-----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, JwXAvn71Sl47mkWFSE9lznez/A7a0HzQtHKkc5sWe7x4cW8Dfh7WZaUbRFURlpsO rZiRnTQlzKFqi47xR6beUw== 0000932471-03-000624.txt : 20030627 0000932471-03-000624.hdr.sgml : 20030627 20030627164246 ACCESSION NUMBER: 0000932471-03-000624 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 20030627 EFFECTIVENESS DATE: 20030627 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: 03761751 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 FUNDS/ DATE OF NAME CHANGE: 20011121 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 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: 03761752 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 FUNDS/ DATE OF NAME CHANGE: 20011121 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 485BPOS 1 vit485b052003.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. 87 AND REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 AMENDMENT NO. 88 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 JULY 3, 2003 PURSUANT TO PARAGRAPH (B) OF RULE 485. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The Vanguard VIPER Shares Prospectus, is incorporated by reference from the prior filing of the 85th Post-Effective Amendment to the Trust's Registration Statement on Form N-1A, filed on April 16, 2003. VANGUARD(R) U.S. STOCK INDEX FUNDS Investor Shares & Admiral(TM) Shares . July 3, 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 JULY 3, 2003 - -------------------------------------------------------------------------------- CONTENTS 1 AN INTRODUCTION TO INDEX FUNDS 34 DIVIDENDS, CAPITAL GAINS, AND TAXES 2 FUND PROFILES 36 SHARE PRICE 2 Vanguard Total Stock Market Index Fund 37 FINANCIAL HIGHLIGHTS 5 Vanguard 500 Index Fund 46 INVESTING WITH VANGUARD 7 Vanguard Extended Market Index Fund 46 Buying Shares 10 Vanguard Mid-Cap Index Fund 48 Converting Shares 13 Vanguard Small-Cap Index Fund 49 Redeeming Shares 16 Vanguard Value Index Fund 51 Exchanging Shares 19 Vanguard Small-Cap Value Index Fund 52 Other Rules You Should Know 22 Vanguard Growth Index Fund 54 Fund and Account Updates 25 Vanguard Small-Cap Growth Index Fund 56 Contacting Vanguard 28 MORE ON THE FUNDS 58 VIPER(R) SHARES 33 THE FUNDS AND VANGUARD GLOSSARY (inside back cover) 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 Investor Shares for nine U.S. Stock Index Funds, as well as Admiral Shares for each of these Funds except Small-Cap Growth Index Fund and Small-Cap Value Index Fund. The Buying Shares section of this prospectus, which begins on page 46, describes the eligibility requirements for each share class. If you are investing $10 million or more may wish to consider the Funds' Institutional Shares, which are offered through a separate prospectus. In addition, Total Stock Market Index Fund and Extended Market Index Fund provide an exchange-traded class of shares (VIPER Shares), which are also are offered through a separate prospectus. A Fund's separate share classes normally 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 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. Index funds attempt to mirror what the target index does, for better or worse. However, an index fund does not always perform exactly like its target index. For example, 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. WHY INDEX FUNDS? Index funds typically have the following characteristics: o Variety of investments. Vanguard index funds generally invest in the stocks 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. 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. - -------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------- *[MSCI LOGO] 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 typically invests all, or substantially all, of its assets in the 1300 largest stocks in its target Index (covering nearly 95% of the Index's total market capitalization), and in a representative sample of the remainder. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.14%. ---------------------------------------------------- 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). 3 The table below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns (before and after taxes) do 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% - -------------------------------------------------------------------------------- *From the inception of the Admiral Shares on November 13, 2000, through December 31, 2002, the average annual total returns were -16.18% for the Fund's Admiral Shares and -16.19% for the Wilshire 5000 Index. - -------------------------------------------------------------------------------- NOTE ON AFTER TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes, and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. 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, a widely recognized benchmark of U.S. stock market performance that is dominated by the stocks of large U.S. companies. The Fund attempts to replicate the target index by investing substantially all of its assets in the stocks that make up the Index, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.19%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns (before and after taxes)do not indicate how it will perform in the future. 6 - -------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------- *From the inception of the Admiral Shares on November 13, 2000, through December 31, 2002, the average annual total returns were -17.06% for the Fund's Admiral Shares and -17.03% for the S&P 500 Index. - -------------------------------------------------------------------------------- NOTE ON AFTER TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes, and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. 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: 0.16% 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. 7 - --------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 the 1,200 largest stocks in its target index (covering nearly 80% of the Index's total market capitalization), and in a representative sample of the remainder. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, please see MORE ON THE FUNDS. 8 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.30%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns (before and after taxes) do 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% - -------------------------------------------------------------------------------- *From the inception of the Admiral Shares on November 13, 2000, through December 31, 2002, the average annual total returns were -14.66% for the Fund's Admiral Shares and -14.69% for the Wilshire 4500 Index. - -------------------------------------------------------------------------------- 9 NOTE ON AFTER TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes, and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. 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): $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. 10 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 MSCI(R) US Mid Cap 450 Index, a broadly diversified index of stocks 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. 11 ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 15.32 2000 18.10 2001 -0.50 2002 -14.61 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -4.45%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns (before and after taxes)do 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% -- - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes) S&P MIDCAP 400 INDEX -14.51% 4.69% SPLICED MID CAP INDEX -14.51 4.69 MSCI US MID CAP 450 INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. ** From the inception of the Admiral Shares on November 12, 2001, through December 31, 2002, the average annual total returns were -6.78% for the Fund's Admiral Shares and -6.04% for the S&P MidCap 400 Index. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes, and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Mid Cap 450 Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P MidCap 400 Index served as the Fund's target index. The Spliced Mid Cap Index reflects performance of the S&P MidCap 400 Index through May 16, 2003, and performance of the MSCI US Mid Cap 450 Index thereafter. 12 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): $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. 13 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 MSCI(R) US Small Cap 1750 Index, a broadly diversified index of stocks of smaller 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. 14 ---------------------------------------------------- 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -4.53%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns (before and after taxes) do 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% -- -- - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes) RUSSELL 200O INDEX -20.48% -1.36% 7.16% SPLICED SMALL CAP INDEX -20.48 -1.36 7.16 MSCI US SMALL CAP 1750 INDEX -- -- -- - -------------------------------------------------------------------------------- * From the inception of the Admiral Shares on November 13, 2000, through December 31, 2002, the average annual total returns were -7.84% for the Fund's Admiral Shares and -5.86% for the Russell 2000 Index. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes, and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Small Cap 1750 Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the Russell 2000 Index served as the Fund's target index. The Spliced Small Cap Index reflects performance of the Russell 2000 Index through May 16, 2003, and performance of the MSCI US Small Cap 1750 Index thereafter. 15 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): $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. 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 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 - -------------------------------------------------------------------------------- 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 MSCI(R) US Prime Market Value Index, a broadly diversified index of value stocks of predominantly 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. 17 ---------------------------------------------------- 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -5.61%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns (before and after taxes) do 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% -- -- - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes) S&P 500/BARRA VALUE INDEX -20.85% -0.85% 9.39% SPLICED VALUE INDEX -20.85 -0.85 9.39 MSCI US PRIME MARKET VALUE INDEX -- -- -- - -------------------------------------------------------------------------------- * From the inception of the Admiral Shares on November 13, 2000, through December 31, 2002, the average annual total returns were -14.30% for the Fund's Admiral Shares and -14.28% for the S&P 500/Barra Value Index. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes, and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Prime Market Value Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P 500/Barra Value Index served as the Fund's target index. The Spliced Value Index reflects performance of the S&P 500/Barra Value Index through May 16, 2003, and performance of the MSCI US Prime Market Value Index thereafter. 18 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: 0.20% 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. 19 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 MSCI(R) US Small Cap Value Index, a broadly diversified index of value stocks of smaller 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. 20 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended May 31, 2003, was -4.53%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns (before and after taxes) do 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 of Fund Shares -8.46 0.41 - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes) S&P SMALLCAP 600/BARRA VALUE INDEX -14.47% 0.95% SPLICED SMALL CAP VALUE INDEX -14.47 0.95 MSCI US SMALL CAP VALUE INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes, and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Small Cap Value Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P SmallCap 600/Barra Value Index served as the Fund's target index. The Spliced Small Cap Value Index reflects performance of the S&P SmallCap 600/Barra Value Index through May 16, 2003, and performance of the MSCI US Small Cap Value Index thereafter. 21 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 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 - -------------------------------------------------------------------------------- 22 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 MSCI(R) US Prime Market Growth Index, a broadly diversified index of growth stocks of predominantly 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -0.91%. ---------------------------------------------------- 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). 23 The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns (before and after taxes)do 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% -- -- - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes) S&P500/BARRA GROWTH INDEX -23.59% -1.08% 8.79% SPLICED GROWTH INDEX -23.59 -1.08 8.79 MSCI US PRIME MARKET GROWTH INDEX -- -- -- - -------------------------------------------------------------------------------- * From the inception of the Admiral Shares on November 13, 2000, through December 31, 2002, the average annual total returns were -20.40% for the Fund's Admiral Shares and -20.27% for the S&P 500/Barra Growth Index. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes, and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Prime Market Growth Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P 500/Barra Growth Index served as the Fund's target index. The Spliced Growth Index reflects performance of the S&P 500/Barra Growth Index through May 16, 2003, and performance of the MSCI US Prime Market Growth Index thereafter. 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. 24 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. 25 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 MSCI(R) US Small Cap Growth Index, a broadly diversified index of growth stocks of smaller 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. 26 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.60%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's part returns (before and after taxes) do 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 - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (relfects no deduction for fees, expenses, or taxes) S&P SMALLCAP 600/BARRA GROWTH INDEX -15.36% -0.97% SPLICED SMALL CAP GROWTH INDEX -15.36 -0.97 MSCI US SMALL CAP GROWTH INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes, and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Small Cap Growth Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P SmallCap 600/Barra Growth Index served as the Fund's target index. The Spliced Small Cap Growth Index reflects performance of the S&P SmallCap 600/Barra Growth Index through May 16, 2003, and performance of the MSCI US Small Cap Growth Index thereafter. 27 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 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 - -------------------------------------------------------------------------------- 28 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. MARKET EXPOSURE The Funds invest mainly in common stocks. As a result, the Funds are subject to certain risks. [FLAG] EACH FUND IS SUBJECT TO 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. 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. 29 Similarly, indexes that focus on growth stocks or value stocks will not necessarily perform in the same way as the broader S&P 500 Index. Both growth and value stocks have the potential at times to be more volatile than the broader markets. 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 May 31, 2003 is listed below: ---------------------------------------------- MEDIAN MARKET VANGUARD INDEX FUND CAPITALIZATION ---------------------------------------------- Total Stock Market $26.9 billion 500 49.6 Extended Market 1.7 Mid-Cap 3.8 Small-Cap 1.0 Value 35.3 Small-Cap Value 0.6 Growth 55.4 Small-Cap Growth 1.0 ---------------------------------------------- [FLAG]EACH FUND, EXCEPT 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. AS A GROUP, 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 30 SECURITY SELECTION Each Fund attempts to track the investment performance of a benchmark index that measures the return of a particular market segment. The 500, Mid-Cap, Small-Cap, Value, Small-Cap Value, Growth, and Small-Cap Growth Index Funds use the replication method of indexing, meaning that each Fund holds the same stocks as its target index, and in approximately the same proportions. The Total Stock Market and Extended Market Index Funds use a sampling method of indexing, with each Fund holding a representative sample of the stocks that make up its target index. The following table shows the number of stocks held by each Fund, and the number of stocks in its target index, as of May 31, 2003. -------------------------------------------------------- NUMBER OF NUMBER OF STOCKS VANGUARD INDEX FUND STOCKS HELD IN TARGET INDEX -------------------------------------------------------- Total Stock Market 3,729 5,513 500 504 500 Extended Market 3,246 5,017 Mid-Cap 465 452 Small-Cap 1,790 1,739 Value 413 410 Small-Cap Value 976 944 Growth 411 407 Small-Cap Growth 1,025 1,007 -------------------------------------------------------- RISK OF NONDIVERSIFICATION The target indexes tracked by Vanguard's U.S. Stock Index Funds include diverse stocks. 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, withthe Growth Index Fund.) For this reason, Vanguard's U.S. Stock Index Funds are classified as "nondiversified." All of the Funds, other than the Growth Index Fund, however, have in actuality been diversified, since inception, 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. Six of the Funds (Mid-Cap Index Fund, Small-Cap Index Fund, Value Index Fund, Small-Cap Value Index Fund, Growth Index Fund, and Small-Cap Growth Index Fund) switched target indexes after May 16, 2003, based upon the board of trustees' determination that this change would be in shareholders' best interests. 31 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 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 32 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: 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 33 that a Fund had sold and replaced securities valued at 100% of its net assets within a one-year period. Turnover rates for six of the Funds (Mid-Cap Index Fund, Small-Cap Index Fund, Value Index Fund, Small-Cap Value Index Fund, Growth Index Fund, and Small-Cap Growth Index Fund) are expected to be higher than normal for the fiscal year ending December 31, 2003, because of portfolio adjustments made when converting these Funds to new target indexes. - -------------------------------------------------------------------------------- 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 $580 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. 34 - -------------------------------------------------------------------------------- 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 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. 35 - -------------------------------------------------------------------------------- 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 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. - -------------------------------------------------------------------------------- 36 GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 28% 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. 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. 37 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 $14.3 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. - -------------------------------------------------------------------------------- 38
