: o Variety of investments. Vanguard index funds generally invest in securities of a wide variety of companies and industries. o Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. o Low cost. Index funds are inexpensive to run, compared with actively managed funds. They have few or no research costs, and typically keep trading activity--and thus brokerage commissions and other transaction costs--to a minimum. Compared with actively managed funds, most index funds have lower turnover rates and lower capital gains distributions. However, from time to time, some index funds may pay out higher-than-expected taxable distributions. That's because index funds must adjust their holdings to reflect changes in their target indexes. In some cases, such changes may force an index fund to sell securities that have appreciated in value, and, thus, realize a capital gain that must be distributed to shareholders. A security may move out of an index for a number of reasons, including a merger or acquisition, or a substantial change in the market capitalization of the issuer. Generally, these changes tend to occur more frequently with small and medium-size companies than they do with large, well-established companies. INDEXING METHODS In seeking to track a particular index, a fund generally uses one of two methods to select the securities in which it invests. REPLICATION METHOD. Many stock funds use the replication method of indexing. This means that a fund holds each security found in its target index in about the same proportion as represented in the index itself. For example, if 5% of the S&P 500 Index were made up of the stock of a specific company, a fund tracking that index would invest about 5% of its assets in that company. The 500, Mid-Cap, Small-Cap, Value, Small-Cap Value, Growth, and Small-Cap Growth Index Funds employ this method of indexing. SAMPLING METHOD. Because it would be very expensive and inefficient to buy and sell all securities held in certain indexes (the Wilshire 5000 Index, for example, included more than 5,600 separate stocks as of December 31, 2002), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund's adviser selects from the target index a representative sample of securities that will resemble the target index in terms of key risk factors and other characteristics. For stock funds, these 36 include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. The Total Stock Market, and Extended Market Index Funds employ this method of indexing. The following table shows the number of stocks held by each Fund, and the number of stocks in its target index, as of December 31, 2002. -------------------------------------------------------- NUMBER OF NUMBER OF STOCKS VANGUARD INDEX FUND STOCKS HELD IN TARGET INDEX -------------------------------------------------------- Total Stock Market 3,739 5,668 500 505 500 Extended Market 3,242 5,172 Mid-Cap 402 400 Small-Cap 1,977 1,964 Value 353 352 Small-Cap Value 390 390 Growth 149 148 Small-Cap Growth 211 210 -------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS Growth investing and value investing are two styles employed by stock-fund managers. Growth funds generally focus on stocks of companies believed to have above-average potential for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. Value funds typically emphasize stocks whose prices are below-average in comparison with those measures; these stocks often have above-average dividend yields. Growth and value stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, growth funds appeal to investors who will accept more volatility in hopes of a greater increase in share price. - -------------------------------------------------------------------------------- MARKET EXPOSURE The Funds invest mainly in common stocks. As a result, they are subject to certain risks. [FLAG] EACH FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. 37 MARKET CAPITALIZATION. Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, or large-cap. It's important to understand that, for both companies and stock funds, market capitalization ranges change over time. Also, interpretations of size vary, and there is no "official" definition of small-, mid-, and large-cap, even among Vanguard fund advisers. The median market capitalization of each Fund as of December 31, 2002 is listed below: ---------------------------------------------- MEDIAN MARKET VANGUARD INDEX FUND CAPITALIZATION ---------------------------------------------- Total Stock Market $26.2 billion 500 47.0 Extended Market 1.5 Mid-Cap 2.2 Small-Cap 0.6 Value 22.8 Small-Cap Value 0.6 Growth 71.4 Small-Cap Growth 1.0 ---------------------------------------------- To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. - ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2002) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.2 10.9 11.2 11.4 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2002. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.9%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or these Funds in particular. Keep in mind that the S&P 500 Index tracks mainly large-cap stocks. Historically, mid- and small-cap stocks (such as those held by the Total Stock Market, Extended Market, Mid- Cap, Small-Cap, Small-Cap Value, and Small-Cap Growth Index Funds) have been more volatile than--and at times have performed quite differently from--the large-cap stocks of the S&P 500 Index. Similarly, indexes that are subsets of the S&P 500 Index--such as the S&P 500/Barra Value Index and the S&P 500/Barra Growth Index (the target indexes of the Value and Growth Index Funds)--will not perform in the same way as the broader S&P 500 Index. Historically, the S&P 500/Barra Value Index has been less volatile than the S&P 500 Index; the S&P 500/Barra Growth Index, on the other hand, has displayed somewhat greater 38 short-term volatility than the S&P 500 Index. However, both value and growth stocks have the potential, at times, to be more volatile than the broader market. [FLAG] EACH FUND (OTHER THAN THE TOTAL STOCK MARKET INDEX FUND) IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE TYPES OF STOCKS IN WHICH THE FUND INVESTS WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. SPECIFIC TYPES OF STOCKS (FOR INSTANCE, SMALL- CAP OR VALUE) TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. RISK OF NONDIVERSIFICATION The target indexes tracked by Vanguard's U.S. Stock Index Funds hold diverse investments. Similarly, the Funds that track these indexes hold stocks of many companies across many different industry sectors. It is possible that a fund's target index could become less diversified if the index's largest companies significantly increase in value relative to the index's other components. In an extreme situation, a fund tracking such an index might no longer meet the legal definition of "diversified." (Such has been the case, from time to time, with the Growth Index Fund.) For this reason, Vanguard's U.S. Stock Index Funds are classified as "nondiversified." However, these funds, other than the Growth Index Fund, from inception to the date of this prospectus, in actuality have been diversified, and Vanguard expects them to continue to be diversified. OTHER INVESTMENT POLICIES AND RISKS Each Fund reserves the right to substitute a different index for the index it currently tracks. This could happen if the current index were discontinued, if the Fund's agreement with the sponsor of its target index were terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same general market segment (large-, mid-, or small-cap; growth; or value) as the current index. Each Fund may invest in foreign securities to the extent necessary to carry out its investment strategy of holding all, or a representative sample, of the stocks that make up the index it tracks. It is not expected that any Fund will invest more than 5% of its assets in foreign securities. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. [FLAG] EACH FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF TRADITIONAL INVESTMENTS. To track their target indexes as closely as possible, the Funds attempt to remain fully invested in stocks. To help stay fully invested, and to reduce transaction costs, the Funds may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, which are types of derivatives. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Similar risks exist for warrants (securities that permit their owners to purchase a specific number of stock shares at a predetermined price), convertible securities (securities that may be exchanged for 39 another asset), and swap agreements (contracts between parties in which each agrees to make payments to the other based on the return of a specified index or asset). The Funds will not use derivatives for speculative purposes or as leveraged investments that magnify gains or losses. In addition, each Fund's obligation under futures contracts will not exceed 20% of its total assets. The reasons for which a Fund may invest in futures include: o To keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in stocks. o To reduce the Fund's transaction costs or add value when these instruments are favorably priced. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DERIVATIVES A derivative is a financial contract whose value is based on (or "derived" from) a traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. Derivatives can carry considerable risks, particularly if used for speculation or as leveraged investments. - -------------------------------------------------------------------------------- ACCOUNT MAINTENANCE FEE Vanguard assesses an account maintenance fee on index fund shareholders whose account balances are below $10,000 (for any reason, including a decline in the value of a fund's shares) on the date a dividend is distributed. This fee is intended to allocate account maintenance costs more equitably among shareholders. For funds that distribute dividends quarterly, the account maintenance fee is $2.50 per quarter, deducted from the quarterly dividend, which usually is distributed during the last two weeks of each calendar quarter. For funds that distribute dividends annually, the account maintenance fee is $10 per year, deducted from the annual dividend, which usually is distributed during the last two weeks of the calendar year. If the fee is deducted from your dividend distribution, you will still be taxed on the full amount of your dividend (unless you hold your shares through a nontaxable account). If you are due a dividend that is less than the fee, fractional shares may be automatically redeemed to make up the difference. COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading or to compensate the funds for the costs associated with it. Specifically: 40 o Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. o Each Vanguard fund (other than money market funds) limits the number of times that an investor can exchange into and out of the fund. o Certain Vanguard funds charge purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or the capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- TURNOVER RATE Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, an index fund sells securities only to respond to redemption requests or to adjust the number of shares held to reflect a change in the fund's target index. Turnover rates for large-cap stock index funds tend to be very low because large-cap indexes--such as the S&P 500 Index--typically do not change much from year to year. Turnover rates for mid-cap and small-cap stock index funds tend to be higher (although still relatively low, compared with actively managed stock funds) because the indexes they track are the most likely to change as a result of companies merging, growing, or failing. The FINANCIAL HIGHLIGHTS section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of December 31, 2002, the average turnover rate for passively managed domestic equity index funds investing in common stocks was approximately 94%; for all domestic stock funds, the average turnover rate was approximately 111%, according to Morningstar, Inc. - -------------------------------------------------------------------------------- 41 THE FUNDS AND VANGUARD Each Fund is a member of The Vanguard Group, a family of 35 investment companies with more than 100 funds holding assets in excess of $550 billion. All of the funds that are members of The Vanguard Group share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. - -------------------------------------------------------------------------------- INVESTMENT ADVISER The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in 1975, serves as the adviser to the Funds through its Quantitative Equity Group. As of December 31, 2002, Vanguard served as adviser for about $406 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended December 31, 2002, the advisory expenses for each Fund (with the exception of the Small-Cap Growth Index Fund) represented an effective annual rate of less than 0.01% of each Fund's average net assets. For the Small-Cap Growth Index Fund, the advisory expenses represented an effective annual rate of approximately 0.02% of its average net assets. The adviser is authorized to choose broker-dealers to handle the purchase and sale of the Funds' securities and to seek to obtain the best available price and most favorable execution for all transactions. Also, the board of trustees may direct the adviser to use a particular broker for certain transactions in exchange for commission rebates paid to the Funds as well as brokerage or research services provided to the adviser. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUNDS' ADVISER The manager primarily responsible for overseeing the Funds' investments is: GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Quantitative Equity Group. He has worked in investment management since 1985 and has had primary responsibility for Vanguard's stock indexing and active quantitative investments and strategy since joining the company in 1987. Education: A.B., Dartmouth College; M.B.A., University of Chicago. - -------------------------------------------------------------------------------- 42 DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any capital gains realized from the sale of its holdings. Income dividends for the Total Stock Market, 500, Value, and Growth Index Funds generally are distributed in March, June, September, and December; income dividends for the Extended Market, Mid-Cap, Small-Cap, Small-Cap Value, and Small-Cap Growth Index Funds generally are distributed in December. Capital gains distributions generally occur in December. In addition, the Funds may occasionally be required to make supplemental distributions at some other time during the year. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- BASIC TAX POINTS Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, taxable investors should be aware of the following basic tax points: o Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. o Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. o Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. o Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. o Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. o A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. o Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. o Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. 43 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT "BUYING A DIVIDEND" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. - -------------------------------------------------------------------------------- GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 30% of any taxable distributions or redemptions from your account if you do not: o Provide us with your correct taxpayer identification number; o Certify that the taxpayer identification number is correct; and o Confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United States, except to certain qualifying investors. If you reside outside the United States, please consult our website at www.vanguard.com and review "Non-U.S. Investors." Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. TAX CONSEQUENCES. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax adviser for detailed information about a fund's tax consequences for you. SHARE PRICE Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. 44 When reliable market quotations are not readily available, securities are priced at their fair value, calculated according to procedures adopted by the board of trustees. A fund also may use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, but may occur in other cases as well. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand each Fund's financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose reports--along with each Fund's financial statements--are included in the Funds' most recent annual reports to shareholders. You may have these annual reports sent to you without charge by contacting Vanguard. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE This explanation uses the Total Stock Market Index Fund's Investor Shares as an example. The Investor Shares began fiscal year 2002 with a net asset value (price) of $25.74 per share. During the year, each Investor Share earned $0.295 from investment income (interest and dividends). There was a decline of $5.672 per share in the value of investments held or sold by the Fund, resulting in a net decline of $5.377 per share from investment operations. Shareholders received $0.293 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $20.07, reflecting losses of $5.377 per share and distributions of $0.293 per share. This was a decrease of $5.67 per share (from $25.74 at the beginning of the year to $20.07 at the end of the year. For a shareholder who reinvested the distributions in the purchase of more shares, the total return was -20.96% for the year. As of December 31, 2002, the Investor Shares had $14.2 billion in net assets. For the year, the expense ratio was 0.20% ($2.00 per $1,000 of net assets), and the net investment income amounted to 1.32% of average net assets. The Fund sold and replaced securities valued at 4% of its net assets. - -------------------------------------------------------------------------------- 45
TOTAL STOCK MARKET INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $25.74 $29.26 $33.22 $27.42 $22.64 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .295 .310 .331 .317 .336 Net Realized and Unrealized Gain (Loss)on Investments (5.672) (3.533) (3.815) 6.133 4.898 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (5.377) (3.223) (3.484) 6.450 5.234 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.293) (.297) (.336) (.330) (.329) Distributions from Realized Capital Gains -- -- (.140) (.320) (.125) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.293) (.297) (.476) (.650) (.454) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $20.07 $25.74 $29.26 $33.22 $27.42 ===================================================================================================================== TOTAL RETURN* -20.96% -10.97% -10.57% 23.81% 23.26% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $14,254 $15,781 $16,856 $18,133 $9,308 Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% Ratio of Net Investment Income to Average Net Assets 1.32% 1.11% 1.04% 1.15% 1.44% Turnover Rate 4%** 7%** 7% 3% 3% =====================================================================================================================
* Total returns do not reflect the $10 annual account maintenance fee applied on balances under $10,000. ** Turnover rates excluding in-kind redemptions were 2% and 3%, respectively.
TOTAL STOCK MARKET INDEX FUND ADMIRAL SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED NOV. 13* TO DECEMBER 31, DEC. 31, --------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $25.75 $29.26 $30.22 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .296 .332 .049 Net Realized and Unrealized Gain (Loss) on Investments (5.672) (3.533) (.830) --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (5.376) (3.201) (.781) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.304) (.309) (.099) Distributions from Realized Capital Gains -- -- (.080) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.304) (.309) (.179) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $20.07 $25.75 $29.26 ===================================================================================================================== TOTAL RETURN -20.95% -10.89% -2.55% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $4,069 $3,894 $2,104 Ratio of Total Expenses to Average Net Assets 0.15% 0.15% 0.15%** Ratio of Net Investment Income to Average Net Assets 1.39% 1.17% 1.23%** Turnover Rate 4%+ 7%+ 7% =====================================================================================================================
* Inception. ** Annualized. + Turnover rates excluding in-kind redemptions were 2% and 3%, respectively. 46
500 INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $105.89 $121.86 $135.33 $113.95 $ 90.07 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income 1.32 1.260 1.29 1.370 1.33 Net Realized and Unrealized Gain (Loss)on Investments (24.70) (15.955) (13.46) 22.415 24.30 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (23.38) (14.695) (12.17) 23.785 25.63 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (1.36) (1.275) (1.30) (1.410) (1.33) Distributions from Realized Capital Gains -- -- -- (.995) (.42) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (1.36) (1.275) (1.30) (2.405) (1.75) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $81.15 $105.89 $121.86 $135.33 $113.95 ===================================================================================================================== TOTAL RETURN* -22.15% -12.02% -9.06% 21.07% 28.62% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $56,224 $73,151 $88,240 $104,652 $74,229 Ratio of Total Expenses to Average Net Assets 0.18% 0.18% 0.18% 0.18% 0.18% Ratio of Net Investment Income to Average Net Assets 1.43% 1.14% 0.98% 1.13% 1.35% Turnover Rate** 7% 4% 9% 6% 6% =====================================================================================================================
* Total returns do not reflect the $10 annual account maintenance fee applied on balances under $10,000. ** Turnover rates excluding in-kind redemptions were 6%, 3%, 7%, 3%, and 3%, respectively.
500 INDEX FUND ADMIRAL SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED NOV. 13* TO DECEMBER 31, DEC. 31, --------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $105.89 $121.87 $124.88 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income 1.374 1.313 .179 Net Realized and Unrealized Gain (Loss) on Investments (24.700) (15.955) (2.808) - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (23.326) (14.642) (2.629) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (1.414) (1.338) (.381) Distributions from Realized Capital Gains -- -- -- - --------------------------------------------------------------------------------------------------------------------- Total Distributions (1.414) (1.338) (.381) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $105.89 $121.87 81.15 ===================================================================================================================== TOTAL RETURN -22.10% -11.98% -2.10% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period(Millions) $11,922 $13,863 $8,237 Ratio of Total Expenses to Average Net Assets 0.12% 0.12% 0.12%+ Ratio of Net Investment Income to Average Net Assets 1.50% 1.22% 1.03%+ Turnover Rate** 7% 4% 9% =====================================================================================================================
* Inception. ** Turnover rates excluding in-kind redemptions were 6%, 3%, and 7%, respectively. + Annualized. 47
EXTENDED MARKET INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $23.09 $26.61 $37.07 $30.63 $30.76 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .19 .203 .274 .297 .388 Net Realized and Unrealized Gain(Loss)on Investments (4.36) (2.703) (6.041) 10.101 2.025 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (4.17) (2.500) (5.767) 10.398 2.413 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.18) (.210) (.263) (.318) (.373) Distributions from Realized Capital Gains -- (.810) (4.430) (3.640) (2.170) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.18) (1.020) (4.693) (3.958) (2.543) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $18.74 $23.09 $26.61 $37.07 $30.63 ===================================================================================================================== TOTAL RETURN* -18.06% -9.13% -15.55% 36.22% 8.32% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,629 $3,115 $3,881 $4,221 $2,939 Ratio of Total Expenses to Average Net Assets 0.26% 0.25% 0.25% 0.25% 0.23% Ratio of Net Investment Income to Average Net Assets 0.88% 0.88% 0.81% 1.04% 1.21% Turnover Rate 17% 20% 33% 26% 27% =====================================================================================================================
* Total returns do not reflect the 0.25% purchase fee imposed through March 31, 2000, or the $10 annual account maintenance fee applied on balances under $10,000.
EXTENDED MARKET INDEX FUND ADMIRAL SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED NOV. 13* TO DECEMBER 31, DEC. 31, --------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $23.09 $26.61 $31.89 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .201 .213 .050 Net Realized and Unrealized Gain (Loss) on Investments (4.360) (2.703) (1.736) - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (4.159) (2.490) (1.686) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.191) (.220) (.274) Distributions from Realized Capital Gains -- (.810) (3.320) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.191) (1.030) (3.594) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $18.74 $23.09 $26.61 ===================================================================================================================== TOTAL RETURN -18.02% -9.09% -4.30% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $611 $735 $441 Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20%** Ratio of Net Investment Income to Average Net Assets 0.94% 0.94% 1.23%** Turnover Rate 17% 20% 33% =====================================================================================================================
* Inception. ** Annualized. 48
MID-CAP INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998* - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $11.81 $12.21 $11.30 $10.79 $10.00 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .088 .081 .071 .073 .053 Net Realized and Unrealized Gain (Loss)on Investments (1.798) (.166) 1.897 1.448 .840 --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.710) (.085) 1.968 1.521 .893 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.093) (.070) (.078 ) (.076 ) (.053 ) Distributions from Realized Capital Gains (.127) (.245) (.980 ) (.935 ) (.050 ) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.220) (.315) (1.058 ) (1.011 ) (.103 ) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 9.88 $11.81 $12.21 $11.30 $10.79 ===================================================================================================================== TOTAL RETURN** -14.61% -0.50% 18.10% 15.32% 8.55% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,267 $2,049 $1,614 $605 $206 Ratio of Total Expenses to Average Net Assets 0.26% 0.25% 0.25% 0.25% 0.25%+ Ratio of Net Investment Income to Average Net Assets 0.85% 0.83% 0.90% 0.99% 1.19%+ Turnover Rate 20%++ 24% 51% 38% 44% =====================================================================================================================
* Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were held in money market instruments. Performance measurement began May 21, 1998. ** Total returns do not reflect the 0.25% purchase fee imposed from inception through February 28, 1999, or the $10 annual account maintenance fee applied on balances under $10,000. + Annualized. ++ Turnover rate excluding in-kind redemptions was 18%.
MID-CAP INDEX FUND ADMIRAL SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED NOV. 12* TO DEC. 31, DEC. 31, 2002 2001 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $53.56 $50.00 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .431 .056 Net Realized and Unrealized Gain (Loss) on Investments (8.154) 3.982 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (7.723) 4.038 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.451) (.320) Distributions from Realized Capital Gains (.576) (.158) - --------------------------------------------------------------------------------------------------------------------- Total Distributions. (1.027) (.478) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $44.81 $53.56 ===================================================================================================================== TOTAL RETURN -14.55% 8.06% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $411 $223 Ratio of Total Expenses to Average Net Assets 0.18% 0.20%** Ratio of Net Investment Income to Average Net Assets 0.94% 0.86%** Turnover Rate 20%+ 24% =====================================================================================================================
* Inception. ** Annualized. + Turnover rate excluding in-kind redemptions was 18%. 49
SMALL-CAP INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $19.82 $19.44 $23.60 $21.20 $23.75 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .192 .217 .270 .256 .311 Net Realized and Unrealized Gain (Loss) on Investments(4.160) .388 (1.145) 4.491 (1.007) - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.968) .605 (.875) 4.747 (.696) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.192) (.225) (.260) (.267) (.304) Distributions from Realized Capital Gains -- -- (3.025) (2.080) (1.550) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.192) (.225) (3.285) (2.347) (1.854) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $15.66 $19.82 $19.44 $23.60 $21.20 ===================================================================================================================== TOTAL RETURN* -20.02% 3.10% -2.67% 23.13% -2.61% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,943 $3,545 $3,577 $3,553 $2,768 Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.27% 0.25% 0.24% Ratio of Net Investment Income to Average Net Assets 1.11% 1.16% 1.17% 1.25% 1.39% Turnover Rate 32% 39% 49% 42% 35% =====================================================================================================================
* Total returns do not reflect the 0.5% purchase fee imposed through March 31, 2000, or the $10 annual account maintenance fee applied on balances under $10,000.
SMALL-CAP INDEX FUND ADMIRAL SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED NOV. 13* TO DECEMBER 31, DEC. 31, --------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $19.82 $19.44 $22.40 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .207 .231 .053 Net Realized and Unrealized Gain (Loss) on Investments (4.160) .388 .062 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.953) .619 .115 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.207) (.239) (.265) Distributions from Realized Capital Gains -- -- (2.810) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.207) (.239) (3.075) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $15.66 $19.82 $19.44 ===================================================================================================================== TOTAL RETURN -19.95% 3.17% 1.75% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period(Millions) $591 $547 $252 Ratio of Total Expenses to Average Net Assets 0.18% 0.20% 0.20%** Ratio of Net Investment Income to Average Net Assets 1.22% 1.24% 1.79%** Turnover Rate 32% 39% 49% =====================================================================================================================
* Inception. ** Annualized. 50
VALUE INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $18.90 $22.87 $22.89 $22.51 $20.85 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .303 .309 .355 .355 .366 Net Realized and Unrealized Gain (Loss)on Investments (4.238) (2.986) .963 2.342 2.647 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.935) (2.677) 1.318 2.697 3.013 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.315) (.316) (.358) (.362) (.363) Distributions from Realized Capital Gains -- (.977) (.980) (1.955) (.990) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.315) (1.293) (1.338) (2.317) (1.353) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $14.65 $18.90 $22.87 $22.89 $22.51 ===================================================================================================================== TOTAL RETURN* -20.91% -11.88% 6.08% 12.57% 14.64% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,197 $3,018 $3,450 $3,378 $2,421 Ratio of Total Expenses to Average Net Assets 0.23% 0.22% 0.22% 0.22% 0.22% Ratio of Net Investment Income to Average Net Assets 1.80% 1.51% 1.60% 1.59% 1.72% Turnover Rate 26% 38% 37% 41% 33% =====================================================================================================================
* Total returns do not reflect the $10 annual account maintenance fee applied on balances under $10,000.
VALUE INDEX FUND ADMIRAL SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED NOV. 13* TO DECEMBER 31, DEC. 31, --------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $18.90 $22.87 $22.86 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .315 .318 .045 Net Realized and Unrealized (4.238) (2.986) .635 Gain (Loss) on Investments - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.923) (2.668) .680 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.327) (.325) (.100) Distributions from Realized Capital Gains -- (.977) (.570) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.327) (1.302) (.670) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $14.65 $18.90 $22.87 ===================================================================================================================== TOTAL RETURN -20.85% -11.83% 3.13% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $480 $587 $248 Ratio of Total Expenses to Average Net Assets 0.15% 0.17% 0.17%** Ratio of Net Investment Income to Average Net Assets 1.88% 1.57% 0.19%** Turnover Rate 26% 38% 37% =====================================================================================================================
* Inception. ** Annualized. 51
SMALL-CAP VALUE INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998* - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.29 $ 9.65 $8.45 $8.74 $10.00 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .090 .074 .084 .065 .045 Net Realized and Unrealized Gain (Loss)on Investments (1.494) 1.176 1.698 .210 (1.250) - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.404) 1.250 1.782 .275 (1.205) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.090) (.065) (.082) (.070) (.055) Distributions from Realized Capital Gains (.276) (.545) (.500) (.495) -- - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.366) (.610) (.582) (.565) (.055) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $8.52 $10.29 $9.65 $8.45 $ 8.74 ===================================================================================================================== TOTAL RETURN** -14.20% 13.70% 21.88% 3.35% -12.47% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $1,176 $802 $317 $204 $113 Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.27% 0.25% 0.25%+ Ratio of Net Investment Income to Average Net Assets 0.93% 0.97% 1.16% 0.96% 1.13%+ Turnover Rate 57% 59% 82% 80% 53% =====================================================================================================================
* Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were held in money market instruments. Performance measurement began May 21, 1998. ** Total returns do not reflect the purchase fee (0.5% from March 1, 1999, through March 31, 2002; 1.0% from inception through February 28, 1999) or the $10 annual account maintenance fee applied on balances under $10,000. + Annualized.
GROWTH INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $26.42 $30.57 $39.43 $31.67 $22.53 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .222 .181 .126 .207 .230 Net Realized and Unrealized Gain (Loss)on Investments (6.465) (4.144) (8.861) 8.821 9.244 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (6.243) (3.963) (8.735) 9.028 9.474 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.227) (.187) (.125) (.228) (.219) Distributions from Realized Capital Gains -- -- -- (1.040) (.115) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.227) (.187) (.125) (1.268) (.334) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $19.95 $26.42 $30.57 $39.43 $31.67 ===================================================================================================================== TOTAL RETURN* -23.68% -12.93% -22.21% 28.76% 42.21% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $6,094 $8,445 $11,162 $15,232 $6,644 Ratio of Total Expenses to Average Net Assets 0.23% 0.22% 0.22% 0.22% 0.22% Ratio of Net Investment Income to Average Net Assets 0.97% 0.67% 0.33% 0.64% 0.92% Turnover Rate 23% 31% 33% 33% 29% =====================================================================================================================
* Total returns do not reflect the $10 annual account maintenance fee applied on balances under $10,000. 52
GROWTH INDEX FUND ADMIRAL SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED NOV. 13* TO DECEMBER 31, DEC. 31, --------------------------------------------- 2002 2001 2000 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $26.42 $30.57 $33.12 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .237 .194 .024 Net Realized and Unrealized Gain (Loss) on Investments (6.465) (4.144) (2.536) - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (6.228) (3.950) (2.512) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.242) (.200) (.038) Distributions from Realized Capital Gains -- -- -- - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.242) (.200) (.038) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $19.95 $26.42 $30.57 ===================================================================================================================== TOTAL RETURN -23.62% -12.88% -7.59% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $751 $906 $709 Ratio of Total Expenses to Average Net Assets 0.15% 0.17% 0.17%** Ratio of Net Investment Income to Average Net Assets 1.05% 0.74% 0.56%** Turnover Rate 23% 31% 33% =====================================================================================================================
* Inception. ** Annualized.
SMALL-CAP GROWTH INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998* - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.87 $10.97 $11.38 $ 9.53 $10.00 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .027 .009 .009 .025 .03 Net Realized and Unrealized Gain (Loss)on Investments (1.702) (.094) .154 1.860 (.47) - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.675) (.085) .163 1.885 (.44) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.025) (.015) (.003) (.035) (.03) Distributions from Realized Capital Gains -- -- (.570) -- -- - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.025) (.015) (.573) (.035) (.03) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $9.17 $10.87 $10.97 $11.38 $ 9.53 ===================================================================================================================== TOTAL RETURN** -15.41% -0.78% 1.59% 19.80% -4.77% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $388 $357 $356 $167 $90 Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.27% 0.25% 0.25%+ Ratio of Net Investment Income to Average Net Assets 0.24% 0.11% 0.03% 0.33% 0.63%+ Turnover Rate 61% 74% 136% 82% 77% =====================================================================================================================
* Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were held in money market instruments. Performance measurement began May 21, 1998. ** Total returns do not reflect the purchase fee (0.5% from March 1, 1999, through March 31, 2002; 1.0% from inception through February 28, 1999) or the $10 annual account maintenance fee applied on balances under $10,000. + Annualized. 53 - -------------------------------------------------------------------------------- INVESTING WITH VANGUARD This section of the prospectus explains the basics of doing business with Vanguard. A special booklet, Investing Made Easy, provides information that will help individual investors make the most of their relationship with Vanguard. A separate booklet, The Compass, does the same for institutional investors. You can request either booklet by calling or writing Vanguard, using the Contacting Vanguard instructions at the end of this section. BUYING SHARES CONVERTING SHARES REDEEMING SHARES EXCHANGING SHARES OTHER RULES YOU SHOULD KNOW FUND AND ACCOUNT UPDATES CONTACTING VANGUARD - -------------------------------------------------------------------------------- BUYING SHARES ACCOUNT MINIMUMS FOR INVESTOR SHARES TO OPEN AND MAINTAIN AN ACCOUNT: $3,000 for regular accounts; $1,000 for IRAs and most custodial accounts for minors. TO ADD TO AN EXISTING ACCOUNT: $100 by mail, exchange, or Fund Express; $1,000 by wire. Vanguard reserves the right to increase or decrease the minimum amount required to open and maintain an account, or to add to an existing account, without prior notice. ACCOUNT MINIMUMS FOR ADMIRAL SHARES TO OPEN AND MAINTAIN AN ACCOUNT: $250,000 for new investors; $150,000 or $50,000 for existing investors who are eligible to convert Investor Shares into Admiral Shares (see Converting Shares). Institutional clients should contact Vanguard for information on special rules that may apply to them. TO ADD TO AN EXISTING ACCOUNT: $100 by mail, exchange, or Fund Express; $1,000 by wire. HOW TO BUY SHARES ONLINE: You can open certain types of accounts or buy shares in an existing account through our website at www.vanguard.com. BY CHECK: Mail your check and a completed account registration form to Vanguard. When adding to an existing account, send your check with an Invest-By-Mail form detached from your last account statement. Make your check payable to: The Vanguard Group-Fund number. For a list of Fund numbers and addresses, see Contacting Vanguard. BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption from another Vanguard (R) fund. See Exchanging Shares and Other Rules You Should Know. 54 BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard. BY FUND EXPRESS (R) (AUTOMATIC OR SPECIAL PURCHASES): You can purchase shares by electronically transferring money from a previously designated bank account. To establish this option, you must complete a special form or the appropriate section of your account registration. YOUR PURCHASE PRICE ONLINE, BY CHECK, BY EXCHANGE, OR BY WIRE: You buy shares at a fund's NAV determined as of your TRADE DATE. For all Vanguard funds (other than money market funds), purchases received at Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) receive a trade date of the same day, and purchases received after that time receive a trade date of the first business day following the date of receipt. For money market funds, the trade date depends on the method of payment for the purchase. BY FUND EXPRESS: For all Vanguard funds, Fund Express instructions received at Vanguard before the close of regular trading on the Exchange will result in a purchase that occurs on and receives a trade date of the next business day (two business days later for money market funds). PURCHASE RULES YOU SHOULD KNOW ^ADMIRAL SHARES. Please note that Admiral Shares are NOT available to: o SIMPLE IRAs and 403(b)(7) custodial accounts; o Other retirement plan accounts receiving special administrative services from Vanguard; or o Accounts maintained by financial intermediaries, except in limited circumstances. ^CHECK PURCHASES. All purchase checks must be written in U.S. dollars and drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or money orders. In addition, to protect the funds from check fraud, Vanguard will not accept checks made payable to third parties. ^NEW ACCOUNTS. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right to close your account or take such other steps as we deem reasonable. ^LARGE PURCHASES. Vanguard reserves the right to reject any purchase request that may disrupt a fund's operation or performance. Please call us before attempting to invest a large dollar amount. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has 55 been initiated and a confirmation number has been assigned (if applicable). ^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares at any time, or to reject specific purchase requests, including purchases by exchange from another Vanguard fund, at any time, for any reason. CONVERTING SHARES ANY CONVERSION BETWEEN CLASSES OF SHARES OF THE SAME FUND IS A NONTAXABLE EVENT. PRICING OF SHARE CLASS CONVERSIONS If you convert from one class of shares to another, the transaction will be based on the respective share prices of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's share prices. At the time of conversion, the total value of your "old" shares will equal the total value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total value of your "new" shares as compared to that of your "old" shares. IMMEDIATE CONVERSIONS INTO ADMIRAL SHARES All shares purchased before the issuance of Admiral Shares are considered Investor Shares. You may convert Investor Shares into Admiral Shares at any time if your account balance in the Fund is at least $250,000. Registered users of Vanguard.com may request a conversion to Admiral Shares online. Or you may contact Vanguard by telephone or mail to request this transaction. TENURE CONVERSIONS INTO ADMIRAL SHARES THREE-YEAR PRIVILEGE. After three years in the Fund, you may convert Investor Shares into Admiral Shares if your account balance in the Fund is at least $150,000 and you are registered with Vanguard.com. TEN-YEAR PRIVILEGE. After ten years in the Fund, you may convert Investor Shares into Admiral Shares if your account balance in the Fund is at least $50,000 and you are registered with Vanguard.com. Registered users of Vanguard.com may request a tenure conversion online. Or you may contact Vanguard by telephone or mail to request this transaction. CONVERSIONS INTO INSTITUTIONAL SHARES You may convert Investor Shares or Admiral Shares into Institutional Shares of the same Fund (if available), provided that your account balance in the Fund is at least $10 million. The Funds' Institutional Shares are offered through a sepa- 56 rate prospectus. Please contact Vanguard's Institutional Division for more information. MANDATORY CONVERSIONS INTO INVESTOR SHARES If an investor no longer meets the requirements for Admiral Shares, the Fund may convert the investor's Admiral Shares into Investor Shares. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into Investor Shares. REDEEMING SHARES HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before initiating your request. ONLINE: Request a redemption through our website at www.vanguard.com. BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For telephone numbers, see Contacting Vanguard. BY MAIL: Send your written redemption instructions to Vanguard. For addresses, see Contacting Vanguard. BY FUND EXPRESS: If you've established the Fund Express option on your account, you can redeem shares by electronically transferring your redemption proceeds to a previously designated bank account. The Fund Express option is not automatic; you must establish it by completing a special form or the appropriate section of your account registration. YOUR REDEMPTION PRICE You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request, including any special documentation required under the circumstances. As long as your request is received before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your shares are redeemed at that day's NAV. This is known as your TRADE DATE. TYPES OF REDEMPTIONS ^CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a check, normally within two business days of your trade date. ^EXCHANGE REDEMPTIONS. You may instruct Vanguard to apply the proceeds of your redemption to purchase shares of another Vanguard fund. See Exchanging Shares and Other Rules You Should Know. ^FUND EXPRESS REDEMPTIONS. Proceeds of shares redeemed by Fund Express will be credited to your bank account two business days after your trade date. 57 ^WIRE REDEMPTIONS. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must establish it by completing a special form or the appropriate section of your account registration. A $5 fee applies to wire redemptions under $5,000. Money Market Funds: For telephone requests received at Vanguard by 10:45 a.m. (2 p.m. for Vanguard (R) Prime Money Market Fund), Eastern time, the redemption proceeds will leave Vanguard by the close of business that same day. For other requests received before 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. Bond Funds: For requests received at Vanguard by 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. REDEMPTION RULES YOU SHOULD KNOW ^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. ^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or part of your redemption in-kind--that is, in the form of securities--if we believe that a cash redemption would disrupt the fund's operation or performance. Under these circumstances, Vanguard also reserves the right to delay payment of your redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you are more likely to avoid in-kind or delayed payment of your redemption. ^RECENTLY PURCHASED SHARES. Although you can redeem shares at any time, proceeds will not be made available to you until the Fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or Vanguard Fund Express(R). ^SHARE CERTIFICATES. If share certificates have been issued for your account, those shares cannot be redeemed until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard. ^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check payable to a different person or send it to a different address. However, this requires the written consent of all registered account owners, which must be provided under signature guarantees. You can obtain a signature guarantee from most commercial and savings banks, credit unions, trust companies, or member firms 58 of a U.S. stock exchange. A notary public cannot provide a signature guarantee. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the New York Stock Exchange is closed or during emergency circumstances, as determined by the U.S. Securities and Exchange Commission. EXCHANGING SHARES All open Vanguard funds accept exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. However, because excessive exchanges can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on the exchange privilege. If you are exchanging into or out of the U.S. STOCK INDEX FUNDS, INTERNATIONAL STOCK INDEX FUNDS, REIT INDEX FUND, BALANCED INDEX FUND, CALVERT SOCIAL INDEX FUND, INTERNATIONAL GROWTH FUND, INTERNATIONAL VALUE FUND, INTERNATIONAL EXPLORER(TM) FUND, or GROWTH AND INCOME FUND, these limits generally are as follows: o No online or telephone exchanges between 2:30 p.m. and 4 p.m., Eastern time, on business days. Any exchange request placed during these hours will not be accepted. On days when the New York Stock Exchange is scheduled to close early, this end-of-day restriction will be adjusted to begin 11^2 hours prior to the scheduled close. (For example, if the New York Stock Exchange is scheduled to close at 1 p.m., Eastern time, the cutoff for online and telephone exchanges will be 11:30 a.m., Eastern time.) o No more than two exchanges OUT of a fund may be requested online or by telephone within any 12-month period. For ALL OTHER VANGUARD FUNDS, the following limits generally apply: 59 o No more than two substantive "round trips" through a non-money-market fund during any 12-month period. A "round trip" is a redemption OUT of a fund (by any means) followed by a purchase back INTO the same fund (by any means). "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect management of the fund. o Round trips must be at least 30 days apart. Please note that Vanguard reserves the right to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Also, in the event of a conflict between the exchange- privilege limitations of two funds, the stricter policy will apply to the transaction. OTHER RULES YOU SHOULD KNOW VANGUARD.COM(R) ^REGISTRATION. You can use your personal computer to review your account holdings, to sell or exchange shares of most Vanguard funds, and to perform other transactions. To establish this service, you can register online. ^SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES BETWEEN 2:30 P.M. AND 4 P.M., EASTERN TIME. To discourage market-timing, the following Vanguard funds generally do not permit online exchanges between 2:30 p.m. and 4 p.m., Eastern time on business days: the U.S. Stock Index Funds, International Stock Index Funds, REIT Index Fund, Balanced Index Fund, Calvert Social Index Fund, International Growth Fund, International Value Fund, International Explorer Fund, and Growth and Income Fund. Funds may be added to or deleted from this list at any time without prior notice to shareholders. TELEPHONE TRANSACTIONS ^AUTOMATIC. In setting up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. ^TELE-ACCOUNT(R). To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account to obtain a PIN, and allow seven days before using this service. ^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone request if the caller is unable to provide the following information exactly as registered on the account: 60 - Ten-digit account number. - Complete owner name and address. - Primary Social Security or employer identification number. - Personal Identification Number (PIN), if applicable. ^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's telephone transaction service at any time, without notice. ^SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES BETWEEN 2:30 P.M. AND 4 P.M., EASTERN TIME. To discourage market-timing, the following Vanguard funds generally do not permit telephone exchanges between 2:30 p.m. and 4 p.m., Eastern time, on business days: the U.S. Stock Index Funds, International Stock Index Funds, REIT Index Fund, Balanced Index Fund, Calvert Social Index Fund, International Growth Fund, International Value Fund, International Explorer Fund, and Growth and Income Fund. Funds may be added to or deleted from this list at any time without prior notice to shareholders. WRITTEN INSTRUCTIONS ^"GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction instructions that are not in "good order." This means that your instructions must include: - - The fund name and account number. - - The amount of the transaction (in dollars, shares,or percent). - - Authorized signatures, as registered on the account. - - Signature guarantees, if required for the type of transaction.* - - Any supporting legal documentation that may be required. * For instance, signature guarantees must be provided by all registered account owners when redemption proceeds are to be sent to a different person or address. Call Vanguard for specific signature-guarantee requirements. ACCOUNTS WITH MORE THAN ONE OWNER In the case of an account with more than one owner, Vanguard will accept telephone instructions from any one owner or authorized person. RESPONSIBILITY FOR FRAUD Vanguard will not be responsible for any account losses due to fraud, so long as we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private and immediately review any account statements that we send to you. Contact Vanguard immediately about any transactions you believe to be unauthorized. 61 UNCASHED CHECKS Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard online, by telephone, or by Tele-Account, you can send us your transaction request by regular or express mail. See Contacting Vanguard for addresses. INVESTING WITH VANGUARD THROUGH OTHER FIRMS You may purchase or sell Investor Shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment adviser. HOWEVER, ACCESS TO ADMIRAL SHARES THROUGH A FINANCIAL INTERMEDIARY IS RESTRICTED. PLEASE CONSULT YOUR FINANCIAL INTERMEDIARY TO DETERMINE WHETHER ADMIRAL SHARES ARE AVAILABLE THROUGH THAT FIRM. If you invest with Vanguard through an intermediary, please read that firm's program materials carefully to learn of any rules or fees that may apply. LOW-BALANCE ACCOUNTS All Vanguard funds reserve the right to close any investment-only retirement-plan account or any nonretirement account whose balance falls below the minimum initial investment. If a fund has a redemption fee, that fee will apply to shares redeemed upon closure of the account. Vanguard deducts a $10 fee in June from each nonretirement account whose balance at that time is below $2,500 ($500 for Vanguard(R) STAR(TM) Fund). The fee can be waived if your total Vanguard account assets are $50,000 or more. FUND AND ACCOUNT UPDATES CONFIRMATION STATEMENTS We will send you a statement confirming the trade date and amount of your transaction when you buy, sell, exchange, or convert shares. PORTFOLIO SUMMARIES We will send you quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, sales, and exchanges for the current calendar year. TAX STATEMENTS We will send you annual tax statements to assist in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous year's dividend and capital gains distributions, proceeds from the sale of shares, and distributions from IRAs or other retirement plans. 62 AVERAGE-COST REVIEW STATEMENTS For most taxable accounts, average-cost review statements will accompany the quarterly portfolio summaries. These statements show the average cost of shares that you redeemed during the current calendar year, using the average-cost single-category method, which is one of the methods established by the IRS. ANNUAL AND SEMIANNUAL REPORTS Financial reports about Vanguard U.S. Stock Index Funds will be mailed twice a year, in February and August. These comprehensive reports include overviews of the financial markets and specific information concerning the Funds: - - Performance assessments with comparisons to industry benchmarks. - - Financial statements with detailed listings of the Funds' holdings. To keep each Fund's costs as low as possible (so that you and other shareholders can keep more of the Fund's investment earnings), Vanguard attempts to eliminate duplicate mailings to the same address. When we find that two or more shareholders have the same last name and address, we send just one copy of the Fund report to that address, instead of mailing separate reports to each shareholder, unless you contact our Client Services Department in writing, by telephone, or by e-mail and instruct us otherwise. Vanguard can deliver your Fund reports electronically, if you prefer. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of Fund reports by logging on and changing your mailing preference under "My Profile." You can revoke your electronic consent at any time, and we will send paper copies of Fund reports within 30 days of receiving your notice. CONTACTING VANGUARD ONLINE VANGUARD.COM - - Your best source of Vanguard news - - For fund, account, and service information - - For most account transactions - - For literature requests - - 24 hours per day, 7 days per week VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) - - For automated fund and account information - - For redemptions by check, exchange (subject to certain limitations), or wire - - Toll-free, 24 hours per day, 7 days per week 63 INVESTOR INFORMATION 1-800-662-7447 (SHIP) (Text telephone at 1-800-952-3335) - - For fund and service information - - For literature requests - - Business hours only CLIENT SERVICES 1-800-662-2739 (CREW) (Text telephone at 1-800-749-7273) - - For account information - - For most account transactions - - Business hours only ADMIRAL SERVICE CENTER 1-888-237-9949 - - For Admiral account information - - For most Admiral transactions - - Business hours only INSTITUTIONAL DIVISION 1-888-809-8102 - - For information and services for large institutional investors - - Business hours only VANGUARD ADDRESSES REGULAR MAIL (INDIVIDUALS): The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 REGULAR MAIL (INSTITUTIONS): The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 REGISTERED, EXPRESS OR OVERNIGHT MAIL: The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 FUND NUMBERS Please use the specific fund number when contacting us about: Vanguard Total Stock Market Index Fund--85 (Investor Shares) or 585 (Admiral Shares) Vanguard 500 Index Fund--40 (Investor Shares) or 540 (Admiral Shares) Vanguard Extended Market Index Fund--98 (Investor Shares) or 598 (Admiral Shares) Vanguard Mid-Cap Index Fund--859 (Investor Shares) or 5859 (Admiral Shares) Vanguard Small-Cap Index Fund--48 (Investor Shares) or 548 (Admiral Shares) 64 Vanguard Value Index Fund--06 (Investor Shares) or 506 (Admiral Shares) Vanguard Small-Cap Value Index Fund--860 (Investor Shares only) Vanguard Growth Index Fund--09 (Investor Shares) or 509 (Admiral Shares) Vanguard Small-Cap Growth Index Fund--861 (Investor Shares only) The Vanguard Group, Vanguard, Vanguard.com, Plain Talk, Admiral, Vanguard Fund Express, Fund Express, Vanguard Tele-Account, Tele-Account, STAR, Explorer, VIPER, VIPERs, Vanguard Brokerage Services and the ship logo are trademarks of The Vanguard Group, Inc., S&P 500(R), Standard & Poor's 500, S&P MidCap 400, Standard & Poor's MidCap 400, S&P SmallCap 600, and Standard & Poor's SmallCap 600, are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds. Calvert Social Index is a trademark of Calvert Group, Ltd., and has been licensed for use by The Vanguard Group, Inc. Vanguard Calvert Social Index Fund is not sponsored, endorsed, sold, or promoted by Calvert Group, Ltd., and Calvert Group, Ltd., makes no representation regarding the advisability of investing in the fund. All other marks are the exclusive property of their respective owners. 65 VIPER(R) SHARES In addition to Investor Shares and Admiral Shares, certain Vanguard funds offer a class of shares, known as Vanguard Index Participation Equity Receipts (VIPER) Shares, that are listed for trading on the American Stock Exchange (AMEX). If you own Investor Shares or Admiral Shares issued by one of these funds, you may convert those shares into VIPER* Shares of the same fund. Note: Vanguard reserves the right to modify or terminate the conversion privilege in the future. Two Vanguard funds currently offer a VIPER Share class:
- ------------------------------------------------------------------------------------------------ FUND VIPER SHARES TICKER SYMBOL - ------------------------------------------------------------------------------------------------ Vanguard Total Stock Market Index Fund Total Stock Market VIPERs(R) VTI Vanguard Extended Market Index Fund Extended Market VIPERs(R) VXF - ------------------------------------------------------------------------------------------------
Although VIPER Shares represent an investment in the same portfolio of securities as Investor Shares or Admiral Shares, they have different characteristics and may appeal to a different group of investors. It is important that you understand the differences before deciding whether to convert your shares to VIPER Shares. The following material summarizes key information about VIPER Shares. A separate prospectus with more complete information about VIPER Shares is also available. Investors should review that prospectus before deciding whether to convert. DIFFERENCES BETWEEN VIPER SHARES AND CONVENTIONAL MUTUAL FUND SHARES Investor Shares and Admiral Shares are "conventional" mutual fund shares; that is, they can be purchased from and redeemed with the issuing fund for cash at a net asset value (NAV) calculated once a day. VIPER Shares, by contrast, cannot be purchased from or redeemed with the issuing fund, except as noted below. An organized trading market is expected to exist for VIPER Shares, unlike conventional mutual fund shares, because VIPER Shares will be listed for trading on the AMEX. Investors can purchase and sell VIPER Shares on the open market through a full-service, discount, or online broker. Open-market transactions will not occur at NAV, but at market prices that change throughout the day based on changes in the prices of the fund's portfolio securities and the supply of and demand for VIPER Shares. The market price of a fund's VIPER Shares will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of extreme market volatility the difference may become significant. BUYING AND SELLING VIPER SHARES Note: VIPER Shares must be held in a brokerage account. Therefore, before acquiring VIPER Shares, whether through a conversion or an open-market purchase, you must have an account with a broker. You buy and sell VIPER Shares in the same way you buy and sell any other exchange-traded security--on the open-market, through a broker. In most cases, the broker will charge you a commission to execute the transaction. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of VIPER Shares you must purchase. Because open-market transactions occur at market prices, you may pay more than NAV when you buy VIPER Shares and receive less than NAV when you sell those shares. *Patent Pending. 66 If you own conventional shares (Investor Shares, Admiral Shares, or Institutional Shares) of a Vanguard fund that issues VIPER Shares, you can convert those shares into VIPER Shares of equivalent value--but you cannot convert back. See below under the heading "Conversions" for a discussion of the conversion process. There is one other way to buy and sell VIPER Shares. Investors can purchase and redeem VIPER Shares directly from the issuing fund at NAV if they do so (i) through certain authorized broker-dealers, (ii) in large blocks of 50,000 or 100,000 VIPER Shares (depending on the fund), known as Creation Units, and (iii) in exchange for baskets of securities rather than cash. However, because Creation Units will be worth millions of dollars, and because most investors prefer to transact in cash rather than with securities, it is expected that only a limited number of institutional investors will purchase and redeem VIPER Shares this way. RISKS VIPER Shares issued by a fund are subject to the same risks as conventional shares of the same fund. VIPER Shares also are subject to the following risks: - - The market price of a fund's VIPER Shares will vary somewhat from the NAV of those shares. Therefore, you may pay more than NAV when buying VIPER Shares and you may receive less than NAV when selling them. - - VIPER Shares cannot be redeemed with the Fund, except in Creation Unit aggregations. Therefore, if you no longer wish to own VIPER Shares, you must sell them on the open market. Although VIPER Shares will be listed for trading on the American Stock Exchange (AMEX), it is possible that an active trading market may not be maintained. - - Trading of a fund's VIPER Shares on the AMEX may be halted if AMEX officials deem such action appropriate, if the shares are delisted from the AMEX, or if the activation of marketwide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. FEES AND EXPENSES When you buy and sell VIPER Shares through a brokerage firm, you will pay whatever commissions the firm charges. You also will incur the cost of the "bid-asked spread," which is the difference between the price a dealer will pay for a security and the somewhat higher price at which the dealer will sell the same security. If you convert from conventional shares to VIPER Shares, you will not pay a brokerage commission or a bid-asked spread. However, Vanguard charges $50 for each conversion transaction, and your broker may impose its own conversion fees as well. For the fiscal year ended December 31, 2002, the total annual operating expenses (the expense ratio) for each type of VIPER Share were: - ------------------------------------------- VIPER SHARES EXPENSE RATIO - ------------------------------------------- Total Stock Market VIPERs 0.15% Extended Market VIPERs 0.20 - ------------------------------------------- ACCOUNT SERVICES Because you hold VIPER Shares through a brokerage account, Vanguard will have no record of your ownership unless you hold the shares through Vanguard Brokerage Services(R). Your broker will service your account. For example, the broker will provide account statements, confirmations of your purchases and sales of VIPER Shares, and year-end tax information. The broker also will be responsible for ensuring that you receive shareholder reports and other communications from the fund whose VIPER Shares you own. You will receive 67 certain services (e.g., dividend reinvestment and average cost information) only if your broker offers those services. CONVERSIONS Owners of conventional shares (Investor Shares, Admiral Shares, or Institutional Shares) issued by one of the Vanguard U.S. Stock Index Funds may convert those shares into VIPER Shares of equivalent value of the same fund. Note: Investors who own conventional shares of a Vanguard fund through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into VIPER Shares. Vanguard imposes a fee on conversion transactions, and your broker may impose a fee of its own to process a conversion request. Vanguard reserves the right, in the future, to limit or terminate the conversion privilege or to raise the amount of the conversion fee. To initiate a conversion of conventional shares into VIPER Shares, you must contact your broker; your broker, in turn, will contact Vanguard. For brokers that can handle fractional shares, each full and fractional conventional share will be converted into full and fractional VIPER Shares of equivalent value. For example, if you own 300.250 conventional shares, and this is equivalent in value to 90.750 VIPER Shares, you will receive 90.750 VIPER Shares. Some brokers cannot handle fractional shares. If you intend to hold your VIPER Shares through one of these brokers, the conversion would be handled in such a way that you would receive a whole number of VIPER Shares. In the example above, for instance, you would convert full and fractional conventional shares equivalent in value to exactly 90 VIPER Shares. The remaining conventional shares would be redeemed, and you would receive the cash proceeds of that redemption. You would realize a gain or loss on the redemption (in no case more than the value of a single VIPER Share) that must be reported on your tax return. Please consult your broker to determine whether it can handle fractional VIPER Shares. Here are some important points to keep in mind when converting conventional shares of a Vanguard fund into VIPER Shares: n The conversion transaction is nontaxable except to the extent that conventional shares must be sold to avoid the creation of fractional VIPER Shares. - - The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day, although processing may take up to three business days depending on when the conversion request is received. - - Until the conversion process is complete, you will remain fully invested in the fund's conventional shares, and your investment will increase or decrease in value in tandem with the net asset value of those shares. - - During the conversion process, you will be able to liquidate all or part of your investment by instructing Vanguard or your broker (depending on who maintains records of your share ownership) to redeem your conventional shares. After the conversion process is complete, you would liquidate all or part of your investment by instructing your broker to sell your VIPER Shares. - - VIPER Shares, whether acquired through a conversion or purchased on the open market, cannot be converted into conventional shares of the same fund. Similarly, VIPER Shares of one fund cannot be exchanged for VIPER Shares of another fund. (THIS PAGE INTENTIONALLY LEFT BLANK.) GLOSSARY OF INVESTMENT TERMS ACTIVE MANAGEMENT An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. GROWTH FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. INDEX An unmanaged group of securities whose overall performance is used as a standard to measure investment performance. INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. PASSIVE MANAGEMENT A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a particular stock or bond market index; also known as indexing. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The amount of money you put into an investment. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE FUND A mutual fund that typically emphasizes stocks whose prices are below-average in comparison with such measures as earnings and book value. These stocks often have above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [SHIP] [THE VANGUARD GROUP LOGO] Post Office Box 2600 Valley Forge, PA 19482-2600 FOR MORE INFORMATION If you'd like more information about Vanguard U.S. Stock Index Funds, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the Funds' annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Funds. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual reports or the SAI, or to request additional information about the Funds or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP INVESTOR INFORMATION DEPARTMENT P.O. BOX 2600 VALLEY FORGE, PA 19482-2600 TELEPHONE: 1-800-662-7447 (SHIP) TEXT TELEPHONE: 1-800-952-3335 WORLD WIDE WEB: WWW.VANGUARD.COM If you are a current Fund shareholder and would like information about your account, account transactions, and/or account statements, please call: CLIENT SERVICES DEPARTMENT TELEPHONE: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273 INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Funds are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file number: 811-2652 (C) 2003 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. P040 042003 VANGUARD(R) U.S. STOCK INDEX FUNDS Investor Shares for Participants . April 28, 2003 This prospectus ontains financial data for the Funds through the fiscal year ended December 31, 2002. VANGUARD TOTAL STOCK MARKET INDEX FUND VANGUARD 500 INDEX FUND VANGUARD EXTENDED MARKET INDEX FUND VANGUARD MID-CAP INDEX FUND VANGUARD SMALL-CAP INDEX FUND VANGUARD VALUE INDEX FUND VANGUARD SMALL-CAP VALUE INDEX FUND VANGUARD GROWTH INDEX FUND VANGUARD SMALL-CAP GROWTH INDEX FUND NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. VANGUARD U.S. STOCK INDEX FUNDS Investor Shares Participant Prospectus April 28, 2003 - -------------------------------------------------------------------------------- CONTENTS 1 AN INTRODUCTION TO INDEX FUNDS 26 MORE ON THE FUNDS 2 FUND PROFILES 31 THE FUNDS AND VANGUARD 2 Vanguard Total Stock Market Index Fund 32 INVESTMENT ADVISER 4 Vanguard 500 Index Fund 32 DIVIDENDS, CAPITAL GAINS, AND TAXES 7 Vanguard Extended Market Index Fund 33 SHARE PRICE 9 Vanguard Mid-Cap Index Fund 34 FINANCIAL HIGHLIGHTS 12 Vanguard Small-Cap Index Fund 40 INVESTING WITH VANGUARD 14 Vanguard Value Index Fund 41 ACCESSING FUND INFORMATION BY COMPUTER 17 Vanguard Small-Cap Value Index Fund GLOSSARY (inside back cover) 20 Vanguard Growth Index Fund 23 Vanguard Small-Cap Growth Index Fund - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with each Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk(R) explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference. This prospectus offers the Fund's Investor Shares and is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 1-800-662-7447. - ------------------------------------------------------------------------------- 1 AN INTRODUCTION TO INDEX FUNDS WHAT IS INDEXING? Indexing is an investment strategy for tracking, as closely as possible, the performance of a specified market benchmark, or "index." An index is an unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. There are many types of indexes. Some represent entire markets--such as the U.S. stock market or the U.S. bond market. Other indexes cover market segments--such as small-capitalization stocks or short-term bonds. An index fund holds all, or a representative sample, of the securities that make up its target index. Unlike actively managed funds, index (or "passively managed") funds do not buy and sell securities based on research and analysis. Rather, index funds simply attempt to mirror what the target index does, for better or worse. An index fund does not always perform exactly like its target index. Like all mutual funds, index funds have operating expenses and transaction costs. Market indexes do not, and therefore will usually have a slight performance advantage over funds that track them. INDEX FUNDS IN THIS PROSPECTUS Vanguard offers a variety of stock (both U.S. and international), bond, and balanced index funds. This prospectus provides information about the nine Vanguard U.S. Stock Index Funds. Eight of these Funds seek to track a particular segment of the U.S. stock market; the ninth Fund seeks to track the entire U.S. stock market. - -------------------------------------------------------------------------- FUND SEEKS TO TRACK - -------------------------------------------------------------------------- Vanguard Total Stock Market Index Fund The overall stock market Vanguard 500 Index Fund Large-cap stocks Vanguard Extended Market Index Fund Mid- and small-cap stocks Vanguard Mid-Cap Index Fund Mid-cap stocks Vanguard Small-Cap Index Fund Small-cap stocks Vanguard Value Index Fund Large-cap value stocks Vanguard Small-Cap Value Index Fund Small-cap value stocks Vanguard Growth Index Fund Large-cap growth stocks Vangaurd Small-Cap Growth Index Fund Small-cap growth stocks - -------------------------------------------------------------------------- On the following pages, you'll find profiles that summarize the key features of each Fund. Following the profiles, there is important additional information about the Funds. 2 FUND PROFILE-- VANGUARD(R) TOTAL STOCK MARKET INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of the overall stock market. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 5000 Total Market Index, which consists of all the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market. The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Index. For a description of the Fund's sampling technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 10.62 1994 -0.17 1995 35.79 1996 20.96 1997 30.99 1998 23.26 1999 23.81 2000 -10.57 2001 -10.97 2002 -20.96 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 21.51% (quarter ended December 31, 1998), and the lowest return for a quarter was -16.84% (quarter ended September 30, 2002). - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- Vanguard Total Stock Market Index Fund Investor Shares -20.96% -0.80% 8.60% Wilshire 5000 Index -20.86 -0.87 8.74 - ------------------------------------------------------------------------------- 3 FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.18% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $20 $64 $113 $255 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Dividends are distributed quarterly in March, TotSt June, September, and December; capital gains, if any, are distributed annually in December. VANGUARD FUND NUMBER 85 INVESTMENT ADVISER The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER since inception 922908306 INCEPTION DATE TICKER SYMBOL April 27, 1992 VTSMX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $24.1 billion - -------------------------------------------------------------------------------- 4 FUND PROFILE--VANGUARD(R) 500 INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's 500 Index, which is dominated by the stocks of large U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from large-cap stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 9.89 1994 1.18 1995 37.45 1996 22.88 1997 33.19 1998 28.62 1999 21.07 2000 -9.06 2001 -12.02 2002 -22.15 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 21.39% (quarter ended December 31, 1998), and the lowest return for a quarter was -17.22% (quarter ended September 30, 2002). 5 - --------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - --------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS - --------------------------------------------------------------------- Vanguard 500 Index Fund Investor Shares -22.15% -0.61% 9.27% S&P 500 Index -22.10 -0.59 9.34 - --------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.16% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $18 $58 $101 $230 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 6 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Dividends are distributed quarterly in March, 500 June, September, and December; capital gains, if any, are distributed annually in December. VANGUARD FUND NUMBER 40 INVESTMENT ADVISER The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER since inception 922908108 INCEPTION DATE TICKER SYMBOL August 31, 1976 VFINX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $68.1 billion - -------------------------------------------------------------------------------- 7 FUND PROFILE-- VANGUARD(R) EXTENDED MARKET INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the investment return of small- and mid-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 4500 Completion Index, a broadly diversified index of stocks of small and medium-size U.S. companies. The Wilshire 4500 Index contains all of the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market, except those stocks included in the Standard & Poor's 500 Index. The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Wilshire 4500 Index. For a description of the Fund's sampling technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small- and mid-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 14.49 1994 -1.76 1995 33.80 1996 17.65 1997 26.73 1998 8.32 1999 36.22 2000 -15.55 2001 -9.13 2002 -18.06 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 29.54% (quarter ended December 31, 1999), and the lowest return for a quarter was -21.05% (quarter ended September 30, 2001). 8 - ------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - ------------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS - ------------------------------------------------------------------------------- Vanguard Extended Market Index Fund Investor Shares -18.06% -1.49% 7.61% Wilshire 4500 Index -17.80 -1.57 7.32 - ------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.23% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.26% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $27 $84 $146 $331 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December Extnd INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 98 since inception CUSIP NUMBER INCEPTION DATE 922908207 December 21, 1987 TICKER SYMBOL NET ASSETS (ALL SHARE CLASSES) AS OF VEXMX DECEMBER 31, 2002 $3.9 billion - -------------------------------------------------------------------------------- 9 FUND PROFILE--VANGUARD(R) MID-CAP INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of mid-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management" --or indexing--investment approach designed to track the performance of the Standard & Poor's MidCap 400 Index, which is made up of a group of medium-size U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from mid-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 15.32 2000 18.10 2001 -0.50 2002 -14.61 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 17.96% (quarter ended December 31, 2001), and the lowest return for a quarter was -16.56% (quarter ended September 30, 2002). 10 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE INCEPTION* 1 YEAR - -------------------------------------------------------------------------------- Vanguard Mid-Cap Index Fund Investor Shares -14.61% 5.07% S&P MidCap 400 Index -14.51 4.69 - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.23% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.26% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $27 $84 $146 $331 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 11 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December MidCp INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 859 since inception CUSIP NUMBER INCEPTION DATE 922908843 May 21, 1998 TICKER SYMBOL NET ASSETS (ALL SHARE CLASSES) AS OF VIMSX DECEMBER 31, 2002 $3.3 billion - -------------------------------------------------------------------------------- 12 FUND PROFILE--VANGUARD(R) SMALL-CAP INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of small-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Russell 2000 Index, which is made up of the stocks of smaller U.S. companies. The Russell 2000 Index is made up of the 2,000 smallest companies from a list of the 3,000 largest U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 18.70 1994 -0.51 1995 28.74 1996 18.12 1997 24.59 1998 -2.61 1999 23.13 2000 -2.67 2001 3.10 2002 -20.02 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 20.88% (quarter ended December 31, 2001), and the lowest return for a quarter was -21.37% (quarter ended September 30, 2002). 13 - --------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - --------------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS - --------------------------------------------------------------------------- Vanguard Small-Cap Index Fund Investor Shares -20.02% -0.76% 7.97% Russell 2000 Index -20.48 -1.36 7.16 - --------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.24% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $28 $87 $152 $343 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December SmCap INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., since 48 1989 CUSIP NUMBER INCEPTION DATE 922908702 October 3, 1960 TICKER SYMBOL NET ASSETS (ALL SHARE CLASSES) AS OF NAESX DECEMBER 31, 2002 $4.2 billion - -------------------------------------------------------------------------------- 14 FUND PROFILE--VANGUARD(R) VALUE INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization value stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment strategy designed to track the performance of the Standard & Poor's 500/Barra Value Index, which includes those stocks of the S&P 500 Index with lower-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from large-cap value stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 18.35 1994 -0.73 1995 36.94 1996 21.86 1997 29.77 1998 14.64 1999 12.57 2000 6.08 2001 -11.88 2002 -20.91 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 17.50% (quarter ended December 31, 1998), and the lowest return for a quarter was -20.45% (quarter ended September 30, 2002). 15 - ----------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - ----------------------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS - ----------------------------------------------------------------------- Vanguard Value Index Fund Investor Shares -20.91% -0.93% 9.27% S&P 500/Barra Value Index -20.85 -0.85 9.39 - ----------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.20% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.23% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $24 $74 $130 $293 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 16 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Dividends are distributed quarterly in March, Value June, September, and December; capital gains, if any, are distributed annually in December. VANGUARD FUND NUMBER 06 INVESTMENT ADVISER The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER since inception 922908405 INCEPTION DATE TICKER SYMBOL November 2, 1992 VIVAX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $3.2 billion - -------------------------------------------------------------------------------- 17 FUND PROFILE-- VANGUARD(R) SMALL-CAP VALUE INDEX FUND INVESTMENT OBJECTIVES The Fund seeks to track the performance of a benchmark index that measures the invest ment return of small-capitalization value stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's SmallCap 600/Barra Value Index, which includes those stocks of the S&P SmallCap 600 Index with lower-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small-cap value stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 3.35 2000 21.88 2001 13.70 2002 -14.20 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 21.37% (quarter ended December 31, 2001), and the lowest return for a quarter was -22.50% (quarter ended September 30, 2002). 18 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE INCEPTION* 1 YEAR - -------------------------------------------------------------------------------- Vanguard Small-Cap Value Index Fund Investor Shares -14.20% 1.59% S&P SmallCap 600/Barra Value Index -14.47 0.95 - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.24% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $28 $87 $152 $343 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 19 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December SmVal INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 860 since inception CUSIP NUMBER INCEPTION DATE 922908793 May 21, 1998 TICKER SYMBOL NET ASSETS (ALL SHARE CLASSES) AS OF VISVX DECEMBER 31, 2002 $1.5 billion - -------------------------------------------------------------------------------- 20 FUND PROFILE--VANGUARD(R) GROWTH INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization growth stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's/500 Barra Growth Index, which includes those stocks of the S&P 500 Index with higher-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. In addition, the Fund's performance could be hurt disproportionately by a decline in the prices of just a few stocks. This is because, compared with other mutual funds, the Fund invests a greater percentage of assets in the stocks of fewer companies. The Fund's performance could also be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from large-cap growth stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 1.53 1994 2.89 1995 38.06 1996 23.74 1997 36.34 1998 42.21 1999 28.76 2000 -22.21 2001 -12.93 2002 -23.68 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 24.64% (quarter ended December 31, 1998), and the lowest return for a quarter was -17.50% (quarter ended March 31, 2001). 21 - ------------------------------------------------------------------------ AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - ------------------------------------------------------------------------ 1 YEAR 5 YEARS 10 YEARS - ------------------------------------------------------------------------ Vanguard Growth Index Fund Investor Shares -23.68% -1.09% 8.70% S&P 500/Barra Growth Index -23.59 -1.08 8.79 - ------------------------------------------------------------------------ FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.20% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.23% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $24 $74 $130 $293 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 22 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Dividends are distributed quarterly in March, Growth June, September, and December; capital gains, if any, are distributed annually in December. VANGUARD FUND NUMBER 09 INVESTMENT ADVISER The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER since inception 922908504 INCEPTION DATE TICKER SYMBOL November 2, 1992 VIGRX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $7.5 billion - -------------------------------------------------------------------------------- 23 FUND PROFILE-- VANGUARD(R) SMALL-CAP GROWTH INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of small-capitalization growth stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's SmallCap 600/Barra Growth Index, which includes those stocks of the S&P SmallCap 600 Index with higher-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small-cap growth stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Investor Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 19.80 2000 1.59 2001 -0.78 2002 -15.41 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 20.69% (quarter ended Decmeber 31, 1999), and the lowest return for a quarter was -17.50% (quarter ended September 30, 2001). 24 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE INCEPTION* 1 YEAR - -------------------------------------------------------------------------------- Vanguard Small-Cap Growth Index Fund Investor Shares -15.41% -0.60% S&P SmallCap 600/Barra Growth Index -15.36 -0.97 - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.24% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Investor Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $28 $87 $152 $343 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 25 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December SmGth INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 861 since inception CUSIP NUMBER INCEPTION DATE 922908827 May 21, 1998 TICKER SYMBOL NET ASSETS (ALL SHARE CLASSES) AS OF VISGX DECEMBER 31, 2002 $492 million - -------------------------------------------------------------------------------- 26 MORE ON THE FUNDS This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that each Fund uses in pursuit of its objective. The Funds' board of trustees, which oversees the Funds' management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. ADVANTAGES OF INDEX FUNDS Index funds typically have the following characteristics: o Variety of investments. Vanguard index funds generally invest in securities of a wide variety of companies and industries. o Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. o Low cost. Index funds are inexpensive to run, compared with actively managed funds. They have few or no research costs, and typically keep trading activity--and thus brokerage commissions and other transaction costs--to a minimum. Compared with actively managed funds, most index funds have lower turnover rates and lower capital gains distributions. However, from time to time, some index funds may pay out higher-than-expected taxable distributions. That's because index funds must adjust their holdings to reflect changes in their target indexes. In some cases, such changes may force an index fund to sell securities that have appreciated in value, and, thus, realize a capital gain that must be distributed to shareholders. A security may move out of an index for a number of reasons, including a merger or acquisition, or a substantial change in the market capitalization of the issuer. Generally, these changes tend to occur more frequently with small and medium-size companies than they do with large, well-established companies. INDEXING METHODS In seeking to track a particular index, a fund generally uses one of two methods to select the securities in which it invests. REPLICATION METHOD. Many stock funds use the replication method of indexing. This means that a fund holds each security found in its target index in about the same proportion as represented in the index itself. For example, if 5% of the S&P 500 Index were made up of the stock of a specific company, a fund tracking that index would invest about 5% of its assets in that company. The 500, Mid-Cap, Small-Cap, Value, Small-Cap Value, Growth, and Small-Cap Growth Index Funds employ this method of indexing. SAMPLING METHOD. Because it would be very expensive and inefficient to buy and sell all securities held in certain indexes (the Wilshire 5000 Index, for example, included more than 5,600 separate stocks as of December 31, 2002), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund's adviser selects from the target index a representative sample of securities that will resemble the target index in terms of key risk factors and other characteristics. For stock funds, these 27 include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. The Total Stock Market, and Extended Market Index Funds employ this method of indexing. The following table shows the number of stocks held by each Fund, and the number of stocks in its target index, as of December 31, 2002. -------------------------------------------------------- NUMBER OF NUMBER OF STOCKS VANGUARD INDEX FUND STOCKS HELD IN TARGET INDEX -------------------------------------------------------- Total Stock Market 3,739 5,668 500 505 500 Extended Market 3,242 5,172 Mid-Cap 402 400 Small-Cap 1,977 1,964 Value 353 352 Small-Cap Value 390 390 Growth 149 148 Small-Cap Growth 211 210 -------------------------------------------------------- - -------------------------------------------------------------------------------- PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS Growth investing and value investing are two styles employed by stock-fund managers. Growth funds generally focus on stocks of companies believed to have above-average potential for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. Value funds typically emphasize stocks whose prices are below-average in comparison with those measures; these stocks often have above-average dividend yields. Growth and value stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, growth funds appeal to investors who will accept more volatility in hopes of a greater increase in share price. - -------------------------------------------------------------------------------- MARKET EXPOSURE The Funds invest mainly in common stocks. As a result, they are subject to certain risks. [FLAG] EACH FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. 28 MARKET CAPITALIZATION. Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, or large-cap. It's important to understand that, for both companies and stock funds, market capitalization ranges change over time. Also, interpretations of size vary, and there is no "official" definition of small-, mid-, and large-cap even among Vanguard fund advisers. The median market capitalization of each Fund as of December 31, 2002 is listed below: ---------------------------------------------- MEDIAN MARKET VANGUARD INDEX FUND CAPITALIZATION ---------------------------------------------- Total Stock Market $26.2 billion 500 47.0 Extended Market 1.5 Mid-Cap 2.2 Small-Cap 0.6 Value 22.8 Small-Cap Value 0.6 Growth 71.4 Small-Cap Growth 1.0 ---------------------------------------------- To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. - ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2002) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.2 10.9 11.2 11.4 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2002. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.9%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or these Funds in particular. Keep in mind that the S&P 500 Index tracks mainly large-cap stocks. Historically, mid- and small-cap stocks (such as those held by the Total Stock Market, Extended Market, Mid-Cap, Small-Cap, Small-Cap Value, and Small-Cap Growth Index Funds) have been more volatile than--and at times have performed quite differently from--the large-cap stocks of the S&P 500 Index. Similarly, indexes that are subsets of the S&P 500 Index--such as the S&P 500/Barra Value Index and the S&P 500/Barra Growth Index (the target indexes of the Value and Growth Index Funds)--will not perform in the same way as the broader S&P 500 Index. Historically, the S&P 500/Barra Value Index has been less volatile than the S&P 500 Index; the S&P 500/Barra Growth Index, on the other hand, has displayed somewhat greater 29 short-term volatility than the S&P 500 Index. However, both value and growth stocks have the potential, at times, to be more volatile than the broader market. [FLAG] EACH FUND (OTHER THAN TOTAL STOCK MARKET INDEX FUND) IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE TYPES OF STOCKS IN WHICH THE FUND INVESTS WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. SPECIFIC TYPES OF STOCKS (FOR INSTANCE, SMALL- CAP OR VALUE) TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. RISK OF NONDIVERSIFICATION The target indexes tracked by Vanguard's U.S. Stock Index Funds hold diverse investments. Similarly, the Funds that track these indexes hold stocks of many companies across many different industry sectors. It is possible that a fund's target index could become less diversified if the index's largest companies significantly increase in value relative to the index's other components. In an extreme situation, a fund tracking such an index might no longer meet the legal definition of "diversified." (Such has been the case, from time to time, with the Growth Index Fund.) For this reason, Vanguard's U.S. Stock Index Funds are classified as "nondiversified." However, these funds, other than the Growth Index Fund, from inception to the date of this prospectus, in actuality have been diversified, and Vanguard expects them to continue to be diversified. OTHER INVESTMENT POLICIES AND RISKS Each Fund reserves the right to substitute a different index for the index it currently tracks. This could happen if the current index were discontinued, if the Fund's agreement with the sponsor of its target index were terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same general market segment (large-, mid-, or small-cap; growth; or value) as the current index. Each Fund may invest in foreign securities to the extent necessary to carry out its investment strategy of holding all, or a representative sample, of the stocks that make up the index it tracks. It is not expected that any Fund will invest more than 5% of its assets in foreign securities. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. [FLAG] EACH FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF TRADITIONAL INVESTMENTS. To track their target indexes as closely as possible, the Funds attempt to remain fully invested in stocks. To help stay fully invested, and to reduce transaction costs, the Funds may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, which are types of derivatives. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Similar risks exist for warrants (securities that permit their owners to purchase a specific number of stock shares at a predetermined price), convertible securities (securities that may be exchanged for 30 another asset), and swap agreements (contracts between parties in which each agrees to make payments to the other based on the return of a specified index or asset). The Funds will not use derivatives for speculative purposes or as leveraged investments that magnify gains or losses. In addition, each Fund's obligation under futures contracts will not exceed 20% of its total assets. The reasons for which a Fund may invest in futures include: o To keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in stocks. o To reduce the Fund's transaction costs or add value when these instruments are favorably priced. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DERIVATIVES A derivative is a financial contract whose value is based on (or "derived" from) a traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. Derivatives can carry considerable risks, particularly if used for speculation or as leveraged investments. - -------------------------------------------------------------------------------- COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading or to compensate the funds for the costs associated with it. Specifically: o Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. o Each Vanguard fund (other than the money market funds) limits the number of times that an investor can exchange into and out of the fund. o Certain Vanguard funds charge purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. 31 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or the capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- TURNOVER RATE Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, an index fund sells securities only to respond to redemption requests or to adjust the number of shares held to reflect a change in the fund's target index. Turnover rates for large-cap stock index funds tend to be very low because large-cap indexes--such as the S&P 500 Index--typically do not change much from year to year. Turnover rates for mid-cap and small-cap stock index funds tend to be higher (although still relatively low, compared with actively managed stock funds) because the indexes they track are the most likely to change as a result of companies merging, growing, or failing. The FINANCIAL HIGHLIGHTS section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of December 31, 2002, the average turnover rate for passively managed domestic equity index funds investing in common stocks was approximately 94%; for all domestic stock funds, the average turnover rate was approximately 111%, according to Morningstar, Inc. - -------------------------------------------------------------------------------- THE FUNDS AND VANGUARD Each Fund is a member of The Vanguard Group, a family of 35 investment companies with more than 100 funds holding assets in excess of $550 billion. All of the funds that are members of The Vanguard Group share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. 32 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. - -------------------------------------------------------------------------------- INVESTMENT ADVISER The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in 1975, serves as the adviser to the Funds through its Quantitative Equity Group. As of December 31, 2002, Vanguard served as adviser for about $406 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended December 31, 2002, the advisory expenses for each Fund (with the exception of Small-Cap Growth Index Fund) represented an effective annual rate of less than 0.01% of each Fund's average net assets. For the Small-Cap Growth Index Fund, the advisory expenses represented an effective annual rate of approximately 0.02% of its average net assets. The adviser is authorized to choose broker-dealers to handle the purchase and sale of the Funds' securities and to seek to obtain the best available price and most favorable execution for all transactions. Also, the board of trustees may direct the adviser to use a particular broker for certain transactions in exchange for commission rebates paid to the Funds as well as brokerage or research services provided to the adviser. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUNDS' ADVISER The manager primarily responsible for overseeing the Funds' investments is: GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Quantitative Equity Group. He has worked in investment management since 1985 and has had primary responsibility for Vanguard's stock indexing and active quantitative investments and strategy since joining the company in 1987. Education: A.B., Dartmouth College; M.B.A., University of Chicago. - -------------------------------------------------------------------------------- DIVIDENDS, CAPITAL GAINS, AND TAXES Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any capital gains realized from the sale of its holdings. Income dividends for the Total Stock Market, 500, Value, and Growth Index Funds generally are distributed in March, June, September, and December; income dividends for the Extended Market, Mid-Cap, Small-Cap, Small-Cap Value, and Small-Cap Growth Index Funds generally are distributed in December. Capital gains distributions generally occur in December. In addition, the Funds may occasionally be required to make supplemental distributions at some other time during the year. 33 Your distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax adviser about the tax consequences of plan withdrawals. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- SHARE PRICE Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. When reliable market quotations are not readily available, securities are priced at their fair value, calculated according to procedures adopted by the board of trustees. A fund also may use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, but may occur in other cases as well. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 34 FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand the Investor Shares' financial performance for the periods shown, and certain information reflects financial results for a single Investor Share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Investor Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose report--along with each Fund's financial statements--is included in the Funds' most recent annual reports to shareholders. You may have these annual reports sent to you without charge by contacting Vanguard. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE This explanation uses the Total Stock Market Index Fund's Investor Shares as an example. The Investor Shares began fiscal year 2002 with a net asset value (price) of $25.74 per share. During the year, each Investor Share earned $0.295 from investment income (interest and dividends). There was a decline of $5.672 per share in the value of investments held or sold by the Fund, resulting in a net decline of $5.377 per share from investment operations. Shareholders received $0.293 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $20.07, reflecting losses of $5.377 per share and distributions of $0.293 per share. This was a decrease of $5.67 per share (from $25.74 at the beginning of the year to $20.07 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was -20.96% for the year. As of December 31, 2002, the Investor Shares had $14.2 billion in net assets. For the year, the expense ratio was 0.20% ($2.00 per $1,000 of net assets), and the net investment income amounted to 1.32% of average net assets. The Fund sold and replaced securities valued at 4% of its net assets. - -------------------------------------------------------------------------------- 35
TOTAL STOCK MARKET INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $25.74 $29.26 $33.22 $27.42 $22.64 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .295 .310 .331 .317 .336 Net Realized and Unrealized Gain (Loss)on Investments (5.672) (3.533) (3.815) 6.133 4.898 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (5.377) (3.223) (3.484) 6.450 5.234 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.293) (.297) (.336) (.330) (.329) Distributions from Realized Capital Gains -- -- (.140) (.320) (.125) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.293) (.297) (.476) (.650) (.454) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $20.07 $25.74 $29.26 $33.22 $27.42 ===================================================================================================================== TOTAL RETURN -20.96% -10.97% -10.57% 23.81% 23.26% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $14,254 $15,781 $16,856 $18,133 $9,308 Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% Ratio of Net Investment Income to Average Net Assets 1.32% 1.11% 1.04% 1.15% 1.44% Turnover Rate 4%* 7%* 7% 3% 3% =====================================================================================================================
* Turnover rates excluding in-kind redemptions were 2% and 3%, respectively.
