VANGUARD EXPLORER(TM) FUND
ANNUAL REPORT -- OCTOBER 31, 2000
[SHIP GRAPHIC]
A member of
THE VANGUARD GROUP(R)
<PAGE>
OUR REPORTS TO
THE OWNERS
At Vanguard, we regard our investors not as mere customers but as owners of the
enterprise. For that's exactly what a mutual fund shareholder is--part owner of
an investment company.
In our reports to you on how the company is doing, we have tried to convey
information without hyperbole and in the context of broad market trends and
relevant benchmarks.
We've introduced several changes to this year's annual reports to make them
even more useful. Among the changes:
**Larger type and redesigned graphics to make the reports easier to read.
**An at-a-glance summary of key points about fund performance and the
financial markets.
**A table--included for many funds--in which the investment adviser
highlights significant changes in holdings.
**Comparisons of fund performance and characteristics against both a broad
market index and a "best fit" benchmark. We hope you'll find that these changes
make the reports even more accessible and informative.
SUMMARY
* Vanguard Explorer Fund's 42.6% return exceeded those of its average peer and
benchmark index.
* Despite a second-half slump, technology-related stocks produced strong gains
for the full fiscal year.
* Health care, producer durables, and energy-related stocks were among the
fund's big gainers.
CONTENTS
1 Letter from the Chairman
6 Report from the Advisers
9 Fund Profile
10 Glossary of Investment Terms
11 Performance Summary
12 Report on After-Tax Returns
13 Financial Statements
28 Report of Independent Accountants
<PAGE>
LETTER
FROM THE CHAIRMAN
FELLOW SHAREHOLDERS,
Small growth stocks surged, then plunged during the 12 months ended October 31,
2000. VANGUARD EXPLORER FUND weathered the storm well, earning a remarkable
full-year return of 42.6%, which outpaced the returns of both of its comparative
measures.
2000 TOTAL RETURNS FISCAL YEAR ENDED
OCTOBER 31
----------------------------------------------------
VANGUARD EXPLORER FUND 42.6%
AVERAGE SMALL-CAP GROWTH FUND* 38.5
RUSSELL 2000 GROWTH FUND 16.2
WILSHIRE 5000 INDEX 8.1
----------------------------------------------------
*Derived from data provided by Lipper Inc.
The adjacent table presents the 12-month total returns (capital change plus
reinvested dividends) for the fund, its average peer, and the unmanaged Russell
2000 Growth Index, the benchmark we consider the best fit for the Explorer Fund.
The table also includes the return for the overall U.S. stock market, as
represented by the Wilshire 5000 Total Market Index.
The fund's return is based on an increase in net asset value from $61.49
per share on October 31, 1999, to $77.28 per share on October 31, 2000, and is
adjusted for a dividend of $0.23 per share paid from net investment income and a
distribution of $8.03 per share paid from net realized capital gains.
If you own Vanguard Explorer Fund in a taxable account, you may wish to review
our report on the fund's after-tax returns on page 12.
FINANCIAL MARKETS IN REVIEW
The U.S. stock market began the fiscal year like a skyrocket, as investors
targeted technology-related stocks. In the first two months of the period, the
broad market gained more than 11%. Fueling the increase were favorable economic
data: Production rose rapidly, unemployment
MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2000
ONE THREE FIVE
YEAR YEARS YEARS
------------------------------------------------------------------------------
STOCKS
S&P 500 Index (Large-caps) 6.1% 17.6% 21.7%
Russell 2000 Index (Small-caps) 17.4 5.9 12.4
Wilshire 5000 Index (Entire market) 8.1 16.0 20.1
MSCI~EAFE Index (International) -2.7 9.7 8.9
------------------------------------------------------------------------------
BONDS
Lehman Aggregate Bond Index (Entire market) 7.3% 5.7% 6.3%
Lehman 10 Year Municipal Bond Index 8.2 5.0 5.7
Salomon Smith Barney 3-Month
U.S. Treasury Bill Index 5.7 5.2 5.2
==============================================================================
CPI
Consumer Price Index 3.4% 2.5% 2.5%
------------------------------------------------------------------------------
1
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fell below 4% of the workforce, long-term interest rates declined, and inflation
was well-behaved, aside from a rise in energy prices.
But as the period progressed, the effects of repeated increases in
short-term interest rates engineered by the Federal Reserve Board to slow the
economy and forestall inflation began to show. Data suggested that the economy's
expansion was decelerating to a moderate pace. And, despite solid increases in
corporate earnings, doubts grew that companies could sustain the growth rate
amid a slowing economy.
Investors grew wary of the lofty prices of many tech stocks in relation to
their earnings and other fundamentals. After soaring during the first four
months of the fiscal year, the growth stocks in the small-capitalization
Russell 2000 Index plunged in the last eight months of the period, as the table
above shows.
TOTAL RETURNS
Oct. 31, 1999, to Feb. 29, 2000, to Fiscal
Feb. 29, 2000 Oct. 31, 2000 2000
--------------------------------------------------------------------------------
Russell 2000 Growth Index 58.8% -26.9% 16.2%
Russell 2000 Value Index 7.1 9.6 17.3
--------------------------------------------------------------------------------
Meanwhile, value stocks--those characterized by relatively low prices in
relation to earnings, book value, and dividends--generally benefited from the
market's increased emphasis on current earnings. A similar divergence between
growth and value issues emerged among large-cap stocks.
For the full 12 months, the overall U.S. stock market, as measured by the
Wilshire 5000 Index, returned 8.1%--a solid result but below the double-digit
gains investors have seen in recent years. For a change, small- and mid-cap
stocks significantly outpaced their large-cap counterparts. The large-cap-
dominated Standard & Poor's 500 Index gained 6.1% for the period, or a little
more than one-third of the return for the Russell 2000 Index.
Short-term interest rates rose substantially during the year, with the
yield on 3-month U.S. Treasury bills increasing 1.3 percentage points. The
increase essentially matched the 1.25-point boost in the federal funds rate
accomplished in four steps by the Federal Reserve.
Yields were relatively flat, on balance, for most longer-term securities. A
rising federal budget surplus shrank the supply of U.S. Treasury bonds, and
their yields declined slightly for the fiscal year: The 30-year Treasury's yield
fell from 6.16% to 5.79%. Yields on 10-year Treasuries fell by about a quarter
of a percentage point. In general, bonds turned in solid results during the 12
months. The Lehman Brothers Aggregate Bond Index, a proxy for investment-grade
bonds, returned 7.3%. Mortgage-backed securities and high-quality corporate
bonds performed well, benefiting from investors' shift toward high-quality
credit and away from speculative issues. Prices of high-yield bonds fell: The
Lehman High Yield Index returned -1.6% due to average price declines exceeding
10%.
2
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FISCAL 2000 PERFORMANCE OVERVIEW
Our advisers' strong stock selection helped the Explorer Fund to maneuver
through a volatile market and achieve a terrific 12-month return of 42.6%, which
surpassed the return of the Russell 2000 Growth Index by more than 26 percentage
points and that of the average peer fund by more than 4 percentage points.
Explorer's margin over its average competitor was achieved during the
latter two-thirds of the fiscal year, when we suffered less than other funds
from the downturn in growth stocks: Explorer returned -6.3% while its average
peer plunged -16.2%.
The fund fared especially well in the technology sector, where much of the
market's volatility was concentrated. Our tech stocks earned 57% for the full
fiscal year, compared with an average 18% return for tech stocks in the Russell
2000 Growth Index. And while technology was our largest sector
commitment--averaging about one-quarter of the fund's assets--Explorer's
exposure was less than that of both the average small growth fund and the index,
which had a 34% average weighting in technology. The decreased emphasis on the
tech sector reduced the fund's relative volatility--both on the upside early in
the fiscal year and, importantly, on the downside later on.
--------------------------------------------------------------------------------
THE FUND WAS LESS VOLATILE THAN MOST OF ITS PEERS, BOTH ON THE UPSIDE EARLY IN
FISCAL 2000 AND ON THE DOWNSIDE THEREAFTER.
--------------------------------------------------------------------------------
Our advisers' selections in the producer durables sector (a broad category
that ranges from home builders to semiconductor manufacturers) also performed
strongly, producing a full-year return of 46%, versus a 19% return for the
sector in the index.