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. 39
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. 40
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. 41
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%. 42
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. 43
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. 44
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. 45
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. 46 - -------------------------------------------------------------------------------- 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. 47 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 10 p.m., Eastern time, will result in a purchase that occurs on and receives a trade date of the next business day. 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 48 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. 49 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- 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. 50 ^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 51 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: 52 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: 53 - 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. 54 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 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. 55 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. 56 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 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 57 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) 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. Standard & Poors 500 and S&P 500(R) 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. The funds or securities referred to herein that are offered by The Vanguard Group and track an MSCI Index are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group. 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. 58 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. 59 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 60 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. 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 072003 VANGUARD(R) U.S. STOCK INDEX FUNDS Investor Shares for Participants . July 3, 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 JULY 3, 2003 - -------------------------------------------------------------------------------- CONTENTS 1 AN INTRODUCTION TO INDEX FUNDS 24 MORE ON THE FUNDS 2 FUND PROFILES 29 THE FUNDS AND VANGUARD 2 Vanguard Total Stock Market Index Fund 29 INVESTMENT ADVISER 4 Vanguard 500 Index Fund 30 DIVIDENDS, CAPITAL GAINS, AND TAXES 6 Vanguard Extended Market Index Fund 30 SHARE PRICE 8 Vanguard Mid-Cap Index Fund 31 FINANCIAL HIGHLIGHTS 11 Vanguard Small-Cap Index Fund 37 INVESTING WITH VANGUARD 13 Vanguard Value Index Fund 38 ACCESSING FUND INFORMATION BY COMPUTER 16 Vanguard Small-Cap Value Index Fund GLOSSARY (inside back cover) 18 Vanguard Growth Index Fund 21 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 Funds' 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 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. Index funds attempt to mirror what the target index does, for better or worse. However, an index fund does not always perform exactly like its target index. For example, 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. WHY INDEX FUNDS? Index funds typically have the following characteristics: o Variety of investments. Vanguard index funds generally invest in the stocks 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. 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. - -------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------- *[MSCI LOGO] - -------------------------------------------------------------------------- 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 typically invests all, or substantially all, of its assets in the 1,300 largest stocks in its target index (covering nearly 95% of the Index's total market capitalization) and in a representative sample of the remainder. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.14%. ---------------------------------------------------- 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 below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. 3 - -------------------------------------------------------------------------------- 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 (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 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. 4 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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, a widely recognized benchmark of U.S. stock market performance that 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. 5 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.19%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- 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 (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 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. 6 - -------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 the 1,200 largest stocks in its target index (covering nearly 80% of the Index's total market capitalization) and in a representative sample of the remainder. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, please see MORE ON THE FUNDS. 7 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.30%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- 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 (reflects no deduction for fees, expenses, or taxes) -17.80% -1.57% 7.32% - -------------------------------------------------------------------------------- 8 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 - -------------------------------------------------------------------------------- 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. 9 PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the MSCI/(R)/ US Mid Cap 450 Index, a broadly diversified index of stocks 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -4.45%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. 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% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes) S&P MIDCAP 400 INDEX -14.51% 4.69% SPLICED MID CAP INDEX -14.51 4.69 MSCI US MID CAP 450 INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTE ON RETURNS TABLE COMPARATIVE INDEXES. The Fund adopted the MSCI US Mid Cap 450 Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P MidCap 400 Index served as the Fund's target index. The Spliced Mid Cap Index reflects performance of the S&P MidCap 400 Index through May 16, 2003, and performance of the MSCI US Mid Cap 450 Index thereafter. 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 - -------------------------------------------------- 11 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 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 - -------------------------------------------------------------------------------- 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 MSCI/(R)/ US Small Cap 1750 Index, a broadly diversified index of stocks of smaller 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. 12 ---------------------------------------------------- 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -4.53%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflect no deduction for fees, expenses, or taxes): RUSSELL 2000 INDEX -20.48% -1.36% 7.16% SPLICED SMALL CAP INDEX -20.48 -1.36 7.16 MSCI US SMALL CAP 1750 INDEX -- -- -- - -------------------------------------------------------------------------------- SPECIAL NOTE ON RETURNS TABLE COMPARATIVE INDEXES. The Fund adopted the MSCI US Small Cap 1750 Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the Russell 2000 Index served as the Fund's target index. The Spliced Small Cap Index reflects performance of the Russell 2000 Index through May 16, 2003, and performance of the MSCI US Small Cap 1750 Index thereafter. 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. 13 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 - -------------------------------------------------------------------------------- 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. 14 PRIMARY INVESTMENT STRATEGIES The Fund employs a "passive management"--or indexing--investment approach designed to track the performance of the MSCI/(R)/ US Prime Market Value Index, a broadly diversified index of value stocks of predominantly 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -5.61%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. 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% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflect no deduction for fees, expenses, or taxes) S&P 500/BARRA VALUE INDEX -20.85% -0.85% 9.39% SPLICED VALUE INDEX -20.85 -0.85 9.39 MSCI US PRIME MARKET VALUE INDEX -- -- -- - -------------------------------------------------------------------------------- SPECIAL NOTE ON RETURNS TABLE COMPARATIVE INDEXES. The Fund adopted the MSCI US Prime Market Value Index as its target index May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P 500/Barra Value Index served as the Fund's target index. The Spliced Value Index reflects performance of the S&P 500/Barra Value Index through May 16, 2003, and performance of the MSCI US Prime Market Value Index thereafter. 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 - -------------------------------------------------------------------------------- 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 MSCI/(R)/ US Small Cap Value Index, a broadly diversified index of value stocks of smaller 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. 17 ---------------------------------------------------- ANNUAL TOTAL RETURNS--INVESTOR SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 3.35 2000 21.88 2001 13.70 2002 -14.20 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -7.98%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and comparative indexes. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD SMALL-CAP VALUE INDEX FUND INVESTOR SHARES -14.20% 1.59% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflect no deduction for fees, expenses, or taxes) S&P SMALLCAP 600/BARRA VALUE INDEX -14.47% 0.95% SPLICED SMALL CAP VALUE FUND -14.47 0.95 MSCI US SMALL CAP VALUE INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTE ON RETURNS TABLE COMPARATIVE INDEXES. The Fund adopted the MSCI US Small Cap Value Index as its target index on May 16, 2003, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P SmallCap 600/Barra Value Index served as the Fund's target index. The Spliced Small Cap Value Index reflects performance of the S&P SmallCap 600/Barra Value Index through May 16, 2003, and performance of the MSCI US Small Cap Value Index thereafter. 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 - -------------------------------------------------- 18 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 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 - -------------------------------------------------------------------------------- 19 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 MSCI/(R)/ US Prime Market Growth Index, a broadly diversified index of growth stocks of predominantly 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -0.91%. ---------------------------------------------------- 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). 20 The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflect no deduction for fees, expenses, or taxes): S&P 500/BARRA GROWTH INDEX -23.59% -1.08% 8.79% SPLICED GROWTH INDEX -23.59 -1.08 8.79 MSCI US PRIME MARKET GROWTH INDEX -- -- -- - -------------------------------------------------------------------------------- SPECIAL NOTE ON RETURNS TABLE COMPARATIVE INDEXES. The Fund adopted the MSCI US Prime Market Growth Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P 500/Barra Growth Index served as the Fund's target index. The Spliced Growth Index reflects performance of the S&P 500/Barra Growth Index through May 16, 2003, and performance of the MSCI US Prime Market Growth Index thereafter. 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. 21 - -------------------------------------------------- 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. - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 22 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 MSCI/(R)/ US Small Cap Growth Index, a broadly diversified index of growth stocks of smaller 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.60%. ---------------------------------------------------- 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). 23 The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD SMALL-CAP GROWTH INDEX FUND INVESTOR SHARES -15.41% -0.60% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflect no deduction for fees, expenses, or taxes): S&P SMALLCAP 600/BARRA GROWTH INDEX -15.36% -0.97% SPLICED SMALL CAP GROWTH INDEX -15.36 -0.97 MSCI US SMALL CAP GROWTH INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Investor Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTE ON RETURNS TABLE COMPARATIVE INDEXES. The Fund adopted the MSCI US Small Cap Growth Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P SmallCap 600/Barra Growth Index served as the Fund's target index. The Spliced Small Cap Growth Index reflects performance of the S&P SmallCap 600/Barra Growth Index through May 16, 2003, and performance of the MSCI US Small Cap Growth Index thereafter. 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. 24 - -------------------------------------------------- 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 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 - -------------------------------------------------------------------------------- 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. MARKET EXPOSURE The Funds invest mainly in common stocks. As a result, the Funds are subject to certain risks. [FLAG] EACH FUND IS SUBJECT TO 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. 25 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 focus on growth stocks or value stocks will not necessarily perform in the same way as the broader S&P 500 Index. Both growth and value stocks have the potential at times to be more volatile than the broader markets. 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 May 31, 2003 is listed below: ---------------------------------------------- MEDIAN MARKET VANGUARD INDEX FUND CAPITALIZATION ---------------------------------------------- Total Stock Market $26.9 billion 500 49.6 Extended Market 1.7 Mid-Cap 3.8 Small-Cap 1.0 Value 35.3 Small-Cap Value 0.6 Growth 55.4 Small-Cap Growth 1.0 ---------------------------------------------- [FLAG] EACH FUND, EXCEPT 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. AS A GROUP, 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. 26 - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- SECURITY SELECTION Each Fund attempts to track the investment performance of a benchmark index that measures the return of a particular market segment. The 500, Mid-Cap, Small-Cap, Value, Small-Cap Value, Growth, and Small-Cap Growth Index Funds use the replication method of indexing, meaning that each Fund holds the same stocks as its target index, and in approximately the same proportions. The Total Stock Market and Extended Market Index Funds use a sampling method of indexing, with each Fund holding a representative sample of the stocks that make up its target index. The following table shows the number of stocks held by each Fund, and the number of stocks in its target index, as of May 31, 2003. -------------------------------------------------------- NUMBER OF NUMBER OF STOCKS VANGUARD INDEX FUND STOCKS HELD IN TARGET INDEX -------------------------------------------------------- Total Stock Market 3,729 5,513 500 504 500 Extended Market 3,246 5,017 Mid-Cap 465 452 Small-Cap 1,790 1,739 Value 413 410 Small-Cap Value 976 944 Growth 411 407 Small-Cap Growth 1,025 1,007 -------------------------------------------------------- RISK OF NONDIVERSIFICATION The target indexes tracked by Vanguard's U.S. Stock Index Funds include diverse stocks. 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, withthe Growth Index Fund.) For this reason, Vanguard's U.S. Stock Index Funds are classified as "nondiversified." All of the Funds, other than the Growth Index Fund, however, have in actuality been diversified since inception, and Vanguard expects them to continue to be diversified. 27 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. Six of the Funds (Mid-Cap Index Fund, Small-Cap Index Fund, Value Index Fund, Small-Cap Value Index Fund, Growth Index Fund, and Small-Cap Growth Index Fund) switched target indexes after May 16, 2003, based upon the board of trustees' determination that this change would be in shareholders' best interests. 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 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. 28 - -------------------------------------------------------------------------------- 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 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. - -------------------------------------------------------------------------------- 29 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. Turnover rates for six of the Funds (Mid-Cap Index Fund, Small-Cap Index Fund, Value Index Fund, Small-Cap Value Index Fund, Growth Index Fund, and Small-Cap Growth Index Fund) are expected to be higher than normal for the fiscal year ending December 31, 2003, because of portfolio adjustments made when converting these Funds to new target indexes. - -------------------------------------------------------------------------------- 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 $580 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. 30 - -------------------------------------------------------------------------------- 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. 31 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. 32 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 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 $14.3 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. - -------------------------------------------------------------------------------- 33
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. 34
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%. 35
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% =====================================================================================================================
36
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% =====================================================================================================================
37