500 INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $105.89 $121.86 $135.33 $113.95 $ 90.07 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income 1.32 1.260 1.29 1.370 1.33 Net Realized and Unrealized Gain (Loss)on Investments (24.70) (15.955) (13.46) 22.415 24.30 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (23.38) (14.695) (12.17) 23.785 25.63 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (1.36) (1.275) (1.30) (1.410) (1.33) Distributions from Realized Capital Gains -- -- -- (.995) (.42) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (1.36) (1.275) (1.30) (2.405) (1.75) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $81.15 $105.89 $121.86 $135.33 $113.95 ===================================================================================================================== TOTAL RETURN -22.15% -12.02% -9.06% 21.07% 28.62% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $56,224 $73,151 $88,240 $104,652 $74,229 Ratio of Total Expenses to Average Net Assets 0.18% 0.18% 0.18% 0.18% 0.18% Ratio of Net Investment Income to Average Net Assets 1.43% 1.14% 0.98% 1.13% 1.35% Turnover Rate* 7% 4% 9% 6% 6% =====================================================================================================================
* Turnover rates excluding in-kind redemptions were 6%, 3%, 7%, 3%, and 3%, respectively. 36
EXTENDED MARKET INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $23.09 $26.61 $37.07 $30.63 $30.76 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .19 .203 .274 .297 .388 Net Realized and Unrealized Gain(Loss)on Investments (4.36) (2.703) (6.041) 10.101 2.025 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (4.17) (2.500) (5.767) 10.398 2.413 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.18) (.210) (.263) (.318) (.373) Distributions from Realized Capital Gains -- (.810) (4.430) (3.640) (2.170) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.18) (1.020) (4.693) (3.958) (2.543) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $18.74 $23.09 $26.61 $37.07 $30.63 ===================================================================================================================== TOTAL RETURN* -18.06% -9.13% -15.55% 36.22% 8.32% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,629 $3,115 $3,881 $4,221 $2,939 Ratio of Total Expenses to Average Net Assets 0.26% 0.25% 0.25% 0.25% 0.23% Ratio of Net Investment Income to Average Net Assets 0.88% 0.88% 0.81% 1.04% 1.21% Turnover Rate 17% 20% 33% 26% 27% =====================================================================================================================
* Total returns do not reflect the 0.25% purchase fee imposed through March 31, 2000.
MID-CAP INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998* - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $11.81 $12.21 $11.30 $10.79 $10.00 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .088 .081 .071 .073 .053 Net Realized and Unrealized Gain (Loss)on Investments (1.798) (.166) 1.897 1.448 .840 --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.710) (.085) 1.968 1.521 .893 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.093) (.070) (.078) (.076) (.053) Distributions from Realized Capital Gains (.127) (.245) (.980) (.935) (.050) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.220) (.315) (1.058) (1.011) (.103) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 9.88 $11.81 $12.21 $11.30 $10.79 ===================================================================================================================== TOTAL RETURN** -14.61% -0.50% 18.10% 15.32% 8.55% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,267 $2,049 $1,614 $605 $206 Ratio of Total Expenses to Average Net Assets 0.26% 0.25% 0.25% 0.25% 0.25%+ Ratio of Net Investment Income to Average Net Assets 0.85% 0.83% 0.90% 0.99% 1.19%+ Turnover Rate 20%++ 24% 51% 38% 44% =====================================================================================================================
* Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were held in money market instruments. Performance measurement began May 21, 1998. ** Total returns do not reflect the 0.25% purchase fee imposed from inception through February 28, 1999. + Annualized. ++ Turnover rate excluding in-kind redemptions was 18%. 37
SMALL-CAP INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $19.82 $19.44 $23.60 $21.20 $23.75 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .192 .217 .270 .256 .311 Net Realized and Unrealized Gain (Loss) on Investments(4.160) .388 (1.145) 4.491 (1.007) - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.968) .605 (.875) 4.747 (.696) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.192) (.225) (.260) (.267) (.304) Distributions from Realized Capital Gains -- -- (3.025) (2.080) (1.550) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.192) (.225) (3.285) (2.347) (1.854) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $15.66 $19.82 $19.44 $23.60 $21.20 ===================================================================================================================== TOTAL RETURN* -20.02% 3.10% -2.67% 23.13% -2.61% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Yeriod (Millions) $2,943 $3,545 $3,577 $3,553 $2,768 Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.27% 0.25% 0.24% Ratio of Net Investment Income to Average Net Assets 1.11% 1.16% 1.17% 1.25% 1.39% Turnover Rate 32% 39% 49% 42% 35% =====================================================================================================================
* Total returns do not reflect the 0.5% purchase fee imposed through March 31, 2000.
VALUE INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $18.90 $22.87 $22.89 $22.51 $20.85 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .303 .309 .355 .355 .366 Net Realized and Unrealized Gain (Loss)on Investments (4.238) (2.986) .963 2.342 2.647 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.935) (2.677) 1.318 2.697 3.013 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.315) (.316) (.358) (.362) (.363) Distributions from Realized Capital Gains -- (.977) (.980) (1.955) (.990) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.315) (1.293) (1.338) (2.317) (1.353) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $14.65 $18.90 $22.87 $22.89 $22.51 ===================================================================================================================== TOTAL RETURN -20.91% -11.88% 6.08% 12.57% 14.64% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,197 $3,018 $3,450 $3,378 $2,421 Ratio of Total Expenses to Average Net Assets 0.23% 0.22% 0.22% 0.22% 0.22% Ratio of Net Investment Income to Average Net Assets 1.80% 1.51% 1.60% 1.59% 1.72% Turnover Rate 26% 38% 37% 41% 33% =====================================================================================================================
38
SMALL-CAP VALUE INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998* - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.29 $ 9.65 $8.45 $8.74 $10.00 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .090 .074 .084 .065 .045 Net Realized and Unrealized Gain (Loss)on Investments (1.494) 1.176 1.698 .210 (1.250) - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.404) 1.250 1.782 .275 (1.205) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.090) (.065) (.082) (.070) (.055) Distributions from Realized Capital Gains (.276) (.545) (.500) (.495) -- - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.366) (.610) (.582) (.565) (.055) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $8.52 $10.29 $9.65 $8.45 $ 8.74 ===================================================================================================================== TOTAL RETURN** -14.20% 13.70% 21.88% 3.35% -12.47% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $1,176 $802 $317 $204 $113 Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.27% 0.25% 0.25%+ Ratio of Net Investment Income to Average Net Assets 0.93% 0.97% 1.16% 0.96% 1.13%+ Turnover Rate 57% 59% 82% 80% 53% =====================================================================================================================
* Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were held in money market instruments. Performance measurement began May 21, 1998. ** Total returns do not reflect the purchase fee (0.5% from March 1, 1999, through March 31, 2002; 1.0% from inception through February 28, 1999). + Annualized.
GROWTH INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $26.42 $30.57 $39.43 $31.67 $22.53 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .222 .181 .126 .207 .230 Net Realized and Unrealized Gain (Loss)on Investments (6.465) (4.144) (8.861) 8.821 9.244 - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (6.243) (3.963) (8.735) 9.028 9.474 - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.227) (.187) (.125) (.228) (.219) Distributions from Realized Capital Gains -- -- -- (1.040) (.115) - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.227) (.187) (.125) (1.268) (.334) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $19.95 $26.42 $30.57 $39.43 $31.67 ===================================================================================================================== TOTAL RETURN -23.68% -12.93% -22.21% 28.76% 42.21% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $6,094 $8,445 $11,162 $15,232 $6,644 Ratio of Total Expenses to Average Net Assets 0.23% 0.22% 0.22% 0.22% 0.22% Ratio of Net Investment Income to Average Net Assets 0.97% 0.67% 0.33% 0.64% 0.92% Turnover Rate 23% 31% 33% 33% 29% =====================================================================================================================
39
SMALL-CAP GROWTH INDEX FUND INVESTOR SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998* - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.87 $10.97 $11.38 $ 9.53 $10.00 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .027 .009 .009 .025 .03 Net Realized and Unrealized Gain (Loss)on Investments (1.702) (.094) .154 1.860 (.47) - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.675) (.085) .163 1.885 (.44) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.025) (.015) (.003) (.035) (.03) Distributions from Realized Capital Gains -- -- (.570) -- -- - --------------------------------------------------------------------------------------------------------------------- Total Distributions (.025) (.015) (.573) (.035) (.03) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $9.17 $10.87 $10.97 $11.38 $ 9.53 ===================================================================================================================== TOTAL RETURN** -15.41% -0.78% 1.59% 19.80% -4.77% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $388 $357 $356 $167 $90 Ratio of Total Expenses to Average Net Assets 0.27% 0.27% 0.27% 0.25% 0.25%+ Ratio of Net Investment Income to Average Net Assets 0.24% 0.11% 0.03% 0.33% 0.63%+ Turnover Rate 61% 74% 136% 82% 77% =====================================================================================================================
* Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were held in money market instruments. Performance measurement began May 21, 1998. ** Total returns do not reflect the purchase fee (0.5% from March 1, 1999, through March 31, 2002; 1.0% from inception through February 28, 1999). + Annualized. 40 INVESTING WITH VANGUARD One or more of the Funds are an investment option in your retirement or savings plan. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect a Fund as an investment option. o If you have any questions about a Fund or Vanguard, including those about a Fund's investment objective, strategies, or risks, contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188. o If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan. INVESTMENT OPTIONS AND ALLOCATIONS Your plan's specific provisions may allow you to change your investment selections, the amount of your contributions, or how your contributions are allocated among the investment choices available to you. Contact your plan administrator or employee benefits office for more details. TRANSACTIONS Contributions, exchanges, or redemptions of a Fund's shares are processed as soon as they have been received by Vanguard in good order. Good order means that your request includes complete information on your contribution, exchange, or redemption, and that Vanguard has received the appropriate assets. In all cases, your transaction will be based on the Fund's next-determined net asset value (NAV) after Vanguard receives your request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern time, you will receive that day's NAV. This is known as your TRADE DATE. EXCHANGES The exchange privilege (your ability to redeem shares from one fund to purchase shares of another fund) may be available to you through your plan. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice. Because excessive exchanges can potentially disrupt the management of the Vanguard/(R)/ funds and increase their transaction costs, Vanguard limits participant exchange activity to no more than FOUR SUBSTANTIVE "ROUND TRIPS" THROUGH NON-MONEY-MARKET FUNDS (at least 90 days apart) during any 12-month period. A "round trip" is a redemption from a fund followed by a purchase back into the fund. "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect the management of a fund. Before making an exchange to or from another fund available in your plan, consider the following: o Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions. o Be sure to read that fund's prospectus. Contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188 for a copy. o Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on the exchange policies that apply to your plan. 41 ACCESSING FUND INFORMATION BY COMPUTER VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies. The Vanguard Group, Vanguard, PlainTalk, and the ship logo are trademarks of The Vanguard Group, Inc., S&P 500(R), Standard & Poor's 500, S&P MidCap 400, Standard & Poor's MidCap 400, S&P SmallCap 600, and Standard & Poor's SmallCap 600, are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds. All other marks are the exclusive property of their respective owners. (THIS PAGE INTENTIONALLY LEFT BLANK.) (THIS PAGE INTENTIONALLY LEFT BLANK.) (THIS PAGE INTENTIONALLY LEFT BLANK.) GLOSSARY OF INVESTMENT TERMS ACTIVE MANAGEMENT An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. GROWTH FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. INDEX An unmanaged group of securities whose overall performance is used as a standard to measure investment performance. INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. PASSIVE MANAGEMENT A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a particular stock or bond market index; also known as indexing. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The amount of money you put into an investment. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE FUND A mutual fund that typically emphasizes stocks whose prices are below-average in comparison with such measures as earnings and book value. These stocks often have above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [SHIP] [THE VANGUARD GROUP LOGO] Institutional Division Post Office Box 2900 Valley Forge, PA 19482-2900 FOR MORE INFORMATION If you'd like more information about Vanguard U.S. Stock Index Funds, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the Funds' annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Funds. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual reports or the SAI, or to request additional information about the Funds or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP PARTICIPANT ACCESS CENTER P.O. BOX 2900 VALLEY FORGE, PA 19482-2900 TELEPHONE: 1-800-523-1188 TEXT TELEPHONE: 1-800-523-8004 WORLD WIDE WEB: WWW.VANGUARD.COM INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Funds are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file numbers: 811-2652 (C) 2003 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I040 042003 VANGUARD(R) U.S. STOCK INDEX FUNDS Admiral(TM) Shares for Participants . April 28, 2003 This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2002. VANGUARD TOTAL STOCK MARKET INDEX FUND VANGUARD 500 INDEX FUND VANGUARD EXTENDED MARKET INDEX FUND VANGUARD MID-CAP INDEX FUND VANGUARD SMALL-CAP INDEX FUND VANGUARD VALUE INDEX FUND VANGUARD GROWTH INDEX FUND NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. VANGUARD U.S. STOCK INDEX FUNDS Admiral Shares Participant Prospectus April 28, 2003 ================================================================================ CONTENTS - -------------------------------------------------------------------------------- 1 AN INTRODUCTION TO INDEX FUNDS 2 FUND PROFILES 2 Vanguard Total Stock Market Index Fund 5 Vanguard 500 Index Fund 8 Vanguard Extended Market Index Fund 11 Vanguard Mid-Cap Index Fund 14 Vanguard Small-Cap Index Fund 17 Vanguard Value Index Fund 20 Vanguard Growth Index Fund 22 MORE ON THE FUNDS 27 THE FUNDS AND VANGUARD 28 INVESTMENT ADVISER 28 DIVIDENDS, CAPITAL GAINS, AND TAXES 29 SHARE PRICE 30 FINANCIAL HIGHLIGHTS 35 INVESTING WITH VANGUARD 36 ACCESSING FUND INFORMATION BY COMPUTER GLOSSARY (inside back cover) ================================================================================ ================================================================================ WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with each Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk(R) explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference. This prospectus offers the Funds' Admiral Shares and is intended for participants in employer-sponsored retirement or savings plans. Another version--for investors who would like to open a personal investment account--can be obtained by calling Vanguard at 1-800-662-7447. - -------------------------------------------------------------------------------- 1 AN INTRODUCTION TO INDEX FUNDS WHAT IS INDEXING? Indexing is an investment strategy for tracking, as closely as possible, the performance of a specified market benchmark, or "index." An index is an unmanaged group of securities whose overall performance is used as a standard to measure the investment performance of a particular market. There are many types of indexes. Some represent entire markets--such as the U.S. stock market or the U.S. bond market. Other indexes cover market segments--such as small-capitalization stocks or short-term bonds. An index fund holds all, or a representative sample, of the securities that make up its target index. Unlike actively managed funds, index (or "passively managed") funds do not buy and sell securities based on research and analysis. Rather, index funds simply attempt to mirror what the target index does, for better or worse. An index fund does not always perform exactly like its target index. Like all mutual funds, index funds have operating expenses and transaction costs. Market indexes do not, and therefore will usually have a slight performance advantage over funds that track them. INDEX FUNDS IN THIS PROSPECTUS Vanguard offers a variety of stock (both U.S. and international), bond, and balanced index funds. This prospectus provides information about seven Vanguard U.S. Stock Index Funds, each of which seeks to track a different segment of the U.S. stock market. - --------------------------------------------------------------- FUND SEEKS TO TRACK - --------------------------------------------------------------- Vanguard Total Stock Market Index The overall stock market Vanguard 500 Index Large-cap stocks Vanguard Extended Market Index Mid- and small-cap stocks Vanguard Mid-Cap Index Mid-cap stocks Vanguard Small-Cap Index Small-cap stocks Vanguard Value Index Large-cap value stocks Vanguard Growth Index Large-cap growth stocks - --------------------------------------------------------------- On the following pages, you'll find profiles that summarize the key features of each Fund. Following the profiles, there is important additional information about the Funds. 2 FUND PROFILE-- VANGUARD(R) TOTAL STOCK MARKET INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of the overall stock market. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 5000 Total Market Index, which consists of all the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market. The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Index. For a description of the Fund's sampling technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 -10.89 2002 -20.95 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 12.37% (quarter ended December 31, 2001), and the lowest return for a quarter was -16.83% (quarter ended September 30, 2002). 3 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- Vanguard Total Stock Market Index Fund Admiral Shares -20.95% -16.18% Wilshire 5000 Index -20.86 -16.19 - -------------------------------------------------------------------------------- *Since-inception returns are from November 13, 2000--the inception date of the Admiral Shares--through December 31, 2002. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.13% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.15% *The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $15 $48 $85 $192 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 4 ================================================================================ ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NET ASSETS (ALL SHARE Dividends are distributed quarterly in March, June, CLASSES) AS OF September, and December; capital gains, if any, DECEMBER 31, 2002 are distributed annually in December. $24.1 billion INVESTMENT ADVISER NEWSPAPER ABBREVIATION The Vanguard Group, Valley Forge, Pa., TotStAdml since inception VANGUARD FUND NUMBER INCEPTION DATE 585 Investor Shares--April 27, 1992 Admiral Shares--November 13, 2000 CUSIP NUMBER 922908728 TICKER SYMBOL VTSAX ================================================================================ 5 FUND PROFILE--VANGUARD(R) 500 INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's 500 Index, which is dominated by the stocks of large U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - - Investment style risk, which is the chance that returns from large-cap stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 -11.98 2002 -22.10 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 10.67% (quarter ended December 31, 2001), and the lowest return for a quarter was -17.20% (quarter ended September 30, 2002). 6 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- Vanguard 500 Index Fund Admiral Shares -22.10% -17.06% S&P 500 Index -22.10 -17.03 - -------------------------------------------------------------------------------- *Since-inception returns are from November 13, 2000--the inception date of the Admiral Shares--through December 31, 2002. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.11% 12b-1 Distribution Fee: None Other Expenses: 0.01% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.12% *The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $12 $39 $68 $154 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 7 ================================================================================ ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NET ASSETS (ALL SHARE Dividends are distributed quarterly in March, June, CLASSES) AS OF September, and December; capital gains, if any, DECEMBER 31, 2002 are distributed annually in December. $68 billion INVESTMENT ADVISER NEWSPAPER ABBREVIATION The Vanguard Group, Valley Forge, Pa., 500Adml since inception VANGUARD FUND NUMBER INCEPTION DATE 540 Investor Shares--August 31, 1976 Admiral Shares--November 13, 2000 CUSIP NUMBER 922908710 TICKER SYMBOL VFIAX ================================================================================ 8 FUND PROFILE-- VANGUARD(R) EXTENDED MARKET INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the investment return of small- and mid-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 4500 Completion Index, a broadly diversified index of stocks of small and medium-size U.S. companies. The Wilshire 4500 Index contains all of the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market, except those stocks included in the Standard & Poor's 500 Index. The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Wilshire 4500 Index. For a description of the Fund's sampling technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - - Investment style risk, which is the chance that returns from small- and mid-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 -9.09 2002 -18.02 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 19.56% (quarter ended December 31, 2001), and the lowest return for a quarter was -21.08% (quarter ended September 30, 2001). 9 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- Vanguard Extended Market Index Fund Admiral Shares -18.02% -14.66% Wilshire 4500 Index -17.80 -14.69 - -------------------------------------------------------------------------------- *Since-inception returns are from November 13, 2000--the inception date of the Admiral Shares--through December 31, 2002. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.18% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20% *The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $20 $64 $113 $255 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 10 ================================================================================ ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December ExtndAdml INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 598 since inception CUSIP NUMBER INCEPTION DATE 922908694 Investor Shares--December 21, 1987 Admiral Shares--November 13, 2000 TICKER SYMBOL VEXAX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $3.9 billion ================================================================================ 11 FUND PROFILE--VANGUARD(R) MID-CAP INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of mid-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management" --or indexing--investment approach designed to track the performance of the Standard & Poor's MidCap 400 Index, which is made up of a group of medium-size U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - - Investment style risk, which is the chance that returns from mid-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows the performance of the Fund's Admiral Shares in their first full calendar year. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURN--ADMIRAL SHARES ---------------------------------------------------- SCALE RANGE -40% to 30% 2002 -14.55 ---------------------------------------------------- During the period shown in the bar chart, the highest return for a calendar quarter was 6.71% (quarter ended March 31, 2002), and the lowest return for a quarter was -16.53% (quarter ended September 30, 2002). 12 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- Vanguard Mid-Cap Index Fund Admiral Shares -14.55% -6.78% S&P MidCap 400 Index -14.51 -6.04 - -------------------------------------------------------------------------------- *Since-inception returns are from November 12, 2001--the inception date of the Admiral Shares--through December 31, 2002. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.16% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18% *The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $18 $58 $101 $230 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 13 ================================================================================ ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December MidCpAdml INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 5859 since inception CUSIP NUMBER INCEPTION DATE 922908645 Investor Shares--May 21, 1998 Admiral Shares--November 12, 2001 TICKER SYMBOL VIMAX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $3.3 billion ================================================================================ 14 FUND PROFILE--VANGUARD(R) SMALL-CAP INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of small-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Russell 2000 Index, which is made up of the stocks of smaller U.S. companies. The Russell 2000 Index is made up of the 2,000 smallest companies from a list of the 3,000 largest U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - - Investment style risk, which is the chance that returns from small-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 3.17 2002 -19.95 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 20.97% (quarter ended December 31, 2001), and the lowest return for a quarter was -21.32% (quarter ended September 30, 2002). 15 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- Vanguard Small-Cap Index Fund Admiral Shares -19.95% -7.84% Russell 2000 Index -20.48 -5.86 - -------------------------------------------------------------------------------- *Since-inception returns are from November 13, 2000--the inception date of the Admiral Shares--through December 31, 2002. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.15% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18% *The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $18 $58 $101 $230 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 16 ================================================================================ ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December SmCapAdml INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., since 548 1989 CUSIP NUMBER INCEPTION DATE 922908686 Investor Shares--October 3, 1960 Admiral Shares--November 13, 2000 TICKER SYMBOL VSMAX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $4.2 billion ================================================================================ 17 FUND PROFILE--VANGUARD(R) VALUE INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization value stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's 500/Barra Value Index, which includes those stocks of the S&P 500 Index with lower-than-average price/book ratios. The Fund attempts to replicate the target index by investing all or substantially all of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - - Investment style risk, which is the chance that returns from large-cap value stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 -11.83 2002 -20.85 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 9.90% (quarter ended December 31, 2002), and the lowest return for a quarter was -20.44% (quarter ended September 30, 2002). 18 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- Vanguard Value Index Fund Admiral Shares -20.85% -14.30% S&P 500/Barra Value Index -20.85 -14.28 - -------------------------------------------------------------------------------- *Since-inception returns are from November 13, 2000--the inception date of the Admiral Shares--through December 31, 2002. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.12% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.15% *The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $15 $48 $85 $192 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 19 ================================================================================ ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NET ASSETS (ALL SHARE Dividends are distributed quarterly in March, June, (CLASSES) AS OF September, and December; capital gains, if any, DECEMBER 31, 2002 are distributed annually in December. $3.2 billion INVESTMENT ADVISER NEWSPAPER ABBREVIATION The Vanguard Group, Valley Forge, Pa., ValAdml since inception VANGUARD FUND NUMBER INCEPTION DATE 506 Investor Shares--November 2, 1992 Admiral Shares--November 13, 2000 CUSIP NUMBER 922908678 TICKER SYMBOL VVIAX ================================================================================ 20 FUND PROFILE--VANGUARD(R) GROWTH INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization growth stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's 500/Barra Growth Index , which includes those stocks of the S&P 500 Index with higher-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. In addition, the Fund's performance could be hurt disproportionately by a decline in the prices of just a few stocks. This is because, compared with other mutual funds, the Fund invests a greater percentage of assets in the stocks of fewer companies. The Fund's performance could also be hurt by: - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - - Investment style risk, which is the chance that returns from large-cap growth stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Admiral Shares has varied from one calendar year to another over the periods shown. The table shows how the average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past performance does not indicate how it will perform in the future. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 -12.88 2002 -23.62 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 12.98% (quarter ended December 31, 2001), and the lowest return for a quarter was -17.49% (quarter ended March 31, 2001). 21 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- Vanguard Growth Index Fund Admiral Shares -23.62% -20.40% S&P 500/Barra Growth Index -23.59 -20.27 - -------------------------------------------------------------------------------- *Since-inception returns are from November 13, 2000--the inception date of the Admiral Shares--through December 31, 2002. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Admiral Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.12% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.15% *The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Admiral Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $15 $48 $85 $192 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 22 ================================================================================ ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NET ASSETS (ALL SHARE Dividends are distributed quarterly in March, June, (CLASSES) AS OF September, and December; capital gains, if any, DECEMBER 31, 2002 are distributed annually in December. $7.5 billion INVESTMENT ADVISER NEWSPAPER ABBREVIATION The Vanguard Group, Valley Forge, Pa., GrwthAdml since inception VANGUARD FUND NUMBER INCEPTION DATE 509 Investor Shares--November 2, 1992 Admiral Shares--November 13, 2000 CUSIP NUMBER 922908660 TICKER SYMBOL VIGAX ================================================================================ MORE ON THE FUNDS This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this FLAG symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that each Fund uses in pursuit of its objective. The Funds' board of trustees, which oversees the Funds' management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. ADVANTAGES OF INDEX FUNDS Index funds typically have the following characteristics: - - Variety of investments. Vanguard index funds generally invest in securities of a wide variety of companies and industries. - - Relative performance consistency. Because they seek to track market benchmarks, index funds usually do not perform dramatically better or worse than their benchmarks. - - Low cost. Index funds are inexpensive to run, compared with actively managed funds. They have few or no research costs, and typically keep trading activity--and thus brokerage commissions and other transaction costs--to a minimum. Compared with actively managed funds, most index funds have lower turnover rates and lower capital gains distributions. However, from time to time, some index funds may pay out higher-than-expected taxable distributions. That's because index funds must adjust their holdings to reflect changes in their target indexes. In some cases, such changes may force an index fund to sell securities that have appreciated in value, and, thus, realize a capital gain that must be distributed to shareholders. A security may move out of an index for a number of reasons, including a merger or acquisition, or a substantial change in the market capitalization of the issuer. Generally, these changes tend to occur more frequently with small and medium-size companies than they do with large, well-established companies. 23 INDEXING METHODS In seeking to track a particular index, a fund generally uses one of two methods to select the securities in which it invests. REPLICATION METHOD. Many stock funds use the replication method of indexing. This means that a fund holds each security found in its target index in about the same proportion as represented in the index itself. For example, if 5% of the S&P 500 Index were made up of the stock of a specific company, a fund tracking that index would invest about 5% of its assets in that company. The 500, Mid-Cap, Small-Cap, Value, and Growth Index Funds employ this method of indexing. SAMPLING METHOD. Because it would be very expensive and inefficient to buy and sell all securities held in certain indexes (the Wilshire 5000 Index, for example, included more than 5,600 separate stocks as of December 31, 2002), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund's adviser selects, from the target index, a representative sample of securities that will resemble the target index in terms of key risk factors and other characteristics. For stock funds, these include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. The Total Stock Market, and Extended Market Index Funds employ this method of indexing. The following table shows the number of stocks held by each Fund, and the number of stocks in its target index, as of December 31, 2002. -------------------------------------------------------- NUMBER OF NUMBER OF STOCKS VANGUARD INDEX FUND STOCKS HELD IN TARGET INDEX -------------------------------------------------------- Total Stock Market 3,739 5,668 500 505 500 Extended Market 3,242 5,172 Mid-Cap 402 400 Small-Cap 1,977 1,964 Value 353 352 Growth 149 148 -------------------------------------------------------- ================================================================================ PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS Growth investing and value investing are two styles employed by stock-fund managers. Growth funds generally focus on stocks of companies believed to have above-average potential for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. Value funds typically emphasize stocks whose prices are below-average in comparison with those measures; these stocks often have above-average dividend yields. Growth and value stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, growth funds appeal to investors who will accept more volatility in hopes of a greater increase in share price. ================================================================================ 24 MARKET EXPOSURE The Funds invest mainly in common stocks. As a result, they are subject to certain risks. [FLAG] EACH FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. MARKET CAPITALIZATION. Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, or large-cap. It's important to understand that, for both companies and stock funds, market capitalization ranges change over time. Also, interpretations of size vary, and there is no "official" definition of small-, mid-, and large-cap, even among Vanguard fund advisers. The median market capitalization of each Fund as of December 31, 2002 is listed below: ---------------------------------------------- MEDIAN MARKET VANGUARD INDEX FUND CAPITALIZATION ---------------------------------------------- Total Stock Market $26.2 billion 500 47.0 Extended Market 1.5 Mid-Cap 2.2 Small-Cap 0.6 Value 22.8 Growth 71.4 ---------------------------------------------- To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. - ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2002) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.2 10.9 11.2 11.4 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2002. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.9%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or these Funds in particular. Keep in mind that the S&P 500 Index tracks mainly large-cap stocks. Historically, mid- and small-cap stocks (such as those held by the Total Stock Market, Extended Market, Mid- Cap, and Small-Cap Index Funds) have been more volatile than--and at times have performed quite differently from--the large-cap stocks of the S&P 500 Index. 25 Similarly, indexes that are subsets of the S&P 500 Index--such as the S&P 500/Barra Value Index and the S&P 500/Barra Growth Index (the target indexes of the Value and Growth Index Funds)--will not perform in the same way as the broader S&P 500 Index. Historically, the S&P 500/Barra Value Index has been less volatile than the S&P 500 Index; the S&P 500/Barra Growth Index, on the other hand, has displayed somewhat greater short-term volatility than the S&P 500 Index. However, both value and growth stocks have the potential, at times, to be more volatile than the broader market. [FLAG] EACH FUND (OTHER THAN TOTAL STOCK MARKET INDEX FUND) IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE TYPES OF STOCKS IN WHICH THE FUND INVESTS WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. SPECIFIC TYPES OF STOCKS (FOR INSTANCE, SMALL-CAP OR VALUE) TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. RISK OF NONDIVERSIFICATION The target indexes tracked by Vanguard's U.S. Stock Index Funds hold diverse investments. Similarly, the Funds that track these indexes hold stocks of many companies across many different industry sectors. It is possible that a fund's target index could become less diversified if the index's largest companies significantly increase in value relative to the index's other components. In an extreme situation, a fund tracking such an index might no longer meet the legal definition of "diversified." (Such has been the case, from time to time, with the Growth Index Fund.) For this reason, Vanguard's U.S. Stock Index Funds are classified as "nondiversified." However, these funds, other than the Growth Index Fund, from inception to the date of this prospectus, in actuality have been diversified, and Vanguard expects them to continue to be diversified. OTHER INVESTMENT POLICIES AND RISKS Each Fund reserves the right to substitute a different index for the index it currently tracks. This could happen if the current index were discontinued, if the Fund's agreement with the sponsor of its target index were terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same general market segment (large-, mid-, or small-cap; growth; or value) as the current index. Each Fund may invest in foreign securities to the extent necessary to carry out its investment strategy of holding all, or a representative sample, of the stocks that make up the index it tracks. It is not expected that any Fund will invest more than 5% of its assets in foreign securities. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. [FLAG] EACH FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF TRADITIONAL INVESTMENTS. To track their target indexes as closely as possible, the Funds attempt to remain fully invested in stocks. To help stay fully invested, and to reduce transaction costs, the Funds may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securi- 26 ties, and swap agreements, which are types of derivatives. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Similar risks exist for warrants (securities that permit their owners to purchase a specific number of stock shares at a predetermined price), convertible securities (securities that may be exchanged for another asset), and swap agreements (contracts between parties in which each agrees to make payments to the other based on the return of a specified index or asset). The Funds will not use derivatives for speculative purposes or as leveraged investments that magnify gains or losses. In addition, each Fund's obligation under futures contracts will not exceed 20% of its total assets. The reasons for which a Fund may invest in futures include: - - To keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in stocks. - - To reduce the Fund's transaction costs or add value when these instruments are favorably priced. ================================================================================ PLAIN TALK ABOUT DERIVATIVES A derivative is a financial contract whose value is based on (or "derived" from) a traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. Derivatives can carry considerable risks, particularly if used for speculation or as leveraged investments. ================================================================================ COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading or to compensate the funds for the costs associated with it. Specifically: - - Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. - - Each Vanguard fund (other than the money market funds) limits the number of times that an investor can exchange into and out of the fund. - - Certain Vanguard funds charge purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. 27 ================================================================================ PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or the capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. ================================================================================ TURNOVER RATE Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, an index fund sells securities only to respond to redemption requests or to adjust the number of shares held to reflect a change in the fund's target index. Turnover rates for large-cap stock index funds tend to be very low because large-cap indexes--such as the S&P 500 Index--typically do not change much from year to year. Turnover rates for mid-cap and small-cap stock index funds tend to be higher (although still relatively low, compared with actively managed stock funds) because the indexes they track are the most likely to change as a result of companies merging, growing, or failing. The FINANCIAL HIGHLIGHTS section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. ================================================================================ PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of December 31, 2002, the average turnover rate for passively managed domestic equity index funds investing in common stocks was approximately 94%; for all domestic stock funds, the average turnover rate was approximately 111%, according to Morningstar, Inc. ================================================================================ THE FUNDS AND VANGUARD Each Fund is a member of The Vanguard Group, a family of 35 investment companies with more than 100 funds holding assets in excess of $550 billion. All of the funds that are members of The Vanguard Group share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. 28 ================================================================================ PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. ================================================================================ INVESTMENT ADVISER The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in 1975, serves as the adviser to the Funds through its Quantitative Equity Group. As of December 31, 2002, Vanguard served as adviser for about $406 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended December 31, 2002, the advisory expenses for each Fund (with the exception of the Small-Cap Growth Index Fund) represented an effective annual rate of less than 0.01% of each Fund's average net assets. For the Small-Cap Growth Index Fund, the advisory expenses represented an effective annual rate of approximately 0.02% of its average net assets. The adviser is authorized to choose broker-dealers to handle the purchase and sale of the Funds' securities and to seek to obtain the best available price and most favorable execution for all transactions. Also, the board of trustees may direct the adviser to use a particular broker for certain transactions in exchange for commission rebates paid to the Funds as well as brokerage or research services provided to the adviser. ================================================================================ PLAIN TALK ABOUT THE FUNDS' ADVISER The manager primarily responsible for overseeing the Funds' investments is: GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Quantitative Equity Group. He has worked in investment management since 1985 and has had primary responsibility for Vanguard's stock indexing and active quantitative investments and strategy since joining the company in 1987. Education: A.B., Dartmouth College; M.B.A., University of Chicago. ================================================================================ DIVIDENDS, CAPITAL GAINS, AND TAXES Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any capital gains realized from the sale of its holdings. Income dividends for the Total Stock Market, 500, Value, and Growth Index Funds generally are distributed in March, June, September, and December; income dividends for the Extended Market, Mid-Cap, and Small-Cap Index Funds generally are distributed in December. Capital gains distributions generally occur in December. In addition, the Funds may occasionally be required to make supplemental distributions at some other time during the year. 29 Your distributions will be reinvested in additional Fund shares and accumulate on a tax-deferred basis if you are investing through an employer-sponsored retirement or savings plan. You will not owe taxes on these distributions until you begin withdrawals from the plan. You should consult your plan administrator, your plan's Summary Plan Description, or your tax adviser about the tax consequences of plan withdrawals. ================================================================================ PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. ================================================================================ SHARE PRICE Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. When reliable market quotations are not readily available, securities are priced at their fair value, calculated according to procedures adopted by the board of trustees. A fund also may use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, but may occur in other cases as well. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. 30 FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand the Admiral Shares' financial performance for the periods shown, and certain information reflects financial results for a single Admiral share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Admiral Shares (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose reports--along with each Fund's financial statements--are included in the Funds' most recent annual reports to shareholders. You may have these annual reports sent to you without charge by contacting Vanguard. ================================================================================ PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE This explanation uses the Total Stock Market Index Fund's Admiral Shares as an example. The Admiral Shares began fiscal year 2002 with a net asset value (price) of $25.75 per share. During the year, each Admiral Share earned $0.296 per share from investment income (interest and dividends). There was a decline of $5.672 per share in the value of investments held or sold by the Fund, resulting in a net decline of $5.376 per share from investment operations. Shareholders received $0.304 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $20.07, reflecting losses of $5.376 per share and distributions of $0.304 per share. This was a decrease of $5.68 per share (from $25.75 at the beginning of the year to $20.07 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return from the Fund was -20.95% for the year. As of December 31, 2002, the Admiral Shares had $4 billion in net assets. For the year, the expense ratio was 0.15% ($1.50 per $1,000 of net assets), and the net investment income amounted to 1.39% of average net assets. The Fund sold and replaced securities valued at at an annualized rate of 4% of its net assets. ================================================================================ 31
TOTAL STOCK MARKET INDEX FUND ADMIRAL SHARES - ---------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, NOV. 13* TO ---------------- DEC. 31, 2002 2001 2000 - ---------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $25.75 $29.26 $30.22 - ---------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .296 .332 .049 Net Realized and Unrealized Gain (Loss) on Investments (5.672) (3.533) (.830) - ---------------------------------------------------------------------------------------- Total from Investment Operations (5.376) (3.201) (.781) - ---------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.304) (.309) (.099) Distributions from Realized Capital Gains -- -- (.080) - ---------------------------------------------------------------------------------------- Total Distributions (.304) (.309) (.179) - ---------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $20.07 $25.75 $29.26 - ---------------------------------------------------------------------------------------- TOTAL RETURN -20.95% -10.89% -2.55% - ---------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $4,069 $3,894 $2,104 Ratio of Total Expenses to Average Net Assets 0.15% 0.15% 0.15%** Ratio of Net Investment Income to Average Net Assets 1.39% 1.17% 1.23%** Turnover Rate 4%+ 7%+ 7% - ----------------------------------------------------------------------------------------
*Inception. **Annualized. +Turnover rates excluding in-kind redemptions were 2% and 3%, respectively.
500 INDEX FUND ADMIRAL SHARES - ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, NOV. 13* TO --------------- DEC. 31, 2002 2001 2000 - ----------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $105.89 $121.87 $124.88 - ----------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income 1.374 1.313 .179 Net Realized and Unrealized Gain (Loss) on Investments (24.700) (15.955) (2.808) - ----------------------------------------------------------------------------------------- Total from Investment Operations (23.326) (14.642) (2.629) - ----------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (1.414) (1.338) (.381) Distributions from Realized Capital Gains -- -- -- - ----------------------------------------------------------------------------------------- Total Distributions (1.414) (1.338) (.381) - ----------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $81.15 $105.89 $121.87 - ----------------------------------------------------------------------------------------- TOTAL RETURN -22.10% -11.98% -2.10% - ----------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $11,922 $13,863 $8,237 Ratio of Total Expenses to Average Net Assets 0.12% 0.12% 0.12%+ Ratio of Net Investment Income to Average Net Assets 1.50% 1.22% 1.03%+ Turnover Rate** 7% 4% 9% - -----------------------------------------------------------------------------------------
*Inception. **Turnover rates excluding in-kind redemptions were 6%, 3%, and 7%, respectively. +Annualized. 32
EXTENDED MARKET INDEX FUND ADMIRAL SHARES - ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, NOV. 31* TO --------------- DEC. 31, 2002 2001 2000 - ----------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $23.09 $26.61 $31.89 - ----------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .201 .213 .050 Net Realized and Unrealized Gain (Loss) on Investments (4.360) (2.703) (1.736) - ----------------------------------------------------------------------------------------- Total from Investment Operations (4.159) (2.490) (1.686) - ----------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.191) (.220) (.274) Distributions from Realized Capital Gains -- (.810) (3.320) - ----------------------------------------------------------------------------------------- Total Distributions (.191) (1.030) (3.594) - ----------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $18.74 $23.09 $26.61 - ----------------------------------------------------------------------------------------- TOTAL RETURN -18.02% -9.09% -4.30% - ----------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $611 $735 $441 Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20%** Ratio of Net Investment Income to Average Net Assets 0.94% 0.94% 1.23%** Turnover Rate 17% 20% 33% - -----------------------------------------------------------------------------------------
*Inception. **Annualized. MID-CAP INDEX FUND ADMIRAL SHARES - -------------------------------------------------------------------------------- YEAR ENDED NOV. 12* TO DEC. 31, DEC. 31, 2002 2001 - -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $53.56 $50.00 - -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .431 .056 Net Realized and Unrealized Gain (Loss) on Investments (8.154) 3.982 - -------------------------------------------------------------------------------- Total from Investment Operations (7.723) 4.038 - -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.451) (.320) Distributions from Realized Capital Gains (.576) (.158) - -------------------------------------------------------------------------------- Total Distributions. (1.027) (.478) - -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $44.81 $53.56 - -------------------------------------------------------------------------------- TOTAL RETURN -14.55% 8.06% - -------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $411 $223 Ratio of Total Expenses to Average Net Assets 0.18% 0.20%** Ratio of Net Investment Income to Average Net Assets 0.94% 0.86%** Turnover Rate 20%+ 24% - -------------------------------------------------------------------------------- *Inception. **Annualized. +Turnover rate excluding in-kind redemptions was 18%. 33
SMALL-CAP INDEX FUND ADMIRAL SHARES - ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, NOV. 13* TO ---------------- DEC. 31, 2002 2001 2000 - ----------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $19.82 $19.44 $22.40 - ----------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .207 .231 .053 Net Realized and Unrealized Gain (Loss) on Investments (4.160) .388 .062 - ----------------------------------------------------------------------------------------- Total from Investment (3.953) .619 .115 - ----------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.207) (.239) (.265) Distributions from Realized Capital Gains -- -- (2.810) - ----------------------------------------------------------------------------------------- Total Distributions (.207) (.239) (3.075) - ----------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $15.66 $19.82 $19.44 - ----------------------------------------------------------------------------------------- TOTAL RETURN -19.95% 3.17% 1.75% - ----------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $591 $547 $252 Ratio of Total Expenses to Average Net Assets 0.18% 0.20% 0.20%** Ratio of Net Investment Income to Average Net Assets 1.22% 1.24% 1.79%** Turnover Rate 32% 39% 49% - -----------------------------------------------------------------------------------------
*Inception. **Annualized.
VALUE INDEX FUND ADMIRAL SHARES - ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, NOV. 13* TO ---------------- DEC. 31, 2002 2001 2000 - ----------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $18.90 $22.87 $22.86 - ----------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .315 .318 .045 Net Realized and Unrealized Gain (Loss) on Investments (4.238) (2.986) .635 - ----------------------------------------------------------------------------------------- Total from Investment Operation (3.923) (2.668) .680 - ----------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.327) (.325) (.100) Distributions from Realized Capital Gains -- (.977) (.570) - ----------------------------------------------------------------------------------------- Total Distributions (.327) (1.302) (.670) - ----------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $14.65 $18.90 $22.87 - ----------------------------------------------------------------------------------------- TOTAL RETURN -20.85% -11.83% 3.13% - ----------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $480 $587 $248 Ratio of Total Expenses to Average Net Assets 0.15% 0.17% 0.17%** Ratio of Net Investment Income to Average Net Assets 1.88% 1.57% 0.19%** Turnover Rate 26% 38% 37% - -----------------------------------------------------------------------------------------
*Inception. **Annualized. 34
GROWTH INDEX FUND ADMIRAL SHARES - ----------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, NOV. 13* TO --------------- DEC.31, 2002 2001 2000 - ----------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $26.42 $30.57 $33.12 - ----------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .237 .194 .024 Net Realized and Unrealized Gain (Loss) on Investments (6.465) (4.144) (2.536) - ----------------------------------------------------------------------------------------- Total from Investment Operations (6.228) (3.950) (2.512) - ----------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.242) (.200) (.038) Distributions from Realized Capital Gains -- -- -- - ----------------------------------------------------------------------------------------- Total Distributions (.242) (.200) (.038) - ----------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $19.95 $26.42 $30.57 - ----------------------------------------------------------------------------------------- TOTAL RETURN -23.62% -12.88% -7.59% - ----------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $751 $906 $709 Ratio of Total Expenses to Average Net Assets 0.15% 0.17% 0.17%** Ratio of Net Investment Income to Average Net Assets 1.05% 0.74% 0.56%** Turnover Rate 23% 31% 33% - -----------------------------------------------------------------------------------------
*Inception. **Annualized. 35 INVESTING WITH VANGUARD One or more of the Funds are an investment option in your retirement or savings plan. Your plan administrator or your employee benefits office can provide you with detailed information on how to participate in your plan and how to elect a Fund as an investment option. - - If you have any questions about a Fund or Vanguard, including those about a Fund's investment objective, strategies, or risks, contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188. - - If you have questions about your account, contact your plan administrator or the organization that provides recordkeeping services for your plan. INVESTMENT OPTIONS AND ALLOCATIONS Your plan's specific provisions may allow you to change your investment selections, the amount of your contributions, or how your contributions are allocated among the investment choices available to you. Contact your plan administrator or employee benefits office for more details. TRANSACTIONS Contributions, exchanges, or redemptions of a Fund's shares are processed as soon as they have been received by Vanguard in good order. Good order means that your request includes complete information on your contribution, exchange, or redemption, and that Vanguard has received the appropriate assets. In all cases, your transaction will be based on the Fund's next-determined net asset value (NAV) after Vanguard receives your request (or, in the case of new contributions, the next-determined NAV after Vanguard receives the order from your plan administrator). As long as this request is received before the close of trading on the New York Stock Exchange, generally 4 p.m., Eastern time, you will receive that day's NAV. This is known as your TRADE DATE. EXCHANGES The exchange privilege (your ability to redeem shares from one fund to purchase shares of another fund) may be available to you through your plan. Although we make every effort to maintain the exchange privilege, Vanguard reserves the right to revise or terminate this privilege, limit the amount of an exchange, or reject any exchange, at any time, without notice. Because excessive exchanges can potentially disrupt the management of the Vanguard/(R)/ funds and increase their transaction costs, Vanguard limits participant exchange activity to no more than FOUR SUBSTANTIVE "ROUND TRIPS" THROUGH NON-MONEY-MARKET FUNDS (at least 90 days apart) during any 12-month period. A "round trip" is a redemption from a fund followed by a purchase back into the fund. "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect the management of a fund. Before making an exchange to or from another fund available in your plan, consider the following: - - Certain investment options, particularly funds made up of company stock or investment contracts, may be subject to unique restrictions. - - Be sure to read that fund's prospectus. Contact Vanguard's Participant Access Center, toll-free, at 1-800-523-1188 for a copy. - - Vanguard can accept exchanges only as permitted by your plan. Contact your plan administrator for details on the exchange policies that apply to your plan. 36 ACCESSING FUND INFORMATION BY COMPUTER VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM Use your personal computer to visit Vanguard's education-oriented website, which provides timely news and information about Vanguard funds and services; the online Education Center that offers a variety of mutual fund classes; and easy-to-use, interactive tools to help you create your own investment and retirement strategies. The Vanguard Group, Vanguard, PlainTalk, Admiral, and the ship logo are trademarks of The Vanguard Group, Inc., S&P 500(R), Standard & Poor's 500, S&P MidCap 400, Standard & Poor's MidCap 400, S&P SmallCap 600, and Standard & Poor's SmallCap 600, are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds. All other marks are the exclusive property of their respective owners. GLOSSARY OF INVESTMENT TERMS ACTIVE MANAGEMENT An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. - -------------------------------------------------------------------------------- CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. - -------------------------------------------------------------------------------- CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. - -------------------------------------------------------------------------------- COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. - -------------------------------------------------------------------------------- DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. - -------------------------------------------------------------------------------- EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. - -------------------------------------------------------------------------------- GROWTH FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. - -------------------------------------------------------------------------------- INDEX An unmanaged group of securities whose overall performance is used as a standard to measure investment performance. - -------------------------------------------------------------------------------- INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. - -------------------------------------------------------------------------------- NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. - -------------------------------------------------------------------------------- PASSIVE MANAGEMENT A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a particular stock or bond market index; also known as indexing. - -------------------------------------------------------------------------------- PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. - -------------------------------------------------------------------------------- PRINCIPAL The amount of money you put into an investment. - -------------------------------------------------------------------------------- TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. - -------------------------------------------------------------------------------- VALUE FUND A mutual fund that typically emphasizes stocks whose prices are below-average in comparison with such measures as earnings and book value. These stocks often have above-average dividend yields. - -------------------------------------------------------------------------------- VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. - -------------------------------------------------------------------------------- YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. ================================================================================ [SHIP] THE VANGUARD GROUP (R) Institutional Division Post Office Box 2900 Valley Forge, PA 19482-2900 FOR MORE INFORMATION If you'd like more information about Vanguard U.S. Stock Index Funds, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the Funds' annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Funds. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual reports or the SAI, or to request additional information about the Funds or other Vanguard funds, please contact us as follows: THE VANGUARD GROUP PARTICIPANT ACCESS CENTER P.O. BOX 2900 VALLEY FORGE, PA 19482-2900 TELEPHONE: 1-800-523-1188 TEXT TELEPHONE: 1-800-523-8004 WORLD WIDE WEB: WWW.VANGUARD.COM INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Funds are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file numbers: 811-2652 (C) 2003 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I585 042003 VANGUARD(R) VIPER(R) SHARES April 28 2003 Exchange-traded fund shares that are not individually redeemable This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2002. VANGUARD TOTAL STOCK MARKET VIPERS VANGUARD EXTENDED MARKET VIPERS NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. VANGUARD TOTAL STOCK MARKET VIPERS VANGUARD EXTENDED MARKET VIPERS Prospectus April 28, 2003 Vanguard Index Participation Equity Receipts An Exchange-Traded Class of Shares of Certain Vanguard Index Funds ================================================================================ CONTENTS - -------------------------------------------------------------------------------- 1 AN INTRODUCTION TO VIPER SHARES 2 FUND PROFILES 2 Total Stock Market VIPERs 5 Extended Market VIPERs 8 MORE ON VIPER SHARES 16 VIPER SHARES AND VANGUARD 17 INVESTMENT ADVISER 17 DIVIDENDS, CAPITAL GAINS, AND TAXES 19 DAILY PRICING 19 FINANCIAL HIGHLIGHTS GLOSSARY (inside back cover) ================================================================================ ================================================================================ A NOTE TO RETAIL INVESTORS: VIPER Shares can be purchased directly from the issuing Fund only in exchange for a basket of securities that is expected to be worth several million dollars. Most individual investors, therefore, will not be able to purchase VIPER Shares directly from the Fund. Instead, these investors will purchase VIPER Shares in the secondary market with the assistance of a broker. Thus, some of the information contained in this prospectus--such as information about purchasing and redeeming VIPER Shares from a Fund and references to transaction fees imposed on purchases and redemptions--is not relevant to most individual investors. - -------------------------------------------------------------------------------- 1 AN INTRODUCTION TO VIPER SHARES WHAT ARE VIPER SHARES? Vanguard Index Participation Equity Receipts, or "VIPER" Shares, are a class of exchange-traded securities that represent an interest in a portfolio of stocks held by a particular Vanguard index mutual fund. The two funds that currently offer VIPER Shares are:
- ------------------------------------------------------------------------------------------------- FUND VIPER SHARES SEEKS TO TRACK - ------------------------------------------------------------------------------------------------- Vanguard Total Stock Vanguard Total Stock Market VIPERs The overall stock market Market Index Fund Vanguard Extended Vanguard Extended Market VIPERs Mid- and small-capitalization stocks Market Index Fund - -------------------------------------------------------------------------------------------------
In addition to VIPER Shares, each of the Funds offers three conventional classes of shares. This prospectus, however, relates only to VIPER Shares. HOW ARE VIPER SHARES DIFFERENT FROM CONVENTIONAL MUTUAL FUND SHARES? Conventional mutual fund shares are bought from and redeemed with the issuing fund for cash at a net asset value (NAV) typically calculated once a day. VIPER Shares, by contrast, cannot be purchased directly from or redeemed directly with the issuing fund except by or through Authorized Participants (defined below), and then only for an in-kind basket of securities. An organized secondary market is expected to exist for VIPER Shares, unlike conventional mutual fund shares, because VIPER Shares are listed for trading on the American Stock Exchange (AMEX). Investors can purchase and sell VIPER Shares on the secondary market through a broker. Secondary-market transactions occur not at NAV, but at market prices that change throughout the day based on the supply of, and demand for, VIPER Shares. Although the market price of a VIPER Share typically will approximate its NAV, there may be times when the market price and the NAV vary, so you may receive more or less than NAV when you sell your shares on the secondary market. Also, it is possible that an active trading market may not be maintained. HOW DO I BUY AND SELL VIPER SHARES? A fund issues and redeems VIPER Shares only in bundles of 50,000 shares (in the case of Total Stock Market VIPERs) or 100,000 shares (in the case of Extended Market VIPERs). These bundles are known as "Creation Units." To purchase or redeem a Creation Unit, you must be an Authorized Participant or you must do so through a broker that is an Authorized Participant. An Authorized Participant is a participant in the Depository Trust Company that has executed a Participant Agreement with the fund's Distributor. Vanguard will provide a list of Authorized Participants upon request. Because Creation Units can be purchased only in exchange for a basket of securities likely to cost millions of dollars, it is expected that only a limited number of institutional investors will purchase and redeem VIPER Shares directly with an issuing fund. Investors who cannot afford to purchase a Creation Unit can acquire VIPER Shares in one of two ways. If you own conventional shares of a fund that issues VIPER Shares, you can, for a fee, convert those shares into VIPER Shares of equivalent value. For more information about the conversion privilege, see "Conversion Privilege" under MORE ON VIPER SHARES. In addition, any investor may purchase VIPER Shares on the secondary market (i.e., not from the issuing fund) through a broker. VIPER Shares are listed on the AMEX and are 2 publicly traded. To acquire VIPER Shares through either means, you must have a brokerage account. For information about acquiring VIPER Shares through conversion of conventional shares or through a secondary market purchase, please contact your broker. If you want to sell VIPER Shares, you must do so through your broker; VIPER Shares cannot be converted back into conventional shares. NOTE: When you buy or sell VIPER Shares on the secondary market, your broker will charge a commission. In addition, because secondary market transactions occur at market prices, you may pay more than NAV when you buy VIPER Shares, and receive less than NAV when you sell those shares. PROFILE--VANGUARD(R) TOTAL STOCK MARKET VIPERS(R) The following profile summarizes key features of Vanguard Total Stock Market VIPERs, an exchange-traded class of shares issued by Vanguard Total Stock Market Index Fund. INVESTMENT OBJECTIVE Total Stock Market VIPERs seek to track the performance of a benchmark index that measures the investment return of the overall stock market. PRIMARY INVESTMENT STRATEGIES Vanguard Total Stock Market Index Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 5000 Total Market Index, which consists of all the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market. The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Index. PRIMARY RISKS - - TOTAL STOCK MARKET VIPERS' TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - - Total Stock Market VIPERs are listed for trading on the American Stock Exchange (AMEX) and can be sold in the secondary market at market prices. Although it is expected that the market price of a Total Stock Market VIPER typically will approximate its net asset value, there may be times when the market price and the NAV vary significantly. Thus, if you sell Total Stock Market VIPERs on the secondary market, you may receive less than NAV. - - Although Total Stock Market VIPERs are listed for trading on the AMEX, it is possible that an active trading market may not be maintained. - - Trading of Total Stock Market VIPERs on the AMEX may be halted if AMEX officials deem such action appropriate, if Total Stock Market VIPERs are delisted from the AMEX, or if the activation of marketwide "circuit breakers" halts stock trading generally. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows the performance of the Fund's VIPER Shares in their first full calendar year. 3 ---------------------------------------------------- ANNUAL TOTAL RETURN--VIPER SHARES SCALE RANGE -40% to 30% 2002 -20.94 ---------------------------------------------------- The return figure assumes that an investor purchased shares at net asset value and does not reflect the transaction fee imposed on purchases and redemptions of Creation Units or the commissions that investors pay their brokers to buy and sell VIPER Shares in the secondary market. During the period shown in the bar chart, the highest return for a calendar quarter was 7.81% (quarter ended December 31, 2002), and the lowest return for a quarter was -16.82% (quarter ended September 30, 2002). The table shows how the average annual total returns of the VIPER Shares compare with those of the Fund's target index. To calculate the figures that present the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should note that the after-tax returns are only for the Fund's VIPER Share class and that after-tax returns for other share classes will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own VIPER Shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD TOTAL STOCK MARKET INDEX FUND VIPER SHARES Return Before Taxes -20.94% -19.00% Return After Taxes on Distributions -21.37 -19.46 Return After Taxes on Distributions and Sale of Fund Shares -12.84 -15.19 Fund Shares - -------------------------------------------------------------------------------- WILSHIRE 5000 INDEX (reflects no deduction for fees, -20.86% -18.96% expenses, or taxes) - -------------------------------------------------------------------------------- * Since-inception returns are from May 24, 2001--the inception date of the VIPER Shares--through December 31, 2002. 4 FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Total Stock Market VIPERs. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Sales Charge (Load) Imposed on Reinvested Dividends: None Transaction Fee on Purchases and Redemptions: Varies* Transaction Fee Imposed on Reinvested Dividends: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.13% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.15% *An investor purchasing or redeeming Creation Units of Total Stock Market VIPERs will pay to the issuing Fund a transaction fee of $5,500, plus an additional fee of up to $5,500 if the investor does not purchase or redeem through the Continuous Net Settlement System of the National Securities Clearing Corporation. An investor buying or selling Total Stock Market VIPERs in the secondary market will pay a commission to his or her broker in an amount established by the broker. An investor converting conventional shares into Total Stock Market VIPERs will pay a $50 conversion fee to Vanguard; in addition, the broker may impose a conversion fee of its own. The following example is intended to help retail investors compare the cost of investing in Total Stock Market VIPERs with the cost of investing in other funds. It illustrates the hypothetical expenses that such investors would incur over various periods if they invest $10,000 in Total Stock Market VIPERs. This example assumes that Total Stock Market VIPERs provide a return of 5% a year and that operating expenses remain the same. This example does not include the brokerage commissions that retail investors will pay to buy and sell Total Stock Market VIPERs. It also does not include the transaction fees on purchases and redemptions of Creation Units, because these fees will not be imposed on retail investors. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $15 $48 $85 $192 - -------------------------------------------------- The value of a Total Stock Market VIPERs Creation Unit as of March 31, 2003, was approximately $3.98 million. Assuming an investment of $3.98 million, payment of the standard $5,500 transaction fee applicable to both the purchase and redemption of the Creation Unit, a 5% return each year, and no change in operating expenses, the total cost of holding a Total Stock Market VIPER Creation Unit would be $17,106 if the Creation Unit were redeemed after one year and $30,222 if redeemed after three years. THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 5
================================================================================================== ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NET ASSETS (ALL SHARE CLASSES OF VANGUARD Dividends are distributed quarterly in March, June, VANGUARD TOTAL STOCK MARKET INDEX FUND) AS OF September, and December; capital gains, if any, DECEMBER 31, 2002 annually in December. $24.1 billion INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 970 since inception CUSIP NUMBER INCEPTION DATE 922908769 May 24, 2001 AMEX TRADING SYMBOL NUMBER OF TOTAL STOCK MARKET VIPERS VTI IN A CREATION UNIT 50,000 ==================================================================================================
PROFILE--VANGUARD(R) EXTENDED MARKET VIPERS(R) The following profile summarizes key features of Vanguard Extended Market VIPERs, an exchange-traded class of shares issued by Vanguard Extended Market Index Fund. INVESTMENT OBJECTIVE Extended Market VIPERs seek to track the performance of a benchmark index that measures the investment return of small- and mid-capitalization stocks. PRIMARY INVESTMENT STRATEGIES Vanguard Extended Market Index Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 4500 Completion Index, a broadly diversified index of stocks of small and medium-size U.S. companies. The Wilshire 4500 Index contains all of the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market, except those stocks included in the Standard & Poor's 500 Index. The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Wilshire 4500 Index. PRIMARY RISKS - - EXTENDED MARKET VIPERS' TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. - - Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. - - Extended Market VIPERs are subject to investment style risk, which is the chance that returns from small- and mid-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. - - Extended Market VIPERs are listed for trading on the American Stock Exchange (AMEX) and can be sold in the secondary market at market prices. Although it is expected that the market price of an Extended Market VIPER typically will approximate its net asset value, there may be times when the market price and the NAV vary significantly. Thus, if you sell Extended Market VIPERs on the secondary market, you may receive less than NAV. - - Although Extended Market VIPERs are listed for trading on the AMEX, it is possible that an active trading market may not be maintained. 6 - - Trading of Extended Market VIPERs on the AMEX may be halted if AMEX officials deem such action appropriate, if Extended Market VIPERs are delisted from the AMEX, or if the activation of marketwide "circuit breakers" halts stock trading generally. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows the performance of the Fund's VIPER Shares in their first full calendar year. ---------------------------------------------------- ANNUAL TOTAL RETURN--VIPER SHARES SCALE RANGE -40% to 30% 2002 -18.04 ---------------------------------------------------- The return figure assumes that an investor purchased shares at net asset value and does not reflect the transaction fee imposed on purchases and redemptions of Creation Units or the commissions that investors pay their brokers to buy and sell VIPER Shares in the secondary market. During the period shown in the bar chart, the highest return for a calendar quarter was 5.82% (quarter ended December 31, 2002), and the lowest return for a quarter was -15.51% (quarter ended September 30, 2002). The table shows how the average annual total returns of the VIPER Shares compare with those of the Fund's target index. To calculate the figures that present the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should note that the after-tax returns are only for the Fund's VIPER Share class and that after-tax returns for other share classes will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own VIPER Shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. 7 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD EXTENDED MARKET INDEX FUND VIPER SHARES Return Before Taxes -18.04% -17.79% Return After Taxes on Distributions -18.37 -18.13 Return After Taxes on Distributions and Sale of Fund Shares -11.07 -14.39 - -------------------------------------------------------------------------------- WILSHIRE 4500 INDEX (reflects no deduction for -17.80% -17.51% fees, expenses, or taxes) - -------------------------------------------------------------------------------- * Since-inception returns are from December 27, 2001--the inception date of the VIPER shares--through December 31,2002. FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Extended Market VIPERs. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Sales Charge (Load) Imposed on Reinvested Dividends: None Transaction Fee on Purchases and Redemptions: Varies* Transaction Fee Imposed on Reinvested Dividends: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.18% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20% *An investor purchasing or redeeming Creation Units of Extended Market VIPERs will pay to the issuing Fund a transaction fee of $5,500, plus an additional fee of up to $5,500 if the investor does not purchase or redeem through the Continuous Net Settlement System of the National Securities Clearing Corporation. An investor buying or selling Extended Market VIPERs in the secondary market will pay a commission to his or her broker in an amount established by the broker. An investor converting conventional shares into Extended Market VIPERs will pay a $50 conversion fee to Vanguard; in addition, the broker may impose a conversion fee of its own. The following example is intended to help retail investors compare the cost of investing in Extended Market VIPERs with the cost of investing in other funds. It illustrates the hypothetical expenses that such investors would incur over various periods if they invest $10,000 in Extended Market VIPERs. This example assumes that Extended Market VIPERs provide a return of 5% a year and that operating expenses remain the same. This example does not include the brokerage commissions that retail investors will pay to buy and sell Extended Market VIPERs. It also does not include the transaction fees on purchases and redemptions of Creation Units, because these fees will not be imposed on retail investors. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $20 $64 $113 $255 - -------------------------------------------------- 8 The value of an Extended Market VIPERs Creation Unit as of March 31, 2003, was approximately $4.78 million. Assuming an investment of $4.78 million, payment of the standard $5,500 transaction fee applicable to both the purchase and redemption of the Creation Unit, a 5% return each year, and no change in operating expenses, the total cost of holding an Extended Market VIPER Creation Unit would be $20,778 if the Creation Unit were redeemed after one year and $41,765 if redeemed after three years. THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. ================================================================================ ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NET ASSETS (ALL SHARE CLASSES OF Distributed annually in December VANGUARD EXTENDED MARKET INDEX FUND) AS OF DECEMBER 31, 2002 INVESTMENT ADVISER $3.9 billion The Vanguard Group, Valley Forge, Pa., since inception VANGUARD FUND NUMBER 965 INCEPTION DATE December 27, 2001 CUSIP NUMBER 922908652 NUMBER OF EXTENDED MARKET VIPERS IN A CREATION UNIT AMEX TRADING SYMBOL 100,000 VXF ================================================================================ MORE ON VIPER SHARES The following sections explain the primary investment strategies and policies that each Fund uses in pursuit of its objective. The Funds' board of trustees, which oversees the Funds' management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. Look for this FLAG symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. INDEXING METHODS In seeking to track a particular index, a fund generally uses one of two methods to select stocks. REPLICATION METHOD. Some index funds hold each stock found in their target indexes in about the same proportion as represented in the indexes themselves. This is called a "replication" method. For example, if 5% of a particular index were made up of the stock of a specific company, a fund tracking that index through replication would invest about 5% of its assets in that company. SAMPLING METHOD. Because it would be very expensive and inefficient to buy and sell all securities held in certain indexes (the Wilshire 5000 Index, for example, included more than 5,600 separate stocks as of December 31, 2002), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund's adviser selects from the target index a representative sample of securities that will resemble the target index in terms of key risk factors and other characteristics. For stock funds, these include industry weightings, country weightings, market capitalization, and other financial 9 characteristics of stocks. The Total Stock Market and Extended Market Index Funds employ this method of indexing. The following table shows the number of stocks held by each Fund, and the number of stocks in its target index, as of December 31, 2002. - ----------------------------------------------------------------------- NUMBER OF NUMBER OF STOCKS FUND STOCKS HELD IN TARGET INDEX - ----------------------------------------------------------------------- Vanguard Total Stock Market Index Fund 3,739 5,668 Vanguard Extended Market Index Fund 3,242 5,172 - ----------------------------------------------------------------------- MARKET EXPOSURE [FLAG] VIPER SHARES ARE SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. - ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2002) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.2 10.9 11.2 11.4 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2002. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.9%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or any VIPER Shares in particular. MARKET CAPITALIZATION. Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, or large-cap. It's important to understand that, for both companies and stock funds, market capitalization ranges change over time. Also, interpretations of size vary, and there is no "official" definition of small-, mid-, and large-cap, even among Vanguard fund advisers. The median market capitalization of each Fund as of December 31, 2002 is listed below: ----------------------------------------- MEDIAN MARKET VANGUARD INDEX FUND CAPITALIZATION ----------------------------------------- Total Stock Market $26.2 billion Extended Market 1.5 ----------------------------------------- 10 [FLAG] EXTENDED MARKET VIPERS ARE SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM SMALL- AND MID-CAP STOCKS WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. HISTORICALLY, THESE STOCKS HAVE BEEN MORE VOLATILE IN PRICE THAN THE LARGE-CAP STOCKS THAT DOMINATE THE OVERALL STOCK MARKET, AND THEY OFTEN PERFORM QUITE DIFFERENTLY. RISK OF NONDIVERSIFICATION The target indexes tracked by the Funds hold diverse investments. Similarly, the Funds that track these indexes hold stocks of many companies across many different industry sectors. It is possible that a fund's target index could become less diversified if the index's largest companies significantly increase in value relative to the index's other components. In an extreme situation, a fund tracking such an index might no longer meet the legal definition of "diversified." For this reason, the Funds are classified as "nondiversified." However, these Funds, from inception to the date of this prospectus, in acutality have been diversified, and Vanguard expects them to continue to be diversified. SPECIAL RISKS OF EXCHANGE-TRADED SHARES [FLAG] VIPER SHARES ARE NOT INDIVIDUALLY REDEEMABLE. They can be redeemed with the issuing Fund at NAV only in large blocks known as Creation Units. You would incur brokerage costs in purchasing enough VIPER Shares to constitute a Creation Unit. [FLAG] THE MARKET PRICE OF VIPER SHARES MAY DIFFER FROM NET ASSET VALUE. VIPER Shares are listed for trading on the AMEX and can be bought and sold in the secondary market at market prices. Although it is expected that the market price of a VIPER Share typically will approximate its net asset value (NAV), there may be times when the market price and the NAV vary significantly. Thus, you may pay more than NAV when buying VIPER Shares on the secondary market, and you may receive less than NAV when you sell those shares. The market price of VIPER Shares, like the price of any exchange-traded security, includes a "bid-asked spread" charged by the exchange specialist and other market makers that cover the particular security. In times of severe market disruption, the bid-asked spread can increase significantly. This means that VIPER Shares are most likely to be traded at a discount to NAV, and the discount is likely to be greatest, when the price of VIPER Shares is falling fastest--and this may be the time that you most want to sell VIPER Shares. NOTE: Vanguard's website will show the prior day's closing NAV and closing market price for each Fund's VIPER Shares. The website also will disclose how frequently each Fund's VIPER Shares traded at a premium or discount to NAV (based on closing NAVs and market prices) and the magnitudes of such premiums and discounts. [FLAG] AN ACTIVE TRADING MARKET MAY NOT EXIST. Although VIPER Shares are listed on the AMEX, it is possible that an active trading market may not be maintained. 11 [FLAG] TRADING MAY BE HALTED. Trading of VIPER Shares on the AMEX will be halted whenever trading in equity securities generally is halted by the activation of marketwide "circuit breakers," which are tied to large decreases in the Dow Jones Industrial Average. Trading of VIPER Shares also will be halted if (i) the shares are delisted from the AMEX without first being listed on another exchange, or (ii) AMEX officials determine that such action is appropriate in the interest of a fair and orderly market or to protect investors. NOTE: If trading of VIPER Shares on the AMEX is halted, eligible investors (see below) will still be able to purchase Creation Units of VIPER Shares directly from an issuing Fund and redeem such units with the Fund. PURCHASING VIPER SHARES FROM AN ISSUING FUND You can purchase VIPER Shares from an issuing Fund if you meet the following criteria and comply with the following procedures: - - Eligible Investors. To purchase VIPER Shares from a Fund, you must be an Authorized Participant or you must purchase through a broker that is an Authorized Participant. An Authorized Participant is a participant in the Depository Trust Company (DTC) that has executed a Participant Agreement with the Fund's Distributor. Most Authorized Participants are expected to be brokerage firms. - - Creation Units. You must purchase VIPER Shares in large blocks known as "Creation Units." The number of VIPER Shares in a Creation Unit is as follows: ---------------------------------------------------------------------- NUMBER OF VIPER SHARES IN A FUND CREATION UNIT ---------------------------------------------------------------------- Vanguard Total Stock Market Index Fund 50,000 Vanguard Extended Market Index Fund 100,000 ---------------------------------------------------------------------- For any particular Fund, the number of VIPER Shares in a Creation Unit will not change over time, except in the event that the Fund splits or revalues its shares. The Funds will not issue fractional Creation Units. - - In-Kind Creation Basket. To purchase VIPER Shares directly from a Fund, you must tender to the Fund a basket of securities. Each business day, prior to the opening of trading on the AMEX, the Fund's adviser will make available, on the National Securities Clearing Corporation (NSCC) bulletin board, a list identifying the name and number of shares of each security to be included in that day's creation basket. Each Fund reserves the right to accept a nonconforming creation basket. - - Balancing Amount. In addition to the in-kind deposit of securities, you will either pay to, or receive from, the Fund an amount of cash (the Balancing Amount) equal to the difference between the NAV of a Creation Unit and the value of the securities in the creation basket. The Balancing Amount ensures that the consideration paid by an investor for a Creation Unit is exactly equal to the value of the Creation Unit. The Fund's adviser will publish, on a daily basis, information about the previous day's Balancing Amount. You also must pay a transaction fee, described below, in cash. The Balancing Amount and the transaction fee, taken together, are referred to as the "Cash Component." - - Placement of Purchase Orders. All purchase orders must be placed with Vanguard by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run by the DTC or through an enhanced clearing process that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the NSCC. Authorized Participants that do not use the NSCC's 12 enhanced clearing process will be charged a higher transaction fee (discussed below). A purchase order must be received by the Fund's Distributor prior to the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) on the day the order is placed, and all other procedures set forth in the Participant Agreement must be followed, in order for you to receive the NAV determined on that day. - - Transaction Fee on Purchase of Creation Units. The Funds impose a transaction fee in the amount of $5,500 on each purchase of Creation Units effected through the NSCC's enhanced clearing process, regardless of the number of units purchased. Thus, for example, whether an investor purchases one, two, or ten Creation Units of Total Stock Market VIPERs, the transaction fee would be $5,500. For an investor purchasing Creation Units through the manual DTC clearing process, the transaction fee would be a maximum of $11,000. Investors permitted to tender a nonconforming creation basket would be subject to an additional charge determined at the discretion of the Fund. The transaction fee is paid to the Fund, not to Vanguard or a third party. The fee protects existing shareholders of the Fund from the costs associated with issuing Creation Units. REDEEMING VIPER SHARES WITH AN ISSUING FUND The redemption process is essentially the reverse of the purchase process. - - Eligible Investors. To redeem VIPER Shares with a Fund, you must be an Authorized Participant or you must redeem through a broker that is an Authorized Participant. - - Creation Units. To redeem VIPER Shares with a Fund, you must tender the shares in Creation Unit-size blocks. - - In-Kind Redemption Proceeds. Redemption proceeds will be paid in kind with a basket of securities. In most cases, the basket of securities you receive will be the same as that required of investors purchasing Creation Units on the same day. There will be times, however, when the creation and redemption baskets differ. The composition of the redemption basket will be available on the NSCC bulletin board. NOTE: Each Fund reserves the right to honor a redemption request with a nonconforming redemption basket, with the consent of the redeeming investor. - - Balancing Amount. Depending on whether the NAV of a Creation Unit is higher or lower than the value of the redemption securities, you will either receive from or pay to the Fund a Balancing Amount in cash. If you are due to receive a Balancing Amount, the amount you actually receive will be reduced by the amount of the applicable transaction fee. - - Placement of Redemption Orders. As with purchases, redemptions may be processed either through the DTC process or the enhanced NSCC process. A redemption order is deemed received on the date of transmittal if it is received by Vanguard prior to the close of regular trading on the New York Stock Exchange on that date, and all other procedures set forth in the Participation Agreement are followed. - - Transaction Fee on Redemption of Creation Units. The Funds impose a transaction fee on each redemption of Creation Units. The amount of the transaction fee on redemptions effected through the NSCC and the DTC, and on nonconforming redemptions, is the same as the fee imposed on comparable purchases (see above). As with the transaction fee on purchases, the transaction fee on redemptions is paid to the Fund, not to Vanguard or a third party. The fee protects existing shareholders of the Fund from the costs associated with redeeming Creation Units. PURCHASING AND SELLING VIPER SHARES ON THE SECONDARY MARKET You can buy and sell VIPER Shares on the secondary market in the same way you buy and sell any other exchange-traded security--through a broker. In most cases, the broker will 13 charge you a commission to execute the transaction. The price at which you buy or sell VIPER Shares (i.e., the market price) may be more or less than the net asset value of the shares. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of VIPER Shares you must buy. CONVERSION PRIVILEGE Owners of conventional shares (Investor Shares, Admiral(TM) Shares, or Institutional Shares) issued by Vanguard Total Stock Market Index Fund and Vanguard Extended Market Index Fund may convert those shares into VIPER Shares of equivalent value of the same Fund. Note: Investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into VIPER Shares. Vanguard will impose a $50 charge on conversion transactions and reserves the right, in the future, to raise or lower the fee and to limit or terminate the conversion privilege. VIPER Shares, whether acquired through a conversion or purchased in the secondary market, cannot be converted into shares of another class of the same Fund. Note to Investors in Vanguard(R) Institutional Total Stock Market Index Fund: Owners of shares issued by Vanguard Institutional Total Stock Market Index Fund CANNOT convert their shares into VIPER Shares of Vanguard Total Stock Market Index Fund because the Funds are separate and distinct. Vanguard Institutional Total Stock Market Index Fund currently does not issue VIPER Shares. Unless you are an Authorized Participant, you must hold VIPER Shares in a brokerage account. Thus, before converting conventional shares into VIPER Shares, you must have an existing, or open a new, brokerage account. To initiate a conversion of conventional shares into VIPER Shares, please contact your broker. Your broker may charge you a fee, over and above Vanguard's fee, to process a conversion request. Converting conventional shares into VIPER Shares generally is accomplished as follows. First, after your broker notifies Vanguard of your request to convert, Vanguard will transfer your conventional shares from your account to the broker's omnibus account with Vanguard (an account maintained by the broker on behalf of all its customers who hold conventional Vanguard Fund shares through the broker). After the transfer, Vanguard's records will reflect your broker, not you, as the owner of the shares. Next, your broker will instruct Vanguard to convert the appropriate number or dollar amount of conventional shares in its omnibus account into VIPER Shares of equivalent value. These shares will be held at Vanguard in an account in the name of the DTC. (The DTC will keep track of which VIPER Shares belong to your broker, and your broker, in turn, will keep track of which VIPER Shares belong to you.) Because the DTC is unable to handle fractional shares, only whole shares will be converted. For example, if you owned 300.250 conventional shares, and this was equivalent in value to 90.750 VIPER Shares, the DTC account would receive 90 VIPER Shares. Conventional shares worth 0.750 VIPER Shares (in this example, that would be 2.481 conventional shares) would remain in the broker's omnibus account with Vanguard. Your broker then could either (i) credit your account with 0.750 VIPER Shares rather than 2.481 conventional shares, or (ii) redeem the 2.481 conventional shares at net asset value, in which case you would receive cash in place of those shares. If your broker chooses to redeem your conventional shares, you will realize a gain or loss on the redemption that must be reported on your tax return (unless you hold the shares in an IRA or other tax-deferred account). Please consult your broker for information on how it will handle the conversion process, including whether it will impose a fee to process a conversion. NOTE: If you convert your conventional shares to VIPER Shares through Vanguard Brokerage Services(R) (VBS(R)), all conventional shares for which you request conversion will 14 be converted into VIPER Shares of equivalent value. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. VBS does not impose a conversion fee over and above the fee imposed by Vanguard. Here are some important points to keep in mind when converting conventional shares of a Vanguard Fund into VIPER Shares: n The conversion transaction is nontaxable except, as applicable, to the limited extent described above. - - The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day, although processing may take up to three business days, depending on when the conversion request is received. - - Until the conversion process is complete, you will remain fully invested in the Fund's conventional shares, and your investment will increase or decrease in value in tandem with the net asset value of those shares. - - During the conversion process, you will be able to liquidate all or part of your investment by instructing Vanguard or your broker (depending on who maintains records of your share ownership) to redeem your conventional shares. After the conversion process is complete, you will be able to liquidate all or part of your investment by instructing your broker to sell your VIPER Shares. EXCHANGES NOT PERMITTED: VIPER Shares of one Fund may not be exchanged for VIPER Shares of another Fund. PRECAUTIONARY NOTES A PRECAUTIONARY NOTE TO RETAIL INVESTORS: The DTC or its nominee will be the registered owner of all outstanding VIPER Shares. Your ownership of VIPER Shares will be shown on the records of the DTC and the DTC Participant broker through which you hold the shares. Vanguard will not have any record of your ownership. Your account information will be maintained by your broker, which will provide you with account statements, confirmations of your purchases and sales of VIPER Shares, and tax information. Your broker also will be responsible for distributing income and capital gains distributions and for ensuring that you receive shareholder reports and other communications from the Fund whose VIPER Shares you own. You will receive other services (e.g., dividend reinvestment and average cost information) only if your broker offers these services. A PRECAUTIONARY NOTE TO PURCHASERS OF CREATION UNITS: You should be aware of certain legal risks unique to investors purchasing Creation Units directly from the issuing Fund. Because new VIPER Shares may be issued on an ongoing basis, a "distribution" of VIPER shares could be occurring at any time. Certain activities that you perform as a dealer could, depending on the circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933. For example, you could be deemed a statutory underwriter if you purchase Creation Units from the issuing Fund, break them down into the constituent VIPER Shares, and sell those shares directly to customers, or if you choose to couple the creation of a supply of new VIPER Shares with an active selling effort involving solicitation of secondary-market demand for VIPER Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person's activities, and the examples mentioned here 15 should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not "underwriters," but are participating in a distribution (as opposed to engaging in ordinary secondary-market transactions), and thus dealing with VIPER Shares as part of an "unsold allotment" within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. A PRECAUTIONARY NOTE TO INVESTMENT COMPANIES: For purposes of the Investment Company Act of 1940, VIPER Shares are issued by registered investment companies, and the acquisition of VIPER Shares by other investment companies is subject to the restrictions of Section 12(d)(1) of that Act. A NOTE ON UNUSUAL CIRCUMSTANCES: Vanguard funds can stop selling shares or postpone payment of redemption proceeds at times when the New York Stock Exchange is closed or under any emergency circumstances as determined by the U.S. Securities and Exchange Commission. OTHER INVESTMENT POLICIES AND RISKS Each Fund reserves the right to substitute a different index for the index it currently tracks. This could happen if the current index were discontinued, if the Fund's agreement with the sponsor of its target index were terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same general market segment as the current index. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. [FLAG] EACH FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF TRADITIONAL INVESTMENTS. To track their target indexes as closely as possible, the Funds attempt to remain fully invested in stocks. To help stay fully invested, and to reduce transaction costs, the Funds may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, which are types of derivatives. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Similar risks exist for warrants (securities that permit their owners to purchase a specific number of stock shares at a predetermined price), convertible securities (securities that may be exchanged for another asset), and swap agreements (contracts between parties in which each agrees to make payments to the other based on the return of a specified index or asset). The Funds will not use derivatives for speculative purposes or as leveraged investments that magnify gains or losses. In addition, each Fund's obligation under futures contracts will not exceed 20% of its total assets. The reasons for which a Fund may invest in futures include: - - To keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in stocks. - - To reduce the Fund's transaction costs or add value when these instruments are favorably priced. 16 ================================================================================ PLAIN TALK ABOUT DERIVATIVES A derivative is a financial contract whose value is based on (or "derived" from) a traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. Derivatives can carry considerable risks, particularly if used for speculation or as leveraged investments. ================================================================================ TURNOVER RATE Generally, an index fund sells securities only to respond to redemption requests or to adjust the number of shares held to reflect a change in the fund's target index. Turnover rates for large-cap stock index funds tend to be very low because large-cap indexes typically do not change much from year to year. Turnover rates for mid-cap and small-cap stock index funds tend to be higher (although still relatively low, compared with actively managed stock funds) because the indexes they track are the most likely to change as a result of companies merging, growing, or failing. The FINANCIAL HIGHLIGHTS section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. ================================================================================ PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of December 31, 2002, the average turnover rate for passively managed domestic equity index funds investing in common stocks was approximately 94%; for all domestic stock funds, the average turnover rate was approximately 111%, according to Morningstar, Inc. ================================================================================ VIPER SHARES AND VANGUARD Each Fund is a member of The Vanguard Group, a family of 35 investment companies with more than 100 funds holding assets in excess of $550 billion. All of the funds that are members of The Vanguard Group share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to the funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each fund pays its allocated share of The Vanguard Group's marketing costs. 17 ================================================================================ PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. ================================================================================ INVESTMENT ADVISER The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in 1975, serves as the adviser to the Funds through its Quantitative Equity Group. As of December 31, 2002, Vanguard served as adviser for about $406 billion in assets. Vanguard manages the Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended December 31, 2002, the advisory expenses represented an effective annual rate of less than 0.01% of each Fund's average net assets. The Funds have authorized Vanguard to choose brokers or dealers to handle the purchase and sale of securities for the Funds, and to seek to obtain the best available price and most favorable execution from these brokers with respect to all transactions. Also, the board of trustees may direct Vanguard to use a particular broker for certain transactions in exchange for commission rebates paid to the Funds as well as brokerage or research services provided to the adviser. ================================================================================ PLAIN TALK ABOUT THE FUNDS' ADVISER The manager primarily responsible for overseeing the Funds' investments is: GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Quantitative Equity Group. He has worked in investment management since 1985 and has had primary responsibility for Vanguard's stock indexing and active quantitative investments and strategy since joining the company in 1987. Education: A.B., Dartmouth College; M.B.A., University of Chicago. ================================================================================ DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any capital gains realized from the sale of its holdings. Income dividends for the Vanguard Total Stock Market Index Fund generally are distributed in March, June, September, and December; income dividends for the Vanguard Extended Market Index Fund generally are distributed in December. For both Funds, capital gains distributions generally occur in December. In addition, the Funds may occasionally be required to make supplemental distributions at some other time during the year. 18 ================================================================================ PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. ================================================================================ DIVIDEND REINVESTMENT SERVICE Brokers may make available to their customers who own VIPER Shares the DTC book-entry dividend reinvestment service. If this service is available and used, dividend distributions of both income and capital gains will automatically be reinvested in additional whole and fractional VIPER Shares of the same Fund. Without this service, investors would receive their distributions in cash. To determine whether the dividend reinvestment service is available and whether there is a commission or other charge for using this service, consult your broker. BASIC TAX POINTS Taxable investors should be aware of the following basic tax points: - - Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional VIPER Shares. - - Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - - Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. - - Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned VIPER Shares. - - Capital gains distributions may vary considerably from year to year as a result of the Fund's normal investment activities and cash flows. - - A sale of VIPER Shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - - Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of VIPER Shares, may be subject to state and local income taxes. NOTE: This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax adviser for detailed information about any tax consequences for you. 19 DAILY PRICING The net asset value, or NAV, of each Fund's VIPER Shares is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of shares outstanding for that class. Remember: If you buy or sell VIPER Shares on the secondary market, you will pay or receive the market price, which may be higher or lower than NAV. Your transaction will be priced at NAV only if you purchase or redeem your VIPER Shares in Creation Unit blocks, or if you convert your conventional fund shares into VIPER Shares. When calculating the NAV of a Vanguard fund's shares, stocks held by the fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. When reliable market quotations are not readily available, securities are priced at their fair value, calculated according to procedures adopted by the board of trustees. A fund also may use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, but may occur in other cases as well. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard's website will show the previous day's closing NAV and closing market price for each Fund's VIPER Shares. The previous day's closing market price also will be published in the business section of most major newspapers in the listing of securities traded on the AMEX. FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand each Fund's financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in VIPER Shares of each Fund (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose reports--along with each Fund's financial statements--are included in the Funds' most recent annual reports to shareholders. You may have the annual reports sent to you without charge by contacting Vanguard. 20 ================================================================================ PLAIN TALK ABOUT HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE This explanation uses the Total Stock Market VIPER Shares as an example. The VIPER Shares began the year ended December 31, 2002, with a net asset value (price) of $105.80 per share. During the year, each VIPER Share earned $1.259 from investment income (interest and dividends). There was a decline of $23.337 per share in the value of investments held or sold by the Fund, resulting in a net decline of $22.078 from investment operations. Shareholders received $1.252 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $82.47, reflecting losses of $22.078 per share and distributions of $1.252 per share. This was a decrease of $23.33 per share (from $105.80 at the beginning of the year to $82.47 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was -20.94% for the year. As of December 31, 2002, the VIPER Shares had $1.3 billion in net assets. For the year, the expense ratio was 0.15% ($1.50 per $1,000 of net assets), and the net investment income amounted to 1.38% of average net assets. The Fund sold and replaced securities valued at 4% of its net assets. ================================================================================ TOTAL STOCK MARKET INDEX FUND VIPER SHARES - -------------------------------------------------------------------------------- YEAR ENDED MAY 24* TO DEC. 31, DEC. 31, 2002 2001 - -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $105.80 $118.46 - -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income 1.259 .843 Net Realized and Unrealized Gain (Loss) on Investments (23.337) (12.515) - -------------------------------------------------------------------------------- Total from Investment Operations (22.078) (11.672) - -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (1.252) (.988) Distributions from Realized Capital Gains -- -- - -------------------------------------------------------------------------------- Total Distributions (1.252) (.988) - -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $82.47 $105.80 - -------------------------------------------------------------------------------- TOTAL RETURN -20.94% -9.82% - -------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $1,290 $1,195 Ratio of Total Expenses to Average Net Assets 0.15% 0.15%** Ratio of Net Investment Income to Average Net Assets 1.38% 1.26%** Turnover Rate 4%+ 7%+ - -------------------------------------------------------------------------------- *Inception. **Annualized. +The turnover rates excluding in-kind redemptions were 2% and 3%, respectively. 21 - -------------------------------------------------------------------------------- EXTENDED MARKET INDEX FUND VIPER SHARES - -------------------------------------------------------------------------------- YEAR ENDED DEC. 27* TO DEC. 31, DEC. 31, 2002 2001 - -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $60.99 $60.94 - -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .566 -- Net Realized and Unrealized Gain (Loss) on Investments (11.561) .05 - -------------------------------------------------------------------------------- Total from Investment Operations (10.995) .05 - -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.535) -- Distributions from Realized Capital Gains -- -- - -------------------------------------------------------------------------------- Total Distributions (.535) -- - -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $49.46 $60.99 - -------------------------------------------------------------------------------- TOTAL RETURN -18.04% 0.08% - -------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $30 $6 Ratio of Total Expenses to Average Net Assets 0.20% 0.20%** Ratio of Net Investment Income to Average Net Assets 1.04% 0.54%** Turnover Rate 17% 20% - -------------------------------------------------------------------------------- *Inception. **Annualized. The Vanguard Group, Vanguard, VIPER, VIPERS, Plain Talk, Admiral, Vanguard Brokerage Services, VBS, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. ================================================================================ GLOSSARY OF INVESTMENT TERMS ACTIVE MANAGEMENT An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. - -------------------------------------------------------------------------------- AUTHORIZED PARTICIPANT Institutional investors that are permitted to purchase Creation Units directly from, and redeem Creation Units directly with, the fund. To be an Authorized Participant, an entity must be a participant in the Depository Trust Company and must enter into an agreement with the fund's Distributor. - -------------------------------------------------------------------------------- CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. - -------------------------------------------------------------------------------- COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. - -------------------------------------------------------------------------------- CREATION UNIT A large block of a specified number of VIPER Shares. Authorized Participants may purchase and redeem VIPER Shares from the fund only in Creation Unit-size aggregations. - -------------------------------------------------------------------------------- DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. - -------------------------------------------------------------------------------- EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. - -------------------------------------------------------------------------------- INDEX An unmanaged group of securities whose overall performance is used as a standard to measure investment performance. - -------------------------------------------------------------------------------- INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. - -------------------------------------------------------------------------------- PASSIVE MANAGEMENT A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a particular stock or bond market index; also known as indexing. - -------------------------------------------------------------------------------- VIPER SHARES Vanguard Index Participation Equity Receipts, which are a class of exchange-traded shares issued by certain Vanguard mutual funds. VIPER Shares can be bought and sold continuously throughout the day at market prices. - -------------------------------------------------------------------------------- VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. - -------------------------------------------------------------------------------- YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. - -------------------------------------------------------------------------------- [SHIP] [THE VANGUARD GROUP LOGO] Institutional Division Post Office Box 2900 Valley Forge, PA 19482-2900 FOR MORE INFORMATION If you'd like more information about Vanguard Total Stock Market VIPERs or Extended Market VIPERs, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. In the Funds' annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI for the issuing Funds provides more detailed information about the Funds' VIPER Shares. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual reports or the SAI, or to request additional information about the VIPER Shares, please contact us as follows: THE VANGUARD GROUP INSTITUTIONAL INVESTOR INFORMATION P.O. BOX 2900 VALLEY FORGE, PA 19482-2900 TELEPHONE: 1-866-499-8473 WORLD WIDE WEB: WWW.VANGUARD.COM INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the issuing Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Funds are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file number: 811-2652 (C) 2003 The Vanguard Group, Inc. All rights reserved. Patent Pending. Vanguard Marketing Corporation, Distributor. P970 042003 VANGUARD(R) U.S. STOCK INDEX FUNDS Institutional Shares & Institutional Plus Shares April 28, 2003 This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2002. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. VANGUARD U.S. STOCK INDEX FUNDS Institutional Shares and Institutional Plus Shares Prospectus April 28, 2003 - -------------------------------------------------------------------------------- CONTENTS 1 FUND PROFILES 35 DIVIDENDS, CAPITAL GAINS, AND TAXES 1 Vanguard Institutional Index Fund 37 SHARE PRICE 3 Vanguard Institutional Total Stock 37 FINANCIAL HIGHLIGHTS Market Index Fund 45 INVESTING WITH VANGUARD 7 Vanguard Total Stock Market Index Fund 45 Buying Shares 9 Vanguard Extended Market Index Fund 47 Converting Shares 13 Vanguard Mid-Cap Index Fund 47 Redeeming Shares 15 Vanguard Small-Cap Index Fund 49 Exchanging Shares 18 Vanguard Value Index Fund 50 Other Rules You Should Know 20 Vanguard Small-Cap Value Index Fund 53 Fund and Account Updates 23 Vanguard Growth Index Fund 54 Contacting Vanguard 26 Vanguard Small-Cap Growth 56 VIPER SHARES Index Fund GLOSSARY (inside back cover) 28 MORE ON THE FUNDS 33 THE FUNDS AND VANGUARD 34 INVESTMENT ADVISER - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WHY READING THIS PROSPECTUS IS IMPORTANT This prospectus explains the investment objective, policies, strategies, and risks associated with each Fund. To highlight terms and concepts important to mutual fund investors, we have provided Plain Talk(R) explanations along the way. Reading the prospectus will help you decide whether a Fund is the right investment for you. We suggest that you keep this prospectus for future reference. - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SHARE CLASS OVERVIEW This prospectus offers Institutional Shares for all of the Funds and Institutional Plus Shares for two of the Funds. The investment minimum is $10 million, except for the Institutional Plus Shares ($200 million) of Vanguard Institutional Index Fund and the Institutional Shares ($200 million) and Institutional Plus Shares ($500 million) of Vanguard Institutional Total Stock Market Index Fund. The Funds generally are not available through financial intermediaries or retirement plans receiving special administrative services from Vanguard. Institutional Shares of Vanguard Total Stock Market and Extended Market Index Funds can be converted into an exchange-traded class of shares known as VIPER Shares. A brief description of VIPER Shares and how to convert into them appears on pages 56 to 58 of this prospectus. A separate prospectus containing more information about VIPER Shares is available at Vanguard's website or by calling 1-866-499-8473 (1-866-499-VIPER). Another prospectus offers Investor Shares for all of the Vanguard U.S. Stock Index Funds (except Vanguard Institutional Index Fund and Institutional Total Stock Market Index Fund) as well as Admiral Shares for seven of the Funds. The Funds' separate share classes have different expenses; as a result, their investment performances will differ. - ------------------------------------------------------------------------------- 1 FUND PROFILE-- VANGUARD(R) INSTITUTIONAL INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's 500 Index, which is dominated by the stocks of large U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from large-cap stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund. The bar chart shows how the performance of the Fund's Institutional Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 1993 10.02 1994 1.31 1995 37.60 1996 23.06 1997 33.36 1998 28.79 1999 21.17 2000 -8.95 2001 -11.93 2002 -22.03 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 21.43% (quarter ended December 31, 1998), and the lowest return for a quarter was -17.18% (quarter ended September 30, 2002). The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the 2 after-tax returns are only for the Fund's Institutional Share class and that after-tax returns for Institutional Plus Shares will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 1 YEAR 5 YEARS 10 YEARS - -------------------------------------------------------------------------------- VANGUARD INSTITUTIONAL INDEX FUND INSTITUTIONAL SHARES Return Before Taxes -22.03% -0.49% 9.40% Return After Taxes on Distributions -22.52 -1.08 8.47 Return After Taxes on Distributions and Sale of Fund Shares -13.51 -0.59 7.51 - -------------------------------------------------------------------------------- VANGUARD INSTITUTIONAL INDEX FUND INSTITUTIONAL PLUS SHARES* Return Before Taxes -22.01% -0.46% -- - -------------------------------------------------------------------------------- S&P 500 INDEX (reflects no deduction for fees,expenses, or taxes) -22.10% -0.59% 9.34% - -------------------------------------------------------------------------------- *Average annual total returns from July 7, 1997--the inception date of the Institutional Plus Shares--through December 31, 2002, were 0.87% for Vanguard Institutional Index Fund Institutional Plus Shares and 0.75% for the S&P 500 Index. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares or Institutional Plus Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. INSTITUTIONAL INSTITUTIONAL SHARES PLUS SHARES ------------- ------------- SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None* None* Sales Charge (Load) Imposed on Reinvested Dividends: None None Redemption Fee: None None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.05% 0.025% 12b-1 Distribution Fee: None None Other Expenses: 0% 0% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.05% 0.025% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. 3 The following examples are intended to help you compare the cost of investing in the Fund's Institutional or Institutional Plus Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - ---------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------- Institutional Shares $5 $16 $28 $64 Institutional Plus Shares 3 8 14 32 - ---------------------------------------------------------------- THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Dividends are distributed quarterly Institutional Shares--InstIdx in March, June, September, and Institutional Plus Shares--InstPlus December; capital gains, if any, are distributed annually in December. INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., Institutional Shares--94 since inception Institutional Plus Shares--854 INCEPTION DATE CUSIP NUMBER Institutional Shares--July 31, 1990 Institutional Shares--922040100 Institutional Plus Shares--July 7, 1997 Institutional Plus Shares--922040209 NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 TICKER SYMBOL $29.4 billion Institutional Shares--VINIX Institutional Plus Shares--VIIIX - -------------------------------------------------------------------------------- FUND PROFILE--VANGUARD(R) INSTITUTIONAL TOTAL STOCK MARKET INDEX FUND INVESTMENT OBJECTIVES The Fund seeks to track the performance of a benchmark index that measures the invest ment return of the overall stock market. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 5000 Total Market Index, which consists of all the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market. The Fund invests all or substantially all of its assets in a representative sample of the stocks that make up the Index. For a description of the Fund's sampling technique, please see "Indexing Methods" under MORE ON THE FUNDS. 4 PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund.The bar chart shows the performance of the Fund's Institutional Shares in their first full calendar year. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 2002 -20.77 ---------------------------------------------------- During the period shown in the bar chart, the highest return for a calendar quarter was 8.05% (quarter ended December 31, 2002), and the lowest return for a quarter was -16.84% (quarter ended September 30, 2002). The table shows how the average annual total returns of the share classes presented compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Institutional Share class and that after-tax returns for Institutional Plus Shares will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. 5 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD INSTITUTIONAL TOTAL STOCK MARKET INDEX FUND INSTITUTIONAL SHARES Return Before Taxes -20.77% -14.55% Return After Taxes on Distributions -21.27 -15.12 Return After Taxes on Distributions and Sale of Fund Shares -12.73 -11.82 - -------------------------------------------------------------------------------- VANGUARD INSTITUTIONAL TOTAL STOCK MARKET INDEX FUND INSTITUTIONAL PLUS SHARES** Return Before Taxes -20.74% -- - -------------------------------------------------------------------------------- WILSHIRE 5000 INDEX (reflects no deduction for fees, expenses, or taxes) -20.86 -14.65% - -------------------------------------------------------------------------------- * Since-inception returns are from August 31, 2001--the inception date of the Institutional Shares--through December 31, 2002. ** Average annual total returns from May 31, 2001--the inception date of the Institutional Plus Shares--through December 31, 2002, were -17.47% for the Vanguard Institutional Total Stock Market Index Fund Institutional Plus Shares and -17.61% for the Wilshire 5000 Index. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares or Institutional Plus Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. INSTITUTIONAL INSTITUTIONAL SHARES PLUS SHARES ------------- ------------- SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None None Purchase Fee: None* None* Sales Charge (Load) Imposed on Reinvested Dividends: None None Redemption Fee: None None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.06% 0.025% 12b-1 Distribution Fee: None None Other Expenses: 0% 0% TOTAL ANNUAL FUND OPERATING EXPENSES 0.06% 0.025% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following examples are intended to help you compare the cost of investing in the Fund's Institutional or Institutional Plus Shares with the cost of investing in other mutual funds. They illustrate the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. These examples assume that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - ---------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------------------------------------------------------- Institutional Shares $6 $19 $34 $77 Institutional Plus Shares 3 8 14 32 - ---------------------------------------------------------------- 6 THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Dividends are distributed quarterly Institutional Shares--InstTStIdxt in March, June, September, and December; Institutional Plus Shares--InstTStPlus capital gains, if any, are distributed annually in December VANGUARD FUND NUMBER INVESTMENT ADVISER Institutional Shares--870 The Vanguard Group, Valley Forge, Pa., Institutional Plus Shares--871 since inception CUSIP NUMBER INCEPTION DATE Institutional Shares--922010308 Institutional Shares--August 31, 2001 Institutional Plus Institutional Plus Shares--May 31, 2001 Shares--922010407 NET ASSETS (ALL SHARE CLASSES) AS OF TICKER SYMBOL DECEMBER 31, 2002 Institutional Shares--VITNX $925 million Institutional Plus Shares--VITPX - -------------------------------------------------------------------------------- 7 FUND PROFILE-- VANGUARD(R) TOTAL STOCK MARKET INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of the overall stock market. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 5000 Total Market Index, which consists of all the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market. The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Index. For a description of the Fund's sampling technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund.The bar chart shows how the performance of the Fund's Institutional Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 1998 23.37 1999 23.93 2000 -10.46 2001 -10.85 2002 -20.90 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 21.55% (quarter ended December 31, 1998), and the lowest return for a quarter was -16.81% (quarter ended September 30, 2002). The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Institutional Share class and that after-tax returns for other share classes will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher 8 after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR 5 YEARS INCEPTION* - -------------------------------------------------------------------------------- VANGUARD TOTAL STOCK MARKET INDEX FUND INSTITUTIONAL SHARES Return Before Taxes -20.90% -0.70% 0.87% Return After Taxes on Distributions -21.35 -1.31 0.18 Return After Taxes on Distributions and Sale of Fund Shares -12.81 -0.77 0.45 WILSHIRE 5000 INDEX (reflects no deduction for fees, expenses, or taxes) -20.86% -0.87% 0.74% - -------------------------------------------------------------------------------- * Since-inception returns are from July 7, 1997--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Insti tutional Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.06% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.08% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 9 - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $8 $26 $45 $103 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Dividends are distributed quarterly in March, TotStInst June, September, and December; capital gains, if any, are distributed annually in December. VANGUARD FUND NUMBER 855 INVESTMENT ADVISER The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER since inception 922908801 INCEPTION DATE TICKER SYMBOL Investor Shares--April 27, 1992; VITSX Institutional Shares--July 7, 1997 NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $24 billion - -------------------------------------------------------------------------------- FUND PROFILE-- VANGUARD(R) EXTENDED MARKET INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the investment return of small- and mid-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Wilshire 4500 Completion Index, a broadly diversified index of stocks of small and medium-size U.S. companies. The Wilshire 4500 Index contains all of the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market, except those stocks included in the Standard & Poor's 500 Index. The Fund invests all, or substantially all, of its assets in a representative sample of the stocks that make up the Wilshire 4500 Index. For a description of the Fund's sampling technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small- and mid-cap stocks will trail returns from the overall stock market. Historically, these stocks have been 10 more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund.The bar chart shows how the performance of the Fund's Institutional Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 1998 8.45 1999 36.45 2000 -15.41 2001 -9.03 2002 -17.93 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 29.63% (quarter ended December 31, 1999), and the lowest return for a quarter was -21.04% (quarter ended September 30, 2001). The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Institutional Share class and that after-tax returns for other share classes will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. 11 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR 5 YEARS INCEPTION* - -------------------------------------------------------------------------------- VANGUARD EXTENDED MARKET INDEX FUND INSTITUTIONAL SHARES Return Before Taxes -17.93% -1.35% 0.80% Return After Taxes on Distributions -18.28 -3.39 -1.40 Return After Taxes on Distributions and Sale of Fund Shares -11.01 -1.16 0.48 WILSHIRE 4500 INDEX (reflects no deduction for fees, expenses, or taxes) -17.80 -1.57 0.64 - -------------------------------------------------------------------------------- * Since-inception returns are from July 7, 1997--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Insti tutional Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.08% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $10 $32 $56 $128 - -------------------------------------------------- 12 THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December ExtndInst INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 856 since inception CUSIP NUMBER INCEPTION DATE 922908884 Investor Shares--December 21, 1987 Institutional Shares--July 7, 1997 TICKER SYMBOL VIEIX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $3.9 billion - -------------------------------------------------------------------------------- 13 FUND PROFILE--VANGUARD(R) MID-CAP INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of mid-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management" --or indexing--investment approach designed to track the performance of the Standard & Poor's MidCap 400 Index, which is made up of a group of medium-size U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from mid-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund.The bar chart shows how the performance of the Fund's Institutional Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 15.41 2000 18.39 2001 -0.37 2002 -14.45 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 18.08% (quarter ended December 31, 2001), and the lowest return for a quarter was -16.52% (quarter ended September 30, 2002). The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns 14 are only for the Fund's Institutional Share class and that after-tax returns for other share classes will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD MID-CAP INDEX FUND INSTITUTIONAL SHARES Return Before Taxes -14.45% 5.22% Return After Taxes on Distributions -15.01 3.33 Return After Taxes on Distributions and Sale of Fund Shares -8.67 3.46 - -------------------------------------------------------------------------------- S&P MIDCAP 400 INDEX (reflects no deduction for fees, expenses, or taxes) -14.51% 4.69% - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.08% 12b-1 Distribution Fee: None Other Expenses: 0.02% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. 15 - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $10 $32 $56 $128 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December MidCpInst INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 864 since inception CUSIP NUMBER INCEPTION DATE 922908835 Investor Shares and Institutional Shares-- May 21, 1998 TICKER SYMBOL VMCIX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $3.3 billion - -------------------------------------------------------------------------------- FUND PROFILE--VANGUARD(R) SMALL-CAP INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of small-capitalization stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Russell 2000 Index, which is made up of the stocks of smaller U.S. companies. The Russell 2000 Index is made up of the 2,000 smallest companies from a list of the 3,000 largest U.S. companies. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small-cap stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. 16 PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund.The bar chart shows how the performance of the Fund's Institutional Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 1998 -2.50 1999 23.33 2000 -2.56 2001 3.27 2002 -19.89 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 20.94% (quarter ended December 31, 2001), and the lowest return for a quarter was -21.30% (quarter ended September 30, 2002). The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Institutional Share class and that after-tax returns for other share classes will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR 5 YEARS INCEPTION* - -------------------------------------------------------------------------------- VANGUARD SMALL-CAP INDEX FUND INSTITUTIONAL SHARES Return Before Taxes -19.89% -0.62% 1.41% Return After Taxes on Distributions -20.31 -2.47 -0.56 Return After Taxes on Distributions and Sale of Fund Shares -12.21 -0.77 0.83 - -------------------------------------------------------------------------------- RUSSELL 2000 INDEX (reflects no deduction for fees, expenses, or taxes) -20.48 -1.36 0.68 - -------------------------------------------------------------------------------- * Since-inception returns are from July 7, 1997--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- 17 FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.07% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $10 $32 $56 $128 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December SmCapInst INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., since 857 1989 CUSIP NUMBER INCEPTION DATE 922908876 Investor Shares--October 3, 1960 Institutional Shares--July 7, 1997 TICKER SYMBOL VSCIX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $4.2 billion - -------------------------------------------------------------------------------- 18 FUND PROFILE--VANGUARD(R) VALUE INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization value stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment strategy designed to track the performance of the Standard & Poor's 500/Barra Value Index, which includes those stocks of the S&P 500 Index with lower-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from large-cap value stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund.The bar chart shows how the performance of the Fund's Institutional Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 12.67 2000 6.19 2001 -11.77 2002 -20.81 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 10.78% (quarter ended June 30, 1999), and the lowest return for a quarter was -20.42% (quarter ended September 30, 2002). The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns 19 are only for the Fund's Institutional Share class and that after-tax returns for other share classes will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD VALUE INDEX FUND INSTITUTIONAL SHARES Return Before Taxes -20.81% -3.76% Return After Taxes on Distributions -21.46 -5.57 Return After Taxes on Distributions and Sale of Fund Shares -12.76 -3.32 S&P 500/BARRA VALUE INDEX (reflects no deduction for fees, expenses, or taxes) -20.85% -3.78% - -------------------------------------------------------------------------------- * Since-inception returns are from July 2, 1998--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.07% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. 20 The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $10 $32 $56 $128 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NET ASSETS (ALL SHARE CLASSES) Dividends are distributed quarterly in DECEMBER 31, 2002 March, June, September, and December; $3.2 billion capital gains, if any, are distributed annually in December. INVESTMENT ADVISER NEWSPAPER ABBREVIATION The Vanguard Group, Valley Forge, Pa., ValueInst since inception VANGUARD FUND NUMBER INCEPTION DATE 867 Investor Shares--November 2, 1992 Institutional Shares--July 2, 1998 CUSIP NUMBER 922908850 TICKER SYMBOL VIVIX - -------------------------------------------------------------------------------- FUND PROFILE-- VANGUARD(R) SMALL-CAP VALUE INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of small-capitalization value stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's SmallCap 600/Barra Value Index, which includes those stocks of the S&P SmallCap 600 Index with lower-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: 21 o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small-cap value stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund.The bar chart shows how the performance of the Fund's Institutional Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 2000 22.04 2001 13.86 2002 -13.96 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 21.40% (quarter ended December 31, 2001), and the lowest return for a quarter was -22.48% (quarter ended September 30, 2002). The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Institutional Share class and that after-tax returns for other share classes will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. 22 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD SMALL-CAP VALUE INDEX FUND INSTITUTIONAL SHARES Return Before Taxes -13.96% 6.97% Return After Taxes on Distributions -15.06 4.08 Return After Taxes on Distributions and Sale of Fund Shares -8.31 4.31 - -------------------------------------------------------------------------------- S&P SMALLCAP 600/BARRA VALUE INDEX (reflects no -14.47% 6.15% deduction for fees, expenses, or taxes) - -------------------------------------------------------------------------------- * Since-inception returns are from December 7, 1999--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.07% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $10 $32 $56 $128 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. 23 - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December SmValInst INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 865 since inception CUSIP NUMBER INCEPTION DATE 922908785 Investor Shares--May 21, 1998 Institutional Shares--December 7, 1999 TICKER SYMBOL VSIIX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $1.5 billion - -------------------------------------------------------------------------------- FUND PROFILE--VANGUARD(R) GROWTH INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of large-capitalization growth stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's 500/Barra Growth Index, which includes those stocks of the S&P 500 Index with higher-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. In addition, the Fund's performance could be hurt disproportionately by a decline in the prices of just a few stocks. This is because, compared with other mutual funds, the Fund invests a greater percentage of assets in the stocks of fewer companies. The Fund's performance could also be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from large-cap growth stocks will trail returns from the overall stock market. Specific types of stocks tend to go through cycles of doing better--or worse--than the stock market in general. These periods have, in the past, lasted for as long as several years. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund.The bar chart shows how the performance of the Fund's Institutional Shares has varied from one calendar year to another over the periods shown. 24 ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 28.91 2000 -22.14 2001 -12.82 2002 -23.58 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 20.21% (quarter ended December 31, 1999), and the lowest return for a quarter was -17.44% (quarter ended March 31, 2001). The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns are only for the Fund's Institutional Share class and that after-tax returns for other share classes will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD GROWTH INDEX FUND INSTITUTIONAL SHARES Return Before Taxes -23.58% -4.51% Return After Taxes on Distributions -23.93 -4.98 Return After Taxes on Distributions and Sale of Fund Shares -14.47 -3.62 - -------------------------------------------------------------------------------- S&P 500/BARRA GROWTH INDEX (reflects no deduction for fees, expenses, or taxes) -23.59% -4.61% - -------------------------------------------------------------------------------- * Since-inception returns are from May 14, 1998--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- 25 FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.07% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $10 $32 $56 $128 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NET ASSETS (ALL SHARE CLASSES) Dividends are distributed quarterly DECEMBER 31, 2002 in March, June, September, and $7.5 billion December; capital gains, if any, are distributed annually in December. INVESTMENT ADVISER NEWSPAPER ABBREVIATION The Vanguard Group, Valley Forge, Pa., GrowthInst since inception VANGUARD FUND NUMBER INCEPTION DATE 868 Investor Shares--November 2, 1992 Institutional Shares--May 14, 1998 CUSIP NUMBER 922908868 TICKER SYMBOL VIGIX - -------------------------------------------------------------------------------- 26 FUND PROFILE-- VANGUARD(R) SMALL-CAP GROWTH INDEX FUND INVESTMENT OBJECTIVE The Fund seeks to track the performance of a benchmark index that measures the invest ment return of small-capitalization growth stocks. PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the Standard & Poor's SmallCap 600/Barra Growth Index, which includes those stocks of the S&P SmallCap 600 Index with higher-than-average price/book ratios. The Fund attempts to replicate the target index by investing all, or substantially all, of its assets in the stocks that make up the Index. For a description of the Fund's replication technique, please see "Indexing Methods" under MORE ON THE FUNDS. PRIMARY RISKS An investment in the Fund could lose money over short or even long periods. You should expect the Fund's share price and total return to fluctuate within a wide range, like the fluctuations of the overall stock market. The Fund's performance could be hurt by: o Stock market risk, which is the chance that stock prices overall will decline. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices. o Investment style risk, which is the chance that returns from small-cap growth stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-cap stocks that dominate the overall stock market, and they often perform quite differently. PERFORMANCE/RISK INFORMATION The following bar chart and table are intended to help you understand the risks of investing in the Fund.The bar chart shows how the performance of the Fund's Institutional Shares has varied from one calendar year to another over the periods shown. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 2001 -0.64 2002 -15.26 ---------------------------------------------------- During the periods shown in the bar chart, the highest return for a calendar quarter was 20.31% (quarter ended December 31, 2001), and the lowest return for a quarter was -17.41% (quarter ended September 30, 2001). The table shows how the average annual total returns of the Institutional Shares compare with those of the Fund's target index. To calculate the figures that depict the impact of taxes on returns, we assumed that, at the time of each distribution of income or capital gains, the shareholder was in the highest federal marginal income tax bracket. We did not take into consideration state or local income taxes. You should keep in mind that the after-tax returns 27 are only for the Fund's Institutional Share class and that after-tax returns for other share classes will differ. In certain cases the figure representing "Return After Taxes on Distributions and Sale of Fund Shares" may be higher than the other return figures for the same period. A higher after-tax return results when a capital loss occurs upon redemption and translates into an assumed tax deduction that benefits the shareholder. Please note that your after-tax returns depend on your tax situation and may differ from those shown. Also note that if you own the Fund in a tax-deferred account, such as an individual retirement account or a 401(k) plan, after-tax information does not apply to your investment, because such accounts are subject to taxes only upon distribution. Finally, keep in mind that the Fund's performance--whether before taxes or after taxes--does not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS - -------------------------------------------------------------------------------- PERIODS ENDED DECEMBER 31, 2002 SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD SMALL-CAP GROWTH INDEX FUND INSTITUTIONAL SHARES Return Before Taxes -15.26% -4.66% Return After Taxes on Distributions -15.41 -5.31 Return After Taxes on Distributions and Sale of Fund Shares -9.37 -3.87 - -------------------------------------------------------------------------------- S&P SMALLCAP 600/BARRA GROWTH INDEX (reflects no deduction for fees, expenses, or taxes) -15.36% -5.16% - -------------------------------------------------------------------------------- * Since-inception returns are from May 24, 2000--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Institutional Shares of the Fund. The expenses shown under Annual Fund Operating Expenses are based on those incurred in the fiscal year ended December 31, 2002. SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Purchase Fee: None* Sales Charge (Load) Imposed on Reinvested Dividends: None Redemption Fee: None ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Expenses: 0.07% 12b-1 Distribution Fee: None Other Expenses: 0.03% TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10% * The Fund reserves the right to deduct a purchase fee from future purchases of shares. 28 The following example is intended to help you compare the cost of investing in the Fund's Institutional Shares with the cost of investing in other mutual funds. It illustrates the hypothetical expenses that you would incur over various periods if you invest $10,000 in the Fund's shares. This example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. The results apply whether or not you redeem your investment at the end of the given period. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $10 $32 $56 $128 - -------------------------------------------------- THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN. - -------------------------------------------------------------------------------- ADDITIONAL INFORMATION DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION Distributed annually in December SmGthInst INVESTMENT ADVISER VANGUARD FUND NUMBER The Vanguard Group, Valley Forge, Pa., 866 since inception CUSIP NUMBER INCEPTION DATE 922908819 Investor Shares--May 21, 1998 Institutional Shares--May 24, 2000 TICKER SYMBOL VSGIX NET ASSETS (ALL SHARE CLASSES) AS OF DECEMBER 31, 2002 $492 million - -------------------------------------------------------------------------------- MORE ON THE FUNDS This prospectus describes the primary risks you would face as a Fund shareholder. It is important to keep in mind one of the main axioms of investing: The higher the risk of losing money, the higher the potential reward. The reverse, also, is generally true: The lower the risk, the lower the potential reward. As you consider an investment in any mutual fund, you should take into account your personal tolerance for daily fluctuations in the securities markets. Look for this [FLAG] symbol throughout the prospectus. It is used to mark detailed information about the more significant risks that you would confront as a Fund shareholder. The following sections explain the primary investment strategies and policies that each Fund uses in pursuit of its objective. The Funds' board of trustees, which oversees the Funds' management, may change investment strategies or policies in the interest of shareholders without a shareholder vote, unless those strategies or policies are designated as fundamental. INDEXING METHODS In seeking to track a particular index, a fund generally uses one of two methods to select the securities in which it invests. REPLICATION METHOD. Many stock funds use the replication method of indexing. This means that a fund holds each security found in its target index in about the same proportion as represented in the index itself. For example, if 5% of the S&P 500 Index were made up of the stock of a specific company, a fund tracking that index would invest about 5% of 29 its assets in that company. The Institutional, Mid-Cap, Small-Cap, Value, Small-Cap Value, Growth, and Small-Cap Growth Index Funds employ this method of indexing. SAMPLING METHOD. Because it would be very expensive and inefficient to buy and sell all securities held in certain indexes (the Wilshire 5000 Index, for example, included more than 5,600 separate stocks as of December 31, 2002), many funds tracking these larger indexes use a "sampling" technique. Using sophisticated computer programs, a fund's adviser selects from the target index a representative sample of securities that will resemble the target index in terms of key risk factors and other characteristics. For stock funds, these include industry weightings, country weightings, market capitalization, and other financial characteristics of stocks. The Institutional Total Stock Market, Total Stock Market, and Extended Market Index Funds employ this method of indexing. The following table shows the number of stocks held by each Fund, and the number of stocks in its target index, as of December 31, 2002. ------------------------------------------------------------------ NUMBER OF NUMBER OF STOCKS IN VANGUARD INDEX FUND STOCKS HELD TARGET INDEX ------------------------------------------------------------------ Institutional 502 500 Institutional Total Stock Market 3,216 5,668 Total Stock Market 3,739 5,668 Extended Market 3,242 5,172 Mid-Cap 402 400 Small-Cap 1,977 1,964 Value 353 352 Small-Cap Value 390 390 Growth 149 148 Small-Cap Growth 211 210 ------------------------------------------------------------------ - -------------------------------------------------------------------------------- PLAIN TALK ABOUT GROWTH FUNDS AND VALUE FUNDS Growth investing and value investing are two styles employed by stock-fund managers. Growth funds generally focus on stocks of companies believed to have above-average potential for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. Value funds typically emphasize stocks whose prices are below-average in comparison with those measures; these stocks often have above-average dividend yields. Growth and value stocks have, in the past, produced similar long-term returns, though each category has periods when it outperforms the other. In general, growth funds appeal to investors who will accept more volatility in hopes of a greater increase in share price. - -------------------------------------------------------------------------------- MARKET EXPOSURE The Funds invest mainly in common stocks. As a result, they are subject to certain risks. [FLAG] EACH FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES. 30 MARKET CAPITALIZATION. Stocks of publicly traded companies and funds that invest in stocks are often classified according to market value, or market capitalization. These classifications typically include small-cap, mid-cap, or large-cap. It's important to understand that, for both companies and stock funds, market capitalization ranges change over time. Also, interpretations of size vary, and there is no "official" definition of small-, mid-, and large-cap, even among Vanguard fund advisers. The median market capitalization of each Fund as of December 31, 2002 is listed below: --------------------------------------------------------- MEDIAN MARKET VANGUARD INDEX FUND CAPITALIZATION --------------------------------------------------------- Institutional $47.0 billion Institutional Total Stock Market 26.2 Total Stock Market 26.2 Extended Market 1.5 Mid-Cap 2.2 Small-Cap 0.6 Value 22.8 Small-Cap Value 0.6 Growth 71.4 Small-Cap Growth 1.0 --------------------------------------------------------- To illustrate the volatility of stock prices, the following table shows the best, worst, and average total returns for the U.S. stock market over various periods as measured by the Standard & Poor's 500 Index, a widely used barometer of market activity. (Total returns consist of dividend income plus change in market price.) Note that the returns shown do not include the costs of buying and selling stocks or other expenses that a real-world investment portfolio would incur. - ---------------------------------------------------------- U.S. STOCK MARKET RETURNS (1926-2002) - ---------------------------------------------------------- 1 YEAR 5 YEARS 10 YEARS 20 YEARS - ---------------------------------------------------------- Best 54.2% 28.6% 19.9% 17.8% Worst -43.1 -12.4 -0.8 3.1 Average 12.2 10.9 11.2 11.4 - ---------------------------------------------------------- The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through 2002. You can see, for example, that while the average return on common stocks for all of the 5-year periods was 10.9%, average returns for individual 5-year periods ranged from -12.4% (from 1928 through 1932) to 28.6% (from 1995 through 1999). These average returns reflect past performance on common stocks; you should not regard them as an indication of future returns from either the stock market as a whole or these Funds in particular. Keep in mind that the S&P 500 Index tracks mainly large-cap stocks. Historically, mid- and small-cap stocks (such as those held by the Total Stock Market, Extended Market, Mid- Cap, Small-Cap, Small-Cap Value, and Small-Cap Growth Index Funds) have been more volatile than--and at times have performed quite differently from--the large-cap stocks of the S&P 500 Index. Similarly, indexes that are subsets of the S&P 500 Index--such as the S&P 500/Barra Value Index and the S&P 500/Barra Growth Index (the target indexes of the Value and Growth Index Funds)--will not perform in the same way as the broader S&P 500 Index. Historically, the S&P 500/Barra Value Index has been less volatile than the S&P 500 Index; 31 the S&P 500/Barra Growth Index, on the other hand, has displayed somewhat greater short-term volatility than the S&P 500 Index. However, both value and growth stocks have the potential, at times, to be more volatile than the broader market. [FLAG] EACH FUND (OTHER THAN THE TOTAL STOCK MARKET INDEX FUND) IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT RETURNS FROM THE TYPES OF STOCKS IN WHICH THE FUND INVESTS WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. SPECIFIC TYPES OF STOCKS (FOR INSTANCE, SMALL-CAP OR VALUE) TEND TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN THE STOCK MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS. RISK OF NONDIVERSIFICATION The target indexes tracked by Vanguard's U.S. Stock Index Funds hold diverse investments. Similarly, the Funds that track these indexes hold stocks of many companies across many different industry sectors. It is possible that a fund's target index could become less diversified if the index's largest companies significantly increase in value relative to the index's other components. In an extreme situation, a fund tracking such an index might no longer meet the legal definition of "diversified." (Such has been the case, from time to time, with the Growth Index Fund.) For this reason, Vanguard's U.S. Stock Index Funds are classified as "nondiversified." However, these funds, other than the Growth Index Fund, from inception to the date of this prospectus, in actuality have been diversified, and Vanguard expects them to continue to be diversified. OTHER INVESTMENT POLICIES AND RISKS Each Fund reserves the right to substitute a different index for the index it currently tracks. This could happen if the current index were discontinued, if the Fund's agreement with the sponsor of its target index were terminated, or for any other reason determined in good faith by the Fund's board of trustees. In any such instance, the substitute index would measure the same general market segment (large-, mid-, or small-cap, growth, or value) as the current index. Each Fund may invest in foreign securities to the extent necessary to carry out its investment strategy of holding all, or a representative sample, of the stocks that make up the index it tracks. It is not expected that any Fund will invest more than 5% of its assets in foreign securities. Although index funds, by their nature, tend to be tax-efficient investment vehicles, the Funds are generally managed without regard to tax ramifications. [FLAG] EACH FUND MAY INVEST, TO A LIMITED EXTENT, IN DERIVATIVES. DERIVATIVES MAY INVOLVE RISKS DIFFERENT FROM, AND POSSIBLY GREATER THAN, THOSE OF TRADITIONAL INVESTMENTS. To track their target indexes as closely as possible, the Funds attempt to remain fully invested in stocks. To help stay fully invested, and to reduce transaction costs, the Funds may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, which are types of derivatives. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Similar risks exist for warrants (securities that permit their owners to purchase a specific number of stock 32 shares at a predetermined price), convertible securities (securities that may be exchanged for another asset), and swap agreements (contracts between parties in which each agrees to make payments to the other based on the return of a specified index or asset). The Funds will not use derivatives for speculative purposes or as leveraged investments that magnify gains or losses. In addition, each Fund's obligation under futures contracts will not exceed 20% of its total assets. The reasons for which a Fund may invest in futures include: o To keep cash on hand to meet shareholder redemptions or other needs while simulating full investment in stocks. o To reduce the Fund's transaction costs or add value when these instruments are favorably priced. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DERIVATIVES A derivative is a financial contract whose value is based on (or "derived" from) a traditional security (such as a stock or a bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Some forms of derivatives, such as exchange-traded futures and options on securities, commodities, or indexes, have been trading on regulated exchanges for decades. These types of derivatives are standardized contracts that can easily be bought and sold, and whose market values are determined and published daily. Nonstandardized derivatives (such as swap agreements), on the other hand, tend to be more specialized or complex, and may be harder to value. Derivatives can carry considerable risks, particulary if used for speculation or as leveraged investments. - -------------------------------------------------------------------------------- COSTS AND MARKET-TIMING Some investors try to profit from a strategy called market-timing--switching money into mutual funds when they expect prices to rise and taking money out when they expect prices to fall. As money is shifted in and out, a fund incurs expenses for buying and selling securities. These costs are borne by all fund shareholders, including the long-term investors who do not generate the costs. This is why all Vanguard funds have adopted special policies to discourage short-term trading or to compensate the funds for the costs associated with it. Specifically: o Each Vanguard fund reserves the right to reject any purchase request--including exchanges from other Vanguard funds--that it regards as disruptive to efficient portfolio management. A purchase request could be rejected because of the timing of the investment or because of a history of excessive trading by the investor. o Each Vanguard fund (other than the money market funds) limits the number of times that an investor can exchange into and out of the fund. o Certain Vanguard funds charge purchase and/or redemption fees on transactions. See the INVESTING WITH VANGUARD section of this prospectus for further details on Vanguard's transaction policies. THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD IF YOU ARE A MARKET-TIMER. 33 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT COSTS OF INVESTING Costs are an important consideration in choosing a mutual fund. That's because you, as a shareholder, pay the costs of operating a fund, plus any transaction costs incurred when the fund buys or sells securities. These costs can erode a substantial portion of the gross income or the capital appreciation a fund achieves. Even seemingly small differences in expenses can, over time, have a dramatic effect on a fund's performance. - -------------------------------------------------------------------------------- TURNOVER RATE Although the Funds normally seek to invest for the long term, each Fund may sell securities regardless of how long they have been held. Generally, an index fund sells securities only to respond to redemption requests or to adjust the number of shares held to reflect a change in the fund's target index. Turnover rates for large-cap stock index funds tend to be very low because large-cap indexes--such as the S&P 500 Index--typically do not change much from year to year. Turnover rates for mid-cap and small-cap stock index funds tend to be higher (although still relatively low, compared with actively managed stock funds) because the indexes they track are the most likely to change as a result of companies merging, growing, or failing. The FINANCIAL HIGHLIGHTS section of this prospectus shows historical turnover rates for the Funds. A turnover rate of 100%, for example, would mean that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT TURNOVER RATE Before investing in a mutual fund, you should review its turnover rate. This gives an indication of how transaction costs could affect the fund's future returns. In general, the greater the volume of buying and selling by the fund, the greater the impact that brokerage commissions and other transaction costs will have on its return. Also, funds with high turnover rates may be more likely to generate capital gains that must be distributed to shareholders as taxable income. As of December 31, 2002, the average turnover rate for passively managed domestic equity index funds investing in common stocks was approximately 94%; for all domestic stock funds, the average turnover rate was approximately 111%, according to Morningstar, Inc. - -------------------------------------------------------------------------------- THE FUNDS AND VANGUARD Each Fund (except the Institutional Index Fund and Institutional Total Stock Market Index Fund) is a member of The Vanguard Group, a family of 35 investment companies with more than 100 funds holding assets in excess of $550 billion. All funds that are members of The Vanguard Group share in the expenses associated with business operations, such as personnel, office space, equipment, and advertising. Vanguard also provides marketing services to its member funds. Although shareholders do not pay sales commissions or 12b-1 distribution fees, each member fund pays its allocated share of The Vanguard Group's marketing costs. 34 Vanguard Institutional Index Fund and Institutional Total Stock Market Index Fund are not members of The Vanguard Group, but are administered by Vanguard and pay Vanguard a fee to provide management, advisory, marketing, and other services. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT VANGUARD'S UNIQUE CORPORATE STRUCTURE The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by the funds it oversees and thus indirectly by the shareholders in those funds. Most other mutual funds are operated by for-profit management companies that may be owned by one person, by a group of individuals, or by investors who own the management company's stock. By contrast, Vanguard provides its services on an "at-cost" basis, and the funds' expense ratios reflect only these costs. No separate management company reaps profits or absorbs losses from operating the funds. - -------------------------------------------------------------------------------- INVESTMENT ADVISER The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in 1975, serves as the adviser to the Funds through its Quantitative Equity Group. As of December 31, 2002, Vanguard served as adviser for about $406 billion in assets. The Institutional Index and Institutional Total Stock Market Index Funds have two agreements with Vanguard. Management Agreement. Vanguard serves as each Fund's adviser and provides a range of administrative services to the Funds under the terms of the Management Agreement. As part of this agreement, each Fund pays Vanguard a monthly fee based on an annual rate of 0.02% of the Fund's average daily net assets. Shareholder Services Agreement. Vanguard provides a range of transfer agency and shareholder services to each Fund under the terms of the Shareholder Services Agreement. As part of this agreement, each Fund pays Vanguard a monthly fee based on the following annual rates: - -------------------------------------------------------------------------------- PERCENTAGE OF DAILY FUND NET ASSETS - -------------------------------------------------------------------------------- Institutional Index Fund Institutional Shares 0.03% Institutional Index Fund Institutional Plus Shares 0.005 Institutional Total Stock Market Index Fund Institutional Shares 0.04 Institutional Total Stock Market Index Fund Institutional Plus Shares 0.005 - ------------------------------------------------------------------------------- Vanguard manages the other Funds on an at-cost basis, subject to the supervision and oversight of the trustees and officers of the Funds. For the fiscal year ended December 31, 2002, the advisory expenses of the U.S. Stock Index Funds represented an effective annual rate of less than 0.01% of each Fund's average net assets. The adviser is authorized to choose broker-dealers to handle the purchase and sale of the Funds' securities and to seek to obtain the best available price and most favorable execution for all transactions. Also, the board of trustees may direct the adviser to use a particular broker for certain transactions in exchange for commission rebates paid to the Funds as well as brokerage or research services provided to the adviser. 35 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT THE FUNDS' ADVISER The manager primarily responsible for overseeing the Funds' investments is: GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Quantitative Equity Group. He has worked in investment management since 1985 and has had primary responsibility for Vanguard's stock indexing and active quantitative investments and strategy since joining the company in 1987. Education: A.B., Dartmouth College; M.B.A., University of Chicago. - -------------------------------------------------------------------------------- DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses) as well as any capital gains realized from the sale of its holdings. Income dividends for the Institutional,Institutional Total Stock Market, Total Stock Market, Value, and Growth Index Funds generally are distributed in March, June, September, and December; income dividends for the Extended Market, Mid-Cap, Small-Cap, Small-Cap Value, and Small-Cap Growth Index Funds generally are distributed in December. Capital gains distributions generally occur in December. In addition, the Funds may occasionally be required to make supplemental distributions at some other time during the year. You can receive distributions of income or capital gains in cash, or you can have them automatically reinvested in more shares of the Fund. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT DISTRIBUTIONS As a shareholder, you are entitled to your portion of a fund's income from interest and dividends as well as gains from the sale of investments. Income consists of both the dividends that the fund earns from any stock holdings and the interest it receives from any money market and bond investments. Capital gains are realized whenever the fund sells securities for higher prices than it paid for them. These capital gains are either short-term or long-term, depending on whether the fund held the securities for one year or less or for more than one year. You receive the fund's earnings as either a dividend or capital gains distribution. - -------------------------------------------------------------------------------- BASIC TAX POINTS Vanguard will send you a statement each year showing the tax status of all your distributions. In addition, taxable investors should be aware of the following basic tax points: o Distributions are taxable to you for federal income tax purposes, whether or not you reinvest these amounts in additional Fund shares. o Distributions declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. o Any dividend and short-term capital gains distributions that you receive are taxable to you as ordinary income for federal income tax purposes. o Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you've owned shares in the Fund. 36 o Capital gains distributions may vary considerably from year to year as a result of the Funds' normal investment activities and cash flows. o A sale or exchange of Fund shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. o Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Fund shares, may be subject to state and local income taxes. o Any conversion between classes of shares of the same fund is a nontaxable event. By contrast, an exchange between classes of shares of different funds is a taxable event. - -------------------------------------------------------------------------------- PLAIN TALK ABOUT "BUYING A DIVIDEND" Unless you are investing through a tax-deferred retirement account (such as an IRA), you should consider avoiding a purchase of fund shares shortly before the fund makes a distribution, because doing so can cost you money in taxes. This is known as "buying a dividend." For example: On December 15, you invest $5,000, buying 250 shares for $20 each. If the fund pays a distribution of $1 per share on December 16, its share price will drop to $19 (not counting market change). You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you owe tax on the $250 distribution you received--even if you reinvest it in more shares. To avoid "buying a dividend," check a fund's distribution schedule before you invest. - -------------------------------------------------------------------------------- GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 30% of any taxable distributions or redemptions from your account if you do not: o Provide us with your correct taxpayer identification number; o Certify that the taxpayer identification number is correct; and o Confirm that you are not subject to backup withholding. Similarly, Vanguard must withhold taxes from your account if the IRS instructs us to do so. FOREIGN INVESTORS. Vanguard funds generally are not sold outside the United States, except to certain qualifying investors. If you reside outside the United States, please consult our website at www.vanguard.com and review "Non-U.S. Investors." Foreign investors should be aware that U.S. withholding and estate taxes may apply to any investments in Vanguard funds. INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to your address of record is returned as undeliverable, Vanguard will automatically reinvest all future distributions until you provide us with a valid mailing address. TAX CONSEQUENCES. This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax adviser for detailed information about a fund's tax consequences for you. 37 SHARE PRICE Each Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4 p.m., Eastern time. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. On holidays or other days when the Exchange is closed, the NAV is not calculated, and the Fund does not transact purchase or redemption requests. However, on those days the value of the Fund's assets may be affected to the extent that the Fund holds foreign securities that trade on foreign markets that are open. Stocks held by a Vanguard fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage a fund's cash are valued on the basis of amortized cost. The values of any foreign securities held by a fund are converted into U.S. dollars using an exchange rate obtained from an independent third party. When reliable market quotations are not readily available, securities are priced at their fair value, calculated according to procedures adopted by the board of trustees. A fund also may use fair-value pricing if the value of a security it holds has been materially affected by events occurring before the fund's pricing time but after the close of the primary markets or exchanges on which the security is traded. This most commonly occurs with foreign securities, but may occur in other cases as well. When fair-value pricing is employed, the prices of securities used by a fund to calculate its NAV may differ from quoted or published prices for the same securities. Vanguard fund share prices can be found daily in the mutual fund listings of most major newspapers under various "Vanguard" headings. FINANCIAL HIGHLIGHTS The following financial highlights tables are intended to help you understand each Fund's financial performance for the periods shown, and certain information reflects financial results for a single Fund share. The total returns in each table represent the rate that an investor would have earned or lost each period on an investment in the Fund (assuming reinvestment of all distributions). This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, independent accountants, whose reports--along with each Fund's financial statements--are included in the Funds' most recent annual reports to shareholders. You may have these annual reports sent to you without charge by contacting Vanguard. 38 - -------------------------------------------------------------------------------- PLAIN TALK ABOUT How to Read the Financial Highlights Table This explanation uses the Institutional Index Fund's Institutional Shares as an example. The Institutional Shares began fiscal year 2002 with a net asset value (price) of $104.89 per share. During the year, each Institutional Share earned $1.42 from investment income (interest and dividends). There was a decline of $24.45 per share in the value of investments held or sold by the Fund, resulting in a net decline of $23.03 per share from investment operations. Shareholders received $1.41 per share in the form of dividend distributions. A portion of each year's distributions may come from the prior year's income or capital gains. The share price at the end of the year was $80.45, reflecting losses of $23.03 per share and distributions of $1.41 per share. This was a decrease of $24.44 per share (from $104.89 at the beginning of the year to $80.45 at the end of the year). For a shareholder who reinvested the distributions in the purchase of more shares, the total return was -22.03% for the year. As of December 31, 2002, the Institutional Shares had $20.4 billion in net assets. For the year, the expense ratio was 0.05% ($0.50 per $1,000 of net assets), and the net investment income amounted to 1.57% of average net assets. The Fund sold and replaced securities valued at 10% of its net assets. - --------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND INSTITUTIONAL SHARES - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $104.89 $120.72 $134.02 $112.85 $ 89.56 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income 1.42 1.374 1.403 1.501 1.429 Net Realized and Unrealized Gain (Loss) on Investments (24.45) (15.829) (13.303) 22.143 24.177 - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (23.03) (14.455) (11.900) 23.644 25.606 - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (1.41) (1.375) (1.400) (1.514) (1.416) Distributions from Realized Capital Gains -- -- -- (.960) (.900) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (1.41) (1.375) (1.400) (2.474) (2.316) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $80.45 $104.89 $120.72 $134.02 $112.85 ==================================================================================================================== TOTAL RETURN -22.03% -11.93% -8.95% 21.17% 28.79% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $20,361 $24,165 $26,406 $28,918 $22,338 Ratio of Total Expenses to Average Net Assets 0.05% 0.05% 0.06% 0.06% 0.06% Ratio of Net Investment Income to Average Net Assets 1.57% 1.27% 1.10% 1.25% 1.46% Turnover Rate* 10% 8% 11% 14% 11% ====================================================================================================================
* Turnover rates excluding in-kind redemptions were 8%, 5%, 7%, 3%, and 7%, respectively. 39
INSTITUTIONAL INDEX FUND INSTITUTIONAL PLUS SHARES - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $104.89 $120.72 $134.02 $112.85 $ 89.56 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income 1.438 1.405 1.449 1.542 1.464 Net Realized and Unrealized Gain (Loss) on Investments (24.446) (15.829) (13.302) 22.143 24.177 - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (23.008) (14.424) (11.853) 23.685 25.641 - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (1.432) (1.406) (1.447) (1.555) (1.451) Distributions from Realized Capital Gains -- -- -- (.960) (.900) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (1.432) (1.406) (1.447) (2.515) (2.351) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $80.45 $104.89 $120.72 $134.02 $112.85 ==================================================================================================================== TOTAL RETURN -22.01% -11.90% -8.92% 21.21% 28.83% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $9,042 $11,349 $10,765 $6,861 $4,951 Ratio of Total Expenses to Average Net Assets 0.025% 0.025% 0.025% 0.025% 0.025% Ratio of Net Investment Income to Average Net Assets 1.59% 1.31% 1.14% 1.29% 1.49% Turnover Rate* 10% 8% 11% 14% 11% ====================================================================================================================
* Turnover rates excluding in-kind redemptions were 8%, 5%, 7%, 3%, and 7%, respectively. INSTITUTIONAL TOTAL STOCK MARKET INDEX FUND INSTITUTIONAL SHARES - -------------------------------------------------------------------------------- YEAR ENDED AUG. 31* TO DEC. 31, DEC. 31, 2002 2001 - -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $23.10 $22.72 Investment Operations Net Investment Income .32 .098 Net Realized and Unrealized Gain (Loss) on Investments (5.10) .421 - -------------------------------------------------------------------------------- Total from Investment Operations (4.78) .519 - -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.32) (.139) Distributions from Realized Capital Gains -- -- - -------------------------------------------------------------------------------- Total Distributions (.32) (.139) - -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $18.00 $23.10 ================================================================================ TOTAL RETURN -20.77% 2.33% ================================================================================ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $245 $358 Ratio of Total Expenses to Average Net Assets 0.06% 0.06%** Ratio of Net Investment Income to Average Net Assets 1.45% 1.33%** Turnover Rate 9% 15% ================================================================================ * Inception. ** Annualized. 40 INSTITUTIONAL TOTAL STOCK MARKET INDEX FUND INSTITUTIONAL PLUS SHARES - -------------------------------------------------------------------------------- YEAR ENDED MAY 31* TO DEC. 31, DEC. 31, 2002 2001 - -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $23.10 $25.00 - -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .327 .151 Net Realized and Unrealized Gain (Loss) on Investments (5.100) (1.900) - -------------------------------------------------------------------------------- Total from Investment Operations (4.773) (1.749) - -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.327) (.151) Distributions from Realized Capital Gains -- -- - -------------------------------------------------------------------------------- Total Distributions (.327) (.151) - -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $18.00 $23.10 ================================================================================ TOTAL RETURN -20.74% -6.96% ================================================================================ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $680 $1,189 Ratio of Total Expenses to Average Net Assets 0.025% 0.025%** Ratio of Net Investment Income to Average Net Assets 1.48% 1.36%** Turnover Rate 9% 15% ================================================================================ * Inception. ** Annualized.
TOTAL STOCK MARKET INDEX FUND INSTITUTIONAL SHARES - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $25.75 $29.27 $33.22 $27.42 $22.64 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .311 .341 .371 .344 .359 Net Realized and Unrealized Gain (Loss) on Investments (5.672) (3.533) (3.815) 6.133 4.898 - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (5.361) (3.192) (3.444) 6.477 5.257 - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.319) (.328) (.366) (.357) (.352) Distributions from Realized Capital Gains -- -- (.140) (.320) (.125) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (.319) (.328) (.506) (.677) (.477) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $20.07 $25.75 $29.27 $33.22 $27.42 ==================================================================================================================== TOTAL RETURN -20.90% -10.85% -10.46% 23.93% 23.37% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $4,466 $4,217 $4,272 $4,006 $2,445 Ratio of Total Expenses to Average Net Assets 0.08% 0.08% 0.10% 0.10% 0.10% Ratio of Net Investment Income to Average Net Assets 1.45% 1.23% 1.14% 1.26% 1.53% Turnover Rate 4% 7% 7% 3% 3% ====================================================================================================================
* Turnover rates excluding in-kind redemptions were 2% and 3%, respectively. 41
EXTENDED MARKET INDEX FUND INSTITUTIONAL SHARES - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $23.09 $26.62 $37.09 $30.63 $30.76 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .22 .228 .313 .363 .427 Net Realized and Unrealized Gain (Loss) on Investments (4.36) (2.703) (6.041) 10.101 2.025 - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (4.14) (2.475) (5.728) 10.464 2.452 - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.21) (.245) (.312) (.364) (.412) Distributions from Realized Capital Gains -- (.810) (4.430) (3.640) (2.170) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (.21) (1.055) (4.742) (4.004) (2.582) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $18.74 $23.09 $26.62 $37.09 $30.63 =================================================================================================================== TOTAL RETURN* -17.93% -9.03% -15.41% 36.45% 8.45% =================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $644 $746 $954 $870 $456 Ratio of Total Expenses to Average Net Assets 0.10% 0.10% 0.10% 0.10% 0.10% Ratio of Net Investment Income to Average Net Assets 1.05% 1.02% 0.96% 1.18% 1.34% Turnover Rate 17% 20% 33% 26% 27% ===================================================================================================================
* Total returns do not reflect the 0.25% transaction fee on purchases through March 31, 2000.
MID-CAP INDEX FUND INSTITUTIONAL SHARES - ------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ------------------------------------------ 2002 2001 2000 1999 1998* - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $11.83 $12.23 $11.30 $10.79 $10.03 - ------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .103 .097 .081 .083 .055 Net Realized and Unrealized Gain (Loss) on Investments 1.798) (.166) 1.918 1.448 .814 - ------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.695) (.069) 1.999 1.531 .869 - ------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.108) (.086) (.089) (.086) (.059) Distributions from Realized Capital Gains (.127) (.245) (.980) (.935) (.050) - ------------------------------------------------------------------------------------------------------------------- Total Distributions (.235) (.331) (1.069) (1.021) (.109) - ------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 9.90 $11.83 $12.23 $11.30 $10.79 =================================================================================================================== Total Return** -14.45% -0.37% 18.39% 15.41% 8.61% =================================================================================================================== Ratios/Supplemental Data Net Assets, End of Period (Millions) $653 $650 $307 $143 $39 Ratio of Total Expenses to Average Net Assets 0.10% 0.10% 0.12% 0.12% 0.12%Y Ratio of Net Investment Income to Average Net Assets 1.01% 1.00% 1.03% 1.11% 1.30%Y Portfolio Turnover Rate 20%YY 24% 51% 38% 44% ===================================================================================================================
* Initial share purchase date was May 20, 1998. Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were held in money market instruments. Performance measurement began May 21, 1998. ** Total returns do not reflect the 0.25% transaction fee on purchases from inception through February 28, 1999. + Annualized. ++ Turnover rate excluding in-kind redemptions was 18%. 42
SMALL-CAP INDEX INDEX FUND INSTITUTIONAL SHARES - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $19.82 $19.44 $23.61 $21.20 $23.75 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .219 .251 .292 .295 .336 Net Realized and Unrealized Gain (Loss) on Investments (4.160) .388 (1.145) 4.491 (1.007) - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.941) .639 (.853) 4.786 (.671) - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.219) (.259) (.292) (.296) (.329) Distributions from Realized Capital Gains -- -- (3.025) (2.080) (1.550) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (.219) (.259) (3.317) (2.376) (1.879) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $15.66 $19.82 $19.44 $23.61 $21.20 ==================================================================================================================== TOTAL RETURN* -19.89% 3.27% -2.56% 23.33% -2.50% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $686 $584 $490 $415 $264 Ratio of Total Expenses to Average Net Assets 0.10% 0.10% 0.13% 0.12% 0.12% Ratio of Net Investment Income to Average Net Assets 1.32% 1.34% 1.32% 1.37% 1.53% Turnover Rate 32% 39% 49% 42% 35% ====================================================================================================================
* Total returns do not reflect the 0.5% transaction fee on purchases through March 31, 2000.
VALUE INDEX FUND INSTITUTIONAL SHARES - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $18.90 $22.87 $22.89 $22.51 $23.22 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .322 .333 .377 .377 .196 Net Realized and Unrealized Gain (Loss) on Investments (4.238) (2.986) .963 2.342 (.060) - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (3.916) (2.653) 1.340 2.719 .136 - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.334) (.340) (.380) (.384) (.236) Distributions from Realized Capital Gains -- (.977) (.980) (1.955) (.610) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (.334) (1.317) (1.360) (2.339) (.846) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $14.65 $18.90 $22.87 $22.89 $22.51 ==================================================================================================================== TOTAL RETURN -20.81% -11.77% 6.19% 12.67% 0.69% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $494 $865 $1,082 $460 $186 Ratio of Total Expenses to Average Net Assets 0.10% 0.10% 0.12% 0.12% 0.12%** Ratio of Net Investment Income to Average Net Assets 1.91% 1.63% 1.70% 1.68% 1.90%** Turnover Rate 26% 38% 37% 41% 33% ====================================================================================================================
* July 2 (inception) through December 31, 1998. ** Annualized. 43
SMALL-CAP VALUE INDEX FUND INSTITUTIONAL SHARES - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, -------------------------------------------- 2002 2001 2000 1999* - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.29 $9.65 $8.45 $8.74 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .114 .089 .097 .009 Net Realized and Unrealized Gain (Loss) on Investments (1.494) 1.176 1.698 .226 - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.380) 1.265 1.795 .235 - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.104) (.080) (.095) (.070) Distributions from Realized Capital Gains (.276) (.545) (.500) (.455) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (.380) (.625) (.595) (.525) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 8.53 $10.29 $9.65 $8.45 ==================================================================================================================== TOTAL RETURN** -13.96% 13.86% 22.04% 2.83% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $338 $325 $86 $10 Ratio of Total Expenses to Average Net Assets 0.10% 0.10% 0.13% 0.13%+ Ratio of Net Investment Income to Average Net Assets 1.08% 1.14% 1.36% 1.37%+ Portfolio Turnover Rate 57% 59% 82% 80% ====================================================================================================================
* December 7 (inception) through December 31, 1999. ** Total returns do not reflect the 0.5% transaction fee on purchases through March 31, 2002. + Annualized.