Our advisers added the most value in the health care sector, where
Explorer's stocks returned nearly 190%, compared with an 89% return for health
care stocks in the Russell 2000 Growth Index. Other winners for the fund
included financial services (+21% return versus the index sector's +9%) and
"other energy" (+61% for the fund versus +48% for the index). Higher oil and
natural gas prices helped the oil exploration and services companies in the
latter group; however, at less than 4% of the fund's assets, this sector had
only a small impact on the fund's total return.
On the downside, Explorer had double-digit losses in two sectors. Holdings
in the consumer discretionary sector, which accounted for one-fifth of the
fund's assets on average, declined -11%. The retailers, restaurants, and apparel
makers in this group were hurt by tough competition and concerns about a
possible slowdown in consumer spending. Our utility stocks (mostly
telecommunications companies) fell -34%, although their damage to the fund's
return was slight because they accounted for less than 2% of assets on average.
The declines in these sectors were even worse in the index.
3
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As you know, the fund's assets are divided among five investment advisers.
The table below shows the allocation among advisers at fiscal year-end. For
further details on the fund's holdings, please see the Report from the Advisers
on page 6.
TOTAL ASSETS MANAGED October 31, 2000
$ Million Percentage
--------------------------------------------------------------------------------
Granahan Investment Management, Inc. $1,575 35%
Wellington Management Company, llp 1,155 25
Vanguard Quantitative Equity Group 642 14
Chartwell Investment Partners 503 11
Grantham, Mayo, Van Otterloo & Co. LLC 457 10
Cash Investments* 234 5
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Total $4,566 100%
--------------------------------------------------------------------------------
*This cash is invested by The Vanguard Group in equity index futures to simulate
investment in stocks; each adviser also maintains a modest cash position.
LONG-TERM PERFORMANCE OVERVIEW
A single year's performance provides an inadequate picture of a fund's merits.
We've always held that a long-term view is important. The table below shows the
results of a hypothetical $10,000 investment made a decade ago in the Explorer
Fund, its average peer, the Russell 2000 Growth Index, and the broad U.S. stock
market.
Explorer Fund's breadth of stock holdings and somewhat conservative stance
relative to its peers--characteristics that helped us in fiscal 2000--were
hindrances in comparison with more aggressive growth funds over the past decade
when the more aggressively a fund was positioned, the higher the return.
Nevertheless, the fund outperformed the relevant indexes for the ten-year
period. This is no small feat, given that indexes are theoretical constructs
that do not incur the actual operating and transaction costs that funds must
bear.
We note that the Explorer Fund's expense ratio (the fund's expenses as a
percentage of average net assets) of 0.71% is less than one-half its average
peer's 1.64%. This gives our advisers a head start each year in their effort to
provide superior returns. Costs matter because they directly reduce a fund's
return, and that cost advantage compounds over years and decades.
TOTAL RETURNS Ten Years Ended
October 31, 2000
Average Final Value of
Annual a $10,000
Return Initial Investment
--------------------------------------------------------------------------------
Vanguard Explorer Fund 20.0% $62,021
Average Small-Cap Growth Fund 22.5 76,291
Russell 2000 Growth Index 15.9 43,924
Wilshire 5000 Index 19.2 57,709
--------------------------------------------------------------------------------
While we expect to provide strong relative returns in the future, we doubt
that the fund or the market will match the absolute returns seen during the past
ten years. The stock market's performance during the 1990s was one of its best
4
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ever; returns were far above the 11% to 12% annual average for stocks over the
past 75 years or so. We suggest that, in making your investment plans, you
assume no more than the long-term average of about 11% for stocks and that you
recognize it's quite possible returns could fall short of that average. After
all, if you make modest assumptions and the market exceeds them, the result is
not bad: You'll merely get to your objectives sooner.
IN SUMMARY
The financial markets during the past 12 months certainly reinforced the
importance of diversification. Large-cap growth stocks had been the market's
leaders for the preceding six years, but small-cap stocks far outpaced their
bigger brethren in fiscal 2000. Investors who maintained an exposure to smaller
stocks were amply rewarded for their broader asset allocation. And during the
second half of the fiscal year, technology-related stocks swooned, demonstrating
that diversification is a sound principle even for growth-oriented portfolios.
Finally, we note that bonds--the asset class many investors forgot in the
excitement of the bull market in stocks--posted solid results.
Perhaps the one safe prediction for the next 12 months is that markets will
continue to be quite unpredictable. But uncertainty and volatility--risk, to use
a four-letter word--are constant companions for investors. A balanced investment
program--a mix of short-term investments, bonds, and both value and growth
stocks across capitalization levels--can help you manage risk. Once you've built
such a program in accordance with your objectives, time horizon, financial
situation, and tolerance for market fluctuations, we recommend staying the
course.
Sincerely,
November 17, 2000
[PHOTO-JOHN J. BRENNAN]
JOHN J. BRENNAN
Chairman and
Chief Executive Officer
5
<PAGE>
REPORT
FROM THE ADVISERS
VANGUARD EXPLORER FUND's total return of 42.6% for the fiscal year ended October
31 was ahead of results for both the average small-capitalization growth fund
and the Russell 2000 Growth Index. Although the largest part of our gain came
during the first half of the year, our margin over the average competitor was
achieved during the second half.
--------------------------------------------------------------------------------
INVESTMENT PHILOSOPHY
THE FUND REFLECTS A BELIEF THAT SUPERIOR LONG-TERM INVESTMENT RESULTS CAN BE
ACHIEVED BY SELECTING A DIVERSIFIED GROUP OF SMALL-COMPANY STOCKS WITH PROSPECTS
FOR ABOVE-AVERAGE GROWTH.
--------------------------------------------------------------------------------
THE INVESTMENT ENVIRONMENT
While the fiscal year was extremely rewarding for Explorer Fund's shareholders,
it was anything but placid. Volatility was the defining characteristic for
small-cap stocks during the period. The economic outlook is decidedly less rosy
now than during the first half of the year: Growth in gross domestic product has
slowed markedly and higher oil prices have made inflation a worry.
The roller-coaster nature of the market was especially evident in the
technology and biotechnology groups, both of which provided strong returns for
the full year. In general, valuations of small-cap stocks have become much more
reasonable than when indexes peaked in March. The market may continue to be
skittish, however, as some fundamental weaknesses in small growth stocks have
been exposed. But even in a difficult environment, excellent companies that are
able to finance their growth from increasing cash flow can still perform well.
THE FUND'S SUCCESSES
Explorer Fund's health care stocks earned nearly 190% during fiscal 2000 and
were the dominant contributors to our good showing. We also generated very high
returns from the "other energy" sector (gains of about 60%), the technology
(57%) sector, and producer durables (46%).
The health care group has benefited from continued strong demand, an aging
population, prospects for a less-restrictive political environment, and greater
interest in fundamentals such as profitability. We saw gains of 80% to 150% for
several holdings, including Caremark Rx, a prescription benefits manager; IDX
Systems, a software company; and two regional HMOs--Health Net (formerly named
Foundation Health Systems) and Coventry Health Care.
Also, the recent breakthroughs in biotechnology, such as the mapping of the
human genome, have boosted investor interest in this sector. As often happens
with emerging technologies, investor psychology concerning biotech
6
<PAGE>
is subject to enormous swings, and we saw very wide price fluctuations for
biotech stocks. Strong performers from this group included Vertex, Millennium
Pharmaceuticals, Human Genome Sciences, and Abgenix. We reduced our stake in
some of these companies due to their big gains and recycled some of the proceeds
into less-recognized names within the health care group.
Technology stocks performed best during the first half of the year, but
even in the second half we enjoyed superb performances from a number of
technology- related holdings, including Manugistics, Zygo, Plantronics, and
Polycom.
Big gainers from the energy sector included St. Mary and Hanover.
THE FUND'S SHORTFALLS
Consumer stocks were disappointing for most of the year. Examples included Ames
and ShopKo, whose share prices were penalized heavily by disappointing operating
results. We also saw significant losses from telecommunications and cable
companies that are experiencing much fiercer competition in pricing than we
expected. Disappointing holdings included Viatel and Mpower Communications.
Although technology stocks were generally strong for the fund, we had some
poor performers, including Westell Technologies, Informix, Titan, Asyst
Technologies, and Nova.
THE FUND'S POSITION
Given the slowdown in the economy's growth rate and the caution we're hearing
from corporate managements, we believe that earnings growth for small-cap
companies will slow in the coming year. It's not clear that the market has
completely reset valuations in line with more realistic expectations for
earnings growth. Volatility is likely to continue to be the norm for small-cap
growth stocks.