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. 38 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 disrupt the management of the Vanguard funds and increase their transaction costs, Vanguard places certain limits on the exchange privilege. If you are exchanging out of Vanguard International Growth Fund, Vanguard International Value Fund, Vanguard International Explorer Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, Vanguard Emerging Markets Stock Index Fund, Vanguard Total International Stock Index Fund, Vanguard Developed Markets Index Fund, or Vanguard Institutional Developed Markets Index Fund, regardless of the dollar amount, the following limits generally apply: o You must wait 90 days before exchanging back into the Fund from any source. o The 90-day clock restarts after every exchange out of the Fund. o Exchanges out of the Fund will not prevent you from making your usual periodic contributions to the Fund through your employer plan. 39 For all other Vanguard funds, the following limits generally apply: o Participant exchange activity is limited to no more than four substantive "round trips" through non-money market funds (at least 90 days apart) during any 12-month period. o A "round trip" is a redemption from a fund followed by a purchase back into the fund. o "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect the management of a fund. Please note that Vanguard reserves the right to revise 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. 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. 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, Plain Talk, Explorer, and the ship logo are trademarks of The Vanguard Group, Inc. S&P 500(R) and Standard & Poor's 500, 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. The funds or securities referred to herein that are offered by The Vanguard Group and track an MSCI Index are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group. All other marks are the exclusive property of their respective owners. (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 072003 VANGUARD(R) U.S. STOCK INDEX FUNDS Admiral(TM) Shares for Participants . July 3, 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 July 3, 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 23 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 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. Index funds attempt to mirror what the target index does, for better or worse. However, an index fund does not always perform exactly like its target index. For example, 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. WHY INDEX FUNDS? Index funds typically have the following characteristics: - - Variety of investments. Vanguard index funds generally invest in the stocks 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. 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. - --------------------------------------------------------------- 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 - --------------------------------------------------------------- *[MSCI LOGO] 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 typically invests all, or substantially all, of its assets in the 1300 largest stocks in its target Index (covering nearly 95% of the Index's total market capitalization), and in a representative sample of the remainder. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, please see 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. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 -10.89 2002 -20.95 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.13%. ---------------------------------------------------- 3 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- 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 (reflects no deduction for fees, expenses, or taxes) -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 - -------------------------------------------------- 4 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 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, a widely recognized benchmark of U.S. stock market performance that 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 -11.98 2002 -22.10 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.17%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. 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 (reflects no deduction for fees, expenses, or taxes) -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 - -------------------------------------------------- 7 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 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. $68.1 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 the 1,200 largest stocks in its target index (covering nearly 80% of the Index's total market capitalization), and in a representative sample of the remainder. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, please see 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. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 -9.09 2002 -18.02 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.28%. ---------------------------------------------------- 9 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- 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 (reflects no deduction for fees, expenses, or taxes) -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 MSCI(R) US Mid Cap 450 Index, a broadly diversified index of stocks 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. ---------------------------------------------------- ANNUAL TOTAL RETURN--ADMIRAL SHARES ---------------------------------------------------- SCALE RANGE -40% to 30% 2002 -14.55 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -4.46%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. 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% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes): S&P MidCap 400 Index -14.51% -6.04% SPLICED MID CAP INDEX -14.51 -6.04 MSCI US MID CAP 450 INDEX -- -- - -------------------------------------------------------------------------------- *Since-inception returns are from November 12, 2001--the inception date of the Admiral Shares--through December 31, 2002. SPECIAL NOTES ON RETURNS TABLE COMPARATIVE INDEXES. The Fund adopted the MSCI US Mid Cap 450 Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P MidCap 400 Index served as the Fund's target index. The Spliced Mid Cap Index reflects performance of the S&P MidCap 400 Index through May 16, 2003, and performance of the MSCI US Mid Cap 450 Index thereafter. 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. 13 - -------------------------------------------------- 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. ================================================================================ 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 MSCI(R) US Small Cap 1750 Index, a broadly diversified index of stocks of smaller 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 3.17 2002 -19.95 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -4.47%. ---------------------------------------------------- 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). The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. 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% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes): RUSSELL 2000 INDEX -20.48% -5.86% SPLICED SMALL CAP INDEX -20.48 -5.86 MSCI US SMALL CAP 1750 INDEX -- -- - -------------------------------------------------------------------------------- *Since-inception returns are from November 13, 2000--the inception date of the Admiral Shares--through December 31, 2002. SPECIAL NOTES ON RETURNS TABLE COMPARATIVE INDEXES. The Fund adopted the MSCI US Small Cap 1750 Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the Russell 2000 Index served as the Fund's target index. The Spliced Small Cap Index reflects performance of the Russell 2000 Index through May 16, 2003, and performance of the MSCI US Small Cap 1750 Index thereafter. 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 - -------------------------------------------------- 16 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 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 MSCI(R) US Prime Market Value Index, a broadly diversified index of value stocks of predominantly 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 Fund's Admiral Shares has varied from one calendar year to another over the periods show. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 -11.83 2002 -20.85 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -5.59%. ---------------------------------------------------- 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 The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD VALUE INDEX FUND ADMIRAL SHARES -20.85% -14.30% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes): S&P 500/Barra Value Index -20.85% -14.28% SPLICED VALUE INDEX -20.85 -14.28 MSCI US PRIME MARKET VALUE INDEX -- -- - -------------------------------------------------------------------------------- *Since-inception returns are from November 13, 2000--the inception date of the Admiral Shares--through December 31, 2002. SPECIAL NOTES ON RETURNS TABLE COMPARATIVE INDEXES. The Fund adopted the MSCI US Prime Market Value Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P 500/Barra Value Index served as the Fund's target index. The Spliced Value Index reflects performance of the S&P 500/Barra Value Index through May 16, 2003, and performance of the MSCI US Prime Market Value Index thereafter. 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. 19 - -------------------------------------------------- 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. ================================================================================ 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 MSCI(R) US Prime Market Growth Index, a broadly diversified index of growth stocks of predominantly 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. ---------------------------------------------------- ANNUAL TOTAL RETURNS--ADMIRAL SHARES SCALE RANGE -40% to 30% 2001 -12.88 2002 -23.62 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -0.84%. ---------------------------------------------------- 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 The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- SINCE 1 YEAR INCEPTION* - -------------------------------------------------------------------------------- VANGUARD GROWTH INDEX FUND ADMIRAL SHARES -23.62% -20.40% - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes): S&P 500/Barra Growth Index -23.59% -20.27% SPLICED GROWTH INDEX -23.59 -20.27 MSCI US PRIME MARKET GROWTH INDEX -- -- - -------------------------------------------------------------------------------- *Since-inception returns are from November 13, 2000--the inception date of the Admiral Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE COMPARATIVE INDEXES. The Fund adopted the MSCI US Prime Market Growth Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P 500/Barra Growth Index served as the Fund's target index. The Spliced Growth Index reflects performance of the S&P 500/Barra Growth Index through May 16, 2003, and performance of the MSCI US Prime Market Growth Index thereafter. 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. 22 - -------------------------------------------------- 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. ================================================================================ 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 ================================================================================ 23 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. 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. 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 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. Similarly, indexes that focus on growth stocks or value stocks will not necessarily perform in the same way as the broader S&P 500 Index. Both growth and value stocks have the potential at times to be more volatile than the broader markets. 24 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 May 31, 2003 is listed below: ---------------------------------------------- MEDIAN MARKET VANGUARD INDEX FUND CAPITALIZATION ---------------------------------------------- Total Stock Market $29.6 billion 500 49.6 Extended Market 1.7 Mid-Cap 3.8 Small-Cap 1.0 Value 35.3 Growth 55.4 ---------------------------------------------- [FLAG] EACH FUND, EXCEPT 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. AS A GROUP, 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. ================================================================================ 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. ================================================================================ 25 SECURITY SELECTION Each Fund attempts to track the investment performance of a benchmark index that measures the return of a particular market segment. The 500, Mid-Cap, Small-Cap, Value, and Growth Index Funds use the replication method of indexing, meaning that each Fund holds the same stocks as its target index, and in approximately the same proportions. The Total Stock Market and Extended Market Index Funds use a sampling method of indexing, with each Fund holding a representative sample of the stocks that make up its target index. The following table shows the number of stocks held by each Fund, and the number of stocks in its target index, as of May 31, 2003. -------------------------------------------------------- NUMBER OF NUMBER OF STOCKS VANGUARD INDEX FUND STOCKS HELD IN TARGET INDEX -------------------------------------------------------- Total Stock Market 3,729 5,513 500 504 500 Extended Market 3,246 5,017 Mid-Cap 465 452 Small-Cap 1,790 1,739 Value 413 410 Growth 411 407 -------------------------------------------------------- RISK OF NONDIVERSIFICATION The target indexes tracked by Vanguard's U.S. Stock Index Funds include diverse stocks. 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." All of the Funds, other than the Growth Index Fund, however, have in actuality been diversified since inception, 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. Four of the Funds (Mid-Cap Index Fund, Small-Cap Index Fund, Value Index Fund, and Growth Index Fund) switched target indexes after May 16, 2003, based upon the board of trustees' determination that this change would be in shareholders' best interest. 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. 26 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- 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: 27 - - 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 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. ================================================================================ 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. Turnover rates for four of the Funds (Mid-Cap Index Fund, Small-Cap Index Fund, Value Index Fund, and Growth Index Fund) are expected to be higher than normal for the fiscal year ending December 31, 2003, because of portfolio adjustments made when converting these Funds to new target indexes. 28 ================================================================================ 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 $580 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 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. 29 ================================================================================ 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. 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. 30 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 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 $4.1 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 a 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 disrupt the management of the Vanguard funds and increase their transaction costs, Vanguard places certain limits on the exchange privilege. If you are exchanging out of Vanguard International Growth Fund, Vanguard International Value Fund, Vanguard International Explorer(tm) Fund, Vanguard European Stock Index Fund, Vanguard Pacific Stock Index Fund, Vanguard Emerging Markets Stock Index Fund, Vanguard Total International Stock Index Fund, Vanguard Developed Markets Index Fund, or Vanguard Institutional Developed Markets Index Fund, regardless of the dollar amount, the following limits generally apply: o You must wait 90 days before exchanging back into the Fund from any source. o The 90-day clock restarts after every exchange out of the Fund. o Exchanges out of the Fund will not prevent you from making your usual periodic contributions to the Fund through your employer plan. 36 For all other Vanguard funds, the following limits generally apply: o Participant exchange activity is limited to no more than four substantive "round trips" through non-money-market funds (at least 90 days apart) during any 12-month period. o A "round trip" is a redemption from a fund followed by a purchase back into the fund. o "Substantive" means a dollar amount that Vanguard determines, in its sole discretion, could adversely affect the management of a fund. Please note that Vanguard reserves the right to revise 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. 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. 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, Plain Talk, Admiral, Explorer, and the ship logo are trademarks of The Vanguard Group, Inc. S&P 500(R) , and Standard & Poor's 500, 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. The funds or securities referred to herein that are offered by The Vanguard Group and track an MSCI Index are not sponsored, endorsed, sold, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group. 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 072003 VANGUARD(R) U.S. STOCK INDEX FUNDS Institutional Shares & Institutional Plus Shares July 3, 2003 This prospectus contains financial data for the Funds through the fiscal year ended December 31, 2002. VANGUARD INSTITUTIONAL INDEX FUND VANGUARD INSTITUTIONAL TOTAL STOCK MARKET INDEX FUND VANGUARD TOTAL STOCK MARKET 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 Institutional Shares and Institutional Plus Shares Prospectus July 3, 2003 - -------------------------------------------------------------------------------- CONTENTS 1 FUND PROFILES 37 DIVIDENDS, CAPITAL GAINS, AND TAXES 1 Vanguard Institutional Index Fund 39 SHARE PRICE 4 Vanguard Institutional Total Stock 40 FINANCIAL HIGHLIGHTS Market Index Fund 47 INVESTING WITH VANGUARD 7 Vanguard Total Stock Market Index Fund 47 Buying Shares 10 Vanguard Extended Market Index Fund 49 Converting Shares 13 Vanguard Mid-Cap Index Fund 49 Redeeming Shares 16 Vanguard Small-Cap Index Fund 51 Exchanging Shares 19 Vanguard Value Index Fund 52 Other Rules You Should Know 22 Vanguard Small-Cap Value Index Fund 55 Fund and Account Updates 25 Vanguard Growth Index Fund 56 Contacting Vanguard 28 Vanguard Small-Cap Growth 58 VIPER SHARES Index Fund GLOSSARY (inside back cover) 31 MORE ON THE FUNDS 36 THE FUNDS AND VANGUARD 36 INVESTMENT ADVISER *[MSCI LOGO] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.15%. ---------------------------------------------------- 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 below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns (before and after taxes) do no indicate how it will perform in the future. 2 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- 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% - -------------------------------------------------------------------------------- *From the inception of the Institutional Plus Shares on July 7, 1997, through December 31, 2002, the average annual total returns were 0.87% for the Fund's Institutional Plus Shares and 0.75% for the S&P 500 Index. - -------------------------------------------------------------------------------- NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. 