GROWTH INDEX FUND INSTITUTIONAL SHARES - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, ---------------------------------------------- 2002 2001 2000 1999 1998* - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $26.42 $30.57 $39.44 $31.67 $26.49 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .248 .213 .156 .249 .167 Net Realized and Unrealized Gain (Loss) on Investments (6.465) (4.144) (8.861) 8.821 5.315 - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (6.217) (3.931) (8.705) 9.070 5.482 - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.253) (.219) (.165) (.260) (.187) Distributions from Realized Capital Gains -- -- -- (1.040) (.115) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (.253) (.219) (.165) (1.300) (.302) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $19.95 $26.42 $30.57 $39.44 $31.67 ==================================================================================================================== TOTAL RETURN -23.58% -12.82% -22.14% 28.91% 20.79% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $675 $921 $948 $452 $224 Ratio of Total Expenses to Average Net Assets 0.10% 0.10% 0.12% 0.12% 0.12%** Ratio of Net Investment Income to Average Net Assets 1.10% 0.80% 0.44% 0.74% 0.97%** Turnover Rate 23% 31% 33% 33% 29% ====================================================================================================================
* March 14 (inception) through December 31, 1998. ** Annualized. 44
SMALL-CAP GROWTH INDEX FUND INSTITUTIONAL SHARES - -------------------------------------------------------------------------------------------------------------------- YEAR ENDED DEC. 31, ---------------------------- 2002 2001 2000* - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $10.87 $10.97 $11.03 - -------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .043 .024 .009 Net Realized and Unrealized Gain (Loss) on Investments (1.702) (.094) .513 - -------------------------------------------------------------------------------------------------------------------- Total from Investment Operations (1.659) (.070) .522 - -------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.041) (.030) (.012) Distributions from Realized Capital Gains -- -- (.570) - -------------------------------------------------------------------------------------------------------------------- Total Distributions (.041) (.030) (.582) - -------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $ 9.17 $10.87 $10.97 ==================================================================================================================== TOTAL RETURN** -15.26% -.64% 4.90% ==================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $104 $109 $73 Ratio of Total Expenses to Average Net Assets 0.10% 0.10% 0.13%+ Ratio of Net Investment Income to Average Net Assets 0.41% 0.28% 0.11%+ Turnover Rate 61% 74% 136% ====================================================================================================================
* May 24 (inception) through December 31, 2000. ** Total returns do not reflect the 0.5% transaction fee on purchases through March 31, 2002. + Annualized. 45 - -------------------------------------------------------------------------------- INVESTING WITH VANGUARD This section of the prospectus explains the basics of doing business with Vanguard. A special booklet, Investing Made Easy, provides information that will help individual investors make the most of their relationship with Vanguard. A separate booklet, The Compass, does the same for institutional investors. You can request either booklet by calling or writing Vanguard, using the Contacting Vanguard instructions at the end of this section. BUYING SHARES CONVERTING SHARES REDEEMING SHARES EXCHANGING SHARES OTHER RULES YOU SHOULD KNOW FUND AND ACCOUNT UPDATES CONTACTING VANGUARD - -------------------------------------------------------------------------------- BUYING SHARES ACCOUNT MINIMUMS TO OPEN AND MAINTAIN AN ACCOUNT: $10 million, except for the Institutional Plus Shares ($200 million) of Vanguard Institutional Index Fund and the Institutional Shares ($200 million) and Institutional Plus Shares ($500 million) of Vanguard Institutional Total Stock Market Index Fund. Vanguard Institutional clients may meet the minimum investment amount by aggregating up to three separate accounts within the same Fund. This exception does not apply to clients receiving special administrative services from Vanguard, nor does this exception apply to omnibus accounts maintained by financial intermediaries. TO ADD TO AN EXISTING ACCOUNT: $100 by mail, exchange, or Fund Express; $1,000 by wire. Vanguard reserves the right to increase or decrease the minimum amount required to open and maintain an account, or add to an existing account, without prior notice. HOW TO BUY SHARES ONLINE: You can open certain types of accounts or buy shares in an existing account through our website at www.vanguard.com. BY CHECK: Mail your check and a completed account registration form to Vanguard. When adding to an existing account, send your check with an Invest-By-Mail form detached from your last account statement. Make your check payable to: The Vanguard Group--Fund number. For a list of Fund numbers and addresses, see Contacting Vanguard. BY EXCHANGE PURCHASE: You can purchase shares with the proceeds of a redemption from another Vanguard(R) fund. See Exchanging Shares and Other Rules You Should Know. 46 BY WIRE: Call Vanguard to purchase shares by wire. See Contacting Vanguard. BY FUND EXPRESS(R) (AUTOMATIC OR SPECIAL PURCHASES): You can purchase shares by electronically transferring money from a previously designated bank account. To establish this option, you must complete a special form or the appropriate section of your account registration. YOUR PURCHASE PRICE ONLINE, BY CHECK, BY EXCHANGE, OR BY WIRE: You buy shares at a fund's NAV determined as of your TRADE DATE. For all Vanguard funds (other than money market funds), purchases received at Vanguard before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time) receive a trade date of the same day, and purchases received after that time receive a trade date of the first business day following the date of receipt. For money market funds, the trade date depends on the method of payment for the purchase. BY FUND EXPRESS: For all Vanguard funds, Fund Express instructions received at Vanguard before the close of regular trading on the Exchange will result in a purchase that occurs on and receives a trade date of the next business day (two business days later for money market funds). PURCHASE RULES YOU SHOULD KNOW ^CHECK PURCHASES. All purchase checks must be written in U.S. dollars and drawn on a U.S. bank. Vanguard does not accept cash, traveler's checks, or money orders. In addition, to protect the funds from check fraud, Vanguard will not accept checks made payable to third parties. ^NEW ACCOUNTS. We are required by law to obtain from you certain personal information that we will use to verify your identity. If you do not provide the information, we may not be able to open your account. If we are unable to verify your identity, Vanguard reserves the right to close your account or take such other steps as we deem reasonable. ^LARGE PURCHASES. Vanguard reserves the right to reject any purchase request that may disrupt a fund's operation or performance. Please call us before attempting to invest a large dollar amount. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^FUTURE PURCHASES. All Vanguard funds reserve the right to stop selling shares at any time, or to reject specific purchase requests, including purchases by exchange from another Vanguard fund, at any time, for any reason. 47 CONVERTING SHARES ANY CONVERSION BETWEEN CLASSES OF SHARES OF THE SAME FUND IS A NONTAXABLE EVENT. PRICING OF SHARE CLASS CONVERSIONS If you convert from one class of shares to another, the transaction will be based on the respective share prices of the separate classes on the trade date for the conversion. Consequently, a conversion may provide you with fewer shares or more shares than you originally owned, depending on that day's share prices. At the time of conversion, the total value of your "old" shares will equal the total value of your "new" shares. However, subsequent share price fluctuations may decrease or increase the total value of your "new" shares as compared with that of your "old" shares. CONVERSION FROM INVESTOR SHARES OR ADMIRAL/TM/ SHARES You may convert Investor Shares or Admiral Shares into Institutional Shares of the same Fund (if available), provided that your account balance in the Fund is at least $10 million. CONVERSION FROM INSTITUTIONAL SHARES You may convert Institutional Shares into Institutional Plus Shares of the same Fund (if available), provided that your account balance is at least $200 million (for Vanguard Institutional Index Fund) or $500 million (for Vanguard Institutional Total Stock Market Index Fund). MANDATORY CONVERSIONS INTO ANOTHER SHARE CLASS If an investor no longer meets the requirements for Institutional Shares or Institutional Plus Shares, the Fund may convert the investor's shares into another share class, as appropriate. A decline in the investor's account balance because of market movement may result in such a conversion. The Fund will notify the investor in writing before any mandatory conversion into another share class. REDEEMING SHARES HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before initiating your request. ONLINE: Request a redemption through our website at www.vanguard.com. BY TELEPHONE: Contact Vanguard by telephone to request a redemption. For telephone numbers, see Contacting Vanguard. BY MAIL: Send your written redemption instructions to Vanguard. For addresses, see Contacting Vanguard. BY FUND EXPRESS: If you've established the Fund Express option on your account, you can redeem shares by electronically transferring your redemption proceeds to a previously designated bank account. The Fund Express option is not 48 automatic; you must establish it by completing a special form or the appropriate section of your account registration. YOUR REDEMPTION PRICE You redeem shares at a fund's next-determined NAV after Vanguard receives your redemption request, including any special documentation required under the circumstances. As long as your request is received before the close of regular trading on the New York Stock Exchange (generally 4 p.m., Eastern time), your shares are redeemed at that day's NAV. This is known as your TRADE DATE. TYPES OF REDEMPTIONS ^CHECK REDEMPTIONS. Unless instructed otherwise, Vanguard will mail you a check, normally within two business days of your trade date. ^EXCHANGE REDEMPTIONS. You may instruct Vanguard to apply the proceeds of your redemption to purchase shares of another Vanguard fund. See Exchanging Shares and Other RulesYou Should Know. ^FUND EXPRESS REDEMPTIONS. Proceeds of shares redeemed by Fund Express will be credited to your bank account two business days after your trade date. ^WIRE REDEMPTIONS. When redeeming from a money market fund or a bond fund, you may instruct Vanguard to wire your redemption proceeds ($1,000 minimum) to a previously designated bank account. Wire redemptions are not available for Vanguard's balanced or stock funds. The wire redemption option is not automatic; you must establish it by completing a special form or the appropriate section of your account registration. A $5 fee applies to wire redemptions under $5,000. Money Market Funds: For telephone requests received at Vanguard by 10:45 a.m. (2 p.m. for Vanguard(R) Prime Money Market Fund), Eastern time, the redemption proceeds will leave Vanguard by the close of business that same day. For other requests received before 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. Bond Funds: For requests received at Vanguard by 4 p.m., Eastern time, the redemption proceeds will leave Vanguard by the close of business on the following business day. REDEMPTION RULES YOU SHOULD KNOW ^SPECIAL ACCOUNTS. Special documentation may be required to redeem from certain types of accounts, such as trust, corporate, nonprofit, or retirement accounts. Please call us before attempting to redeem from these types of accounts. ^POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves the right to pay all or part of your redemption in-kind--that is, in the form of securities--if we believe that a cash redemption would disrupt the fund's operation or performance. Under these circumstances, Vanguard also reserves the right 49 to delay payment of your redemption proceeds for up to seven calendar days. By calling us before you attempt to redeem a large dollar amount, you are more likely to avoid in-kind or delayed payment of your redemption. ^RECENTLY PURCHASED SHARES. Although you can redeem shares at any time, proceeds will not be made available to you until the Fund collects payment for your purchase. This may take up to ten calendar days for shares purchased by check or Vanguard Fund Express(R). ^SHARE CERTIFICATES. If share certificates have been issued for your account, those shares cannot be redeemed until you return the certificates (unsigned) to Vanguard by registered mail. For the correct address, see Contacting Vanguard. ^PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make your redemption check payable to a different person or send it to a different address. However, this requires the written consent of all registered account owners, which must be provided under signature guarantees. You can obtain a signature guarantee from most commercial and savings banks, credit unions, trust companies, or member firms of a U.S. stock exchange. A notary public cannot provide a signature guarantee. ^NO CANCELLATIONS. Place your transaction requests carefully. Vanguard will NOT cancel any transaction once it has been initiated and a confirmation number has been assigned (if applicable). ^EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone payment of redemption proceeds for up to seven calendar days. In addition, Vanguard funds can suspend redemptions and/or postpone payments of redemption proceeds beyond seven calendar days at times when the New York Stock Exchange is closed or during emergency circumstances, as determined by the U.S. Securities and Exchange Commission. EXCHANGING SHARES All open Vanguard funds accept exchange requests online (through your account registered with Vanguard.com), by telephone, or by mail. However, because excessive exchanges can disrupt management of a fund and increase the fund's costs for all shareholders, Vanguard places certain limits on the exchange privilege. If you are exchanging into or out of the U.S. STOCK INDEX FUNDS, INTERNATIONAL STOCK INDEX FUNDS, REIT INDEX FUND, BALANCED INDEX FUND, CALVERT SOCIAL INDEX FUND, INTERNATIONAL GROWTH FUND, INTERNATIONAL VALUE FUND, 50 INTERNATIONAL EXPLORER(TM) FUND, or GROWTH AND INCOME FUND, these limits generally are as follows: o No online or telephone exchanges between 2:30 p.m. and 4 p.m., Eastern time, on business days. Any exchange request placed during these hours will not be accepted. On days when the New York Stock Exchange is scheduled to close early, this end-of-day restriction will be adjusted to begin 1 1/2 hours prior to the scheduled close. (For example, if the New York Stock Exchange is scheduled to close at 1 p.m., Eastern time, the cutoff for online and telephone exchanges will be 11:30 a.m., Eastern time.) o No more than two exchanges OUT of a fund may be requested online or by telephone within any 12-month period. For ALL OTHER VANGUARD FUNDS, the following limits generally apply: o No more than two substantive "round trips" through a non-money-market fund during any 12-month period. A "round trip" is a redemption OUT of a fund (by any means) followed by a purchase back INTO the same fund (by any means). "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect management of the fund. o Round trips must be at least 30 days apart. Please note that Vanguard reserves the right to revise or terminate the exchange privilege, limit the amount of any exchange, or reject an exchange, at any time, for any reason. Vanguard also reserves the right to waive or modify the exchange privilege for certain categories of investors. In the event of a conflict between the exchange-privilege limitations of two funds, the stricter policy will apply to the transaction. OTHER RULES YOU SHOULD KNOW VANGUARD.COM(R) ^REGISTRATION. You can use your personal computer to review your account holdings, to sell or exchange shares of most Vanguard funds, and to perform other transactions. To establish this service, you can register online. ^SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES BETWEEN 2:30 P.M. AND 4 P.M., EASTERN TIME. To discourage market-timing, the following Vanguard funds generally do not permit online exchanges between 2:30 p.m. and 4 p.m., Eastern time, on business days: the U.S. Stock Index Funds, International Stock Index Funds, REIT Index Fund, Balanced Index Fund, Calvert Social Index Fund, Inter national Growth Fund, International Value Fund, International Explorer Fund, and Growth and Income Fund. Funds may be 51 added to or deleted from this list at any time without prior notice to shareholders. TELEPHONE TRANSACTIONS ^AUTOMATIC. In setting up your account, we'll automatically enable you to do business with us by telephone, unless you instruct us otherwise in writing. ^TELE-ACCOUNT(R). To conduct account transactions through Vanguard's automated telephone service, you must first obtain a Personal Identification Number (PIN). Call Tele-Account to obtain a PIN, and allow seven days before using this service. ^PROOF OF A CALLER'S AUTHORITY. We reserve the right to refuse a telephone request if the caller is unable to provide the following information exactly as registered on the account: o Ten-digit account number. o Complete owner name and address. o Primary Social Security or employer identification number. o Personal Identification Number (PIN), if applicable. ^SUBJECT TO REVISION. We reserve the right to revise or terminate Vanguard's telephone transaction service at any time, without notice. ^SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES BETWEEN 2:30 P.M. AND 4 P.M., EASTERN TIME. To discourage market-timing, the following Vanguard funds generally do not permit telephone exchanges between 2:30 p.m. and 4 p.m., Eastern time, on business days: the U.S. Stock Index Funds, International Stock Index Funds, REIT Index Fund, Balanced Index Fund, Calvert Social Index Fund, International Growth Fund, International Value Fund, International Explorer Fund, and Growth and Income Fund. Funds may be added to or deleted from this list at any time without prior notice to shareholders. WRITTEN INSTRUCTIONS ^"GOOD ORDER" REQUIRED. We reserve the right to reject any written transaction instructions that are not in "good order." This means that your instructions must include: o The fund name and account number. o The amount of the transaction (in dollars, shares, or percent). o Authorized signatures, as registered on the account. o Signature guarantees, if required for the type of transaction.* o Any supporting legal documentation that may be required. *For instance, signature guarantees must be provided by all registered account owners when redemption proceeds are to be sent to a different person or address. Call Vanguard for specific signature-guarantee requirements. 52 ACCOUNTS WITH MORE THAN ONE OWNER In the case of an account with more than one owner, Vanguard will accept telephone instructions from any one owner or authorized person. RESPONSIBILITY FOR FRAUD Vanguard will not be responsible for any account losses due to fraud, so long as we reasonably believe that the person transacting business on an account is authorized to do so. Please take precautions to protect yourself from fraud. Keep your account information private and immediately review any account statements that we send to you. Contact Vanguard immediately about any transactions you believe to be unauthorized. UNCASHED CHECKS Please cash your distribution or redemption checks promptly. Vanguard will not pay interest on uncashed checks. UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard online, by telephone, or by Tele-Account, you can send us your transaction request by regular or express mail. See Contacting Vanguard for addresses. INVESTING WITH VANGUARD THROUGH OTHER FIRMS You may purchase or sell shares of most Vanguard funds through a financial intermediary, such as a bank, broker, or investment adviser. If you invest with Vanguard through an intermediary, please read that firm's program materials carefully to learn of any rules or fees that may apply. LOW-BALANCE ACCOUNTS Each Fund (except Vanguard Institutional Index Fund and Institutional Total Stock Market Index Fund) reserves the right to convert an investor's Institutional Shares into Investor Shares or Admiral Shares of the Fund if the investor's account balance falls below the minimum initial investment. Vanguard Institutional Index Fund and Vanguard Institutional Total Stock Market Index Fund reserve the right to convert an investor's Institutional Plus Shares into Institutional Shares of the Fund if the investor's fund account balance falls below the minimum initial investment. In addition, each Fund reserves the right to redeem an investor's Institutional Shares if the investor's fund account balance falls below the minimum initial investment for that share class. Any such conversion or redemption will be preceded by written notice to the investor. 53 FUND AND ACCOUNT UPDATES CONFIRMATION STATEMENTS We will send you a statement confirming the trade date and amount of your transaction when you buy, sell, exchange or convert shares. PORTFOLIO SUMMARIES We will send you quarterly portfolio summaries to help you keep track of your accounts throughout the year. Each summary shows the market value of your account at the close of the statement period, as well as all distributions, purchases, sales, and exchanges for the current calendar year. TAX STATEMENTS We will send you annual tax statements to assist in preparing your income tax returns. These statements, which are generally mailed in January, will report the previous year's dividend and capital gains distributions, proceeds from the sale of shares, and distributions from IRAs or other retirement plans. AVERAGE-COST REVIEW STATEMENTS For most taxable accounts, average-cost review statements will accompany the quarterly portfolio summaries. These statements show the average cost of shares that you redeemed during the current calendar year, using the average-cost single-category method, which is one of the methods established by the IRS. ANNUAL AND SEMIANNUAL REPORTS Financial reports about Vanguard U.S. Stock Index Funds will be mailed twice a year, in February and August. These comprehensive reports include overviews of the financial markets and specific information concerning the Funds: o Performance assessments with comparisons to industry benchmarks. o Financial statements with detailed listings of the Funds' holdings. To keep each Fund's costs as low as possible (so that you and other shareholders can keep more of the Fund's investment earnings), Vanguard attempts to eliminate duplicate mailings to the same address. When we find that two or more shareholders have the same last name and address, we send just one copy of the Fund report to that address, instead of mailing separate reports to each shareholder, unless you contact our Client Services Department in writing, by telephone, or by e-mail and instruct us otherwise. Vanguard can deliver your Fund reports electronically, if you prefer. If you are a registered user of Vanguard.com, you can consent to the electronic delivery of Fund reports by logging on and changing your mailing preference under "My Profile." You can revoke your electronic consent at any time, and we will send paper copies of Fund reports within 30 days of receiving your notice. 54 CONTACTING VANGUARD ONLINE VANGUARD.COM o Your best source of Vanguard news o For fund, account, and service information o For most account transactions o For literature requests o 24 hours per day, 7 days per week VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) o For automated fund and account information o For redemptions by check, exchange (subject to certain limitations), or wire o Toll-free, 24 hours per day, 7 days per week INVESTOR INFORMATION 1-800-662-7447 (SHIP) (Text telephone at 1-800-952-3335) o For fund and service information o For literature requests o Business hours only CLIENT SERVICES 1-800-662-2739 (CREW) (Text telephone at 1-800-749-7273) o For account information o For most account transactions o Business hours only INSTITUTIONAL DIVISION 1-888-809-8102 o For information and services for large institutional investors o Business hours only VANGUARD ADDRESSES REGULAR MAIL (INDIVIDUALS): The Vanguard Group P.O. Box 1110 Valley Forge, PA 19482-1110 REGULAR MAIL (INSTITUTIONS): The Vanguard Group P.O. Box 2900 Valley Forge, PA 19482-2900 REGISTERED, EXPRESS, OR OVERNIGHT MAIL: The Vanguard Group 455 Devon Park Drive Wayne, PA 19087-1815 55 FUND NUMBERS Please use the specific fund number when contacting us about: Vanguard Institutional Index Fund--94 (Institutional Shares) or 854 (Institutional Plus Shares) Vanguard Institutional Total Stock Market Index Fund--870 (Institutional Shares) or 871 (Institutional Plus Shares) Vanguard Total Stock Market Index Fund Institutional Shares--855 Vanguard Extended Market Index Fund Institutional Shares--856 Vanguard Mid-Cap Index Fund Institutional Shares--864 Vanguard Small-Cap Index Fund Institutional Shares--857 Vanguard Value Index Fund Institutional Shares--867 Vanguard Small-Cap Value Index Fund Institutional Shares--865 Vanguard Growth Index Fund Institutional Shares--868 Vanguard Small-Cap Growth Index Fund Institutional Shares--866 The Vanguard Group, Vanguard, Vanguard.com, Plain Talk, Admiral, Vanguard Fund Express, Fund Express, Vanguard Tele-Account, Tele-Account, STAR, Explorer, VIPER, VIPERs, Vanguard Brokerage Services and the ship logo are trademarks of The Vanguard Group, Inc., S&P 500(R), Standard & Poor's 500, S&P MidCap 400, Standard & Poor's MidCap 400, S&P SmallCap 600, and Standard & Poor's SmallCap 600, are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds. Calvert Social Index is a trademark of Calvert Group, Ltd., and has been licensed for use by The Vanguard Group, Inc. Vanguard Calvert Social Index Fund is not sponsored, endorsed, sold, or promoted by Calvert Group, Ltd., and Calvert Group, Ltd., makes no representation regarding the advisability of investing in the fund. All other marks are the exclusive property of their respective owners. 56 VIPER(R) SHARES In addition to Institutional Shares, certain Vanguard funds offer a class of shares, known as Vanguard Index Participation Equity Receipts (VIPER) Shares, that are listed for trading on the American Stock Exchange (AMEX). If you own Institutional Shares issued by one of these funds, you may convert those shares into VIPER* Shares of the same fund. Note: Vanguard reserves the right to modify or terminate the conversion privilege in the future. Two Vanguard funds currently offer a VIPER Share class: - -------------------------------------------------------------------------------- FUND VIPER SHARES TICKER SYMBOL - -------------------------------------------------------------------------------- Vanguard Total Stock Market Total Stock Market Index Fund VIPERs(R) VTI Vanguard Extended Market Index Extended Market Fund VIPERs(R) VXF - -------------------------------------------------------------------------------- Although VIPER Shares represent an investment in the same portfolio of securities as Institutional Shares of that Fund, they have different characteristics and may appeal to a different group of investors. It is important that you understand the differences before deciding whether to convert your shares to VIPER Shares. The following material summarizes key information about VIPER Shares. A separate prospectus with more complete information about VIPER Shares is also available. Investors should review that prospectus before deciding whether to convert. DIFFERENCES BETWEEN VIPER SHARES AND CONVENTIONAL MUTUAL FUND SHARES Institutional Shares are "conventional" mutual fund shares; that is, they can be purchased from and redeemed with the issuing fund for cash at a net asset value (NAV) calculated once a day. VIPER Shares, by contrast, cannot be purchased from or redeemed with the issuing fund, except as noted below. An organized trading market is expected to exist for VIPER Shares, unlike conventional mutual fund shares, because VIPER Shares are listed for trading on the AMEX. Investors can purchase and sell VIPER Shares on the open market through a full-service, discount, or online broker. Open-market transactions will not occur at NAV, but at market prices that change throughout the day based on changes in the prices of the fund's portfolio securities and the supply of and demand for VIPER Shares. The market price of a fund's VIPER Shares will differ somewhat from the NAV of those shares. The difference between market price and NAV is expected to be small most of the time, but in times of extreme market volatility the difference may become significant. BUYING AND SELLING VIPER SHARES Note: VIPER Shares must be held in a brokerage account. Therefore, before acquiring VIPER Shares, whether through a conversion or an open-market purchase, you must have an account with a broker. You buy and sell VIPER Shares in the same way you buy and sell any other exchange-traded security--on the open market, through a broker. In most cases, the broker will charge you a commission to execute the transaction. Unless imposed by your broker, there is no minimum dollar amount that you must invest and no minimum number of VIPER Shares you must purchase. Because open-market transactions occur at market prices, you may pay more than NAV when you buy VIPER Shares and receive less than NAV when you sell those shares. *Patent Pending. 57 If you own conventional shares (Investor Shares, Admiral Shares, or Institutional Shares) of a Vanguard fund that issues VIPER Shares, you can convert those shares into VIPER Shares of equivalent value--but you cannot convert back. See below under the heading "Conversions" for a discussion of the conversion process. There is one other way to buy and sell VIPER Shares. Investors can purchase and redeem VIPER Shares directly from the issuing fund at NAV if they do so (i) through certain authorized broker-dealers, (ii) in large blocks of 50,000 or 100,000 VIPER Shares (depending on the fund), known as Creation Units, and (iii) in exchange for baskets of securities rather than cash. However, because Creation Units will be worth millions of dollars, and because most investors prefer to transact in cash rather than with securities, it is expected that only a limited number of institutional investors will purchase and redeem VIPER Shares this way. RISKS VIPER Shares issued by a fund are subject to the same risks as conventional shares of the same fund. VIPER Shares also are subject to the following risks: o The market price of a fund's VIPER Shares will vary somewhat from the NAV of those shares. Therefore, you may pay more than NAV when buying VIPER Shares and you may receive less than NAV when selling them. o VIPER Shares cannot be redeemed with the Fund, except in Creation Unit aggregations. Therefore, if you no longer wish to own VIPER Shares, you must sell them on the open market. Although VIPER Shares will be listed for trading on the AMEX, it is possible that an active trading market may not be maintained. o Trading of a fund's VIPER Shares on the AMEX may be halted if AMEX officials deem such action appropriate, the shares are delisted from the AMEX, or the activation of marketwide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. FEES AND EXPENSES When you buy and sell VIPER Shares through a brokerage firm, you will pay whatever commissions the firm charges. You also will incur the cost of the "bid-asked spread," which is the difference between the price a dealer will pay for a security and the somewhat higher price at which the dealer will sell the same security. If you convert from conventional shares to VIPER Shares, you will not pay a brokerage commission or a bid-asked spread. However, Vanguard charges $50 for each conversion transaction, and your broker may impose its own conversion fees as well. For the fiscal year ended December 31, 2002, the total annual operating expenses (the expense ratio) for each type of VIPER Shares were: - ------------------------------------------- VIPER SHARES EXPENSE RATIO - ------------------------------------------- Total Stock Market VIPERs 0.15% Extended Market VIPERs 0.20 - ------------------------------------------- ACCOUNT SERVICES Because you hold VIPER Shares through a brokerage account, Vanguard will have no record of your ownership unless you hold the shares through Vanguard Brokerage Services/(R)/. Your broker will service your account. For example, the broker will provide account statements, confirmations of your purchases and sales of VIPER Shares, and year-end tax information. The broker also will be responsible for ensuring that you receive shareholder reports and other communications from the fund whose VIPER Shares you own. You will receive 58 certain services (e.g., dividend reinvestment and average cost information) only if your broker offers those services. CONVERSIONS Owners of conventional shares (Investor Shares, Admiral Shares, or Institutional Shares) issued by one of the Vanguard U.S. Stock Index Funds may convert those shares into VIPER Shares of equivalent value of the same fund. Note: Investors who own conventional shares of a Vanguard fund through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into VIPER Shares. Vanguard imposes a fee on conversion transactions, and your broker may impose a fee of its own to process a conversion request. Vanguard reserves the right, in the future, to limit or terminate the conversion privilege or to raise the amount of the conversion fee. To initiate a conversion of conventional shares into VIPER Shares, you must contact your broker; your broker, in turn, will contact Vanguard. For brokers that can handle fractional shares, each full and fractional conventional share will be converted into full and fractional VIPER Shares of equivalent value. For example, if you own 300.250 conventional shares, and this is equivalent in value to 90.750 VIPER Shares, you will receive 90.750 VIPER Shares. Some brokers cannot handle fractional shares. If you intend to hold your VIPER Shares through one of these brokers, the conversion would be handled in such a way that you would receive a whole number of VIPER Shares. In the example above, for instance, you would convert full and fractional conventional shares equivalent in value to exactly 90 VIPER Shares. The remaining conventional shares would be redeemed, and you would receive the cash proceeds of that redemption. You would realize a gain or loss on the redemption (in no case more than the value of a single VIPER Share) that must be reported on your tax return. Please consult your broker to determine whether it can handle fractional VIPER Shares. Here are some important points to keep in mind when converting conventional shares of a Vanguard fund into VIPER Shares: n The conversion transaction is nontaxable except to the extent that conventional shares must be sold to avoid the creation of fractional VIPER Shares. o The conversion process can take anywhere from several days to several weeks, depending on your broker. Vanguard generally will process conversion requests either on the day they are received or on the next business day, although processing may take up to three business days, depending on when the conversion request is received. o Until the conversion process is complete, you will remain fully invested in the fund's conventional shares, and your investment will increase or decrease in value in tandem with the net asset value of those shares. o During the conversion process, you will be able to liquidate all or part of your investment by instructing Vanguard or your broker (depending on who maintains records of your share ownership) to redeem your conventional shares. After the conversion process is complete, you would liquidate all or part of your investment by instructing your broker to sell your VIPER Shares. o VIPER Shares, whether acquired through a conversion or purchased on the open market, cannot be converted into conventional shares of the same fund. Similarly, VIPER Shares of one fund cannot be exchanged for VIPER Shares of another fund. (THIS PAGE INTENTIONALLY LEFT BLANK.) (THIS PAGE INTENTIONALLY LEFT BLANK.) GLOSSARY OF INVESTMENT TERMS ACTIVE MANAGEMENT An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. CAPITAL GAINS DISTRIBUTION Payment to mutual fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. CASH INVESTMENTS Cash deposits, short-term bank deposits, and money market instruments that include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements, commercial paper, and banker's acceptances. COMMON STOCK A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. DIVIDEND DISTRIBUTION Payment to mutual fund shareholders of income from interest or dividends generated by a fund's investments. EXPENSE RATIO The percentage of a fund's average net assets used to pay its expenses during a fiscal year. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. GROWTH FUND A mutual fund that emphasizes stocks of companies believed to have above-average prospects for growth in revenue and earnings. These stocks typically have low dividend yields and above-average prices in relation to such measures as earnings and book value. INDEX An unmanaged group of securities whose overall performance is used as a standard to measure investment performance. INVESTMENT ADVISER An organization that makes the day-to-day decisions regarding a fund's investments. NET ASSET VALUE (NAV) The market value of a mutual fund's total assets, minus liabilities, divided by the number of shares outstanding. The value of a single share is also called its share value or share price. PASSIVE MANAGEMENT A low-cost investment strategy in which a mutual fund attempts to track--rather than outperform--a particular stock or bond market index; also known as indexing. PRICE/EARNINGS (P/E) RATIO The current share price of a stock, divided by its per-share earnings (profits). A stock selling for $20, with earnings of $2 per share, has a price/earnings ratio of 10. PRINCIPAL The amount of money you put into an investment. TOTAL RETURN A percentage change, over a specified time period, in a mutual fund's net asset value, assuming the reinvestment of all distributions of dividends and capital gains. VALUE FUND A mutual fund that typically emphasizes stocks whose prices are below-average in comparison with such measures as earnings and book value. These stocks often have above-average dividend yields. VOLATILITY The fluctuations in value of a mutual fund or other security. The greater a fund's volatility, the wider the fluctuations in its returns. YIELD Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. [SHIP] [THE VANGUARD GROUP LOGO] Post Office Box 2600 Valley Forge, PA 19482-2600 FOR MORE INFORMATION If you'd like more information about Vanguard Institutional Index Funds or Vanguard U.S. Stock Index Funds, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the Funds' investments is available in the Funds' annual and semiannual reports to shareholders. (The Institutional Index Fund's reports are separate from those of the U.S. Stock Index Funds.) In the Funds' annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Funds' performance during their last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Funds. (The SAI for the Institutional Index Funds is separate from that of the U.S. Stock Index Funds.) The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual reports or the SAI, or to request additional information about the Funds or other Vanguard funds, please contact us as follows: If you are an individual investor: THE VANGUARD GROUP INVESTOR INFORMATION DEPARTMENT P.O. BOX 2900 VALLEY FORGE, PA 19482-2900 TELEPHONE: 1-800-662-7447 (SHIP) TEXT TELEPHONE: 1-800-952-3335 If you are a client of Vanguard's Institutional Division: THE VANGUARD GROUP INSTITUTIONAL INVESTOR INFORMATION DEPARTMENT P.O. BOX 2900 VALLEY FORGE, PA 19482-2900 TELEPHONE: 1-888-809-8102 TEXT TELEPHONE: 1-800-952-3335 WORLD WIDE WEB: WWW.VANGUARD.COM If you are a current Fund shareholder and would like information about your account, account transactions, and/or account statements, please call: CLIENT SERVICES DEPARTMENT TELEPHONE: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273 INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the Funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the Funds are also available on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Vanguard Institutional Index Funds' Investment Company Act file number: 811-6093 Vanguard U.S. Stock Index Funds' Investment Company Act file number: 811-2652 (C) 2003 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I854 042003 PART B VANGUARD(R) INDEX FUNDS (THE TRUST) STATEMENT OF ADDITIONAL INFORMATION APRIL 28, 2003 This Statement is not a prospectus but should be read in conjunction with the Fund's current Prospectuses (dated April 28, 2003). To obtain, without charge, a Prospectus or the most recent Annual Report to Shareholders, which contains the Funds' financial statements as hereby incorporated by reference, please call: INVESTOR INFORMATION DEPARTMENT:1-800-662-7447 TABLE OF CONTENTS DESCRIPTION OF THE TRUST...............................................B-1 INVESTMENT POLICIES ...................................................B-3 INVESTMENT LIMITATIONS................................................B-16 SHARE PRICE...........................................................B-17 PURCHASE OF SHARES....................................................B-17 REDEMPTION OF SHARES..................................................B-18 MANAGEMENT OF THE FUND................................................B-19 PORTFOLIO TRANSACTIONS................................................B-26 YIELD AND TOTAL RETURNS...............................................B-27 INFORMATION ABOUT THE VIPER SHARE CLASS...............................B-33 FINANCIAL STATEMENTS..................................................B-40 COMPARATIVE INDEXES...................................................B-40 DESCRIPTION OF THE TRUST ORGANIZATION The Trust was organized as a Pennsylvania business trust in 1975 and was reorganized as a Delaware statutory trust in July 1998. The Trust is registered with the United States Securities and Exchange Commission (the Commission) under the Investment Company Act of 1940 (the 1940 Act) as an open-end management investment company. The Trust currently offers the following funds (and classes thereof): SHARE CLASSES ------------- FUND INVESTOR ADMIRAL INSTITUTIONAL VIPERS - -------------------------------------------------------------------------------- Vanguard(R) Total Stock Market Index Fund Yes Yes Yes Yes Vanguard(R) 500 Index Fund Yes Yes No No Vanguard(R) Extended Market Index Fund Yes Yes Yes Yes Vanguard(R) Mid-Cap Index Fund Yes Yes Yes No Vanguard(R) Small-Cap Index Fund Yes Yes Yes No Vanguard(R) Value Index Fund Yes Yes Yes No Vanguard(R) Small-Cap Value Index Fund Yes No Yes No Vanguard(R) Growth Index Fund Yes Yes Yes No Vanguard(R) Small-Cap Growth Index Fund Yes No Yes No (individually, a Fund; collectively, the Funds) B-1 Each of the Funds, is registered as a nondiversified management investment company. As the market values of the each Fund's largest holdings rise and fall, there may be times when a Fund is diversified under the Commission's standards and other times when it is not. The Trust has the ability to offer additional funds, which in turn may issue additional classes of shares. There is no limit on the number of full and fractional shares that may be issued for a single fund or class of shares. SERVICE PROVIDERS CUSTODIANS. Wachovia Bank, N.A., 123 S. Broad Street, PA4942, Philadelphia, PA 19109 (for Mid-Cap Index, Small-Cap Growth Index, and Small-Cap Value Index Funds) and JPMorgan Chase Bank, 270 Park Avenue, New York, NY 10017-2070 (for the 500 Index, Extended Market Index, Growth Index, Small-Cap Index, Total Stock Market Index, and Value Index Funds), serve as the Funds' custodians. The custodians are responsible for maintaining the Funds' assets, keeping all necessary accounts and records of Fund assets, and appointing any foreign sub-custodians or foreign securities depositories. INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, Two Commerce Square, Suite 1700, 2001 Market Street, Philadelphia, PA, 19103-7042, serves as the Funds' independent accountants. The accountants audit the Funds' annual financial statements and provide other related services. TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, PA 19355. CHARACTERISTICS OF THE FUNDS' SHARES RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions on the right of shareholders to retain or dispose of the Funds' shares, other than the possible future termination of a Fund or share class. Each Fund or class may be terminated by reorganization into another mutual fund or class or by liquidation and distribution of the assets of the fund or class. Unless terminated by reorganization or liquidation, each Fund and share class will continue indefinitely. SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which provides that shareholders of a statutory trust are entitled to the same limitations of personal liability as shareholders of a corporation organized under Delaware law. Effectively, this means that a shareholder of a Fund will not be personally liable for payment of the Fund's debts except by reason of his or her own conduct or acts. In addition, a shareholder could incur a financial loss as a result of a Fund obligation only if the Fund itself had no remaining assets with which to meet such obligation. We believe that the possibility of such a situation arising is extremely remote. DIVIDEND RIGHTS. The shareholders of a Fund are entitled to receive any dividends or other distribution declared by the Fund. No shares of a Fund have priority or preference over any other shares of the Fund with respect to distributions. Distributions will be made from the assets of the Fund and will be paid ratably to all shareholders of the Fund (or class) according to the number of shares of the Fund (or class) held by shareholders on the record date. The amount of dividends per share may vary between separate share classes of the Fund based upon differences in the way that expenses are allocated between share classes pursuant to a multiple class plan. VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a shareholder vote is required under the 1940 Act; (ii) the matter concerns an amendment to the Declaration of Trust that would adversely affect to a material degree the rights and preferences of the shares of a Fund or any class; or (iii) the trustees determine that it is necessary or desirable to obtain a shareholder vote. The 1940 Act requires a shareholder vote under various circumstances, including to elect or remove trustees upon the written request of shareholders representing 10% or more of a Fund's net assets and to change any fundamental policy of a Fund. Unless otherwise required by applicable law, shareholders of a Fund receive one vote for each dollar of net asset value owned on the record date, and a fractional vote for each fractional dollar of net asset value owned on the record date. However, only the shares of the fund or class affected by a particular matter are entitled to vote on that matter. In addition, each class has exclusive voting rights on any matter submitted to shareholders in which the interests of one class differ from the interests of another. Voting rights are noncumulative and cannot be modified without a majority vote. LIQUIDATION RIGHTS. In the event that a Fund is liquidated, shareholders will be entitled to receive a pro rata share of the Fund's net assets. In the event that a class of shares is liquidated, shareholders of that class will be entitled to B-2 receive a pro rata share of the Fund's net assets that are attributable to that class. Shareholders may receive cash, securities, or a combination of the two. PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Funds' shares. CONVERSION RIGHTS. Shareholders of each Fund may convert their shares into another class of shares of the same Fund upon the satisfaction of any then applicable eligibility requirements. For additional information about the conversion rights applicable to VIPER Shares, please see "Information about the VIPER Share Class." REDEMPTION PROVISIONS. Each Fund's redemption provisions are described in its current prospectus and elsewhere in this Statement of Additional Information. SINKING FUND PROVISIONS. The Funds have no sinking fund provisions. CALLS OR ASSESSMENT. The Funds' shares, when issued, are fully paid and non-assessable. TAX STATUS OF THE FUND Each Fund intends to continue to qualify as a "regulated investment company" under Subchapter M of the Internal Revenue Code of 1986, as amended. This special tax status means that the Fund will not be liable for federal tax on income and capital gains distributed to shareholders. In order to preserve its tax status, each Fund must comply with certain requirements. If a Fund fails to meet these requirements in any taxable year, it will be subject to tax on its taxable income at corporate rates, and all distributions from earnings and profits, including any distributions of net tax-exempt income and net long-term capital gains, will be taxable to shareholders as ordinary income. In addition, a Fund could be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before regaining its tax status as a regulated investment company. Dividends received and distributed by each Fund on shares of stock of domestic corporations may be eligible for the dividends-received deduction applicable to corporate shareholders. Corporations must satisfy certain requirements in order to claim the deduction. Capital gains distributed by the Fund are not eligible for the dividends-received deduction. INVESTMENT POLICIES Some of the investment policies described below and in the Funds' prospectuses set forth percentage limitations on a Fund's investment in, or holdings of, certain securities or other assets. Unless otherwise required by law, compliance with these policies will be determined immediately after the acquisition of such securities or assets. Subsequent changes in values, net assets, or other circumstances will not be considered when determining whether the investment complies with a Fund's investment policies and limitations. The following policies supplement each Fund's investment objective and policies set forth in the prospectuses. BORROWING. A fund's ability to borrow money is limited by its investment policies and limitations, by the Investment Company Act of 1940, as amended ("1940 Act"), and by applicable exemptive orders, no-action letters, interpretations and other pronouncements by the Securities and Exchange Commission and its staff ("SEC") and any other any regulatory authority having jurisdiction, from time to time. Under the 1940 Act, a fund is required to maintain continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5% of the fund's total assets made for temporary or emergency purposes. Any borrowings for temporary purposes in excess of 5% of the fund's total assets must maintain continuous asset coverage. If the 300% asset coverage should decline as a result of market fluctuations or other reasons, a fund may be required to sell some of its portfolio holdings within three days (excluding Sundays and holidays) to reduce the debt and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. Borrowing will tend to exaggerate the effect on net asset value of any increase or decrease in the market value of a fund's portfolio. Money borrowed will be subject to interest costs which may or may not be recovered by earnings on the securities purchased. A fund also may be required to maintain minimum average balances in connection with a borrowing or to pay a commitment or other fee to maintain a line of credit; either of these requirements would increase the cost of borrowing over the stated interest rate. The SEC takes the position that other transactions that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing can be viewed as constituting a form of borrowing by the fund. These transactions B-3 can include entering into reverse repurchase agreements, engaging in mortgage dollar roll transactions, selling securities short (other than short sales "against-the-box"), buying and selling certain derivatives (such as futures contracts), selling (or writing) put and call options, engaging in sale-buybacks, entering into firm commitment agreements and standby commitment agreements, engaging in when-issued, delayed delivery and forward commitment transactions, and other trading practices that have a leveraging effect on the capital structure of a fund or are economically equivalent to borrowing (additional discussion about a number of these transaction can be found below). A borrowing transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund (1) "covers" the borrowing transaction by maintaining an offsetting financial position or (2) segregates liquid assets (with such liquidity determined by the adviser in accordance with procedures established by the board of trustees) equal (as determined on a daily mark-to-market basis) in value to the fund's potential economic exposure under the borrowing transaction. A fund may have to buy or sell a security at a disadvantageous time or price in order to cover a borrowing transaction or segregate sufficient liquid assets. In addition, assets so segregated may not be available to satisfy redemptions or for other purposes. COMMON STOCK. Common stock represents an equity or ownership interest in an issuer. Common stock typically entitles the owner to vote on the election of directors and other important matters as well as to receive dividends on such stock. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds, other debt holders and owners of preferred stock take precedence over the claims of those who own common stock. CONVERTIBLE SECURITIES. Convertible securities are hybrid securities that combine the investment characteristics of bonds and common stocks. Convertible securities typically consist of debt securities or preferred stock that may be converted (on a voluntary or mandatory basis) within a specified period of time (normally for the entire life of the security) into a certain amount of common stock or other equity security of the same or a different issuer at a predetermined price. Convertible securities also include debt securities with warrants or common stock attached and derivatives combining the features of debt securities and equity securities. Other convertible securities with features and risks not specifically referred to herein may become available in the future. Convertible securities involve risks similar to both fixed-income and equity securities. The market value of a convertible security is a function of its "investment value" and its "conversion value." A security's "investment value" represents the value of the security without its conversion feature (i.e., a nonconvertible fixed income security). The investment value may be determined by reference to its credit quality and the current value of its yield to maturity or probable call date. At any given time, investment value is dependent upon such factors as the general level of interest rates, the yield of similar nonconvertible securities, the financial strength of the issuer and the seniority of the security in the issuer's capital structure. A security's "conversion value" is determined by multiplying the number of shares the holder is entitled to receive upon conversion or exchange by the current price of the underlying security. If the conversion value of a convertible security is significantly below its investment value, the convertible security will trade like nonconvertible debt or preferred stock and its market value will not be influenced greatly by fluctuations in the market price of the underlying security. In that circumstance, the convertible security takes on the characteristics of a bond, and its price moves in the opposite direction from interest rates. Conversely, if the conversion value of a convertible security is near or above its investment value, the market value of the convertible security will be more heavily influenced by fluctuations in the market price of the underlying security. In that case, the convertible security's price may be as volatile as that of common stock. Because both interest rate and market movements can influence its value, a convertible security generally is not as sensitive to interest rates as a similar fixed income security, nor is it as sensitive to changes in share price as its underlying equity security. Convertible securities are often rated below investment grade or are not rated, and are generally subject to a high degree of credit risk. While all markets are prone to change over time, the generally high rate at which convertible securities are retired (through mandatory or scheduled conversions by issuers or voluntary redemptions by holders) and replaced with newly issued convertibles may cause the convertible securities market to change more rapidly than other markets. For example, a concentration of available convertible securities in a few economic sectors could elevate the sensitivity of the convertible securities market to the volatility of the equity markets and to the specific risks of those sectors. Moreover, convertible securities with innovative structures, such as mandatory conversion securities and equity-linked securities, have increased the sensitivity of the convertible securities market to the volatility of the equity markets and to the special risks of those innovations, which may include risks different from, and possibly greater than, those associated with traditional convertible securities. B-4 DEPOSITARY RECEIPTS. Depositary receipts are securities that evidence ownership interests in a security or a pool of securities that have been deposited with a "depository." Depositary receipts may be sponsored or unsponsored and include American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) and Global Depositary Receipts (GDRs). In ADRs, the depository is typically a U.S. financial institution and the underlying securities are issued by a foreign issuer. In other depositary receipts, the depository may be a foreign or a U.S. entity, and the underlying securities may have a foreign or a U.S. issuer. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities. Generally, ADRs are issued in registered form, denominated in U.S. dollars, and designed for use in the U.S. securities markets. Other Depositary receipts, such as GDRs and EDRs, may be issued in bearer form and denominated in other currencies, and are generally designed for use in securities markets outside the U.S. While the two types of depositary receipt facilities (unsponsored or sponsored) are similar, there are differences regarding a holder's rights and obligations and the practices of market participants. A depository may establish an unsponsored facility without participation by (or acquiescence of) the underlying issuer; typically, however, the depository requests a letter of non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored depositary receipts generally bear all the costs of the facility. The depository usually charges fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of other services. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the underlying issuer or to pass through voting rights to depositary receipt holders with respect to the underlying securities. Sponsored depositary receipt facilities are created in generally the same manner as unsponsored facilities, except that sponsored depositary receipts are established jointly by a depository and the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With sponsored facilities, the underlying issuer typically bears some of the costs of the depositary receipts (such as dividend payment fees of the depository), although most sponsored depositary receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and other shareholder communications and information to the depositary receipt holders at the underlying issuer's request. The depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through, to the holders of the receipts, voting rights with respect to the deposited securities. For purposes of a fund's investment policies, investments in depositary receipts will be deemed to be investments in the underlying securities. Thus, a depositary receipt representing ownership of common stock will be treated as common stock. Depository receipts do not eliminate all of the risks associated with directly investing in the securities of foreign issuers. DERIVATIVES. A derivative is a financial instrument which has a value that is based on - or "derived from" - the values of other assets, reference rates or indices. Derivatives may relate to a wide variety of underlying references, such as commodities, stocks, bonds, interest rates, currency exchange rates and related indices. Derivatives include futures contracts and options on futures contracts (see additional discussion below), forward commitment transactions (see additional discussion below), options on securities (see additional discussion below), caps, floors, collars, swap agreements (see additional discussion below) and other financial instruments. Some derivatives, such as futures contracts and certain options, are traded on U.S. commodity and securities exchanges, while other derivatives, such as swap agreements, are privately negotiated and entered into in the over-the-counter ("OTC") market. The risks associated with the use of derivatives are different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Derivatives are used by some investors for speculative purposes. Derivatives also may be used for a variety of purposes that do not constitute speculation, such as hedging, risk management, seeking to stay fully invested, seeking to reduce transaction costs, seeking to simulate an investment in equity or debt securities or other investments, seeking to add value when derivatives are favorably priced relative to equity or debt securities or other investments, and for other purposes. A fund will not use derivatives for speculative purposes or as leveraged investments that magnify the gains or losses of an investment. There is no assurance that any derivatives strategy used by a fund's adviser will succeed. Derivative products are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks, bonds and other traditional investments. The use of a derivative requires an understanding not only of the underlying instrument but also of the derivative itself, without the benefit of observing the performance of the derivative under all possible market conditions. B-5 The use of a derivative involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the other party to the contract (usually referred to as a "counterparty") or the failure of the counterparty to make required payments or otherwise comply with the terms of the contract. Additionally, the use of credit derivatives can result in losses if a fund's adviser does not correctly evaluate the creditworthiness of the issuer on which the credit derivative is based. Derivatives may be subject to liquidity risk, which exists when a particular derivative is difficult to purchase or sell. If a derivative transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC derivatives), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price. Derivatives may be subject to pricing or "basis" risk, which exists when a particular derivative becomes extraordinarily expensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity. Because many derivatives have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate or index can result in a loss substantially greater than the amount invested in the derivative itself. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Accordingly, certain derivative transactions may be considered to constitute borrowing transactions. Such a derivative transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Like most other investments, derivative instruments are subject to the risk that the market value of the instrument will change in a way detrimental to a fund's interest. A fund bears the risk that its adviser will incorrectly forecast future market trends or the values of assets, reference rates, indices or other economic factors in establishing derivative positions for the fund. If the adviser attempts to use a derivative as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the derivative will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving derivative instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many derivatives, in particular OTC derivatives, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. EXCHANGE-TRADED FUNDS. A fund may purchase shares of exchange-traded funds ("ETFs"), including ETF shares issued by other Vanguard funds. Typically, a fund would purchase ETF shares for the same reason it would purchase (and as an alternative to purchasing) futures contracts: to obtain exposure to all or a portion of the stock market while maintaining flexibility to meet the liquidity needs of the fund. ETF shares enjoy several advantages over futures. Depending on the market, the holding period, and other factors, ETF shares can be less costly and more tax-efficient than futures. In addition, ETF shares can be purchased for smaller sums, offer exposure to market sectors and styles for which there is no suitable or liquid futures contract, and do not involve leverage. Most ETFs are investment companies. Therefore, a fund's purchases of ETF shares generally are subject to the limitations on a fund's investments in other investment companies, which are described below under the heading "Other Investment Companies." An investment in an ETF generally presents the same primary risks as an investment in a conventional fund (i.e., one that is not exchange traded) that has the same investment objectives, strategies, and policies. The price of an ETF can fluctuate within a wide range, and a fund could lose money investing in an ETF if the prices of the stocks owned by the ETF go down. In addition, ETFs are subject to the following risks that do not apply to conventional funds: (1) the market price of the ETF's shares may trade at a discount to their net asset value; (2) an active trading market for an ETF's shares may not develop or be maintained; or (3) trading of an ETF's shares may be halted if the listing exchange's officials deem such action appropriate, the shares are de-listed from the exchange, or the activation of market-wide "circuit breakers" (which are tied to large decreases in stock prices) halts stock trading generally. FUNDS MAY REPURCHASE VIPER/TM/ SHARES. Any Fund that issues VIPER Shares may repurchase those shares on the open market at the current market price if doing so would be advantageous for the Fund. A repurchase might be advantageous, for example, because the VIPER Shares are more cost-effective than alternative investments, are selling B-6 at a discount to net asset value, will cause the Fund to more closely track its index than alternative investments, or some combination of the three. A Fund that repurchases its VIPER Shares may lend those shares to qualified institutional borrowers as part of the Fund's securities lending activities discussed on page 12. FOREIGN SECURITIES. Foreign securities are equity or debt securities issued by entities organized, domiciled or with a principal place of business outside the United States, such as foreign corporations and governments. Foreign securities may trade in U.S. or foreign securities markets. A fund may make foreign investments either directly by purchasing foreign securities or indirectly by purchasing depositary receipts or depositary shares of similar instruments ("depositary receipts") for foreign securities (see discussion above). Depositary receipts are securities that are listed on exchanges or quoted in OTC markets in one country but represent shares of issuers domiciled in another country. Direct investments in foreign securities may be made either on foreign securities exchanges or in the OTC markets. Investing in foreign securities involves certain special risk considerations that are not typically associated with investing in U.S. companies or governments. Because foreign issuers are not generally subject to uniform accounting, auditing and financial reporting standards and practices comparable to those applicable to U.S. issuers, there may be less publicly available information about certain foreign issuers than about U.S. issuers. Evidence of securities ownership may be uncertain in many foreign countries. As a result, there is a risk that a fund's trade details could be incorrectly or fraudulently entered at the time of the transaction, resulting in a loss to the fund. Securities of foreign issuers are generally less liquid and more volatile than securities of comparable U.S. issuers. There is generally less government supervision and regulation of stock exchanges, brokers, and listed companies than in the U.S. In addition, with respect to certain foreign countries, there is the possibility of expropriation or confiscatory taxation, political or social instability, war, terrorism, nationalization, limitations on the removal of funds or other assets, or diplomatic developments which could affect U.S. investments in those countries. Although an adviser will endeavor to achieve most favorable execution costs for a fund's portfolio transactions in foreign securities under the circumstances, commissions (and other transaction costs) are generally higher than those on U.S. securities. In addition, it is expected that the expenses for custodian arrangements of a funds' foreign securities will be somewhat greater than the expenses for a fund that invests primarily in domestic securities. Certain foreign governments levy withholding taxes against dividend and interest income. Although in some countries a portion of these taxes are recoverable, the non-recovered portion of foreign withholding taxes will reduce the income received from the companies making up a fund. The value of the foreign securities held by a fund may be significantly affected by changes in currency exchange rates. The U.S. dollar value of a foreign security generally decreases when the value of the U.S. dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the U.S. dollar falls against such currency (as discussed below, a fund may attempt to hedge its currency risks). In addition, the value of fund assets may be affected by losses and other expenses incurred in converting between various currencies in order to purchase and sell foreign securities, and by currency restrictions, exchange control regulation, currency devaluations and political and economic developments. FOREIGN SECURITIES - FOREIGN CURRENCY TRANSACTIONS. The value of a fund's foreign securities as measured in United States dollars may be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations, and the fund may incur costs in connection with conversions between various currencies. To seek to minimize the impact of such factors on net asset values, a fund may engage in foreign currency transactions in connection with its investments in foreign securities. A fund will not speculate in foreign currency exchange, and will enter into foreign currency transactions only to attempt to "hedge" the currency risk associated with investing in foreign securities. Although such transactions tend to minimize the risk of loss due to a decline in the value of the hedged currency, they also may limit any potential gain which might result should the value of such currency increases. A fund may conduct its currency exchange transactions either on a spot (i.e., cash) basis at the rate prevailing in the currency exchange market, or through forward contracts to purchase or sell foreign currencies. A forward currency contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into with large commercial banks or other currency traders who are participants in the interbank market. Currency exchange transactions also may be effected through the use of swap agreements or other derivatives. Currency exchange transactions may be considered borrowings. A currency exchange transaction will not be considered to constitute the issuance of a "senior security" by a fund, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or B-7 segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." By entering into a forward contract for the purchase or sale of foreign currency involved in underlying security transactions, a fund may be able to protect itself against possible loss between trade and settlement dates for that purchase or sale resulting from an adverse change in the relationship between the U.S. dollar and such foreign currency. This practice is sometimes referred to as "transaction hedging." In addition, when the adviser reasonably believes that a particular foreign currency may suffer a substantial decline against the U.S. dollar, a fund may enter into a forward contract to sell an amount of foreign currency approximating the value of some or all of its portfolio securities denominated in such foreign currency. This practice is sometimes referred to as "portfolio hedging." Similarly, when the adviser reasonably believes that the U.S. dollar may suffer a substantial decline against a foreign currency, a fund may enter into a forward contract to buy that foreign currency for a fixed dollar amount. A fund may also attempt to hedge its foreign currency exchange rate risk by engaging in currency futures, options and "cross-hedge" transactions. In "cross-hedge" transactions, a fund holding securities denominated in one foreign currency will enter into a forward currency contract to buy or sell a different foreign currency (one that the adviser reasonably believes generally tracks the currency being hedged with regard to price movements). The adviser may select the tracking (or substitute) currency rather than the currency in which the security is denominated in order to take advantage of pricing or other opportunities presented by the tracking currency. Such cross-hedges are expected to help protect a fund against an increase or decrease in the value of the U.S. dollar against certain foreign currencies. A fund may hold a portion of its assets in bank deposits denominated in foreign currencies, so as to facilitate investment in foreign securities as well as protect against currency fluctuations and the need to convert such assets into U.S. dollars (thereby also reducing transaction costs). To the extent these monies are converted back into U.S. dollars, the value of the assets so maintained will be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations. The forecasting of short-term currency market movement is extremely difficult and whether a short-term hedging strategy will be successful is highly uncertain. Moreover, it is impossible to forecast with absolute precision the market value of portfolio securities at the expiration of a foreign currency forward contract. Accordingly, a fund may be required to buy or sell additional currency on the spot market (and bear the expense of such transaction) if its adviser's predictions regarding the movement of foreign currency or securities markets prove inaccurate. In addition, the use of cross-hedging transactions may involve special risks, and may leave a fund in a less advantageous position than if such a hedge had not been established. Because foreign currency forward contracts are privately negotiated transactions, there can be no assurance that a fund will have flexibility to roll-over the foreign currency forward contract upon its expiration if it desires to do so. Additionally, there can be no assurance that the other party to the contract will perform its services thereunder. FOREIGN SECURITIES - FOREIGN INVESTMENT COMPANIES. Some of the countries in which a fund may invest may not permit, or may place economic restrictions on, direct investment by outside investors. Fund investments in such countries may only be permitted through foreign government-approved or authorized investment vehicles, which may include other investment companies. Such investments may also be made through registered or unregistered closed-end investment companies that invest in foreign securities. Investing through such vehicles may involve frequent or layered fees or expenses and may also be subject to limitation under the 1940 Act, as described below under the heading "Other Investment Companies." FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. A futures contract is a standardized agreement between two parties to buy or sell at a specific time in the future a specific quantity of a commodity at a specific price. The commodity may consist of an asset, a reference rate, or an index. A security futures contract relates to the sale of a specific quantity of shares of a single equity security or a narrow-based securities index. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying commodity. The buyer of a futures contract enters into an agreement to purchase the underlying commodity on the settlement date and is said to be "long" the contract. The seller of a futures contract enters into an agreement to sell the underlying commodity on the settlement date and is said to be "short" the contract. The price at which a futures contract is entered into is established by open outcry on the floor of an exchange between exchange members acting as traders or brokers. Open futures contracts can be liquidated or closed out by physical delivery of the underlying commodity or payment of the cash settlement amount on the settlement date, depending on the terms of the particular contract. Some financial futures contracts (such as security futures) provide for B-8 physical settlement at maturity. Other financial futures contracts (such as those relating to interest rates, foreign currencies and broad-based securities indices) generally provide for cash settlement at maturity. In the case of cash settled futures contracts, the cash settlement amount is equal to the difference between the final settlement price on the last trading day of the contract and the price at which the contract was entered into. Most futures contracts, however, are not held until maturity but instead are "offset" before the settlement date through the establishment of an opposite and equal futures position. The purchaser or seller of a futures contract is not required to deliver or pay for the underlying commodity unless the contract is held until the settlement date. However, both the purchaser and seller are required to deposit "initial margin" with a futures commission merchant ("FCM") when the futures contract is entered into. Initial margin deposits are typically calculated as a percentage of the contract's market value. If the value of either party's position declines, that party will be required to make additional "variation margin" payments to settle the change in value on a daily basis. This process is known as "marking-to-market." Because the exchange of initial and variation margin payments prior to the settlement date will not represent payment in full for a futures contract, a fund's futures transactions can be considered borrowing transactions. A futures transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." An option on a futures contract (or "futures option") conveys the right, but not the obligation, to purchase (in the case of a "call" option) or sell (in the case of a "put" option) a specific futures contract at a specific price (called the "exercise" or "strike" price) any time before the option expires. The buyer of a call option is said to go "long" a futures contract, while the buyer of a put option is said to go "short" a futures contract. The seller of an option is called an option writer. The purchase price of an option is called the "premium." Although the potential loss to an option buyer is limited to the amount of the premium plus transaction costs, that person can lose the entire amount of the premium. This will be the case, for example, if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying futures contract exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying futures contract. Generally, any profit realized by an option buyer represents a loss for the option writer. A fund that takes the position of a writer of a futures option is required to deposit and maintain initial and variation margin with respect to the option, as described above in the case of futures contracts. Because the exchange of initial and variation margin payments prior to the expiration date of the option will not represent payment in full for a futures option, a fund's put and call option transactions can be considered borrowing transactions. A futures option transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Each fund intends to comply with the Rule 4.5 of the Commodity Futures Trading Commission ("CFTC"), under which a mutual fund avoids being deemed a "commodity pool" or a "commodity pool operator" by limiting its use of futures contracts and futures options to "bona fide hedging" transactions (as defined by the CFTC) and by limiting the maximum amount or value of those futures and options transactions that do not constitute bona fide hedging transactions. A fund will only enter into futures contracts and futures options which are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS - RISKS. The risk of loss in trading futures contracts and in writing futures options can be substantial, due to the low margin deposits required, the extremely high degree of leverage involved in futures and options pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (as well as gain) to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss B-9 equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract, and the writing of a futures option, may result in losses in excess of the amount invested in the position. In the event of adverse price movements, a fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if the fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements (and segregation requirements, if applicable) at a time when it may be disadvantageous to do so. In addition, on the settlement date, a fund may be required to make delivery of the instruments underlying the futures positions it holds. A fund could suffer losses if it is unable to close out a futures contract or a futures option because of an illiquid secondary market. Futures contracts and futures options may be closed out only on an exchange which provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures or option position. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures and options positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment. A fund bears the risk that its adviser will incorrectly predict future market trends. If the adviser attempts to use a futures contract or a futures option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the futures position will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. A fund could lose margin payments it has deposited with its FCM, if, for example, the FCM breached its agreement with the fund or became insolvent or goes into bankruptcy. In that event, the fund may be entitled to return of margin owed to it only in proportion to the amount received by the FCM's other customers, potentially resulting in losses to the fund. INTERFUND BORROWING AND LENDING. The SEC has issued an exemptive order permitting the Vanguard funds to participate in Vanguard's interfund lending program. This program allows the Vanguard funds to borrow money from and loan money to each other for temporary or emergency purposes. The program is subject to a number of conditions, including the requirement that no fund may borrow or lend money through the program unless it receives a more favorable interest rate than is available from a typical bank for a comparable transaction. In addition, a Vanguard fund may participate in the program only if and to the extent that such participation is consistent with the fund's investment objective and other investment policies. The boards of trustees of the Vanguard funds are responsible for overseeing the interfund lending program. OPTIONS. An option on a security (or index) is a contract that gives the holder of the option, in return for the payment of a "premium," the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option. The writer of an option on a security has the obligation upon exercise of the option (i) to deliver the underlying security upon payment of the exercise price (in the case of a call option) or (ii) to pay the exercise price upon delivery of the underlying security (in the case of a put option). The writer of an option on an index has the obligation upon exercise of the option to pay an amount equal to the cash value of the index minus the exercise price, multiplied by the specified multiplier for the index option. The multiplier for an index option determines the "size" of the investment position the option represents. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size, and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the purchaser or writer greater flexibility to tailor an option to its needs, OTC options generally involve greater credit risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. B-10 The buyer of a call option is said to go "long" on the underlying position, while the buyer of a put option is said to go "short" the underlying position. The seller of an option is called an option writer. The purchase price of an option is called the "premium." Although the potential loss to an option buyer is limited to the amount of the premium plus transaction costs, that person can lose the entire amount of the premium. This will be the case if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer, but that person could also seek to profit from an anticipated rise or decline in option prices. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying position exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying position. Generally, any profit realized by an option buyer represents a loss for the option writer. The writing of an option will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." If a trading market in particular options were to become unavailable, investors in those options would be unable to close out their positions until trading resumes, and they may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Even if the market were to remain available, there may be times when options prices will not maintain their customary or anticipated relationships to the prices of the underlying interests and related interests. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity or even the orderliness of the market for particular options. A fund bears the risk that its adviser will not accurately predict future market trends. If the adviser attempts to use an option as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the option will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving options can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many options, in particular OTC options, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. OTHER INVESTMENT COMPANIES. A fund may invest in other investment companies to the extent permitted by applicable law or SEC order. Under the 1940 Act, a fund generally may invest up to 10% of its assets in shares of investment companies and up to 5% of its assets in any one investment company as long as the investment does not represent more than 3% of the voting stock of the acquired investment company. If a fund invests in investment companies, shareholders will bear not only their proportionate share of the fund's expenses (including operating expenses and the fees of the adviser), but also, indirectly, the similar expenses of the underlying investment companies. Shareholders would also be exposed to the risks associated not only to the investments of the fund but also to the portfolio investments of the underlying investment companies. Certain types of investment companies, such as closed-end investment companies, issue a fixed number of shares that typically trade on a stock exchange or over-the-counter at a premium or discount to their net asset value. Others are continuously offered at net asset value but also may be traded in the secondary market. PREFERRED STOCK. Preferred stock represents an equity or ownership interest in an issuer. Preferred stock normally pays dividends at a specified rate and has precedence over common stock in the event the issuer is liquidated or declares bankruptcy. However, in the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence over the claims of those who own preferred and common stock. Preferred stock, unlike common stock, often has a stated dividend rate payable from the corporation's earnings. Preferred stock dividends may be cumulative or non-cumulative, participating, or auction rate. "Cumulative" dividend provisions require all or a portion of prior unpaid dividends to be paid before dividends can be paid to the issuer's common stock. "Participating" preferred stock may be entitled to a dividend exceeding the stated dividend in certain cases. If interest rates rise, the fixed dividend on preferred stocks may be less attractive, causing the price of such stocks to decline. Preferred stock may have mandatory sinking fund provisions, as well as provisions allowing the stock to be called or redeemed, which can limit the benefit of a decline in interest rates. Preferred stock is subject to many of the risks to which common stock and debt securities are subject. B-11 REPURCHASE AGREEMENTS. A repurchase agreement is an agreement under which a fund acquires a fixed income security (generally a security issued by the U.S. Government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by a fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by a fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and are held by a custodian bank until repurchased. In addition, the board of trustees will monitor a fund's repurchase agreement transactions generally and will establish guidelines and standards for review by the investment adviser of the creditworthiness of any bank, broker, or dealer party to a repurchase agreement relating to a fund. The use of repurchase agreements involves certain risks. One risk is the seller's ability to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under the bankruptcy or other laws, a court may determine that the underlying security is collateral for a loan by the fund not within its control and therefore the realization by the fund on such collateral may be automatically stayed. Finally, it is possible that the fund may not be able to substantiate its interest in the underlying security and may be deemed an unsecured creditor of the other party to the agreement. RESTRICTED AND ILLIQUID SECURITIES. Illiquid securities are securities that can not be sold or disposed of in the ordinary course of business within seven business days at approximately the value at which they are being carried on a fund's books. Illiquid securities may include a wide variety of investments, such as repurchase agreements maturing in more than seven days, OTC options contracts and certain other derivatives (including certain swap agreements), fixed time deposits that are not subject to prepayment or do not provide for withdrawal penalties upon prepayment (other than overnight deposits), participation interests in loans, municipal lease obligations, commercial paper issued pursuant to Section 4(2) of the Securities Act of 1933, as amended ("1933 Act"), and securities whose disposition is restricted under the federal securities laws. Illiquid securities include restricted, privately placed securities that, under the federal securities laws, may be sold only to qualified institutional buyers. Because these securities can be resold only to qualified institutional buyers, they may be considered illiquid securities-meaning that they could be difficult for a fund to convert to cash if needed. If a substantial market develops for a restricted security (or other illiquid investment) held by a fund, it will be treated as a liquid security, in accordance with procedures and guidelines approved by the board of trustees. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or securities that are exempt from registration under the 1933 Act, such as commercial paper. While a fund's adviser monitors the liquidity of restricted securities on a daily basis, the board of trustees oversees and retains ultimate responsibility for the adviser's decisions. Several factors that the board considers in monitoring these decisions include the valuation of a security, the availability of qualified institutional buyers, brokers and dealers that trade in the security, and the availability of information about the security's issuer. REVERSE REPURCHASE AGREEMENTS. In a reverse repurchase agreement, a fund sells a security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase that security at an agreed-upon price and time. Under a reverse repurchase agreement, the fund continues to receive any principal and interest payments on the underlying security during the term of the agreement. Reverse repurchase agreements involve the risk that the market value of securities retained by the fund may decline below the repurchase price of the securities sold by the fund which it is obligated to repurchase. A reverse repurchase agreement may be considered a borrowing transaction. A reverse repurchase agreement transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." A fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been reviewed and found satisfactory by the adviser. SECURITIES LENDING. A fund may lend its investment securities to qualified institutional investors (typically brokers, dealers, banks, or other financial institutions) who need to borrow securities in order to complete certain transactions, such as covering short sales, avoiding failures to deliver securities, or completing arbitrage operations. By lending its investment securities, a fund attempts to increase its net investment income through the receipt of interest on the loan. B-12 Any gain or loss in the market price of the securities loaned that might occur during the term of the loan would be for the account of the fund. If the borrower defaults on its obligation to return the securities loaned because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities loaned or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If a fund is not able to recover the securities loaned, a fund may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased. Cash received as collateral through loan transactions may be invested in other eligible securities. Investing this cash subjects that investment, as well as the securities loaned, to market appreciation or depreciation. The terms and the structure and the aggregate amount of securities loans must be consistent with the 1940 Act, and the rules or interpretations of the SEC thereunder. These provisions limit the amount of securities a fund may lend to 33-1/3% of the fund's total assets, and require that (1) the borrower pledge and maintain with the fund collateral consisting of cash, an irrevocable letter of credit or securities issued or guaranteed by the United States Government having at all times not less than 100% of the value of the securities loaned, (2) the borrower add to such collateral whenever the price of the securities loaned rises (i.e., the borrower "marks to the market" on a daily basis), (3) the loan be made subject to termination by the fund at any time, and (4) the fund receive reasonable interest on the loan (which may include the fund's investing any cash collateral in interest bearing short-term investments), any distribution on the loaned securities and any increase in their market value. Loan arrangements made by each fund will comply with all other applicable regulatory requirements, including the rules of the New York Stock Exchange, which presently require the borrower, after notice, to redeliver the securities within the normal settlement time of three business days. All relevant facts and circumstances, including the creditworthiness of the borrower, will be considered in making decisions with respect to the lending of securities, subject to review by the board of trustees, and a fund may pay such fees. At the present time, the staff of the SEC does not object if an investment company pays reasonable negotiated fees in connection with loaned securities, so long as such fees are set forth in a written contract and approved by the investment company's trustees. In addition, voting rights pass with the loaned securities, but if a material event will occur affecting an investment on loan, the loan must be called and the securities voted. SWAP AGREEMENTS. A swap agreement is an agreement between two parties ("counterparties") to exchange payments at specified dates ("periodic payment dates") on the basis of a specified amount ("notional amount") with the payments calculated with reference to a specified asset, reference rate or index. Examples of swap agreements include, but are not limited to, interest rate swaps, credit default swaps, equity swaps, commodity swaps, foreign currency swaps, index swaps and total return swaps. Most swap agreements provide that when the periodic payment dates for both parties are the same, payments are netted and only the net amount is paid to the counterparty entitled to receive the net payment. Consequently, a fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each counterparty. Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments; U.S. dollar-denominated payments may be exchanged for payments denominated in a different currency; and payments tied to the price of one asset, reference rate or index may be exchanged for payments tied to the price of another asset, reference rate or index. An option on a swap agreement, also called a "swaption," is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based "premium." A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate or index. A payer swaption gives the owner the right to pay the total return of a specified asset, reference rate or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties. The use of swap agreements by a fund entails certain risks, which are different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Swaps are highly specialized instruments that require investment techniques and risk analyses different from those associated with stocks, bonds and other traditional investments. The use of a swap requires an understanding not only of the referenced asset, reference rate or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions. Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. If a swap transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC swaps), it may B-13 not be possible to initiate a transaction or liquidate a position at an advantageous time or price. For this reason, a swap transaction may be subject to a fund's limitation on investments in illiquid securities. Swap agreements may be subject to pricing risk, which exists when a particular swap becomes extraordinarily expensive relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity. Because some swap agreements have a leverage or borrowing component, adverse changes in the value or level of the underlying asset, reference rate or index can result in a loss substantially greater than the amount invested in the swap itself. Certain swaps have the potential for unlimited loss, regardless of the size of the initial investment. Certain swap transactions may be considered to constitute borrowing transactions. Such a swap transaction will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." Like most other investments, swap agreements are subject to the risk that the market value of the instrument will change in a way detrimental to a fund's interest. A fund bears the risk that its adviser will not accurately forecast future market trends or the values of assets, reference rates, indices or other economic factors in establishing swap positions for the fund. If the adviser attempts to use a swap as a hedge against, or as a substitute for, a portfolio investment, the fund will be exposed to the risk that the swap will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the fund. While hedging strategies involving swap instruments can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other fund investments. Many swaps, in particular OTC swaps, are complex and often valued subjectively. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. The use of a swap agreement involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty or the failure of the counterparty to make required payments or otherwise comply with the terms of the agreement. Additionally, the use of credit default swaps can result in losses if a fund's adviser does not correctly evaluate the creditworthiness of the issuer on which the credit swap is based. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect a fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements. TAX MATTERS - FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. A fund is required for federal income tax purposes to recognize as income for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. In these cases, any gain or loss recognized with respect to a futures contract is considered to be 60% long-term capital gain or loss and 40% short-term capital gain or loss, without regard to the holding period of the contract. Gains and losses on certain other futures contracts (primarily non-U.S. futures contracts) are not recognized until the contracts are closed and are treated as long-term or short-term depending on the holding period of the contract. Sales of futures contracts which are intended to hedge against a change in the value of securities held by a fund may affect the holding period of such securities and, consequently, the nature of the gain or loss on such securities upon disposition. A fund may be required to defer the recognition of losses on one position, such as futures contracts, to the extent of any unrecognized gains on a related offsetting position held by the fund. In order for a fund to continue to qualify for federal income tax treatment as a regulated investment company, at least 90% of its gross income for a taxable year must be derived from qualifying income; i.e., dividends, interest, income derived from loans of securities, gains from the sale of securities or of foreign currencies or other income derived with respect to the fund's business of investing in securities or currencies. It is anticipated that any net gain recognized on futures contracts will be considered qualifying income for purposes of the 90% requirement. A fund will distribute to shareholders annually any net capital gains which have been recognized for federal income tax purposes on futures transactions. Such distributions will be combined with distributions of capital gains realized on the fund's other investments and shareholders will be advised on the nature of the distributions. B-14 TAX MATTERS - FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the Federal income tax treatment of certain transactions denominated in terms of a currency other than the U.S. dollar or determined by reference to the value of one or more currencies other than the U.S. dollar. The types of transactions covered by the special rules include the following: (1) the acquisition of, or becoming the obligor under, a bond or other debt instrument (including, to the extent provided in Treasury regulations, preferred stock); (2) the accruing of certain trade receivables and payables; and (3) the entering into or acquisition of any forward contract, futures contract, option or similar financial instrument if such instrument is not marked to market. The disposition of a currency other than the U.S. dollar by a taxpayer whose functional currency is the U.S. dollar is also treated as a transaction subject to the special currency rules. However, foreign currency-related regulated futures contracts and non-equity options are generally not subject to the special currency rules if they are or would be treated as sold for their fair market value at year-end under the marking-to-market rules applicable to other futures contracts unless an election is made to have such currency rules apply. With respect to transactions covered by the special rules, foreign currency gain or loss is calculated separately from any gain or loss on the underlying transaction and is normally taxable as ordinary income or loss. A taxpayer may elect to treat as capital gain or loss foreign currency gain or loss arising from certain identified forward contracts, futures contracts and options that are capital assets in the hands of the taxpayer and which are not part of a straddle. The Treasury Department issued regulations under which certain transactions subject to the special currency rules that are part of a "section 988 hedging transaction" (as defined in the Code and the Treasury regulations) will be integrated and treated as a single transaction or otherwise treated consistently for purposes of the Code. Any gain or loss attributable to the foreign currency component of a transaction engaged in by a fund which is not subject to the special currency rules (such as foreign equity investments other than certain preferred stocks) will be treated as capital gain or loss and will not be segregated from the gain or loss on the underlying transaction. It is anticipated that some of the non-U.S. dollar-denominated investments and foreign currency contracts a fund may make or enter into will be subject to the special currency rules described above. TAX MATTERS - FOREIGN TAX CREDIT. Foreign governments may withhold taxes on dividends and interest paid with respect to foreign securities. Foreign governments may also impose taxes on other payments or gains with respect to foreign securities. If, at the close of its fiscal year, more than 50% of a fund's total assets are invested in securities of foreign issuers, the fund may elect to pass through foreign taxes paid, and thereby allow shareholders to take a deduction or, if they meet certain holding period requirements, a tax credit on their tax returns. If shareholders do not meet the holding period requirements, they may still be entitled to a deduction for certain gains that were actually distributed by the fund, but will also show the amount of the available offsetting credit or deduction. TEMPORARY INVESTMENTS. A fund may take temporary defensive measures that are inconsistent with the fund's normal fundamental or non-fundamental investment policies and strategies in response to adverse market, economic, political or other conditions. Such measures could include, but are not limited to, investments in (1) highly liquid short-term fixed income securities issued by or on behalf of municipal or corporate issuers, obligations of the U.S. Government and its agencies, commercial paper, and bank certificates of deposit; (2) shares of other investment companies which have investment objectives consistent with those of the fund; (3) repurchase agreements involving any such securities; and (4) other money market instruments. There is no limit on the extent to which the fund may take temporary defensive measures. In taking such measures, the fund may fail to achieve its investment objective. WARRANTS. Warrants are instruments which give the holder the right, but not the obligation, to buy an equity security at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond to changes in the value of its underlying security. The price of a warrant may be more volatile than the price of its underlying security, and a warrant may offer greater potential for capital appreciation as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases to have value if it is not exercised prior to its expiration date. These factors can make warrants more speculative than other types of investments. WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS. When-issued, delayed delivery and forward commitment transactions involve a commitment to purchase or sell specific securities at a predetermined price or yield in which payment and delivery take place after the customary settlement period for that type of security. Typically, no interest accrues to the purchaser until the security is delivered. When purchasing securities pursuant to one of these transactions, the purchaser assumes the rights and risks of ownership, including the risks of price and yield fluctuations and the risk that the security will not be issued as anticipated. Because payment for the securities is not required until the delivery date, these risks are in addition to the risks associated with a fund's investments. When a B-15 fund has sold a security pursuant to one of these transactions, the fund does not participate in further gains or losses with respect to the security. If the other party to a delayed-delivery transaction fails to deliver or pay for the securities, a fund could miss a favorable price or yield opportunity or suffer a loss. A fund may renegotiate a when-issued or forward transaction and may sell the underlying securities before delivery, which may result in capital gains or losses for the fund. When-issued, delayed delivery and forward commitment transactions may be considered to constitute borrowing transactions. When-issued, delayed delivery and forward commitment transactions will not be considered to constitute the issuance of a "senior security" by a fund, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or segregates sufficient liquid assets in accordance with the requirements, and subject to the risks, described above under the heading "Borrowing." INVESTMENT POLICIES RELATING TO THE SALE OF INVESTOR SHARES OF VANGUARD SMALL-CAP INDEX AND TOTAL STOCK MARKET INDEX FUNDS IN JAPAN. In connection with the offering of the Investor Shares of the Small-Cap Index and Total Stock Market Index Funds in Japan, the Funds have undertaken to the Japanese Securities Dealers Association that each Fund may not: 1. borrow money, except for temporary or emergency purposes in an amount not exceeding 10% of the Fund's net assets; 2. together with other mutual funds managed by The Vanguard Group, Inc., acquire more than 50% of the outstanding voting securities of any issuer; 3. invest more than 15% of its net assets in illiquid securities (which include securities restricted as to resale unless they are determined to be readily marketable in accordance with procedures established by the board of trustees); and 4. sell securities short at any time in excess of its net asset value. If the undertaking is violated, the Fund will, promptly after discovery, take such action as may be necessary to cause the violation to cease, which shall be the only obligation of the Fund and the only remedy in respect of the violation. This undertaking will remain in effect as long as (i) shares of the Fund are qualified for offer or sale in Japan and (ii) the undertaking is required by the "Standards of Selection of Foreign Investment Fund Securities" established under the Rules of Foreign Securities Transactions by the Japanese Securities Dealers Association. INVESTMENT LIMITATIONS Each Fund is subject to the following fundamental investment limitations, which cannot be changed in any material way without the approval of the holders of a majority of the Fund's shares. For these purposes, a "majority" of shares means shares representing the lesser of: (1) 67% or more of the Fund's net assets voted, so long as shares representing more than 50% of the Fund's net assets are present or represented by proxy; or (2) shares representing more than 50% of the Fund's net assets. BORROWING. Each Fund may borrow money for temporary or emergency purposes only in an amount not to exceed 15% of the Fund's net assets. The Fund may borrow money through banks, reverse repurchase agreements, or Vanguard's interfund lending program only, and must comply with all applicable regulatory conditions. The Fund may not make any additional investments whenever its outstanding borrowings exceed 5% of net assets. COMMODITIES. Each Fund may not invest in commodities, except that it may invest in stock index futures contracts, stock options and in stock Index futures contracts. No more than 5% of a Fund's total assets may be used as initial margin deposit for futures contracts, and no more than 20% of a Fund's total assets may be invested in futures contracts or options at any time. DIVERSIFICATION. Each Fund will limit the aggregate value of all holdings (except U.S. Government and cash items as defined under Subchapter M of the Internal Revenue Code (the Code)), each of which exceeds 5% of the Fund's total assets, to an aggregate of 50% of such assets. Additionally, the Fund will limit the aggregate value of holdings of a single issuer (except U.S. Government and cash items, as defined in the Code) to a maximum of 25% of the Fund's total assets. ILLIQUID SECURITIES. Each Fund may not acquire any security if, as a result, more than 15% of its net assets would be invested in securities that are illiquid. From time to time, each Fund's board of trustees may determine that certain restricted securities known as Rule 144A securities are liquid and not subject to the 15% limitation. B-16 INDUSTRY CONCENTRATION. Each Fund may not invest more than 25% of its total assets in any one industry. INVESTING FOR CONTROL. Each Fund may not invest in a company for purpose of controlling its management. LOANS. Each Fund may not lend money to any person except by purchasing fixed-income securities that are publicly distributed, by lending its portfolio securities, or through Vanguard's interfund lending program. MARGIN. Each Fund may not purchase securities on margin or sell securities short, except as permitted by the Funds' investment policies relating to commodities. OIL, GAS, MINERALS. Each Fund may not invest in oil, gas, or other mineral exploration or development programs. PLEDGING ASSETS. Each Fund may not pledge, mortgage, or hypothecate more than 15% of its net assets. PUTS AND CALLS. Each Fund may not purchase or sell put, call, straddle, or spread options, except as permitted by the Fund's investment policies relating to commodities. REAL ESTATE. Each Fund may not invest directly in real estate, although it may invest in securities of companies that deal in real estate. SENIOR SECURITIES. Each Fund may not issue senior securities, except in compliance with the 1940 Act. UNDERWRITING. Each Fund may not engage in the business of underwriting securities issued by other persons. The Fund will not be considered an underwriter when disposing of its investment securities. Compliance with the above mentioned investment limitations is measured at the time investment securities are purchased. None of these limitations prevents a Fund from participating in The Vanguard Group. As a member of The Vanguard Group, each Fund may own securities issued by Vanguard, make loans to Vanguard, and contribute to Vanguard's costs or other financial requirements. See "Management of the Funds" for more information. SHARE PRICE A Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange (the Exchange), generally 4 p.m., Eastern time. Net asset value per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. The Exchange typically observes the following holidays: New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although each Fund expects the same holidays to be observed in the future, the Exchange may modify its holiday schedule or hours of operation at any time. PURCHASE OF SHARES The purchase price of shares of each Fund is the net asset value per share next determined after the purchase request is received in good order, as defined in the Fund's prospectus. The net asset value per share is calculated after the close of regular trading on the Exchange on each day the Exchange is open for business. An order received before the close of regular trading on the Exchange will be executed at the price computed on the date of receipt; an order received after the close of regular trading on the Exchange will be executed at the price computed on the next day the Exchange is open. Each Fund reserves the right in its sole discretion (1) to suspend the offering of its shares, (2) to reject purchase orders, including a purchase by exchange from another Vanguard fund, if management determines such rejection is in the best interest of the Fund, (3) to increase or decrease the minimum amount required to open and maintain an account, without prior notice, (4) to impose a transaction fee on a purchase of the Fund's shares if the purchase, in the opinion of the adviser, would disrupt the efficient management of the Fund, and (5) to reduce or waive the minimum investment for, or any other restrictions on, initial and subsequent investments for certain categories of investors or under circumstances where certain economies can be achieved in sales of the Fund's shares. EXCHANGE OF SECURITIES FOR SHARES OF A FUND (OTHER THAN VIPER SHARES). In certain circumstances, shares of a Fund may be purchased "in kind" (i.e., in exchange for securities, rather than for cash). The securities tendered as part of an in-kind purchase must be included in the Index tracked by the Fund and must have a total market value of $1 million or B-17 more. In addition, each position must have a market value of $10,000 or more. Such securities also must be liquid securities that are not restricted as to transfer and have a value that is readily ascertainable as evidenced by a listing on the American Stock Exchange, the New York Stock Exchange, or NASDAQ. Securities accepted by the Fund will be valued, as set forth in the Fund's prospectus, as of the time of the next determination of net asset value after such acceptance. Shares of each Fund are issued at net asset value determined as of the same time. All dividend, subscription, or other rights that are reflected in the market price of accepted securities at the time of valuation become the property of the Fund and must be delivered to the Fund by the investor upon receipt from the issuer. A gain or loss for federal income tax purposes would be realized by the investor upon the exchange, depending upon the cost of the securities tendered. A Fund will not accept securities in exchange for its shares unless: (1) such securities are, at the time of the exchange, eligible to be held by the Fund; (2) the transaction will not cause the Fund's weightings to become imbalanced with respect to the weightings of the securities included in the corresponding Index; (3) the investor represents and agrees that all securities offered to the Fund are not subject to any restrictions upon their sale by the Fund under Securities Act of 1933, or otherwise; (4) such securities are traded in an unrelated transaction with a quoted sales price on the same day the exchange valuation is made; (5) the quoted sales price used as a basis of valuation is representative (e.g., one that does not involve a trade of substantial size that artificially influences the price of the security); and (6) the value of any such security being exchanged will not exceed 5% of the Fund's net assets immediately prior to the transaction. Investors interested in purchasing Fund shares in kind should contact Vanguard. REDEMPTION OF SHARES Each Fund may suspend redemption privileges or postpone the date of payment for redeemed shares (1) during any period that the Exchange is closed or trading on the Exchange is restricted as determined by the Commission, (2) during any period when an emergency exists, as defined by the Commission, as a result of which it is not reasonable practicable for the Fund to dispose of securities it owns or to fairly determine the value of its assets, and (3) for such other periods as the Commission may permit. Each Fund has made an election with the Commission to pay in cash all redemptions requested by any shareholder of record limited in amount during any 90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at the beginning of such period. This election does not apply to a Fund's VIPER shares. If Vanguard determines that it would be detrimental to the best interests of the remaining shareholders of each Fund to make payment wholly or partly in cash, the Fund may pay the redemption price in whole or in part by a distribution in kind of readily marketable securities held by the Fund in lieu of cash in conformity with applicable rules of the Commission. Investors may incur brokerage charges on the sale of such securities received in payment of redemptions. INVESTING WITH VANGUARD THROUGH OTHER FIRMS The Funds have authorized certain agents to accept on their behalf purchase and redemption orders, and those agents are authorized to designate other intermediaries to accept purchase and redemption orders on the Funds' behalf (collectively, "Authorized Agents"). A Fund will be deemed to have received a purchase or redemption order when an Authorized Agent accepts the order in accordance with the Fund's instructions. A customer order that is properly transmitted to a Fund by an Authorized Agent will be priced at the Fund's net asset value next determined after the order is received by the agent. MANAGEMENT OF THE FUNDS THE VANGUARD GROUP Each Fund is a member of The Vanguard Group of Investment Companies, which consists of more than 100 funds. Through their jointly-owned subsidiary, The Vanguard Group, Inc., the funds obtain at cost virtually all of their corporate management, administrative, and distribution services. Vanguard also provides investment advisory services on an at-cost basis to several of the Vanguard funds. Vanguard employs a supporting staff of management and administrative personnel needed to provide the requisite services to the funds and also furnishes the funds with necessary office space, furnishings, and equipment. Each fund B-18 pays its share of Vanguard's total expenses, which are allocated among the funds under methods approved by the board of trustees of each fund. In addition, each fund bears its own direct expenses, such as legal, auditing and custodian fees. The funds' officers are also officers and employees of Vanguard. No officer or employee owns, or is permitted to own, any securities of any external adviser for the funds. Vanguard, Vanguard Marketing Corporation, the funds' advisers, and the funds have adopted Codes of Ethics designed to prevent employees who may have access to nonpublic information about the trading activities of the funds (access persons) from profiting from that information. The Codes permit access persons to invest in securities for their own accounts, including securities that may be held by a fund, but place substantive and procedural restrictions on the trading activities of access persons. For example, the Codes require that access persons receive advance approval for every securities trade to ensure that there is no conflict with the trading activities of the funds. Vanguard was established and operates under an Amended and Restated Funds' Service Agreement, which was approved by the shareholders of each of the funds. The Amended and Restated Funds' Service Agreement provides as follows: (1) each Vanguard fund may be called upon to invest a up to 0.40% of its current net assets in Vanguard, and (2) there is no other limitation on the dollar amount that each Vanguard fund may contribute to Vanguard's capitalization. The amounts that each of the funds has invested are adjusted from time to time in order to maintain the proportionate relationship between each fund's relative net assets and its contribution to Vanguard's capital. As of December 31, 2002, each Fund had contributed capital of $22,927,000 to Vanguard, representing 0.02% of each Fund's net assets and 32.9% of Vanguard's capitalization. MANAGEMENT. Corporate management and administrative services include: (1) executive staff; (2) accounting and financial; (3) legal and regulatory; (4) shareholder account maintenance; (5) monitoring and control of custodian relationships; (6) shareholder reporting; and (7) review and evaluation of advisory and other services provided to the funds by third parties. DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of Vanguard, provides all distribution and marketing activities for the funds. The principal distribution expenses are for advertising, promotional materials, and marketing personnel. Distribution services may also include organizing and offering to the public, from time to time, one or more new investment companies that will become members of Vanguard. The funds' trustees review and approve the amount to be spent annually on distribution activities, as well as the manner and amount to be spent on each fund. The trustees also determine whether to organize new investment companies. One half of the distribution expenses of a marketing and promotional nature is allocated among the funds based upon their relative net assets. The remaining half of those expenses is allocated among the funds based upon each fund's sales for the preceding 24 months relative to the total sales of the funds as a group, provided, however, that no fund's aggregate quarterly rate of contribution for distribution expenses of a marketing and promotional nature shall exceed 125% of average distribution expense rate for Vanguard, and that no fund shall incur annual distribution expenses in excess of 0.20 of 1% of its average month-end net assets. During the fiscal years ended December 31, 2000, 2001, and 2002, the Funds incurred the following approximate amounts of The Vanguard Group's management and administrative (including transfer agency), distribution, and marketing expenses. ================================================================================ FUND 2000 2001 2002 - -------------------------------------------------------------------------------- Vanguard Total Stock Market Index Fund $42,133,000 $39,128,000 $39,969,000 Vanguard 500 Index Fund 183,574,000 151,291,000 127,920,000 Vanguard Extended Market Index Fund 12,662,000 10,062,000 8,731,000 Vanguard Mid-Cap Index Fund 2,611,000 5,073,000 6,695,000 Vanguard Small-Cap Index Fund 10,743,000 10,127,000 10,106,000 Vanguard Value Index Fund 8,172,000 8,832,000 6,882,000 Vanguard Small-Cap Value Index Fund 560,000 1,538,000 3,431,000 Vanguard Growth Index Fund 33,486,000 21,049,000 16,994,000 Vanguard Small-Cap Growth Index Fund 798,000 817,000 926,000 ================================================================================ B-19 INVESTMENT ADVISORY SERVICES Vanguard provides investment advisory services to the Funds and several other Vanguard funds. These services are provided on an at-cost basis from an experienced investment management staff employed directly by Vanguard. During the fiscal years ended December 31, 2000, 2001, and 2002, the Funds paid the following approximate amounts of Vanguard's expenses relating to investment advisory services: ================================================================================ FUND 2000 2001 2002 - -------------------------------------------------------------------------------- Vanguard Total Stock Market Index Fund $153,000 $181,000 $144,000 Vanguard 500 Index Fund 152,000 181,000 190,000 Vanguard Extended Market Index Fund 46,000 54,000 154,000 Vanguard Mid-Cap Index Fund 46,000 55,000 108,000 Vanguard Small-Cap Index Fund 153,000 181,000 190,000 Vanguard Value Index Fund 46,000 55,000 108,000 Vanguard Small-Cap Value Index Fund 46,000 55.000 108,000 Vanguard Growth Index Fund 153,000 181,000 144,000 Vanguard Small-Cap Growth Index Fund 46,000 54,000 108,000 ================================================================================ Each Fund's board of trustees oversees the Fund's management and performance on a regular basis. In addition, the board considers annually whether each Fund and its shareholders continue to benefit from the internalized management structure whereby the Fund receives investment management services at cost from Vanguard's Quantitative Equity Group. Vanguard provides the board with monthly, quarterly, and annual analyses of the Group's performance. In addition, Vanguard provides the board with quarterly self-evaluations and certain other information the board deems important to evaluate the short- and long-term performance of each Fund's internalized management. Each Fund's portfolio managers meet with the board periodically to discuss the management and performance of the Fund. When considering whether to continue the internalized management structure of each Fund, the board examines several factors, but does not identify any particular factor as controlling their decision. Some of the factors considered by the board include: the nature, extent and quality of the services provided as well as other material facts, such as the investment performance of the fund's assets and the fair market value of services provided. The board also considers information detailing Vanguard's control of the investment expenses of each Fund, such as transaction costs, including the ways in which portfolio transactions for the Funds are conducted and brokers are selected. The board also reviews the investment performance of each Fund compared with a peer group of funds and an appropriate index or combination of indexes, in addition to a comparative analysis of expense ratios of, and advisory fees paid by, similar funds. The following tables reflect a sample of the most recent data for each Fund:
AVERAGE ANNUAL RETURN (BEFORE TAXES) ------------------------------------ ADVISORY FEES EXPRESSED AS AN ANNUAL EFFECTIVE 1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED RATE OF THE FUNDS' 12/31/2002 12/31/2002 12/31/2002 EXPENSE RATIO AVERAGE NET ASSETS -------------- ------------- -------------- ------------- ------------------- VANGUARD TOTAL STOCK MARKET INDEX FUND* -20.96% -0.80% 8.60% 0.20% 0.001% Average Multi-Cap Core Fund** -21.75 -0.44 7.84 1.38 0.58 Wilshire 5000 Index -20.86 -0.87 8.74 None None VANGUARD 500 INDEX FUND -22.15% -0.61% 9.27% 0.18% 0.000% Average Large-Cap Core Fund** -23.49 -1.62 7.48 1.41 0.62 S&P 500 Index -22.10 -0.59 9.34 None None VANGUARD EXTENDED MARKET INDEX FUND* -18.06% -1.49% 7.61% 0.26% 0.004% Average Mid-Cap Core Fund** -18.40 4.81 10.58 1.39 0.61 Wilshire 4500 Index -17.80 -1.57 7.32 None None
B-20
AVERAGE ANNUAL RETURN (BEFORE TAXES) ------------------------------------ ADVISORY FEES EXPRESSED AS AN ANNUAL EFFECTIVE 1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED RATE OF THE FUNDS' 12/31/2002 12/31/2002 12/31/2002 EXPENSE RATIO AVERAGE NET ASSETS -------------- ------------- -------------- ------------- ------------------- VANGUARD MID-CAP INDEX FUND* -14.61% 5.07% N/A 0.26% 0.003% Average Mid-Cap Core Fund** -18.40 3.02 N/A 1.39 0.61 S&P MidCap 400 Index -14.51 4.69 N/A None None VANGUARD SMALL-CAP INDEX FUND* -20.02% -0.76% 7.97% 0.27% 0.004% Average Small-Cap Core Fund** -18.23 2.74 10.00 1.58 0.73 Russell 2000 Index -20.48 -1.36 7.16 None None VANGUARD VALUE INDEX FUND* -20.91% -0.93% 9.27% 0.23% 0.003% Average Large-Cap Value Fund** -19.95 0.07 8.81 1.41 0.56 S&P 500/Barra Value Index -20.85 -0.85 9.39 None None VANGUARD SMALL-CAP VALUE INDEX FUND* -14.20% 1.59% N/A 0.27% 0.006% Average Small-Cap Value Fund** -10.32 2.29 N/A 1.56 0.76 S&P SmallCap 600/Barra Value Index -14.47 0.95 N/A None None VANGUARD GROWTH INDEX FUND* -23.68% -1.09% 8.70% 0.23% 0.002% Average Large-Cap Growth Fund** -28.63 -2.57 6.74 1.57 0.64 S&P 500/Barra Growth Index -23.59 -1.08 8.79 None None VANGUARD SMALL-CAP GROWTH INDEX FUND* -15.41% -0.60% N/A 0.27% 0.022% Average Small-Cap Growth Fund** -29.72 -1.54 N/A 1.74 0.77 S&P Small-Cap 600/Barra Growth Index -15.36 -0.97 N/A None None *Information about the Fund's other share classes may be found elsewhere in this Statement of Additional Information. **Derived from data provided by Lipper Inc.