The fund's holdings are tilted toward companies with strong fundamentals,
such as balance sheets strong enough to provide some staying power. Also, our
holdings include a number of companies that we believe can effect a turnaround
in earnings. Although technology and health care were the fund's largest sector
commitments at fiscal year-end, we were underweighted in both groups compared
with the Russell 2000 Growth Index.
Although the consumer discretionary group was a poor performer in fiscal
2000, we are overweighted in this group, where we've found some solid names.
Explorer Fund also has a heavier stake in financial services stocks than our
benchmark index.
Granahan Investment Management, Inc.
Wellington Management Company, llp
Vanguard Quantitative Equity Group
Chartwell Investment Partners
Grantham, Mayo, Van Otterloo & Co. LLC November 13, 2000
7
<PAGE>
PORTFOLIO CHANGES Fiscal Year Ended October 31, 2000
Comments
--------------------------------------------------------------------------------
ADDITIONS
Verity* A fast-growing and profitable provider of
software for retrieving information
from websites.
--------------------------------------------------------------------------------
AnnTaylor Stores* A quality name in women's apparel with a
promising e-commerce site.
--------------------------------------------------------------------------------
Equity Residential Properties* The largest apartment real estate
investment trust in America.
================================================================================
REDUCTIONS
Vertex Pharmaceuticals Reduced holding after huge price gains.
--------------------------------------------------------------------------------
Human Genome Sciences Reduced our stake after price
appreciated.
--------------------------------------------------------------------------------
Zale Earnings prospects looked less sparkling.
--------------------------------------------------------------------------------
*New holding in portfolio.
SEE PAGE 13
FOR A COMPLETE
LISTING OF THE
FUND'S HOLDINGS.
8
<PAGE>
FUND PROFILE As of October 31, 2000
FOR EXPLORER FUND
This Profile provides a snapshot of the fund's characteristics, compared where
appropriate to both an unmanaged index that we consider a "best fit" for the
fund and a broad market index. Key terms are defined on page 10.
--------------------------------------------------------------------------------
PORTFOLIO CHARACTERISTICS
Wilshire
Fund Best Fit* 5000
--------------------------------------------------------------------------------
Number of Stocks 822 1,263 6,768
Median Market Cap $1.1B $1.0B $46.1B
Price/Earnings Ratio 34.7x 58.9x 29.8x
Price/Book Ratio 3.5x 5.2x 4.5x
Yield 0.4% 0.3% 1.1%
Return on Equity 13.6% 14.4% 22.8%
Earnings Growth Rate 17.4% 18.0% 16.8%
Foreign Holdings 1.0% 0.0% 0.0%
Turnover Rate 123% ,, ,,
Expense Ratio 0.71% ,, ,,
Cash Investments 4.3% ,, ,,
--------------------------------------------------------------------------------
----------------------------------------------
TEN LARGEST HOLDINGS
(% of total net assets)
Caremark Rx, Inc.
(health care) 1.4%
Investment Technology Group, Inc.
(securities brokers & services) 1.0
Mettler-Toledo International Inc.
(electrical & electronics) 0.9
Genzyme Corp.
(pharmaceuticals) 0.8
Oak Technology, Inc.
(electrical & electronics) 0.8
The Corporate Executive Board Co.
(diversified services) 0.7
Vertex Pharmaceuticals, Inc.
(pharmaceuticals) 0.7
Remec, Inc.
(telecommunications) 0.7
Plantronics, Inc.
(telecommunications) 0.7
Equity Residential Properties Trust REIT
(real estate) 0.7
----------------------------------------------
Top Ten 8.4%
----------------------------------------------
--------------------------------------------------
VOLATILITY MEASURES
Wilshire
Fund Best Fit* Fund 5000
--------------------------------------------------
R-Squared 0.95 1.00 0.59 1.00
Beta 0.82 1.00 1.18 1.00
--------------------------------------------------
--------------------------------------------------------------------------------
SECTOR DIVERSIFICATION
(% of common stocks)
Wilshire
Fund Best Fit* 5000
--------------------------------------------------------------------------------
Auto & Transportation 4.4% 1.3% 1.7%
Consumer Discretionary 19.5 16.6 12.0
Consumer Staples 0.6 1.3 5.3
Financial Services 11.3 8.2 17.0
Health Care 22.2 23.0 12.4
Integrated Oils 0.0 0.0 3.1
Other Energy 4.9 4.5 2.6
Materials & Processing 3.1 4.4 2.5
Producer Durables 8.4 9.3 3.3
Technology 24.5 28.1 26.4
Utilities 1.0 3.0 8.7
Other 0.1 0.3 5.0
--------------------------------------------------------------------------------
*Russell 2000 Growth Index.
-------------------
INVESTMENT FOCUS
MARKET CAP - SMALL
STYLE - GROWTH
-------------------
VISIT OUR WEBSITE
WWW.VANGUARD.COM
FOR REGULARLY UPDATED
FUND INFORMATION.
[COMPUTER GRAPHIC]
9
<PAGE>
GLOSSARY
OF INVESTMENT TERMS
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of the fund's "best fit" index benchmark and an
overall market index. Each index is assigned a beta of 1.00. Compared with a
given index, a fund with a beta of 1.20 would have seen its share price rise or
fall by 12% when the index rose or fell by 10%.
--------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts to simulate stock
investment.
--------------------------------------------------------------------------------
EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
--------------------------------------------------------------------------------
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
--------------------------------------------------------------------------------
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or American Depositary Receipts of companies based outside the United States.
--------------------------------------------------------------------------------
MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
--------------------------------------------------------------------------------
PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
--------------------------------------------------------------------------------
PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
--------------------------------------------------------------------------------
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the market in general, as measured by the fund's "best fit"
index benchmark and by an overall market index. If a fund's total returns were
precisely synchronized with an index's returns, its R-squared would be 1.00. If
the fund's returns bore no relationship to the index's returns, its R-squared
would be 0.
--------------------------------------------------------------------------------
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholderIs equity (net income
divided by shareholderIs equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
--------------------------------------------------------------------------------
TURNOVER RATE. An indication of trading activity during the past year. Funds
with high turnover rates incur higher transaction costs and are more likely to
distribute capital gains (which are taxable to investors).
--------------------------------------------------------------------------------
YIELD. A snapshot of a fundIs income from interest and dividends. The yield,
expressed as a percentage of the fundIs net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of
dividends paid on stocks in the index.
--------------------------------------------------------------------------------
10
<PAGE>
PERFORMANCE SUMMARY
FOR EXPLORER FUND
All of the data on this page represent past performance, which cannot be used to
predict future returns that may be achieved by the fund. Note, too, that both
share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost.
--------------------------------------------------------------------------------
TOTAL INVESTMENT RETURNS (%) October 31, 1990-October 31, 2000
[CHART]
EXPLORER FUND RUSSELL 2000 GROWTH INDEX
1991 64.6 66.5
1992 13.0 -0.4
1993 22.3 27.7
1994 4.5 -0.9
1995 17.5 20.6
1996 18.0 13.3
1997 18.9 21.2
1998 -11.2 -15.9
1999 25.1 29.3
2000 42.6 16.2
--------------------------------------------------------------------------------
See Financial Highlights table on page 25 for dividend and capital gains
information for the past five years.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
CUMULATIVE PERFORMANCE October 31, 1990-October 31, 2000
[MOUNTAIN CHART]
Initial Investment of $10,000
Date Explorer Average Small Russell Russell Wilshire
Fund Cap Growth Fund 2000 Growth 2000 Index 5000 Index
199101 12549 12520 12514 12193 11562
199104 14699 14338 14757 14474 12865
199107 15277 15167 15071 14787 13395
199110 16464 16591 16653 15860 13860
199201 19039 18658 18655 17662 14751
199204 17429 16998 16738 16945 14789
199207 17284 16652 16126 16933 15166
199210 18597 17545 16593 17364 15202
199301 20520 20014 18871 19999 16310
199304 19392 19030 17725 19617 16332
199307 20608 20369 19020 20896 16916
199310 22740 22493 21185 22991 17902
199401 23858 23841 21693 23723 18488
199404 22737 22267 20302 22524 17432
199407 21890 21023 19269 21873 17646
199410 23760 23086 20991 22920 18356
199501 23355 23114 20196 22298 18300
199504 24913 24937 22074 24149 20019
199507 27685 29745 25767 27327 22239
199510 27909 29585 25313 27121 23062
199601 29468 31717 26792 28974 25108
199604 33524 37266 30761 32116 26464
199607 30620 33662 26545 29215 25508
199610 32924 36751 28686 31624 28118
199701 34187 39780 30809 34465 31252
199704 30951 32966 26594 32132 31131
199707 37543 42785 33250 38969 37538
199710 39158 44711 34759 40899 36990
199801 37722 43801 33498 40693 39123
199804 42474 49086 38217 45756 44600
199807 37112 43332 32814 39871 43961
199810 34764 37665 29248 36056 42484
199901 40342 47262 35914 40828 49829
199904 40108 45778 36775 41522 52172
199907 43964 51353 37575 42825 52018
199910 43504 55096 37811 41417 53385
200001 55143 73421 48721 48071 56994
200004 59878 74641 48317 49169 58554
200007 59862 75741 45515 48718 57832
200010 62021 76291 43924 48623 57709
Average Annual Total Returns Final Value
Periods Ended October 31, 2000 of a $10,000
------------------------------- Investment
1 Year 5 Years 10 Years
--------------------------------------------------------------------------------
Explorer Fund 42.56% 17.32% 20.02% $62,021
Average Small-Cap Growth Fund* 38.47 20.86 22.53 76,291
Russell 2000 Growth Index 16.17 11.65 15.95 43,924
Russell 2000 Index 17.40 12.38 17.13 48,623
Wilshire 5000 Index 8.10 20.14 19.16 57,709
--------------------------------------------------------------------------------
*Derived from data provided by Lipper Inc.