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 - -------------------------------------------------------------------------------- 4 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 typically invests all, or substantially all, of its assets in the 1,300 largest stocks in its target index (covering nearly 95% of the Index's total market capitalization) and in a representative sample of the remainder. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, please see 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 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.12%. ---------------------------------------------------- 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). 5 The table below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns (before and after taxes) do not indicate how it will perform in the future. - -------------------------------------------------------------------------------- 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. ** From the inception of the Institutional Plus Shares on May 31, 2001, through December 31, 2002, the average annual total returns were -17.47% for the Fund's Institutional Plus Shares and -17.61% for the Wilshire 5000 Index. - -------------------------------------------------------------------------------- NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. 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 6 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 - ---------------------------------------------------------------- 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 typically invests all, or substantially all, of its assets in the 1,300 largest stocks in its target index (covering nearly 95% of the Index's total market capitalization) and in a representative sample of the remainder. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.12%. ---------------------------------------------------- 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). 8 The table below shows the how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns (before and after taxes) do 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. - -------------------------------------------------------------------------------- NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. 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: 0.06% 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. - -------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS - -------------------------------------------------- $8 $26 $45 $103 - -------------------------------------------------- 9 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 $24.1 billion - -------------------------------------------------------------------------------- 10 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 & Poors 500 Index . The Fund invests all, or substantially all, of its assets in the 1,200 largest stocks in its target index (covering nearly 80% of the Index's total market capitalization) and in a representative sample of the remainder. The Fund holds a range of securities that, in the aggregate, approximate the full Index in terms of key characteristics. These key characteristics include industry weightings and market capitalization, as well as certain financial measures, such as price/earnings ratio and dividend yield. For additional information on the Fund's investment strategies, please see 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 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.27%. ---------------------------------------------------- 11 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 below shows how the Fund's average annual total returns compare with those of the Fund's target index. Keep in mind that the Fund's past returns (before and after taxes) do 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 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. - -------------------------------------------------------------------------------- NOTE ON AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. 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. 12 - -------------------------------------------------- 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 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 MSCI(R) US Mid Cap 450 Index, a broadly diversified index of stocks 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -4.44%. ---------------------------------------------------- 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 below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns (before and after taxes) do not indicate how it will perform in the future. 14 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- COMPARATIVE INDEXES(reflects no deduction for fees, expenses, or taxes): S&P MIDCAP 400 INDEX -14.51% 4.69% SPLICED MID CAP INDEX -14.51 4.69 MSCI US MID CAP 450 INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from May 21, 1998--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Mid Cap 450 Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P MidCap 400 Index served as the Fund's target index. The Spliced Mid Cap Index reflects performance of the S&P MidCap 400 Index through May 16, 2003, and performance of the MSCI US Mid Cap 450 Index thereafter. 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 - -------------------------------------------------------------------------------- 16 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 MSCI(R) US Small Cap 1750 Index, a broadly diversified index of stocks of smaller 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -4.47%. ---------------------------------------------------- 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 below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns (before and after taxes) do not indicate how it will perform in the future. 17 - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes): RUSSELL 2000 INDEX -20.48% -1.36% 0.68% SPLICED SMALL CAP INDEX -20.48 -1.36 0.68 MSCI US SMALL CAP 1750 INDEX -- -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from July 7, 1997--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Small Cap 1750 Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the Russell 2000 Index served as the Fund's target index. The Spliced Small Cap Index reflects performance of the Russell 2000 Index through May 16, 2003, and performance of the MSCI US Small Cap 1750 Index thereafter. 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. 18 - -------------------------------------------------- 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 - -------------------------------------------------------------------------------- 19 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 MSCI(R) US Prime Market Value Index, a broadly diversified index of value stocks of predominantly 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -5.57%. ---------------------------------------------------- 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). 20 The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns (before and after taxes) do 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 - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes): S&P 500/BARRA VALUE INDEX -20.85% -3.78% SPLICED VALUE INDEX -20.85 -3.78 MSCI US PRIME MARKET VALUE INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from July 2, 1998--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Prime Market Value Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P 500/Barra Value Index served as the Fund's target index. The Spliced Value Index reflects performance of the S&P 500/Barra Value Index through May 16, 2003, and performance of the MSCI US Prime Market Value Index thereafter. 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. 21 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 - -------------------------------------------------------------------------------- 22 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 MSCI(R) US Small Cap Value Index, a broadly diversified index of value stocks of smaller 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -7.97. ---------------------------------------------------- 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 below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past (before and after taxes) returns do not indicate how it will perform in the future. 23 - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes): S&P SMALLCAP 600/BARRA VALUE INDEX -14.47% 6.15% SPLICED SMALL CAP VALUE INDEX -14.47 6.15 MSCI US SMALL CAP VALUE INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from December 7, 1999--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Small Cap Value Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P SmallCap 600/Barra Value Index served as the Fund's target index. The Spliced Small Cap Value Index reflects performance of the S&P SmallCap 600/Barra Value Index through May 16, 2003, and performance of the MSCI US Small Cap Value Index thereafter. 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. 24 - -------------------------------------------------- 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 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 - -------------------------------------------------------------------------------- 25 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 MSCI(R) US Prime Market Growth Index, a broadly diversified index of growth stocks of predominantly 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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. ---------------------------------------------------- ANNUAL TOTAL RETURNS--INSTITUTIONAL SHARES ---------------------------------------------------- Scale -40% -- 60% 1999 28.91 2000 -22.14 2001 -12.82 2002 -23.58 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -0.82%. ---------------------------------------------------- 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). 26 The table below shows how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns (before and after taxes) do 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 - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes): S&P 500/BARRA GROWTH INDEX -23.59% -4.61% SPLICED GROWTH INDEX -23.59 -4.61 MSCI US PRIME MARKET GROWTH INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from May 14, 1998--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Prime Market Growth Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P 500/Barra Growth Index served as the Fund's target index. The Spliced Growth Index reflects performance of the S&P 500/Barra Growth Index through May 16, 2003, and performance of the MSCI US Prime Market Growth Index thereafter. 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. 27 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 - -------------------------------------------------------------------------------- 28 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 MSCI(R) US Small Cap Growth Index, a broadly diversified index of growth stocks of smaller 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, holding each stock in approximately the same proportion as its weighting in the Index. For additional information on the Fund's investment strategies, please see 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 ---------------------------------------------------- The year-to-date return as of the most recent calendar quarter, which ended March 31, 2003, was -3.60%. ---------------------------------------------------- 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). 29 The table below show how the Fund's average annual total returns compare with those of the Fund's target index and other comparative indexes. Keep in mind that the Fund's past returns (before and after taxes) do 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 - -------------------------------------------------------------------------------- COMPARATIVE INDEXES (reflects no deduction for fees, expenses, or taxes): S&P SMALLCAP 600/BARRA GROWTH INDEX -15.36% -5.16% SPLICED SMALL CAP GROWTH INDEX -15.36 -5.16 MSCI US SMALL CAP GROWTH INDEX -- -- - -------------------------------------------------------------------------------- * Since-inception returns are from May 24, 2000--the inception date of the Institutional Shares--through December 31, 2002. - -------------------------------------------------------------------------------- SPECIAL NOTES ON RETURNS TABLE AFTER-TAX RETURNS. Actual after-tax returns depend on your tax situation and may differ from those shown in the table above. When calculating after-tax return figures for a fund, we assume the shareholder was in the highest federal marginal income tax bracket at the time of each distribution of income or capital gains, but we do not consider state or local income taxes. Please note that actual after-tax returns will vary for a fund's separate share classes and are not relevant to a shareholder who holds fund shares in a tax-deferred account, such as an individual retirement account or a 401(k) plan. Also, for any fund, figures captioned Returns After Taxes on Distributions and Sale of Fund Shares will be higher than other return figures for the same period if a capital loss occurs upon redemption and results in an assumed tax deduction for the shareholder. COMPARATIVE INDEXES. The Fund adopted the MSCI US Small Cap Growth Index as its target index on May 16, 2003, following a determination by the Fund's board of trustees that this change would be in shareholders' best interests. Previously, the S&P SmallCap 600/Barra Growth Index served as the Fund's target index. The Spliced Small Cap Growth Index reflects performance of the S&P SmallCap 600/Barra Growth Index through May 16, 2003, and performance of the MSCI US Small Cap Growth Index thereafter. 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. 30 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 - -------------------------------------------------------------------------------- 31 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. 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. 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 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. 32 Similarly, indexes that focus on growth stocks or value stocks will not necessarily perform in the same way as the broader S&P 500 Index. Both growth and value stocks have the potential at times to be more volatile than the broader markets. 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 May 31, 2003, is listed below: --------------------------------------------------------- MEDIAN MARKET VANGUARD INDEX FUND CAPITALIZATION --------------------------------------------------------- Institutional $49.6 billion Institutional Total Stock Market 26.9 Total Stock Market 26.9 Extended Market 1.6 Mid-Cap 3.8 Small-Cap 1.0 Value 35.3 Small-Cap Value 0.6 Growth 55.4 Small-Cap Growth 1.0 --------------------------------------------------------- [FLAG] EACH FUND, EXCEPT THE INSTITUTIONAL TOTAL STOCK MARKET AND TOTAL STOCK MARKET INDEX FUNDS 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. AS A GROUP, 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. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- SECURITY SELECTION Each Fund attempts to track the investment performance of a benchmark index that measures the return of a particular market segment. The Institutional, Mid-Cap, Small-Cap, 33 Value, Small-Cap Value, Growth, and Small-Cap Growth Index Funds use the replication method of indexing, meaning that each Fund holds the same stocks as its target index, and in approximately the same proportions. The Institutional Total Stock Market, Total Stock Market, and Extended Market Index Funds use a sampling method of indexing, with each Fund holding a representative sample of the stocks that make up its target index. The following table shows the number of stocks held by each Fund, and the number of stocks in its target index, as of May 31, 2003. ------------------------------------------------------------------ NUMBER OF NUMBER OF STOCKS IN VANGUARD INDEX FUND STOCKS HELD TARGET INDEX ------------------------------------------------------------------ Institutional 502 500 Institutional Total Stock Market 3,391 5,513 Total Stock Market 3,729 5,513 Extended Market 3,246 5,017 Mid-Cap 465 452 Small-Cap 1,790 1,739 Value 413 410 Small-Cap Value 976 944 Growth 411 407 Small-Cap Growth 1,025 1,007 ------------------------------------------------------------------ RISK OF NONDIVERSIFICATION The target indexes tracked by Vanguard's U.S. Stock Index Funds include diverse stocks. 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." All of the Funds, other than Growth Index Fund, however, have in actuality been diversified since inception, 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. Six of the Funds (Mid-Cap Index Fund, Small-Cap Index Fund, Value Index Fund, Small-Cap Value Index Fund, Growth Index Fund, and Small-Cap Growth Index Fund) switched target indexes after May 16, 2003, based upon the board of trustees' determination that this change would be in shareholders' best interests. 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. 34 [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: 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. 35 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. - -------------------------------------------------------------------------------- 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. Turnover rates for six of the Funds (Mid-Cap Index Fund, Small-Cap Index Fund, Value Index Fund, Small-Cap Value Index Fund, Growth Index Fund, and Small-Cap Growth Index Fund) are expected to be higher than normal for the fiscal year ending December 31, 2003, because of portfolio adjustments made when converting these Funds to new target indexes. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 36 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 $580 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. 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: 37 - -------------------------------------------------------------------------------- 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 these other 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. - -------------------------------------------------------------------------------- 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. 38 - -------------------------------------------------------------------------------- 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 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. - -------------------------------------------------------------------------------- 39 GENERAL INFORMATION BACKUP WITHHOLDING. By law, Vanguard must withhold 28% 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. 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. 40 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 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. - -------------------------------------------------------------------------------- 41
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.
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. 42 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. 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. 43
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.
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. 44