Based upon its most recent evaluation of each Fund's investment staff, the portfolio management process, the short- and long-term performance results, and the at-cost, internalized management arrangements for each Fund, the board determined that it would be in the best interests of each Fund's shareholders to continue its internalized management arrangements. B-21 OFFICERS AND TRUSTEES The officers of the Funds manage the day-to-day operations of the Funds under the direction of the Funds' board of trustees. The trustees set broad policies for the Funds and choose the Funds' officers. Each trustee serves a Fund until its termination; until the trustee's retirement, resignation, death; or as otherwise specified in the Trust's organizational documents. Any trustee may be removed at a meeting of shareholders by a vote representing two-thirds of the total net asset value of all shares of the Funds. Each trustee also serves as a director of The Vanguard Group, Inc. The following chart shows information for each trustee and executive officer of the Funds. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF VANGUARD FUNDS POSITION(S) VANGUARD FUND(S) OVERSEEN BY HELD WITH TRUSTEE/ PRINCIPAL OCCUPATION(S) DURING TRUSTEE/ NAME, YEAR OF BIRTH FUNDS OFFICER SINCE THE PAST FIVE YEARS OFFICER - ------------------------------------------------------------------------------------------------------------------------------------ INTERESTED TRUSTEE - ------------------------------------------------------------------------------------------------------------------------------------ John J. Brennan* Chairman of the May 1987 Chairman of the Board, Chief Executive 112 (1954) Board, Chief Officer, and Director(Trustee) of The Executive Officer Vanguard Group, Inc. and each of the and Trustee investment companies served by The Vanguard Group, Inc. - ------------------------------------------------------------------------------------------------------------------------------------ INDEPENDENT TRUSTEES - ------------------------------------------------------------------------------------------------------------------------------------ Charles D. Ellis Trustee January 2001 The Partners of '63 (probono ventures in 112 (1937) education); Senior Advisor to Greenwich Associates (international business strategy consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. - ------------------------------------------------------------------------------------------------------------------------------------ Rajiv L. Gupta Trustee December 2001 Chairman and Chief Executive Officer 112 (1945) (since October, 1999), Vice Chairman (January-September 1999),and Vice President (prior to September, 1999) of Rohm and Haas Co.(chemicals); Director of Technitrol, Inc. (electronic components) and Agere Systems (communication components); Board Member of American Chemistry Council; Trustee of Drexel University. - ------------------------------------------------------------------------------------------------------------------------------------ JoAnn Heffernan Heisen Trustee July 1998 Vice President, Chief Information Officer, and 112 (1950) Member of the Executive Committee of Johnson & Johnson (pharmaceuticals/ consumer products); Director of the Medical Center at Princeton and Women's Research and Education Institute. - ------------------------------------------------------------------------------------------------------------------------------------ Burton G. Malkiel Trustee May 1977 Chemical Bank Chairman's Professor of 110 (1932) Economics, Princeton University; Director of Vanguard Investment Series plc (Irish investment fund) since November, 2001, Vanguard Group (Ireland) Limited (Irish investment management firm) since November, 2001, Prudential Insurance Co. of America, BKF Capital (investment management), The Jeffrey Co. (holding company), and NeuVis, Inc. (software company). *Officers of the Funds are "Interested persons" as defined in the 1940 Act.
B-22
- ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF VANGUARD FUNDS POSITION(S) VANGUARD FUND(S) OVERSEEN BY HELD WITH TRUSTEE/ PRINCIPAL OCCUPATION(S) DURING TRUSTEE/ NAME, YEAR OF BIRTH FUNDS OFFICER SINCE THE PAST FIVE YEARS OFFICER - ------------------------------------------------------------------------------------------------------------------------------------ Alfred M. Rankin, Jr. Trustee January 1993 Chairman, President, Chief Executive 112 (1941) Officer, and Director of NACCO Industries, Inc. (forklifttrucks/housewares/lignite); Director of Goodrich Corporation. (industrialproducts/aircraft systems and services). Director of the Standard Products Company (supplier for automotive industry) until 1998. - ------------------------------------------------------------------------------------------------------------------------------------ J. Lawrence Wilson Trustee April 1985 Retired Chairman and Chief Executive 112 (1936) Officer of Rohm and Haas Co. (chemicals); Director of Cummins Inc. (diesel engines), MeadWestvaco Corp. (paper products), and AmerisourceBergen Corp. (pharmaceutical distribution); and Trustee of Vanderbilt University. - ------------------------------------------------------------------------------------------------------------------------------------ EXECUTIVE OFFICERS - ------------------------------------------------------------------------------------------------------------------------------------ R. Gregory Barton* Secretary June 2001 Managing Director and General Counsel 112 (1951) of The Vanguard Group, Inc. (since September, 1997); Secretary of The Vanguard Group, Inc. and of each of the investment companies served by The Vanguard Group, Inc. (since June, 2001); Principal of The Vanguard Group, Inc. (prior to September, 1997). - ------------------------------------------------------------------------------------------------------------------------------------ Thomas J. Higgins* Treasurer July 1998 Principal of The Vanguard Group, Inc.; 112 (1957) Treasurer of each of the investment companies served by The Vanguard Group, Inc. (since July, 1998). - ------------------------------------------------------------------------------------------------------------------------------------
*Officers of the Funds are "Interested persons" as defined in the 1940 Act. Mr. Ellis is a Senior Advisor to Greenwich Associates, a firm that consults on business strategy to professional financial services organizations in markets around the world. A large number of financial service providers, including Vanguard, subscribe to programs of research-based consulting. During 2001 and 2002, Vanguard paid Greenwich subscription fees amounting to less than $275,000. Vanguard's subscription rates are similar to those of other subscribers. Board Committees: Each Fund's board has the following committees: - - Audit Committee: This committee oversees the accounting and financial reporting policies, the systems of internal controls, and the independent audits of each Fund and Vanguard. All independent trustees serve as members of the committee. The committee held six meetings during each Fund's last fiscal year. - - Compensation Committee: This committee oversees the compensation programs established by each Fund and Vanguard for the benefit of their employees, officers, and trustees/directors. All independent trustees serve as members of the committee. The committee held three meeting during each Fund's last fiscal year. - - Nominating Committee: This committee nominates candidates for election to Vanguard's board of directors and the board of trustees of each Fund (collectively, the "Vanguard boards"). The committee also has the authority to recommend the removal of any director or trustee from the Vanguard boards. All independent trustees serve as members of the committee. The committee held two meeting during each Fund's last fiscal year. The Nominating Committee will consider shareholder recommendations for trustee nominees. Shareholders may send recommendations to Mr. Wilson, Chairman of the Committee. TRUSTEES' OWNERSHIP OF FUND SHARES All trustees allocate their investments among the various Vanguard funds based on their own investment needs. The following table shows each trustee's ownership of shares of each Fund and of all Vanguard funds served by the trustee as of December 31, 2002. As a group, the Funds' trustees and officers own less than 1% of the outstanding shares of each Fund. B-23 VANGUARD INDEX FUNDS
AGGREGATE DOLLAR DOLLAR RANGE OF RANGE OF VANGUARD FUND SHARES OWNED FUND SHARES OWNED FUND NAME OF TRUSTEE BY TRUSTEE BY TRUSTEE - -------------------------------------- ---------------- ----------------- ----------------- VANGUARD TOTAL STOCK MARKET INDEX FUND John J. Brennan Over $100,000 Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta None Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel Over $100,000 Over $100,000 Alfred M. Rankin, Jr. Over $100,000 Over $100,000 J. Lawrence Wilson None Over $100,000 VANGUARD 500 INDEX FUND John J. Brennan Over $100,000 Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta Over $100,000 Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel $50,001-$100,000 Over $100,000 Alfred M. Rankin, Jr. Over $100,000 Over $100,000 J. Lawrence Wilson None Over $100,000 VANGUARD EXTENDED MARKET INDEX FUND John J. Brennan $10,001-$50,000 Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta $50,001-$100,000 Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel None Over $100,000 Alfred M. Rankin, Jr. Over $100,000 Over $100,000 J. Lawrence Wilson None Over $100,000 VANGUARD MID-CAP INDEX FUND John J. Brennan None Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta None Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel None Over $100,000 Alfred M. Rankin, Jr. None Over $100,000 J. Lawrence Wilson None Over $100,000 VANGUARD SMALL-CAP INDEX FUND John J. Brennan None Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta None Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel None Over $100,000 Alfred M. Rankin, Jr. None Over $100,000 J. Lawrence Wilson None Over $100,000
B-24
AGGREGATE DOLLAR DOLLAR RANGE OF RANGE OF VANGUARD FUND SHARES OWNED FUND SHARES OWNED FUND NAME OF TRUSTEE BY TRUSTEE BY TRUSTEE - -------------------------------------- ---------------- ----------------- ----------------- VANGUARD VALUE INDEX FUND John J. Brennan None Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta None Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel None Over $100,000 Alfred M. Rankin, Jr. None Over $100,000 J. Lawrence Wilson None Over $100,000 VANGUARD SMALL-CAP VALUE INDEX FUND John J. Brennan None Over $100,000 Charles D. Ellis Over $100,000 Over $100,000 Rajiv L. Gupta None Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel None Over $100,000 Alfred M. Rankin, Jr. None Over $100,000 J. Lawrence Wilson None Over $100,000 VANGUARD GROWTH INDEX FUND John J. Brennan None Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta None Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel None Over $100,000 Alfred M. Rankin, Jr. None Over $100,000 J. Lawrence Wilson None Over $100,000 VANGUARD SMALL-CAP GROWTH INDEX FUND John J. Brennan Over $100,000 Over $100,000 Charles D. Ellis None Over $100,000 Rajiv L. Gupta None Over $100,000 JoAnn Heffernan Heisen None Over $100,000 Burton G. Malkiel None Over $100,000 Alfred M. Rankin, Jr. None Over $100,000 J. Lawrence Wilson None Over $100,000
TRUSTEE COMPENSATION The same individuals serve as trustees of all Vanguard funds (with one exception, which is noted in the table on pages B-xx and B-xx), and each fund pays a proportionate share of the trustees' compensation. The funds also employ their officers on a shared basis; however, officers are compensated by Vanguard, (not the funds). INDEPENDENT TRUSTEES. The funds compensate their independent trustees (i.e., the ones who are not also officers of the funds) in three ways: - - The independent trustees receive an annual fee for their service to the funds, which is subject to reduction based on absences from scheduled board meetings. - - The independent trustees are reimbursed for the travel and other expenses that they incur in attending board meetings. - - Upon retirement (after attaining age 65 and completing five years of service), the independent trustees who began their service prior to January 1, 2001, receive a retirement benefit under a separate account arrangement. As of January 1, 2001, the opening balance of each eligible trustee's separate account was generally equal to the net B-25 present value of the benefits he or she had accrued under the trustees' former retirement plan. Each eligible trustee's separate account will be credited annually with interest at a rate of 7.5% until the trustee receives his or her final distribution. Those independent trustees who began their service on or after January 1, 2001, are not eligible to participate in the plan. "INTERESTED" TRUSTEE. Mr. Brennan serves as a trustee, but is not paid in this capacity. He is, however, paid in his role as officer of The Vanguard Group, Inc. COMPENSATION TABLE. The following table provides compensation details for each of the trustees. We list the amounts paid as compensation and accrued as retirement benefits by the Funds for each trustee. In addition, the table shows the total amount of benefits that we expect each trustee to receive from all Vanguard funds upon retirement, and the total amount of compensation paid to each trustee by all Vanguard funds. VANGUARD INDEX FUNDS TRUSTEES' COMPENSATION TABLE
PENSION OR RETIREMENT RETIREMENT BENEFIT AT TOTAL AGGREGATE BENEFITS ACCRUED ACCRUED ANNUAL COMPENSATION FROM COMPENSATION FROM AS PART OF THESE RETIREMENT BENEFIT AT ALL VANGUARD FUNDS NAME OF TRUSTEE THESE FUNDS (1) FUNDS' EXPENSES (1) JANUARY 1, 2002 (2) PAID TO TRUSTEES (3) - --------------- ------------------ ---------------------- ----------------------- -------------------- John J. Brennan None None None None Charles D. Ellis $25,303 N/A N/A $108,000 Rajiv L. Gupta 25,303 N/A N/A 108,000 JoAnn Heffernan Heisen $25,303 498 2,992 108,000 Burton G. Malkiel 25,419 1,914 9,799 108,000 Alfred M. Rankin, Jr. 25,303 977 5,000 108,000 J. Lawrence Wilson 28,818 1,419 7,266 123,000
(1) The amounts shown in this column are based on the Funds' fiscal year ended December 31, 2002. (2) Each trustee is eligible to receive retirement benefits only after completing at least 5 years (60 consecutive months) of service as a trustee for the Vanguard funds. The annual retirement benefit will be paid in monthly installments, beginning with the month following the trustee's retirement from service, and will cease after 10 years of payments (120 monthly installments). Trustees who began their service on or after January 1, 2001, are not eligible to participate in the retirement benefit plan. (3) The amounts reported in this column reflect the total compensation paid to each trustee for his or her service as trustee of 112 Vanguard funds (110 in the case of Mr. Malkiel; and 90 in the case of Mr. Gupta) for the 2002 calendar year. PORTFOLIO TRANSACTIONS In placing securities transactions, the adviser will use its best judgment to choose the broker most capable of providing the brokerage services necessary to obtain the best available price and most favorable execution. The full range and quality of brokerage services available will be considered in making these determinations. In those instances where it is reasonably determined that more than one broker can offer the brokerage services needed to obtain the best available price and most favorable execution, consideration may be given to those brokers who supply statistical information and provide other services in addition to execution services to the Funds. Because the Funds do not market their shares through intermediary brokers or dealers, it is not the Funds' practice to allocate brokerage or principal business on the basis of sales of their shares that may be made through such firms. However, a Fund may place portfolio orders with qualified broker-dealers who recommend the Fund to clients, and may, when a number of brokers and dealers can provide best price and execution on a particular transaction, consider the sale of Fund shares by a broker or dealer in selecting among broker-dealers. B-26 During the fiscal years ended December 31, 2000, 2001, and 2002, the Funds paid brokerage commissions in the following amounts: ================================================================================ FUND 2000 2001 2002 - --------------------------------------- --------- --------- ---------- Vanguard Total Stock Market Index Fund 1,422,000 1,968,000 1,919,000 Vanguard 500 Index Fund 4,374,000 2,718,000 4,386,000 Vanguard Extended Market Index Fund 1,366,000 793,000 758,000 Vanguard Mid-Cap Index Fund 436,000 593,000 621,000 Vanguard Small-Cap Index Fund 2,453,000 1,712,000 2,050,000 Vanguard Value Index Fund 510,000 643,000 567,000 Vanguard Small-Cap Value Index Fund 202,000 680,000 1,187,000 Vanguard Growth Index Fund 1,979,000 1,260,000 743,000 Vanguard Small-Cap Growth Index Fund 202,000 109,000 133,000 ================================================================================ YIELD AND TOTAL RETURNS The annualized yields of each Fund for the 30-day period ended December 31, 2002, are set forth below: ================================================================================ SHARE CLASSES ------------- FUND INVESTOR ADMIRAL INSTITUTIONAL VIPERS - -------------------------------------------------------------------------------- Vanguard Total Stock Market Index Fund 1.50% 1.55% 1.62% 1.55% Vanguard 500 Index Fund 1.62 1.68 N/A N/A Vanguard Extended Market Index Fund 1.02 1.10 1.20 1.10 Vanguard Mid-Cap Index Fund 0.95 1.05 1.13 N/A Vanguard Small-Cap Index Fund 1.29 1.40 1.46 N/A Vanguard Value Index Fund 1.94 2.05 2.09 N/A Vanguard Small-Cap Value Index Fund 1.08 N/A 1.25 N/A Vanguard Growth Index Fund 1.10 1.20 1.25 N/A Vanguard Small-Cap Growth Index Fund 0.31 N/A 0.48 N/A ================================================================================ The average annual total returns (both before and after taxes for Investor Shares only) of each Fund for the one-, five-, and ten-year periods (or since inception) ended December 31, 2002, are set forth below:
=================================================================================================================== 1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED 12/31/2002 12/31/2002 12/31/2002 INVESTOR SHARES(*) (or since inception) (or since inception) (or since inception) - ------------------------------------------------------------------------------------------------------------------- VANGUARD TOTAL STOCK MARKET INDEX FUND Return Before Taxes -20.96% -0.80% 8.60% Return After Taxes on Distributions -21.37 -1.38 7.77 Return After Taxes on Distributions and Sale of Fund Shares -12.85 -0.83 6.87 VANGUARD 500 INDEX FUND Return Before Taxes -22.15% -0.61% 9.27% Return After Taxes on Distributions -22.62 -1.14 8.44 Return After Taxes on Distributions and Sale of Fund Shares -13.58 -0.67 7.44 VANGUARD EXTENDED MARKET INDEX FUND Return Before Taxes -18.06% -1.49% 7.61% Return After Taxes on Distributions -18.36 -3.47 5.76 Return After Taxes on Distributions and Sale of Fund Shares -11.09 -1.25 6.03 ===================================================================================================================
B-27
=================================================================================================================== 1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED 12/31/2002 12/31/2002 12/31/2002 INVESTOR SHARES(*) (or since inception) (or since inception) (or since inception) - ------------------------------------------------------------------------------------------------------------------- VANGUARD MID-CAP INDEX FUND (Inception May 21, 1998) Return Before Taxes -14.61% 5.07% N/A Return After Taxes on Distributions -15.12 3.22 N/A Return After Taxes on Distributions and Sale of Fund Shares -8.77 3.36 N/A VANGUARD SMALL-CAP INDEX FUND Return Before Taxes -20.02% -0.76% 7.97% Return After Taxes on Distributions -20.40 -2.55 6.08 Return After Taxes on Distributions and Sale of Fund Shares -12.29 -0.85 6.14 VANGUARD VALUE INDEX FUND Return Before Taxes -20.91% -0.93% 9.27% Return After Taxes on Distributions -21.52 -2.72 7.41 Return After Taxes on Distributions and Sale of Fund Shares -12.82 -1.10 7.15 VANGUARD SMALL-CAP VALUE INDEX FUND(**) (Inception May 21, 1998) Return Before Taxes -14.20% 1.59% N/A Return After Taxes on Distributions -15.24 -0.30 N/A Return After Taxes on Distributions and Sale of Fund Shares -8.46 0.41 N/A VANGUARD GROWTH INDEX FUND Return Before Taxes -23.68% -1.09% 8.70% Return After Taxes on Distributions -23.99 -1.53 8.05 Return After Taxes on Distributions and Sale of Fund Shares -14.53 -0.94 7.09 VANGUARD SMALL-CAP GROWTH INDEX FUND(**) (Inception May 21, 1998) Return Before Taxes -15.41% -0.60% N/A Return After Taxes on Distributions -15.50 -1.00 N/A Return After Taxes on Distributions and Sale of Fund Shares -9.46 -0.59 N/A ================================================================================================================== *Total return figures do not reflect the $10 annual account maintenance fee for accounts under $10,000 or transaction fees no longer in effect. **Total return figures do not reflect a 0.50% fee imposed on purchases prior to April 1, 2002.
=================================================================================================================== 1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED 12/31/2002 12/31/2002 12/31/2002 INSTITUTIONAL SHARES(*) (or since inception) (or since inception) (or since inception) - ------------------------------------------------------------------------------------------------------------------- VANGUARD TOTAL STOCK MARKET INDEX FUND (Inception July 7, 1997) Return Before Taxes -20.90% -0.70% 0.87% VANGUARD EXTENDED MARKET INDEX FUND (Inception July 7, 1997) Return Before Taxes -17.93% -1.35% 0.80% VANGUARD MID-CAP INDEX FUND (Inception May 21, 1998) Return Before Taxes -14.45% 5.22% N/A VANGUARD SMALL-CAP INDEX FUND (Inception July 7, 1997) Return Before Taxes -19.89% -0.62% 1.41% VANGUARD VALUE INDEX FUND (Inception July 2, 1998) Return Before Taxes -20.81% -3.76% N/A ===================================================================================================================
B-28
=================================================================================================================== 1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED 12/31/2002 12/31/2002 12/31/2002 INSTITUTIONAL SHARES(*) (or since inception) (or since inception) (or since inception) - ------------------------------------------------------------------------------------------------------------------- VANGUARD SMALL-CAP VALUE INDEX FUND(**) (Inception December 7,1999) Return Before Taxes -13.96% 6.97% N/A VANGUARD GROWTH INDEX FUND (Inception May 14, 1998) Return Before Taxes -23.58% -4.51% N/A VANGUARD SMALL-CAP GROWTH INDEX FUND(**) (Inception May 24, 2000) Return Before Taxes -15.26% -4.66% N/A =================================================================================================================== *Total return figures do not reflect transaction fees no longer in effect. **Total return figures do not reflect a 0.50% fee imposed on purchases prior to April 1, 2002.
================================================================================ 1 YEAR ENDED 5 YEARS ENDED 12/31/2002 12/31/2002 ADMIRAL SHARES (or since inception) (or since inception) - -------------------------------------------------------------------------------- VANGUARD 500 INDEX FUND (Inception November 13, 2000) Return Before Taxes -22.10% -17.06% VANGUARD TOTAL STOCK MARKET INDEX FUND (Inception November 13, 2000) Return Before Taxes -20.95% -16.18% VANGUARD EXTENDED MARKET INDEX FUND (Inception November 13, 2000) Return Before Taxes -18.02% -14.66% VANGUARD MID-CAP INDEX FUND (Inception November 12, 2001) Return Before Taxes -14.55% -6.78% VANGUARD SMALL-CAP INDEX FUND (Inception November 13, 2000) Return Before Taxes -19.95% -7.84% VANGUARD VALUE INDEX FUND (Inception November 13, 2000) Return Before Taxes -20.85% -14.30% VANGUARD GROWTH INDEX FUND (Inception November 13, 2000) Return Before Taxes -23.62% -20.40% ================================================================================ ================================================================================ 1 YEAR ENDED 5 YEARS ENDED 12/31/2002 12/31/2002 VIPER SHARES (or since inception) (or since inception) - -------------------------------------------------------------------------------- VANGUARD TOTAL STOCK MARKET INDEX FUND (Inception May 24, 2001) Return Before Taxes -20.94% -19.00% VANGUARD EXTENDED MARKET INDEX FUND (Inception December 27, 2001) Return Before Taxes -18.04% -17.79% ================================================================================ B-29 AVERAGE ANNUAL TOTAL RETURN Average annual total return is the average annual compounded rate of return for the periods of one year, five years, ten years, or the life of the fund, all ended on the last day of a recent month. Average annual total return quotations will reflect changes in the price of the fund's shares and assume that all dividends and capital gains distributions during the respective periods were reinvested in fund shares. Average annual total returns are quoted to the nearest hundredth of one percent. AVERAGE ANNUAL TOTAL RETURN (BEFORE TAXES) Average annual total return (before taxes) is calculated by finding the average annual compounded rates of return over the 1-, 5-, and 10-year periods (or for the periods of the fund's operations) that would equate the initial amount invested to the ending redeemable value, according to the following formula: T = (ERV/P)/1/N/ - 1 Where: T =average annual total return P =a hypothetical initial investment of $1,000 n =number of years ERV =ending redeemable value of a hypothetical $1,000 investment (made at the beginning of the 1-, 5-, or 10-year periods) at the end of the 1-, 5-, and 10-year periods (or fractional portion thereof) Instructions: 1. Assume the maximum sales load (or other charges deducted from payments) is deducted from the initial $1,000 investment. 2. Assume all distributions by the fund are reinvested at the price stated in the prospectus (including any sales load imposed upon reinvestment of dividends) on the reinvestment dates during the period. Adjustments may be made for subsequent recharacterizations of distributions. 3. Include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, assume an account size equal to the fund's mean (or median) account size. Reflect, as appropriate, any recurring fees charged to shareholder accounts that are paid other than by redemption of the fund's shares. 4. Determine the ending value by assuming a complete redemption at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) and the deduction of all nonrecurring charges deducted at the end of each period. If shareholders are assessed a deferred sales load, assume the maximum deferred sales load is deducted at the times, in the amounts, and under the terms disclosed in the prospectus. AVERAGE ANNUAL TOTAL RETURN (AFTER TAXES ON DISTRIBUTIONS) We calculate a fund's average annual total return (after taxes on distributions) by finding the average annual compounded rates of return over the 1-, 5-, and 10-year periods (or for the periods of the fund's operations) that would equate the initial amount invested to the after-tax ending value, according to the following formulas: T = (ATV\\D\\/P)/1/N/ - 1 Where: T =average annual total return (after taxes on distributions) P =a hypothetical initial investment of $1,000 n =number of years ATV\D\ =ending value of a hypothetical $1,000 investment (made at the beginning of the 1-, 5-, or 10-year periods) at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof), after taxes on fund distributions but not after taxes on redemption Instructions: 1. Assume the maximum sales load (or other charges deducted from payments) is deducted from the initial $1,000 investment. B-30 2. Assume all distributions by the fund--less the taxes due on such distributions--are reinvested at the price stated in the prospectus (including any sales load imposed upon reinvestment of dividends) on the reinvestment dates during the period. 3. Include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, assume an account size equal to the fund's mean (or median) account size. Assume that no additional taxes or tax credits result from any redemption of shares required to pay such fees. Reflect, as appropriate, any recurring fees charged to shareholder accounts that are paid other than by redemption of the fund's shares. 4. Calculate the taxes due on any distributions by the fund by applying the highest individual marginal federal income tax rates in effect on the reinvest date, to each component of the distributions on the reinvestment date (e.g., ordinary income, short-term capital gain, long-term capital gain). Note that the applicable tax rates may vary over the measurement period. Distributions should be adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date. Assume no taxes are due on the portion of any distribution that would not result in federal income tax on an individual, e.g., tax-exempt interest or non-taxable returns of capital. The effect of applicable tax credits, such as the foreign tax credit, should be taken into account in accordance with federal tax law. Disregard any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes); the effect of phaseouts of certain exemptions, deductions, and credits at various income levels; and the impact of the federal alternative minimum tax. 5. Determine the ending value by assuming a complete redemption at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof) and the deduction of all nonrecurring charges deducted at the end of each period. If shareholders are assessed a deferred sales load, assume the maximum deferred sales load is deducted at the times, in the amounts, and under the terms disclosed in the prospectus. Assume that the redemption has no tax consequences. AVERAGE ANNUAL TOTAL RETURN (AFTER TAXES ON DISTRIBUTIONS AND REDEMPTION) We calculate a fund's average annual total return (after taxes on distributions and redemption) by finding the average annual compounded rates of return over the 1-, 5-, and 10-year periods (or for the periods of the fund's operations) that would equate the initial amount invested to the after-tax ending value, according to the following formula: T = (ATV\\DR\\/P)/1/N/ - 1 Where: T =average annual total return (after taxes on distributions and redemption) P =a hypothetical initial investment of $1,000 n =number of years ATV\DR\ =ending value of a hypothetical $1,000 investment (made at the beginning of the 1-, 5-, or 10-year periods) at the end of the 1-, 5-, or 10-year periods (or fractional portion thereof), after taxes on fund distributions and redemption Instructions: 1. Assume the maximum sales load (or other charges deducted from payments) is deducted from the initial $1,000 investment. 2. Assume all distributions by the fund--less the taxes due on such distributions--are reinvested at the price stated in the prospectus (including any sales load imposed upon reinvestment of dividends) on the reinvestment dates during the period. 3. Include all recurring fees that are charged to all shareholder accounts. For any account fees that vary with the size of the account, assume an account size equal to the fund's mean (or median) account size. Assume that no additional taxes or tax credits result from any redemption of shares required to pay such fees. Reflect, as appropriate, any recurring fees charged to shareholder accounts that are paid other than by redemption of the fund's shares. 4. Calculate the taxes due on any distributions by the fund by applying the highest individual marginal federal income tax rates in effect on the reinvest date, to each component of the distributions on the reinvestment date (e.g., ordinary income, short-term capital gain, long-term capital gain). Note that the applicable tax rates may vary over the measurement period. Distributions should be adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date. Assume no taxes are due on the portion of any distribution that would not result in federal income tax on an individual, e.g., tax-exempt interest or non-taxable returns of capital. The effect of applicable tax credits, such as the foreign tax credit, should be taken into account in accordance with B-31 federal tax law. Disregard any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes); the effect of phaseouts of certain exemptions, deductions, and credits at various income levels; and the impact of the federal alternative minimum tax. 5. Determine the ending value by assuming a complete redemption at the end of the 1-, 5-, or 10 year periods (or fractional portion thereof) and the deduction of all nonrecurring charges deducted at the end of each period. If shareholders are assessed a deferred sales load, assume the maximum deferred sales load is deducted at the times, in the amounts, and under the terms disclosed in the prospectus. 6. Determine the ending value by subtracting capital gains taxes resulting from the redemption and adding the tax benefit from capital losses resulting from the redemption. (a) Calculate the capital gain or loss upon redemption by subtracting the tax basis from the redemption proceeds (after deducting any nonrecurring charges as specified by Instruction 5). (b) The fund should separately track the basis of shares acquired through the $1,000 initial investment and each subsequent purchase through reinvested distributions. In determining the basis for a reinvested distribution, include the distribution net of taxes assumed paid from the distribution, but not net of any sales loads imposed upon reinvestment. Tax basis should be adjusted for any distributions representing returns of capital and any other tax basis adjustments that would apply to an individual taxpayer, as permitted by applicable federal tax law. (c) The amount and character (e.g., short-term or long-term) of capital gain or loss upon redemption should be separately determined for shares acquired through the $1,000 initial investment and each subsequent purchase through reinvested distributions. The fund should not assume that shares acquired through reinvestment of distributions have the same holding period as the initial $1,000 investment. The tax character should be determined by the length of the measurement period in the case of the initial $1,000 investment and the length of the period between reinvestment and the end of the measurement period in the case of reinvested distributions. (d) Calculate the capital gains taxes (or the benefit resulting from tax losses) using the highest federal individual capital gains tax rate for gains of the appropriate character in effect on the redemption date and in accordance with federal tax law applicable on the redemption date. For example, applicable federal tax law should be used to determine whether and how gains and losses from the sale of shares with different holding periods should be netted, as well as the tax character (e.g., short-term or long-term) of any resulting gains or losses. Assume that a shareholder has sufficient capital gains of the same character from other investments to offset any capital losses from the redemption so that the taxpayer may deduct the capital losses in full. CUMULATIVE TOTAL RETURN Cumulative total return is the cumulative rate of return on a hypothetical initial investment of $1,000 for a specified period. Cumulative total return quotations reflect changes in the price of each Fund's shares and assume that all dividends and capital gains distributions during the period were reinvested in each Fund's shares. Cumulative total return is calculated by finding the cumulative rates of a return of a hypothetical investment over such periods, according to the following formula (cumulative total return is then expressed as a percentage): C = (ERV/P) - 1 Where: C =cumulative total return P =a hypothetical initial investment of $1,000 ERV =ending redeemable value: ERV is the value, at the end of the applicable period, of a hypothetical $1,000 investment made at the beginning of the applicable period SEC YIELDS Yield is the net annualized yield based on a specified 30-day (or one month) period assuming semiannual compounding of income. Yield is calculated by dividing the net investment income per share earned during the period by the maximum offering price per share on the last day of the period, according to the following formula: B-32 YIELD = 2[((A-B)/CD+1)/6 /- 1] Where: a =dividends and interest earned during the period b =expenses accrued for the period (net of reimbursements) c =the average daily number of shares outstanding during the period that were entitled to receive dividends d =the maximum offering price per share on the last day of the period INFORMATION ABOUT THE VIPER SHARE CLASS Vanguard Total Stock Market Index Fund and Vanguard Extended Market Index Fund (the VIPER Funds) offer and issue an exchange-traded class of shares called VIPER Shares. Each VIPER Fund issues VIPER Shares in large blocks, known as "Creation Units." To purchase or redeem a Creation Unit, you must be an Authorized Participant or you must do so through a broker that is an Authorized Participant. An Authorized Participant is a participant in the Depository Trust Company (DTC) that has executed a Participant Agreement with Vanguard Marketing Corporation, the Funds' Distributor. Each VIPER Fund issues Creation Units in kind, in exchange for a basket of stocks that are part of--or soon to be part of--its target index (Deposit Securities). Each VIPER Fund also redeems Creation Units in kind; an investor who tenders a Creation Unit will receive, as redemption proceeds, a basket of stocks that are part of the Fund's portfolio holdings (Redemption Securities). The Deposit Securities and the Redemption Securities will usually, but may not necessarily always, be the same. As part of any creation or redemption transaction, the investor will either pay or receive some cash in addition to the securities, as described more fully below. Each VIPER Fund reserves the right to issue Creation Units for cash, rather than in kind, although each has no current intention of doing so. EXCHANGE LISTING AND TRADING Total Stock Market VIPERs and Extended Market VIPERs have been approved for listing on the American Stock Exchange (AMEX) and will trade on the AMEX at market prices that may differ from net asset value. There can be no assurance that, in the future, VIPER Shares will continue to meet all of the AMEX's listing requirements. The AMEX may, but is not required to, delist a Fund's VIPER Shares from listing if: (1) following the initial 12-month period beginning upon the commencement of trading, there are fewer than 50 beneficial owners of the VIPER Shares for 30 or more consecutive trading days; (2) the value of the target index tracked by the Fund (the Wilshire 5000 Index for Total Stock Market VIPERs or the Wilshire 4500 Completion Index for Extended Market VIPERs) is no longer calculated or available; or (3) such other event shall occur or condition exist that, in the opinion of the AMEX, makes further dealings on the AMEX inadvisable. The AMEX will also delist a Fund's VIPER Shares upon termination of the VIPER Share class. As with any stock traded on an exchange, purchases and sales of VIPER Shares will be subject to usual and customary brokerage commissions. CONVERSIONS AND EXCHANGES Owners of conventional shares issued by a VIPER Fund (Investor, Admiral, and Institutional Shares) may convert those shares into VIPER Shares of equivalent value of the same fund. Note: Investors who own conventional shares through a 401(k) plan or other employer-sponsored retirement or benefit plan may not convert those shares into VIPER Shares. Vanguard will impose a charge on conversion transactions and reserves the right, in the future, to limit or terminate the conversion privilege. VIPER Shares, whether acquired through a conversion or purchased in the secondary market, cannot be converted into shares of another class of the same fund. NOTE FOR INVESTORS IN VANGUARD INSTITUTIONAL TOTAL STOCK MARKET INDEX FUND: Owners of shares issued by Vanguard Institutional Total Stock Market Index Fund CANNOT convert their shares into VIPER Shares of Vanguard Total Stock Market Index Fund because the Funds are separate and distinct. Vanguard Institutional Total Stock Market Index Fund does not issue VIPER Shares. Investors that are not Authorized Participants must hold VIPER Shares in a brokerage account. Thus, before converting conventional shares into VIPER Shares, an investor must have an existing, or open a new, brokerage account. To initiate B-33 a conversion of conventional shares into VIPER Shares, an investor must contact her broker. The broker may charge a fee, over and above Vanguard's fee, to process a conversion request. Converting conventional shares into VIPER Shares generally is accomplished as follows. First, after the broker notifies Vanguard of an investor's request to convert, Vanguard will transfer conventional shares from the investor's account with Vanguard to the broker's omnibus account with Vanguard (an account maintained by the broker on behalf of all its customers who hold conventional Vanguard fund shares through the broker). At this point, Vanguard will no longer have any record of the investor; her ownership of conventional shares and VIPER Shares will be known only to her broker. Next, the broker will instruct Vanguard to convert the appropriate amount of conventional shares in its omnibus account into VIPER Shares of equivalent value. These shares will be held in an account at Vanguard in the name of DTC. (DTC will keep track of which VIPER Shares belong to the broker and the broker, in turn, will keep track of which VIPER Shares belong to its customers.) Because DTC is unable to handle fractional shares, only whole shares will be converted. For example, if the investor owned 300.250 conventional shares, and this was equivalent in value to 90.750 VIPER Shares, the DTC account would receive 90 VIPER Shares. Conventional shares worth 0.750 VIPER Shares (in this example, that would be 2.481 conventional shares) would remain in the broker's omnibus account with Vanguard. The broker then could either (i) take certain internal actions necessary to credit the investor's account with 0.750 VIPER Shares rather than 2.481 conventional shares, or (ii) redeem the 2.481 conventional shares at net asset value, in which case the investor would receive cash in lieu of those shares. If the broker chooses to redeem the conventional shares, the investor will realize a gain or loss on the redemption that must be reported on her tax return (unless she holds the shares in an IRA or other tax-deferred account). Investors should consult their brokers for information on how the brokers will handle the conversion process, including whether they will impose a fee to process a conversion. The conversion process works differently if the investor opts to hold VIPER Shares through an account at Vanguard Brokerage Services/(R)/ (VBS/(R)/). If the investor converts her conventional shares to VIPER Shares through VBS, all conventional shares for which she requests conversion will be converted into the equivalent amount of VIPER Shares. Because no fractional shares will have to be sold, the transaction will be 100% tax-free. Here are some important points to keep in mind when converting conventional shares of a VIPER Fund into VIPER Shares: - - The conversion transaction is nontaxable except, as applicable, to the limited extent described above. - - The conversion process can take anywhere from several days to several weeks, depending on the broker. Vanguard generally will process conversion requests, once received, on the same or next business day, although processing may take up to three business days depending on when the conversion request is received. - - During the conversion process, the investor will remain fully invested in the Fund's conventional shares, and her investment will increase or decrease in value in tandem with the net asset value of those shares. - - During the conversion process, the investor will be able to liquidate all or part of her investment by instructing Vanguard or her broker (depending on whether her shares are held in her own account or her broker's omnibus account) to redeem her conventional shares. After the conversion process is complete, the investor will be able to liquidate all or part of her investment by instructing her broker to sell her VIPER Shares. BOOK ENTRY ONLY SYSTEM Vanguard(R)Total Stock Market VIPERs(TM) and Vanguard/(R)/ Extended Market VIPERs(TM) are registered in the name of the DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC. DTC is a limited-purpose trust company that was created to hold securities of its participants (the DTC Participants) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the New York Stock Exchange (NYSE), the AMEX and the National Association of Securities Dealers (NASD). Access to the DTC system is also available to others such as banks, brokers, dealers, and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (the Indirect Participants). Beneficial ownership of VIPER Shares is limited to DTC Participants, Indirect Participants, and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in VIPER Shares (owners B-34 of such beneficial interests are referred to herein as Beneficial Owners) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of VIPER Shares. Each VIPER Fund recognizes DTC or its nominee as the record owner of all VIPER Shares for all purposes. Beneficial Owners of VIPER Shares are not entitled to have VIPER Shares registered in their names, and will not receive or be entitled to physical delivery of share certificates. Each Beneficial Owner must rely on the procedures of DTC and any DTC Participant and/or Indirect Participant through which such Beneficial Owner holds its interests, to exercise any rights of a holder of VIPER Shares. Conveyance of all notices, statements, and other communications to Beneficial Owners is effected as follows. DTC will make available to the Trust upon request and for a fee a listing of the VIPER Shares of each Fund held by each DTC Participant. The Trust shall obtain from each such DTC Participant the number of Beneficial Owners holding VIPER Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement, or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements. Share distributions shall be made to DTC or its nominee as the registered holder of all VIPER Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants' accounts with payments in amounts proportionate to their respective beneficial interests in VIPER Shares of the appropriate Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial Owners of VIPER Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a "street name," and will be the responsibility of such DTC Participants. The Trust has no responsibility or liability for any aspects of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such VIPER Shares, or for maintaining, supervising, or reviewing any records relating to such beneficial ownership interests, or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants. DTC may determine to discontinue providing its service with respect to VIPER Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such replacement is unavailable, to issue and deliver printed certificates representing ownership of VIPER Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the AMEX (or such other exchange on which VIPER Shares may be listed). PURCHASE AND ISSUANCE OF VIPER SHARES IN CREATION UNITS The VIPER Funds issue and sell VIPER Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their net asset value next determined after receipt, on any Business Day, of an order in proper form. The VIPER Funds will not issue fractional Creation Units. A Business Day is any day on which the NYSE is open for business. As of the date of the Prospectus, the NYSE observes the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. FUND DEPOSIT The consideration for purchase of a Creation Unit from a VIPER Fund generally consists of the in kind deposit of a designated portfolio of equity securities (the Deposit Securities) and an amount of cash (the Cash Component) B-35 consisting of a Balancing Amount (described below) and a Transaction Fee (also described below). Together, the Deposit Securities and the Cash Component constitute the Fund Deposit. The Balancing Amount is an amount equal to the difference between the net asset value (NAV) of a Creation Unit and the market value of the Deposit Securities (the Deposit Amount). It ensures that the NAV of a Fund Deposit (not including the Transaction Fee) is identical to the NAV of the Creation Unit it is used to purchase. If the Balancing Amount is a positive number (i.e., the NAV per Creation Unit exceeds the market value of the Deposit Securities), then that amount will be paid by the purchaser to the Fund in cash. If the Balancing Amount is a negative number (i.e., the NAV per Creation Unit is less than the market value of the Deposit Securities), then that amount will be paid by the Fund to the purchaser in cash (except as offset by the Transaction Fee, described below). Vanguard, through the National Securities Clearing Corporation (NSCC) (discussed below), makes available on each Business Day, immediately prior to the opening of business on the AMEX (currently 9:30 a.m., Eastern time), a list of the names and the required number of shares of each Deposit Security to be included in the current Fund Deposit for each VIPER Fund (based on information at the end of the previous Business Day). The Fund Deposit is applicable, subject to any adjustments as described below, in order to effect purchases of Creation Units of a VIPER Fund until such time as the next-announced Fund Deposit composition is made available. Each VIPER Fund reserves the right to accept a nonconforming Fund Deposit. The identity and number of shares of the Deposit Securities required for a Fund Deposit may change to reflect rebalancing adjustments and corporate actions by a Fund, or in response to adjustments to the weighting or composition of the component stocks of the relevant target index. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash--i.e., a "cash in lieu" amount--to be added to the Cash Component to replace any Deposit Security that may not be available in sufficient quantity for delivery, may not be eligible for transfer through the Clearing Process (discussed below), or may not be eligible for trading by an Authorized Participant (as defined below) or the investor for which an Authorized Participant is acting. Brokerage commissions incurred in connection with acquisition of Deposit Securities not eligible for transfer through the systems of DTC and hence not eligible for transfer through the Clearing Process (discussed below) will be an expense of the Fund. However, Vanguard may adjust the Transaction Fee (described below) to protect existing shareholders from this expense. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility, and acceptance for deposit of any securities to be delivered shall be determined by the appropriate VIPER Fund, and the Fund's determination shall be final and binding. PROCEDURES FOR PURCHASING CREATION UNITS To be eligible to place orders with the Distributor and to purchase Creation Units from a VIPER Fund, you must be an Authorized Participant, i.e., a DTC Participant that has executed an agreement with the Trust's Distributor governing the purchase and redemption of Creation Units (the Participant Agreement). Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant in order to purchase or redeem a Creation Unit. If your broker is not a DTC Participant or has not executed a Participant Agreement, it will have to place your order through an Authorized Participant, which may result in additional charges to you. For a current list of Authorized Participants, contact the Distributor. An Authorized Participant may place an order to purchase (or redeem) Creation Units of a VIPER Fund either (i) through the Continuous Net Settlement (CNS) clearing processes of NSCC as such processes have been enhanced to effect purchases (and redemptions) of Creation Units, such processes being referred to herein as the Clearing Process, or (ii) outside the Clearing Process. To purchase or redeem through the Clearing Process, an Authorized Participant must be a member of NSCC that is eligible to use the Continuous Net Settlement system. Purchases (and redemptions) of Creation Units cleared through the Clearing Process will be subject to a lower Transaction Fee than those cleared outside the Clearing Process. To initiate a purchase order for a Creation Unit, whether through the Clearing Process or outside the Clearing Process, an Authorized Participant must give notice to the Distributor. The order must be in proper form and must be received by the Distributor prior to the closing time of the regular trading session on the NYSE (Closing Time) (ordinarily 4 p.m., Eastern time) to receive that day's NAV. The date on which an order to purchase (or redeem) Creation Units is placed is referred to as the Transmittal Date. Orders must be transmitted by an Authorized Participant by a transmission method acceptable to the Distributor pursuant to procedures set forth in the Participation Agreement. B-36 Purchase orders effected outside the Clearing Process are likely to require transmittal by the Authorized Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Cash Component. Neither the Trust, the Distributor, nor any affiliated party will be liable to an investor who is unable to submit a purchase (or redemption) order by Closing Time, even if the problem is the responsibility of one of those parties (e.g., the Distributor's phone systems or fax machines were not operating properly.) If you are not an Authorized Participant, you must place your purchase order with an Authorized Participant in a form acceptable to such Authorized Participant. In addition, the Authorized Participant may request that you make certain representations or enter into agreements with respect to the order, e.g., to provide for payments of cash when required. You should afford sufficient time to permit proper submission of the order by the Authorized Participant to the Distributor prior to Closing Time on the Transmittal Date. PLACEMENT OF PURCHASE ORDERS USING CLEARING PROCESS For purchase orders placed through the Clearing Process, the Authorized Participant Agreement authorizes the Distributor to transmit through the Transfer Agent or Index Receipt Agent to NSCC, on behalf of an Authorized Participant, such trade instructions as are necessary to effect the Authorized Participant's purchase order. Pursuant to such trade instructions to NSCC, the Authorized Participant agrees to deliver the requisite Deposit Securities and the Cash Component to the appropriate VIPER Fund, together with such additional information as may be required by the Distributor. An order to purchase Creation Units through the Clearing Process is deemed received on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date, and (ii) all other procedures set forth in the Participant Agreement are properly followed. Such order will be effected based on the NAV of the Fund next determined on that day. An order to purchase Creation Units through the Clearing Process made in proper form but received after Closing Time on the Transmittal Date will be deemed received on the next Business Day immediately following the Transmittal Date and will be effected at the NAV next determined on that day. The Deposit Securities and the Cash Component will be transferred by the third NSCC Business Day following the date on which the purchase request is deemed received. PLACEMENT OF PURCHASE ORDERS OUTSIDE CLEARING PROCESS An Authorized Participant that wishes to place an order to purchase Creation Units outside the Clearing Process must state that it is not using the Clearing Process and that the purchase instead will be effected through a transfer of securities and cash directly through DTC. An order to purchase Creation Units outside the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed. If a Fund's custodian does not receive the Deposit Securities and Cash Component by the settlement date (T+3 unless otherwise agreed), the Fund shall be entitled to cancel the purchase order and/or charge the purchaser for any costs (including investment losses, attorney's fees, and interest) sustained by the Fund as a result of the late delivery or failure to deliver. A VIPER Fund may issue Creation Units to a purchaser before receiving some or all of the Deposit Securities if the purchaser deposits, in addition to the available Deposit Securities and the Cash Component, cash totaling at least 115% of the market value of the undelivered Deposit Securities (the Additional Cash Deposit). The order shall be deemed to be received on the Business Day on which the order is placed provided that the order is placed in proper form prior to Closing Time on such date and federal funds in the appropriate amount are deposited with the Custodian by 11 a.m., Eastern time, the following Business Day. If the order is not placed in proper form by 4 p.m. or federal funds in the appropriate amount are not received by 11 a.m. the next Business Day, then the Fund may reject the order and the investor shall be liable to the Fund for losses, if any, resulting therefrom. Pending delivery of the missing Deposit Securities, the purchaser must deposit additional cash with the Fund to the extent necessary to maintain the Additional Cash Deposit in an amount at least equal to 115% of the daily marked-to-market value of the missing Deposit Securities. If the purchaser fails to deliver missing Deposit Securities by 1 p.m. on the third Business Day following the day on B-37 which the purchase order is deemed received by the Distributor, or fails to pay additional money to maintain the Additional Cash Deposit at 115% of the marked-to-market value of the missing securities within one Business Day following notification by the Distributor that such a payment is required, the Fund may use the cash on deposit to purchase the missing Deposit Securities. Authorized Participants will be liable to the Fund for the costs incurred by the Fund in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed received by the Distributor, plus the brokerage and related transaction costs associated with such purchases. The Fund will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian or purchased by the Fund. In addition, the Fund will be entitled to collect a transaction fee of $4,000 in all such cases. The delivery of Creation Units so purchased will occur no later than the third Business Day following the day on which the purchase order is deemed received by the Distributor. REJECTION OF PURCHASE ORDERS Each of the VIPER Funds reserves the absolute right to reject a purchase order transmitted to it by the Distributor. By way of example, and not limitation, a VIPER Fund will reject a purchase order if: - - the order is not in proper form; - - the investor(s), upon obtaining the VIPER Shares ordered, would own 80% or more of the total combined voting power of all classes of stock issued by the Fund; - - the Deposit Securities delivered are not as disseminated through the facilities of the AMEX for that date by the Custodian, as described above; - - acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund; - - acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; - - acceptance of the Fund Deposit would otherwise, in the discretion of the Fund or Vanguard, have an adverse effect on the Fund or any of its shareholders; or - - circumstances outside the control of the Fund, the Transfer Agent, the Custodian, the Distributor, and Vanguard make it for all practical purposes impossible to process the order. Examples of such circumstances include acts of God; public service or utility problems such as fires, floods, extreme weather conditions, and power outages resulting in telephone, telecopy, and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the Trust, Vanguard, the Distributor, DTC, NSCC, or any other participant in the purchase process, and similar extraordinary events. The Distributor shall notify the prospective purchaser of a Creation Unit, and/or the Authorized Participant acting on the purchaser's behalf, of its rejection of the purchaser's order. The VIPER Funds, the Transfer Agent, the Custodian, and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of a Fund Deposit, nor shall any of them incur any liability for the failure to give any such notification. TRANSACTION FEE ON PURCHASES OF CREATION UNITS Each of the VIPER Funds imposes a transaction fee (payable to the Fund) to compensate the Fund for the transfer and other transaction costs associated with the issuance of Creation Units. For purchases effected through the Clearing Process, the transaction fee is $5,500, regardless of how many Creation Units are purchased. An additional charge of up to $5,500 may be imposed for purchases effected outside the Clearing Process. When a VIPER Fund permits a purchaser to substitute cash in lieu of depositing one or more Deposit Securities, the purchaser will be assessed an additional variable charge on the "cash in lieu" portion of its investment. The amount of this variable charge shall be determined by the Fund in its sole discretion, but shall not be more than is reasonably needed to compensate the Fund for the brokerage costs associated with purchasing the relevant Deposit Securities and, if applicable, the estimated market impact costs of purchasing such securities. REDEMPTION OF VIPER SHARES IN CREATION UNITS VIPER Shares may be redeemed only in Creation Units; a Fund will not redeem VIPER Shares tendered in less than Creation Unit-size aggregations. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of VIPER Shares to constitute a redeemable Creation Unit. There can be no assurance, B-38 however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit. Redemption requests in good order will receive the NAV next determined after the request is made. An investor tendering a Creation Unit generally will receive redemption proceeds consisting of (1) a basket of Redemption Securities, plus (2) a Cash Redemption Amount equal to the difference between (x) the NAV of the Creation Unit being redeemed, as next determined after receipt of a request in proper form, and (y) the value of the Redemption Securities, less (3) a Redemption Transaction Fee (described below). If the Redemption Securities have a value greater then the NAV of a Creation Unit, the redeeming investor would pay the Cash Redemption Amount to the Fund, rather than receiving such amount from the Fund. Vanguard, through the NSCC, makes available immediately prior to the opening of business on the AMEX (currently 9:30 a.m., Eastern time) on each Business Day, the identity of the Redemption Securities that will be used (subject to possible amendment or correction) to satisfy redemption requests received in proper form (as defined below) on that day. The basket of Redemption Securities provided to an investor redeeming a Creation Unit may not be identical to the basket of Deposit Securities required of a investor purchasing a Creation Unit. If a Fund and a redeeming investor mutually agree, the Fund may provide the investor with a basket of Redemption Securities that differs from the composition of the redemption basket published through NSCC. TRANSACTION FEES ON REDEMPTIONS OF CREATION UNITS Each of the VIPER Funds imposes a transaction fee (payable to the Fund) to compensate the Funds for the transfer and other transaction costs associated with the redemption of Creation Units. For redemptions effected through the Clearing Process, the transaction fee is $5,500, regardless of how many Creation Units are redeemed. An additional charge of up to $5,500 may be imposed for redemptions effected outside the Clearing Process. When a VIPER Fund permits a redeeming investor to receive cash in lieu of one or more Redemption Securities, the investor will be assessed an additional variable charge on the "cash in lieu" portion of its redemption. The amount of this variable charge shall be determined by the Fund in its sole discretion, but shall not be more than is reasonably needed to compensate the Fund for the brokerage costs associated with selling portfolio securities to raise the necessary cash and, if applicable, the estimated market impact costs of selling such securities. PLACEMENT OF REDEMPTION ORDERS USING CLEARING PROCESS An order to redeem Creation Units through the Clearing Process is deemed received on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date, and (ii) all other procedures set forth in the Participant Agreement are properly followed. Such order will be effected based on the NAV of the Fund next determined on that day. An order to redeem Creation Units through the Clearing Process made in proper form but received by a Fund after Closing Time on the Transmittal Date will be deemed received on the next Business Day immediately following the Transmittal Date and will be effected at the NAV next determined on that day. The Redemption Securities and the Cash Redemption Amount will be transferred by the third NSCC Business Day following the date on which the redemption request is deemed received. PLACEMENT OF REDEMPTION ORDERS OUTSIDE CLEARING PROCESS An Authorized Participant that wishes to place an order to redeem a Creation Unit outside the Clearing Process must state that it is not using the Clearing Process and that redemption instead will be effected through a transfer of VIPER Shares directly through DTC. An order to redeem a Creation Unit of a VIPER Fund outside the Clearing Process is deemed received on the Transmittal Date if (i) such order is received by the Fund's Transfer Agent prior to the Closing Time on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed. If the Fund's custodian does not receive the required number of VIPER Shares from the redeeming investor by the settlement date (T+3 unless otherwise agreed), the Fund shall be entitled to charge the redeeming investor for any costs (including investment losses, attorney's fees, and interest) sustained by the Fund as a result of the late delivery or failure to deliver. After the Transfer Agent has deemed an order for redemption outside the Clearing Process received, the Transfer Agent will initiate procedures to transfer the Redemption Securities and the Cash Redemption Amount to the Authorized Participant on behalf of the redeeming Beneficial Owner by the third Business Day following the Transmittal Date on which such redemption order is deemed received by the Transfer Agent. B-39 The calculation of the value of the Redemption Securities and the Cash Redemption Amount to be delivered upon redemption will be made by the Custodian according to the procedures set forth under "Calculation of Net Asset Value," computed on the Business Day on which a redemption order is deemed received by the Transfer Agent. Therefore, if a redemption order in proper form is submitted to the Transfer Agent by an Authorized Participant prior to the Closing Time on the Transmittal Date, then the value of the Redemption Securities and the Cash Redemption Amount will be determined by the Custodian on such Transmittal Date. Each of the VIPER Funds reserves the right, in its sole discretion, to require or permit a redeeming investor to receive its redemption proceeds in cash. In such cases, the investor would receive a cash payment equal to the net asset value of its VIPER Shares based on the NAV of those shares next determined after the redemption request is received in proper form (minus a transaction fee, including a charge for cash redemptions, described above). If a redeeming investor (or an Authorized Participant through which it is acting) is subject to a legal restriction with respect to a particular stock included in the basket of Redemption Securities, such investor may be paid an equivalent amount of cash in lieu of the stock. In addition, each VIPER Fund reserves the right to redeem Creation Units partially for cash to the extent that the Fund could not lawfully deliver one or more Redemption Securities or could not do so without first registering such securities under federal or state law. FINANCIAL STATEMENTS Each Fund's Financial Statements for the year ended December 31, 2002, appearing in the Funds' 2002 Annual Reports to Shareholders, and the reports thereon of PricewaterhouseCoopers LLP, independent accountants, also appearing therein, are incorporated by reference in this Statement of Additional Information. For a more complete discussion of each Fund's performance, please see the Funds' Annual Reports to Shareholders, which may be obtained without charge. COMPARATIVE INDEXES Vanguard may use reprinted material discussing The Vanguard Group, Inc. or any of the member funds of The Vanguard Group of Investment Companies. Each of the investment company members of The Vanguard Group uses one or more of the following unmanaged indexes for comparative performance purposes. ASSET ALLOCATION COMPOSITE INDEX--Made up of two unmanaged benchmarks, weighted 65% Standard & Poor's 500 Index and 35% Lehman Brothers Long Treasury Index. AVERAGE 1-2 YEAR MUNICIPAL FUND--An industry benchmark of average adjustable short municipal funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE 1-5 YEAR GOVERNMENT FUND--An industry benchmark that includes funds with U.S. Treasury and agency obligations with similar investment objectives and policies and maturities of 1 to 5 years, as measured by Lipper Inc. AVERAGE 1-5 YEAR INVESTMENT-GRADE FUND--An industry benchmark of average 1-5 year investment-grade funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE 1-5 YEAR MUNICIPAL FUND--An industry benchmark that includes funds with investment-grade tax-exempt bonds that are issued by state and local governments with similar investment objectives and policies and have maturities of 1 to 5 years, as measured by Lipper Inc. AVERAGE ADJUSTED SHORT MUNICIPAL DEBT FUND--An industry benchmark of average adjustable short municipal funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE BALANCED FUND--An industry benchmark of average balanced funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE CALIFORNIA INTERMEDIATE MUNICIPAL DEBT FUND--An industry benchmark that includes intermediate-term California municipal bond funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE CALIFORNIA INSURED MUNICIPAL DEBT FUND--An industry benchmark of average California municipal bond funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE CALIFORNIA TAX-EXEMPT MONEY MARKET FUND--An industry benchmark of average California tax-exempt money market funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE CONVERTIBLE SECURITIES FUND--An industry benchmark of funds with convertible securities rated B or better by Standard & Poor's, with similar investment objectives and policies, as measured by Lipper Inc. B-40 AVERAGE CORPORATE A-RATED FUND--An industry benchmark of average corporate A-rated funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE EMERGING MARKETS FUND--An industry benchmark of average emerging markets funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE EQUITY INCOME FUND--An industry benchmark of average equity income funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE EUROPEAN REGION FUND---An industry benchmark of average European region funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE FLORIDA INSURED MUNICIPAL DEBT FUND--An industry benchmark of average Florida municipal bond funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE FLEXIBLE FUND--An industry benchmark of average flexible funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE GENERAL GOVERNMENT FUND--An industry benchmark of average general government funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE GENERAL MUNICIPAL FUND--An industry benchmark of average general municipal funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE GENERAL TREASURY FUND--An industry benchmark of average general treasury funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE GLOBAL FUND---An industry benchmark of average global funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE GNMA FUND--An industry benchmark that includes funds of mortgage-backed pass-through securities of the Government National Mortgage Association, with similar investment objectives and policies; these securities are based on pools of 15- and 30-year fixed-rate home mortgages, as measured by Lipper Inc. AVERAGE GOLD-ORIENTED FUND--An industry benchmark of funds that track the performance of companies around the world, with similar investment objectives and policies, that are engaged in the mining, processing, or marketing of gold, other precious metals, and rare minerals, as measured by Lipper Inc. AVERAGE GOVERNMENT MONEY MARKET FUND--An industry benchmark of average government money market funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE HEALTH/BIOTECHNOLOGY FUND--An industry benchmark of funds that track the stocks of the health care companies within the S&P 500 Index, as measured by Lipper Inc. AVERAGE HIGH-CURRENT-YIELD FUND--An industry benchmark of average high current yield funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE HIGH YIELD MUNICIPAL FUND--An industry benchmark of average high-yield municipal funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE INCOME FUND--An industry benchmark of average income funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE INSTITUTIONAL MONEY MARKET FUND--An industry benchmark of average institutional money market funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE INSURED MUNICIPAL FUND--An industry benchmark of average insured municipal funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE INTERMEDIATE GOVERNMENT FUND--An industry benchmark of average intermediate government funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE INTERMEDIATE INVESTMENT-GRADE FUND--An industry benchmark of average intermediate investment-grade funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE INTERMEDIATE MUNICIPAL FUND--An industry benchmark of average intermediate municipal funds with similar investment objectives and policies, as measured by Lipper Inc. B-41 AVERAGE INTERMEDIATE TREASURY FUND--An industry benchmark of average intermediate treasury funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE INTERNATIONAL FUND--An industry benchmark of average international funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE JAPAN/PACIFIC REGION FUND--An industry benchmark of average pacific region funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE LARGE-CAP CORE FUND--An industry benchmark of average large-cap core funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE LARGE-CAP GROWTH FUND--An industry benchmark of average large-cap growth funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE LARGE-CAP VALUE FUND--An industry benchmark of average large-cap value funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE MASSACHUSETTS MUNICIPAL DEBT FUND--An industry benchmark of average Massachusetts municipal debt funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE MID-CAP CORE FUND--An industry benchmark of average mid-cap core funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE MID-CAP VALUE FUND--An industry benchmark of average mid-cap value funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE MONEY MARKET FUND--An industry benchmark of average money market funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE MULTI-CAP CORE FUND--An industry benchmark of average multi-cap core funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE MULTI-CAP GROWTH FUND--An industry benchmark of average multi-cap growth funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE MULTI-CAP VALUE FUND--An industry benchmark of average multi-cap value funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE NATURAL RESOURCES FUND--An industry benchmark of average natural resources funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE NEW JERSEY MUNICIPAL DEBT FUND--An industry benchmark of average New Jersey municipal bond funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE NEW JERSEY TAX-EXEMPT MONEY MARKET FUND--An industry benchmark of average New Jersey tax-exempt money market funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE NEW YORK INSURED MUNICIPAL DEBT FUND--An industry benchmark of average New York municipal bond funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE NEW YORK TAX-EXEMPT MONEY MARKET FUND--An industry benchmark of average New York tax-exempt money market funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE OHIO MUNICIPAL DEBT FUND--An industry benchmark of average Ohio municipal bond funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE OHIO TAX-EXEMPT MONEY MARKET FUND--An industry benchmark of average Ohio tax-exempt money market funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE PENNSYLVANIA MUNICIPAL DEBT FUND--An industry benchmark of average Pennsylvania municipal bond funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE PENNSYLVANIA TAX-EXEMPT MONEY MARKET FUND--An industry benchmark of average Pennsylvania tax-exempt money market funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE PACIFIC REGION FUND--An industry benchmark of average pacific region funds with similar investment objectives and policies, as measured by Lipper Inc. B-42 AVERAGE REAL ESTATE FUND--An industry benchmark of average real estate funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE SHORT TREASURY FUND--An industry benchmark of average short treasury funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE SMALL-CAP CORE FUND--An industry benchmark of average small-cap core funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE SMALL-CAP GROWTH FUND--An industry benchmark of average small-cap growth funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE SMALL-CAP VALUE FUND--An industry benchmark of average small-cap value funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE TAX-EXEMPT MONEY MARKET FUND--An industry benchmark of average tax-exempt money market funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE U.S. TREASURY MONEY MARKET FUND--An industry benchmark of average U.S. treasury money market funds with similar investment objectives and policies, as measured by Lipper Inc. AVERAGE UTILITY FUND--An industry benchmark of average utility funds with similar investment objectives and policies, as measured by Lipper Inc. BALANCED COMPOSITE INDEX--Made up of two unmanaged benchmarks, weighted 60% Wilshire 5000 Index and 40% Lehman Brothers Aggregate Bond Index. CALVERT SOCIAL INDEX--A socially screened index of large- and mid-capitalization U.S. stocks that is provided by the Calvert Group of Bethesda, Maryland. CONSERVATIVE GROWTH COMPOSITE AVERAGE--A composite fund average weighted 40% average fixed income fund, 35% average general equity fund, 20% average money market fund, and 5% average international fund. Derived from data provided by Lipper Inc. CONSERVATIVE GROWTH COMPOSITE INDEX--Made up of four unmanaged benchmarks, weighted 40% Lehman Brothers Aggregate Bond Index, 35% Wilshire 5000 Index, 20% Salomon Smith Barney 3-Month Treasury Index, and 5% Morgan Stanley Capital International Europe Australasia Far East Index. CREDIT SUISSE FIRST BOSTON CONVERTIBLE SECURITIES INDEX--An industry benchmark that includes convertible securities rated B or better by Standard & Poor's. GROWTH COMPOSITE AVERAGE--A composite fund average weighted 65% average general equity fund, 20% average fixed income fund, and 15% average international fund. Derived from data provided by Lipper Inc. GROWTH COMPOSITE INDEX--Made up of three unmanaged benchmarks, weighted 65% Wilshire 5000 Index, 20% Lehman Brothers Aggregate Bond Index, and 15% Morgan Stanley Capital International Europe Australasia Far East Index. GROWTH FUND STOCK INDEX--Tracks the performance of the average common stock holdings of the 50 largest growth-oriented mutual funds. IMONEYNET MONEY FUND REPORT'S AVERAGE 100% TREASURY FUND--Contains weekly summary of asset, yield, average maturity, and portfolio holdings data for the industry benchmark Money Fund Report Averages. INCOME COMPOSITE AVERAGE--A composite fund average weighted 60% averaged fixed income fund, 20% average general equity fund, and 20% average money market fund. Derived from data provided by Lipper Inc. INCOME COMPOSITE INDEX--Made up of three unmanaged benchmarks, weighted 60% Lehman Brothers Aggregate Bond Index, 20% Wilshire 5000 Index, and 20% Salomon Smith Barney 3-Month Treasury Index. LEHMAN BROTHERS 1-5 YEAR GOVERNMENT/CREDIT BOND INDEX--Includes U.S. Treasury and agency obligations, as well as investment-grade (rated Baa3 or above by Moody's) corporate and international dollar-denominated bonds, all having maturities of 1 to 5 years. LEHMAN BROTHERS 1-5 YEAR U.S. CREDIT INDEX--Includes investment-grade corporate and international dollar-denominated bonds (rated Baa3 or above by Moody's) with maturities of 1 to 5 years. B-43 LEHMAN BROTHERS 1-5 YEAR U.S. GOVERNMENT BOND INDEX--Includes U.S. Treasury and agency obligations with maturities of 1 to 5 years. LEHMAN BROTHERS 1-5 YEAR U.S. TREASURY BOND INDEX--Includes U.S. Treasury obligations with maturities of 1 to 5 years. LEHMAN BROTHERS 3 YEAR MUNICIPAL BOND INDEX--Includes investment-grade tax-exempt bonds (rated Baa or above by Moody's) that are issued by state and local governments and have maturities of 2 to 4 years. LEHMAN BROTHERS 5-10 YEAR GOVERNMENT/CREDIT BOND INDEX--Includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds (rated Baa3 or above by Moody's), all having maturities of 5 to 10 years. LEHMAN BROTHERS 5-10 YEAR U.S. CREDIT INDEX--Includes investment-grade corporate and international dollar-denominated bonds (rated Baa3 or above by Moody's) with maturities of 5 to 10 years. LEHMAN BROTHERS 5-10 YEAR U.S. TREASURY BOND INDEX--Includes U.S. Treasury obligations with maturities of 5 to 10 years. LEHMAN BROTHERS 7 YEAR MUNICIPAL BOND INDEX--Includes investment-grade tax-exempt bonds (rated Baa or above by Moody's) that are issued by state and local governments and have maturities of 6 to 8 years. LEHMAN BROTHERS 10 YEAR MUNICIPAL BOND INDEX--Includes investment-grade tax-exempt bonds (rated Baa or above by Moody's) that are issued by state and local governments and have maturities of 8 to 12 years. LEHMAN BROTHERS AGGREGATE BOND INDEX--The broadest measure of the taxable U.S. bond market, including most Treasury, agency, corporate, mortgage-backed, asset-backed, and international dollar-denominated issues, all with investment-grade ratings (rated Baa3 or above by Moody's) and maturities of 1 year or more. LEHMAN BROTHERS CREDIT A OR BETTER BOND INDEX--Includes high-quality corporate and international dollar-denominated bonds (rated A or above by Moody's) with a broad range of maturities. LEHMAN BROTHERS GNMA BOND INDEX--Includes mortgage-backed pass-through securities of the Government National Mortgage Association; these securities are based on pools of 15- and 30-year fixed-rate home mortgages. LEHMAN BROTHERS HIGH YIELD BOND INDEX--Includes mainly corporate bonds with credit ratings at or below Ba1 (Moody's) or BB+ (Standard & Poor's); these issues are considered below-investment-grade. LEHMAN BROTHERS LONG CREDIT A OR BETTER BOND INDEX--Includes top-quality corporate and international dollar-denominated bonds (rated A or above by Moody's) with maturities of 10 years or more. LEHMAN BROTHERS LONG GOVERNMENT/CREDIT BOND INDEX--Includes U.S. Treasury and agency obligations, as well as investment-grade corporate bonds and international dollar-denominated bonds (rated Baa3 or above by Moody's), all having maturities of 10 years or more. LEHMAN BROTHERS LONG U.S. TREASURY BOND INDEX--Includes U.S. Treasury obligations with maturities of 10 years or more. LEHMAN BROTHERS MUNICIPAL BOND INDEX--Includes most investment-grade tax-exempt bonds (rated Baa or above by Moody's) that are issued by state and local governments in the United States. LEHMAN BROTHERS U.S. TREASURY INFLATION NOTES INDEX--Includes the inflation-indexed securities within the Lehman Brothers Treasury Index, which represents U.S. Treasury obligations with maturities of more than 1 year. MODERATE GROWTH COMPOSITE AVERAGE--A composite fund average weighted 50% average general equity fund, 40% averaged fixed income fund, and 10% average international fund. Derived from data provided by Lipper Inc. MODERATE GROWTH COMPOSITE INDEX--Made up of three unmanaged benchmarks, weighted 50% Wilshire 5000 Index, 40% Lehman Brothers Aggregate Bond Index, and 10% Morgan Stanley Capital International Europe Australasia Far East Index. MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) ALL COUNTRY WORLD INDEX FREE--Tracks stock markets in countries included in the MSCI EAFE Index plus the United States, Canada, and a number of emerging markets. MORGAN STANLEY CAPITAL INTERNATIONAL ALL COUNTRY WORLD INDEX FREE EX USA--Includes both developed markets (minus the United States) and emerging markets from around the globe. Tracking stock markets in 48 nations, it is a good representation of the overall international equity market. B-44 MORGAN STANLEY CAPITAL INTERNATIONAL EMERGING MARKETS FREE INDEX--Free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE INDEX--Tracks stocks in more than 15 developed European markets. MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALASIA, FAR EAST (MSCI EAFE) INDEX--Tracks more than 1,000 stocks from more than 20 developed markets in Europe, Australia, Asia, and the Pacific region. MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALASIA, FAR EAST GROWTH INDEX--Measures the performance of those stocks within the MSCI EAFE Index that have higher price/book ratios. MORGAN STANLEY CAPITAL INTERNATIONAL PACIFIC INDEX--Tracks stocks from developed Pacific Rim markets. MORGAN STANLEY REAL ESTATE INVESTMENT TRUST (REIT) INDEX--Tracks more than 1,000 real estate investment trusts that meet size and liquidity criteria specified by Morgan Stanley. RUSSELL 1000 INDEX--Measures the performance of the 1,000 largest companies in the Russell 3000 Index. RUSSELL 1000 GROWTH INDEX--Measures the performance of those Russell 1000 Index companies with higher price/ book ratios and higher predicted growth rates. RUSSELL 1000 VALUE INDEX--Measures the performance of those Russell 1000 Index companies with lower price/book ratios and lower predicted growth rates. RUSSELL 2500 INDEX--Measures the performance of the 2,500 smallest companies in the Russell 3000 Index. RUSSELL 2500 GROWTH INDEX--Measures the performance of those Russell 2500 Index companies with higher price/ book ratios and higher predicted growth rates. RUSSELL 2000 INDEX--Measures the performance of the 2,000 smallest companies in the Russell 3000 Index. RUSSELL 2000 GROWTH INDEX--Measures the performance of those Russell 2000 Index companies with higher price/ book ratios and higher predicted growth rates. RUSSELL 2800 INDEX--Consists of the Russell 3000 Index (the 3,000 largest U.S. stocks) minus the largest 200. RUSSELL 3000 GROWTH INDEX--Measures the performance of those Russell 3000 Index companies with higher price/ book ratios and higher predicted growth rates. RUSSELL 3000 INDEX--Measures the performance of the 3,000 largest U.S. companies. RUSSELL 3000 VALUE INDEX--Measures the performance of those Russell 3000 Index companies with lower price/ book ratios and lower predicted growth rates. RUSSELL MIDCAP GROWTH INDEX--Measures the performance of those Russell Midcap Index companies with higher price/book ratios and higher predicted growth rates. RUSSELL MIDCAP INDEX--Measures the performance of the 800 smallest companies in the Russell 1000 Index. RUSSELL MIDCAP VALUE INDEX--Measures the performance of those Russell Midcap Index companies with lower price/book ratios and lower predicted growth rates. SALOMON SMITH BARNEY 3-MONTH U.S. TREASURY BILL INDEX--Tracks the performance of short-term U.S. government debt instruments. SALOMON SMITH BARNEY BROAD MARKET INDEX--Tracks the performance of the U.S. broad market. SALOMON SMITH BARNEY EXTENDED MARKET EUROPE AND PACIFIC (EM EPAC) INDEX--Measures the performance of the smallest companies from the European and Pacific countries represented in the Salomon Smith Barney Broad Market Index. The EM EPAC Index represents the bottom 20% of the total market capital of each country. SALOMON SMITH BARNEY WORLD EQUITY GOLD INDEX--Tracks the performance of companies around the world that are engaged in the mining, processing, or marketing of gold, other precious metals, and rare minerals. SELECT EMERGING MARKETS FREE INDEX--This composite includes stocks that can be bought free of restrictions in 15 emerging markets of Europe, Asia, Africa, and Latin America (95%), and a cash component (5%) based on the Average Money Market Fund. This index is administered by MSCI exclusively for Vanguard. STANDARD & POOR'S (S&P) 500 INDEX--A widely used barometer of U.S. stock market performance; as a market-weighted index of leading companies in leading industries, it is dominated by large-capitalization companies. B-45 STANDARD & POOR'S 500/BARRA GROWTH INDEX--Includes those stocks of the S&P 500 Index that have higher price/ book ratios; these stocks generally offer lower-than-average dividend yields. STANDARD & POOR'S 500/BARRA VALUE INDEX--Includes those stocks of the S&P 500 Index that have lower price/book ratios; these stocks generally offer higher-than-average dividend yields. STANDARD & POOR'S ENERGY SECTOR INDEX--Tracks the stocks of the energy-related companies within the S&P 500 Index. STANDARD & POOR'S HEALTH SECTOR INDEX--Tracks the stocks of the health care companies within the S&P 500 Index. STANDARD & POOR'S INTEGRATED TELECOMMUNICATION SERVICES INDEX--Includes the Telecommunications Services industry group (Alternative Carriers and Integrated Telecommunication Equipment) and Wireless Telecommunications Services. STANDARD & POOR'S MIDCAP 400/BARRA GROWTH INDEX--Includes those stocks of the S&P MidCap 400 Index that have above average price/earnings and price/book ratios. STANDARD & POOR'S MIDCAP 400 INDEX--Includes stocks of 400 medium-sized U.S. companies representing a spectrum of industries. On average, these stocks are smaller than those in the S&P 500 Index. STANDARD & POOR'S SMALLCAP 600 INDEX--Includes stocks of 600 small-capitalization U.S. companies representing a spectrum of industries. On average, these stocks are smaller than those in the S&P MidCap 400 Index. STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--Includes those stocks of the S&P SmallCap 600 Index that have higher price/book ratios. STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--Includes those stocks of the S&P SmallCap 600 Index that have lower price/book ratios. STANDARD & POOR'S UTILITIES INDEX--Includes the following industries: Electric Utilities; Gas Utilities; Multi-Utilities, and Water Utilities. STAR COMPOSITE AVERAGE--An industry benchmark average similarly weighted using the average general equity fund, average fixed income fund, and average money market fund, as measured by Lipper Inc. STAR COMPOSITE INDEX--Made up of three unmanaged benchmarks, weighted 62.5% Wilshire 5000 Index, 25% Lehman Brothers Aggregate Bond Index, and 12.5% Salomon Smith Barney 3-Month Treasury Index. TARGET REIT COMPOSITE--Consists of the Morgan Stanley REIT Index adjusted to include a 2% cash position (Lipper Money Market Average). TAX-MANAGED BALANCED COMPOSITE INDEX--Made up of two unmanaged benchmarks, weighted 50% Russell 1000 Index and 50% Lehman Brothers 7 Year Municipal Bond Index. TOTAL INTERNATIONAL COMPOSITE INDEX--Consists of the MSCI Europe Index plus the MSCI Pacific Index, and the Select Emerging Markets Free Index. UTILITIES COMPOSITE INDEX--Made up of two unmanaged benchmarks, weighted 75% S&P Utilities Index and 25% S&P Integrated Telecommunication Services Index. WELLESLEY COMPOSITE INDEX--Made up of four unmanaged benchmarks, weighted 65% Lehman Brothers Credit A or Better Index, 26% S&P 500/Barra Value Index, 4.5% S&P Utilities Index, and 4.5% S&P Integrated Telecommunication Services Index. WELLINGTON COMPOSITE INDEX--Made up of two unmanaged benchmarks, weighted 65% S&P 500 Index and 35% Lehman Brothers Credit A or Better Index. WILSHIRE 4500 COMPLETION INDEX--Measures the performance of virtually all U.S. mid- and small-capitalization stocks. The index is constructed by removing the S&P 500 Index stocks from the Wilshire 5000 Index. WILSHIRE 5000 TOTAL MARKET INDEX--The broadest measure of the U.S. stock market; tracks all stocks publicly traded in the United States for which daily pricing is available. B-46 SAI040 042003 PART C VANGUARD INDEX FUNDS OTHER INFORMATION ITEM 23. EXHIBITS (a) Declaration of Trust, amended and restated July 19, 2002, is filed herewith (b) By-Laws, filed on July 31, 1998, Post-Effective Amendment No. 52, is hereby incorporated by reference. (c) Reference is made to Articles III and V of the Registrant's Declaration of Trust (d) Investment Advisory Contract, The Vanguard Group, Inc. provides investment advisory services to the Funds at cost pursuant to the Amended and Restated Funds' Service Agreement, refer to Exhibit H below. (e) Not applicable (f) Reference is made to the section entitled "Management of the Funds" in the Registrant's Statement of Additional Information (g) Custodian Agreement, filed herewith for JP Morgan Chase Bank, N.A., and Wachovia Bank (h) Amended and Restated Funds' Service Agreement, is filed herewith (i) Not Applicable (j) Consent of Independent Accountants, is filed herewith. (k) Not Applicable (l) Not Applicable (m) Not Applicable (n) Rule 18f-3 Plan, filed on April 11, 2002, Post-Effective Amendment No. 84, is hereby incorporated by reference. (o) Not Applicable (p) Code of Ethics, filed on April 11, 2002, Post-Effective Amendment No. 84, is hereby incorporated by reference. ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT Registrant is not controlled by or under common control with any person. ITEM 25. INDEMNIFICATION The Registrant's organizational documents contain provisions indemnifying Trustees and officers against liability incurred in their official capacity. Article VII, Section 2 of the Declaration of Trust provides that the Registrant may indemnify and hold harmless each and every Trustee and officer from and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to the performance of his or her duties as a Trustee or officer. However, this provision does not cover any liability to which a Trustee or officer would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her office. Article VI of the By-Laws generally provides that the Registrant shall indemnify its Trustees and officers from any liability arising out of their past or present service in that capacity. Among other things, this provision excludes any liability arising by reason of willful misfeasance, bad faith, gross negligence, or the reckless disregard of the duties involved in the conduct of the Trustee's or officer's office with the Registrant. C-1 ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER Investment advisory services are provided to the Registrant on an at-cost basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Registrant and the other funds in The Vanguard Group of Investment Companies. See the information concerning The Vanguard Group, Inc. set forth in Parts A and B. For information as to any other business, vocation or employment of a substantial nature in which each director or officer of the Registrant's investment advisor is or has been engaged for his own account or in the capacity of officer, employee, partner or trustee, reference is made to Form ADV (File #801-11953) filed by it under the Investment Advisers Act of 1940. ITEM 27. PRINCIPAL UNDERWRITERS a. Not Applicable b. Not Applicable c. Not Applicable ITEM 28. LOCATION OF ACCOUNTS AND RECORDS The books, accounts and other documents required by Section 31(a) under the 1940 Act and the Rules thereunder will be maintained at the offices of Registrant; Registrant's Transfer Agent, The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, PA 19355; and the Registrant's Custodians, Wachovia Bank, N.A. 123 S. Broad Street, PA4942, Philadelphia, PA 19109, and JP Morgan Chase Bank, N.A., New York, NY 10017-20705. ITEM 29. MANAGEMENT SERVICES Other than as set forth under the description of The Vanguard Group in Part B of this Registration Statement, the Registrant is not a party to any management-related service contract. ITEM 30. UNDERTAKINGS Not Applicable C-2 SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant hereby certifies that it meets all requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the Town of Valley Forge and the Commonwealth of Pennsylvania, on the 16th day of April, 2003. VANGUARD INDEX FUNDS BY:_____________(signature)________________ (HEIDI STAM) JOHN J. BRENNAN* CHAIRMAN AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated:
SIGNATURES TITLE DATE - ---------------------------------------------------------------------------------------------- By: /S/ JOHN J. BRENNAN President, Chairman, Chief April 16, 2003 - ---------------------------- Executive Officer, and (Heidi Stam) Trustee John J. Brennan* By:/S/ CHARLES D. ELLIS - ---------------------------- Trustee April 16, 2003 (Heidi Stam) Charles D. Ellis* By:/S/ RAJIV L. GUPTA - ---------------------------- Trustee April 16, 2003 (Heidi Stam) Rajiv L. Gupta* By: /S/ JOANN HEFFERNAN HEISEN - ---------------------------- Trustee April 16, 2003 (Heidi Stam) JoAnn Heffernan Heisen* By: /S/ BURTON G. MALKIEL - ---------------------------- Trustee April 16, 2003 (Heidi Stam Burton G. Malkiel* By:/S/ ALFRED M. RANKIN, JR. - ---------------------------- Trustee April 16, 2003 (Heidi Stam) Alfred M. Rankin, Jr.* By:/S/ J. LAWRENCE WILSON - ---------------------------- Trustee April 16, 2003 (Heidi Stam) J. Lawrence Wilson* By: /S/ THOMAS J. HIGGINS Treasurer,Principal, April 16, 2003 - ---------------------------- Financial Officer, and (Heidi Stam) Officer Accounting Thomas J. Higgins*