--------------------------------------------------------------------------------
11
<PAGE>
A REPORT
ON YOUR FUND'S AFTER-TAX RETURNS
This table presents pre-tax and after-tax returns for your fund and an
appropriate peer group of mutual funds. The after-tax returns represent the
fund's past results only and should not be used to predict future tax
efficiency.
If you own the fund in a tax-deferred account such as an individual
retirement account or a 401(k), this information does not apply to you. Such
accounts are not subject to current taxes.
Income taxes can have a considerable impact on a fund's return--an
important consideration for investors who own mutual funds in taxable accounts.
While the pre-tax return is most often used to tally a fund's performance, the
fund's after-tax return, which accounts for taxes on distributions of capital
gains and income dividends, is an important measure of the return that many
investors actually received.
<TABLE>
<CAPTION>
PRE-TAX AND AFTER-TAX Periods Ended October 31, 2000
AVERAGE ANNUAL TOTAL RETURNS
<S> <C> <C> <C> <C> <C> <C>
One Year Five Years Ten Years
------------------------------------------------------------------
Pre-Tax After-Tax Pre-Tax After-Tax Pre-Tax After-Tax
----------------------------------------------------------------------------------------------
Vanguard Explorer Fund 42.6% 38.1% 17.3% 15.0% 20.0% 18.1%
Average Small Growth Fund* 36.2 33.4 17.8 15.3 19.8 17.4
----------------------------------------------------------------------------------------------
*Based on data from Morningstar, Inc. Elsewhere in this report, returns for
comparable funds are derived from data provided by Lipper Inc., which may differ
somewhat.
</TABLE>
The after-tax return calculations use the top federal income tax rates in
effect at the time of each distribution. The tax burden would be less, and the
after-tax return higher, for those in lower tax brackets.
We must stress that because many interrelated factors affect how
tax-friendly a fund may be, it is very difficult to predict tax efficiency. A
fund's tax efficiency can be influenced by its turnover rate, the types of
securities it holds, the accounting practices it uses when selling shares, and
the net cash flow it receives.
Finally, it's important to understand that our calculation does not reflect
the tax effect of your own investment activities. Specifically, you may incur
additional capital gains taxes--thereby lowering your after-tax return--if you
decide to sell all or some of your shares.
--------------------------------------------------------------------------------
A NOTE ABOUT OUR CALCULATIONS: Pre-tax total returns assume that all
distributions received (income dividends, short-term capital gains, and
long-term capital gains) are reinvested in new shares, while our after-tax
returns assume that distributions are reduced by any taxes owed on them before
reinvestment. When calculating the taxes due, we used the highest individual
federal income tax rates at the time of the distributions. Those rates are
currently 39.6% for dividends and short-term capital gains and 20% for long-term
capital gains. State and local income taxes were not considered. The competitive
group returns provided by Morningstar are calculated in a manner consistent with
that used for Vanguard funds.
(c)2000 by Morningstar(R), Inc. All rights reserved. Average return
information for comparative fund groups is proprietary information of
Morningstar, Inc. It may not be copied or redistributed, and it may only be used
for noncommercial, personal purposes. Morningstar does not warrant that this
information is accurate, correct, complete, or timely, and Morningstar is not
responsible for investment decisions, damages, or other losses resulting from
use of this information. Past performance is no guarantee of future performance.
Morningstar, Inc., has not consented to be considered or deemed an nexperti
under the Securities Act of 1933.
YOU CAN USE VANGUARD'S ONLINE AFTER-TAX
RETURN CALCULATOR AT
WWW.VANGUARD.COM/?AFTERTAX
TO CUSTOMIZE THE CALCULATION
OF YOUR AFTER-TAX RETURN.
[COMPUTER GRAPHIC]
12
<PAGE>
FINANCIAL STATEMENTS
October 31, 2000
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested by
shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the fund's investments and their cost, and reflects the gains
(losses) that would be realized if the fund were to sell all of its investments
at their statement-date values.
--------------------------------------------------------------------------------
Market
Value
Explorer Fund Shares (000)
--------------------------------------------------------------------------------
COMMON STOCKS (90.5%)(1)
--------------------------------------------------------------------------------
AUTO & TRANSPORTATION (4.0%)
Oshkosh Truck Corp. 564,600 23,219
* Swift Transportation Co., Inc. 1,356,950 19,337
C.H. Robinson Worldwide, Inc. 319,400 17,467
Polaris Industries, Inc. 488,100 16,961
Tidewater Inc. 322,000 14,872
* EGL, Inc. 486,700 13,871
*(2)M.S. Carriers, Inc. 774,700 12,105
*(2)Mesa Air Group Inc. 2,037,800 11,972
*(2)Mesaba Holdings, Inc. 1,036,500 11,207
* Atlas Air, Inc. 300,500 10,893
* Heartland Express, Inc. 547,733 9,517
Skywest, Inc. 150,300 7,590
Werner Enterprises, Inc. 256,000 3,584
* AirTran Holdings, Inc. 542,000 2,405
* Landstar System 44,400 2,098
* Stoneridge, Inc. 124,900 1,218
* Forward Air Corp. 21,400 880
* Hayes Lemmerz
International, Inc. 68,600 750
* Frontier Airlines, Inc. 29,200 686
Wabash National Corp. 73,300 586
* Monaco Coach Corp. 9,800 167
* American Axle &
Manufacturing Holdings, Inc. 13,100 163
-----------
181,548
-----------
CONSUMER DISCRETIONARY (17.6%)
* The Corporate Executive
Board Co. 712,500 32,864
* AnnTaylor Stores Corp. 894,300 26,829
* Jones Apparel Group, Inc. 830,000 23,084
* Pegasus Communications Corp.
Class A 576,270 20,494
* ACNielson Corp. 845,400 20,237
* Learning Tree
International, Inc. 438,200 19,829
Callaway Golf Co. 1,071,700 17,147
* Pacific Sunwear of California 829,000 16,995
E.W. Scripps Co. Class A 275,000 16,070
*(2)LodgeNet Entertainment Corp. 912,500 16,026
* Heidrick & Struggles
International, Inc. 257,600 15,923
*(2)TETRA Technologies, Inc. 1,062,000 15,333
* Venator Group, Inc. 1,069,700 15,110
* Outback Steakhouse 500,000 14,250
* Six Flags, Inc. 907,400 14,178
* Edison Schools Inc. 500,000 13,719
* American Eagle Outfitters, Inc. 389,300 13,407
* Genesco, Inc. 751,900 13,346
* Borders Group, Inc. 960,900 13,332
* Linens in Things, Inc. 418,300 12,863
Liz Claiborne, Inc. 300,000 12,750
* Too Inc. 555,000 12,730
13
<PAGE>
--------------------------------------------------------------------------------
Market
Value
Explorer Fund Shares (000)
--------------------------------------------------------------------------------
* Jack in the Box Inc. 511,000 12,520
* Insight Communications Co., Inc. 900,000 12,488
Pier 1 Imports Inc. 883,050 11,700
Penton Media, Inc. Class A 377,600 11,540
* Furniture Brands
International Inc. 671,500 11,332
Regis Corp. 742,000 11,223
* Insight Enterprises, Inc. 330,750 10,749
The Marcus Corp. 741,800 10,524
* Coach, Inc. 450,000 10,519
* Value Vision International, Inc.