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%.
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. 45
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.
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. 46
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.
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. 47 - -------------------------------------------------------------------------------- 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. 48 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 10 p.m., Eastern time, will result in a purchase that occurs on and receives a trade date of the next business day. 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. 49 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 50 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 51 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, 52 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 53 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. 54 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. 55 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. 56 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 57 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, Explorer, VIPER, VIPERs, Vanguard Brokerage Services and the ship logo are trademarks of The Vanguard Group, Inc. S&P 500(R) and Standard & Poor's 500 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. The funds or securities referred to herein that are offered by The Vanguard Group and track an MSCI Index are not sponsored, endorsed, or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities. For such funds or securities, the Statement of Additional Information contains a more detailed description of the limited relationship MSCI has with The Vanguard Group. 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. 58 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. 59 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 60 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. 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 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 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 Index Funds' Investment Company Act file number: 811-2652 (C) 2003 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. I854 072003 PART B VANGUARD(R) INDEX FUNDS (THE TRUST) STATEMENT OF ADDITIONAL INFORMATION JULY 3, 2003 This Statement is not a prospectus but should be read in conjunction with the Funds' current Prospectuses (dated April 28, 2003, for the Vanguard VIPER Shares; and July 3, 2003, for the Vanguard U.S. Stock Index Funds). 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 FUNDS...............................................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 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 FUNDS 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, 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 for purposes of the 1940 Act. 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 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 by using derivatives to more efficiently implement portfolio positions when derivatives are favorably priced relative to equity or debt securities or other investments, and for other purposes. A fund will not use derivatives for 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 for purposes of the 1940 Act. 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 financial or 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, and the risks of, 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. B-6 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 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 13. 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 from foreign securities. Although in some countries a portion of these taxes are recoverable by the fund, the non-recovered portion of foreign withholding taxes will reduce the income received from the companies making up a fund. The value of the foreign securities held by a fund that are not U.S. dollar-denominated may be significantly affected by changes in currency exchange rates. The U.S. dollar value of a foreign security generally decreases when the value of the U.S. dollar rises against the foreign currency in which the security is denominated and tends to increase when the value of the U.S. dollar falls against such currency (as discussed below, a fund may attempt to hedge its currency risks). In addition, the value of fund assets may be affected by losses and other expenses incurred in converting between various currencies in order to purchase and sell foreign securities, and by currency restrictions, exchange control regulation, currency devaluations and political and economic developments. FOREIGN SECURITIES - FOREIGN CURRENCY TRANSACTIONS. For foreign securities that are not U.S. dollar-denominated, the value of a fund's foreign securities as measured in U.S. 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. B-7 Currency exchange transactions may be considered borrowings. A currency exchange transaction will not be considered to constitute the issuance of a "senior security" by a fund for purposes of the 1940 Act, and therefore such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction or 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 for various reasons, including in order to take advantage of pricing or other opportunities presented by the tracking currency or becuase the market for tracking currency is more liquid or more efficient. Such cross-hedges are expected to help protect a fund against an increase or decrease in the value of the U.S. dollar against certain foreign currencies. A fund may hold a portion of its assets in bank deposits denominated in foreign currencies, so as to facilitate investment in foreign securities as well as protect against currency fluctuations and the need to convert such assets into U.S. dollars (thereby also reducing transaction costs). To the extent these monies are converted back into U.S. dollars, the value of the assets so maintained will be affected favorably or unfavorably by changes in foreign currency exchange rates and exchange control regulations. The forecasting of currency market movement is extremely difficult and whether any hedging strategy will be successful is highly uncertain. Moreover, it is impossible to forecast with 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. Futures contracts and options on futures contracts are derivatives (see additional discussion above). A futures contract is a standardized agreement between two parties to buy or sell at a specific time in the future a specific quantity of a commodity at a specific price. The commodity may consist of an asset, a reference rate, or an index. A security futures contract relates to the sale of a specific quantity of B-8 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 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 for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction 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 for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction 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. B-9 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 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 is a derivative (see additional discussion above). An option on a security (or index) is a contract that gives the holder of the option, in return for the payment of a "premium," the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price 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). B-10 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. 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 for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by a fund, if the fund covers the transaction 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 (such as the funds) would be unable to close out their positions until trading resumes, and they may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Even if the market were to remain available, there may be times when options prices will not maintain their customary or anticipated relationships to the prices of the underlying interests and related interests. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity or even the orderliness of the market for particular options. A fund bears the risk that its 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 based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to a fund. OTHER INVESTMENT COMPANIES. A fund may invest in other investment companies to the extent permitted by applicable law or SEC 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. B-11 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. 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 for purposes of the 1940 Act. 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, 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, generally may be resold only to qualified institutional buyers. If a substantial market develops for a restricted security (or other illiquid investment) held by a fund, it may be treated as a liquid security, in accordance with procedures and guidelines approved by the board of trustees. This generally includes securities that are unregistered that can be sold to qualified institutional buyers in accordance with Rule 144A under the 1933 Act or 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. B-12 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. 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. The adviser will consider the creditworthiness of the borrower, among other things, in making decisions with respect to the lending of securities, subject to oversight by the board of trustees. At the present time, the 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, and a fund may pay such fees. 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 a derivative (see additional discussion above). A swap agreement is an agreement between two parties ("counterparties") to exchange payments at specified dates ("periodic payment dates") on the basis of a specified amount ("notional amount") with the payments calculated with reference to a specified asset, reference rate or index. Examples of swap agreements include, but are not limited to, interest rate swaps, credit default swaps, equity swaps, commodity swaps, foreign currency swaps, index swaps and total return swaps. Most swap agreements provide that when the periodic payment dates for both parties are the same, payments are netted and only the net amount is paid to the counterparty entitled to receive the net payment. Consequently, a fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each counterparty. Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments; U.S. dollar-denominated payments may be exchanged for payments denominated in a different currency; and payments tied to the price of one asset, reference rate or index may be exchanged for payments tied to the price of another asset, reference rate or index. An option on a swap agreement, also called a "swaption," is an option that gives the buyer the right, but not the obligation, to enter into a swap on a future date in exchange for paying a market-based "premium." A receiver swaption gives the owner the right to receive the total return of a specified asset, reference rate or index. A payer swaption gives the owner the right to pay the total return of a specified asset, reference rate or index. Swaptions also include options that allow an existing swap to be terminated or extended by one of the counterparties. The use of swap agreements by a fund entails certain risks, which may be different from, or possibly greater than, the risks associated with investing directly in the securities and other traditional investments that are the referenced asset for the swap agreement. Swaps are highly specialized B-13 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 not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. In addition, 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 (or cheap) relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity or to realize the intrinsic value of the swap agreement. Because some swap agreements have a leverage 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 for purposes of the 1940 Act. 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 also involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty or the failure of the counterparty to make required payments or otherwise comply with the terms of the agreement. Additionally, the use of credit default swaps can result in losses if a fund's 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. B-14 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. 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 held by a fund. Foreign governments may also impose taxes on other payments or gains with respect to foreign securities. If, at the close of its fiscal year, more than 50% of a fund's total assets are invested in securities of foreign issuers, the fund may elect to pass through foreign taxes paid, and thereby allow shareholders to take a deduction or, if they meet certain holding period requirements, a tax credit on their tax returns. If shareholders do not meet the holding period requirements, they may still be entitled to a deduction for certain gains that were actually distributed by the fund, but will also show the amount of the available offsetting credit or deduction. 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. B-15 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 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-commitment transaction and may sell the underlying securities before delivery, which may result in capital gains or losses for the fund. When-issued, delayed delivery and forward commitment transactions may be considered to constitute borrowing transactions for purposes of the 1940 Act. 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 AND TOTAL STOCK MARKET INDEX FUNDS IN JAPAN. In connection with the offering of the Investor Shares of the Small-Cap 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. INVESTMENT POLICY RELATING TO THE SALE OF INVESTOR SHARES VANGUARD GROWTH AND VALUE INDEX FUNDS IN JAPAN: Each Fund may borrow money for temporary or emergency purposes only in an amount not to exceed 10% of the Fund's net assets. Each Fund may borrow money through banks, reverse repurchase agreements, or Vanguard's interfund lending program only, and must comply with all applicable regulatory conditions. Each Fund may not make any additional investments whenever its outstanding borrowings exceed 5% of net assets. 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) 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. B-16 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. 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. If a percentage restriction is adhered to at the time the investment is made, a later change in percentage resulting from a change in the market value of assets will not constitute a violation of such restriction. 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. NAV per share is computed by dividing the net assets allocated to each share class by the number of Fund shares outstanding for that class. The Exchange typically observes the following holidays: New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day. Although 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 NAV per share is calculated as of 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. B-18 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 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 to Vanguard representing 0.02% of its Fund's net assets. The total amound contributed by the Funds was $22,927,000, which represented 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. B-19 ================================================================================ 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 ================================================================================ 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 table reflects a sample of the most recent data for each Fund: 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 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
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 page B-22), 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 the 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 the 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, 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. B-38 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. CITIGROUP 3-MONTH U.S. TREASURY BILL INDEX--Tracks the performance of short-term U.S. government debt instruments. CITIGROUP BROAD MARKET INDEX--Tracks the performance of the U.S. broad market. CITIGROUP EXTENDED MARKET EUROPE AND PACIFIC (EM EPAC) INDEX--Measures the performance of the smallest companies from the European and Pacific countries represented in the Citigroup Broad Market Index. The EM EPAC Index represents the bottom 20% of the total market capital of each country. CITIGROUP 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. 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% Citigroup 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. B-43 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% Citigroup 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. 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. B-44 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. MSCI 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. MSCI EMERGING MARKETS FREE INDEX--Free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. MSCI EUROPE INDEX--Tracks stocks in more than 15 developed European markets. MSCI 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. MSCI EUROPE, AUSTRALASIA, FAR EAST GROWTH INDEX--Measures the performance of those stocks within the MSCI EAFE Index that have higher price/book ratios. MSCI PACIFIC INDEX--Tracks stocks from developed Pacific Rim markets. MSCI US MID CAP 450 INDEX--Tracks stocks of medium-size U.S. companies. MSCI US PRIME MARKET GROWTH INDEX--Tracks growth stocks of predominantly large U.S. companies. MSCI US PRIME MARKET VALUE INDEX--Tracks value stocks of predominantly large U.S. companies. MSCI US SMALL CAP 1750 INDEX-- Tracks stocks of smaller U.S. companies. MSCI US SMALL CAP GROWTH INDEX--Tracks growth stocks of smaller U.S. companies. MSCI US SMALL CAP VALUE INDEX--Tracks value stocks of smaller U.S. companies. MSCI US SMALL + MID CAP 2200 INDEX--A market-capitalization weighted composite of the MSCI US Small Cap 1750 Index and the MSCI US Mid Cap 450 Index. 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. B-45 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. 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. 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% Citigroup 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. B-46 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. LEGAL DISCLAIMERS THIS FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MORGAN STANLEY CAPITAL INTERNATIONAL INC. ("MSCI"), ANY OF ITS AFFILIATES, ANY OF ITS INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR CREATING ANY MSCI INDEX (COLLECTIVELY, THE "MSCI PARTIES"). THE MSCI INDEXES ARE THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAMES ARE SERVICE MARK(S) OF MSCI OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY VANGUARD. NONE OF THE MSCI PARTIES MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE OWNERS OF THIS FUND OR ANY MEMBER OF THE PUBLIC REGARDING THE ADVISABILITY OF INVESTING IN FUNDS GENERALLY OR IN THIS FUND PARTICULARLY OR THE ABILITY OF ANY MSCI INDEX TO TRACK CORRESPONDING STOCK MARKET PERFORMANCE. MSCI OR ITS AFFILIATES ARE THE LICENSORS OF CERTAIN TRADEMARKS, SERVICE MARKS AND TRADE NAMES AND OF THE MSCI INDEXES WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THIS FUND OR THE ISSUER OR OWNER OF THIS FUND. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION TO TAKE THE NEEDS OF THE ISSUERS OR OWNERS OF THIS FUND INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE MSCI INDEXES. NONE OF THE MSCI PARTIES IS RESPONSIBLE FOR OR HAS PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THIS FUND TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY WHICH THIS FUND IS REDEEMABLE FOR CASH. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION OR LIABILITY TO THE OWNERS OF THIS FUND IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR OFFERING OF THIS FUND. ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI INDEXES FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NONE OF THE MSCI PARTIES WARRANTS OR GUARANTEES THE ORIGINALITY, ACCURACY AND/OR THE COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, LICENSEE'S CUSTOMERS OR COUNTERPARTIES, ISSUERS OF THE FUNDS, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. NONE OF THE MSCI PARTIES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. FURTHER, NONE OF THE MSCI PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, AND THE MSCI PARITES HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO ANY MSCI INDEX AND ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING WITHOUT LIMITATION LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. B-47 SAI040 072003 PART C VANGUARD INDEX FUNDS OTHER INFORMATION ITEM 23. EXHIBITS (a) Declaration of Trust, filed on April 16, 2003, Post-Effective Amendment No. 85, is hereby incorporated by reference. (b) By-Laws, filed herewith. (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 on April 16, 2003, for JP Morgan Chase Bank, N.A., and Wachovia Bank, Post-Effective Amendment No. 85, is hereby incorporated by reference. (h) Amended and Restated Funds' Service Agreement, filed on April 16, 2003, Post-Effective Amendment No. 85, is hereby incorporated by reference. (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 herewith for The Vanguard Group. 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., 270 Park Avenue, New York, NY 10017-2070. 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 27th day of June, 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 June 27, 2003 - ---------------------------- Executive Officer, and (Heidi Stam) Trustee John J. Brennan* By:/S/ CHARLES D. ELLIS - ---------------------------- Trustee June 27, 2003 (Heidi Stam) Charles D. Ellis* By:/S/ RAJIV L. GUPTA - ---------------------------- Trustee June 27, 2003 (Heidi Stam) Rajiv L. Gupta* By: /S/ JOANN HEFFERNAN HEISEN - ---------------------------- Trustee June 27, 2003 (Heidi Stam) JoAnn Heffernan Heisen* By: /S/ BURTON G. MALKIEL - ---------------------------- Trustee June 27, 2003 (Heidi Stam Burton G. Malkiel* By:/S/ ALFRED M. RANKIN, JR. - ---------------------------- Trustee June 27, 2003 (Heidi Stam) Alfred M. Rankin, Jr.* By:/S/ J. LAWRENCE WILSON - ---------------------------- Trustee June 27, 2003 (Heidi Stam) J. Lawrence Wilson* By: /S/ THOMAS J. HIGGINS Treasurer,Principal, June 27, 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 By-Laws.................................................................Ex-99.B Consent of Independent Accountants......................................Ex-99.J Code of Ethics..........................................................Ex.99.P EX-99.B 3 bylaws.txt VANGUARD INDEX FUNDS-BY LAWS BY-LAWS OF VANGUARD INDEX FUNDS ARTICLE I FISCAL YEAR AND OFFICES SECTION 1. FISCAL YEAR. Unless otherwise provided by resolution of the Board of Trustees, the fiscal year of the Trust shall begin on the 1st day of January and end on the last day of December. SECTION 2. DELAWARE OFFICE. The Board of Trustees shall establish a registered office in the State of Delaware and shall appoint as the Trust's registered agent for service of process in the State of Delaware an individual resident of the State of Delaware or a Delaware corporation or a foreign corporation authorized to transact business in the State of Delaware; in each case the business office of such registered agent for service of process shall be identical with the registered Delaware office of the Trust. SECTION 3. OTHER OFFICES. The Board of Trustees may at any time establish branch or subordinate offices at any place or places where the Trust intends to do business. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 1. PLACE OF MEETING. Meetings of the shareholders for the election of trustees shall be held in such place as shall be fixed by resolution of the Board of Trustees and stated in the notice of the meeting. SECTION 2. ANNUAL MEETINGS. An Annual Meeting of shareholders will not be held unless the Investment Company Act of 1940 requires the election of trustees to be acted upon. SECTION 3. SPECIAL MEETINGS. Special Meetings of the shareholders may be called at any time by the Chairman, or President, or by a majority of the Board of Trustees, and shall be called by the Secretary upon written request of the holders of shares entitled to cast not less than twenty percent of all the votes entitled to be cast at such meeting provided that (a) such request shall state the purposes of such meeting and the matters proposed to be acted on and (b) the shareholders requesting such meeting shall have paid to the Trust the reasonable estimated cost of preparing and mailing the notice thereof, which the Secretary shall determine and specify to such shareholders. No special meeting need be called upon the request of shareholders entitled to cast less than a majority of -2- all votes entitled to be cast at such meeting to consider any matter which is substantially the same as a matter voted on at any meeting of the shareholders held during the preceding twelve months. The foregoing provisions of this section 3 notwithstanding a special meeting of shareholders shall be called upon the request of the holders of at least ten percent of the votes entitled to be cast for the purpose of consideration removal of a trustee from office as provided in section 16(c) of the Investment Company Act of 1940. SECTION 4. NOTICE. Not less than ten, nor more than ninety days before the date of every Annual or Special Shareholders Meeting, the Secretary shall cause to be mailed to each shareholder entitled to vote at such meeting at his (her) address (as it appears on the records of the Trust at the time of mailing) written notice stating the time and place of the meeting and, in the case of a Special Meeting of Shareholders, shall be limited to the purposes stated in the notice. Notice of adjournment of a shareholders meeting to another time or place need not be given, if such time and place are announced at the meeting. SECTION 5. RECORD DATE FOR MEETINGS. Subject to the provisions of the Declaration of Trust, the Board of Trustees may fix in advance a date not more than ninety, nor less than ten days, prior to the date of any annual or special meeting of the shareholders as a record date for the determination of the shareholders entitled to receive notice of, and to vote at any meeting and any adjournment thereof; and in such case such shareholders and only such shareholders as shall be shareholders of record on the date so fixed shall be entitled to receive notice of and to vote at such meeting and any adjournment thereof as the case may be, notwithstanding any transfer of any stock on the books of the Trust after any such record date fixed as aforesaid. SECTION 6. QUORUM. 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. If, however, a quorum shall not be present or represented at any meeting of the shareholders, the holders of a majority of the votes present or in person or by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented to a date not more than 120 days after the original record date. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. SECTION 7. VOTING. 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 set pursuant to Section 5 on each matter submitted to a vote at a meeting of shareholders. For purposes of this section and Section 6 of this Article II, net asset value shall be determined pursuant to Section 3 Article VIII of these Bylaws as of the record date for such meeting set pursuant to Section 5. There shall be no cumulative voting in the election of trustees. Votes may be made in person or by proxy. -3- At all meetings of the shareholders, a quorum being present, all matters shall be decided by majority of the votes entitled to be cast held by shareholders present in person or by proxy, unless the question is one for which by express provision of the laws of the State of Delaware, the Investment Company Act of 1940, as from time to time amended, or the Declaration of Trust, a different vote is required, in which case such express provision shall control the decision of such question. At all meetings of shareholders, unless the voting is conducted by inspectors, all questions relating to the qualification of voters and the validity of proxies and the acceptance or rejection of votes shall be decided by the Chairman of the meeting. SECTION 8. INSPECTORS. At any election of trustees, the Board of Trustees prior thereto may, or, if they have not so acted, the Chairman of the meeting may appoint one or more inspectors of election who shall first subscribe an oath of affirmation to execute faithfully the duties of inspectors at such election with strict impartiality and according to the best of their ability, and shall after the election make a certificate of the result of the vote taken. SECTION 9. STOCK LEDGER AND LIST OF SHAREHOLDERS. It shall be the duty of the Secretary or Assistant Secretary of the Trust to cause an original or duplicate share ledger to be maintained at the office of the Trust's transfer agent. Such share ledger may be in written form or any other form capable of being converted into written form within a reasonable time for visual inspection. SECTION 10. ACTION WITHOUT MEETING. Any action to be taken by shareholders may be taken without a meeting if (a) all shareholders entitled to vote on the matter consent to the action in writing, and (b) all shareholders entitled to notice of the meeting but not entitled to vote at it sign a written waiver of any right to dissent, and (c) the written consents are filed with the records of the meeting of shareholders. Such consent shall be treated for all purposes as a vote at a meeting. ARTICLE III TRUSTEES SECTION 1. GENERAL POWERS. The business of the Trust shall be managed under the direction of its Board of Trustees, which may exercise all powers of the Trust, except such as are by statute, or the Declaration of Trust, or by these Bylaws conferred upon or reserved to the shareholders. SECTION 2. NUMBER AND TERM OF OFFICE. The number of trustees which shall constitute the whole Board shall be determined from time to time by the Board of Trustees, but shall not be fewer than the minimum number permitted by applicable laws, nor more than fifteen. Each trustee elected shall hold office until his successor is elected and qualified. Trustees need not be shareholders. -4- SECTION 3. ELECTIONS. Provided a quorum is present, the trustees shall be elected by the vote of a plurality of the votes present in person or by proxy, except that any vacancy on the Board of Trustees may be filled by a majority vote of the Board of Trustees, although less than a quorum, subject to the requirements of Section 16(a) of the Investment Company Act of 1940. SECTION 4. PLACE OF MEETING. Meetings of the Board of Trustees, regular or special, may be held at any place as the Board may from time to time determine. SECTION 5. QUORUM. At all meetings of the Board of Trustees, one-third of the entire Board of Trustees shall constitute a quorum for the transaction of business provided that in no case may a quorum be less than two persons. The action of a majority of the trustees present at any meeting at which a quorum is present shall be the action of the Board of Trustees unless the concurrence of a greater proportion is required for such action by the Investment Company Act of 1940, these Bylaws or the Declaration of Trust. If a quorum shall not be present at any meeting of trustees, the trustees present thereat may by a majority vote adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be present. SECTION 6. REGULAR MEETINGS. Regular meetings of the Board of Trustees may be held without additional notice at such time and place as shall from time to time be determined by the Board of Trustees provided that notice of any change in the time or place of such meetings shall be sent promptly to each trustee not present at the meeting at which such change was made in the manner provided for notice of special meetings. SECTION 7. SPECIAL MEETINGS. Special meetings of the Board of Trustees may be called by the Chairman or President on one day's notice to each trustee; Special meetings shall be called by the Chairman or President or Secretary in like manner and on like notice on the written request of two trustees. SECTION 8. TELEPHONE MEETING. Members of the Board of Trustees or a committee of the Board of Trustees may participate in a meeting by means of a conference telephone or similar communications equipment if all persons participating in the meeting can hear each other at the same time. SECTION 9. INFORMAL ACTIONS. Any action required or permitted to be taken at any meeting of the Board of Trustees or of any committee thereof may be taken without a meeting, if a written consent to such action is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of proceedings of the Board or committee. -5- SECTION 10. COMMITTEES. The Board of Trustees may by resolution passed by a majority of the entire Board appoint from among its members an Executive Committee and other committees composed of two or more trustees, and may delegate to such committees, in the intervals between meetings of the Board of Trustees, any or all of the powers of the Board of Trustees in the management of the business and affairs of the Trust. SECTION 11. ACTION OF COMMITTEES. In the absence of an appropriate resolution of the Board of Trustees, each committee may adopt such rules and regulations governing its proceedings, quorum and manner of acting as it shall deem proper and desirable, provided that the quorum shall not be less than two trustees. The committees shall keep minutes of their proceedings and shall report the same to the Board of Trustees at the meeting next succeeding, and any action by the committee shall be subject to revision and alteration by the Board of Trustees, provided that no rights of third persons shall be affected by any such revision or alteration. In the absence of any member of such committee, the members thereof present at any meeting, whether or not they constitute a quorum, may appoint a member of the Board of Trustees to act in the place of such absent member. SECTION 12. COMPENSATION. Any trustee, whether or not he is a salaried officer or employee of the Trust, may be compensated for his services as trustee or as a member of a committee of trustees, or as chairman of a committee by fixed periodic payments or by fees for attendance at meetings or by both, and in addition may be reimbursed for transportation and other expenses, all in such manner and amounts as the Board of Trustees may from time to time determine. ARTICLE IV NOTICES SECTION 1. FORM. Notices to shareholders shall be in writing and delivered personally or mailed to the shareholders at their addresses appearing on the books of the Trust. Notices to trustees shall be oral or by telephone or telegram or in writing delivered personally or mailed to the trustees at their addresses appearing on the books of the Trust. Notice by mail shall be deemed to be given at the time when the same shall be mailed. Subject to the provisions of the Investment Company Act of 1940, notice to trustees need not state the purpose of a regular or special meeting. SECTION 2. WAIVER. Whenever any notice of the time, place or purpose of any meeting of shareholders, trustees or a committee is required to be given under the provisions of the Declaration of Trust or these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to such notice and filed with the records of the meeting, whether before or after the holding thereof, or actual attendance at the meeting of shareholders in person or by proxy, or at the meeting of trustees or a committee in person, shall be deemed equivalent to the giving of such notice to such persons. -6- ARTICLE V OFFICERS SECTION 1. EXECUTIVE OFFICERS. The officers of the Trust shall be chosen by the Board of Trustees and shall include a Chairman, President, a Secretary and a Treasurer. The Board of Trustees may, from time to time, elect or appoint a Controller, one or more Vice Presidents, Assistant Secretaries and Assistant Treasurers. The Board of Trustees, at its discretion, may also appoint a trustee as Senior Chairman of the Board who shall perform and execute such executive and administrative duties and powers as the Board of Trustees shall from time to time prescribe. The same person may hold two or more offices, except that no person shall be both President and Vice-President and no officer shall execute, acknowledge or verify any instrument in more than one capacity, if such instrument is required by law, the Declaration of Trust or these Bylaws to be executed, acknowledged or verified by two or more officers. SECTION 2. ELECTION. The Board of Trustees shall choose a Chairman, President, a Secretary and a Treasurer. SECTION 3. OTHER OFFICERS. The Board of Trustees from time to time may appoint such other officers and agents as it shall deem advisable, who shall hold their offices for such terms and shall exercise powers and perform such duties as shall be determined from time to time by the Board. The Board of Trustees from time to time may delegate to one or more officers or agents the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties. SECTION 4. COMPENSATION. The salaries or other compensation of all officers and agents of the Trust shall be fixed by the Board of Trustees, except that the Board of Trustees may delegate to any person or group of persons the power to fix the salary or other compensation of any subordinate officers or agents appointed pursuant to Section 3 of this Article V. SECTION 5. TENURE. The officers of the Trust shall serve at the pleasure of the Board of Trustees. Any officer or agent may be removed by the affirmative vote of a majority of the Board of Trustees whenever, in its judgment, the best interests of the Trust will be served thereby. In addition, any officer or agent appointed pursuant to Section 3 may be removed, either with or without cause, by any officer upon whom such power of removal shall have been conferred by the Board of Trustees. Any vacancy occurring in any office of the Trust by death, resignation, removal or otherwise shall be filled by the Board of Trustees, unless pursuant to Section 3 the power of appointment has been conferred by the Board of Trustees on any other officer. -7- SECTION 6. PRESIDENT AND CHIEF EXECUTIVE OFFICER. The President