*By Power of Attorney. For Charles D. Ellis, see File Number 33-19446, filed on January 31, 2003; for all other trustees and officers, see File Number 2-57689, filed on December 26, 2002. Incorporated by reference. EXHIBIT INDEX Declaration of Trust. . . . . . . . . . . . . . . . . . Ex-99.A Custodian Agreements. . . . . . . . . . . . . . . . . . Ex-99.G Amended and Restated Funds' Service Agreement. . . . . .Ex-99.H Consent of Inpendent Accountants. . . . . . . . . . . . Ex-99.J EX-99.A 3 decoftrust.txt DECLARATION OF TRUST Effective as of January 23, 1998 As amended July 19, 2002 AMENDED AND RESTATED AGREEMENT AND DECLARATION OF TRUST OF VANGUARD INDEX FUNDS A DELAWARE BUSINESS TRUST PRINCIPAL PLACE OF BUSINESS: 100 VANGUARD BOULEVARD MALVERN, PENNSYLVANIA 19355 AGREEMENT AND DECLARATION OF TRUST OF VANGUARD INDEX FUNDS WHEREAS, this AGREEMENT AND DECLARATION OF TRUST is made and entered into as of the date set forth below by the Trustees named hereunder for the purpose of forming a Delaware business trust in accordance with the provisions hereinafter set forth, NOW, THEREFORE, the Trustees hereby direct that a Certificate of Trust be filed with the Office of the Secretary of State of the State of Delaware and do hereby declare that the Trustees will hold IN TRUST all cash, securities and other assets which the Trust now possesses or may hereafter acquire from time to time in any manner and manage and dispose of the same upon the following terms and conditions for the pro rata benefit of the holders of Shares in this Trust. ARTICLE I. Name and Definitions Section 1. Name. This trust shall be known as "VANGUARD INDEX FUNDS" and the Trustees shall conduct the business of the Trust under that name or any other name as they may from time to time determine. Section 2. Definitions. Whenever used herein, unless otherwise required by the context or specifically provided: (a) The "Trust" refers to the Delaware business trust established by this Agreement and Declaration of Trust, as amended from time to time; (b) The "Trust Property" means any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of the Trust; (c) "Trustees" refers to the persons who have signed this Agreement and Declaration of Trust, so long as they continue in office in accordance with the terms hereof, and all other persons who may from time to time be duly elected or appointed to serve on the Board of Trustees in accordance with the provisions hereof, and reference herein to a Trustee or the Trustees shall refer to such person or persons in their capacity as trustees hereunder; (d) "Shares" means the shares of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time and includes fractions of Shares as well as whole Shares; (e) "Shareholder" means a record owner of outstanding Shares; (f) "Person" means and includes individuals, corporations, partnerships, trusts, foundations, plans, associations, joint ventures, estates and other entities, whether or not legal entities, and governments and agencies and political subdivisions thereof, whether domestic or foreign; (g) The "1940 Act" refers to the Investment Company Act of 1940 and the Rules and Regulations thereunder, all as amended from time to time. References herein to specific sections of the 1940 Act shall be deemed to include such Rules and Regulations as are applicable to such sections as determined by the Trustees or their designees; (h) The terms "Commission" and "Principal Underwriter" shall have the respective meanings given them in Section 2(a)(7) and Section (2)(a)(29) of the 1940 Act; (i) "Declaration of Trust" shall mean this Agreement and Declaration of Trust, as amended or restated from time to time; (j) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time; (k) The term "Interested Person" has the meaning given it in Section 2(a)(19) of the 1940 Act; (l) "Investment Adviser" or "Adviser" means a party furnishing services to the Trust pursuant to any contract described in Article IV, Section 7(a) hereof; (m) "Series" refers to each Series of Shares established and designated under or in accordance with the provisions of Article III. ARTICLE II. Purpose of Trust The purpose of the Trust is to conduct, operate and carry on the business of a management investment company registered under the 1940 Act through one or more Series investing primarily in securities. 2 ARTICLE III. Shares Section 1. Division of Beneficial Interest. The beneficial interest in the Trust shall at all times be divided into an unlimited number of Shares, with a par value of $ .001 per Share. The Trustees may authorize the division of Shares into separate Series and the division of Series into separate classes of Shares. The different Series shall be established and designated, and the variations in the relative rights and preferences as between the different Series shall be fixed and determined, by the Trustees. If only one Series shall be established, the Shares shall have the rights and preferences provided for herein and in Article III, Section 6 hereof to the extent relevant and not otherwise provided for herein. Subject to the provisions of Section 6 of this Article III, each Share shall have voting rights as provided in Article V hereof, and holders of the Shares of any Series shall be entitled to receive dividends, when, if and as declared with respect thereto in the manner provided in Article VI, Section 1 hereof. No Share shall have any priority or preference over any other Share of the same Series with respect to dividends or distributions of the Trust or otherwise. All dividends and distributions shall be made ratably among all Shareholders of a Series (or class) from the assets held with respect to such Series according to the number of Shares of such Series (or class) held of record by such Shareholders on the record date for any dividend or distribution or on the date of termination of the Trust, as the case may be. Shareholders shall have no preemptive or other right to subscribe to any additional Shares or other securities issued by the Trust or any Series. The Trustees may from time to time divide or combine the Shares of a Series into a greater or lesser number of Shares of such Series without thereby materially changing the proportionate beneficial interest of such Shares in the assets held with respect to that Series or materially affecting the rights of Shares of any other Series. Section 2. Ownership of Shares. The ownership of Shares shall be recorded on the books of the Trust or a transfer or similar agent for the Trust, which books shall be maintained separately for the Shares of each Series. No certificates evidencing the ownership of Shares shall be issued except as the Board of Trustees may otherwise determine from time to time. The Trustees may make such rules as they consider appropriate for the transfer of Shares of each Series (or class) and similar matters. The record books of the Trust as kept by the Trust or any transfer or similar agent, as the case may be, shall be conclusive as to the identity of the Shareholders of each Series and as to the number of Shares of each Series held from time to time by each Shareholder. Section 3. Investments in the Trust. Investments may be accepted by the Trust from such Persons, at such times, on such terms, and for such consideration as the Trustees from time to time may authorize. Each investment shall be credited to the Shareholder's account in the form of full and fractional Shares of the Trust, in such Series (or class) as the purchaser shall select, at the net asset value per Share next determined for such Series (or class) after receipt of the investment; provided, however, that the Trustees may, in their sole discretion, impose a sales charge or reimbursement fee upon investments in the Trust. 3 Section 4. Status of Shares and Limitation of Personal Liability. Shares shall be deemed to be personal property giving only the rights provided in this instrument and the By-Laws of the Trust. Every Shareholder by virtue of having become a Shareholder shall be held to have expressly assented and agreed to the terms hereof. The death of a Shareholder during the existence of the Trust shall not operate to terminate the Trust, nor entitle the representative of any deceased Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but shall entitle such representative only to the rights of said deceased Shareholder under this Declaration of Trust. Ownership of Shares shall not entitle a Shareholder to any title in or to the whole or any part of the Trust Property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders as partners or joint venturers. Neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust shall have any power to bind personally any Shareholder, or to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time agree to pay. Section 5. Power of Board of Trustees to Change Provisions Relating to Shares. Notwithstanding any other provision of this Declaration of Trust to the contrary, and without limiting the power of the Board of Trustees to amend the Declaration of Trust as provided elsewhere herein, the Board of Trustees shall have the power to amend this Declaration of Trust, at any time and from time to time, in such manner as the Board of Trustees may determine in their sole discretion, without the need for Shareholder action, so as to add to, delete, replace or otherwise modify any provisions relating to the Shares contained in this Declaration of Trust, provided that before adopting any such amendment without Shareholder approval the Board of Trustees shall determine that it is consistent with the fair and equitable treatment of all Shareholders and that Shareholder approval is not required by the 1940 Act or other applicable law. If Shares have been issued, Shareholder approval shall be required to adopt any amendments to this Declaration of Trust which would adversely affect to a material degree the rights and preferences of the Shares of any Series (or class) or to increase or decrease the par value of the Shares of any Series (or class). Section 6. Establishment and Designation of Shares. The establishment and designation of any Series (or class) of Shares shall be effective upon the adoption by a majority of the Trustees, of a resolution which sets forth such establishment and designation and the relative rights and preferences of such Series (or class). Each such resolution shall be incorporated herein by reference upon adoption. Shares of each Series (or class) established pursuant to this Section 6, unless otherwise provided in the resolution establishing such Series, shall have the following relative rights and preferences: (a) Assets Held with Respect to a Particular Series. All consideration received by the Trust for the issue or sale of Shares of a Series, including dividends and distributions paid by, and reinvested in, such Series, together 4 with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably be held with respect to that Series for all purposes, subject only to the rights of creditors, and shall be so recorded upon the books of account of the Trust. Such consideration, assets, income, earnings, profits and proceeds thereof, from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, are herein referred to as "assets held with respect to" that Series. In the event that there are any assets, income, earnings, profits and proceeds thereof, funds or payments which are not readily identifiable as assets held with respect to any particular Series (collectively "General Assets"), the Trustees shall allocate such General Assets to, between or among any one or more of the Series in such manner and on such basis as the Trustees, in their sole discretion, deem fair and equitable, and any General Asset so allocated to a particular Series shall be held with respect to that Series. Each such allocation by the Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes in absence of manifest error. (b) Liabilities Held with Respect to a Particular Series. The assets of the Trust held with respect to each Series shall be charged with the liabilities of the Trust with respect to such Series and all expenses, costs, charges and reserves attributable to such Series, and any general liabilities of the Trust which are not readily identifiable as being held in respect of a Series shall be allocated and charged by the Trustees to and among any one or more Series in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. The liabilities, expenses, costs, charges, and reserves so charged to a Series are herein referred to as "liabilities held with respect to" that Series. Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive and binding upon the holders of all Series for all purposes in absence of manifest error. All Persons who have extended credit which has been allocated to a particular Series, or who have a claim or contract which has been allocated to a Series, shall look exclusively to the assets held with respect to such Series for payment of such credit, claim, or contract. In the absence of an express agreement so limiting the claims of such creditors, claimants and contracting parties, each creditor, claimant and contracting party shall be deemed nevertheless to have agreed to such limitation unless an express provision to the contrary has been incorporated in the written contract or other document establishing the contractual relationship. (c) Dividends, Distributions, Redemptions, and Repurchases. No dividend or distribution including, without limitation, any distribution paid upon termination of the Trust or of any Series (or class) with respect to, or any redemption or repurchase of, the Shares of any Series (or class) shall be effected by the Trust other than from the assets held with respect to such Series, nor shall any Shareholder of any Series otherwise have any right or claim against the assets held with respect to any other Series except to the extent that such Shareholder has such a right or claim hereunder as a Shareholder of such other Series. The Trustees shall have full discretion to determine which items shall be treated as income and which items as capital; and each such determination and allocation shall be conclusive and binding upon the Shareholders in absence of manifest error. 5 (d) Voting. All Shares of the Trust entitled to vote on a matter shall vote without differentiation between the separate Series on a one-vote-per-each dollar (and a fractional vote for each fractional dollar) of the net asset value of each share (including fractional shares) basis; provided however, if a matter to be voted on affects only the interests of not all Series (or class of a Series), then only the Shareholders of such affected Series (or class) shall be entitled to vote on the matter. (e) Equality. All the Shares of each Series shall represent an equal proportionate undivided interest in the assets held with respect to such Series (subject to the liabilities of such Series and such rights and preferences as may have been established and designated with respect to classes of Shares within such Series), and each Share of a Series shall be equal to each other Share of such Series. (f) Fractions. Any fractional Share of a Series shall have proportionately all the rights and obligations of a whole share of such Series, including rights with respect to voting, receipt of dividends and distributions and redemption of Shares. (g) Exchange Privilege. The Trustees shall have the authority to provide that the holders of Shares of any Series shall have the right to exchange such Shares for Shares of one or more other Series in accordance with such requirements and procedures as may be established by the Trustees. (h) Combination of Series. The Trustees shall have the authority, without the approval of the Shareholders of any Series unless otherwise required by applicable law, to combine the assets and liabilities held with respect to any two or more Series into assets and liabilities held with respect to a single Series. (i) Elimination of Series. At any time that there are no Shares outstanding of a Series (or class), the Trustees may abolish such Series (or class). ARTICLE IV. The Board of Trustees Section 1. Number, Election and Tenure. The number of Trustees constituting the Board of Trustees shall be fixed from time to time by a written instrument signed, or by resolution approved at a duly constituted meeting, by a majority of the Board of Trustees, provided, however, that the number of Trustees shall in no event be less than one (1) nor more than fifteen (15). Subject to the requirements of Section 16(a) of the 1940 Act, the Board of Trustees, by action of a majority of the then Trustees at a duly constituted meeting, may fill vacancies in the Board of Trustees and remove Trustees with or without cause. 6 Each Trustee shall serve during the continued lifetime of the Trust until he or she dies, resigns, is declared bankrupt or incompetent by a court of competent jurisdiction, or is removed. Any Trustee may resign at any time by written instrument signed by him and delivered to any officer of the Trust or to a meeting of the Trustees. Such resignation shall be effective upon receipt unless specified to be effective at some other time. Except to the extent expressly provided in a written agreement with the Trust, no Trustee resigning and no Trustee removed shall have any right to any compensation for any period following his or her resignation or removal, or any right to damages or other payment on account of such removal. Any Trustee may be removed at any meeting of Shareholders by a vote of two-thirds of the total combined net asset value of all Shares of the Trust issued and outstanding. A meeting of Shareholders for the purpose of electing or removing one or more Trustees may be called (i) by the Trustees upon their own vote, or (ii) upon the demand of Shareholders owning 10% or more of the Shares of the Trust in the aggregate. Section 2. Effect of Death, Resignation, etc. of a Trustee. The death, declination, resignation, retirement, removal, or incapacity of one or more Trustees, or all of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Declaration of Trust. Whenever a vacancy in the Board of Trustees shall occur, until such vacancy is filled as provided in Article IV, Section 1, the Trustees in office, regardless of their number, shall have all the powers granted to the Trustees and shall discharge all the duties imposed upon the Trustees by this Declaration of Trust. Section 3. Powers. Subject to the provisions of this Declaration of Trust, the business of the Trust shall be managed by the Board of Trustees, and such Board shall have all powers necessary or convenient to carry out that responsibility including the power to engage in transactions of all kinds on behalf of the Trust. Trustees, in all instances, shall act as principals and are and shall be free from the control of the Shareholders. The Trustees shall have full power and authority to do any and all acts and to make and execute any and all contracts, documents and instruments that they may consider desirable, necessary or appropriate in connection with the administration of the Trust. Without limiting the foregoing, the Trustees may: adopt, amend and repeal By-Laws not inconsistent with this Declaration of Trust providing for the regulation and management of the affairs of the Trust; elect and remove such officers and appoint and terminate such agents as they consider appropriate; appoint from their own number and establish and terminate one or more committees consisting of two or more Trustees who may exercise the powers and authority of the Board of Trustees to the extent that the Trustees determine; employ one or more custodians of the assets of the Trust and may authorize such custodians to employ subcustodians and to deposit all or any part of such assets in a system or systems for the central handling of securities or with a Federal Reserve Bank, retain a transfer agent or a shareholder servicing agent, or both; provide for the issuance and distribution of Shares by the Trust directly or through one or more Principal Underwriters or otherwise; redeem, repurchase and transfer Shares pursuant to applicable law; set record dates for the determination of Shareholders with respect to various matters; declare and pay dividends and distributions to Shareholders of each Series from the assets of such Series; establish from time to time, in accordance with the provisions of Article III, 7 Section 6 hereof, any Series of Shares, each such Series to operate as a separate and distinct investment medium and with separately defined investment objectives and policies and distinct investment purpose; and in general delegate such authority as they consider desirable to any officer of the Trust, to any committee of the Trustees and to any agent or employee of the Trust or to any such custodian, transfer or shareholder servicing agent, Investment Manager or Principal Underwriter. Any determination as to what is in the interests of the Trust made by the Trustees in good faith shall be conclusive. In construing the provisions of this Declaration of Trust, the presumption shall be in favor of a grant of power to the Trustees and unless otherwise specified herein or required by the 1940 Act or other applicable law, any action by the Board of Trustees shall be deemed effective if approved or taken by a majority of the Trustees then in office or a majority of any duly constituted committee of Trustees. Any action required or permitted to be taken at any meeting of the Board of Trustees, or any committee thereof, may be taken without a meeting if all members of the Board of Trustees or committee (as the case may be) consent thereto in writing, and the writing or writings are filed with the minutes of the proceedings of the Board of Trustees, or committee, except as otherwise provided in the 1940 Act. Without limiting the foregoing, the Trust shall have power and authority: (a) To invest and reinvest cash and cash items, to hold cash uninvested, and to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, write options on, lend or otherwise deal in or dispose of contracts for the future acquisition or delivery of all types of securities, futures contracts and options thereon, and forward currency contracts of every nature and kind, including, without limitation, all types of bonds, debentures, stocks, preferred stocks, negotiable or non-negotiable instruments, obligations, evidences of indebtedness, certificates of deposit or indebtedness, commercial paper, repurchase agreements, bankers' acceptances, and other securities of any kind, issued, created, guaranteed, or sponsored by any and all Persons, including, without limitation, states, territories, and possessions of the United States and the District of Columbia and any political subdivision, agency, or instrumentality thereof, any foreign government or any political subdivision of the U.S. Government or any foreign government, or any international instrumentality or organization, or by any bank or savings institution, or by any corporation or organization organized under the laws of the United States or of any state, territory, or possession thereof, or by any corporation or organization organized under any foreign law, or in "when issued" contracts for any such securities, futures contracts and options thereon, and forward currency contracts, to change the investments of the assets of the Trust; and to exercise any and all rights, powers, and privileges of ownership or interest in respect of any and all such investments of every kind and description, including, without limitation, the right to consent and otherwise act with respect thereto, with power to designate one or more Persons, to exercise any of said rights, powers, and privileges in respect of any of said instruments; (b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease, or write options with respect to or otherwise deal in any property rights relating to any or all of the assets of the Trust or any Series; 8 (c) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper; (d) To exercise powers and right of subscription or otherwise which in any manner arise out of ownership of securities; (e) To hold any security or property in a form not indicating that it is trust property, whether in bearer, unregistered or other negotiable form, or in its own name or in the name of a custodian or subcustodian or a nominee or nominees or otherwise or to authorize the custodian or a subcustodian or a nominee or nominees to deposit the same in a securities depository, subject in each case to the applicable provisions of the 1940 Act; (f) To consent to, or participate in, any plan for the reorganization, consolidation or merger of any corporation or issuer of any security which is held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer; and to pay calls or subscriptions with respect to any security held in the Trust; (g) To join with other security holders in acting through a committee, depository, voting trustee or otherwise, and in that connection to deposit any security with, or transfer any security to, any such committee, depository or trustee, and to delegate to them such power and authority with relation to any security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such committee, depository or trustee as the Trustees shall deem proper; (h) To litigate, compromise, arbitrate, settle or otherwise adjust claims in favor of or against the Trust or a Series, or any matter in controversy, including but not limited to claims for taxes; (i) To enter into joint ventures, general or limited partnerships and any other combinations or associations; (j) To borrow funds or other property in the name of the Trust or Series exclusively for Trust purposes; (k) To endorse or guarantee the payment of any notes or other obligations of any Person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof; (l) To purchase and pay for entirely out of Trust Property such insurance as the Trustees may deem necessary, desirable or appropriate for the conduct of the business, including, without limitation, insurance policies 9 insuring the assets of the Trust or payment of distributions and principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees, officers, employees, agents, Investment Manager, principal underwriters, or independent contractors of the Trust, individually against all claims and liabilities of every nature arising by reason of holding Shares, holding, being or having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such Person as Trustee, officer, employee, agent, Investment Manager, Principal Underwriter, or independent contractor, including any action taken or omitted that may be determined to constitute negligence, whether or not the Trust would have the power to indemnify such Person against liability; and (m) To adopt, establish and carry out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust. The Trust shall not be limited to investing in obligations maturing before the possible termination of the Trust or one or more of its Series. The Trust shall not in any way be bound or limited by any present or future law or custom in regard to investment by fiduciaries. The Trust shall not be required to obtain any court order to deal with any assets of the Trust or take any other action hereunder. Section 4. Payment of Expenses by the Trust. Subject to the provisions of Article III, Section 6(b), the Trustees are authorized to pay or cause to be paid out of the principal or income of the Trust or Series, or partly out of the principal and partly out of income, and to charge or allocate the same to, between or among such one or more of the Series that may be established or designated pursuant to Article III, Section 6, all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust or Series, or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses and charges for the services of the Trust's officers, employees, Investment Manager^, Principal Underwriter, auditors, counsel, custodian, transfer agent, Shareholder servicing agent, and such other agents or independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur. Section 5. Ownership of Assets of the Trust. Title to all of the assets of the Trust shall at all times be considered as vested in the Trust, except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or in the name of any other Person as nominee, on such terms as the Trustees may determine. Upon the resignation, incompetency, bankruptcy, removal, or death of a Trustee he or she shall automatically cease to have any such title in any of the Trust Property, and the title of such Trustee in the Trust Property shall vest automatically in the remaining Trustees. Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered. The Trustees may determine that the Trust or the Trustees, acting for and on behalf of the Trust, shall be deemed to hold beneficial ownership of any income earned on the securities owned by the Trust, whether domestic or foreign. 10 Section 6. Service Contracts. ----------------------------- (a) The Trustees may, at any time and from time to time, contract for exclusive or nonexclusive advisory, management and/or administrative services for the Trust or for any Series with any Person; and any such contract may contain such other terms as the Trustees may determine, including without limitation, authority for the Investment Adviser to determine from time to time without prior consultation with the Trustees what investments shall be purchased, held, sold or exchanged and what portion, if any, of the assets of the Trust shall be held uninvested and to make changes in the Trust's investments, and such other responsibilities as may specifically be delegated to such Person. (b) The Trustees may also, at any time and from time to time, contract with any Persons, appointing such Persons exclusive or nonexclusive distributor or Principal Underwriter for the Shares of one or more of the Series or other securities to be issued by the Trust. Every such contract may contain such other terms as the Trustees may determine. (c) The Trustees are also empowered, at any time and from time to time, to contract with any Persons, appointing such Person(s) to serve as custodian(s), transfer agent and/or shareholder servicing agent for the Trust or one or more of its Series. Every such contract shall comply with such terms as may be required by the Trustees. (d) The Trustees are further empowered, at any time and from time to time, to contract with any Persons to provide such other services to the Trust or one or more of the Series, as the Trustees determine to be in the best interests of the Trust and the applicable Series. (e) The fact that: (i) any of the Shareholders, Trustees, or officers of the Trust is a shareholder, director, officer, partner, trustee, employee, Manager, adviser, Principal Underwriter, distributor, or affiliate or agent of or for any Person with which an advisory, management or administration contract, or Principal Underwriter's or distributor's contract, or transfer, shareholder servicing or other type of service contract may be made, or that (ii) any Person with which an advisory, management or administration contract or Principal Underwriter's or distributor's contract, or transfer, shareholder servicing or other type of service contract may be made also has an advisory, management or administration contract, or principal underwriter's or distributor's contract, or transfer, shareholder servicing or other service contract, or has other business or interests with any other Person, shall not affect the validity of any such contract or disqualify any Shareholder, Trustee or officer of the Trust from voting upon or executing the same, or create any liability or accountability to the Trust or its Shareholders, provided approval of each such contract is made pursuant to the applicable requirements of the 1940 Act. 11 ARTICLE V. Shareholders' Voting Powers and Meetings Section 1. Voting Powers. Subject to the provisions of Article III, Sections 5 and 6(d), the Shareholders shall have right to vote only (i) for the election or removal of Trustees as provided in Article IV, Section 1, and (ii) with respect to such additional matters relating to the Trust as may be required by the applicable provisions of the 1940 Act, including Section 16(a) thereof, and (iii) on such other matters as the Trustees may consider necessary or desirable. Each shareholder shall have one vote for each dollar (and a fractional vote for each fractional dollar) of the net asset value of each share (including fractional shares) held by such shareholder on the record date on each matter submitted to a vote at a meeting of shareholders. For purposes of this section, net asset value shall be determined pursuant to Section 3 of Article VIII of the Trustee's Bylaws as of the record date for such meeting set pursuant to Section 5 of such Bylaws. There shall be no cumulative voting in the election of Trustees. Votes may be made in person or by proxy. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. Section 2. Voting Power and Meetings. Meetings of the Shareholders may be called by the Trustees for the purposes described in Section 1 of this Article V. A meeting of Shareholders may be held at any place designated by the Trustees. Written notice of any meeting of Shareholders shall be given or caused to be given by the Trustees by delivering personally or mailing such notice not more than ninety (90), nor less than ten (10) days before such meeting, postage prepaid, stating the time and place of the meeting, to each Shareholder at the Shareholder's address as it appears on the records of the Trust. Whenever notice of a meeting is required to be given to a Shareholder under this Declaration of Trust, a written waiver thereof, executed before or after the meeting by such Shareholder or his or her attorney thereunto authorized and filed with the records of the meeting, or actual attendance at the meeting of Shareholders in person or by proxy, shall be deemed equivalent to such notice. Section 3. Quorum and Required Vote. Except as otherwise provided by the Investment Company Act of 1940 or in the Trust's Declaration of Trust, at any meeting of shareholders, the presence in person or by proxy of the holders of record of Shares issued and outstanding and entitled to vote representing more than fifty percent of the total combined net asset value of all Shares issued and outstanding and entitled to vote shall constitute a quorum for the transaction of any business at the meeting. Any meeting of Shareholders may be adjourned from time to time by a majority of the votes properly cast upon the question of adjourning a meeting to another date and time, whether or not a quorum is present, and the meeting may be held as adjourned within a reasonable time after the date set for the original meeting without further notice. Subject 12 to the provisions of Article III, Section 6(d) and the applicable provisions of the 1940 Act, when a quorum is present at any meeting, a majority vote of the combined net asset value of all shares entitled to vote that are present in person or by proxy shall decide any questions, except only a plurality vote shall be necessary to elect trustees. Section 4. Action by Written Consent. Any action taken by Shareholders may be taken without a meeting if all the holders of Shares entitled to vote on the matter are provided with not less than 7 days written notice thereof and written consent to the action is filed with the records of the meetings of Shareholders by the holders of the number of votes that would be required to approve the matter as provided in Article V, Section 3. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders. Section 5. Record Dates. For the purpose of determining the Shareholders who are entitled to vote or act at any meeting or any adjournment thereof, the Trustees may fix a time, which shall be not more than ninety (90) nor less than ten (10) days before the date of any meeting of Shareholders, as the record date for determining the Shareholders having the right to notice of and to vote at such meeting and any adjournment thereof, and in such case only Shareholders of record on such record date shall have such right, notwithstanding any transfer of shares on the books of the Trust after the record date. For the purpose of determining the Shareholders who are entitled to receive payment of any dividend or of any other distribution, the Trustees may fix a date, which shall be before the date for the payment of such dividend or distribution, as the record date for determining the Shareholders having the right to receive such dividend or distribution. Nothing in this Section shall be construed as precluding the Trustees from setting different record dates for different Series. ARTICLE VI. Net Asset Value, Distributions, and Redemptions Section 1. Determination of Net Asset Value, Net Income, and Distributions. Subject to Article III, Section 6 hereof, the Trustees, in their absolute discretion, may prescribe and shall set forth in the By-laws or in a duly adopted resolution of the Trustees such bases and time for determining the per Share net asset value of the Shares of any Series and the declaration and payment of dividends and distributions on the Shares of any Series, as they may deem necessary or desirable. Section 2. Redemptions and Repurchases. The Trust shall purchase such Shares as are offered by any Shareholder for redemption, upon receipt by the Trust or a Person designated by the Trust that the Trust redeem such Shares or in accordance with such procedures for redemption as the Trustees may from time to time authorize; and the Trust will pay therefor the net asset value thereof, in accordance with the By-Laws and the applicable provisions of the 1940 Act. Payment for said Shares shall be made by the Trust to the Shareholder within seven days after the date on which the request for redemption is received in proper form. The obligation set forth in this Section 2 is subject to the provision that in the event that any time the New York Stock Exchange (the "Exchange") is closed for other than weekends or holidays, or if permitted by the Rules of the Commission during periods when trading on the Exchange is restricted or during any emergency which makes it impracticable for the Trust to dispose of the investments of the applicable Series or to determine fairly the value of the net assets held with respect to such Series or during any other period permitted by order of the Commission for the protection of investors, such obligations may be suspended or postponed by the Trustees. 13 The redemption price may in any case or cases be paid in cash or wholly or partly in kind in accordance with Rule 18f-1 under the 1940 Act if the Trustees determine that such payment is advisable in the interest of the remaining Shareholders of the Series of which the Shares are being redeemed. Subject to the foregoing, the selection and quantity of securities or other property so paid or delivered as all or part of the redemption price shall be determined by or under authority of the Trustees. In no case shall the Trust be liable for any delay of any corporation or other Person in transferring securities selected for delivery as all or part of any payment in kind. Section 3. Redemptions at the Option of the Trust. The Trust shall have the right, at its option, upon 30 days notice to the affected Shareholder at any time to redeem Shares of any Shareholder at the net asset value thereof as described in Section 1 of this Article VI: (i) if at such time such Shareholder owns Shares of any Series having an aggregate net asset value of less than a minimum value determined from time to time by the Trustees; or (ii) to the extent that such Shareholder owns Shares of a Series equal to or in excess of a maximum percentage of the outstanding Shares of such Series determined from time to time by the Trustees; or (iii) to the extent that such Shareholder owns Shares equal to or in excess of a maximum percentage, determined from time to time by the Trustees, of the outstanding Shares of the Trust. Section 4. Transfer of Shares. The Trust shall transfer shares held of record by any Person to any other Person upon receipt by the Trust or a Person designated by the Trust of a written request therefore in such form and pursuant to such procedures as may be approved by the Trustees. ARTICLE VII. Compensation and Limitation of Liability Section 1. Compensation of Trustees. The Trustees as such shall be entitled to reasonable compensation from the Trust, and they may fix the amount of such compensation from time to time. Nothing herein shall in any way prevent the employment of any Trustee to provide advisory, management, legal, accounting, investment banking or other services to the Trust and to be specially compensated for such services by the Trust. Section 2. Indemnification and Limitation of Liability. The Trustees shall not be responsible or liable in any event for any neglect or wrong-doing of any officer, agent, employee, Manager or Principal Underwriter of the Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee, and, subject to the provisions of the Bylaws, the Trust out of its assets may indemnify and hold harmless each and every Trustee and officer of the Trust from 14 and against any and all claims, demands, costs, losses, expenses, and damages whatsoever arising out of or related to such Trustee's or officer's performance of his or her duties as a Trustee or officer of the Trust; provided that nothing herein contained shall indemnify, hold harmless or protect any Trustee or officer from or against any liability to the Trust or any Shareholder to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office. Every note, bond, contract, instrument, certificate or undertaking and every other act or thing whatsoever issued, executed or done by or on behalf of the Trust or the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been issued, executed or done only in or with respect to their or his or her capacity as Trustees or Trustee, and such Trustees or Trustee shall not be personally liable thereon. Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety. The exercise by the Trustees of their powers hereunder shall be binding upon everyone interested in or dealing with the Trust. A Trustee shall be liable to the Trust and to any Shareholder solely for his or her own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the office of Trustee, and shall not be liable for errors of judgment or mistakes of fact or law. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, and shall be under no liability for any act or omission in accordance with such advice nor for failing to follow such advice. The Trustees shall not be required to give any bond as such, nor any surety if a bond is required. Section 4. Insurance. The Trustees shall be entitled and empowered to the fullest extent permitted by law to purchase with Trust assets insurance for liability and for all expenses reasonably incurred or paid or expected to be paid by a Trustee or officer in connection with any claim, action, suit or proceeding in which he or she becomes involved by virtue of his or her capacity or former capacity with the Trust, whether or not the Trust would have the power to indemnify him or her against such liability under the provisions of this Article. ARTICLE VIII. Miscellaneous Section 1. Liability of Third Persons Dealing with Trustees. No Person dealing with the Trustees shall be bound to make any inquiry concerning the validity of any transaction made or to be made by the Trustees or to see to the application of any payments made or property transferred to the Trust or upon its order. 15 Section 2. Termination of Trust or Series. Unless terminated as provided herein, the Trust shall continue without limitation of time. The Trust may be terminated at any time by the Trustees upon 60 days prior written notice to the Shareholders. Any Series may be terminated at any time by the Trustees upon 60 days prior written notice to the Shareholders of that Series. Upon termination of the Trust (or any Series, as the case may be), after paying or otherwise providing for all charges, taxes, expenses and liabilities held, severally, with respect to each Series (or the applicable Series, as the case may be), whether due or accrued or anticipated as may be determined by the Trustees, the Trust shall, in accordance with such procedures as the Trustees consider appropriate, reduce the remaining assets held, severally, with respect to each Series (or the applicable Series, as the case may be), to distributable form in cash or shares or other securities, and any combination thereof, and distribute the proceeds held with respect to each Series (or the applicable Series, as the case may be), to the Shareholders of that Series, as a Series, ratably according to the number of Shares of that Series held by the several Shareholders on the date of termination. Section 3. Merger and Consolidation. The Trustees may cause (i) the Trust or one or more of its Series to the extent consistent with applicable law to be merged into or consolidated with another Trust, series or Person, (ii) the Shares of the Trust or any Series to be converted into beneficial interests in another business trust (or series thereof), (iii) the Shares to be exchanged for assets or property under or pursuant to any state or federal statute to the extent permitted by law or (iv) a sale of assets of the Trust or one or more of its Series. Such merger or consolidation, Share conversion, Share exchange or sale of assets must be authorized by vote as provided in Article V, Section 3 herein; provided that in all respects not governed by statute or applicable law, the Trustees shall have power to prescribe the procedure necessary or appropriate to accomplish a sale of assets, Share exchange, merger or consolidation including the power to create one or more separate business trusts to which all or any part of the assets, liabilities, profits or losses of the Trust may be transferred and to provide for the conversion of Shares of the Trust or any Series into beneficial interests in such separate business trust or trusts (or series thereof). Section 4. Amendments. This Declaration of Trust may be restated and/or amended at any time by an instrument in writing signed by a majority of the Trustees then holding office. Any such restatement and/or amendment hereto shall be effective immediately upon execution and approval. The Certificate of Trust of the Trust may be restated and/or amended by a similar procedure, and any such restatement and/or amendment shall be effective immediately upon filing with the Office of the Secretary of State of the State of Delaware or upon such future date as may be stated therein. Section 5. Filing of Copies, References, Headings. The original or a copy of this instrument and of each restatement and/or amendment hereto shall be kept at the office of the Trust where it may be inspected by any Shareholder. Anyone dealing with the Trust may rely on a certificate by an officer of the Trust as to whether or not any such restatements and/or amendments have been made and as to any matters in connection with the Trust hereunder; and, with the same effect 16 as if it were the original, may rely on a copy certified by an officer of the Trust to be a copy of this instrument or of any such restatements and/or amendments. In this instrument and in any such restatements and/or amendment, references to this instrument, and all expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to this instrument as amended or affected by any such restatements and/or amendments. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. This instrument may be executed in any number of counterparts each of which shall be deemed an original. Section 6. Applicable Law. This Agreement and Declaration of Trust is created under and is to be governed by and construed and administered according to the laws of the State of Delaware and the Delaware Business Trust Act, as amended from time to time (the "Act"). The Trust shall be a Delaware business trust pursuant to such Act, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a business trust. Section 7. Provisions in Conflict with Law or Regulations. (a) The provisions of the Declaration of Trust are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the regulated investment company provisions of the Internal Revenue Code or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of the Declaration of Trust; provided, however, that such determination shall not affect any of the remaining provisions of the Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination. (b) If any provision of the Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of the Declaration of Trust in any jurisdiction. Section 8. Business Trust Only. It is the intention of the Trustees to create a business trust pursuant to the Act, and thereby to create only the relationship of trustee and beneficial owners within the meaning of such Act between the Trustees and each Shareholder. It is not the intention of the Trustees to create a general partnership, limited partnership, joint stock association, corporation, bailment, joint venture, or any form of legal relationship other than a business trust pursuant to such Act. Nothing in this Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association. Section 9. Use of the Name "The Vanguard Group, Inc.". The name "The Vanguard Group, Inc." and any variants thereof and all rights to the use of the name "The Vanguard Group, Inc." or any variants thereof shall be the sole and exclusive property of The Vanguard Group, Inc. ("VGI"). VGI has permitted the 17 use by the Trust of the identifying word "Vanguard" and the use of the name "Vanguard" as part of the name of the Trust and the name of any Series of Shares. Upon the Trust's withdrawal from the Amended and Restated Funds' Service Agreement among the Trust, the other investment companies within the Vanguard Group of Investment Companies and VGI, and upon the written request of VGI, the Trust and any Series of Shares thereof shall cease to use or in any way to refer to itself as related to "The Vanguard Group, Inc." or any variant thereof. 18 IN WITNESS WHEREOF, the Trustees named below do hereby make and enter into this Declaration of Trust as of the 19th day of July 2002. For and on behalf of the Delaware business trusts listed on Appendix A attached hereto.* /s/ John J. Brennan /s/ Burton G. Malkiel - ---------------------------------- ---------------------------------- John J. Brennan Burton G. Malkiel /s/ Charles D. Ellis /s/ Alfred M. Rankin, Jr. - ---------------------------------- ---------------------------------- Charles D. Ellis Alfred M. Rankin, Jr. /s/ Rajiv L. Gupta /s/ J. Lawrence Wilson - ---------------------------------- ---------------------------------- Rajiv L. Gupta J. Lawrence Wilson /s/ JoAnn Heffernan Heisen - ---------------------------------- JoAnn Heffernan Heisen THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS 100 Vanguard Boulevard Malvern, PA 19355 * Mr. Malkiel is not signing as a trustee of Vanguard Fenway Funds. Mr. Gupta is not signing as a trustee of Vanguard Fenway Funds, Vanguard Municipal Bond Funds, and the Vanguard California, Florida, Massachusetts, New Jersey, New York, Ohio and Pennsylvania Tax-Exempt Funds. 19 TABLE OF CONTENTS Page ARTICLE I. Name and Definitions............................................. 1 Section 1. Name................................................... 1 Section 2. Definitions............................................ 1 (a) The Trust....................................................... 1 (b) Trust Property.................................................. 1 (c) Trustees........................................................ 1 (d) Shares.......................................................... 1 (e) Shareholder..................................................... 2 (f) Person.......................................................... 2 (g) 1940 Act........................................................ 2 (h) Commission and Principal Underwriter............................ 2 (i) Declaration of Trust............................................ 2 (j) By-Laws......................................................... 2 (k) Interested Person............................................... 2 (l) Investment Adviser.............................................. 2 (m) Series.......................................................... 2 ARTICLE II. Purpose of Trust.............................................. 2 ARTICLE III. Shares....................................................... 3 Section 1. Division of Beneficial Interest............................. 3 Section 2. Ownership of Shares......................................... 3 Section 3. Investments in the Trust.................................... 3 Section 4. Status of Shares and Limitation of Personal Liability................................................. 4 Section 5. Power of Board of Trustees to Change Provisions Relating to Shares............................. 4 Section 6. Establishment and Designation of Shares..................... 4 (a) Assets Held with Respect to a Particular Series............... 4 (b) Liabilities Held with Respect to a Particular Series........................................... 5 (c) Dividends, Distributions, Redemptions, and Repurchases................................................. 5 (d) Voting........................................................ 6 (e) Equality...................................................... 6 (f) Fractions..................................................... 6 (g) Exchange Privilege............................................ 6 (h) Combination of Series......................................... 6 (i) Elimination of Series......................................... 6 ARTICLE IV. The Board of Trustees......................................... 6 Section 1. Number, Election and Tenure.................................. 6 Section 2. Effect of Death, Resignation, etc. of a Trustee............................................... 7 Section 3. Powers....................................................... 7 Section 4. Payment of Expenses by the Trust............................. 10 Section 5. Ownership of Assets of the Trust............................. 10 Section 6. Service Contracts............................................ 10 ARTICLE V. Shareholders' Voting Powers and Meetings...................... 11 Section 1. Voting Powers................................................. 12 Section 2. Voting Power and Meetings..................................... 12 Section 3. Quorum and Required Vote...................................... 12 Section 4. Action by Written Consent..................................... 12 Section 5. Record Dates.................................................. 13 ARTICLE VI. Net Asset Value, Distributions, and Redemptions............... 13 Section 1. Determination of Net Asset Value, Net Income, and Distributions................................... 13 Section 2. Redemptions and Repurchases................................... 13 Section 3. Redemptions at the Option of the Trust........................ 14 Section 4. Transfer of Shares............................................ 14 ARTICLE VII. Compensation and Limitation of Liability...................... 14 Section 1. Compensation of Trustees...................................... 14 Section 2. Indemnification and Limitation of Liability................... 14 Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety................................... 15 Section 4. Insurance..................................................... 15 ARTICLE VIII. Miscellaneous............................................... 15 Section 1. Liability of Third Persons Dealing with Trustees............................................... 15 Section 2. Termination of Trust or Series................................ 15 Section 3. Merger and Consolidation...................................... 16 Section 4. Amendments.................................................... 16 Section 5. Filing of Copies, References, Headings........................ 16 Section 6. Applicable Law................................................ 16 Section 7. Provisions in Conflict with Law or Regulations................ 17 Section 8. Business Trust Only........................................... 17 Section 9. Use of the Name "The Vanguard Group, Inc.".................... 17 (ii) EX-99.D 4 jpmorganchase052002.txt JPMORGANCHASE ADVISORY CONTRACT GLOBAL CUSTODY AGREEMENT This Amended and Restated Agreement, dated June 25, 2001, is between THE CHASE MANHATTAN BANK ("Bank"), a New York banking corporation with a place of business at 4 MetroTech Center, Brooklyn, New York 11245; and each of the open-end management investment companies listed on Exhibit 1 of this Agreement, registered with the U.S. Securities and Exchange Commission under the Investment Company Act of 1940, organized as Delaware business trusts (each a "Trust"), severally and for and on behalf of certain of their respective portfolios listed on Exhibit 1 (each a "Fund"), each Trust and their respective Funds with a place of business at P.O. Box 2600, Valley Forge, PA 19482. Each Trust for which Bank serves as custodian under this Agreement, shall individually be referred to as "Customer". 1. INTENTION OF THE PARTIES; DEFINITIONS 1.1 INTENTION OF THE PARTIES. (a) This Agreement sets out the terms governing custodial, settlement and certain other associated services offered by Bank to Customer. Bank shall be responsible for the performance of only those duties that are set forth in this Agreement or expressly contained in Instructions that are consistent with the provisions of this Agreement and with Bank's operations and procedures. Customer acknowledges that Bank is not providing any legal, tax or investment advice in providing the services hereunder. (b) Investing in foreign markets may be a risky enterprise. The holding of Global Assets and cash in foreign jurisdictions may involve risks of loss or other special features. Bank shall not be liable for any loss that results from the general risks of investing or Country Risk. 1.2 DEFINITIONS. (a) As used herein, the following terms have the meaning hereinafter stated. "ACCOUNT" has the meaning set forth in Section 2.1 of this Agreement. "AFFILIATE" means an entity controlling, controlled by, or under common control with, Bank. "AFFILIATED SUBCUSTODIAN" means a Subcustodian that is an Affiliate. "APPLICABLE LAW" means any statute, whether national, state or local, applicable in the United States or any other country, the rules of the treaty establishing the European Community, other applicable treaties, any other law, rule, regulation or interpretation of any governmental entity, any applicable common law, and any decree, injunction, judgment, order, ruling, or writ of any governmental entity. "AUTHORIZED PERSON" means any person (including an investment manager or other agent) who has been designated by written notice from Customer or its designated agent to act on behalf of Customer hereunder. Such persons shall continue to be Authorized Persons until such time as Bank receives Instructions from Customer or its designated agent that any such person is no longer an Authorized Person. "BANK INDEMNITEES" means Bank, its Subcustodians, and their respective nominees, directors, officers, employees and agents. "BANK'S LONDON BRANCH" means the London branch office of The Chase Manhattan Bank. "CASH ACCOUNT" has the meaning set forth in Section 2.1(a)(ii). "CORPORATE ACTION" means any subscription right, bonus issue, stock repurchase plan, redemption, exchange, tender offer, or similar matter with respect to a Financial Asset in the Securities Account that requires discretionary action by the holder, but does not include proxy voting. "COUNTRY RISK" means the risk of investing or holding assets in a particular country or market, including, but not limited to, risks arising from: nationalization, expropriation or other governmental actions; the country's financial infrastructure, including prevailing custody and settlement practices; laws applicable to the safekeeping and recovery of Financial Assets and cash held in custody; the regulation of the banking and securities industries, including changes in market rules; currency restrictions, devaluations or fluctuations; and market conditions affecting the orderly execution of securities transactions or the value of assets. "CUSTOMER" means individually each Trust and their respective Funds as listed on Exhibit 1 hereto. "ENTITLEMENT HOLDER" means the person named on the records of a Securities Intermediary as the person having a Securities Entitlement against the Securities Intermediary. "FINANCIAL ASSET" means, as the context requires, either the asset itself or the means by which a person's claim to it is evidenced, including a Security, a security certificate, or a Securities Entitlement. "Financial Asset" includes any Global Assets but does not include cash. "FUND" means each portfolio of each Trust and listed on Exhibit 1 hereto. 2 "GLOBAL ASSET" means any "Financial Asset" (a) for which the principal trading market is located outside of the United States; (b) for which presentment for payment is to be made outside of the United States; or (c) which is acquired outside of the United States. "INSTRUCTIONS" has the meaning set forth in Section 3.1 of this Agreement. "LIABILITIES" means any liabilities, losses, claims, costs, damages, penalties, fines, obligations, or expenses of any kind whatsoever (including, without limitation, reasonable attorneys', accountants', consultants' or experts' fees and disbursements). "SECURITIES" means stocks, bonds, rights, warrants and other negotiable and non-negotiable instruments, whether issued in certificated or uncertificated form, that are commonly traded or dealt in on securities exchanges or financial markets. "Securities" also means other obligations of an issuer, or shares, participations and interests in an issuer recognized in the country in which it is issued or dealt in as a medium for investment and any other property as may be acceptable to Bank for the Securities Account. "SECURITIES ACCOUNT" means each Securities custody account on Bank's records to which Financial Assets are or may be credited pursuant hereto. "SECURITIES DEPOSITORY" has the meaning set forth in Section 5.1 of this Agreement. "SECURITIES ENTITLEMENT" means the rights and property interest of an Entitlement Holder with respect to a Financial Asset as set forth in Part 5 of Article 8 of the Uniform Commercial Code of the State of New York, as the same may be amended from time to time. "SECURITIES INTERMEDIARy" means Bank, a Subcustodian, a Securities Depository, and any other financial institution which in the ordinary course of business maintains custody accounts for others and acts in that capacity. "SUBCUSTODIAN" has the meaning set forth in Section 5.1 and includes Affiliated Subcustodians. "TRUST" means each open-end investment company organized as a Delaware business trust and listed on Exhibit 1 hereto. (b) All terms in the singular shall have the same meaning in the plural unless the context otherwise provides and visa versa. 3 2. WHAT BANK IS REQUIRED TO DO 2.1 Set Up Accounts. - --- ---------------- (a) Bank shall establish and maintain the following accounts ("Accounts"): (i) a Securities Account in the name of Customer on behalf of each Fund for Financial Assets, which may be received by Bank or its Subcustodian for the account of Customer, including as an Entitlement Holder; and (ii) an account in the name of Customer ("Cash Account") for any and all cash in any currency received by Bank or its Subcustodian for the account of Customer. Notwithstanding paragraph (ii), cash held in respect of those markets where Customer is required to have a cash account in its own name held directly with the relevant Subcustodian shall be held in that manner and shall not be part of the Cash Account. Bank shall notify Customer prior to the establishment of such an account. (b) At the request of Customer, additional Accounts may be opened in the future, which shall be subject to the terms of this Agreement. 2.2 Cash Account. - --- ------------- Except as otherwise provided in Instructions acceptable to Bank, all cash held in the Cash Account shall be deposited during the period it is credited to the Account in one or more deposit accounts at Bank or at Bank's London Branch. Any cash so deposited with Bank's London Branch shall be payable exclusively by Bank's London Branch in the applicable currency, subject to compliance with any Applicable Law, including, without limitation, any restrictions on transactions in the applicable currency imposed by the country of the applicable currency. 2.3 Segregation of Assets; Nominee Name. - --- ------------------------------------ (a) Bank shall identify in its records that Financial Assets credited to Customer's Securities Account belong to Customer on behalf of the relevant Fund (except as otherwise may be agreed by Bank and Customer). (b) To the extent permitted by Applicable Law or market practice, Bank shall require each Subcustodian to identify in its own records that Financial Assets credited to Customer's Securities Account belong to customers of Bank, such that it is readily apparent that the Financial Assets do not belong to Bank or the Subcustodian. (c) Bank is authorized, in its discretion, to hold in bearer form, such Financial 4 Assets as are customarily held in bearer form or are delivered to Bank or its Subcustodian in bearer form; and to register in the name of the Customer, Bank, a Subcustodian, a Securities Depository, or their respective nominees, such Financial Assets as are customarily held in registered form. Customer authorizes Bank or its Subcustodian to hold Financial Assets in omnibus accounts and shall accept delivery of Financial Assets of the same class and denomination as those deposited with Bank or its Subcustodian. 2.4 Settlement of Trades. - --- --------------------- When Bank receives an Instruction directing settlement of a trade in Financial Assets that includes all information required by Bank, Bank shall use reasonable care to effect such settlement as instructed. Settlement of purchases and sales of Financial Assets shall be conducted in accordance with prevailing standards of the market in which the transaction occurs. The risk of loss shall be Customer's whenever Bank delivers Financial Assets or payment in accordance with applicable market practice in advance of receipt or settlement of the expected consideration. In the case of the failure of Customer's counterparty to deliver the expected consideration as agreed, Bank shall contact the counterparty to seek settlement and, if the settlement is not received, notify Customer, but Bank shall not be obligated to institute legal proceedings, file proof of claim in any insolvency proceeding, or take any similar action. 2.5 Contractual Settlement Date Accounting. - --- --------------------------------------- (a) Bank shall effect book entries on a "contractual settlement date accounting" basis as described below with respect to the settlement of trades in those markets where Bank generally offers contractual settlement day accounting and shall notify Customer of these markets from time to time. (i) Sales: On the settlement date for a sale, Bank shall credit the Cash Account with the sale proceeds of the sale and transfer the relevant Financial Assets to an account pending settlement of the trade if not already delivered. (ii) Purchases: On the settlement date for the purchase (or earlier, if market practice requires delivery of the purchase price before the settlement date), Bank shall debit the Cash Account with the settlement monies and credit a separate account. Bank then shall post the Securities Account as awaiting receipt of the expected Financial Assets. Customer shall not be entitled to the delivery of Financial Assets that are awaiting receipt until Bank or a Subcustodian actually receives them. Bank reserves the right to restrict in good faith the availability of contractual day settlement accounting for credit reasons. Bank, whenever reasonably possible, will notify Customer prior to imposing such restrictions. 5 (b) Bank may (in its discretion) upon at least 48 hours prior oral or written notification to Customer, reverse any debit or credit made pursuant to Section 2.5(a) prior to a transaction's actual settlement, and Customer shall be responsible for any costs or liabilities resulting from such reversal. Customer acknowledges that the procedures described in this sub-section are of an administrative nature, and Bank does not undertake to make loans and/or Financial Assets available to Customer. 2.6 Actual Settlement Date Accounting. - --- ---------------------------------- With respect to any sale or purchase transaction that is not posted to the Account on the contractual settlement date as referred to in Section 2.5, Bank shall post the transaction on the date on which the cash or Financial Assets received as consideration for the transaction is actually received by Bank. 2.7 Income Collection; Autocredit. - --- ------------------------------ (a) Bank shall credit the Cash Account with income and redemption proceeds on Financial Assets in accordance with the times notified by Bank from time to time on or after the anticipated payment date, net of any taxes that are withheld by Bank or any third party. Where no time is specified for a particular market, income and redemption proceeds from Financial Assets shall be credited only after actual receipt and reconciliation. Bank may reverse such credits upon at least 48 hours prior oral or written notification to Customer when Bank believes that the corresponding payment shall not be received by Bank within a reasonable period or such credit was incorrect. (b) Bank shall make reasonable endeavors in its discretion to contact appropriate parties to collect unpaid interest, dividends or redemption proceeds, but neither Bank nor its Subcustodians shall be obliged to file any formal notice of default, institute legal proceedings, file proof of claim in any insolvency proceeding, or take any similar action. 2.8 Fractions/ Redemptions by Lot. - --- ------------------------------ Bank may sell fractional interests in Financial Assets and credit the Cash Account with the proceeds of the sale. If some, but not all, of an outstanding class of Financial Asset is called for redemption, Bank may allot the amount redeemed among the respective beneficial holders of such class of Financial Asset in any manner Bank deems to be fair and equitable. 2.9 Presentation of Coupons; Certain Other Ministerial Acts. - --- -------------------------------------------------------- Until Bank receives Instructions to the contrary, Bank shall: (a) present all Financial Assets for which Bank has received notice of a call for redemption or that have otherwise matured, and all income and interest coupons and other income items that call for payment upon 6 presentation; (b) execute in the name of Customer such certificates as may be required to obtain payment in respect of Financial Assets; and (c) exchange interim or temporary documents of title held in the Securities Account for definitive documents of title. 2.10 Corporate Actions. - ---- ------------------ (a) Bank shall follow Corporate Actions and advise Customer of those Corporate Actions of which Bank's central corporate actions department receives notice from the issuer or from the Securities Depository in which such Financial Assets are maintained or notice published in publications and reported in reporting services routinely used by Bank for this purpose. (b) If an Authorized Person fails to provide Bank with timely Instructions with respect to any Corporate Action, neither Bank nor its Subcustodians or their respective nominees shall take any action in relation to that Corporate Action, except as otherwise agreed in writing by Bank and Customer or as may be set forth by Bank as a default action in the advice it provides under Section 2.10 (a) with respect to that Corporate Action. 2.11 Proxy Voting. - ---- ------------- (a) Subject to and upon the terms of this sub-section, Bank shall provide Customer with information which it receives on matters to be voted upon at meetings of holders of Financial Assets ("Notifications"), and Bank shall act in accordance with Customer's Instructions in relation to such Notifications ("the active proxy voting service"). (b) The following provisions relate to proxy voting services with respect to Global Assets: (i) If information is received by Bank at its proxy voting department too late to permit timely voting by Customer, Bank's only obligation shall be to provide to Customer, so far as reasonably practicable, a Notification (or summary information concerning a Notification) on an "information only" basis. (ii) The active proxy voting service is available only in certain markets, details of which are available from Bank on request. Provision of the active proxy voting service is conditional upon receipt by Bank of a duly completed enrollment form as well as additional documentation that may be required for certain markets. (iii)Bank reserves the right to provide Notifications or parts thereof in the language received. Bank shall attempt in good faith to provide accurate and complete 7 Notifications, whether or not translated. (iv) Customer acknowledges that Notifications and other information furnished pursuant to the active proxy voting service ("information") are proprietary to Bank and that Bank owns all intellectual property rights, including copyrights and patents, embodied therein. Accordingly, Customer shall not make any use of such information except in connection with the active proxy voting service. (v) In markets where the active proxy voting service is not available or where Bank has not received a duly completed enrollment form or other relevant documentation, Bank shall not provide Notifications to Customer but shall endeavor to act upon Instructions to vote on matters before meetings of holders of Financial Assets where it is reasonably practicable for Bank (or its Subcustodians or nominees as the case may be) to do so and where such Instructions are received in time for Bank to take timely action (the "passive proxy voting service"). (c) Bank shall act upon Instructions to vote on matters referred to in a Notification, provided Instructions are received by Bank at its proxy voting department by the deadline referred to in the relevant Notification. If Instructions are not received in a timely manner, Bank shall not be obligated to vote on the matter, but shall notify Customer accordingly. (d) Customer acknowledges that the provision of proxy voting services (whether active or passive) may be precluded or restricted under a variety of circumstances. These circumstances include, but are not limited to: (i) the Financial Assets being on loan or out for registration, (ii) the pendency of conversion or another corporate action, or (iii) Financial Assets being held at Customer's request in a name not subject to the control of Bank or its Subcustodian, in a margin or collateral account at Bank or another bank or broker, or otherwise in a manner which affects voting, local market regulations or practices, or restrictions by the issuer. Additionally, in some cases Bank may be required to vote all shares held for a particular issue for all of Bank's customers in the same way. Where this is the case Bank, in the Notification, shall inform Customer. (e) Notwithstanding the fact that Bank may act in a fiduciary capacity with respect to Customer under other agreements or otherwise hereunder, in performing active or passive voting proxy services Bank shall be acting solely as the agent of Customer, and shall not exercise any discretion with regard to such proxy services or vote any proxy except when directed by an Authorized Person. 2.12 Statements and Information Available On-Line. - ---- --------------------------------------------- (a) Bank will send, or make available on-line, to Customer, at times mutually agreed, a statement of account in Bank's standard format for each Account maintained by Customer with Bank, identifying the Financial Assets and cash held in each Account. Bank also will provide to Customer, upon request, the capability to reformat the information contained in each statement of account. In addition, Bank will send, or make available on-line, to Customer an advice or notification of any transfers of cash or 8 Financial Assets with respect to each Account. Bank will not be liable with respect to any matter set forth in those portions of any such statement of account or advice (or reasonably implied therefrom) to which Customer has not given Bank a written exception or objection within sixty (60) days of receipt of such statement, provided such matter is not the result of Bank's willful misconduct or bad faith. (b) Prices and other information obtained from third parties which may be contained in any statement sent to Customer have been obtained from sources Bank believes to be reliable. Bank does not, however, make any representation as to the accuracy of such information or that the prices specified necessarily reflect the proceeds that would be received on a disposal of the relevant Financial Assets. (c) Customer understands that records and reports, other than statements of account, that are available to it on-line on a real-time basis may not be accurate due to mis-postings, delays in updating Account records, and other causes. Bank will not be liable for any loss or damage arising out of the inaccuracy of any such records or reports that are accessed on-line on a real-time basis. 2.13 Access to Bank's Records. - ---- ------------------------- (a) Bank shall allow Customer and Customer's independent public accountants such reasonable access to the records of Bank relating to Financial Assets as is required in connection with their examination of books and records pertaining to Customer's affairs. Subject to restrictions under Applicable Law, Bank also shall obtain an undertaking to permit Customer's independent public accountants reasonable access to the records of any Subcustodian of Securities held in the Securities Account as may be required in connection with such examination. (b) Upon reasonable request of Customer, Bank shall provide Customer with a copy of Bank's report prepared in compliance with the requirements of Statement of Auditing Standards No. 70 issued by the American Institute of Certified Public Accountants, as it may be amended from time to time. 2.14 Maintenance of Financial Assets at Bank and at Subcustodian Locations. - ---- ---------------------------------------------------------------------- (a) Unless Instructions require another location acceptable to Bank, Global Assets shall be held in the country or jurisdiction in which their principal trading market is located, where such Global Assets may be presented for payment, where such Financial Assets were acquired, or where such Financial Assets are held. Bank reserves the right to refuse to accept delivery of Global Assets or cash in countries and jurisdictions other than those referred to in Schedule 1 to this Agreement, as in effect from time to time. (b) Bank shall not be obliged to follow an Instruction to hold Financial Assets with, or have them registered or recorded in the name of, any person not chosen by Bank. 9 However, if Customer does instruct Bank to hold Securities with or register or record Securities in the name of a person not chosen by Bank, the consequences of doing so are at Customer's own risk and Bank shall not be liable therefor. 2.15 Tax Reclaims. - ---- ------------- Bank shall provide tax reclamation services as provided in Section 8.2. 2.16 Foreign Exchange Transactions. - ----------------------------------- To facilitate the administration of Customer's trading and investment activity, Bank may, but shall not be obliged to, enter into spot or forward foreign exchange contracts with Customer, or an Authorized Person, and may also provide foreign exchange contracts and facilities through its Affiliates or Subcustodians. Instructions, including standing instructions, may be issued with respect to such contracts, but Bank may establish rules or limitations concerning any foreign exchange facility made available. In all cases where Bank, its Affiliates or Subcustodians enter into a master foreign exchange contract that covers foreign exchange transactions for the Accounts, the terms and conditions of that foreign exchange contract and, to the extent not inconsistent, this Agreement, shall apply to such transactions. 3. INSTRUCTIONS 3.1 Acting on Instructions; Unclear Instructions. - --- --------------------------------------------- (a) Bank is authorized to act under this Agreement (or to refrain from taking action) in accordance with the instructions received by Bank, via telephone, telex, facsimile transmission, or other teleprocess or electronic instruction or trade information system acceptable to Bank ("Instructions"). Bank shall have no responsibility for the authenticity or propriety of any Instructions that Bank believes in good faith to have been given by Authorized Persons or which are transmitted with proper testing or authentication pursuant to terms and conditions that Bank may specify. Customer authorizes Bank to accept and act upon any Instructions received by it without inquiry. Customer shall indemnify the Bank Indemnitees against, and hold each of them harmless from, any Liabilities that may be imposed on, incurred by, or asserted against the Bank Indemnitees as a result of any action or omission taken in accordance with any Instructions or other directions upon which Bank is authorized to rely under the terms of this Agreement. (b) Unless otherwise expressly provided, all Instructions shall continue in full force and effect until canceled or superseded. 10 (c) Bank may (in its sole discretion and without affecting any part of this Section 3.1) seek clarification or confirmation of an Instruction from an Authorized Person and may decline to act upon an Instruction if it does not receive clarification or confirmation satisfactory to it. Bank shall not be liable for any loss arising from any delay while it seeks such clarification or confirmation. (d) In executing or paying a payment order Bank may rely upon the identifying number (e.g. Fedwire routing number or account) of any party as instructed in the payment order. Customer assumes full responsibility for any inconsistency within an Instruction between the name and identifying number of any party in payment orders issued to Bank in Customer's name. 3.2 Confirmation of Oral Instructions/ Security Devices. - --- ---------------------------------------------------- Any Instructions delivered to Bank by telephone shall promptly thereafter be confirmed in writing by an Authorized Person. Each confirmation is to be clearly marked "Confirmation." Bank shall not be liable for having followed such Instructions notwithstanding the failure of an Authorized Person to send such confirmation in writing or the failure of such confirmation to conform to the telephone Instructions received. Bank shall notify Customer as soon as reasonably practicable if Bank does not receive a written confirmation or if such written confirmation fails to conform to the telephone Instructions received. Either party may record any of their telephonic communications. Customer shall comply with any security procedures reasonably required by Bank from time to time with respect to verification of Instructions. Customer shall be responsible for safeguarding any test keys, identification codes or other security devices that Bank shall make available to Customer or any Authorized Person. 3.3 Instructions; Contrary to Law/Market Practice. - --- ---------------------------------------------- Bank need not act upon Instructions which it reasonably believes to be contrary to law, regulation or market practice but shall be under no duty to investigate whether any Instructions comply with Applicable Law or market practice. Bank shall notify Customer as soon as reasonably practicable if it does not act upon Instructions under this Section. 3.4 Cut-off Times. - --- -------------- Bank has established cut-off times for receipt of some categories of Instruction, which shall be made available to Customer. If Bank receives an Instruction after its established cut-off time, it shall attempt to act upon the Instruction on the day requested if Bank deems it practicable to do so or otherwise as soon as practicable on the next business day. 4. FEES, EXPENSES AND OTHER AMOUNTS OWING TO BANK 4.1 Fees and Expenses. - --- ------------------ 11 Customer shall pay Bank for its services hereunder the fees set forth in Schedule 2 hereto or such other amounts as may be agreed upon in writing from time to time. 4.2 Overdrafts. - --- ----------- If a debit to any currency in the Cash Account results in a debit balance in that currency then Bank may, in its discretion, advance an amount equal to the overdraft and such an advance shall be deemed a loan to Customer, payable on demand, bearing interest at the rate agreed by Customer and Bank for the Accounts from time to time, or, in the absence of such an agreement, at the rate charged by Bank from time to time, for overdrafts incurred by customers similar to Customer, from the date of such advance to the date of payment (both after as well as before judgment) and otherwise on the terms on which Bank makes similar advances available from time to time. Bank shall promptly notify Customer of such an advance. No prior action or course of dealing on Bank's part with respect to the settlement of transactions on Customer's behalf shall be asserted by Customer against Bank for Bank's refusal to make advances to the Cash Account or to settle any transaction for which Customer does not have sufficient available funds in the applicable currency in the Account. 4.3 Bank's Right Over Securities; Set-off. - --- ----------------------------- -------- (a) Customer grants Bank a security interest in and a lien on the Financial Assets held in the Securities Account of a particular Fund as shall have a fair market value equal to the aggregate amount of all overdrafts of such Fund, together with accrued interest, as security for any and all amounts which are now or become owing to Bank with respect to that Fund under any provision of this Agreement, whether or not matured or contingent ("Indebtedness"). Such lien and security interest shall be effective only so long as such advance, overdraft, or accrued interest thereon remains outstanding and Bank shall have all the rights and remedies of a secured party under the New York Uniform Commercial Code in respect of the repayment of the advance, overdraft or accrued interest. (b) Bank shall be further entitled to set any such Indebtedness off against any cash or deposit account of a Fund with Bank or any of its Affiliates of which the Fund is the beneficial owner, regardless of the currency involved. Bank shall notify Customer in advance of any such charge. 5. SUBCUSTODIANS, SECURITIES DEPOSITORIES, AND OTHER AGENTS 5.1 Appointment of Subcustodians; Use of Securities Depositories. - --- ------------------------------------------------------------- (a) Bank is authorized under this Agreement to act through and hold Customer's Global Assets with subcustodians, being at the date of this Agreement the entities listed in Schedule 1 and/or such other entities as Bank may appoint as subcustodians ("Subcustodians"). Bank shall use reasonable care, prudence and diligence in the selection 12 and continued appointment of such Subcustodians. In addition, Bank and each Subcustodian may deposit Global Assets with, and hold Global Assets in, any securities depository, settlement system, dematerialized book entry system or similar system (together a "Securities Depository") on such terms as such systems customarily operate and Customer shall provide Bank with such documentation or acknowledgements that Bank may require to hold the Global Assets in such systems. (b) Any agreement Bank enters into with a Subcustodian for holding Bank's customers' assets shall provide that: (i) such assets shall not be subject to any right, charge, security interest, lien or claim of any kind in favor of such Subcustodian or its creditors, except a claim of payment for their safe custody or administration or, in the case of cash deposits, except for liens or rights in favor of creditors of the Subcustodian arising under bankruptcy, insolvency or similar laws; (ii) beneficial ownership of such assets shall be freely transferable without the payment of money or value other than for safe custody or administration; (iii) adequate records will be maintained identifying the assets as belonging to Customer or as being held by a third party for the benefit of Customer; (iv) Customer and Customer's independent public accountants will be given reasonable access to those records or confirmation of the contents of those records; and (v) Customer will receive periodic reports with respect to the safekeeping of Customer's assets, including, but not limited to, notification of any transfer to or from Customer's account or a third party account containing assets held for the benefit of Customer. Where a Subcustodian deposits Securities with a Securities Depository, Bank shall cause the Subcustodian to identify on its records as belonging to Bank, as agent, the Securities shown on the Subcustodian's account at such Securities Depository. The foregoing shall not apply to the extent of any special agreement or arrangement made by Customer with any particular Subcustodian. (c) Bank shall have no responsibility for any act or omission by (or the insolvency of) any Securities Depository. In the event Customer incurs a loss due to the negligence, bad faith, willful misconduct, or insolvency of a Securities Depository, Bank shall make reasonable endeavors to seek recovery from the Securities Depository. 5.2 Liability for Subcustodians. - --- ---------------------------- (a) Subject to Section 7.1(b), Bank shall be liable for direct losses incurred by Customer that result from: (i) the failure by the Subcustodian to use reasonable care in the provision of custodial services by it in accordance with the standards prevailing in the relevant market or from the fraud or willful default of such Subcustodian in the provision of custodial services by it; or 13 (ii) the insolvency of any Affiliated Subcustodian. (b) Subject to Section 7.1(b) and Bank's duty to use reasonable care, prudence and diligence in the monitoring of a Subcustodian's financial condition as reflected in its published financial statements and other publicly available financial information concerning it, Bank shall not be responsible for the insolvency of any Subcustodian which is not a branch or an Affiliated Subcustodian. (c) Bank reserves the right to add, replace or remove Subcustodians. Bank shall give Customer prompt notice of any such action, which shall be advance notice if practicable. Upon request by Customer, Bank shall identify the name, address and principal place of business of any Subcustodian and the name and address of the governmental agency or other regulatory authority that supervises or regulates such Subcustodian. 5.3 Use of Agents. - --- -------------- (a) Bank may provide certain services under this Agreement through third parties. These third parties may be Affiliates. Except to the extent provided in Section 5.2 with respect to Subcustodians, Bank shall not be responsible for any loss as a result of a failure by any broker or any other third party that it selects and retains using reasonable care to provide ancillary services, such as pricing, proxy voting, and corporate action services, that it does not customarily provide itself. Nevertheless, Bank shall be liable for the performance of any such service provider selected by Bank that is an Affiliate to the same extent as Bank would have been liable if it performed such services itself. (b) Bank shall execute transactions involving Financial Assets of United States origin through a broker which is an Affiliate (i) in the case of the sale under Section 2.8 of a fractional interest or (ii) if an Authorized Person directs Bank to use the affiliated broker or otherwise requests that Bank select a broker for that transaction, unless, in either case, the Affiliate does not execute similar transactions in such Financial Assets. The affiliated broker may charge its customary commission (or retain its customary spread) with respect to either such transaction. 6. ADDITIONAL PROVISIONS RELATING TO CUSTOMER 6.1 Representations of Customer and Bank. - --- ------------------------------------- (a) Customer represents and warrants to Bank that: (i) it has full authority and power, and has obtained all necessary authorizations and consents, to deposit and control the Financial Assets and cash in the Accounts, to use Bank as its custodian in accordance with the terms of this Agreement and to incur indebtedness, pledge Financial Assets as contemplated by Section 4.3, and enter into foreign exchange transactions; and (ii) this Agreement is its legal, valid and binding obligation, enforceable in accordance with its terms and it has full 14 power and authority to enter into and has taken all necessary corporate action to authorize the execution of this Agreement. Bank may rely upon the above or the certification of such other facts as may be required to administer Bank's obligations hereunder. (b) Bank represents and warrants to Customer that this Agreement is its legal, valid and binding obligation, enforceable in accordance with its terms and it has full power and authority to enter into and has taken all necessary corporate action to authorize the execution of this Agreement. Customer may rely upon the above or the certification of such other facts as may be required to administer Customer's obligations hereunder. 6.2 Customer to Provide Certain Information to Bank. - --- ------------------------------------------------ Upon request, Customer shall promptly provide to Bank such information about itself and its financial status as Bank may reasonably request, including Customer's organizational documents and its current audited and unaudited financial statements. 6.3 Customer is Liable to Bank Even if it is Acting for Another Person. - --- ------------------------------------------------------------------- If Customer is acting as an agent for a disclosed or undisclosed principal in respect of any transaction, cash, or Financial Asset, Bank nevertheless shall treat Customer as its principal for all purposes under this Agreement. In this regard, Customer shall be liable to Bank as a principal in respect of any transactions relating to the Account. The foregoing shall not affect any rights Bank might have against Customer's principal. 6.4 Several Obligations of the Funds. - --- --------------------------------- This Agreement is executed on behalf of the Board of Trustees of each Fund as Trustees and not individually and the obligations of this Agreement are not binding upon any of the Trustees or shareholders individually but are binding only upon the assets and property of the Funds. With respect to the obligations of each Fund arising hereunder, Bank shall look for payment or satisfaction of any such obligation solely to the assets of the Fund to which such obligation relates as though Bank had separately contracted by separate written instrument with respect to each Fund. 7. WHEN BANK IS LIABLE TO CUSTOMER 7.1 Standard of Care; Liability. - --- ---------------------------- (a) Bank shall use reasonable care in performing its obligations under this Agreement. Bank shall not be in violation of this Agreement with respect to any matter as to which it has satisfied its obligation of reasonable care. (b) Bank shall be liable for Customer's direct damages to the extent they result from Bank's negligence, bad faith or willful misconduct in performing its duties as set out in 15 this Agreement and to the extent provided for in Section 5.2(a). Nevertheless, under no circumstances shall Bank be liable for any indirect, incidental, consequential or special damages (including, without limitation, lost profits) of any form incurred by any person, whether or not foreseeable and regardless of the type of action in which such a claim may be brought, with respect to the Accounts or Bank's performance hereunder or its role as custodian. (c) Customer shall indemnify the Bank Indemnitees against, and hold them harmless from, any Liabilities that may be imposed on, incurred by or asserted against any of the Bank Indemnitees in connection with or arising out of Bank's performance under this Agreement, provided the Bank Indemnitees have not acted with negligence or bad faith or engaged in fraud or willful misconduct in connection with the Liabilities in question. Nevertheless, Customer shall not be obligated to indemnify any Bank Indemnitee under the preceding sentence with respect to any Liability for which Bank is liable under Section 5.2 of this Agreement. (d) Without limiting Subsections 7.1 (a), (b) or (c), Bank shall have no duty or responsibility to: (i) question Instructions or make any suggestions to Customer or an Authorized Person regarding such Instructions that Bank believes in good faith to have been given by Authorized Persons or which are transmitted with proper testing or authentication pursuant to terms and conditions that Bank may specify; (ii) supervise or make recommendations with respect to investments or the retention of Financial Assets; (iii) advise Customer or an Authorized Person regarding any default in the payment of principal or income of any security other than as provided in Section 2.7(b) of this Agreement; (iv) evaluate or report to Customer or an Authorized Person regarding the financial condition of any broker, agent or other party to which Bank is instructed to deliver Financial Assets or cash; or (v) except for trades settled at DTC where the broker provides DTC trade confirmation and Customer provides for Bank to receive the trade instruction, review or reconcile trade confirmations received from brokers (and Customer or its Authorized Persons issuing Instructions shall bear any responsibility to review such confirmations against Instructions issued to and statements issued by Bank). 