Class A 510,600 10,340
* Lands' End, Inc. 350,000 8,978
* Nautica Enterprises, Inc. 705,500 8,907
* Tweeter Home
Entertainment Group, Inc. 358,100 8,617
* Vans, Inc. 660,000 8,539
* Williams-Sonoma, Inc. 407,200 8,475
Dover Downs
Entertainment, Inc. 622,700 7,317
* Tokyo Style Co., Ltd. 824,000 6,784
* Career Education Corp. 170,400 6,592
Phillips-Van Heusen Corp. 545,000 6,472
* PETsMART, Inc. 1,441,100 6,395
* Westwood One, Inc. 335,200 6,348
* Corinthian Colleges, Inc. 87,200 6,028
* Diamond Technology
Partners Inc. 132,400 5,908
* Emmis Communications, Inc. 216,130 5,781
* Timberland Co. 107,300 5,539
* Abercrombie & Fitch Co. 220,400 5,193
* Education Management Corp. 163,700 5,075
* Key3Media Group, Inc. 530,000 5,035
* Wink Communications, Inc. 472,500 4,843
* Playboy Enterprises, Inc.
Class B 350,000 4,528
Ruby Tuesday, Inc. 327,900 4,447
* World Wrestling Federation
Entertainment, Inc. 267,500 4,046
* Dendrite International, Inc. 181,000 3,937
* Sirius Satellite Radio, Inc. 77,000 3,869
* Bally Total Fitness Holding
Corp. 153,800 3,835
* Rare Hospitality
International Inc. 163,700 3,806
* Urban Outfitters, Inc. 418,100 3,685
* New Horizons Worldwide, Inc. 250,000 3,625
* Chico's Fas, Inc. 110,400 3,574
* ADVO, Inc. 96,100 3,538
* On Command Corp. 318,500 3,344
* PrimaCom AG ADR 345,000 3,278
* Copart, Inc. 211,700 3,189
Harman International
Industries, Inc. 62,600 3,005
* Kenneth Cole Productions, Inc. 64,800 2,944
* The Topps Co., Inc. 322,700 2,914
* Pinnacle Entertainment, Inc. 126,800 2,893
* P.F. ChangIs China Bistro, Inc. 69,700 2,858
* Zale Corp. 82,800 2,805
Tupperware Corp. 162,300 2,779
* United Stationers, Inc. 91,300 2,745
* The Cheesecake Factory 61,800 2,739
* Hot Topic, Inc. 74,400 2,548
* Administaff, Inc. 70,100 2,489
* Rent-A-Center, Inc. 85,000 2,481
* MAXIMUS, Inc. 99,100 2,434
* Columbia Sportswear Co. 56,200 2,403
* Musicland Stores Corp. 289,700 2,354
* Vail Resorts Inc. 110,100 2,333
Intrawest Corp. 135,800 2,309
John H. Harland Co. 160,300 2,224
* NPC International Class A 192,500 2,142
* Men's Wearhouse, Inc. 72,200 2,112
* InfoSpace, Inc. 104,468 2,102
* Polo Ralph Lauren Corp. 106,700 2,094
* Watson Wyatt &
Company Holdings 120,700 2,090
Landry's Seafood
Restaurants, Inc. 245,100 1,976
Ethan Allen Interiors, Inc. 66,550 1,947
* Direct Focus, Inc. 43,000 1,913
* Mohawk Industries, Inc. 83,700 1,826
* CEC Entertainment Inc. 54,400 1,734
* Footstar Inc. 47,700 1,711
* Wilsons The Leather
Experts Inc. 109,250 1,673
* Concord Camera Corp. 54,000 1,671
* Sunglass Hut International, Inc. 207,400 1,607
Strayer Education, Inc. 66,500 1,600
* HotJobs.com Ltd. 100,300 1,567
* Cost Plus, Inc. 53,900 1,509
* FOSSIL, INC. 115,100 1,503
Oshkosh B Gosh, Inc. Class A 91,700 1,467
* Factory 2-U Stores Inc. 45,900 1,466
* Sonic Corp. 40,000 1,460
* Young Broadcasting Inc. 58,700 1,456
* Aztar Corp. 95,600 1,446
* WMS Industries, Inc. 64,100 1,426
* Bell & Howell Co. 73,100 1,389
* Oakley, Inc. 62,600 1,315
* Michaels Stores, Inc. 53,100 1,291
* Jupiter Media Metrix, Inc. 94,100 1,282
ApplebeeIs International, Inc. 42,200 1,275
* Brightpoint, Inc. 191,300 1,273
* MSC Industrial Direct Co., Inc.
Class A 85,300 1,269
Midas Inc. 89,200 1,238
* On Assignment, Inc. 47,700 1,201
14
<PAGE>
--------------------------------------------------------------------------------
Market
Value
Shares (000)
--------------------------------------------------------------------------------
* SCP Pool Corp. 43,900 1,136
* MemberWorks, Inc. 32,900 1,131
* Spherion Corp. 91,300 1,084
* Choice Hotel International, Inc. 89,500 1,052
* The Children's Place
Retail Stores, Inc. 40,400 1,048
* Startek, Inc. 40,700 1,035
Darden Restaurants Inc. 45,200 1,017
* OIReilly Automotive, Inc. 55,000 990
* Dollar Thrifty Automotive
Group, Inc. 63,600 978
* Korn/Ferry International 26,900 942
* Station Casinos, Inc. 54,550 880
* Mail-Well, Inc. 176,000 869
Polaroid Corp. 86,000 865
* 24/7 Media, Inc. 166,000 861
* Argosy Gaming Co. 50,300 817
Stewart Enterprises, Inc.