shall be the Chief Executive Officer of the Trust, unless the Board of Trustees designates the Chairman as Chief Executive Officer. The Chief Executive Officer shall see that all orders and resolutions of the Board are carried into effect. The Chief Executive Officer shall also be the Chief Administrative Officer of the Trust and shall perform such other duties and have such other powers as the Board of Trustees may from time to time prescribe. SECTION 7.CHAIRMAN. The Chairman of the Board shall perform and execute such duties and administrative powers as the Board of Trustees shall from time to time prescribe. SECTION 8. SENIOR CHAIRMAN OF THE BOARD. The Senior Chairman of the Board, if one shall be chosen, shall perform and execute such executive duties and administrative powers as the Board of Trustees shall from time to time prescribe. SECTION 9. VICE-PRESIDENT. The Vice-Presidents, in order of their seniority, shall, in the absence or disability of the Chief Executive Officer, perform the duties and exercise the powers of the Chief Executive Officer and shall perform such other duties as the Board of Trustees or the Chief Executive Officer may from time to time prescribe. Section 10. Secretary. The Secretary shall attend all meetings of the Board of Trustees and all meetings of the shareholders and record all the proceedings thereof and shall perform like duties for any committee when required. He shall give, or cause to be given, notice of meetings of the shareholders and of the Board of Trustees, shall have charge of the records of the Trust, including the stock books, and shall perform such other duties as may be prescribed by the Board of Trustees or Chief Executive Officer, under whose supervision he shall be. He shall keep in safe custody the seal of the Trust and, when authorized by the Board of Trustees, shall affix and attest the same to any instrument requiring it. The Board of Trustees may give general authority to any other officer to affix the seal of the Trust and to attest the affixing by his signature. SECTION 11. ASSISTANT SECRETARIES. The Assistant Secretaries in order of their seniority, shall, in the absence or disability of the Secretary, perform the duties and exercise the powers of the Secretary and shall perform such other duties as the Board of Trustees shall prescribe. SECTION 12. TREASURER. The Treasurer, unless another officer has been so designated, shall be the Chief Financial Officer of the Trust. He shall have general charge of the finances and books of account of the Trust. Except as otherwise provided by the Board of Trustees, he shall have general supervision of the funds and property of the Trust and of the performance by the custodian of its duties with respect thereto. He shall render to the Board of Trustees, whenever directed by the Board, an account of the financial condition of the Trust and of all his transactions as Treasurer. He shall cause to be prepared -8- annually a full and correct statement of the affairs of the Trust, including a balance sheet and a statement of operations for the preceding fiscal year. He shall perform all the acts incidental to the office of Treasurer, subject to the control of the Board of Trustees. SECTION 13. ASSISTANT TREASURER. The Assistant Treasurer shall in the absence or disability of the Treasurer, perform the duties and exercise the powers of the Treasurer and shall perform such other duties as the Board of Trustees may from time to time prescribe. ARTICLE VI INDEMNIFICATION AND INSURANCE SECTION 1. AGENTS, PROCEEDINGS AND EXPENSES. For the purpose of this Article, "agent" means any person who is or was a trustee or officer of this Trust and any person who, while a trustee or officer of this Trust, is or was serving at the request of this Trust as a trustee, director, officer, partner, employee, or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; "Trust" includes any domestic or foreign predecessor entity of this Trust in a merger, consolidation, or other transaction in which the predecessor's existence ceased upon consummation of the transaction; "proceeding" means any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative; and "expenses" includes without limitation attorney's fees and any expenses of establishing a right to indemnification under this Article. SECTION 2. ACTIONS OTHER THAN BY TRUST. This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding (other than an action by or in the right of this Trust) by reason of the fact that such person is or was an agent of this Trust, against expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such proceeding, if it is determined that person acted in good faith and reasonably believed: (a) in the case of conduct in his official capacity as an agent of the Trust, that his conduct was in the Trust's best interests and (b) in all other cases, that his conduct was at least not opposed to the Trust's best interests and (c) in the case of a criminal proceeding, that he had no reasonable cause to believe the conduct of that person was unlawful. The termination of any proceeding by judgment, order or settlement shall not of itself create a presumption that the person did not meet the requisite standard of conduct set forth in this Section. The termination of any proceeding by conviction, or a plea of nolo contendere or its equivalent, or an entry of an order of probation prior to judgment, creates a rebuttable presumption that the person did not meet the requisite standard of conduct set forth in this Section. SECTION 3. ACTIONS BY THE TRUST. This Trust shall indemnify any person who was or is a party or is threatened to be made a party to any proceeding by or in the right of this Trust to procure a judgment in its favor by reason of the fact that that person is or was an agent of this Trust, against -9- expenses actually and reasonably incurred by that person in connection with the defense or settlement of that action if that person acted in good faith, in a manner that person believed to be in the best interests of this Trust and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. SECTION 4. EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to the contrary contained herein, there shall be no right to indemnification for 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 agent's office with this Trust. No indemnification shall be made under Sections 2 or 3 of this Article: (a) In respect of any proceeding as to which that person shall have been adjudged to be liable on the basis that personal benefit was improperly received by him, whether or not the benefit resulted from an action taken in the person's official capacity; or (b) In respect of any proceeding as to which that person shall have been adjudged to be liable in the performance of that person's duty to this Trust, unless and only to the extent that the court in which that action was brought shall determine upon application that in view of all the relevant circumstances of the case, that person is fairly and reasonably entitled to indemnity for the expenses which the court shall determine; however, in such case, indemnification with respect to any proceeding by or in the right of the Trust or in which liability shall have been adjudged by reason of the disabling conduct set forth in the preceding paragraph shall be limited to expenses; or (c) Of amounts paid in settling or otherwise disposing of a proceeding, with or without court approval, or of expenses incurred in defending a proceeding which is settled or otherwise disposed of without court approval, unless the required approval set forth in Section 6 of this Article is obtained. SECTION 5. SUCCESSFUL DEFENSE BY AGENT. To the extent that an agent of this Trust has been successful, on the merits or otherwise, in the defense of any proceeding referred to in Sections 2 or 3 of this Article before the court or other body before whom the proceeding was brought, the agent shall be indemnified against expenses actually and reasonably incurred by the agent in connection therewith, provided that the Board of Trustees, including a majority who are disinterested, non-party trustees, also determines that based upon a review of the facts, the agent was not liable by reason of the disabling conduct referred to in Section 4 of this Article. -10- SECTION 6. REQUIRED APPROVAL. Except as provided in Section 5 of this Article, any indemnification under this Article shall be made by this Trust only if authorized in the specific case on a determination that indemnification of the agent is proper in the circumstances because the agent has met the applicable standard of conduct set forth in Sections 2 or 3 of this Article and is not prohibited from indemnification because of the disabling conduct set forth in Section 4 of this Article, by: (a) A majority vote of a quorum consisting of trustees who are not parties to the proceeding and are not interested persons of the Trust (as defined in the Investment Company Act of 1940); (b) A written opinion by an independent legal counsel; or (c) The shareholders; however, shares held by agents who are parties to the proceeding may not be voted on the subject matter under this Sub-Section. SECTION 7. ADVANCE OF EXPENSES. Expenses incurred in defending any proceeding may be advanced by this Trust before the final disposition of the proceeding if (a) receipt of a written affirmation by the agent of his good faith belief that he has met the standard of conduct necessary for indemnification under this Article and a written undertaking by or on behalf of the agent, such undertaking being an unlimited general obligation to repay the amount of the advance if it is ultimately determined that he has not met those requirements, and (b) a determination that the facts then known to those making the determination would not preclude indemnification under this Article. Determinations and authorizations of payments under this Section must be made in the manner specified in Section 6 of this Article for determining that the indemnification is permissible. SECTION 8. OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article shall affect any right to indemnification to which persons other than Trustees and officers of this Trust or any subsidiary hereof may be entitled by contract or otherwise. SECTION 9. LIMITATIONS. No indemnification or advance shall be made under this Article, except as provided in Sections 5 or 6 in any circumstances where it appears: (a) That it would be inconsistent with a provision of the Agreement and Declaration of Trust of the Trust, a resolution of the shareholders, or an agreement in effect at the time of accrual of the alleged cause of action asserted in the proceeding in which the expenses were incurred or other amounts were paid which prohibits or otherwise limits indemnification; or (b) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. -11- SECTION 10. INSURANCE. Upon and in the event of a determination by the Board of Trustees of this Trust to purchase such insurance, this Trust shall purchase and maintain insurance on behalf of any agent or employee of this Trust against any liability asserted against or incurred by the agent or employee in such capacity or arising out of the agent's or employee's status as such to the fullest extent permitted by law. SECTION 11. FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not apply to any proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in that person's capacity as such, even though that person may also be an agent of this Trust as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a trustee, investment manager, or other fiduciary may be entitled by contract or otherwise which shall be enforceable to the extent permitted by applicable law other than this Article. ARTICLE VII SHARES OF BENEFICIAL INTEREST SECTION 1. CERTIFICATES. A certificate or certificates representing and certifying the class and the full, but not fractional, number of shares of beneficial interest owned by each shareholder in the Trust shall not be issued except as the Board of Trustees may otherwise determine from time to time. Any such certificate issued shall be signed by facsimile signature or otherwise by the Chairman or President or a Vice-President and counter-signed by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer. SECTION 2. SIGNATURE. In case any officer who has signed any certificate ceases to be an officer of the Trust before the certificate is issued, the certificate may nevertheless be issued by the Trust with the same effect as if the officer had not ceased to be such officer as of the date of its issue. SECTION 3. RECORDING AND TRANSFER WITHOUT CERTIFICATES. The Trust shall have the full power to participate in any program approved by the Board of Trustees providing for the recording and transfer of ownership of the Trust's shares by electronic or other means without the issuance of certificates. SECTION 4. LOST CERTIFICATES. The Board of Trustees may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Trust alleged to have been stolen, lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to have been stolen, lost or destroyed, or upon other satisfactory evidence of such theft, loss or destruction and may in its discretion and as a condition precedent to the issuance thereof, require the owner of such stolen, lost or destroyed certificate or certificates, or his legal representative, to give the Trust a bond with sufficient surety, to the Trust to indemnify it against any loss or claim that may be made by reason of the issuance of a new certificate. -12- SECTION 5. TRANSFER OF SHARES. Transfers of shares of beneficial interest of the Trust shall be made on the books of the Trust by the holder of record thereof (in person or by his attorney thereunto duly authorized by a power of attorney duly executed in writing and filed with the Secretary of the Trust) (i) if a certificate or certificates have been issued, upon the surrender of the certificate or certificates, properly endorsed or accompanied by proper instruments of transfer, representing such shares, or (ii) as otherwise prescribed by the Board of Trustees. Every certificate exchanged, surrendered for redemption or otherwise returned to the Trust shall be marked "Canceled" with the date of cancellation. SECTION 6. REGISTERED SHAREHOLDERS. The Trust shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by applicable law or the Declaration of Trust. SECTION 7. TRANSFER AGENTS AND REGISTRARS. The Board of Trustees may, from time to time, appoint or remove transfer agents and or registrars of the Trust, and they may appoint the same person as both transfer agent and registrar. Upon any such appointment being made, all certificates representing shares of beneficial interest thereafter issued shall be countersigned by such transfer agent and shall not be valid unless so countersigned. Section 8. Stock Ledger. The Trust shall maintain an original stock ledger containing the names and addresses of all shareholders and the number and class of shares held by each shareholder. Such stock ledger may be in written form or any other form capable of being converted into written form within reasonable time for visual inspection. ARTICLE VIII GENERAL PROVISIONS SECTION 1. CUSTODIANSHIP. Except as otherwise provided by resolution of the Board of Trustees, the Trust shall place and at all times maintain in the custody of a custodian (including any sub-custodian for the custodian) all funds, securities and similar investments owned by the Trust. Subject to the approval of the Board of Trustees, the custodian may enter into arrangements with securities depositories, provided such arrangements comply with the provisions of the Investment Company Act of 1940 and the rules and regulations promulgated thereunder. -13- SECTION 2. EXECUTION OF INSTRUMENTS. All deeds, documents, transfers, contracts, agreements and other instruments requiring execution by the Trust shall be signed by the Chairman or President or a Vice President. SECTION 3. NET ASSET VALUE. The net asset value per share shall be determined separately as to each class of the Trust's shares, by dividing the sum of the total market value of the class's investments and other assets, less any liabilities, by the total outstanding shares of such class, subject to the Investment Company Act of 1940 and any other applicable Federal securities law or rule or regulation currently in effect. ARTICLE IX AMENDMENTS The Board of Trustees shall have the power to make, alter and repeal the Bylaws of the Trust. -14- EX-99.J 4 consent.txt VANGUARD INDEX FUNDS-ACCOUNTANTS CONSENT 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. 87 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 June 25, 2003 EX-99.P 5 vgicoe3282003.txt CODE OF ETHICS-VANGUARD GROUP THE VANGUARD GROUP, INC. CODE OF ETHICS SECTION 1: BACKGROUND This Code of Ethics has been approved and adopted by the Board of Directors of The Vanguard Group, Inc. ("Vanguard") and the Boards of Trustees of each of the Vanguard funds in compliance with Rule 17j-1 under the Investment Company Act of 1940. This Code was adopted on May 1, 1999, and was last amended on March 28, 2003. Except as otherwise provided, the Code applies to all "Vanguard personnel," which term includes all employees, officers, Directors and Trustees of Vanguard and the Vanguard funds. Employees, officers, directors, and trustees of Vanguard subsidiaries that provide services to Vanguard funds, including subsidiaries located outside the Unites States, also are subject to the Code unless the subsidiary has adopted its own Code of Ethics. The Code also contains provisions which apply to the investment advisers to the Vanguard funds (see section 11). SECTION 2: STATEMENT OF GENERAL FIDUCIARY STANDARDS This Code of Ethics is based on the overriding principle that Vanguard personnel act as fiduciaries for shareholders' investments in the Vanguard funds. Accordingly, Vanguard personnel must conduct their activities at all times in accordance with the following standards: A) SHAREHOLDERS' INTERESTS COME FIRST. In the course of fulfilling their duties and responsibilities to Vanguard fund shareholders, Vanguard personnel must at all times place the interests of Vanguard fund shareholders first. In particular, Vanguard personnel must avoid serving their own personal interests ahead of the interests of Vanguard fund shareholders. B) CONFLICTS OF INTEREST MUST BE AVOIDED. Vanguard personnel must avoid any situation involving an actual or potential conflict of interest or possible impropriety with respect to their duties and responsibilities to Vanguard fund shareholders. 1 C) COMPROMISING SITUATIONS MUST BE AVOIDED. Vanguard personnel must not take advantage of their position of trust and responsibility at Vanguard. Vanguard personnel must avoid any situation that might compromise or call into question their exercise of full independent judgment in the best interests of Vanguard fund shareholders. All activities of Vanguard personnel should be guided by and adhere to these fiduciary standards. The remainder of this Code sets forth specific rules and procedures which are consistent with these fiduciary standards. However, all activities by Vanguard personnel are required to conform with these fiduciary standards regardless of whether the activity is specifically covered in this Code. SECTION 3: DUTY OF CONFIDENTIALITY Vanguard personnel must keep confidential at all times any nonpublic information they may obtain in the course of their employment at Vanguard. This information includes but is not limited to: 1) information on the Vanguard funds, including recent or impending securities transactions by the funds, activities of the funds' advisers, offerings of new funds, and closings of funds; 2) information on Vanguard fund shareholders and prospective shareholders, including their identities, investments, and account transactions; 3) information on other Vanguard personnel, including their pay, benefits, position level, and performance ratings; and 4) information on Vanguard business activities, including new services, products, technologies, and business initiatives. Vanguard personnel have the highest fiduciary obligation not to reveal confidential Vanguard information to any party that does not have a clear and compelling need to know such information. 