7.2 Force Majeure. - --- -------------- Bank shall maintain and update from time to time business continuation and disaster recovery procedures with respect to its global custody business that it determines from time to time meet reasonable commercial standards. Bank shall have no liability, however, for any damage, loss or expense of any nature that Customer may suffer or incur, caused by an act of God, fire, flood, civil or labor disturbance, war, act of any governmental authority or other act or threat of any authority (de jure or de facto), legal constraint, fraud or forgery (except by Bank or Bank Indemnitees), malfunction of equipment or software (except to the extent such malfunction is primarily attributable to Bank's negligence, or willful misconduct in maintaining the equipment or software), failure of or the effect of rules or operations of any external funds transfer system, inability to obtain or interruption of external communications facilities, or any cause beyond the reasonable control of Bank (including without limitation, the non-availability of appropriate foreign 16 exchange). Bank shall endeavor to promptly notify Customer when it becomes aware of any situation outlined above, but shall not be liable for failure to do so. 7.3 Bank May Consult With Counsel. - --- ---- ------------------------- Bank shall be entitled to rely on, and may act upon the advice of professional advisers in relation to matters of law, regulation or market practice (which may be the professional advisers of Customer), and shall not be liable to Customer for any action reasonably taken or omitted pursuant to such advice. 7.4 Bank Provides Diverse Financial Services and May Generate Profits as - --- -------------------------------------------------------------------- a Result. --------- Customer acknowledges that Bank or its Affiliates may have a material interest in transactions entered into by Customer with respect to the Account or that circumstances are such that Bank may have a potential conflict of duty or interest. For example, Bank or its Affiliates may act as a market maker in the Financial Assets to which Instructions relate, provide brokerage services to other customers, act as financial adviser to the issuer of such Financial Assets, act in the same transaction as agent for more than one customer, have a material interest in the issue of the Financial Assets, or earn profits from any of these activities. Customer acknowledges that Bank or its Affiliates may be in possession of information tending to show that the Instructions received may not be in the best interests of Customer. Bank is not under any duty to disclose any such information. 8. TAXATION 8.1 Tax Obligations. - --- ---------------- (a) Customer confirms that Bank is authorized to deduct from any cash received or credited to the Cash Account any taxes or levies required by any revenue or governmental authority for whatever reason in respect of Customer's Accounts. (b) If Bank does not receive appropriate declarations, documentation and information then additional United Kingdom taxation shall be deducted from all income received in respect of the Financial Assets issued outside the United Kingdom (which shall for this purpose include United Kingdom Eurobonds) and any applicable United States tax (including, but not limited to, non-resident alien tax) shall be deducted from United States source income. Customer shall provide to Bank such certifications, documentation, and information as it may require in connection with taxation, and warrants that, when given, this information is true and correct in every respect, not misleading in any way, and contains all material information. Customer undertakes to notify Bank immediately if any information requires updating or correcting. (c) Customer shall be responsible for the payment of all taxes relating to the Financial Assets in the Securities Account, and Customer shall pay, indemnify and hold Bank 17 harmless from and against any and all liabilities, penalties, interest or additions to tax with respect to or resulting from, any delay in, or failure by, Bank (1) to pay, withhold or report any U.S. federal, state or local taxes or foreign taxes imposed on, or (2) to report interest, dividend or other income paid or credited to the Cash Account, whether such failure or delay by Bank to pay, withhold or report tax or income is the result of (x) Customer's failure to comply with the terms of this paragraph, or (y) Bank's own acts or omissions; provided however, Customer shall not be liable to Bank for any penalty or additions to tax due as a result of Bank's failure to pay or withhold tax or to report interest, dividend or other income paid or credited to the Cash Account solely as a result of Bank's negligent acts or omissions. 8.2 Tax Reclaims. - --- ------------- (a) Subject to the provisions of this Section, Bank shall apply for a reduction of withholding tax and any refund of any tax paid or tax credits in respect of income payments on Financial Assets credited to the Securities Account that Bank believes may be available. (b) The provision of a tax reclamation service by Bank is conditional upon Bank receiving from Customer (i) a declaration of its identity and place of residence and (ii) certain other documentation (pro forma copies of which are available from Bank). If Financial Assets credited to the Account are beneficially owned by someone other than Customer, this information shall be necessary with respect to the beneficial owner. Customer acknowledges that Bank shall be unable to perform tax reclamation services unless it receives this information. (c) Bank shall perform tax reclamation services only with respect to taxation levied by the revenue authorities of the countries advised to Customer from time to time and Bank may, by notification in writing, in its absolute discretion, supplement or amend the countries in which the tax reclamation services are offered. Other than as expressly provided in this Section 8.2 Bank shall have no responsibility with regard to Customer's tax position or status in any jurisdiction. (d) Customer confirms that Bank is authorized to disclose any information requested by any revenue authority or any governmental body in relation to the processing of any tax reclaim. 9. TERMINATION Either party may terminate this Agreement on sixty days' notice in writing to the other party. If Customer gives notice of termination, it must provide full details of the persons to whom Bank must deliver Financial Assets and cash. If Bank gives notice of termination, then Customer must, within sixty days following receipt of the notice, notify Bank of details of its new custodian, failing which Bank may elect (at any time after sixty days following Customer's receipt of the notice) either to retain the Financial Assets and cash until such details are given, continuing to charge fees due (in which case Bank's sole obligation shall be for the safekeeping of the Financial Assets and cash), or deliver the Financial Assets and cash to Customer. Bank shall in any event be entitled to deduct any uncontested amounts owing to it prior to delivery of the Financial Assets and cash (and, accordingly, Bank shall be 18 entitled to deduct cash from the Cash Account in satisfaction of uncontested amounts owing to it). Customer shall reimburse Bank promptly for all out-of-pocket expenses it incurs in delivering Financial Assets upon termination by Customer. Termination shall not affect any of the liabilities either party owes to the other arising under this Agreement prior to such termination. 10. MISCELLANEOUS 10.1 Notices. - ---- -------- Notices (other than Instructions) shall be served by registered mail or hand delivery to the address of the respective parties as set out on the first page of this Agreement, unless notice of a new address is given to the other party in writing. Notice shall not be deemed to be given unless it has been received. 10.2 Successors and Assigns. - ---- ----------------------- This Agreement shall be binding on each of the parties' successors and assigns, but the parties agree that neither party can assign its rights and obligations under this Agreement without the prior written consent of the other party, which consent shall not be unreasonably withheld. 10.3 Interpretation. - ---- --------------- Headings are for convenience only and are not intended to affect interpretation. References to sections are to sections of this Agreement and references to sub-sections and paragraphs are to sub-sections of the sections and paragraphs of the sub-sections in which they appear. 10.4 Entire Agreement. - ---- ----------------- (a) The following Rider(s) are incorporated into this Agreement: ___ Cash Trade Execution; ___ Accounting Services _X_ Investment Company _X_ Domestic and Global 19 (b) This Agreement, including the Schedules, Exhibits, and Riders (and any separate agreement which Bank and Customer may enter into with respect to any Cash Account), sets out the entire Agreement between the parties in connection with the subject matter, and this Agreement supersedes any other agreement, statement, or representation relating to custody, whether oral or written. Amendments must be in writing and signed by both parties. 10.5 Information Concerning Deposits at Bank. - ---- ---------------------------------------- (a) Bank's London Branch is a member of the United Kingdom Deposit Protection Scheme (the "Scheme") established under Banking Act 1987 (as amended). The Scheme provides that in the event of Bank's insolvency payments may be made to certain customers of Bank's London Branch. Payments under the Scheme are limited to 90% of a depositor's total cash deposits subject to a maximum payment to any one depositor of (pound)18,000 (or 20,000 euros if greater). Most deposits denominated in sterling and other European Economic Area Currencies and euros made with Bank within the United Kingdom are covered. Further details of the Scheme are available on request. (b) In the event that Bank incurs a loss attributable to Country Risk with respect to any cash balance it maintains on deposit at a Subcustodian or other correspondent bank in regard to its global custody or trust businesses in the country where the Subcustodian or other correspondent bank is located, Bank may set such loss off against Customer's Cash Account to the extent that such loss is directly attributable to Customer's investments in that market. 10.6 Confidentiality. - ---- ---------------- The parties hereto agree that each shall treat confidentially the terms and conditions of this Agreement and all information provided by each party to the other regarding its business and operations. All confidential information provided by a party shall be used by the other party solely for the purpose of rendering or obtaining services pursuant to this Agreement, and except as may be required in carrying out this Agreement, shall not be disclosed to any third party without the prior consent of such providing party. The foregoing shall not be applicable to any information that is publicly available when provided or thereafter becomes publicly available other than through a breach of this provision, or that is required to be disclosed by or to any regulatory authority, any external or internal accountant, auditor or counsels of the parties, by judicial or administrative process or otherwise by applicable law, or to any disclosure made by a party if such party's counsel has advised that such party could be liable under any applicable law or any judicial or administrative order or process for failure to make such disclosure. 10.7 Insurance. - ---- ---------- Bank shall not be required to maintain any insurance coverage for the benefit of Customer. 20 10.8 Governing Law and Jurisdiction. Certification of Residency. - ---- ------------------------------- --------------------------- This Agreement shall be construed, regulated, and administered under the laws of the United States or State of New York, as applicable, without regard to New York's principles regarding conflict of laws. The United States District Court for the Southern District of New York shall have the sole and exclusive jurisdiction over any lawsuit or other judicial proceeding relating to or arising from this Agreement. If that court lacks federal subject matter jurisdiction, the Supreme Court of the State of New York, New York County shall have sole and exclusive jurisdiction. Either of these courts shall have proper venue for any such lawsuit or judicial proceeding, and the parties waive any objection to venue or their convenience as a forum. The parties agree to submit to the jurisdiction of any of the courts specified and to accept service of process to vest personal jurisdiction over them in any of these courts. The parties further hereby knowingly, voluntarily and intentionally waive, to the fullest extent permitted by applicable law, any right to a trial by jury with respect to any such lawsuit or judicial proceeding arising or relating to this Agreement or the transactions contemplated hereby. Customer certifies that it is a resident of the United States and shall notify Bank of any changes in residency. Bank may rely upon this certification or the certification of such other facts as may be required to administer Bank's obligations hereunder. Customer shall indemnify Bank against all losses, liability, claims or demands arising directly or indirectly from any such certifications. 10.9 Severability and Waiver. - ---- ------------------------ (a) If one or more provisions of this Agreement are held invalid, illegal or unenforceable in any respect on the basis of any particular circumstances or in any jurisdiction, the validity, legality and enforceability of such provision or provisions under other circumstances or in other jurisdictions and of the remaining provisions shall not in any way be affected or impaired. (b) Except as otherwise provided herein, no failure or delay on the part of either party in exercising any power or right hereunder operates as a waiver, nor does any single or partial exercise of any power or right preclude any other or further exercise, or the exercise of any other power or right. No waiver by a party of any provision of this Agreement, or waiver of any breach or default, is effective unless in writing and signed by the party against whom the waiver is to be enforced. [Section 10.10 follows on next page] 21 10.10 Counterparts. - ----- ------------- This Agreement may be executed in several counterparts, each of which shall be deemed to be an original and together shall constitute one and the same agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. Each of the open-end investment companies listed on Exhibit 1 (each a "Trust") By: /s/ Robert D. Snowden Title: Assistant Treasurer Date: June 25, 2001 THE CHASE MANHATTAN BANK By: /s/ James E. Cecere, Jr. Title: Vice President Date: June 28, 2001 22 EXHIBIT 1 EACH VANGUARD REGISTERED INVESTMENT COMPANY (AND THEIR FUNDS) THAT IS ENTERING INTO THE AMENDED AND RESTATED GLOBAL CUSTODY AGREEMENT WITH THE CHASE MANHATTAN BANK AND DATED AS OF JUNE 25, 2001 Vanguard Bond Index Funds Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Fixed Income Securities Funds Vanguard GNMA Fund Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund Vanguard Index Funds Vanguard 500 Index Fund Vanguard Growth Index Fund Vanguard Small-Cap Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund Vanguard Specialized Funds Vanguard Health Care Fund Vanguard Precious Metals Fund Vanguard STAR Funds Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard Tax-Managed Funds Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund 23 Vanguard Wellesley Income Fund Vanguard Wellington Fund Vanguard World Funds Vanguard International Growth Fund 24 7 Investment Company Rider to Amended and Restated Global Custody Agreement Between The Chase Manhattan Bank and Certain Open-End Management Investment Companies Listed on Exhibit 1 of the Agreement The following modifications are made to the Agreement. To the extent there are any inconsistencies between the terms in this Investment Company Rider and the terms in the Agreement, the terms in this Investment Company Rider shall govern. A. Add a new Section 2.17 to the Agreement as follows: "2.17. Compliance with Securities and Exchange Commission ("SEC") rule 17f-5 ("rule 17f-5"). (a) Customer's board of directors (or equivalent body) (hereinafter `Board') hereby delegates to Bank, and, except as to the country or countries as to which Bank may, from time to time, advise Customer that it does not accept such delegation, Bank hereby accepts the delegation to it, of the obligation to perform as Customer's `Foreign Custody Manager' (as that term is defined in rule 17f-5(a)(3) as promulgated under the Investment Company Act of 1940, as amended ("1940 Act")), including for the purposes of: (i) selecting Eligible Foreign Custodians (as that term is defined in SEC rule 17f-5(a)(1), and as the same may be amended from time to time, or that have otherwise been exempted pursuant to an SEC exemptive order) to hold foreign Financial Assets and cash, (ii) evaluating the contractual arrangements with such Eligible Foreign Custodians (as set forth in SEC rule 17f-5(c)(2)), (iii) monitoring such foreign custody arrangements (as set forth in rule 17f-5(c)(3)). (b) In connection with the foregoing, Bank shall: (i) provide written reports notifying Customer's Board of the placement of Financial Assets and cash with particular Eligible Foreign Custodians and of any material change in the arrangements with such Eligible Foreign Custodians, with such reports to be provided to Customer's Board at such times as the Board deems reasonable and appropriate based on the circumstances of Customer's foreign custody arrangements (and until further notice from Customer such reports shall be provided not less than annually with respect to the placement of Financial Assets and cash with particular Eligible Foreign Custodians and with reasonable promptness upon the occurrence of any material change in the arrangements with such Eligible Foreign Custodians); (ii) exercise such reasonable care, prudence and diligence in performing as Customer's Foreign Custody Manager as a person having responsibility for the safekeeping of foreign Financial Assets and cash would exercise; (iii)in selecting an Eligible Foreign Custodian, first have determined that foreign Financial Assets and cash placed and maintained in the safekeeping of such Eligible Foreign Custodian shall be subject to reasonable care, based on the standards applicable to custodians in the relevant market, after having considered all factors relevant to the safekeeping of such foreign Financial Assets and cash, including, without limitation, those factors set forth in SEC rule 17f-5(c)(1)(i)-(iv); (iv) determine that the written contract with an Eligible Foreign Custodian requires that the Eligible Foreign Custodian shall provide reasonable care for foreign Financial Assets and cash based on the standards applicable to custodians in the relevant market, including, without limitation, those factors set forth in SEC rule 17f-5(c)(1)(i)-(iv). (v) have established a system to monitor the continued appropriateness of maintaining foreign Financial Assets and cash with particular Eligible Foreign Custodians and of the governing contractual arrangements; it being understood, however, that in the event that Bank shall have determined that the existing Eligible Foreign Custodian in a given country would no longer afford foreign Financial Assets and cash reasonable care and that no other Eligible Foreign Custodian in that country would afford reasonable care, Bank shall promptly so advise Customer and shall then act in accordance with the Instructions of Customer with respect to the disposition of the affected foreign Financial Assets and cash. (c) Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain foreign Financial Assets and cash on behalf of Customer with Eligible Foreign Custodians pursuant to a written contract deemed appropriate by Bank. Each such contract shall, except as set forth in the last paragraph of this subsection (c), include provisions that provide: (i) For indemnification or insurance arrangements (or any combination of the foregoing) that will adequately protect Customer against the risk of loss of Financial Assets and cash held in accordance with such contract; (ii) That Customer's Financial Assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the Eligible Foreign Custodian or its creditors, except a claim of payment for their safe custody or administration or, in the case of cash, liens or rights in favor of creditors of such Eligible Foreign Custodian arising under bankruptcy, insolvency or similar laws; (iii)That beneficial ownership of Customer's Assets will be freely transferable without the payment of money or value other than for safe custody or administration; 2 (iv) That adequate records will be maintained identifying Customer's Assets as belonging to Customer or as being held by a third party for the benefit of Customer; (v) That Customer's independent public accountants will be given access to those records described in (iv) above or confirmation of the contents of those records; and (vi) That Customer will receive sufficient and timely periodic reports with respect to the safekeeping of Customer's Assets, including, but not limited to, notification of any transfer to or from Customer's account or a third party account containing Assets held for the benefit of Customer. Such contract may contain, in lieu of any or all of the provisions specified in this subsection (c), such other provisions that Bank determines will provide, in their entirety, the same or a greater level of care and protection for Customer's Assets as the specified provisions, in their entirety. (d) Except as expressly provided herein, Customer shall be solely responsible to assure that the maintenance of foreign Financial Assets and cash hereunder complies with the rules, regulations, interpretations and exemptive orders as promulgated by or under the authority of the SEC. (e) Bank represents to Customer that it is a U.S. Bank as defined in Rule 17f-5(a)(7). Customer represents to Bank that: (1) the foreign Financial Assets and cash being placed and maintained in Bank's custody are subject to the 1940 Act, as the same may be amended from time to time; (2) its Board has determined that it is reasonable to rely on Bank to perform as Customer's Foreign Custody Manager; and (3) its Board or its investment adviser shall have determined that Customer may maintain foreign Financial Assets and cash in each country in which Customer's Financial Assets and cash shall be held hereunder and determined to accept Country Risk. Nothing contained herein shall require Bank to make any selection or to engage in any monitoring on behalf of Customer that would entail consideration of Country Risk. (f) Bank shall provide to Customer such information relating to Country Risk as is specified in Appendix 1 hereto. Customer hereby acknowledges that: (i) such information is solely designed to inform Customer of market conditions and procedures and is not intended as a recommendation to invest or not invest in particular markets; and (ii) Bank has gathered the information from sources it considers reliable, but that Bank shall have no responsibility for inaccuracies or incomplete information, provided that Bank transmits the information using reasonable care. B. Add a new Section 2.18 to the Agreement as follows: 3 2.18. Compliance with SEC rule 17f-7 ("rule 17f-7"). ---------------------------------------------------- (a) Bank shall, for consideration by Customer, provide an analysis of the custody risks associated with maintaining Customer's Financial Assets with each Eligible Securities Depository used by Bank as of the date hereof (or, in the case of an Eligible Securities Depository not used by Bank as of the date hereof, prior to the initial placement of Customer's Financial Assets at such Depository) and at which any Financial Assets of Customer are held or are expected to be held. The foregoing analysis will be provided to Customer at Bank's Website. In connection with the foregoing, Customer shall notify Bank of any Eligible Securities Depositories at which it does not choose to have its Financial Assets held. Bank shall monitor the custody risks associated with maintaining Customer's Financial Assets at each such Eligible Securities Depository on a continuing basis and shall promptly notify Customer or its investment adviser of any material changes in such risks. (b) Bank shall exercise reasonable care, prudence and diligence in performing the requirements set forth in Section 2.18(a) above. (c) Based on the information available to it in the exercise of diligence, Bank shall determine the eligibility under rule 17f-7 of each depository before including it on Schedule 3 hereto and shall promptly advise Customer if any Eligible Securities Depository ceases to be eligible. (Eligible Securities Depositories used by Bank as of the date hereof are set forth in Schedule 3 hereto, and as the same may be amended on notice to Customer from time to time.) C. Add the following after the first sentence of Section 5.1(a) of the Agreement: "At the request of Customer, Bank may, but need not, add to Schedule 1 an Eligible Foreign Custodian where Bank has not acted as Foreign Custody Manager with respect to the selection thereof. Bank shall notify Customer in the event that it elects to add any such entity." D. Add the following language as Sections 5.1(d) and (e) of the Agreement: (d) The term Subcustodian as used herein shall mean the following: (i) a `U.S. Bank,' which shall mean a U.S. bank as defined in SEC rule 17f-5(a)(7); (ii) an `Eligible Foreign Custodian,' which shall mean: (i) a banking institution or trust company, incorporated or organized under the laws of a country other than the United States, that is regulated as such by that country's government or an agency thereof, and (ii) a majority-owned direct or indirect subsidiary of a U.S. Bank or bank holding company which subsidiary is incorporated or organized under the laws of a country other than the United States. In addition, an Eligible Foreign Custodian shall also mean any other entity that 4 shall have been so qualified by exemptive order, rule or other appropriate action of the SEC. (iii)For purposes of clarity, it is agreed that as used in Section 5.2(a), the term Subcustodian shall not include any Eligible Foreign Custodian as to which Bank has not acted as Foreign Custody Manager. (e) The term `securities depository' as used herein when referring to a securities depository located outside the U.S. shall mean: an "Eligible Securities Depository" which, in turn, shall have the same meaning as in rule 17f-7(b)(1)(i)-(vi) as the same may be amended from time to time, or that has otherwise been made exempt pursuant to an SEC exemptive order; provided that, prior to the compliance date with rule 17f-7 for a particular securities depository the term "securities depository" shall be as defined in (a)(1)(ii)-(iii) of the 1997 amendments to rule 17f-5. (f) The term "securities depository" as used herein when referring to a securities depository located in the U.S. shall mean a "securities depository" as defined in SEC rule 17f-4(a). 5 Appendix 1 Information Regarding Country Risk ---------------------------------- 1. To aid Customer in its determinations regarding Country Risk, Bank shall furnish annually and upon the initial placing of Financial Assets and cash into a country the following information (check items applicable): A Opinions of local counsel concerning: ___ i. Whether applicable foreign law would restrict the access afforded Customer's independent public accountants to books and records kept by an eligible foreign custodian located in that country. ___ ii. Whether applicable foreign law would restrict the Customer's ability to recover its Financial Assets and cash in the event of the bankruptcy of an Eligible Foreign Custodian located in that country. ___ iii. Whether applicable foreign law would restrict the Customer's ability to recover Financial Assets that are lost while under the control of an Eligible Foreign Custodian located in the country. B. Written information concerning: ___ i. The foreseeability of expropriation, nationalization, freezes, or confiscation of Customer's Financial Assets. ___ ii. Whether difficulties in converting Customer's cash and cash equivalents to U.S. dollars are reasonably foreseeable. C. A market report with respect to the following topics: (i) securities regulatory environment, (ii) foreign ownership restrictions, (iii) foreign exchange, (iv) securities settlement and registration, (v) taxation, and (vi) depositories (including depository evaluation), if any. 2. To aid Customer in monitoring Country Risk, Bank shall furnish Customer the following additional information: Market flashes, including with respect to changes in the information in market reports. DOMESTIC AND GLOBAL SPECIAL TERMS AND CONDITIONS RIDER ---------------------------------- Corporate Actions and Proxies through The Depository Trust Company ("DTC") -------------------------------------------------------------------------- With respect to Financial Assets held at DTC, the following provisions shall apply rather than the pertinent provisions of Sections 2.10-2.11 of the Agreement: Bank shall send to Customer or the Authorized Person for a Securities Account, such proxies (signed in blank, if issued in the name of Bank's nominee or the nominee of a central depository) and communications with respect to Financial Assets in the Securities Account as call for voting or relate to legal proceedings within a reasonable time after sufficient copies are received by Bank for forwarding to its customers. In addition, Bank shall follow coupon payments, redemptions, exchanges or similar matters with respect to Financial Assets in the Securities Account and advise Customer or the Authorized Person for such Account of rights issued, tender offers or any other discretionary rights with respect to such Financial Assets, in each case, of which Bank has received notice from the issuer of the Financial Assets, or as to which notice is published in publications routinely utilized by Bank for this purpose. Correspondent banks are listed for information only. April 11, 2001 SUB-CUSTODIAN EMPLOYED BY THE CHASE MANHATTAN BANK, GLOBAL CUSTODY COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ ARGENTINA The Chase Manhattan Bank Banco Generale de Negocios Arenales 707, 5th Floor Buenos Aires 1061 Buenos Aires ARGENTINA Citibank, N.A. Banco Generale de Negocios Bartolome Mitre 530 Buenos Aires 1036 Buenos Aires ARGENTINA AUSTRALIA The Chase Manhattan Bank Australia and New Zealand Level 37 Banking Group Ltd. AAP Center Melbourne 259, George Street Sydney NSW 2000 AUSTRALIA AUSTRIA Bank Austria AG Chase Manhattan Bank AG Julius Tandler Platz - 3 Frankfurt A-1090 Vienna AUSTRIA BAHRAIN HSBC Bank Middle East National Bank of Bahrain PO Box 57 Manama Manama, 304 BAHRAIN BANGLADESH Standard Chartered Bank Standard Chartered Bank 18-20 Motijheel C.A. Dhaka Box 536, Dhaka-1000 BANGLADESH BELGIUM Fortis Bank N.V. Chase Manhattan Bank AG 3 Montagne Du Parc Frankfurt 1000 Brussels BELGIUM 1 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ Correspondent banks are listed for information only. April 11, 2001 BERMUDA The Bank of Bermuda Limited The Bank of Bermuda Ltd 6 Front Street Hamilton Hamilton HMDX BERMUDA BOTSWANA Barclays Bank of Botswana Limited Barclays Bank of Botswana Ltd Barclays House, Khama Crescent Gaborone Gaborone BOTSWANA BRAZIL Citibank, N.A. Citibank, N.A.. Avenida Paulista, 1111 Sao Paulo Sao Paulo, SP 01311-920 BRAZIL BankBoston, N.A. BankBoston, N.A. Rua Libero Badaro, 425-29 andar Sao Paulo Sao Paulo - SP 01009-000 BRAZIL BULGARIA ING Bank N.V. ING Bank N.V. Sofia Branch Sofia 7 Vassil Levski Street 1000 Sofia BULGARIA CANADA Canadian Imperial Bank of Commerce Royal Bank of Canada Commerce Court West Toronto Security Level Toronto, Ontario M5L 1G9 CANADA Royal Bank of Canada Royal Bank of Canada 200 Bay Street, Suite 1500 Toronto 15th Floor Royal Bank Plaza, North Tower Toronto Ontario M5J 2J5 CANADA CHILE Citibank, N.A. Citibank, N.A. Avda. Andres Bello 2687 Santiago 3rd and 5th Floors Santiago CHILE 2 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ CHINA - SHANGHAI The Hongkong and Shanghai Banking Citibank, N.A. Corporation Limited New York 34/F, Shanghai Senmao International Building 101 Yin Cheng East Road Pudong Shanghai 200120 THE PEOPLE'S REPUBLIC OF CHINA CHINA - SHENZHEN The Hongkong and Shanghai Banking The Chase Manhattan Bank Corporation Limited Hong Kong 1st Floor Century Plaza Hotel No.1 Chun Feng Lu Shenzhen THE PEOPLE'S REPUBLIC OF CHINA COLOMBIA Cititrust Colombia S.A. Cititrust Colombia S.A. Fiduciaria Sociedad Sociedad Fiduciaria Santa Fe de Bogota Carrera 9a No 99-02 First Floor Santa Fe de Bogota, D.C. COLOMBIA CROATIA Privredna banka Zagreb d.d. Privredna banka Zagreb d.d. Savska c.28 Zagreb 10000 Zagreb CROATIA CYPRUS The Cyprus Popular Bank Ltd. Cyprus Popular Bank 154 Limassol Avenue Nicosia P.O. Box 22032 CY-1598 Nicosia, CYPRUS CZECH REPUBLIC Ceskoslovenska Obchodni Banka, A.S. Ceskoslovenska Obchodni Banka, A.S Na Prikope 14 Prague 115 20 Prague 1 CZECH REPUBLIC DENMARK Danske Bank A/S Unibank A/S 2-12 Holmens Kanal Copenhagen DK 1092 Copenhagen K DENMARK 3 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ ECUADOR Citibank, N.A. Citibank, N.A. Av. Republica de El Salvador y Quito Naciones Unidas (Esquina) Quito ECUADOR EGYPT Citibank, N.A. Citibank, N.A. 4 Ahmed Pasha Street Cairo Garden City Cairo EGYPT ESTONIA Hansabank Esti Uhispank Liivalaia 8 Tallinn EE0001 Tallinn ESTONIA FINLAND Merita Bank Plc Chase Manhattan Bank AG 2598 Custody Services Frankfurt Aleksis Kiven Katu 3-5 FIN-00020 MERITA, Helsinki FINLAND FRANCE BNP PARIBAS S.A. Chase Manhattan Bank AG Ref 256 Frankfurt BP 141 3, Rue D'Antin 75078 Paris Cedex 02 FRANCE Societe Generale Chase Manhattan Bank AG 50 Boulevard Haussman Frankfurt 75009 Paris FRANCE Credit Agricole Indosuez Chase Manhattan Bank AG 96 Blvd. Haussmann Frankfurt 75008 Paris FRANCE GERMANY Dresdner Bank AG Chase Manhattan Bank AG Juergen-Ponto-Platz 1 Frankfurt 60284 Frankfurt/Main GERMANY 4 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ GHANA Barclays Bank of Ghana Limited Barclays Bank of Ghana Ltd Barclays House, High Street Accra Accra GHANA GREECE HSBC Bank plc Chase Manhattan Bank AG 1, Kolokotroni Street Frankfurt 105 62 Athens GREECE HONG KONG The Hongkong and Shanghai Banking The Chase Manhattan Bank Corporation Limited Hong Kong 36th Floor, Sun Hung Kai Centre 30 Harbour Road Wan Chai HONG KONG HUNGARY Citibank Rt. Citibank Rt. Szabadsag ter 7-9 Budapest H-1051 Budapest V HUNGARY INDIA The Hongkong and Shanghai Banking The Hongkong and Shanghai Corporation Limited Banking Corporation Limited Sudam Kalu Ahire Marg, Worli Mumbai Mumbai 400 025 INDIA Deutsche Bank AG Deutsche Bank AG Kodak House Mumbai 222 D.N. Road, Fort Mumbai 400 001 INDIA Standard Chartered Bank Standard Chartered Bank Phoenix Centre, Phoenix Mills Mumbai Compound Senapati Bapat Marg, Lower Parel Mumbai 400 013 INDIA INDONESIA The Hongkong and Shanghai Standard Chartered Bank Banking Jakarta Corporation Limited World Trade Center Jl. Jend Sudirman Kav. 29-31 Jakarta 10023 INDONESIA 5 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ Standard Chartered Bank Standard Chartered Bank Jl. Jend Sudirman Kav. 33-A Jakarta Jakarta 10220 INDONESIA IRELAND Bank of Ireland Chase Manhattan Bank AG International Financial Services Frankfurt Centre 1 Harbourmaster Place Dublin 1 IRELAND Allied Irish Banks, p.l.c. Chase Manhattan Bank AG P.O. Box 518 Frankfurt International Financial Services Centre Dublin 1 IRELAND ISRAEL Bank Leumi le-Israel B.M. Bank Leumi Le-Israel B.M. 35, Yehuda Halevi Street Tel Aviv 61000 Tel Aviv ISRAEL ITALY BNP PARIBAS S.A. Chase Manhattan Bank AG 2 Piazza San Fedele Frankfurt 20121 Milan ITALY IVORY COAST Societe Generale de Banques en Societe Generale Cote Paris d'Ivoire 5 et 7, Avenue J. Anoma - 01 B.P. 1355 Abidjan 01 IVORY COAST JAMAICA CIBC Trust and Merchant Bank CIBC Trust and Merchant Bank Jamaica Limited Jamaica Limited 23-27 Knutsford Blvd. Kingston Kingston 10 JAMAICA JAPAN The Fuji Bank, Limited The Chase Manhattan Bank 6-7 Nihonbashi-Kabutocho Tokyo Chuo-Ku Tokyo 103 JAPAN 6 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ The Bank of Tokyo-Mitsubishi, The Chase Manhattan Bank Limited Tokyo 3-2 Nihombashi Hongkucho 1-chome Chuo-ku Tokyo 103 JAPAN JORDAN Arab Bank Plc Arab Bank Plc P O Box 950544-5 Amman Amman Shmeisani JORDAN KAZAKHSTAN ABN AMRO Bank Kazakhstan ABN AMRO Bank Kazakhstan 45, Khadzhi Mukana Street Almaty 480099 Almaty KAZAKHSTAN KENYA Barclays Bank of Kenya Limited Barclays Bank of Kenya Ltd c/o Barclaytrust Investment Nairobi Services & Limited Mezzanine 3, Barclays Plaza, Loita Street Nairobi KENYA LATVIA A/S Hansabanka A/S Hansabanka Kalku iela 26 Riga Riga, LV 1050 LATVIA LEBANON HSBC Bank Middle East The Chase Manhattan Bank Ras-Beirut Branch New York P.O. Box 11-1380 Abdel Aziz Ras-Beirut LEBANON LITHUANIA Vilniaus Bankas AB Vilniaus Bankas AB Ukmerges str. 41-106 Vilnius LT 2662 Vilnius LITHUANIA LUXEMBOURG Banque Generale du Luxembourg S.AChase Manhattan Bank AG 50 Avenue J.F. Kennedy Frankfurt L-2951 LUXEMBOURG 7 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ MALAYSIA The Chase Manhattan Bank (M) The Chase Manhattan Bank Berhad (M) Berhad Menara Dion, Level 26 Kuala Lumpur Jalan Sultan Ismail 50250, Kuala Lumpur MALAYSIA HSBC Bank Malaysia Berhad HSBC Bank Malaysia Berhad 2 Leboh Ampang Kuala Lumpur 50100 Kuala Lumpur MALAYSIA MAURITIUS The Hongkong and Shanghai BankingThe Hongkong and Shanghai Corporation Limited Banking Corporation Limited 5/F Les Cascades Building Port Louis Edith Cavell Street Port Louis MAURITIUS MEXICO Chase Manhattan Bank Mexico, S.A.Chase Manhattan Bank Mexico, Torre Optima S.A. Paseo de las Palmas #405 Piso 15 Mexico, D.F Lomas de Chapultepec 11000 Mexico, D. F. MEXICO Citibank Mexico, S.A. Citibank Mexico, S.A. Paseo de la Reforma 390 Mexico, D.F 06695 Mexico, D.F. MEXICO MOROCCO Banque Commerciale du Maroc S.A. Banque Commerciale du Maroc S.A 2 Boulevard Moulay Youssef Casablanca Casablanca 20000 MOROCCO NAMIBIA Standard Bank Namibia Limited Standard Corporate & Merchant Mutual Platz Bank Johannesburg Cnr. Stroebel and Post Streets P.O.Box 3327 Windhoek NAMIBIA NETHERLANDS ABN AMRO N.V. Chase Manhattan Bank AG Kemelstede 2 Frankfurt P. O. Box 3200 4800 De Breda NETHERLANDS 8 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ Fortis Bank (Nederland) N.V. Chase Manhattan Bank AG 55 Rokin Frankfurt P.O. Box 243 1000 AE Amsterdam NETHERLANDS NEW ZEALAND National Nominees Limited National Bank of New Zealand Level 2 BNZ Tower Wellington 125 Queen Street Auckland NEW ZEALAND *NIGERIA* Stanbic Merchant Bank Nigeria Standard Bank of South Africa Limited Johannesburg 188 Awolowo Road P.O. Box 54746 Falomo, Ikoyi Lagos NIGERIA *RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION.* NORWAY Den norske Bank ASA Den norske Bank ASA Stranden 21 Oslo PO Box 1171 Sentrum N-0107 Oslo NORWAY OMAN HSBC Bank Middle East Oman Arab Bank Bait Al Falaj Main Office Muscat Ruwi, Muscat PC 112 OMAN PAKISTAN Citibank, N.A. Citibank, N.A. AWT Plaza Karachi I.I. Chundrigar Road Karachi 74200 PAKISTAN Deutsche Bank AG Deutsche Bank AG Unitowers Karachi I.I. Chundrigar Road Karachi 74200 PAKISTAN 9 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ Standard Chartered Bank Standard Chartered Bank Box 4896 Karachi Ismail Ibrahim Chundrigar Road Karachi 74200 PAKISTAN PERU Citibank, N.A. Banco de Credito del Peru Camino Real 457 Lima Torre Real - 5th Floor San Isidro, Lima 27 PERU PHILIPPINES The Hongkong and Shanghai BankingThe Hongkong and Shanghai Corporation Limited Banking Corporation Limited 30/F Discovery Suites Manila 25 ADB Avenue Ortigas Center Pasig City, Manila PHILIPPINES POLAND Bank Handlowy w. Warszawie S.A. Bank Rozwoju Eksportu S.A. ul. Senatorska 16 Warsaw 00-082 Warsaw POLAND Bank Polska Kasa Opieki S.A. Bank Rozwoju Eksportu S.A. 11 Lucka street Warsaw 00-950 Warsaw POLAND PORTUGAL Banco Espirito Santo e Comercial Chase Manhattan Bank AG de Lisboa, S.A. Frankfurt Rua Mouzinho da Silveira, 36 R/c 1250 Lisbon PORTUGAL Banco Comercial Portugues, S.A. Chase Manhattan Bank AG Rua Augusta, 62174 Frankfurt 1100 Lisbon PORTUGAL ROMANIA ABN AMRO Bank (Romania) S.A. ABN AMRO Bank (Romania) S.A. World Trade Centre Building-E, Bucharest 2nd Floor Bld. Expozitiei Nr. 2 78334 Bucharest 1 ROMANIA 10 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ ING Bank N.V. ING Bank N.V. 13-15 Kiseleff Blvd Bucharest Bucharest 1 ROMANIA *RUSSIA* Chase Manhattan Bank The Chase Manhattan Bank International 1st Tverskaya - Yamskaya, 23 New York 125047 Moscow A/C The Chase Manhattan RUSSIA London (US$ NOSTRO Account) Credit Suisse First Boston AO The Chase Manhattan Bank Nikitsky Pereulok, 5 New York 103009 Moscow A/C The Chase Manhattan RUSSIA London (US$ NOSTRO Account) *RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION.* SINGAPORE Standard Chartered Bank Oversea-Chinese Banking 3/F, 6 Battery Road Corporation 049909 Singapore SINGAPORE SLOVAK REPUBLIC Ceskoslovenska Obchodni Ceskoslovenska Obchodni Banka, A.S. Banka, A.S. Michalska 18 Bratislava 815 63 Bratislava SLOVAK REPUBLIC SLOVENIA Bank Austria Creditanstalt d.d. Bank Austria Creditanstalt d.d. Ljubljana Ljubljana Kotnikova 5 SL-61104 Ljubljana SLOVENIA SOUTH AFRICA The Standard Bank of South Standard Corporate & Merchant Africa Limited Bank Standard Bank Centre Johannesburg 1st Floor 5 Simmonds Street Johannesburg 2001 SOUTH AFRICA SOUTH KOREA The Hongkong and Shanghai BankingThe Hongkong and Shanghai Corporation Limited Banking 5/F HSBC Building Corporation Limited #25, Bongrae-dong 1-ga Seoul Seoul SOUTH KOREA 11 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ Standard Chartered Bank Standard Chartered Bank 22/F, Seoul Finance Centre Seoul Building 63, Mukyo-dong, Chung-Ku Seoul SOUTH KOREA SPAIN Chase Manhattan Bank CMB, S.A. Chase Manhattan Bank AG Paseo de la Castellana, 51 Frankfurt 28046 Madrid SPAIN SRI LANKA The Hongkong and Shanghai BankingThe Hongkong and Shanghai Corporation Limited Banking Corporation Limited Unit #02-02, West Block Podium Colombo World Trade Center Colombo 1 SRI LANKA SWEDEN Skandinaviska Enskilda Banken Svenska Handelsbanken Sergels Torg 2 Stockholm SE-106 40 Stockholm SWEDEN SWITZERLAND UBS AG UBS AG 45 Bahnhofstrasse Zurich 8021 Zurich SWITZERLAND TAIWAN The Chase Manhattan Bank The Chase Manhattan Bank 14th Floor Taipei 2, Tun Hwa S. Road Sec. 1 Taipei TAIWAN The Hongkong and Shanghai BankingThe Hongkong and Shanghai Corporation Limited Banking Corporation Limited International Trade Building Taipei 16th Floor, Taipei World Trade Center 333 Keelung Road, Section 1 Taipei 110 TAIWAN THAILAND Standard Chartered Bank Standard Chartered Bank 14th Floor, Zone B Bangkok Sathorn Nakorn Tower 100 North Sathorn Road Bangrak, Bangkok 10500 THAILAND 12 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ TUNISIA Banque Internationale Arabe de Banque Internationale Arabe de Tunisie, S.A. Tunis S.A. 70-72 Avenue Habib Bourguiba P.O. Box 520 1080 Tunis Cedex TUNISIA TURKEY The Chase Manhattan Bank The Chase Manhattan Bank Emirhan Cad. No: 145 Istanbul Atakule, A Blok Kat:11 80700-Dikilitas/Besiktas Istanbul TURKEY *UKRAINE* ING Bank Ukraine ING Bank Ukraine 28 Kominterna Street Kiev 5th Floor Kiev, 252032 UKRAINE *RESTRICTED SERVICE ONLY. PLEASE CONTACT YOUR RELATIONSHIP MANAGER FOR FURTHER INFORMATION.* U.A.E. HSBC Bank Middle East The National Bank of Abu Dhabi P.O. Box 66 Abu Dhabi Dubai UNITED ARAB EMIRATES U.K. The Chase Manhattan Bank National Westminster Bank Crosby Court London Ground Floor 38 Bishopsgate London EC2N 4AJ UNITED KINGDOM URUGUAY BankBoston, N.A. BankBoston, N.A. Zabala 1463 Montevideo Montevideo URUGUAY U.S.A. The Chase Manhattan Bank The Chase Manhattan Bank 4 New York Plaza New York New York NY 10004 U.S.A. 13 of 14 COUNTRY SUB-CUSTODIAN CORRESPONDENT BANK - ------- ------------- ------------------ VENEZUELA Citibank, N.A. Citibank, N.A. Carmelitas a Altagracia Caracas Edificio Citibank Caracas 1010 VENEZUELA ZAMBIA Barclays Bank of Zambia Limited Barclays Bank of Zambia Ltd Kafue House, Cairo Road Lusaka Lusaka ZAMBIA ZIMBABWE Barclays Bank of Zimbabwe LimitedBarclays Bank of Zimbabwe Ltd 2nd Floor, 3 Anchor House Harare Jason Mayo Avenue Harare 14 of 14 [LOGO] JP MORGAN SECURITIES DEPOSITORIES
- -------------------------------------------------------------------------------------------------------------------- COUNTRY DEPOSITORY INSTRUMENTS - -------------------------------------------------------------------------------------------------------------------- Argentina CVSA Equity, Corporate Debt, Government Debt (Caja de Valores S.A.) - -------------------------------------------------------------------------------------------------------------------- Argentina CRYL Government Debt (Central de Registration y Liquidacion de Instrumentos de Endeudamiento Publico) - -------------------------------------------------------------------------------------------------------------------- Australia Austraclear Limited Corporate Debt, Money Market, Semi-Government Debt - -------------------------------------------------------------------------------------------------------------------- Australia CHESS Equity (Clearing House Electronic Sub-register System) - -------------------------------------------------------------------------------------------------------------------- Australia RITS Government Debt (Reserve Bank of Australia/Reserve Bank Information and Transfer System) - -------------------------------------------------------------------------------------------------------------------- Austria OeKB Equity, Corporate Debt, Government Debt (Oesterreichische Kontrollbank AG) - -------------------------------------------------------------------------------------------------------------------- Belgium CIK Equity, Corporate Debt (Caisse Interprofessionnelle de Depots et de Virements de Titres S.A.) - -------------------------------------------------------------------------------------------------------------------- Belgium NBB Corporate Debt, Government Debt (National Bank of Belgium) - -------------------------------------------------------------------------------------------------------------------- Brazil CBLC Equity (Companhia Brasileira de Liquidacao e Custodia) - -------------------------------------------------------------------------------------------------------------------- Brazil CETIP Corporate Debt (Central de Custodia e Liquidacao Financiera de Titulos Privados) - -------------------------------------------------------------------------------------------------------------------- Brazil SELIC Government Debt (Sistema Especial de Liquidacao e Custodia) - -------------------------------------------------------------------------------------------------------------------- Bulgaria BNB Government Debt (Bulgaria National Bank) - -------------------------------------------------------------------------------------------------------------------- Bulgaria CDAD Equity, Corporate Debt (Central Depository A.D.) - -------------------------------------------------------------------------------------------------------------------- Canada CDS Equity, Corporate, Government Debt (The Canadian Depository for Securities Limited) - --------------------------------------------------------------------------------------------------------------------
This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby. April 19, 2001 1 [LOGO] JP MORGAN SECURITIES DEPOSITORIES
- -------------------------------------------------------------------------------------------------------------------- COUNTRY DEPOSITORY INSTRUMENTS - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Chile DCV Equity, Corporate Debt, Government Debt (Deposito Central de Valores S.A.) - -------------------------------------------------------------------------------------------------------------------- China, Shanghai SSCCRC Equity (Shanghai Securities Central Clearing and Registration Corporation) - -------------------------------------------------------------------------------------------------------------------- China, Shenzhen SSCC Equity (Shenzhen Securities Clearing Company, Limited) - -------------------------------------------------------------------------------------------------------------------- Colombia DCV Government Debt (Deposito Central de Valores) - -------------------------------------------------------------------------------------------------------------------- Colombia DECEVAL Equity, Corporate Debt, Government Debt (Deposito Centralizado de Valores de Colombia S.A.) - -------------------------------------------------------------------------------------------------------------------- Croatia SDA Equity, Government Debt (Central Depository Agency Inc. - Stredisnja depozitarna agencija d.d.) - -------------------------------------------------------------------------------------------------------------------- Croatia Ministry of Finance of the Republic of Croatia Short-term debt issued by the Ministry of Finance. - -------------------------------------------------------------------------------------------------------------------- Croatia CNB Short-term debt issued by the National (Croatian National Bank) Bank of Croatia. - -------------------------------------------------------------------------------------------------------------------- Czech Republic SCP Equity, Corporate Debt, Government Debt (Stredisko cennych papiru) - -------------------------------------------------------------------------------------------------------------------- Czech Republic CNB Government Debt (Czech National Bank) - -------------------------------------------------------------------------------------------------------------------- Denmark VP Equity, Corporate Debt, Government Debt (Vaerdipapircentralen A/S) - -------------------------------------------------------------------------------------------------------------------- Egypt MCSD Equity, Corporate Debt (Misr for Clearing, Settlement and Depository, S.A.E.) - -------------------------------------------------------------------------------------------------------------------- Estonia ECDS Equity, Corporate Debt, Government Debt (Estonian Central Depository for Securities Limited - Eesti Vaatpaberite Keskdepositoorium) - -------------------------------------------------------------------------------------------------------------------- Euromarket DCC Euro-CDs (The Depository and Clearing Centre) - -------------------------------------------------------------------------------------------------------------------- Euromarket Clearstream Euro-Debt (Clearstream Banking, S.A.) - -------------------------------------------------------------------------------------------------------------------- Euromarket Euroclear Euro-Debt - --------------------------------------------------------------------------------------------------------------------
This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby. April 19, 2001 2 [LOGO] JP MORGAN SECURITIES DEPOSITORIES
- -------------------------------------------------------------------------------------------------------------------- COUNTRY DEPOSITORY INSTRUMENTS - -------------------------------------------------------------------------------------------------------------------- Finland APK Equity, Corporate Debt, Government Debt (Finnish Central Securities Depository Limited) - -------------------------------------------------------------------------------------------------------------------- France Euroclear France Equity, Corporate Debt, Government Debt - -------------------------------------------------------------------------------------------------------------------- Germany Clearstream Equity, Corporate Debt, Government Debt (Clearstream Banking AG) - -------------------------------------------------------------------------------------------------------------------- Greece CSD Equity, Corporate Debt (Central Securities Depository S.A.) - -------------------------------------------------------------------------------------------------------------------- Greece BoG Government Debt (Bank of Greece) - -------------------------------------------------------------------------------------------------------------------- Hong Kong HKSCC Equity (Hong Kong Securities Clearing Company Limited) - -------------------------------------------------------------------------------------------------------------------- Hong Kong CMU Corporate Debt, Government Debt (Central Moneymarkets Unit) - -------------------------------------------------------------------------------------------------------------------- Hungary KELER Equity, Corporate Debt, Government Debt (Central Clearing House and Depository (Budapest) Ltd. - Kozponti Elszamolohaz es Ertektar (Budapest) Rt.) - -------------------------------------------------------------------------------------------------------------------- India NSDL Equity, Corporate Debt, Government Debt (National Securities Depository Limited) - -------------------------------------------------------------------------------------------------------------------- India CDSL Equity (Central Depository Services (India) Limited) - -------------------------------------------------------------------------------------------------------------------- India RBI Government Debt (Reserve Bank of India) - -------------------------------------------------------------------------------------------------------------------- Indonesia KSEI Equity, Corporate Debt (PT Kustodian Sentral Efek Indonesia) - -------------------------------------------------------------------------------------------------------------------- Ireland CREST Equity, Corporate Debt (CRESTCo Limited) - -------------------------------------------------------------------------------------------------------------------- Israel TASE Clearing House Equity, Corporate Debt, Government Debt (Tel Aviv Stock Exchange Clearing House) - -------------------------------------------------------------------------------------------------------------------- Italy Monte Titoli S.p.A. Equity, Corporate Debt, Government Debt - -------------------------------------------------------------------------------------------------------------------- Italy Banca d'Italia Government Debt - --------------------------------------------------------------------------------------------------------------------
This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby. April 19, 2001 3 [LOGO] JP MORGAN SECURITIES DEPOSITORIES
- -------------------------------------------------------------------------------------------------------------------- COUNTRY DEPOSITORY INSTRUMENTS - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Ivory Coast DC/BR Equity (Le Depositaire Central / Banque de Reglement) - -------------------------------------------------------------------------------------------------------------------- Japan JASDEC Equity, Convertible Debt (Japan Securities Depository Center) - -------------------------------------------------------------------------------------------------------------------- Japan BoJ Registered Government Debt (Bank of Japan) - -------------------------------------------------------------------------------------------------------------------- Kazahkstan CSD Equity (Central Securities Depository CJSC) - -------------------------------------------------------------------------------------------------------------------- Kenya CBCD Government Debt (Central Bank Central Depository) - -------------------------------------------------------------------------------------------------------------------- Latvia LCD Equity, Corporate Debt, Government Debt (Latvian Central Depository) - -------------------------------------------------------------------------------------------------------------------- Lebanon Midclear S.A.L. Equity (Custodian and Clearing Center of Financial Instruments for Lebanon and the Middle East S.A.L.) - -------------------------------------------------------------------------------------------------------------------- Lithuania CSDL Equity, Corporate Debt, Government Debt (Central Securities Depository of Lithuania) - -------------------------------------------------------------------------------------------------------------------- Luxembourg Clearstream Equity (Clearstream Banking S.A.) - -------------------------------------------------------------------------------------------------------------------- Malaysia MCD Equity, Corporate Debt, Government Debt (Malaysian Central Depository Sdn. Bhd.) - -------------------------------------------------------------------------------------------------------------------- Mauritius CDS Equity, Corporate Debt (Central Depository and Settlement Company Limited) - -------------------------------------------------------------------------------------------------------------------- Mexico INDEVAL Equity, Corporate Debt, Government Debt (S.D. INDEVAL S.A. de C.V.) - -------------------------------------------------------------------------------------------------------------------- Morocco Maroclear Equity, Corporate Debt, Government Debt - -------------------------------------------------------------------------------------------------------------------- Netherlands NECIGEF Equity, Corporate Debt, Government Debt (Nederlands Centraal Insituut voor Giraal Effectenverkeer B.V.) - -------------------------------------------------------------------------------------------------------------------- New Zealand NZCSD Equity, Corporate Debt, Government Debt (New Zealand Central Securities Depository) - --------------------------------------------------------------------------------------------------------------------
This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby. April 19, 2001 4 [LOGO] JP MORGAN SECURITIES DEPOSITORIES
- -------------------------------------------------------------------------------------------------------------------- COUNTRY DEPOSITORY INSTRUMENTS - -------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------- Nigeria CSCS Equity, Corporate Debt, Government Debt (Central Securities Clearing System Limited) - -------------------------------------------------------------------------------------------------------------------- Norway VPS Equity, Corporate Debt, Government Debt (Verdipapirsentralen) - -------------------------------------------------------------------------------------------------------------------- Oman MDSRC Equity, Corporate Debt (The Muscat Depository and Securities Registration Company, S.A.O.C.) - -------------------------------------------------------------------------------------------------------------------- Pakistan CDC Equity, Corporate Debt (Central Depository Company of Pakistan Limited) - -------------------------------------------------------------------------------------------------------------------- Pakistan SBP Government Debt (State Bank of Pakistan) - -------------------------------------------------------------------------------------------------------------------- Peru CAVALI Equity, Corporate Debt, Government Debt (CAVALI ICLV S.A.) - -------------------------------------------------------------------------------------------------------------------- Philippines PCD Equity (Philippine Central Depository, Inc.) - -------------------------------------------------------------------------------------------------------------------- Philippines ROSS Government Debt (Bangko Sentral ng Pilipinas / Register of Scripless Securities) - -------------------------------------------------------------------------------------------------------------------- Poland NDS Equity, Long-Term Government Debt (National Depository for Securities S.A.) - -------------------------------------------------------------------------------------------------------------------- Poland CRT Short-Term Government Debt (Central Registry of Treasury-Bills) - -------------------------------------------------------------------------------------------------------------------- Portugal CVM Equity, Corporate Debt, Government Debt (Central de Valores Mobiliarios e Sistema de Liquidacao e Compensacao) - -------------------------------------------------------------------------------------------------------------------- Romania SNCDD Equity (National Company for Clearing, Settlement and Depository for Securities) - -------------------------------------------------------------------------------------------------------------------- Romania BSE Equity (Bucharest Stock Exchange Registry) - -------------------------------------------------------------------------------------------------------------------- Russia VTB Equity, Corporate Debt, Government Debt (Vneshtorgbank) (Ministry of Finance Bonds) - --------------------------------------------------------------------------------------------------------------------
This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby. April 19, 2001 5 [LOGO] JP MORGAN SECURITIES DEPOSITORIES
- -------------------------------------------------------------------------------------------------------------------- COUNTRY DEPOSITORY INSTRUMENTS - -------------------------------------------------------------------------------------------------------------------- Russia NDC Equity, Corporate Debt, Government Debt (National Depository Centre) - -------------------------------------------------------------------------------------------------------------------- Russia DCC Equity (Depository Clearing Company) - -------------------------------------------------------------------------------------------------------------------- Singapore CDP Equity, Corporate Debt (The Central Depository (Pte) Limited) - -------------------------------------------------------------------------------------------------------------------- Singapore SGS Government Debt (Monetary Authority of Singapore / Singapore Government Securities Book-Entry System) - -------------------------------------------------------------------------------------------------------------------- Slovak Republic SCP Equity, Corporate Debt, Government Debt (Stredisko cennych papierov SR Bratislava, a.s.) - -------------------------------------------------------------------------------------------------------------------- Slovak Republic NBS Government Debt (National Bank of Slovakia) - -------------------------------------------------------------------------------------------------------------------- Slovenia KDD Equity, Corporate Debt, Government Debt (Centralna klirinsko depotna druzba d.d.) - -------------------------------------------------------------------------------------------------------------------- South Africa CDL Corporate Debt, Government Debt (Central Depository (Pty) Limited) - -------------------------------------------------------------------------------------------------------------------- South Africa STRATE Equity (Share Transactions Totally Electronic) - -------------------------------------------------------------------------------------------------------------------- South Korea KSD Equity, Corporate Debt, Government Debt (Korea Securities Depository) - -------------------------------------------------------------------------------------------------------------------- Spain SCLV Equity, Corporate Debt (Servicio de Compensacion y Liquidacion de Valores, S.A.) - -------------------------------------------------------------------------------------------------------------------- Spain CBEO Government Debt (Banco de Espana / Central Book Entry Office) - -------------------------------------------------------------------------------------------------------------------- Sri Lanka CDS Equity, Corporate Debt (Central Depository System (Private) Limited) - -------------------------------------------------------------------------------------------------------------------- Sweden VPC Equity, Corporate Debt, Government Debt (Vardepapperscentralen AB) - --------------------------------------------------------------------------------------------------------------------
This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby. April 19, 2001 6 [LOGO] JP MORGAN SECURITIES DEPOSITORIES
- -------------------------------------------------------------------------------------------------------------------- COUNTRY DEPOSITORY INSTRUMENTS - -------------------------------------------------------------------------------------------------------------------- Switzerland SIS Equity, Corporate Debt, Government Debt (SIS SegaInterSettle AG) - -------------------------------------------------------------------------------------------------------------------- Taiwan TSCD Equity, Government Debt (Taiwan Securities Central Depository Co., Ltd.) - -------------------------------------------------------------------------------------------------------------------- Thailand TSD Equity, Corporate Debt, Government Debt (Thailand Securities Depository Company Limited) - -------------------------------------------------------------------------------------------------------------------- Tunisia STICODEVAM Equity, Corporate Debt, Government Debt (Societe Tunisienne Interprofessionnelle pour la Compensation et le Depot des Valeurs Mobilieres) - -------------------------------------------------------------------------------------------------------------------- Turkey TAKASBANK Equity, Corporate Debt, Government Debt (IMKB Takas ve Saklama Bankasi A.S.) - -------------------------------------------------------------------------------------------------------------------- United Kingdom CREST Equity, Corporate Debt, Government Debt (CRESTCo Limited) - -------------------------------------------------------------------------------------------------------------------- United Kingdom CMO Sterling & Euro CDs, Commercial Paper (Central Moneymarkets Office) - -------------------------------------------------------------------------------------------------------------------- United States DTC Equity, Corporate Debt (Depository Trust Company) - -------------------------------------------------------------------------------------------------------------------- United States PTC Mortgage Back Debt (Participants Trust Company) - -------------------------------------------------------------------------------------------------------------------- United States FED Government Debt (The Federal Reserve Book-Entry System) - -------------------------------------------------------------------------------------------------------------------- Uruguay BCU Corporate Debt, Government Debt (Banco Central del Uruguay) - -------------------------------------------------------------------------------------------------------------------- Venezuela BCV Government Debt (Banco Central de Venezuela) - -------------------------------------------------------------------------------------------------------------------- Zambia CSD Equity, Government Debt (LuSE Central Shares Depository Limited) - -------------------------------------------------------------------------------------------------------------------- Zambia BoZ Government Debt (Bank of Zambia) - --------------------------------------------------------------------------------------------------------------------
This document is for information only and is designed to keep you abreast of market conditions and procedures. This document is intended neither to influence your investment decisions nor to amend or supplement any agreement governing your relations with JP Morgan Chase. JP Morgan Chase has gathered the information from a source it considers reliable, however, it cannot be responsible for inaccuracies, incomplete information or updating of the information furnished hereby. April 19, 2001 EXHIBIT 1 - AMENDMENT #1 The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001 (the "Agreement") by and between The Chase Manhattan Bank ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below. Exhibit 1 is hereby amended as follows: Vanguard Bond Index Funds Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Fixed Income Securities Funds Vanguard GNMA Fund Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund Vanguard Index Funds Vanguard 500 Index Fund Vanguard Extended Market Index Fund Vanguard Growth Index Fund Vanguard Small-Cap Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund Vanguard Specialized Funds Vanguard Health Care Fund Vanguard Precious Metals Fund Vanguard STAR Funds Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard Tax-Managed Funds Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund Vanguard Wellesley Income Fund Vanguard Wellington Fund 1 Vanguard World Funds Vanguard International Growth Fund AGREED TO as of July 23, 2001 BY: Chase Manhattan Bank Each Fund listed on Exhibit 1 By: /s James E. Cecere, Jr. By: /s Robert D. Snowden Name: James E. Cecere, Jr. Name: Robert D. Snowden Title: Vice President Title: Assistant Treasurer 2 EXHIBIT 1 - AMENDMENT #2 The following is an amendment ("Amendment") to the Global Custody Agreement dated June 25, 2001 and amended July 23, 2001 (the "Agreement") by and between JPMorgan Chase Bank (previously The Chase Manhattan Bank) ("Bank") and each open-end management investment company listed on Exhibit 1 thereto (each a "Trust," collectively "Customer"). This Amendment serves to update the names of the Trusts and certain of their portfolios (each a "Fund") listed on Exhibit 1. Bank and Customer hereby agree that all of the terms and conditions as set forth in the Agreement are hereby incorporated by reference with respect to the Trusts and Funds listed below. Exhibit 1 is hereby amended as follows: Vanguard Bond Index Funds Vanguard Intermediate-Term Bond Index Fund Vanguard Long-Term Bond Index Fund Vanguard Short-Term Bond Index Fund Vanguard Total Bond Market Index Fund Vanguard Fixed Income Securities Funds Vanguard GNMA Fund Vanguard High-Yield Corporate Fund Vanguard Inflation Protected Securities Fund Vanguard Long-Term Corporate Fund Vanguard Index Funds Vanguard 500 Index Fund Vanguard Extended Market Index Fund Vanguard Growth Index Fund Vanguard Small-Cap Index Fund Vanguard Total Stock Market Index Fund Vanguard Value Index Fund Vanguard Institutional Index Funds Vanguard Institutional Total Bond Market Index Fund Vanguard Specialized Funds Vanguard Health Care Fund Vanguard Precious Metals Fund Vanguard STAR Funds Vanguard Developed Markets Index Fund Vanguard Institutional Developed Markets Index Fund Vanguard LifeStrategy Conservative Growth Fund Vanguard LifeStrategy Growth Fund Vanguard LifeStrategy Income Fund Vanguard LifeStrategy Moderate Growth Fund Vanguard Tax-Managed Funds Vanguard Tax-Managed Balanced Fund Vanguard Tax-Managed Capital Appreciation Fund Vanguard Tax-Managed Growth and Income Fund Vanguard Tax-Managed Small-Cap Fund Vanguard Wellesley Income Fund Vanguard Wellington Fund Vanguard Whitehall Fund Vanguard International Explorer Fund Vanguard World Funds Vanguard International Growth Fund AGREED TO as of May 20, 2002 BY: JPMorgan Chase Bank Each Fund listed on Exhibit 1 By: /s James E. Cecere, Jr. By: /s Thomas J. Higgins Name: James E. Cecere, Jr. Name: Thomas J. Higgins Title: Vice President Title: Treasurer EX-99.D 5 wachovia0203.txt WACHOVIAADVISORYAGREE MUTUAL FUND CUSTODY AGREEMENT VANGUARD FUNDS Wachovia Bank, National Association Table of Contents Paragraph Page 1. Definitions 1 2. Appointment 3 3. Delivery of Documents 3 4. Delivery and Registration of the Property 3 5. Voting and Other Rights 4 6. Receipt and Disbursement of Money 5 7. Receipt and Delivery of Securities 5 8. Scope of Responsibilities as Foreign Custody Manager 6 9. Eligible Securities Depositories; Compliance with Rule 17f-7 9 10. Foreign Market Transactions 10 11. Pledge or Encumbrance of Securities or Cash 10 12. Foreign Exchange 10 13. Lending of Securities 11 14. Overdrafts or Indebtedness 11 15. Use of Securities Depository or the Book-Entry System 11 16. Instructions Consistent With The Declaration 13 17. Transactions Not Requiring Proper Instructions 14 18. Transactions Requiring Proper Instructions 16 19. Purchase and Sale of Securities 17 20. Tax Reclaims 18 21. Records 19 22. Cooperation with Accountants 19 23. Reports to Customer by Independent Public Accountants 19 24. Confidentiality 19 25. Equipment 20 26. Right to Receive Advice 20 27. Compensation 21 28. Representations 21 29. Several Obligations of the Trusts 21 30. Performance of Duties and Standard of Care 22 31. Indemnification 22 32. Effective Period; Termination and Amendment 23 33. Successor Custodian 23 34. Notices 24 35. Further Actions 24 36. Additional Funds 24 37. Miscellaneous 24 ATTACHMENT A Authorized Persons ATTACHMENT B Trusts and Funds EXHIBIT A Provision of Additional Information EXHIBIT B Eligible Securities Depositories EXHIBIT C List of Foreign Markets MUTUAL FUND CUSTODY AGREEMENT THIS AMENDED AND RESTATED AGREEMENT is made as of March 6, 2003, by and among each Delaware statutory trust listed on Attachment B hereto (each a "Trust"), severally and for and on behalf of certain of their respective portfolios listed on Attachment B hereto (each a "Fund") and Wachovia Bank, National Association ("Wachovia"), a national bank. Each Trust for which Wachovia serves as custodian under this Agreement shall individually be referred to as "Customer." 1. Definitions. ----------- "Account" is defined in Paragraph 6 of this Agreement. "Authorized Person" means any person (including an investment manager or other agent) who has been designated by written notice from Customer or its designated agent to act on behalf of Customer hereunder. Such person shall continue to be an Authorized Person until such time as Wachovia receives Proper Instructions from Customer or its designated agent that any such person is no longer an Authorized Person. "Board" means the board of trustees or board of directors, as applicable, of a Trust. "Book-Entry System" means the Federal Reserve/Treasury book-entry system for receiving and delivering Securities, its successor or successors and its nominee or nominees. "Business Day" means any day on which Wachovia, the Book-Entry System, and relevant Depositories are open for business. "Country Risks" means the systemic risks arising from holding Foreign Assets in a particular country, including, but not limited to, those arising from a country's financial infrastructure, prevailing custody and settlement practices; expropriation, nationalization or other governmental actions; and laws applicable to the safekeeping and recovery of assets held in custody in such country. "Customer" means, individually, each Trust and their respective Funds as listed on Attachment B hereto. "Eligible Foreign Custodian" means an Eligible Foreign Custodian as defined in Rule 17f-5(a)(1) under the 1940 Act or any other entity that the SEC qualifies as such by exemptive order, no-action letter, rule or other appropriate SEC action. "Eligible Securities Depository" means an Eligible Securities Depository as defined in Rule 17f-7(b)(1) under the 1940 Act or any entity that the SEC qualifies as such by exemptive order, no-action letter, rule or other appropriate SEC action. "Wachovia" shall include any office, branch or subsidiary of Wachovia Bank, National Association. "Foreign Assets" means Customer's investments (including foreign currencies) for which the primary market is outside the United States and such cash and cash equivalents as are reasonably necessary to effect Customer's transactions in such investments. "Foreign Custody Manager" means a Foreign Custody Manager as defined in Rule 17f-5(a)(3) under the 1940 Act. "Foreign Market" means each market so identified in Exhibit C hereto. "Fund" means each separate portfolio of shares offered by each Trust representing interests in a separate portfolio of securities and other assets and listed on Attachment B hereto. "NASD" means National Association of Securities Dealers. "Proper Instruction" is defined in paragraph 16 to this Agreement "Property" means any and all Securities, cash, and other property of Customer which Customer may from time to time deposit, or cause to be deposited, with Wachovia or which Wachovia may from time to time hold for Customer; all income of any Securities or other property; all proceeds of the sales of any Securities or other property; and all proceeds of the sale of securities issued by Customer, which Wachovia receives from time to time from or on behalf of Customer. "Rule 17f-5" means 17 C.F.R.ss.270.17f-5 under the 1940 Act, as amended from time to time. "Rule 17f-7" means 17 C.F.R.ss.270.17f-7 under the 1940 Act, as amended from time to time. "SEC" means the U.S. Securities and Exchange Commission. "Securities" shall include, without limitation, any common stock and other equity securities; bonds, debentures and other debt securities; notes; forwards, swaps, futures, derivatives, mortgages or other obligations; and any instruments representing rights to receive, purchase, or subscribe for the same, or representing any other rights or interests therein (whether represented by a certificate or held by a Securities Depository, subcustodian, Eligible Foreign Custodian, or Eligible Securities Depository). "Securities Depository" shall include the Book-Entry System, the Depository Trust Company, any other domestic securities depository, book-entry system or clearing agency registered with the SEC or its successor or successors and its nominee or nominees, and any other entity permitted to hold Securities under Rule 17f-4 under the 1940 Act, and shall also mean any other registered clearing agency that acts as a securities depository, its successor or successors. "Trust" means each open-end registered investment company organized as a Delaware statutory trust and listed on Attachment B hereto. 2 "U.S. Bank" means a U.S. Bank as defined in Rule 17f-5(a)(7) under the 1940 Act. "1940 Act" means the Investment Company Act of 1940, as amended. All terms in the singular shall have the same meaning in the plural unless the context otherwise provides and vice versa. 2. Appointment. ----------- a. Appointment as Custodian. Each Trust is registered as an open-end management investment company under the 1940 Act, and each Trust desires to retain Wachovia to serve as the custodian for those Funds of the Trusts listed in Attachment B hereto, and Wachovia is willing to furnish these services. Each Trust hereby appoints Wachovia to act as custodian of its Funds' Securities, cash and other Property on the terms set forth in this Agreement. Wachovia accepts this appointment and agrees to furnish the services set forth below for the compensation as provided in Paragraph 27 of this Agreement. b. Appointment as Foreign Custody Manager. Customer hereby appoints Wachovia as a Foreign Custody Manager to perform the responsibilities set forth in Paragraph 8 of this Agreement with respect to Foreign Assets, and Wachovia hereby accepts such appointment as Customer's Foreign Custody Manager. 3. Delivery of Documents. Customer will promptly furnish to Wachovia copies, --------------------- properly certified or authenticated, of contracts, documents and other related information that Wachovia may reasonably request or requires to properly discharge its duties. These documents may include but are not limited to the following: a. Resolutions of Customer's Board authorizing the appointment of Wachovia as custodian of the Property of Customer and approving this Agreement; b. Incumbency and signature certificates identifying and containing the signatures of those authorized to select Customer's Authorized Persons; c. Each Fund's most recent prospectus including all amendments and supplements thereto (each, a "Prospectus"). Upon Wachovia's request, Customer will furnish Wachovia from time to time with copies of all amendments of or supplements to the foregoing documents, if any. 4. Delivery and Registration of the Property. Customer will deliver or cause ----------------------------------------- to be delivered to Wachovia all Property it owns, including cash received for the issuance of its shares, at any time during the period of this Agreement, except for Securities and monies to be delivered to any subcustodian appointed pursuant to Paragraph 7. Wachovia will not be responsible for Securities and monies until Wachovia or any subcustodian actually receives them. All Securities delivered to Wachovia or to any subcustodian, Securities Depository, Eligible Foreign Custodian, or Eligible Securities Depository (other than in bearer form) shall be registered in the name of the Customer on behalf of each Fund, or in the name of a nominee of Customer, in the name of Wachovia or any nominee of Wachovia (with or without indication of fiduciary status), in the name of any subcustodian or any nominee of a subcustodian appointed pursuant to Paragraph 7, any Eligible Foreign Custodian appointed pursuant to Paragraph 8, or any Eligible Securities Depository appointed pursuant to Paragraph 9, or shall be properly endorsed and in form for transfer satisfactory to Wachovia. 3 5. Voting and Other Rights. ----------------------- a. Customer shall exercise voting and other rights and powers for all Securities, however registered. Wachovia's only duty shall be to mail for delivery on the next Business Day to Customer any documents received, including proxy statements and offering circulars, with any proxies executed by the nominee for Securities registered in a nominee name. Wachovia reserves the right to provide any documents received, or parts thereof, in the language received. Customer acknowledges that in certain countries Wachovia may be unable to vote individual proxies but be able only to vote proxies on a net basis. Wachovia shall vote or cause proxies to be voted only as expressly directed in writing pursuant to Proper Instructions of Customer's Authorized Person. In the absence of Proper Instructions, neither Wachovia nor any subcustodian or Eligible Foreign Custodian shall vote or cause proxies to be voted, and they shall expire without liability to Wachovia. Wachovia will not advise or act for Customer in any legal proceedings, including bankruptcies, involving Securities Customer holds or previously held or the issuers of these Securities, except as Customer and Wachovia expressly agree upon in writing. b. Wachovia shall notify, make available or transmit promptly to Customer all official notices, circulars, reports and announcements that Wachovia receives regarding the Securities and Foreign Assets held by Customer. Wachovia shall also promptly notify Customer of any rights or discretionary actions and of the date or dates by when the rights must be exercised or action must be taken, provided that Wachovia has received, from the issuer, from persons making a tender or exchange offer, from a subcustodian, from a Securities Depository, from an Eligible Foreign Custodian or Eligible Securities Depository, or from a nationally or internationally recognized bond or corporate action service to which Wachovia subscribes (each, a "Notice Provider"), timely notice of rights, discretionary corporate actions, or dates such rights must be exercised or such actions must be taken. If Customer desires to take action on any tender offer, exchange offer or any other similar transaction, Customer shall notify Wachovia before the time at which Wachovia is to take action. Absent Wachovia's failure to promptly transmit such written information that it has received to Customer, or absent Wachovia's timely receipt of Proper Instructions, Wachovia shall not be liable for failure to take any action relating to or to exercise any rights the Securities confer. Wachovia shall use due diligence in attempting to receive complete and accurate information, and shall use reasonable care in forwarding information to Customer. c. Wachovia shall retain shares with respect to tender offers for less than 5% of outstanding shares at less than 99% of the current market value, without obligation to provide notice of such officers. 4 6. Receipt and Disbursement of Money. --------------------------------- a. Wachovia shall open and maintain a custody account for Customer (the "Account") subject only to draft or order by Wachovia acting pursuant to the terms of this Agreement, and shall hold in the Account, subject to the provisions in this Paragraph 6, all cash it receives by or for Customer. Wachovia shall make payments of cash to, or for the account of, Customer from cash, based on Proper Instructions. b. Wachovia is hereby authorized to endorse and collect all checks, drafts or other orders for the payment of money received as custodian for Customer. 7. Receipt and Delivery of Securities. ---------------------------------- a. Except as provided in this Paragraph 7, and in Paragraphs 8 and 9 of this Agreement, Wachovia shall hold and segregate (physically, where Securities are held in certificate form) all Securities and non-cash Property it receives for Customer on behalf of each Fund in one or more Accounts. Wachovia will hold or dispose of all Securities and non-cash Property for Customer pursuant to the terms of this Agreement. In the absence of Proper Instructions, Wachovia shall have no power or authority to withdraw, deliver, assign, hypothecate, pledge or otherwise dispose of any Securities and other Property, except in accordance with this Agreement. b. Wachovia may, at its own expense, employ subcustodians for the receipt of certain non-Foreign Assets Wachovia is to hold for the account of Customer pursuant to this Agreement; provided that each subcustodian has an aggregate capital, surplus and undivided profits, as shown by its last published report, of not less than twenty million dollars ($20,000,000) and that such subcustodian agrees with Wachovia to comply with all relevant provisions of the 1940 Act and applicable rules and regulations thereunder. Securities and cash held through subcustodians shall be held subject to the terms and conditions of Wachovia's agreements with the subcustodians. Wachovia will be liable for acts or omissions of any subcustodian to the same extent that Wachovia is liable to Customer under this Agreement. c. Wachovia shall hold Securities through a Securities Depository only if (a) the Securities Depository and any of its creditors may not assert any right, charge, security interest, lien, encumbrance or other claim of any kind to Securities except a claim of payment for their safe custody or administration, and (b) beneficial ownership of Securities may be freely transferred without the payment of money or value other than for safe custody or administration. d. Wachovia may from time to time establish pursuant to a written agreement with and for the benefit of a broker, dealer, futures commission merchant or other third party identified in Proper Instructions such Accounts on such terms and conditions as Customer and Wachovia shall reasonably agree upon; and Wachovia shall transfer to such Account such Securities and money as Customer may specify in Proper Instructions. e. Wachovia shall furnish Customer with confirmations and a summary of all transfers to or from the account of each Fund during said day. Where Securities are transferred to the account of a Fund established at a Securities Depository or Book-Entry System, Wachovia shall also by book-entry or otherwise identify the Securities belonging to the Fund. At least monthly and from time to time, Wachovia shall furnish Customer with a detailed statement of the Property held for each Fund under this Agreement. 5 8. Scope of Responsibilities as Foreign Custody Manager. ----------------------------------------------------- a. Authorization. Subject to the terms and conditions herein, Wachovia is hereby authorized to: (i) place and maintain Foreign Assets on behalf of Customer with Eligible Foreign Custodians pursuant to a written contract determined appropriate by Wachovia in accordance with the terms and conditions herein and (ii) withdraw Foreign Assets from Eligible Foreign Custodians in accordance with the terms and conditions herein. b. Selection. Wachovia shall place and maintain Foreign Assets in the care of one or more Eligible Foreign Custodians. In performing its responsibilities to place and maintain Foreign Assets with an Eligible Foreign Custodian, Wachovia shall determine that the Eligible Foreign Custodian will hold Foreign Assets in the exercise of reasonable care, based on the standards applicable to custodians in the jurisdiction or market in which the Foreign Assets will be held by that Eligible Foreign Custodian, after considering all factors relevant to the safekeeping of such assets, including, without limitation: (i) the Eligible Foreign Custodian's practices, procedures, and internal controls, including, but not limited to, the physical protections available for certificated securities (if applicable), its methods of keeping custodial records, its security and data protection practices, and its settlement practices; (ii) whether the Eligible Foreign Custodian has the financial strength to provide reasonable care for Foreign Assets and to protect Foreign Assets against the Eligible Foreign Custodian's insolvency; (iii) the Eligible Foreign Custodian's general reputation and standing; and (iv) whether Customer will have jurisdiction over, and be able to enforce judgments against, the Eligible Foreign Custodian in the United States. c. Contracts. Wachovia shall ensure that Customer's foreign custody arrangements with each Eligible Foreign Custodian are governed by a written contract with such Eligible Foreign Custodian. Wachovia shall determine that the written contract governing the foreign custody arrangements with each Eligible Foreign Custodian that Wachovia selects will provide reasonable care for Foreign Assets held by that Eligible Foreign Custodian, as described in subparagraph b. of this Paragraph 8. Each written contract will include terms that provide: (i) for indemnification and/or insurance arrangements that will adequately protect Customer against the risk of loss of the Foreign Assets held in accordance with such contract; 6 (ii) that the Foreign Assets will not be subject to any right, charge, security interest, lien or claim of any kind in favor of the Eligible Foreign Custodian or its creditors, except a claim for the Eligible Foreign Custodian's services under the contract or, in the case of cash deposits, liens or rights in favor of creditors of such Eligible Foreign Custodian arising under bankruptcy, insolvency or similar laws; (iii)that beneficial ownership of the Foreign Assets will be freely transferable without the payment of money or value, other than payments for the Eligible Foreign Custodian's services under the contract; (iv) that the Eligible Foreign Custodian will maintain adequate records identifying the Foreign Assets held under the contract as belonging to Customer or as being held by a third party for the benefit of Customer; (v) that Customer's independent public accountants will be given access to those records described in (iv) above, or confirmation of the contents of those records; (vi) that Customer will receive periodic reports with respect to the safekeeping of the Foreign Assets, including, but not limited to, notification of any transfer of the Foreign Assets to or from the account of Customer or a third party account containing the Foreign Assets held for the benefit of Customer; and (vii)that the Eligible Foreign Custodian will indemnify and hold harmless Wachovia (or its agent) or Customer from and against any loss, expense, liability or claim incurred by Wachovia (or its agent) or Customer to the extent such loss, expense, liability or claim arises from the Eligible Foreign Custodian's negligence, bad faith, or willful misconduct. or, in lieu of any or all of the terms set forth in (i) through (vi) above, such other terms that Wachovia determines will provide, in their entirety, the same or greater level of care and protection for the Foreign Assets as the provisions set forth in (i) through (vi) above in their entirety. d. Monitoring. Wachovia will establish and maintain a system to monitor: (i) the appropriateness of maintaining Foreign Assets with each Eligible Foreign Custodian; (ii) Material Changes to Customer's foreign custody arrangements, as defined in subparagraph f. of this Paragraph 8. below; and (iii) the performance of the contracts described in subparagraph c. of this Paragraph 8. above (the "Monitoring System"). e. Withdrawing Trust Assets. In the event that a foreign custody arrangement no longer meets the terms and conditions set forth in Rule 17f-5, Wachovia will promptly notify Customer and will then act in accordance with Customer's Proper Instructions with respect to the disposition of the affected Foreign Assets. 7 f. Reporting Requirements. Wachovia shall notify Customer's Board of the placement of Foreign Assets with an Eligible Foreign Custodian and any Material Changes in Customer's foreign custody arrangements by providing a written report to Customer's Board at the end of each calendar quarter or at such times as Customer's Board deems reasonable and appropriate. With respect to Material Changes, Wachovia shall provide Customer's Board with a written report promptly after the occurrence of the Material Change. "Material Changes" include, but are not limited to: a decision to remove all Foreign Assets from a particular Eligible Foreign Custodian; any event that may adversely and materially affect an Eligible Foreign Custodian's financial or operational strength; Wachovia's inability to perform its duties in accordance with the standard of care under this Paragraph 8; a change in control of an Eligible Foreign Custodian; the failure of an Eligible Foreign Custodian to comply with the standards in or the terms of Rule 17f-5; any material change in any contract governing Customer's foreign custody arrangements; the failure of Wachovia or a foreign custody arrangement to meet the standards in Rule 17f-5; any event that may adversely affect Wachovia's ability to comply with Rule 17f-5; and a Material Change in any (i) information provided to the Board regarding Wachovia's expertise in foreign custody issues and risks (ii) Wachovia's use of third party experts to perform its foreign custody responsibilities, (iii) Customer's Board's ability to monitor Wachovia's performance, or (iv) Wachovia's financial strength or its ability to indemnify Customer. g. Provision of Information. Wachovia shall provide to Customer (or Customer's investment adviser(s)) such information as is specified in Exhibit A hereto, as may be amended from time to time by the parties. Customer hereby acknowledges that such information is solely designed to inform Customer of market conditions and procedures, but is not intended to influence Customer's investment decisions (or those of its investment adviser(s)). Wachovia will use reasonable care in gathering such information. Wachovia agrees to promptly notify Customer (or its investment adviser(s)) at the time that Wachovia becomes aware of a material change to the information provided or if Wachovia learns that any information previously provided is incomplete or inaccurate. Wachovia will provide to Customer (or its investment adviser(s)) upon reasonable request a written statement as may reasonably be required to document its compliance with the terms of this Agreement, as well as information regarding the following factors: (i) Wachovia's expertise in foreign custody issues and risks; (ii) Wachovia's use of third party experts to perform its foreign custody responsibilities; (iii) the Board's ability to monitor Wachovia's performance; and (iv) Wachovia's financial strength and its ability to indemnify Customer if necessary. With respect to each Eligible Foreign Custodian employed by Customer under subparagraph i. of this Paragraph 8. below, Wachovia agrees to provide to Customer (or its investment adviser(s)) any information it possesses regarding Country Risk or the risks associated with placing or maintaining Foreign Assets with the Eligible Foreign Custodian. h. Standard of Care as Foreign Custody Manager. In performing its delegated responsibilities as Customer's Foreign Custody Manager, Wachovia agrees to exercise reasonable care, prudence and diligence such as a person having responsibility for the safekeeping of Foreign Assets under the 1940 Act would exercise. In particular, regardless of whether assets are maintained in the custody of an Eligible Foreign Custodian or an Eligible Securities Depository, Wachovia shall be liable to Customer for the acts or omissions of an Eligible Foreign Custodian where that Eligible Foreign Custodian has not acted with reasonable care, except to the extent Customer has directed Wachovia to use a particular Eligible Foreign Custodian. 8 i. Direction of Eligible Foreign Custodians. Customer may direct Wachovia to place and maintain Foreign Assets with a particular Eligible Foreign Custodian. In such event, Wachovia will have no duties under this Paragraph 8 with respect to such arrangement, except those included under Paragraph 8.g and those that it may undertake specifically in writing. j. Best Customer. If at any time Wachovia is or becomes a party to an agreement to serve as Foreign Custody Manager to an investment company that provides for either: (i) a standard of care with respect to the selection of Eligible Foreign Custodians in any jurisdiction higher than that set forth in subparagraph b. of this Paragraph 8., or (ii) a standard of care with respect to exercise of Wachovia's duties other than that set forth in subparagraph h. of this Paragraph 8., Wachovia agrees to notify Customer of this fact and to raise the applicable standard of care hereunder to the standard specified in such other agreement. k. Condition Precedent. As a condition precedent to Wachovia's performance under this Paragraph 8, Customer shall deliver to Wachovia a certificate from each Trust's secretary containing the resolution of the Trust's Board regarding the Board's determination that it is reasonable to rely on Wachovia to perform the responsibilities delegated pursuant to this Agreement to Wachovia as Foreign Custody Manager of the Trust. l. Limitations. Wachovia shall have only such duties as are expressly set forth herein. In no event shall Wachovia be liable for any Country Risks associated with investments in a particular country. m. Representations with respect to Rule 17f-5. Wachovia represents to Customer that it is a U.S. Bank as defined in Rule 17f-5(a)(7). 