Class A 360,000 765
* Internet Pictures Corp. 347,000 743
Talbots Inc. 9,400 743
* Quiksilver, Inc. 38,600 738
* 3DO Co. 236,300 724
* Quanta Services, Inc. 23,100 718
* Pegasus Solutions Inc. 41,800 713
* Waste Connections, Inc. 27,100 693
* THQ Inc. 33,700 691
* Isle of Capri Casinos, Inc. 60,700 668
* Rent-Way, Inc. 126,000 638
* JAKKS Pacific, Inc. 71,900 634
* Skechers U.S.A., Inc. 41,600 632
* Radio One, Inc. 77,900 618
* The IT Group, Inc. 137,100 608
* StarMedia Network, Inc. 92,300 565
* Extended Stay America, Inc. 45,900 565
* kforce.com, Inc. 127,900 520
* Professional Detailing, Inc. 5,700 505
* 99 Cents Only Stores 22,400 503
* Netcentives Inc. 65,400 466
* QRS Corp. 54,900 463
* PC Connection, Inc. 16,100 439
* Lightbridge, Inc. 40,600 434
Spiegel, Inc. Class A 61,500 427
Haverty Furniture Cos., Inc. 36,800 414
* Ultimate Electronics, Inc. 11,200 405
Blair Corp. 19,900 403
* Penn National Gaming, Inc. 22,200 389
* Ticketmaster Online-City
Search, Inc. 23,700 379
* Guitar Center, Inc. 23,200 307
* Salton, Inc. 11,600 265
* Rare Medium Group, Inc. 55,100 255
* Hollywood Entertainment Corp. 79,300 243
Westpoint Stevens, Inc. 31,900 229
* Wackenhut Corrections Corp. 32,400 229
* SITEL Corp. 80,200 226
* LookSmart, Ltd. 28,700 203
* Meta Group, Inc. 21,000 202
* Group 1 Automotive, Inc. 15,400 153
* XM Satellite Radio Holdings, Inc. 4,900 142
* Finlay Enterprises, Inc. 8,900 123
* The Yankee Candle Company, Inc. 7,400 109
* Beyond.com Corp. 20,500 15
-----------
803,875
-----------
CONSUMER STAPLES (0.6%)
Fleming Cos., Inc. 715,000 10,144
* Wild Oats Markets Inc. 878,129 5,543
* American Italian Pasta Co. 120,700 2,422
Dreyer's Grand Ice Cream, Inc. 89,900 2,214
* Hain Celestial Group, Inc. 42,200 1,675
* Del Monte Foods Co. 250,200 1,517
Church & Dwight, Inc. 65,800 1,300
* NBTY, Inc. 161,100 1,047
-----------
25,862
-----------
FINANCIAL SERVICES (10.3%)
* Investment Technology
Group, Inc. 1,329,621 47,866
Equity Residential Properties
Trust REIT 675,500 31,791
* Concord EFS, Inc. 659,175 27,232
Sun Communities, Inc. REIT 753,900 22,900
* Affiliated Computer Services,
Inc. Class A 400,000 22,275
Manufactured Home
Communities, Inc. REIT 871,650 21,682
Dain Rauscher Corp. 212,500 19,935
Avalonbay Communities
Inc. REIT 428,000 19,661
Regency Realty Corp. REIT 800,000 18,000
Fidelity National Financial, Inc. 715,020 17,563
Cullen/Frost Bankers, Inc. 520,000 17,322
* BISYS Group, Inc. 359,600 16,946
Metris Cos., Inc. 467,150 15,124
Jefferies Group, Inc. 517,200 14,094
Federal Realty Investment
Trust REIT 597,000 11,492
Annuity and Life Re
(Holdings), Ltd. 404,500 11,149
Prentiss Properties Trust REIT 387,000 9,820
Banco Latinoamericano de
Exportaciones, SA 350,000 8,772
Heller Financial, Inc. 273,800 8,009
First Washington Realty
Trust, Inc. REIT 300,000 7,575
* Labranche & Co. Inc. 186,675 7,397
* AmeriCredit Corp. 264,100 7,098
* Wit Soundview Group, Inc. 711,800 5,072
* The InterCept Group, Inc. 165,900 4,490
15
<PAGE>
--------------------------------------------------------------------------------
Market
Value
Explorer Fund Shares (000)
--------------------------------------------------------------------------------
* Affiliated Managers Group, Inc. 72,200 4,341
* Silicon Valley Bancshares 92,900 4,297
* Barra, Inc. 65,700 4,016
Saul Centers, Inc. REIT 262,000 4,012
Investors Financial
Services Corp. 54,500 3,907
* Advent Software, Inc. 58,200 3,481
FactSet Research Systems Inc. 85,200 3,227
* Pinnacle Holdings Inc. REIT 199,550 3,143
* Kronos, Inc. 82,100 2,992
Cousins Properties, Inc. REIT 111,600 2,902
WestAmerica Bancorporation 77,800 2,796
First American Corp. 133,100 2,787
Arthur J. Gallagher & Co. 34,900 2,203
John Nuveen Co. Class A 43,800 2,091
* Multex.com Inc. 161,300 2,087
First Midwest Bancorp 80,600 2,020
* XTRA Corp. 38,200 1,738
GBC Bancorp 52,000 1,658
Greater Bay Bancorp 48,300 1,573
* Imperial Bancorp 64,600 1,571
HSB Group Inc. 38,400 1,519
McGrath Rent Corp. 83,900 1,447
Phoenix Investment
Partners Ltd. 66,900 1,045
Texas Regional Bancshares, Inc. 34,600 1,034
Brown & Brown, Inc. 31,800 1,033
Radian Group, Inc. 13,000 921
Oriental Financial Group 72,700 891
* CompuCredit Corp. 24,700 763
* BlackRock, Inc. 17,300 737
Hilb, Rogal and Hamilton Co. 18,000 713
Queens County Bancorp, Inc. 24,600 689
Charles E. Smith Residential
Realty, Inc. REIT 15,000 660
Southwest Securities
Group, Inc. 22,160 626
* Data Broadcasting Corp. 127,100 560
Eaton Vance Corp. 10,800 538
Mills Corp. REIT 30,438 519
* Carreker Corporation 27,000 499
* Triad Guaranty, Inc. 16,700 485
CVB Financial Corp. 22,800 380
* Avis Group Holdings, Inc. 12,600 376
Health Care Properties
Investors REIT 12,400 364
Stifel Financial Corp. 22,398 311
Washington REIT 14,800 296
* NextCard, Inc. 37,500 286
* Farm Family Holdings, Inc. 8,000 276
First Source Corp. 12,885 202
* Hamilton Bancorp, Inc. 9,000 135
Senior Housing Properties
Trust REIT 3,500 33
* Imperial Credit 29,000 30
* Harbor Global Company Ltd. 5,180 21
-----------
467,496
-----------
HEALTH CARE (20.0%)
* Caremark Rx, Inc. 5,167,700 64,596
* Genzyme Corp. 530,700 37,680
* Vertex Pharmaceuticals, Inc. 351,000 32,681
Bindley Western
Industries, Inc. 849,500 30,529
* BioChem Pharma Inc. 1,039,000 25,715
DENTSPLY International Inc. 738,900 25,631
* Coventry Health Care Inc. 1,391,000 25,386
* Foundation Health Systems
Class A 1,095,300 22,111
* ImmunoGen, Inc. 593,900 20,415
* Mid Atlantic Medical
Services, Inc. 1,109,400 18,860
* GelTex Pharmaceuticals, Inc. 376,800 18,699
* Varian Medical Systems, Inc. 351,400 17,175
* I-STAT Corp. 851,700 16,715
* Chiron Corp. 385,000 16,675
* Medarex, Inc. 238,000 14,548
* Quorum Health Group, Inc. 1,066,600 14,266
* Tularik, Inc. 444,000 14,097
* Regeneron
Pharmaceuticals, Inc. 515,000 13,776
* Abgenix, Inc. 174,200 13,740
* Human Genome Sciences, Inc. 150,200 13,276
* Cell Genesys, Inc. 573,000 13,215
* Community Health
Systems, Inc. 465,300 13,116
* Millennium
Pharmaceuticals, Inc. 173,812 12,612
Arrow International, Inc. 309,500 12,477
* Invitrogen Corp. 158,700 12,071
* Sybron International Corp. 481,000 11,905
* Acuson Corp. 500,000 11,406
* Oxford Health Plan 331,400 11,185
* Albany Molecular
Research, Inc. 189,500 11,015
* Henry Schein, Inc. 446,500 10,883
* Cubist Pharmaceuticals, Inc. 245,200 10,536
* Laboratory Corp. of America
Holdings 75,070 10,125
* Myriad Genetics, Inc. 84,300 10,116
* Cephalon, Inc. 181,364 9,726
Mentor Corp. 541,500 9,544
* Gene Logic Inc. 419,800 9,157
Kissei Pharmaceutical Co., Ltd. 479,000 8,770
* Gilead Sciences, Inc. 100,000 8,600
* Beverly Enterprises, Inc. 1,622,200 8,111
* Barr Labs Inc. 125,550 7,925
* Pharmacopeia, Inc. 432,400 7,891
* Triad Hospitals, Inc. 283,500 7,867
16
<PAGE>
--------------------------------------------------------------------------------
Market
Value
Shares (000)
--------------------------------------------------------------------------------
* Sequenom, Inc. 225,100 7,288
* LifePoint Hospitals, Inc. 163,300 6,328
* Express Scripts 91,600 6,154
* Cerner Corp. 96,200 5,958
* US Oncology, Inc. 1,041,100 5,596
*(2)Matria Healthcare, Inc. 2,657,600 5,564
* Syncor International Corp. 205,500 5,279
* Lincare Holdings, Inc. 125,100 5,262
* Celera Genomics 77,800 5,252
* Endocare, Inc. 295,400 5,225
* Aurora Biosciences Corp. 85,350 5,201
* ISIS Pharmaceuticals, Inc. 474,000 4,888
* OSI Pharmaceuticals, Inc. 61,000 4,392
* Cell Therapeutics, Inc. 65,400 4,375
* CuraGen Corp. 66,900 4,323
* Immunomedics Inc. 186,500 4,313
* Transkaryotic Therapies, Inc. 108,900 4,057
* Noven Pharmaceuticals, Inc. 87,900 3,917
* Rehabcare Corp. 90,700 3,917
* Corixa Corp. 85,400 3,800
* AmeriSource Health Corp. 83,000 3,605
* Sicor, Inc. 275,200 3,526
* Alexion Pharmaceuticals, Inc. 33,500 3,463
* Apria Healthcare 164,800 3,296
* Orthodontic Centers of
America, Inc. 96,500 3,221
* Priority Healthcare Corp.