2 SECTION 4: GIFT POLICY Vanguard personnel are prohibited from seeking or accepting gifts of material value from any person or entity, including any Vanguard fund shareholder or Vanguard client, when such gift is in relation to doing business with Vanguard. In certain cases, Vanguard personnel may accept gifts of de minimis value (as determined in accordance with guidelines set forth in Vanguard's Human Resources Policy Manual) but only if they obtain the approval of a Vanguard officer. SECTION 5: OUTSIDE ACTIVITIES A) PROHIBITIONS ON SECONDARY EMPLOYMENT. Vanguard employees are prohibited from working for any business or enterprise in the financial services industry that competes with Vanguard. In addition, Vanguard employees are prohibited from working for any organization that could possibly benefit from the employee's knowledge of confidential Vanguard information, such as new Vanguard services and technologies. Beyond these prohibitions, Vanguard employees may accept secondary employment, but only with prior approval from the Vanguard Compliance Department. Vanguard officers are prohibited from accepting or serving in any form of secondary employment unless they have received approval from a Vanguard Managing Director or the Vanguard Chairman and Chief Executive Officer. B) PROHIBITION ON SERVICE AS DIRECTOR OR PUBLIC OFFICIAL. Vanguard officers and employees are prohibited from serving on the board of directors of any publicly traded company or in an official capacity for any federal, state, or local government (or governmental agency or instrumentality) without prior approval from the Vanguard Compliance Department. C) PROHIBITION ON MISUSE OF VANGUARD TIME OR PROPERTY. Vanguard personnel are prohibited from using Vanguard time, equipment, services, personnel or property for any purposes other than the performance of their duties and responsibilities at Vanguard. SECTION 6: GENERAL PROHIBITIONS ON TRADING A) TRADING ON KNOWLEDGE OF VANGUARD FUNDS ACTIVITIES. All Vanguard personnel are prohibited from taking personal advantage of their knowledge of recent or impending securities activities of the Vanguard funds or the funds' investment advisers. In particular, Vanguard personnel are prohibited from purchasing or selling, directly or indirectly, any security when they have actual knowledge that the security is being purchased or sold, or considered for 3 purchase or sale, by a Vanguard fund. This prohibition applies to all securities in which the person has acquired or will acquire "beneficial ownership." For these purposes, a person is considered to have beneficial ownership in all securities over which the person enjoys economic benefits substantially equivalent to ownership (for example, securities held in trust for the person's benefit), regardless of who is the registered owner. Under this Code of Ethics, Vanguard personnel are considered to have beneficial ownership of all securities owned by their spouse or minor children. B) VANGUARD INSIDER TRADING POLICY. All Vanguard personnel are subject to Vanguard's Insider Trading Policy, which is considered an integral part of this Code of Ethics. Vanguard's Insider Trading Policy prohibits Vanguard personnel from buying or selling any security while in the possession of material nonpublic information about the issuer of the security. The policy also prohibits Vanguard personnel from communicating to third parties any material nonpublic information about any security or issuer of securities. Any violation of Vanguard's Insider Trading Policy may result in penalties which could include termination of employment with Vanguard. SECTION 7: ADDITIONAL TRADING RESTRICTIONS FOR ACCESS PERSONS A) APPLICATION. The restrictions of this section 7 apply to all Vanguard access persons. For purposes of the Code of Ethics, "access persons" include: 1) any Director or Trustee of Vanguard or a Vanguard fund, excluding disinterested Directors and Trustees (i.e., any Director or Trustee who is not an "interested person" of a Vanguard fund within the meaning of Section 2(a)(19) of the Investment Company Act of 1940); 2) any officer of Vanguard or a Vanguard fund; and 3) any employee of Vanguard or a Vanguard fund who in the course of his or her regular duties participates in the selection of a Vanguard fund's securities or who works in a Vanguard department or unit that has access to information regarding a Vanguard fund's impending purchases or sales of securities. 4 The Vanguard Compliance Department will notify all Vanguard personnel who qualify as access persons of their duties and responsibilities under this Code of Ethics. The restrictions of this section 7 apply to all transactions in which a Vanguard access person has or will acquire beneficial ownership (see section 6a) of a security, including transactions by a spouse or minor child. However, the restrictions do not apply to transactions involving the following types of securities: (i) direct obligations of the Government of the United States; (ii) high quality short-term debt instruments, including bankers' acceptances, bank certificates of deposit, commercial paper, and repurchase agreements; (iii) shares of registered open-end investment companies (including shares of any Vanguard fund); or (iv) shares of exchange-traded funds organized as open-end investment companies or unit investment trusts. In addition, the restrictions do not apply to transactions: (v) in accounts over which the access person has no direct or indirect control or influence; or (vi) effected pursuant to an automatic investment program. B) GENERAL RESTRICTIONS FOR ACCESS PERSONS. Vanguard access persons are subject to the following restrictions with respect to their securities transactions: 1) PRE-CLEARANCE OF SECURITIES TRANSACTIONS. Vanguard access persons must receive approval from the Vanguard Compliance Department before purchasing or selling any securities. The Vanguard Compliance Department will notify Vanguard access persons if their proposed securities transactions are permitted under this Code of Ethics. 2) TRADING THROUGH VANGUARD BROKERAGE SERVICES. Vanguard access persons must conduct all their securities transactions through Vanguard Brokerage Services. Vanguard Brokerage Services will send a confirmation notice of any purchase or sale of securities by a Vanguard access person to the Vanguard Compliance Department. 3) PROHIBITION ON INITIAL PUBLIC OFFERINGS. Vanguard access persons are prohibited from acquiring securities in an initial public offering. 4) PROHIBITION ON PRIVATE PLACEMENTS. Vanguard access persons are prohibited from acquiring securities in a private placement without prior approval from the Vanguard Compliance Department. In the event an access person receives approval to purchase securities in a private placement, the access person must disclose that investment if he or she plays any part in a Vanguard fund's later consideration of an investment in the issuer. 5 5) PROHIBITION ON FUTURES AND OPTIONS. Vanguard access persons are prohibited from entering into, acquiring, or selling any futures contract (including single stock futures) or any option on any security. 6) PROHIBITION ON SHORT-SELLING. Vanguard access persons are prohibited from selling any security that the access person does not own or otherwise engaging in "short-selling" activities. 7) PROHIBITION ON SHORT-TERM TRADING PROFITS. Vanguard access persons are prohibited from profiting in the purchase and sale, or sale and purchase, of the same (or related) securities within 60 calendar days. In the event that an access person realizes profits on such short-term trades, the access person must relinquish such profits to The Vanguard Group Foundation. C) BLACKOUT RESTRICTIONS FOR ACCESS PERSONS. All Vanguard access persons are subject to the following restrictions when their purchases and sales of securities coincide with trades by the Vanguard funds: 1) PURCHASES AND SALES WITHIN THREE DAYS FOLLOWING A FUND TRADE. Vanguard access persons are prohibited from purchasing or selling any security within three calendar days after a Vanguard fund has traded in the same (or a related) security. In the event that an access person makes a prohibited purchase or sale within the three-day period, the access person must unwind the transaction and relinquish any gain from the transaction to The Vanguard Group Foundation. 2) PURCHASES WITHIN SEVEN DAYS BEFORE A FUND PURCHASE. A Vanguard access person who purchases a security within seven calendar days before a Vanguard fund purchases the same (or a related) security is prohibited from selling the security for a gain (exclusive of commissions) for a period of six months following the fund's trade. In the event that an access person makes a prohibited sale within the six-month period, the access person must relinquish to The Vanguard Group Foundation the difference between the purchase and sales prices. 3) SALES WITHIN SEVEN DAYS BEFORE A FUND SALE. A Vanguard access person who sells a security within seven days before a Vanguard fund sells the same (or a related) security must relinquish to The Vanguard Group 6 Foundation the difference between the access person's sale price and the Vanguard fund's sale price (assuming the access person's sale price is higher). 4) RESTRICTIONS NOT APPLICABLE TO TRADES BY VANGUARD INDEX FUNDS. The restrictions of this section 7c do not apply to purchases and sales of securities by Vanguard access persons which would otherwise violate section 7c solely because the transactions coincide with trades by any Vanguard index funds. SECTION 7A: ADDITIONAL TRADING RESTRICTIONS FOR NON-ACCESS PERSONS A) GENERALLY, Vanguard's Compliance and Legal Departments shall have the authority to apply any or all of the trading restrictions specified in Section 7 to all non-access persons or to groups of non-access persons. B) ON AN INDIVIDUAL BASIS, Vanguard's Compliance and Legal Departments shall have the authority to apply any or all of the trading restrictions specified in Section 7 to any individual non-access person for cause. For example, they may require a non-access person who has previously violated the Code or who has a history of frequent trading activity to pre-clear trades and/or effect trades through Vanguard Brokerage Services. SECTION 8: ADDITIONAL TRADING RESTRICTIONS FOR INSTITUTIONAL CLIENT CONTACTS A) APPLICATION. The restrictions of this section 8 apply to all Vanguard Institutional client contacts. For purposes of the Code of Ethics, an "Institutional client contact" includes any Vanguard employee who works in a department or unit at Vanguard that has significant levels of interaction or dealings with the management of clients of Vanguard's Institutional Investor Group. The Vanguard Compliance Department will notify Vanguard employees who qualify as Institutional client contacts of the restrictions of this Section 8. B) PROHIBITION ON TRADING SECURITIES OF INSTITUTIONAL CLIENTS. Vanguard Institutional client contacts are prohibited from acquiring securities issued by clients of the Vanguard Institutional Investor Group (including any options or futures contracts based on such securities). In the event that any individual who becomes subject to this prohibition already owns securities issued by Institutional clients, the individual will be prohibited from disposing of those securities without prior approval from the Vanguard Compliance Department. The restrictions of this section 8 apply to all transactions in which Institutional client contacts have acquired or would acquire beneficial ownership (see section 6a) of a security, including transactions by a spouse or minor child. However, 7 the restrictions do not apply to transactions in any account over which an individual does not possess any direct or indirect control or influence. The Vanguard Compliance Department will maintain a list of the Institutional clients to which the prohibitions of this section 8 apply. The Vanguard Compliance Department may waive the prohibition on acquiring securities of Institutional clients in appropriate cases (including, for example, cases in which an individual acquires securities as part of an inheritance or through an employer-sponsored employee benefits or compensation program). 8 SECTION 9: COMPLIANCE PROCEDURES A) APPLICATION. The requirements of this section 9 apply to all Vanguard personnel other than disinterested Directors and Trustees (see section 7a). The requirements apply to all transactions in which Vanguard personnel have acquired or would acquire beneficial ownership (see section 6a) of a security, including transactions by a spouse or minor child. However, the requirements do not apply to transactions involving: (i) direct obligations of the Government of the United States; (ii) high quality short-term debt instruments, including bankers' acceptances, bank certificates of deposit, commercial paper, and repurchase agreements; and (iii) shares of registered open-end investment companies (including shares of any Vanguard fund). In addition, the requirements do not apply to securities acquired for accounts over which the person has no direct or indirect control or influence. B) DISCLOSURE OF PERSONAL HOLDINGS. All Vanguard personnel must disclose their personal securities holdings to the Vanguard Compliance Department upon commencement of employment with Vanguard. These disclosures must identify the title, number of shares, and principal amount with respect to each security holding. C) RECORDS OF SECURITIES TRANSACTIONS. All Vanguard personnel must notify the Vanguard Compliance Department if they have opened or intend to open a brokerage account. Vanguard personnel must direct their brokers to supply the Vanguard Compliance Department with duplicate confirmation statements of their securities transactions and copies of all periodic statements for their brokerage accounts. D) CERTIFICATION OF COMPLIANCE. All Vanguard personnel must certify annually to the Vanguard Compliance Department that: (i) they have read and understand this Code of Ethics; (ii) they have complied with all requirements of the Code of Ethics; and (3) they have reported all transactions required to be reported under the Code of Ethics. SECTION 10: REQUIRED REPORTS BY DISINTERESTED DIRECTORS AND TRUSTEES Disinterested Directors and Trustees (see section 7a) are required to report their securities transactions to the Vanguard Compliance Department only in cases where the Director or Trustee knew or should have known during the 15-day 9 period immediately preceding or following the date of the transaction that the security had been purchased or sold, or was being considered for purchase or sale, by a Vanguard fund. SECTION 11: APPLICATION TO INVESTMENT ADVISERS A) ADOPTION OF CODE OF ETHICS. Each investment adviser to a Vanguard fund must adopt a code of ethics in compliance with Rule 17j-1 and provide the Vanguard Compliance Department with a copy of the code of ethics and any subsequent amendments. Each investment adviser is responsible for enforcing its code of ethics and reporting to the Vanguard Compliance Department on a timely basis any violations of the code of ethics and resulting sanctions. B) PREPARATION OF ANNUAL REPORTS. Each investment adviser to a Vanguard fund must prepare an annual report on its code of ethics for review by the Board of Trustees of the Vanguard fund. This report must contain the following: 1) a description of any issues arising under the adviser's code of ethics including, but not limited to, information about any violations of the code, sanctions imposed in response to such violations, changes made to the code's provisions or procedures, and any recommended changes to the code; and 2) a certification that the investment adviser has adopted such procedures as are reasonably necessary to prevent access persons from violating the code of ethics. SECTION 12: REVIEW BY BOARDS OF DIRECTORS AND TRUSTEES A) REVIEW OF INVESTMENT ADVISERS' CODE OF ETHICS. Prior to retaining the services of any investment adviser for a Vanguard fund, the Board of Trustees of the Vanguard fund must review the code of ethics adopted by the investment adviser pursuant to Rule 17j-1 under the Investment Company Act of 1940. The Board of Trustees must receive a certification from the investment adviser that the adviser has adopted such procedures as are reasonably necessary to prevent access persons from violating the adviser's code of ethics. A majority of the Trustees of the Vanguard fund, including a majority of the disinterested Trustees of the Fund, must determine whether the adviser's code of ethics contains such provisions as are reasonably necessary to prevent access persons from engaging in any act, practice, or course of conduct prohibited by the anti-fraud provisions of Rule 17j-1. 10 B) REVIEW OF VANGUARD ANNUAL REPORTS. The Vanguard Compliance Department must prepare an annual report on this Code of Ethics for review by the Board of Directors of Vanguard and the Boards of Trustees of the Vanguard funds. The report must contain the following: 1) a description of issues arising under the Code of Ethics since the last report including, but not limited to, information about any violations of the Code, sanctions imposed in response to such violations, changes made to the Code's provisions or procedures, and any recommended changes to the Code; and 2) a certification that Vanguard and the Vanguard Funds have adopted such procedures as are reasonably necessary to prevent access persons from violating the Code of Ethics. SECTION 13: SANCTIONS In the event of any violation of this Code of Ethics, Vanguard senior management will impose such sanctions as deemed necessary and appropriate under the circumstances and in the best interests of Vanguard fund shareholders. In the case of any violations by Vanguard employees, the range of sanctions could include a letter of censure, suspension of employment without pay, or permanent termination of employment. SECTION 14: RETENTION OF RECORDS Vanguard must maintain all records required by Rule 17j-1 including: (i) copies of this Code of Ethics and the codes of ethics of all investment advisers to the Vanguard funds; (ii) records of any violations of the codes of ethics and actions taken as a result of the violations; (iii) copies of all certifications made by Vanguard personnel pursuant to section 9d; (iv) lists of all Vanguard personnel who are, or within the past five years have been, access persons subject to the trading restrictions of section 8 and lists of the Vanguard compliance personnel responsible for monitoring compliance with those trading restrictions; and (v) copies of the annual reports to the Boards of Directors and Trustees pursuant to section 12. Last Approved by Board: March 28, 2003 -----END PRIVACY-ENHANCED MESSAGE-----