9. Eligible Securities Depositories; Compliance with Rule 17f-7. Wachovia shall ------------------------------------------------------------- provide an analysis of the custody risks associated with maintaining Customer's Foreign Assets with each Eligible Securities Depository prior to the initial placement of Customer's Foreign Assets at such Depository and at which any Foreign Assets of Customer are held or are expected to be held. Wachovia shall monitor the custody risks associated with maintaining Customer's Foreign Assets at each such Eligible Securities Depository on a continuing basis and shall promptly notify Customer and its investment adviser(s) of any material changes in such risks. Wachovia shall exercise reasonable care, prudence and diligence in performing the requirements set forth in this Paragraph. Based on the information available to it in the exercise of the foregoing standard of care, Wachovia shall determine the eligibility under Rule 17f-7 of each Depository before including it on Exhibit B hereto and shall promptly advise Customer (and its investment adviser(s)) if any Eligible Securities Depository ceases to be eligible and will withdraw Customer's foreign assets from the depository as soon as reasonably practical. For purposes of this Paragraph 9, Customer (and its investment adviser(s)) shall be deemed to have considered the Country Risk incurred by placing and maintaining Foreign Assets in each country in which each such Eligible Securities Depository operates. Wachovia's responsibilities under this Paragraph 9 shall not include, or be deemed to include, any evaluation of Country Risks associated with investment in a particular country. 9 10. Foreign Market Transactions. Customer agrees that all settlements of Foreign --------------------------- Assets transactions shall be transacted in accordance with the local laws, customs, market practices and procedures to which Eligible Foreign Custodians and Eligible Securities Depositories are subject in each Foreign Market, including, without limitation, delivering Foreign Assets to the purchaser, dealer, or an agent for such purchaser or dealer, with the expectation of receiving later payment for the Foreign Assets from the purchaser, dealer, or agent. Wachovia shall provide a report of settlement practices in Foreign Markets as described in Exhibit A. 11. Pledge or Encumbrance of Securities or Cash. Except as provided in this ------------------------------------------- Agreement, Wachovia may not pledge, assign, hypothecate or otherwise encumber Securities or cash in any Account without Customer's prior written consent. 12. Foreign Exchange. ---------------- a. For the purpose of settling Securities and foreign exchange transactions, Customer shall provide Wachovia with sufficient immediately available funds for all transactions by such time and date as conditions in the relevant market dictate. As used herein, "sufficient immediately available funds" shall mean either (i) sufficient cash denominated in U.S. dollars to purchase the necessary foreign currency, or (ii) sufficient applicable foreign currency to settle the transaction. Wachovia shall provide Customer with immediately available funds, which result from the actual settlement of all sale transactions each day, based upon advices Wachovia receives from Customer's Eligible Foreign Custodians and Eligible Securities Depositories. Such funds shall be in U.S. dollars or such other currency as Customer may specify to Wachovia. b. Any foreign exchange transaction Wachovia effects in connection with this Agreement may be entered with Wachovia acting as principal or otherwise through customary banking channels. Customer may issue standing Proper Instructions with respect to foreign exchange transactions but Wachovia may establish rules or limitations concerning any foreign exchange facility made available to Customer. Customer shall bear all risks of investing in Securities or holding cash denominated in a foreign currency. In particular (and except to the extent that this paragraph is inconsistent with Paragraphs 8 or 9), Customer shall bear the risks that (i) a transfer to, by or for the account of Customer of Securities or cash held outside Customer's jurisdiction or denominated in a currency other than its home jurisdiction, or (ii) the conversion of cash from one currency into another, may be prohibited, limited, or be subject to burdens or costs, because of (w) Eligible Securities Depository rules or procedures, (x) exchange controls, (y) asset freezes, or (z) other laws, rules, regulations or orders. Wachovia shall not be obligated to substitute another currency for a currency (including a currency that is a component of a composite currency unit such as the Euro) whose transferability, convertibility or availability has been affected by such law, regulation, rule or procedure. Wachovia shall not be liable to Customer of any loss resulting from any of the foregoing events. 10 13. Lending of Securities. Promptly after Customer or its agent lends Securities --------------------- in Customer's account, Customer shall deliver or cause to be delivered to Wachovia a certificate specifying information reasonably required by Wachovia to deliver the securities. Wachovia shall not lend Securities except as Customer or its agent instructs. Wachovia shall deliver Securities so designated to the broker-dealer or financial institution to which the loan was made upon the receipt of the total amount designated as to be delivered against the loan of Securities. Promptly after each termination of a loan of Securities, Customer shall deliver to Wachovia a certificate specifying information reasonably required by Wachovia to return the securities. Wachovia shall receive all Securities returned from a broker-dealer or other financial institution to which the Securities were loaned, and upon receipt thereof shall pay the total amount payable upon the return of the Securities as set forth in the certificate. Securities returned to Wachovia shall be held as they were before the loan. Wachovia shall have no liability of any sort for any loss arising in connection with the loan of securities outside of the performance of its obligations under this agreement. 14. Overdrafts or Indebtedness. If Wachovia in its sole discretion advances -------------------------- funds in any currency hereunder or if there shall arise for whatever reason an overdraft in an Account (including, without limitation, overdrafts incurred in connection with the settlement of securities transactions, funds transfers or foreign exchange transactions) or if Customer is for any other reason indebted to Wachovia pursuant to this Agreement, Customer agrees to repay Wachovia on demand the amount of the advance, overdraft or indebtedness plus accrued interest at a rate agreed to between Customer and Wachovia, or in the absence of such an agreement, the rate that Wachovia ordinarily charges to its institutional custody customers in the relevant currency. Wachovia shall promptly notify Customer of any advance and the time at which such advance must be paid. To secure repayment of Customer's obligations to Wachovia hereunder, Customer hereby pledges and grants to Wachovia a lien and security interest in, and right of set off against the securities account of the relevant Fund as shall have a fair market value equal to the aggregate amount of all overdrafts of such Fund, together with accrued interest, as security for any and all amounts which are now owing to Wachovia with respect to that Fund under any provision of this Agreement, whether or not matured or contingent. Such lien and security interest shall be effective only so long as such advance, overdraft, or accrued interest thereon remains outstanding. In this regard, Wachovia shall be entitled to all the rights and remedies of a pledgee and secured creditor under applicable laws, rules or regulations then in effect. 15. Use of Securities Depository or the Book-Entry System. ----------------------------------------------------- a. Upon receipt of Proper Instructions, Wachovia may (i) deposit in a Depository or the Book-Entry System all Securities of Customer eligible for deposit therein and (ii) use a Depository, or the Book-Entry System to the extent possible in connection with the performance of its duties hereunder, including without limitation, settlements of Customer's purchases and sales of Securities, and deliveries and returns of securities collateral in connection with borrowings. Without limiting the generality of this use, it is agreed that the following provisions shall apply thereto: 11 b. Securities and any cash of Customer deposited in a Securities Depository or Book-Entry System will at all times (1) be represented in an account of Wachovia in the Securities Depository or Book-Entry System (the "Account") and (2) be segregated from any assets and cash Wachovia controls in other than a fiduciary or custodian capacity but may be commingled with other assets held in these capacities. Securities and cash Wachovia deposits in a Depository or Book-Entry System will be held subject to the rules, terms and conditions of the Depository or Book-Entry System. Wachovia shall identify on its books and records the Securities and cash belonging to Customer, whether held directly or indirectly through Depositories or the Book-Entry System. Wachovia shall not be responsible for Securities or cash until actually received. Wachovia will effect payment for Securities and receive and deliver Securities in accordance with accepted industry practices as set forth in subparagraph c. of this Paragraph 15 below, unless Customer has given Wachovia Proper Instructions to the contrary. c. Wachovia shall pay for Securities purchased for the account of Customer upon (i) receipt of advice from the Securities Depository or Book-Entry System that the Securities have been transferred to Customer, and (ii) the making of an entry on the records of Wachovia to reflect the payment and transfer for the account of Customer. Upon receipt of Proper Instructions, Wachovia shall transfer Securities sold for the account of Customer upon (i) receipt of advice from the Securities Depository or Book-Entry System that payment for the Securities has been transferred to the Account, and (ii) the making of an entry on the records of Wachovia to reflect the transfer and payment for the account of Customer. Copies of all advices from the Securities Depository or Book-Entry System of transfers of Securities for the account of Customer shall identify Customer, and Wachovia shall maintain these copies for Customer and provide them to Customer at its request. d. Wachovia shall provide Customer with any report Wachovia obtains on the Securities Depository or Book-Entry System's accounting system, internal accounting controls and procedures for safeguarding Securities deposited in the Securities Depository or Book-Entry System. e. All books and records Wachovia maintains that relate to Customer's participation in a Securities Depository or Book-Entry System will at all times during Wachovia's regular business hours be open to the inspection of Customer's duly authorized employees or agents, and Customer will be furnished with all information in respect of the services rendered to it as it may require. f. Notwithstanding anything to the contrary in this Agreement, Wachovia shall be liable to Customer for any loss or damage to Customer resulting from any negligence, misfeasance or misconduct of Wachovia or any of its agents or of any of its or their employees in connection with its or their use of the Securities Depository or Book-Entry Systems or from failure of Wachovia or any agent to enforce effectively the rights it may have against the Securities Depository or Book-Entry System; at the election of Customer on a case by case basis, it shall be entitled to be subrogated to the rights of Wachovia for any claim against the Securities Depository or Book-Entry System or any other person that Wachovia may have as a consequence of any loss or damage if and to the extent that Customer has not been made whole for any loss or damage. 16. Instructions Consistent With The Declaration. --------------------------------------------- 12 a. Unless otherwise provided in this Agreement, Wachovia shall act only upon Proper Instructions. Proper Instructions include any notices, instructions or other instruments in writing that Wachovia receives from an Authorized Person by letter, telex, facsimile transmission, Wachovia's on-line communication system, or any other method whereby Wachovia is able to verify with a reasonable degree of certainty the identity of the sender of the communications or the sender is required to provide a password or other identification code. Oral instructions will be considered Proper Instructions if Wachovia reasonably believes that an Authorized Person has given the oral instructions. Customer shall cause all oral instructions to be confirmed in writing by the close of business of the same day that the oral instructions are given to Wachovia. Proper Instructions that conflict with earlier Proper Instructions will supersede earlier Instructions unless Wachovia has already acted in reliance on the earlier Instructions. However, Customer agrees that where Wachovia does not receive confirming Proper Instructions or receives contrary Proper Instructions, the validity or enforceability of transactions the oral instructions authorize and which Wachovia carries out shall not be affected. Wachovia agrees to notify Customer as soon as reasonably practicable if Wachovia does not receive confirming Proper Instructions or receives conflicting Proper Instructions. Wachovia may assume that any Proper Instructions received hereunder are not in any way inconsistent with any provision of Customer's Declaration of Trust or By-Laws or any vote or resolution of a Trust's Board, or any committee thereof. Wachovia shall be entitled to rely upon any Proper Instructions it actually receives pursuant to this Agreement and which it reasonably believes an Authorized Person has given. Customer agrees that Wachovia shall incur no liability in acting in good faith upon Proper Instructions that Wachovia reasonably believes an Authorized Person has given to Wachovia. b. In accordance with Proper Instructions from Customer, as accepted industry practice requires or as Wachovia may elect in effecting Proper Instructions, Wachovia shall be deemed to make a loan to Customer, payable on demand, bearing interest at a rate agreed to between Customer and Wachovia, or in the absence of such an agreed rate, at the rate Wachovia customarily charges for similar loans, when Wachovia advances cash or other Property arising from the purchase, sale, redemption, transfer or other disposition of Property of Customer, or in connection with the disbursement of funds to any party, or in payment of uncontested fees, expenses, claims or liabilities Customer owes to Wachovia, or to any other party that has secured judgment in a court of law against Customer which creates an overdraft in the accounts or over-delivery of Property. c. Customer agrees that test arrangements, authentication methods or other security devices to be used for Proper Instructions which Customer may give by telephone, telex, TWX, facsimile transmission, bank wire or through an electronic instruction system, shall be processed in accordance with terms and conditions for the use of the arrangements, methods or devices as Wachovia may put into effect and modify from time to time. Customer shall safeguard any test keys, identification codes or other security devices which Wachovia makes available to Customer and agrees that Customer shall be responsible for any loss, liability or damage Wachovia or Customer incurs as a result of Wachovia's acting in accordance with instructions from any unauthorized person using the proper security device unless the loss, liability or damage was incurred as a result of Wachovia's negligence, bad faith, or willful misconduct. Wachovia may, but is not obligated to, electronically record any instructions given by telephone and any other telephone discussions about the Account. 17. Transactions Not Requiring Proper Instructions. Wachovia is authorized to ----------------------------------------------- take the following action without Proper Instructions: a. Collection of Income and Other Payments. Wachovia shall: --------------------------------------- 13 i. Collect and receive on a timely basis for the account of Customer, all income and other payments and distributions, including (without limitation) stock dividends, rights, warrants and similar items, included or to be included in the Property of Customer, and promptly advise Customer of the receipt and shall credit the income, as collected, to Customer. Wachovia shall promptly advise Customer of any such amounts due but not paid. Without limiting the generality of the foregoing, Wachovia shall detach and present for payment all coupons and other income items requiring presentation as and when they become due and shall collect interest when due on Securities held hereunder. Any income due Customer on Securities loaned pursuant to the provisions of Paragraph 13 that is credited to Wachovia for the benefit of Customer shall be credited by Wachovia to Customer's account. Wachovia shall, to the extent practicable, credit the Account with interest, dividends or principal payments on payable or contractual settlement date, in anticipation of receiving the same from a payor, Securities Depository, broker or other agent Customer or Wachovia employs. Any such crediting and posting shall be at Customer's sole risk, and Wachovia shall be authorized to reverse any advance posting in the event Wachovia does not receive good funds from any payor, Securities Depository, broker or agent of Customer. Wachovia shall (where practical, in its discretion) provide Customer with advance notice of two Business Days prior to any such reversal; ii. Endorse and deposit for collection in the name of Customer, checks, drafts, or other orders for the payment of money on the same day as received; iii. Present for payment and collect the amount payable upon all Securities which may mature or be called, redeemed or retired, or otherwise become payable on the date the Securities become payable, promptly deposit or withdraw such proceeds as designated therein and promptly advise Customer of any such amounts due but not paid; iv. Take any action which may be necessary and proper in connection with the collection and receipt of the income and other payments and the endorsement for collection of checks, drafts and other negotiable instruments; v. Effect an exchange of the shares where the par value of stock is changed, and to surrender Securities at maturity or when advised of an earlier call for redemption or when Securities otherwise become available, against payment therefor in accordance with accepted industry practice. Customer understands that Wachovia subscribes to one or more nationally recognized services that provide information on calls for redemption of bonds or other corporate actions. Wachovia shall transmit promptly to Customer written information with respect to materials received by Wachovia (or its agent) via Eligible Foreign Custodians from issuers of the foreign securities being held for Customer. Wachovia will use reasonable care in facilitating the exercise of voting and other shareholder rights by Customer, subject always to the laws, regulations and practical constraints that may exist in the country where such securities are issued. Customer acknowledges that local conditions may have the effect of severely limiting the ability of Customer to exercise shareholder rights. Subject to the foregoing acknowledgement and the standard of care to which Wachovia is held under this Agreement, Wachovia shall not be liable for any untimely exercise of any tender, exchange or other right or power in connection with foreign securities or other property of Customer at any time held by it unless Wachovia receives Proper Instructions from Customer with regard to the exercise of any such right or power before the date on which Wachovia is to take action to exercise such right or power. 14 vi. Wachovia shall notify Customer of any rights, duties, limitations, conditions or other information set forth in any Security (including mandatory or optional put, call and similar provisions), and of the date or dates by which such rights must be exercised or such action must be taken, provided that Wachovia has actually received, from the issuer or the relevant Securities Depository, or from the relevant Eligible Foreign Custodian or Eligible Securities Depository, or a nationally or internationally recognized bond or corporate action service to which Wachovia subscribes (each a "Notice Provider"), timely notice in regard to the Securities (a "Notice"). Wachovia shall use due diligence in attempting to receive complete and accurate information, and shall use reasonable care in forwarding information to Customer. vii. When fractional shares of stock of a declaring corporation are received as a stock distribution, unless specifically instructed to the contrary in writing, Wachovia is authorized to sell the fraction received and credit Customer's account. Unless specifically instructed to the contrary in writing, Wachovia is authorized to exchange Securities in bearer form for Securities in registered form. If Customer owns Property that is registered in the name of a nominee of Wachovia and the issuer of any such Property calls the Property for partial redemption, Wachovia is authorized to allot the called portion to the beneficial holders of the Property in a manner it deems fair and equitable in its sole discretion; viii.Forward to Customer copies of all information or documents that it may receive from an issuer of Securities which, in the opinion of Wachovia, are intended for Customer as the beneficial owner of Securities; and ix. Execute, as custodian, any certificates of ownership, affidavits, declarations or other certificates in connection with the collection or receipt of income, bond and note coupons, or other payments from Securities or in connection with transfers of Securities. b. Miscellaneous Transactions. Wachovia is authorized to deliver or cause --------------------------- to be delivered Property against payment or other consideration or written receipt therefor in the following cases: i. for examination by a broker selling for the Account of Customer in accordance with street delivery custom; ii. for the exchange of interim receipts or temporary Securities for definitive securities; and iii. for transfer of Securities into the name of Customer or Wachovia or a nominee of either, or to the issuer thereof for exchange of Securities for a different number of bonds, certificates, or other evidence, representing the same aggregate face amount or number of units bearing the same interest rate, maturity date and call provisions, if any; provided that, in any case, the new Securities are to be delivered to Wachovia. 18. Transactions Requiring Proper Instructions. In addition to the actions --------------------------------------------- requiring Proper Instructions set forth in this Agreement, upon receipt of Proper Instructions and not otherwise, Wachovia, directly or through the use of a Depository or the Book-Entry System, shall: 15 a. Execute and deliver to the persons as may be designated in Proper Instructions, proxies, consents, authorizations, and any other instruments whereby the authority of Customer as owner of any Securities may be exercised; b. Deliver any Securities held for Customer against receipt of other Securities or cash or take such other steps as shall be stated in Proper Instructions in connection with the liquidation, reorganization, refinancing, merger, consolidation or recapitalization of any corporation, or the exercise of any conversion privilege; c. Release Securities belonging to Customer to any bank or trust company for the purpose of pledge or hypothecation to secure any loan Customer incurs; d. Deliver Securities in accordance with the provisions of any agreement among Customer, Wachovia and a broker-dealer registered under the Securities Exchange Act of 1934 and a member of the NASD relating to compliance with the rules of The Options Clearing Corporation and of any registered national securities exchange, or of any similar organization or organizations, regarding escrow or other arrangements in connection with Customer transactions; e. Deliver Securities in accordance with the provisions of any agreement among Customer, Wachovia and a Futures Commission Merchant registered under the Commodity Exchange Act, relating to compliance with the rules of the Commodity Futures Trading Commission, or any similar organization or organizations, regarding account deposits in connection with Customer transactions; f. Surrender Securities, in connection with their exercise, warrants, rights or similar actions, provided that in each case, the new Securities and cash, if any, are to be delivered to Wachovia; g. Deliver Securities upon receipt of payment for any repurchase agreement Customer enters into; h. Deliver Securities pursuant to any other proper corporate purpose, but only upon receipt of Proper Instructions; and i. Deliver Securities held for Customer pursuant to security lending agreements concerning the lending of Customer's Securities into which Customer may enter, from time to time. 19. Purchase and Sale of Securities. ------------------------------- a. Promptly after Customer's investment adviser (or any sub-adviser) purchases Securities, Customer shall deliver to Wachovia (as custodian) Proper Instructions specifying for each purchase all information Wachovia may reasonably request to settle such purchase. Wachovia shall upon receipt of Securities purchased by or for a Fund pay out of the monies held for the account of a Fund the total amount payable to the person from whom or the broker through whom the purchase was made, provided that the same conforms to the total amount payable as set forth in Proper Instructions. 16 b. Promptly after Customer's investment adviser (or any sub-adviser) sells Securities, Customer shall deliver to Wachovia (as Custodian) Proper Instructions, specifying for each sale all information Wachovia may reasonably request to settle such sale. Wachovia shall deliver the Securities upon receipt of the total amount payable to the Fund upon sale, provided that the same conforms to the total amount payable as set forth in Proper Instructions. Subject to the foregoing, Wachovia may accept payment in any form as shall be satisfactory to it, and may deliver Securities and arrange for payment in accordance with the customs prevailing among dealers in Securities. c. Customer understands that when Wachovia is instructed to deliver Securities against payment, delivery of the Securities and receipt of payment therefor may not be completed simultaneously. Customer assumes full responsibility for all credit risks involved in connection with Wachovia's delivery of Securities pursuant to Proper Instructions of Customer. d. Upon Customer's Proper Instructions, Wachovia shall purchase or sell Securities and is authorized to use any broker or agent in connection with these transactions, but shall use affiliates of Wachovia only as Customer directs. Wachovia shall not be liable for the acts or omissions of any broker or agent (except an affiliate of Wachovia). e. Except as otherwise provided by law, a cash account (including subdivisions of accounts maintained in different currencies) shall constitute one single and indivisible Account. Consequently, Wachovia has the right to transfer the balance of any subaccount of a cash account to any other subaccount of a cash account. Wachovia shall notify Customer of any such transfers. f.(i) For puts, calls and futures traded on securities exchanges, Nasdaq, over-the-counter, or commodities exchanges, Wachovia shall take action as to put options and call options Customer purchases or sells (writes) regarding escrow or other arrangements in accordance with the provisions of any agreement entered into upon receipt of Proper Instructions among Wachovia, any broker-dealer that is a member of the NASD or futures commission merchant registered under the Commodity Exchange Act, and, if necessary, Customer, relating to compliance with rules of the Options Clearing Corporation or Commodities Futures Trading Commission, and of any registered national securities exchange, or of any similar organization or organizations. (ii) Unless another agreement requires it to do so, Wachovia shall be under no obligation or duty to see that Customer has deposited or is maintaining adequate margin, if required, with any broker or futures commission merchant in connection with any option, futures, puts or calls, nor shall Wachovia be under any obligation or duty to present the option to the broker or futures commission merchant for exercise unless it receives Proper Instructions from Customer. Wachovia shall have no responsibility for the legality of any put, call or option sold on Customer's behalf, the propriety of any purchase or sale, or the adequacy of any collateral delivered to a broker or futures commission merchant in connection with a put, call or option or deposited to or withdrawn from any Account. Wachovia specifically, but not by way of limitation, shall not be under any obligation or duty to: (x) periodically check with or notify Customer that the amount of collateral a broker or futures commission merchant holds is sufficient to protect the broker or futures commission merchant or Customer against any loss; (y) effect the return of any collateral delivered to a broker or futures commission merchant; or (z) advise Customer that any option it holds has expired or is about to expire, subject to the requirement of Paragraph 5b. to promptly transmit notices. These obligations and duties shall be Customer's sole responsibility. 17 20. Tax Reclaims ------------ a. Subject to the provisions of this Paragraph, Wachovia shall apply for a reduction of withholding tax and any refund of any tax paid or tax credits in respect of income payments on Foreign Assets and other Property credited to the Account that Wachovia believes may be available. b. The provision of a tax reclamation service by Wachovia is conditional upon Wachovia receiving from Customer (i) a declaration of its identity and place of residence and (ii) certain other documentation (copies of which are available from Wachovia). If Foreign Assets or Property credited to the Account are beneficially owned by someone other than Customer, this information shall be necessary with respect to the beneficial owner. Customer acknowledges that Wachovia shall be unable to perform tax reclamation services unless it receives this information. c. Wachovia shall perform tax reclamation services with respect to taxation levied by the revenue authorities of the countries advised to Customer from time to time and Wachovia may, by notification in writing, supplement or amend the countries in which the tax reclamation services are offered. d. Customer confirms that Wachovia is authorized to disclose any information requested by any revenue authority or any governmental body in relation to the processing of any tax reclaim. 21. Records. The books and records pertaining to Customer that are in the ------- possession of Wachovia shall be the property of Customer. Wachovia shall prepare and maintain these books and records as the 1940 Act and other applicable federal securities laws and rules and regulations require. Customer and Customer's authorized representatives shall have access to Wachovia's books and records pertaining to Customer at all times during Wachovia's normal business hours, and Wachovia shall surrender these books and records to Customer promptly upon request. Upon reasonable request of Customer, Wachovia shall provide copies of any books and records to Customer and Customer's authorized representative. 22. Cooperation with Accountants. Wachovia shall cooperate with Customer's ------------------------------ independent public accountants and shall take all reasonable action in the performance of its obligations under this Agreement to assure that the necessary information is made available to the accountants. 18 23. Reports to Customer by Independent Public Accountants. Wachovia shall --------------------------------------------------------- provide Customer, at such times as Customer may reasonably require, with reports from Wachovia's independent public accountants on the accounting system, internal accounting controls and procedures for safeguarding cash, Securities, futures contracts and options on futures contracts, including Securities deposited and/or maintained in a Securities Depository or Book-Entry System, relating to the services Wachovia provides under this Agreement. These reports shall be of sufficient scope and in sufficient detail as Customer may reasonably require to provide reasonable assurance that the examination would disclose any material inadequacies and, if there are no material inadequacies, the reports shall so state. 24. Confidentiality. --------------- Customer and Wachovia agree, and will assure that each of its employees, officers, directors, consultants, representatives, agents and subcontractors performing services hereunder, also agree as follows: a. During the term of this Agreement and thereafter, except as permitted in this Agreement or expressly in writing by each party to this Agreement, each party shall not use, disclose, distribute, make known or communicate any Confidential Information to any person, firm or enterprise. Wachovia may disclose Confidential Information belonging to Customer as required to comply with any validly issued subpoena or order, provided that, prior to compliance with any such order, and at the request and expense of Customer, Wachovia will cooperate with Customer to obtain a protective order. Customer may disclose Confidential Information belonging to Wachovia as required to comply with any validly issued subpoena or order, provided that, prior to compliance with any such order, and at the request and expense of Wachovia, Customer will cooperate with Wachovia to obtain a protective order. The provisions of this subparagraph a. of Paragraph 24 shall survive termination of this Agreement and shall be perpetual. b. As used herein, the term "Confidential Information" shall mean all oral or written information, of whatever kind and in whatever form, relating to a party's business and business activities, financial, technical information and client information (including but not limited to clients' identities), whether in tangible or intangible form and whether or not marked as "confidential" that may be obtained from any source as a result of this Agreement together with all such other information designated as confidential. c. Except as reasonably necessary to provide the services requested by Customer hereunder, Wachovia shall not use the name(s), trademarks or trade names of Customer, or any of its affiliates, whether registered or not, in publicity releases or advertising or publicly in any other manner, including company client lists, without securing the prior written approval of a Managing Director or higher ranking officer of Customer. 25. Equipment. --------- a. Wachovia shall notify Customer of any errors, omissions or interruptions in, or delay or unavailability of Wachovia's ability to safeguard and hold Securities and cash in accordance with this Agreement as promptly as practicable, and proceed to correct the same as soon as is reasonably possible at no additional expense to Customer. 19 b. Neither Wachovia nor Customer shall be responsible for delays or failures in performance resulting from acts beyond the reasonable control of such party, including acts of God, riots, acts of war or terrorism, epidemics, fire, earthquakes, flood, or other disasters. In the event that either party is unable to perform any of its obligations under this Agreement or to enjoy any of its benefits because of such acts, the party who has been so affected shall immediately give notice to the other party and shall do everything possible to resume performance. Upon receipt of such notice, all obligations under this Agreement shall be immediately suspended. If the period of nonperformance exceeds ten (10) days from the receipt of notice of a force majeure event, the party that has the ability to perform and has not been so affected may, by giving written notice, immediately terminate this Agreement. Wachovia shall enter into and shall maintain in effect with appropriate parties one or more agreements making reasonable provision for back-up emergency use of electronic data processing equipment to the extent appropriate equipment is available. 26. Right to Receive Advice. ----------------------- a. If Wachovia shall be in doubt as to any action it may take or omit to take, it may request, and shall receive, clarification from Customer. If Wachovia shall be in doubt as to any question of law involved in any action it may take or omit to take in connection with Customer's Accounts, it may request advice at its own cost from counsel of its own choosing (who may be counsel for Customer or Wachovia, at the option of Wachovia). Wachovia shall be entitled to rely on and follow the advice of its counsel, and shall be fully protected for anything it does or omits to do in good faith in conformity with this advice. b. Wachovia shall be protected in any action or inaction which it takes or omits to take in reliance on any directions or advice received pursuant to subparagraph (a) of this Paragraph 26 which Wachovia, after receipt of any directions or advice, in good faith believes to be consistent with these directions or advice. However, nothing in this Paragraph shall be construed as imposing upon Wachovia any obligation (i) to seek directions or advice; or (ii) to act in accordance with directions or advice when received, unless, under the terms or another provision of this Agreement, the same is a condition to Wachovia's properly taking or omitting to take action. Nothing in this subparagraph shall excuse Wachovia when an action or omission on the part of Wachovia constitutes willful misfeasance, bad faith, negligence or reckless disregard of its duties under this Agreement. 27. Compensation. ------------ As compensation for the services provided by Wachovia pursuant to this Agreement Customer will pay to Wachovia such amounts as may be agreed upon in writing from time to time by Customer and Wachovia. 28. Representations. --------------- 20 a. Customer hereby represents to Wachovia that (i) this Agreement has been duly authorized, executed and delivered by each Trust, constitutes a valid and legally binding obligation of each Trust enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on a Trust prohibits the Trust's execution or performance under this Agreement. Wachovia hereby represents to Customer that (i) it is a U.S. Bank with the full power to carry on its businesses as now conducted, and to enter into this Agreement and to perform its obligations hereunder; and (ii) this Agreement has been duly authorized, executed and delivered by Wachovia, constitutes a valid and legally binding obligation of Wachovia enforceable in accordance with its terms, and no statute, regulation, rule, order, judgment or contract binding on Wachovia prohibits Wachovia's execution or performance of this Agreement; and (iii) Wachovia has established, and agrees to maintain during the term of this Agreement, the Monitoring System. b. Wachovia hereby represents and warrants that each and every commercial and noncommercial hardware, software, firmware, mechanical, or electrical product ("Products") used, created, assembled, manufactured, developed, or modified in connection with any goods or services offered or provided under this Agreement shall, at no additional costs to Customer, be able to store and process accurately any and all data reflected in the currency unit of the European Monetary Union, the Euro, and related to the Euro (including, but not limited to, calculating, comparing, storing, processing, recording, valuing, recognizing, validating, presenting and sequencing). Customer may, at no additional cost, require Wachovia to demonstrate compliance and/or compliance techniques and test procedures it intends to follow or evidence of compliance by Wachovia and relevant third party vendors, consistent with the Euro related representations, warranties and obligations contained herein. These representations and warranties shall be in effect so long as the service(s) or Product(s) provided under this Agreement are used by Wachovia or provided by Wachovia for the benefit of Customer. 29. Several Obligations of the Trusts --------------------------------- With respect to the obligations of each Fund of each Trust arising hereunder, Wachovia shall look for payment or satisfaction of any obligation solely to the assets of the Fund to which such obligation relates as though Wachovia had separately contracted by separate written instrument with respect to each Fund. 30. Performance of Duties and Standard of Care. ------------------------------------------ a. Except as stated in Paragraphs 8 and 9 of this Agreement, in the performance of its duties hereunder, Wachovia shall be obligated to exercise care and diligence and act in good faith to ensure the accuracy and completeness of all services performed under this Agreement. b. Wachovia shall be under no duty to take any action on behalf of Customer except as specifically set forth herein or as Wachovia may specifically agree to in writing. d. Wachovia may enter into subcontracts, agreements and understandings with affiliates, whenever and on any terms and conditions as it deems necessary or appropriate to perform its services under this Agreement, consistent with the 1940 Act and other applicable law. No subcontract, agreement or understanding shall discharge Wachovia from its obligations under this Agreement. e. Wachovia shall not be obligated to execute any of Customer's Proper Instructions if Wachovia believes that to do so will or may contravene any law or regulation, any relevant market practice, or Wachovia's general practice in performing custody services. Wachovia shall notify Customer as soon as practicable in the event that Wachovia determines not to execute a Proper Instruction of Customer. 21 f. Except as stated in Paragraphs 8 and 9 of this Agreement, Wachovia shall be responsible for its own negligent failure or that of any subcustodian it shall appoint to perform its duties under this Agreement, but to the extent that duties, obligations and responsibilities are not expressly set forth in this Agreement, Wachovia shall not be liable. Without limiting the generality of the foregoing or of any other provision of this Agreement, Wachovia in connection with its duties under this Agreement, so long as and to the extent it is in the exercise of reasonable care, shall not be under any duty or obligation to inquire into and shall not be liable for or in respect of (i) the validity or invalidity or authority or lack thereof of any advice, direction, notice or other instrument which conforms to the applicable requirements of this Agreement, if any, and which Wachovia reasonably believes to be genuine, (ii) the validity of the issue of any Securities Customer purchases or sells, the legality of the purchase or sale thereof or the propriety of the amount paid or received therefor, (iii) the legality of the issue or sale of any Shares, or the sufficiency of the amount to be received therefor, (iv) the legality of the redemption of any Shares, or the propriety of the amount to be paid therefor, or (v) the legality of the declaration or payment of any dividend or distribution on Shares. g. Each Trust assumes full responsibility for insuring that the contents of each Registration Statement of the Trust complies with all applicable requirements of the 1933 Act, the 1940 Act, and any laws, rules and regulations of governmental authorities having jurisdiction. 31. Indemnification. Customer agrees to indemnify and hold harmless Wachovia and --------------- its nominees from all taxes, charges, assessments, claims, and liabilities (including, without limitation, liabilities arising under the Securities Act of 1933, the Securities Exchange Act of 1934, the 1940 Act, and any state and foreign securities and blue sky laws, all as or to be amended from time to time) and expenses, including (without limitation) attorney's fees and disbursements, arising directly or indirectly from any action or thing which Wachovia takes or does or omits to take or do in connection with or arising out of Wachovia's performance of its responsibilities expressly set forth herein, provided Wachovia has not acted with negligence or bad faith, or engaged in fraud or willful misconduct in connection with the liabilities in question. Wachovia similarly agrees to indemnify and hold harmless Customer from all taxes, charges, assessments, claims, and liabilities (including, without limitation, liabilities arising under the 1933 Act, the 1934 Act, the 1940 Act, and any state and foreign securities and blue sky laws, all as or to be amended from time to time) and expenses, including (without limitation) attorney's fees and disbursements arising directly or indirectly from Wachovia's or its nominee's or sub-custodian's willful misfeasance, bad faith, negligence or reckless disregard in performing its duties under this agreement. If Wachovia advances any cash for any purpose resulting from Proper Instructions, or if Wachovia or its nominee or subcustodian shall incur or be assessed any taxes, charges, expenses, assessments, claims or liabilities in connection with the performance of this Agreement, except as may arise from its or its nominee's or subcustodian's own negligent action, negligent failure to act, willful misconduct, or reckless disregard of its duties under this Agreement or any agreement between Wachovia and any nominee or subcustodian, Customer shall promptly reimburse Wachovia for the advance of cash or taxes, charges, expenses, assessments, claims or liabilities. 22 32. Effective Period; Termination and Amendment. This Agreement shall become --------------------------------------------- effective as of its execution and shall continue in full force and effect until terminated as hereinafter provided. The parties may mutually agree to amend this Agreement at any time. Either party may terminate this Agreement by an instrument in writing delivered or mailed, postage prepaid to the other party at the address listed in Paragraph 34, the termination to take effect not sooner than sixty (60) days after the date of delivery or mailing; provided, however, that Wachovia shall not act under Paragraph 8 in the absence of receipt of a certificate from Customer's secretary containing the resolution of the Board regarding the Board's determination that it is reasonable to rely on Wachovia to perform the responsibilities delegated pursuant to this Agreement to Wachovia as Foreign Custody Manager of the Trust, provided further, however, that Customer shall not amend or terminate this Agreement in contravention of any applicable federal or state regulations, or any provision of the Declaration of Trust, and further provided, that Customer may at any time by action of its Board (i) substitute another bank or trust company for Wachovia by giving notice as described above to Wachovia or (ii) immediately terminate this Agreement in the event the Comptroller of the Currency appoints a conservator or receiver for Wachovia or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent jurisdiction. Upon termination of the Agreement, Customer shall pay to Wachovia all uncontested compensation as may be due as of the date of termination. Termination of this Agreement shall not affect any liabilities either party owes to the other arising under this Agreement prior to such termination. 33. Successor Custodian. If Customer's Board shall appoint a successor -------------------- custodian, Wachovia shall, upon termination, deliver to the successor custodian at the office of the custodian, duly endorsed and in the form for transfer, all Securities it then holds under this Agreement and shall transfer to an account of the successor custodian all of Customer's Securities held in a Securities Depository, Book-Entry System, Eligible Securities Depository, or Eligible Foreign Custodian. If Customer does not deliver to Wachovia a written order designating a successor custodian on or before the date when the termination shall become effective, Wachovia shall have the right to deliver to a bank or trust company, which is a "bank" as defined in the 1940 Act, doing business in New York, New York, of its own selection, having an aggregate capital, surplus, and undivided profits, as shown by its last published report, of not less than $25,000,000, all Securities, monies, and other Property Wachovia holds and all instruments Wachovia holds relative thereto and all other Property it holds under this Agreement and to transfer to an account of the successor custodian all of Customer's Securities held in any Securities Depository, Book-Entry System, Eligible Securities Depository, or Eligible Foreign Custodian. Thereafter, that bank or trust company shall be the successor of Wachovia under this Agreement. If Property of Customer remains in the possession of Wachovia after the date of termination of this Agreement owing to Customer's failure to procure the certified copy of the vote referred to or of the Board to appoint a successor custodian, Wachovia shall be entitled to fair compensation for its services during the period Wachovia retains possession of the Property and the provisions of this Agreement relating to the duties and obligations of Wachovia shall remain in full force and effect. This Agreement shall be binding on each of the parties' successors and assigns, but the parties agree that neither party can assign its rights or obligations under this Agreement without the prior written consent of the other party, which consent shall not be unreasonably withheld. 23 34. Notices. Notices, other than Proper Instructions, shall be served by ------- registered mail or hand delivery to the address of the respective parties as follows: (a) if to Wachovia, at Wachovia's address, 123 S. Broad Street, PA4942, Philadelphia, PA 19109; or (b) if to Customer, at the address of the Customer, P.O. Box 2600, Valley Forge, PA 19482, unless notice of a new address is given to the other party in writing. 35. Further Actions. Each party agrees to perform further acts and execute ---------------- further documents as are necessary to effectuate the purposes of this Agreement. 36. Additional Funds. In the event that Customer has an additional Fund for ----------------- which it desires Wachovia to render services as custodian under the terms hereof, it shall so notify Wachovia in writing, and if the Custodian agrees to provide these services, the Funds shall become Funds hereunder and shall be added to Attachment B of this Agreement. 37. Miscellaneous. This Agreement embodies the entire Agreement and ------------- understanding between the parties hereto, and supersedes all prior agreements and understandings relating to the services hereunder. The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall together, constitute only one instrument. This Agreement shall be deemed to be a contract made in Pennsylvania and governed by Pennsylvania law. If a court decision, statute, rule or otherwise holds or invalidates any provision of this Agreement, the remainder of this Agreement shall not be affected. This Agreement shall be binding upon and shall inure to the benefit of the parties and their respective successors. Each Trust's Declaration of Trust is on file with the Secretary of the State of Delaware. Each Trust's officers have executed this Agreement on behalf of the Trust as officers and not individually and the obligations this Agreement imposes upon a Trust are not binding upon any of the Trust's trustees, officers or shareholders individually but are binding only upon the assets and Property of such Trust. 24 IN WITNESS WHEREOF, the parties hereto have caused their officers designated below to execute this Agreement as of the day and year first above written. Each of the open-end investment companies listed on Attachment B Attest:/s/ By:/S/THOMAS J. HIGGINS Name: Thomas J. Higgins Title: Treasurer WACHOVIA BANK, NATIONAL ASSOCIATION Attest:/s/ By:/S/ELLEN C. KRAUSE Name: Ellen C. Krause Title: Vice President 25 ATTACHMENT A Each Trust's Board of Trustees delegated to John J. Brennan, Chief Executive Officer of each Trust, Ralph K. Packard, Chief Financial Officer of The Vanguard Group, Inc., and Thomas J. Higgins, Treasurer of each Trust, the authority individually to designate Authorized Persons. The currently effective list of Authorized Persons has been provided by Customer to Wachovia, and will be updated by Customer as necessary. ATTACHMENT B: TRUSTS AND FUNDS Vanguard Balanced Index Fund Vanguard California Tax-Free Funds Vanguard California Intermediate-Term Tax-Exempt Fund Vanguard California Long-Term Tax-Exempt Fund Vanguard California Tax-Exempt Money Market Fund Vanguard Convertible Securities Fund Vanguard Fenway Funds Vanguard Growth Equity Fund Vanguard Florida Tax-Free Funds Vanguard Florida Long-Term Tax-Exempt Fund Vanguard Institutional Index Fund Vanguard Massachusetts Tax-Exempt Funds Vanguard Massachusetts High-Grade Tax-Exempt Fund Vanguard Municipal Bond Funds Vanguard High-Yield Tax-Exempt Fund Vanguard Insured Long-Term Tax-Exempt Fund Vanguard Intermediate-Term Tax-Exempt Fund Vanguard Limited-Term Tax-Exempt Fund Vanguard Long-Term Tax-Exempt Fund Vanguard Short-Term Tax-Exempt Fund Vanguard Tax-Exempt Money Market Fund Vanguard New Jersey Tax-Free Funds Vanguard New Jersey Long-Term Tax-Exempt Fund Vanguard New Jersey Tax-Exempt Money Market Fund Vanguard New York Tax-Free Funds Vanguard New York Long-Term Tax-Exempt Fund Vanguard New York Tax-Exempt Money Market Fund Vanguard Ohio Tax-Free Funds Vanguard Ohio Long-Term Tax-Exempt Fund Vanguard Ohio Tax-Exempt Money Market Fund Vanguard Pennsylvania Tax-Free Funds Vanguard Pennsylvania Long-Term Tax-Exempt Fund Vanguard Pennsylvania Tax-Exempt Money Market Fund Vanguard Quantitative Funds Vanguard Growth and Income Fund Vanguard Specialized Funds Vanguard REIT Index Fund Vanguard STAR Funds Vanguard STAR Fund Vanguard Total International Stock Index Fund Vanguard Variable Insurance Fund Balanced Portfolio Diversified Value Portfolio Equity Index Portfolio High-Yield Bond Portfolio Mid-Cap Index Portfolio REIT Index Portfolio Small Company Growth Portfolio Total Bond Market Index Portfolio Vanguard World Fund Vanguard Calvert Social Index Fund EXHIBIT A PROVISION OF ADDITIONAL INFORMATION For purposes of Paragraph 8 of the Agreement, Customer (or its investment adviser(s)) shall be deemed to have considered the Country Risk as is incurred by placing and maintaining Foreign Assets in each country for which Wachovia is serving as Foreign Custody Manager of Customer. To aid Customer (and its investment adviser(s)) in monitoring Country Risk, however, Wachovia shall provide Customer (or its investment adviser(s)) the following information with respect to the foreign countries of Eligible Foreign Custodians that Wachovia selects pursuant to Paragraph 8.b of the Agreement: (a) opinions of local counsel or reports concerning whether applicable foreign law would restrict the access afforded to Customer's independent public accountants to books and records kept by an Eligible Foreign Custodian located in that country; whether applicable foreign law would restrict Customer's ability to recover its Foreign Assets and cash in the event of the bankruptcy of an Eligible Foreign Custodian located in that country; whether applicable foreign law would restrict Customer's ability to recover Foreign Assets that are lost while under the control of an Eligible Foreign Custodian located in the country; and (b) periodic market reports with respect to securities settlement and registration, taxation, and depositories (including depository evaluation), if any. Wachovia will also periodically provide Customer (or its investment adviser(s)) the following information relating to Country Risk with respect to the foreign countries of Eligible Foreign Custodians that Wachovia selects pursuant to Paragraph 8.b of the Agreement, or eligible securities depositories pursuant to Paragraph 9, as Wachovia receives this information: (y) written information concerning each foreign country's practices with regard to expropriation, nationalization, freezes, or confiscation of financial assets; or whether difficulties in converting Customer's cash and cash equivalents to U.S. dollars are reasonably foreseeable; (z) market reports with respect to each foreign country's securities regulatory environment, foreign ownership restrictions, or foreign exchange practices. Customer hereby acknowledges that: (i) this information is solely designed to inform Customer (or its investment adviser(s)) of market conditions and procedures and is not intended to be considered comprehensive or as a recommendation to invest or not invest in particular markets; and (ii) Wachovia is not the primary source of the information and has gathered the information from sources it considers reliable, but that Wachovia shall have no responsibility for inaccuracies or incomplete information. To aid Customer or its delegate in its consideration of Country Risks, Wachovia shall furnish Customer annually and prior to the initial placing of Foreign Assets into a country, the following information: (i) securities settlement and registration, (ii) taxation, and (iii) compulsory depositories. Wachovia shall furnish additional information customarily provided to other investment companies registered under the Investment Company Act of 1940 for which Wachovia provides foreign custody services. Wachovia shall furnish additional information regarding Country Risks as Customer may reasonably request from time to time. EXHIBIT B EXHIBIT C LIST OF ELIGIBLE SECURITIES DEPOSITORIES LIST OF FOREIGN MARKETS
COUNTRY SUB-CUSTODIAN CASH CORRESPONDENT BANK - ------- ------------- -------------------------------------------- ARGENTINA JPMorgan Chase Bank JPMorgan Chase Bank Arenales 707, 5th Floor Buenos Aires 1061 Buenos Aires BIC Code: CHASARBA ARGENTINA BIC Code: CHASARBA AUSTRALIA JPMorgan Chase Bank Australia and New Zealand Banking Group Ltd. Level 37 Melbourne AAP Center 259, George BIC Code: ANZBAU3M Street Sydney NSW 2000 AUSTRALIA a/c A/c 70003 BIC Code: CHASAU2X AUSTRIA Bank Austria AG J.P. Morgan AG-Frankfurt Julius Tandler Platz-3 Acct: Chase Manhattan London A-1090 Vienna Acct #: 6231400604 AUSTRIA A/c 0101-05963/00 BIC Code: CHASDEFX BIC Code: BKAUATWW BELGIUM Fortis Bank N.V. J.P. Morgan AG- Frankfurt 3 Montagne Du Parc Acct: Chase Manhattan London 1000 Brussels Acct #: 6231400604 BELGIUM A/c 210-0002694-30 BIC Code: CHASDEFX BIC Code: GEBABEBB36A BERMUDA The Bank of Bermuda Limited The Bank of Bermuda Limited 6 Front Street Hamilton Hamilton HMDX BIC Code: BBDABMHMCTS BERMUDA BIC Code: BBDABMHMCTS BRAZIL BankBoston, N.A. BankBoston, N.A. Rua Libero Badaro, 425-29 Sao Paulo Sao Paulo - SP 01009-000 BIC Code: N/A BRAZIL BIC Code: N/A BULGARIA ING Bank N.V. ING Bank N.V. Sofia Branch Sofia 12 Emil Bersinski Street BIC Code: INGBBGSF Ivan Vazov Region 1408 Sofia BULGARIA BIC Code: INGBBGSF COUNTRY SUB-CUSTODIAN CASH CORRESPONDENT BANK - ------- ------------- -------------------------------------------- BULGARIA ING Bank N.V. ING Bank N.V. Sofia Branch Sofia 12 Emil Bersinski Street BIC Code: INGBBGSF Ivan Vazov Region 1408 Sofia BULGARIA BIC Code: INGBBGSF CANADA Royal Bank of Canada Royal Bank of Canada 200 Bay Street, Suite 1500 Toronto 15th Floor BIC Code: ROYCCAT2 Royal Bank Plaza, North Tower Toronto Ontario M5J 2J5 CANADA a/c T12207321 BIC Code: ROYCCAT2XXX CHILE Citibank, N.A. Citibank, N.A. Avda. Andres Bello 2687 Santiago 3rd and 5th Floors BIC Code: CITIUS33SAN Santiago CHILE BIC Code: CITIUS33SAN COLOMBIA Cititrust Colombia S.A. Cititrust Colombia S.A. Sociedad Fiduciaria Sociedad Fiduciaria Santa Fe de Bogota Carrera 9a No 99-02 BIC Code: CITIUS33COR First Floor Santa Fe de Bogota, D.C. COLOMBIA BIC Code: CITIUS33COR DENMARK Danske Bank A/S Nordea Bank Danmark A/S 2-12 Holmens Kanal Copenhagen DK 1092 Copenhagen K BIC Code: NDEADKKK Denmark a/c 4001455435 BIC Code: DABADKKK EGYPT Citibank, N.A. Citibank, N.A. 4 Ahmed Pasha Street Cairo Garden City BIC Code: CITIEGCX Cairo EGYPT BIC Code: CITIEGCX FINLAND Nordea Bank Finland Plc J.P. Morgan Ag- Frankfurt 2598 Custody Services CHASDEFX Aleksis Kiven Katu 3-5 Acct: Chase Manhattan London FIN-00020 MERITA, Helsinki Acct #: 6231400604 FINLAND a/c 22642999 BIC Code: CHASDEFX BIC Code: NDEAFIHH COUNTRY SUB-CUSTODIAN CASH CORRESPONDENT BANK - ------- ------------- -------------------------------------------- FRANCE BNP Paribus SA J.P. Morgan AG- Frankfurt 3, Rue D'Antin Acct: Chase Manhattan London 75078 Paris Acct #: 6231400604 FRANCE BIC Code: CHASDEFX BIC Code: PARBFRPP GERMANY Dresdner Bank AG J.P. Morgan AG- Frankfurt Juergen-Ponto-Platz 1 Acct: Chase Manhattan London 60284 Frankfurt/Main Acct #: 6231400604 GERMANY A/c 4990804867808 BIC Code: CHASDEFX BIC # DRESDEFF GREECE HSBC Bank plc J.P. Morgan AG- Frankfurt Messogion 109-111 Acct: Chase Manhattan London 11526 Athens Acct #: 6231400604 GREECE BIC Code: CHASDEFX BIC Code: MIDLGRAAXGSS HONG KONG The Hongkong and Shanghai JPMorgan Chase Bank Banking Corporation Ltd. Hong Kong 36th Floor, Sun Hung Kai BIC Code: CHASDEFX Centre 30 Harbour Road Wan Chai HONG KONG a/c 500-231204-085 BIC Code: HSBCHKHHSEC HUNGARY Citibank Rt. ING Bank Rt. Szabadsag ter 7-9 Budapest H-1051 Budapest V BIC Code: INGBHUHB HUNGARY BIC Code: CITIHUHXCUS ICELAND Islandsbanki-FBA Islandsbanki-FBA Kirkjusandur 2 Reykjavik 155 Reykjavik BIC Code: ISBAISRE ICELAND BIC Code: ISBAISRE INDONESIA The Hongkong and Shanghai The Hongkong and Shanghai Banking Corporation Ltd. Banking Corporation Limited World Trade Center 4th Floor Jakarta Jalan Jendral Sudirman Kav. BIC Code: HSBCIDJAXXX 29-31 Jakarta 12920 INDONESIA BIC Code: HSBCIDJAXXX IRELAND Allied Irish Banks, p.l.c. J. P. Morgan AG- Frankfurt P.O. Box 518 Acct: Chase Manhattan London Int'l Financial Services Acct #: 6231400604 Centre Dublin 1 BIC Code: CHASDEFX IRELAND BIC Code: N/A COUNTRY SUB-CUSTODIAN CASH CORRESPONDENT BANK - ------- ------------- -------------------------------------------- ISRAEL Bank Leumi le-Israel B.M. Bank Leumi le-Israel B.M. 35, Yehuda Halevi Street Tel Aviv 61000 Tel Aviv BIC Code: LUMIILITTLV ISRAEL BIC Code: LUMIILITBSC ITALY BNP Paribas Securities J.P. Morgan AG- Frankfurt Services S.A. Acct: Chase Manhattan London 2 Piazza San Fedele Acct #: 6231400604 20121 Milan BIC Code: CHASDEFX ITALY a/c 6674.65 BIC Code: PARBITMM IVORY COAST Societe Generale de Banques Societe Generale en Cote d'Ivoire Paris 5 et 7, Avenue J. Anoma BIC Code: SOGEFRPP - 01 B.P. 1355 Abidjan 01 IVORY COAST BIC Code: SOGEFRPPAGM JAMAICA CIBC Trust and Merchant CIBC Trust and Merchant Bank Jamaica Ltd Bank Jamaica Limited Kingston 23-27 Knutsford Blvd. BIC Code: CITMJMKN Kingston 10 JAMAICA BIC Code: CITMJMKN JAPAN The Bank of Tokyo- JPMorgan Chase Bank Mitsubishi, Ltd. Tokyo 3-2 Nihombashi Hongkucho BIC Code: CHASJPJT 1-chome Chuo-ku Tokyo 103 JAPAN a/c 010026000 BIC Code: BOTKJPJTSAD KENYA Barclays Bank of Kenya Ltd. Barclays Bank of Kenya Ltd. C/O Barclaytrust Investment Nairobi Services & Limited BIC Code: BARCKENXXXX Mezzanine 3, Barclays Plaza, Loita St. Nairobi KENYA BIC Code: BARCKENXXXX LUXEMBOURG Banque Generale du J.P. Morgan AG- Frankfurt Luxembourg S.A. Acct #: 6231400604 50 Avenue J.F. Kennedy BIC Code: CHASDEFX L-2951 LUXEMBOURG BIC Code: BGLLLULL COUNTRY SUB-CUSTODIAN CASH CORRESPONDENT BANK - ------- ------------- -------------------------------------------- MALAYSIA HSBC Bank Malaysia Berhad HSBC Bank Malaysia Berhad 2 Leboh Ampang Kuala Lumpur 50100 Kuala Lumpur BIC Code: HBMBMYKL MALAYSIA BIC Code: HBMBMYKL MEXICO Banco J.P. Morgan, S.A. Banco J.P. Morgan, S.A. Torre Optima Mexico, D.F Paseo de las Palmas # 405 BIC Code: CHASMXMX Piso 15 Lomas de Chapultepec 11000 Mexico, D.F. MEXICO a/c 300010 BIC Code: CHASMXMX NETHERLANDS ABN AMRO bank N.V. J.P. Morgan AG- Frankfurt Kemelstede 2 Acct: Chase Manhattan London P.O. Box 3200 Acct #: 6231400604 4800 De Breda BIC Code: CHASDEFX NETHERLANDS NECICOM # 0410743429 BIC Code: ABNANL2A NEW ZEALAND National Nominees Limited National Bank of New Zealand Level 2 BNZ Tower Wellington 125 Queen Street BIC Code: NBNZNZ22 Auckland New Zealand BIC Code: NATANZ22 NORWAY Den norske Bank ASA Den norske Bank ASA Stranden 21 Oslo PO Box 1171 Sentrum BIC Code: DNBANOKK N-0107 Oslo NORWAY a/c 050050033070 BIC Code: DNBANOKK PERU Citibank, N.A. Banco de Credito del Peru Camino Real 457 Lima Torre Real - 5th Floor BIC Code: BCPLPEPL San Isidro, Lima 27 PERU BIC Code: CITIUS33LIM PHILIPPINES The Hongkong and Shanghai The Hongkong and Shanghai Banking Banking Corporation Limited Corporation Limited Manila 30/F Discovery Suites BIC Code: HSBCPHMM 25 ADB Avenue Ortigas Center Pasig City, Manila PHILIPPINES BIC Code: HSBCPHMM COUNTRY SUB-CUSTODIAN CASH CORRESPONDENT BANK - ------- ------------- -------------------------------------------- POLAND Bank Handlowy w. Warszawie Bank Rozwoju Eksportu S.A. S.A. Warsaw ul. Senatorska 16 BIC Code: BREXPLPW 00-082 Warsaw POLAND BIC Code: BHWAPLPW PORTUGAL Banco Espirito Santo, S.A J.P. Morgan AG- Frankfurt 7th floor Acct: Chase Manhattan London Rua Castilho, 26 Acct #: 6231400604 1250-069 Lisbon BIC Code: CHASDEFX PORTUGAL a/c 099332090018 BIC Code: BESCPTPL SINGAPORE Standard Chartered Bank Oversea-Chinese Banking Corporation 3/F, 6 Battery Road Singapore 049909 BIC Code: OCBCSGSG SINGAPORE a/c SG0000025464 BIC Code: SCBLSGSG SOUTH AFRICA The Standard Bank of The Standard Bank of South Africa Ltd. South Africa Ltd. Johannesburg Standard Bank Centre BIC Code: SBZAZAJJ 1st Floor 5 Simmonds Street Johannesburg 2001 SOUTH AFRICA a/c 400564092 BIC Code: SBZAZAJJ SOUTH KOREA The Hongkong and Shanghai The Hongkong and Shanghai Banking Banking Corporation Limited Corporation Limited BIC Code: HSBCKRSE 5/F HSBC Building #25, Bongrae-dong 1-ga Seoul SOUTH KOREA BIC Code: HSBCKRSE SPAIN J.P. Morgan Bank, S.A. J.P. Morgan AG-Frankfurt Paseo de la Castellana, 51 BIC Code: CHASDEFX 28046 Madrid SPAIN A/c 877710 BIC Code: CHASES2X SWEDEN Skandinaviska Enskilda Svenska Handelsbanken Banken Sergels Torg 2 Stockholm SE-106 40 Stockholm BIC Code: HANDSESS SWEDEN a/c 01-001 239 423 BIC Code: ESSESESS SWITZERLAND UBS AG UBS AG 45 Bahnhofstrasse Zurich 8021 Zurich BIC Code: UBSWCHZH80A SWITZERLAND a/c 01-001 239 423 BIC Code: UBSWCHZH80A COUNTRY SUB-CUSTODIAN CASH CORRESPONDENT BANK - ------- ------------- -------------------------------------------- TAIWAN The Hongkong and Shanghai The Hongkong and Shanhai Banking Banking Corporation Limited Corporation Limited Taipei International Trade Building BIC Code: HSBCTWTP 16th Floor, Taipei World Trade Cntr 333 Keelung Road, Sec. 1 Taipei 110 TAIWAN BIC Code: HSBCTWTP THAILAND Standard Chartered Bank Standard Chartered Bank 14th Floor, Zone B Bangkok Sathorn Nakorn Tower BIC Code: SCBLTHBX 100 North Sathorn Road Bangrak Bangkok 10500 THAILAND a/c TH0000038460 BIC Code: SCBLTHBX TURKEY JPMorgan Chase Bank JPMorgan Chase Bank Emirhan Cad. No: 145 Istanbul Atakule, A Blok Kat: 11 BIC Code: CHASTRIS 80700-Dikilitas/Besiktas Istanbul TURKEY BIC Code: CHASTRIS U.K. JPMorgan Chase Bank National Westminster Bank Crosby Court London Ground Floor Sort code: 60-92-42 38 Bishopsgate Acct: Chase Manhattan Bank London London EC2N 4AJ SIC Code: NWBKGB2L UNITED KINGDOM BIC Code: CHASGB2L U.S.A. JPMorgan Chase Bank JPMorgan Chase Bank 4 New York Plaza New York New York BIC Code: CHASUS33 NY 10004 U.S.A. BIC Code: CHASUS33 VENEZUELA Citibank, N.A. Citibank, N.A. Carmelitas a Altagracia Caracas Edificio Citibank BIC Code: CITIUS33VEC Caracas 1010 VENEZUELA BIC Code: CITIUS33VEC
EX-99.D 6 vgi2001servagmt.txt VGISERVICEAGREEMENT FOURTH AMENDED AND RESTATED FUNDS' SERVICE AGREEMENT This Fourth Amended and Restated Funds' Service Agreement, made as the 15th day of June, 2001 (the "Agreement"), between and among the 34 investment companies registered under the Investment Company Act of 1940 ("1940 Act"), whose names are set forth on the signature page of this Agreement, which together with any additional investment companies which may become a party to this Agreement pursuant to Section 5.4 are collectively called the "Funds"; and The Vanguard Group, Inc., a Pennsylvania corporation ("Service Company"). Whereas, each of the Funds has heretofore determined (as evidenced by, among many documents, prior versions* of this Agreement (the "Prior Agreements"), and by prospectuses and proxy statements of the Funds related thereto): (i) to manage and perform the corporate management, administrative and share distribution functions required for its continued operation, (ii) to create a structure which enhances the independence of the Funds from the providers of external services, (iii) to share, on an equitable and fair basis, with all of the other Funds the expenses of establishing the means to accomplish these objectives at the lowest reasonable cost; and Whereas, each of the Funds: (i) has heretofore determined that these objectives can best be accomplished by establishing a company: (a) to be wholly-owned by the Funds; (b) to provide corporate management, administrative, and distribution services, and upon the reasonable request of any Fund to provide other service to such Fund at cost; (c) to employ the executive, managerial, administrative, secretarial and clerical personnel necessary or appropriate to perform such services; and (d) to acquire such assets and to obtain such facilities and equipment as are necessary or appropriate to carry out such services, and to make those assets available to the Funds; and (ii) since May 1, 1975 (or the commencement of its operations after this date) has utilized Service Company, pursuant to the provisions of the Prior Agreements; and Whereas, each of the Funds has further heretofore recognized that it may, from time to time, be in the best interests of the Funds (i) for Service Company to provide similar services to investment companies other than the Funds, (ii) for the Funds to organize, from time to time, new investment companies which are intended to become parties to this Agreement; and, (iii) for Service Company to engage in business activities (directly or through subsidiaries), supportive of the Funds' operations as investment companies; and Whereas, each of the Funds desires to enter into a completely integrated Fourth Amended and Restated Funds' Service Agreement with the other Funds to (i) set forth the current terms and provisions of the relationships which the Funds have determined to establish; and (ii) make non-substantive amendments to the Amended and Restated Funds' Service Agreement, including correcting the names of the Funds set forth on the signature page of this Agreement. Now, Therefore, each Fund agrees with each and all of the other Funds, and with Service Company, as follows: - -------- * Funds' Service Agreement dated May 1, 1975; an Amended and Restated Funds' Service Agreement dated October 1, 1977; and an Amended and Restated Funds' Service Agreement dated May 10, 1993, and an Amended and Restated Funds' Service Agreement dated January 1, 1996, as therefore amended. I. CAPITALIZATION AND ASSETS OF SERVICE COMPANY 1.1 Capital and Assets. To provide the Service Company with the cash and with the office space, facilities and equipment necessary for it to discharge its responsibilities hereunder, each Fund agrees: A. To make cash investments in the Service Company as provided in Sections 1.2, 1.3 and 1.4. B. To assign and transfer to Service Company on and after May 1, 1975 any and all right, title and interest which the Funds may have in any office facilities and equipment necessary for it to discharge its responsibilities and in any other assets which Service Company may develop or acquire, subject only to the rights reserved in Section 1.6 (concerning certain major assets). Section 5.2 (concerning rights upon withdrawal) and Section 5.3 (concerning rights upon termination) of the Agreement. 1.2 Cash Investments in Service Company. To provide Service Company with such cash as may be necessary or appropriate from time to time to accomplish the purposes of the Funds and to discharge its responsibilities hereunder, each Fund agrees to purchase, for cash, shares of common stock of Service Company ("Shares") or such other securities of Service Company (hereafter referred to as "other securities") upon the favorable vote of the holders of a majority of the Shares adopting a resolution setting forth the terms and provisions of the purchase. Provided, however, that: A. Without the consent of all of the Funds, the date for the purchase of Shares or other securities shall not be less than 15 days following the date on which the resolution is approved by the shareholders. B. The cash purchase price to be paid by any Fund for the Shares or other securities, expressed as a percentage of the total purchase price for the additional securities to be paid by all of the Funds shall not exceed the percentage which the then current net assets of the Fund bears to the aggregate current net assets of all of the Funds as of the most recent month-end preceding the purchase date. 1.3 Periodic Adjustments of Cash Investments. To maintain and re-establish periodically a fair and proportionate ratio of cash investments by each Fund in the Service Company as compared to its then current net assets, each Fund agrees to purchase from one or more of the other Funds, or to sell one or more of the Funds, sufficient Shares or other securities to re-establish the ratio. A. Such purchases and sales shall be made (1) as of the last business day of any month upon the addition or withdrawal of any Fund as a party to this Agreement, provided that if the addition or withdrawal of a Fund creates no material disparity in the ratios (as determined by the Service Company's Board of Directors), and no Fund requests that an adjustment be made, the adjustment may be deferred until the close of the Service Company's fiscal year; (2) in connection with additional investments pursuant to Section 1.2; and (3) annually as of the close of the Service Company's fiscal year, on a date fixed by Service Company's Board of Directors within 90 days after the close of the fiscal year unless there is no material disparity in the ratios (as determined by the Service Company's Board of Directors) and no Fund requests that an adjustment be made. B. The cash purchases and sale price of the Share or other securities shall be for each Fund (1) in the case of Shares, the fair market value of Shares determined in accord with generally accepted accounting principles and procedures established by the Board of Directors of Service Company; and (2) in the case of debt securities, the face value thereof. C. Unless specifically required by applicable law, the issuance and transfer of Shares or other securities of Service Company, and the cash investments of the Funds in Service Company, may be evidenced by proper records of Service Company; and no certificates need be issued. 1.4 Limitation Upon Funds' Obligations to Make Cash Investments or Purchases. Notwithstanding the provisions of Sections 1.1, 1.2 and 1.3 above, no Fund shall be obligated to purchase Shares or other securities of Service Company if, as a result of such purchase the Fund would thereby have invested in cash a total of more than 0.40% of its then current net assets in Shares or other securities of Service Company. 1.5 Restrictions on Transfer of Shares or Other Securities. Each Fund agrees that it will not, without the written consent of all other parties to this Agreement, transfer or dispose of or encumber any of its Shares or other securities of Service Company except as provided in this Agreement, and that, if issued, each certificate for Shares or other securities of Service Company will be stamped with a legend referring to this restriction. 1.6 Assets of Service Company. The Funds agree that Service Company may acquire, by purchase or lease, office space, furniture, equipment, supplies, files, records, computer hardware and software, and other assets necessary or appropriate for the discharge of the Service Company's responsibilities hereunder. Each of the Funds hereby assigns and transfers to Service Company, any and all right, title and interest that it may have or hereafter acquire in any such assets, subject to the rights of each Fund (A) to receive the then fair value of such assets upon the purchase or sale of Shares pursuant to this Agreement, (B) to the continued use of such assets in the administration of the business affairs of a Fund so long as the Fund remains a party to this Agreement. 1.7 Borrowing by Service Company. The Funds agree that Service Company may borrow money, and may issue a note or other security in connection with such borrowing, as long as such borrowing, is in connection with the discharge of Service Company's responsibilities hereunder and is undertaken in accord with procedures approved by the Service Company's Board of Directors. II. SERVICES TO BE OBTAINED INDEPENDENTLY BY EACH FUND 2.1 Services and Expenses. Each Fund shall, at its own expense, obtain from Service Company or an outside vendor (as that Fund's Board of Directors shall determine): A. Services of an independent public accountant. B. Services of outside legal counsel. C. Transfer agency services, including "shareholder services." D. Custodian, registrar and dividend disbursing services. E. Brokerage fees, commissions and transfer taxes in connection with the purchase and sale of securities for its investment portfolio. F. Investment advisory services. G. Taxes and other fees applicable to its operations. H. Costs incident to its annual or special meetings of shareholders, including but not limited to legal and accounting fees, and the preparations, printing and mailing of proxy materials. I. Directors' fees. J. Costs incurred in the continued maintenance of its corporate existence, including reports to shareholders and government agencies, and the expenses, if any, attributable to the registration of the Fund's shares with Federal and state regulatory authorities. K. And, in general and except as provided in Section 3.2(B), any other costs directly attributable to and identified with a particular Fund or Funds rather than all Funds which are parties to this Agreement. 2.2 Disbursement of Payment for These Services. Notwithstanding the provisions of Section 2.1 above, Service Company may, as agent for any Fund, disburse to third parties payments for any of the foregoing services or expenses. Each Fund shall reimburse Service Company promptly for such disbursements made on behalf of the Fund. III. SERVICES PROVIDED BY AND EXPENSES OF SERVICE COMPANY 3.1 Services to be Provided to Funds. Service Company shall with respect to each Fund, subject to the direction and control of the Board of Directors and officers of the Fund: A. Manage, administer and/or conduct the general business activities of the Fund. B. Provide the personnel and obtain the office space, facilities and equipment necessary to perform such general business activities under the direction of the Funds' executive officers (who may also be officers of Service Company) who will have the full responsibility for the general management of these functions. C. Establish wholly-owned subsidiaries, and supervise the management and operations of such subsidiaries, as are necessary or appropriate to carry on or support the business activities of the Fund; and authorize such subsidiaries to perform such other functions for the Fund, including organizing new investment companies which are intended to become parties to this Agreement pursuant to Section 5.4, as Service Company's Board of Directors shall determine. No provisions hereof shall prohibit the Service Company from performing such additional services to the Fund as the Fund's Board of Directors may appropriately request and which two-thirds of the shareholders of the Service Company shall approve. 3.2 Expenses of Operation of Service Company. Each of the Funds agrees to pay to the Service Company, within 10 days after the last business day of each month or at such other time as agreed to by the Fund and the Service Company, the Fund's portion of the actual costs of operation of Service Company for each monthly period, or for such other period as is agreed upon, during which the Fund is a party to this Agreement. A. Corporate Management and Administrative Expenses. A Fund's portion of the cost of operation of Service Company shall mean its share of the direct and indirect expenses of Service Company's providing corporate management and administrative services, including distribution services of an administrative nature, as allocated among the Funds with Allocation of indirect costs based on one or more of the following methods of allocation: (1) Net Assets: The proportionate allocation of expenses based upon the value of each Fund's net assets, computed as a percentage of the value of total net assets of all Funds receiving services from Service Company, determined at the end of the last preceding monthly period. (2) Personnel Time: The proportionate allocation of expenses based upon a summary by each Fund of the time spent by each employee who works directly on the affairs of one or more of the Funds, computed as a percentage of the total time spent by such employee on the affairs of all of the Funds. (3) Shareholder Accounts: The proportionate allocation of expenses based upon the number of each Fund's shareholder accounts and transaction activity in those accounts, measured over a period of time, relative to the total number of shareholder accounts and transaction activity in those accounts for all Funds receiving number of portfolio transactions for all Funds receiving services from the Service Company during such period. (4) Such other methods of allocation as may be approved by the Board of Directors of the Service Company based upon its determination that the allocation method is fair to each Fund in view of (i) the nature, amount and purpose of the expenditure, (ii) the benefits, if any, to be derived directly by each Fund relative to the benefits derived by other Funds, (iii) the need or desirability for the Funds as a group to provide competitive investment programs and services at competitive prices for the group to survive and grow, (iv) the benefits which each Fund derives by being a member of a strong Fund group, and (v) such other factors as the Board considers relevant to the specific expenditure and allocation. B. Distribution Expenses. Each of the Funds expressly agrees to pay to Service Company, as requested, the Fund's portion of the actual cost of distributing shares of the Funds, which shall mean its share of all of the direct and indirect expenses of a marketing and promotional nature including, but not limited to, advertising, sales literature, and sales personnel, as well as expenditures on behalf of any newly organized registered investment company which is to become a party of this Agreement pursuant to Section 5.4. The cost of distributing shares of the Funds shall not include distribution-related expenses of an administrative nature, which shall be allocated among the Funds pursuant to Section 3.2(A). Distribution expenses of a marketing and promotional nature shall be allocated among the Funds in the manner approved by the Securities and Exchange Commission in Investment Company Act Release No. 11645 (Feb. 25, 1981): (1) 50% of these expenses will be allocated based upon each Fund's average month-end assets during the preceding quarter relative to the average month-end assets during the preceding quarter of the Funds as a group. (2) 50% of these expenses will be allocated initially among the Funds based upon each Fund's sales for the 24 months ended with the last day of the preceding quarter relative to the sales of the Funds as a group for the same period. (Shares issued pursuant to a reorganization shall be excluded from the sales of a Fund and the Funds as a group.) (3) Provided, however, that no Fund's aggregate quarterly contribution for distribution expenses, expressed as a percentage of its assets, shall exceed 125% of the average expenses for the Funds as a Group, expressed as a percentage of the total assets of the Funds. Expenses not charged to a particular Fund(s) because of this 125% limitation shall be reallocated to other Funds on iterative basis; and that no Fund's annual expenses for distribution shall exceed 0.2% of its average month-end net assets. IV. CONCERNING THE SERVICE COMPANY 4.1 Name. Each Fund acknowledge and agrees: A. That the name "The Vanguard Group, Inc.", and any variants thereof used to identify (1) the Funds as a group, (2) any Fund as a member of a group being served by Service Company, or (3) any other person as being served or related to Service Company (whether now in existence or hereafter created), shall be the sole and exclusive property of Service Company, its affiliates, and its successors. B. That Service Company shall have the sole and exclusive right to permit the use of said name or variants thereof so long as this Agreement or any amendments thereto are effective. C. That upon its withdrawal from this Agreement and upon the written request of Service Company, the Fund shall cease to use, or in any way to refer to itself as related to, "The Vanguard Group, Inc." or any variant thereof. The foregoing agreements on the part of each Fund are hereby made binding upon it, its directors, officers, shareholders and creditors and all other persons claiming under or through it. 4.2 Services to Others. The Service Company may render services to any person other than the Funds so long as: A. The services to be rendered to the Funds hereunder are not impaired thereby. B. The terms and provisions upon which the services are to be rendered have been approved by the holders of a majority of the Shares. C. The services rendered for compensation and, to the extent achievable, for the purpose of gaining a profit thereon. D. Any income earned and fees received by Service Company shall be used to reduce the total costs and expenses of Service Company. 4.3 Books, Records, and Audits of Service Company. The Service Company, and any subsidiary established pursuant to Section 3.1(C), shall maintain complete, accurate, and current books, records, and financial statements concerning its activities. To the extent appropriate, it will preserve said records in the manner and for the periods prescribed by law. Financial records and statements shall be kept in accord with generally accepted accounting principles and shall be audited at least annually by independent public accountants (who may also be accountants for any of the Funds). Within 120 days after the close of Service Company's fiscal year, it shall deliver to each Fund a copy of its audited financial statements for that year and the accountants report thereon. Service Company, on behalf of itself and any subsidiary, acknowledges that all of the records they shall prepare and maintain pursuant to this Agreement shall be the property of the Funds and that upon a request of any Fund they shall make the Fund's records available to it, along with such other information and data as are reasonably requested by the Fund, for inspection, audit or copying, or turn said records over to the Fund. 4.4 Indemnification. A. Each Fund (herein the "Indemnitor") agrees to indemnify, hold harmless, and reimburse (herein "indemnify") every other Fund, Service Company and/or any subsidiary of Service Company (herein the "Indemnitee"): (1) which Indemnitee (a) was or is a party to, or is threatened to be made a party to, any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (herein a "suit"), or (b) incurs an actual economic loss or expense (herein a "loss"). (2) if: (a) such suit or loss arises from an action or failure to act, event, occurrence, transaction, or other analogous happening (herein an "event") under circumstances in which the Indemnitee is involved in a suit or incurs a loss. (i) as a result substantially of, or attributable primarily to, its being a party to this Agreement, or to its indirect participation in transactions contemplated by this Agreement; and (ii) where the suit or loss arises primarily and substantially from an event related primarily and substantially to the business and/or operations of the Indemnitor; and (b) an independent third party, who may but need not be legal counsel for the Funds, advises the Funds in writing (i) that the condition set forth in "(1)" and "(2)(a)" have occurred and (ii) that the Indemnitee is without significant fault or responsibility for the suit or loss as measured by the comparative conduct of the Indemnitor and Indemnitee and by the purposes sought to be accomplished by this Agreement. B. The financial obligations of the Indemnitor under this Section shall be limited to: (1) In the case of a suit, to expenses (including attorneys' fees), actually incurred by the Indemnitee. The termination of any suit by judgment, order, settlement, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the Indemnitee is not entitled to be indemnified hereunder. (2) In the case of an event, to losses and/or expenses (including attorney's fees) actually incurred by the Indemnitee. The Indemnitee shall not be liable financially hereunder for lost profits in the case of either a suit or loss. C. Expenses incurred in defending a suit or resolving an event may be paid by the prospective Indemnitor in advance of the final disposition of such suit or event if authorized by the Board of Directors of the prospective Indemnitor in the specific case upon receipt of an undertaking by or on behalf of the prospective indemnitee to repay such amount unless it shall ultimately be determined that the Indemnitee is entitled to be indemnified by the Indemnitor as provided in this Section. D. The indemnification provided by this section shall not be deemed exclusive of any other rights to which the Indemnitee may be entitled under any agreement or otherwise. V. TERM OF AGREEMENT 5.1 Effective Period. This Agreement shall become effective on the date first written above, and shall continue in full force and effect as to all parties hereto until terminated or amended by mutual agreement of all parties hereto. The withdrawal pursuant to Section 5.2(A) or 5.2(B) of one or more of the Funds from this agreement shall not affect the continuance of this Agreement except as to the parties withdrawing. 5.2 Withdrawal from Agreement. A. Any Fund may elect to withdraw from this Agreement effective at the end of any monthly period by giving at least 90 days' prior written notice to each of the parties to this Agreement. Upon the written demand of all other Funds which are parties to this Agreement a Fund shall withdraw, and in the event of its failure to do so shall be deemed to have withdrawn, from this Agreement; such demand shall specify the date of withdrawal which shall be at the end of any monthly period at least 90 days from the time of service of such demand. B. In the event of the withdrawal of any Fund from this Agreement, all its rights and obligations, except for lease commitments, under this Agreement (except such rights or obligations as have accrued prior to the date of withdrawal) shall terminate as of the date of the withdrawal. The withdrawing Fund shall surrender its Shares to Service Company, and (1) shall be entitled to receive from Service Company an amount equal to the excess of the fair value of (i) its Shares of other securities Service Company as of the date of its withdrawal less (ii) its proportionate interest in any liabilities of Service Company, including when appropriate any commitments of Service Company and unexpired leases at the date of withdrawal; (2) shall be obligated to pay Service Company an amount equal to the excess of (ii) over (i). Such amount to be received from or paid to Service Company shall be determined by the favorable vote of the holders of a majority of the Shares whose determination shall be conclusive upon the Funds. Any amount found payable by the Service Company to the withdrawing Fund shall be recoverable by Service Company from the Funds remaining under this Agreement in accordance with the provisions of Section 1.2, 1.3 and 1.4 hereof. 5.3 Termination by Mutual Consent. In the event that all Funds withdraw from this Agreement without entering into a comparable successor agreement, each Fund shall surrender its Shares to Service Company and after payment by Service Company of all its liabilities, including the settlement of unexpired lease obligations, shall: A. Receive from Service Company in cash an amount equal to its proportionate share of the actual value of all assets of the Service Company which can be reduced readily to cash. B. Negotiate in good faith with the other Funds provision for the equitable use and/or disposition of assets of the Service Company which are not readily reducible to cash. 5.4 Additional Parties to Agreement. Upon the favorable vote of two-thirds of the shareholders and of the holders of two-thirds of the Shares of the Service Company, any investment company registered under the Investment Company Act of 1940 may become a party to this Agreement and share as a Fund in all of the rights, duties and liabilities hereunder by adopting, executing and delivering to the Service Company and the Funds a signed copy of this Agreement which shall evidence that investment company's agreement to assume the duties and obligations of a Fund hereunder. Upon the delivery of a signed copy of this Agreement, the new Fund shall be subject to all provisions of this Agreement and become a holder of Shares by adjustment in cash investments among the Funds pursuant to Section 1.3. No person shall become a holder of shares without becoming a party to this Agreement. VI. GENERAL 6.1 Definition of Certain Terms. As used in this Agreement, the terms set forth below shall mean: A. "Fair Value of Shares" shall mean the proportionate interest, as represented by the ratio of the number of Shares owned by a Fund to the number of Shares issued and outstanding, in all assets of the Service Company less all liabilities of the Service Company on the date fair value is to be determined. Assets shall be valued at fair market value. In case of any dispute as to the proportionate interest of any Fund or as to the fair value of the Shares, the issue shall be determined by the favorable vote of the holders of a majority of the Shares, whose determination shall be conclusive upon the Fund. B. "Person" shall mean a natural person, a corporation, a partnership, an association, a joint-stock company, a trust, a fund or any organized group of persons whether incorporated or not. 6.2 Assignment. This Agreement shall bind and inure to the benefit of the parties thereto, their respective successors and assigns. 6.3 Captions. The captions in this Agreement are included for convenience of reference only and in no way define any of the provisions hereof or otherwise affect their construction or effect. 6.4 Amendment. Unless prohibited by applicable laws, regulations or orders of regulatory authorities and except as set forth below, this Agreement may be amended at any time and in one or more respects upon the favorable vote of the holders of a majority of the Shares (except that the vote required in Sections 3.1 and 5.4 may be amended only by the favorable votes of the number of holders or Shares specified therein) and without the further approval or vote of shareholders of any of the Funds; provided, however, that Section 1.4 (limiting cash investments by the Funds in Service Company) may not be amended unless and exemptive order permitting such amendment is obtained from the U.S. Securities and Exchange Commission. 6.5 Severability. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. In Witness Whereof, each of the parties hereto has caused the Agreement to be signed and its corporate seal to be hereto affixed by its proper officers thereunto duly authorized, all as of the date and year first above written. The Vanguard Group, Inc. Attest: /S/ Raymond J. Klapinsky BY: /S/ John J. Brennan Raymond J. Klapinsky John J. Brennan Secretary Chairman, President, and Chief Executive Officer The Vanguard Group of Investment Companies: Vanguard Admiral Funds Vanguard Balanced Index Funds Vanguard Bond Index Funds Vanguard California Tax-Free Funds Vanguard Convertible Securities Fund Vanguard Explorer Fund Vanguard Fenway Funds Vanguard Fixed Income Securities Funds Vanguard Florida Tax-Free Funds Vanguard Horizon Funds Vanguard Index Funds Vanguard International Equity Index Funds Vanguard Malvern Funds Vanguard Massachusetts Tax-Exempt Funds Vanguard Money Market Reserves Vanguard Morgan Growth Fund Vanguard Municipal Bond Funds Vanguard New Jersey Tax-Free Funds Vanguard New York Tax-Free Funds Vanguard Ohio Tax-Free Funds Vanguard Pennsylvania Tax-Free Funds Vanguard Preferred Stock Fund Vanguard PRIMECAP Fund Vanguard Quantitative Funds Vanguard Specialized Funds Vanguard Tax-Managed Funds Vanguard Treasury Fund Vanguard Trustees' Equity Fund Vanguard Variable Insurance Funds Vanguard Wellesley Income Fund Vanguard Wellington Fund Vanguard Whitehall Fund Vanguard Windsor Funds Vanguard World Fund Attest: /S/ Raymond J. Klapinsky BY: /S/ John J. Brennan Raymond J. Klapinsky John J. Brennan Secretary Chairman, President, and Chief Executive Officer EX-99.J 7 consent.txt ACCOUNTANTSCONSENT CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectuses and Statement of Additional Information constituting parts of this Post-Effective Amendment No. 85 to the registration statement on Form N-1A (the "Registration Statement") of our reports dated January 30, 2003, and February 5, 2003, relating to the financial statements and financial highlights appearing in the December 31, 2002 Annual Reports to Shareholders of Vanguard 500 Index Fund, Vanguard U.S. Stock Index Funds, Vanguard Institutional Index Fund, Vanguard Institutional Total Stock Market Index Fund, and Vanguard Institutional Total Bond Market Index Fund which are also incorporated by reference into the Registration Statement. We also consent to the references to us under the heading "Financial Highlights" in the Prospectuses and under the headings "Financial Statements" and "Service Providers--Independent Accountants" in the Statement of Additional Information. PricewaterhouseCoopers LLP Philadelphia, PA April 10, 2003 -----END PRIVACY-ENHANCED MESSAGE-----