Class B 58,000 3,118
* Eclipsys Corp. 125,600 3,101
Cooper Cos., Inc. 86,300 3,085
* CV Therapeutics, Inc. 37,800 2,977
* Medicis Pharmaceutical Corp. 39,900 2,938
* Dura Pharmaceuticals, Inc. 83,500 2,876
* Varian, Inc. 91,300 2,813
* Celgene Corp. 43,100 2,775
* Province Healthcare Co. 65,650 2,766
* AmeriPath, Inc. 153,700 2,757
* IDEXX Laboratories Corp. 112,400 2,698
* Titan Pharmaceuticals, Inc. 63,600 2,676
* Inhale Therapeutic Systems 52,900 2,632
* United Therapeutics Corp. 48,395 2,589
* Neurocrine Biosciences, Inc. 66,300 2,569
* Maxim Pharmaceuticals, Inc. 56,000 2,485
* Pharmaceutical Product
Development, Inc. 76,300 2,389
* Cytyc Corp. 38,600 2,292
* Protein Design Labs, Inc. 16,000 2,161
* Enzon, Inc. 30,100 2,145
* NPS Pharmaceuticals Inc. 49,700 2,131
* NeoRx Corp. 129,800 2,109
Alpharma, Inc. Class A 54,100 2,100
* Versicor, Inc. 144,200 1,893
* NEOSE Technologies, Inc. 50,500 1,827
* Avigen, Inc. 46,900 1,817
* Alliance Pharmaceutical Corp. 123,200 1,740
* King Pharmaceuticals, Inc. 36,375 1,630
* Coulter Pharmaceutical, Inc. 42,400 1,624
* Advance Paradigm, Inc. 33,100 1,618
* ArQule, Inc. 69,800 1,614
* Alkermes, Inc. 42,800 1,586
* ResMed Inc. 60,800 1,550
* Enzo Biochem, Inc. 37,500 1,444
* Genome Therapeutics Corp. 91,300 1,364
* Genzyme Transgenics Corp. 63,500 1,361
* Aviron 18,400 1,203
* Sciclone Pharmaceuticals 147,500 1,189
* Martek Biosciences Corp. 54,900 1,180
* Novoste Corp. 46,100 1,164
* Allscripts, Inc. 96,400 1,157
* ADAC Laboratories 88,500 1,150
* Hyseq, Inc. 38,600 1,122
* Curon Medical Inc. 98,100 1,116
* PolyMedica Corp. 19,000 1,093
* Targeted Genetics Corp. 108,000 1,080
* Trimeris, Inc. 14,700 1,040
* Sunrise Technologies
International, Inc. 143,000 1,032
* Nanogen, Inc. 64,700 1,003
* Vical, Inc. 46,400 986
Hooper Holmes, Inc. 100,900 958
* Sunrise Assisted Living, Inc. 40,500 947
* Respironics, Inc. 47,400 930
* Sunquest Information
Systems, Inc. 87,600 909
* Cygnus Inc. 79,200 708
* Nabi 115,800 707
* Per-Se Technologies, Inc. 147,300 649
* Miravant Medical Technology 42,400 641
* Triangle Pharmaceuticals, Inc. 76,000 639
* Imatron, Inc. 294,100 634
* Ventana Medical Systems, Inc. 23,900 627
* Biopure Corp. 29,900 615
* Sangstat Medical Corp. 60,300 603
* ATS Medical, Inc. 30,700 562
Diagnostic Products Corp. 11,400 520
* Biosite Diagnostics, Inc. 22,600 497
* Cell Pathways, Inc. 62,500 477
* Vasomedical, Inc. 111,800 426
* Biomatrix, Inc. 20,500 392
* Kos Pharmaceuticals, Inc. 19,200 380
* Connetics Corp. 70,400 368
* Molecular Devices Corp. 4,900 335
* Ocular Sciences, Inc. 27,100 335
* Advanced Tissue Sciences Inc. 46,200 329
* Closure Medical Corp. 13,000 315
* BioCryst Pharmaceuticals, Inc. 31,200 285
* QuadraMed Corp. 147,200 166
* Theragenics Corp. 17,600 83
17
<PAGE>
--------------------------------------------------------------------------------
Market
Value
Explorer Fund Shares (000)
--------------------------------------------------------------------------------
* Bio-Technology General Corp. 5,900 62
* Endo Pharmaceuticals 15,900 10
-----------
914,898
-----------
INTEGRATED OILS
* Tesoro Petroleum Corp. 117,300 1,217
OTHER ENERGY (4.4%)
St. Mary Land &
Exploration Co. 986,300 23,116
* Core Laboratories N.V. 1,045,600 22,546
* Hanover Compressor Co. 576,600 18,812
* Chieftain International, Inc. 599,900 12,148
* Veritas DGC Inc. 400,000 12,000
COFLEXIP ADR 187,800 10,716
* Unit Corp. 628,500 8,367
* Marine Drilling Co., Inc. 291,400 6,957
Valero Energy Corp. 188,600 6,236
Equitable Resources, Inc. 99,300 5,759
* Spinnaker Exploration Co. 176,740 5,346
* National-Oilwell, Inc. 176,500 5,163
Cross Timbers Oil Co. 265,650 4,998
* Patterson Energy, Inc. 174,600 4,911
Vintage Petroleum, Inc. 195,200 4,124
Carbo Ceramics Inc. 135,500 4,057
* OSCA, Inc. 241,500 3,743
ENSCO International, Inc. 111,100 3,694
* HS Resources Inc. 115,800 3,604
* Stone Energy Corp. 67,000 3,430
Pogo Producing Co. 129,300 3,233
* Swift Energy Co. 96,200 3,127
* Grey Wolf, Inc. 646,500 2,990
Mitchell Energy &
Development Corp. Class A 54,000 2,484
* Key Energy Services, Inc. 241,000 2,169
* Forest Oil Corp. 156,400 2,160
* Barrett Resources Corp. 51,800 1,884
* Chesapeake Energy Corp. 240,400 1,352
Noble Affiliates, Inc. 36,600 1,343
* UTI Energy Corp. 66,100 1,326
* Louis Dreyfus Natural Gas Corp. 36,300 1,164
* Newfield Exploration Co. 30,600 1,155
* Basin Exploration Inc. 52,000 1,030
* Seitel, Inc. 57,400 861
Penn Virginia Corp. 30,000 795
* Nuevo Energy Co. 40,700 738
* Newpark Resources, Inc. 81,400 733
* Prima Energy Corp. 15,300 680
* The Meridian Resource Corp. 93,800 651
* Tom Brown, Inc. 27,100 620
CONSOL Energy, Inc. 35,700 605
Cabot Oil & Gas Corp. Class A 28,300 555
* Houston Exploration Co. 23,500 529
* Plains Resources 24,400 467
* EEX Corp. 62,200 292
-----------
202,670
-----------
MATERIALS & PROCESSING (2.8%)
* Cytec Industries, Inc. 400,000 13,850
Wellman, Inc. 863,000 12,945
Nagase & Co., Ltd. 2,100,000 10,059
Granite Construction Co. 426,800 9,736
Cambrex Corp. 236,100 9,429
Valmont Industries, Inc. 444,500 9,057
* Unifi, Inc. 724,900 6,298
Polymer Group, Inc. 778,000 4,765
* Insituform Technologies
Class A 131,200 4,682
* Shaw Group, Inc. 48,800 3,977
* Grant Prideco, Inc. 200,500 3,722
* Catellus Development Corp. 202,600 3,685
* Fairfield Communities, Inc. 284,600 3,611
* Valence Technology 209,600 2,921
Georgia Gulf Corp. 195,300 2,612
* Dal-Tile International Inc. 193,800 2,398
* Stillwater Mining Co. 80,500 2,335
* Dycom Industries, Inc. 52,500 1,975
OM Group, Inc. 38,700 1,790
Delta & Pine Land Co. 69,300 1,694
* Lone Star Technologies, Inc. 40,100 1,610
Olin Corp. 80,300 1,425
Carpenter Technology Corp. 42,100 1,305
* Paxar Corp. 145,900 1,195
* W.R. Grace & Co. 272,300 1,038
N L Industries, Inc. 42,900 1,014
Ethyl Corp. 437,000 874
* Maverick Tube Corp. 53,300 829
Spartech Corp. 53,400 824
* Energy Conversion Devices, Inc. 22,300 722
* Buckeye Technology, Inc. 42,000 719
Brady Corp. Class A 23,200 719
* Crestline Capital Corp. 32,200 672
Texas Industries, Inc. 28,800 671
* Cadiz Inc. 58,900 626
Valspar Corp. 22,800 623
* Advanced Lighting
Technologies, Inc. 44,600 532
* Silgan Holdings, Inc. 52,900 450
* Trex Co., Inc. 10,900 407
* Battle Mountain Gold Co.
Class A 291,800 401
* Agribrands International, Inc. 7,700 335
* Material Sciences Corp. 21,900 222
Commonwealth Industries Inc. 29,000 169
Aptargroup Inc. 6,700 139
* CB Richard Ellis Services, Inc. 9,700 121
-----------
129,183
-----------
18
<PAGE>
--------------------------------------------------------------------------------
Market
Value
Shares (000)
--------------------------------------------------------------------------------
PRODUCER DURABLES (7.6%)
* Mettler-Toledo
International Inc. 847,000 39,544
* Plantronics, Inc. 698,400 31,865
* Polycom, Inc. 316,600 20,579
Clayton Homes Inc. 1,943,500 17,856
* PRI Automation, Inc. 757,500 17,138
* Veeco Instruments, Inc. 194,700 12,890
* Waters Corp. 171,000 12,408
* American Tower Corp. Class A 270,000 11,053
* Palm Harbor Homes, Inc. 703,108 10,283
* Ultratech Stepper, Inc. 430,000 10,105
Lindsay Manufacturing Co. 449,150 9,432
* DuPont Photomasks, Inc. 147,475 8,277
* Brooks Automation, Inc. 251,000 6,651
Donaldson Co., Inc. 271,000 6,131
* NVR, Inc. 56,800 5,873
* Adaptive Broadband Corp. 356,455 5,726
Technitrol, Inc. 48,500 5,377
* Electro Scientific
Industries, Inc. 148,500 5,188
* Therma-Wave Inc. 225,750 4,628
Newport News
Shipbuilding Inc. 91,800 4,515
* Crown Castle
International Corp. 142,600 4,323
* GSI Lumonics, Inc. 297,500 3,756
* Cymer, Inc. 144,500 3,612
Helix Technology Corp. 127,300 3,548
* Artesyn Technologies, Inc. 83,700 3,400
* Silicon Valley Group, Inc. 102,900 3,389
* Zygo Corp. 67,700 3,351
* Varian Semiconductor
Equipment Associates, Inc. 144,200 3,317
* American Superconductor Corp. 63,500 3,032
* LTX Corp. 216,100 3,025
* SpectraLink Corp. 405,200 3,014
Ametek Aerospace
Products Inc. 137,900 2,999
* Kulicke & Soffa Industries, Inc. 203,700 2,992
* Alliant Techsystems, Inc. 32,400 2,914
Graco, Inc. 81,000 2,911
* Tollgrade Communications, Inc. 28,500 2,729
C & D Technology Inc. 46,100 2,726
* Asyst Technologies, Inc. 181,300 2,719
* Tut Systems, Inc. 73,600 2,447
* FEI Co. 101,700 2,409
* ATMI, Inc. 119,000 2,246
* Electroglas, Inc. 159,600 2,244
* FSI International, Inc. 185,300 1,726
Briggs & Stratton Corp. 47,300 1,688
CTS Corp. 35,300 1,516
* Credence Systems Corp. 79,900 1,498
* Scott Technologies, Inc. 63,000 1,449
* Presstek, Inc 90,500 1,425
Applied Industrial
Technology, Inc. 83,900 1,421
Cohu, Inc. 82,900 1,311
* Robotic Vision Systems, Inc. 226,000 1,236
* California Amplifier, Inc. 48,100 1,202
* Kent Electronics Corp. 62,300 1,160
* Photon Dynamics, Inc. 32,200 1,159
* Advanced Energy
Industries, Inc. 65,600 1,132
* Cognex Corp. 32,900 1,102
X-Rite Inc. 162,400 1,096
Standard Pacific Corp. 55,100 1,033
* Entegris Inc. 114,800 1,026
* Nanometrics Inc. 44,500 1,024
* Vicor Corp. 18,700 1,010
* GaSonics International Corp. 49,400 1,010
* MKS Instruments, Inc. 54,600 1,003
* Power-One, Inc. 14,100 1,000
* Interdigital Communications
Corp. 70,400 770
* Mastec Inc. 25,600 741
Kennametal, Inc. 23,800 699
* Mattson Technology, Inc. 59,100 694
Inter-Tel, Inc. 51,400 594
* Symmetricom Inc. 41,400 528
* SpeedFam-IPEC, Inc. 54,200 515
General Cable Corp. 83,100 499
* Com21, Inc. 45,300 490
* inTEST Corp. 38,600 333
* Cable Design Technologies 900 21
-----------
345,733
-----------
TECHNOLOGY (22.1%)
* Oak Technology, Inc. 1,314,857 36,898
* Remec, Inc. 1,076,300 32,087
* IDX Systems Corp. 930,200 29,766
* Maxtor Corp. 3,681,100 28,759
* Quantum Corp.U
Hard Disk Drive 2,439,200 27,898
* Sensormatic Electronics Corp. 1,415,900 25,486
* Western Digital Corp. 4,009,500 24,057
* Avant! Corp. 1,368,000 22,999
* Cognos Inc. 531,300 22,049
* Verity, Inc. 905,700 21,284
* Documentum, Inc. 230,900 19,626
* S3, Inc. 2,147,600 19,396
* Manugistics Group, Inc. 157,200 17,911
* Cirrus Logic 407,000 17,552
* Actel Corp. 471,300 17,261
* Aeroflex, Inc. 259,425 15,436
* Acxiom Corp. 368,000 14,812
* DMC Stratex Networks, Inc. 627,800 14,518
* Sybase, Inc. 651,500 13,641
* Aspen Technologies, Inc. 311,650 12,875
19
<PAGE>
--------------------------------------------------------------------------------
Market
Value
Explorer Fund Shares (000)
--------------------------------------------------------------------------------
* Sipex Corp. 325,000 12,797
* Ingram Micro, Inc. Class A 727,100 12,406
* SeaChange International, Inc. 560,850 12,339
* Trimble Navigation Ltd. 516,750 12,273
* Gartner Group, Inc. Class A 1,183,200 11,240
* Advanced Fibre
Communications, Inc. 340,225 11,079
* SERENA Software, Inc. 217,250 11,053
* internet.com Corp. 530,000 11,031
* Ditech Communications Corp. 309,500 10,658
* Exar Corp. 230,900 10,318
* Hutchinson Technology, Inc. 470,000 10,311
* Semtech Corp. 318,400 10,268
* Benchmark Electronics, Inc. 242,700 9,769
* Optimal Robotics Corp. 285,000 9,583
* Rainbow Technologies, Inc. 376,700 9,370
* Electronics for Imaging, Inc. 588,200 9,117
* Natural Microsystems Corp. 191,100 8,635
* AremisSoft Corp. 201,300 8,606
* ANADIGICS, Inc. 371,550 8,313
* Extreme Networks, Inc. 99,350 8,240
* Peregrine Systems, Inc. 340,300 8,167
* TriQuint Semiconductor, Inc. 212,000 8,122
* Planar Systems, Inc. 473,600 8,051
* eSPEED, Inc. 363,700 7,638
* Macrovision Corp. 104,000 7,579
* Ceridian Corp. 297,100 7,427
* Tekelec 197,200 7,259
* Inet Technologies, Inc. 174,665 7,161
* MicroStrategy Inc. 285,500 6,834
* Actuate Software Corp. 239,000 6,737
* Bell Microproducts Inc. 250,000 6,500
* Mentor Graphics Corp. 268,700 6,298
* Cerprobe Corp. 300,000 5,948
* Netro Corp. 267,000 5,824
* Diversinet Corp. 950,000 5,819
* FileNet Corp. 214,700 5,690
* InFocus Corp. 124,400 5,497
* Stratos Lightwave, Inc. 204,475 5,406
* SilverStream Software, Inc. 240,000 5,400
* Network Engines, Inc. 167,900 5,247
* New Era of Networks, Inc. 330,000 5,136
* NetIQ Corp. 59,100 5,090
* Anaren Microwave, Inc. 48,800 5,075
* Elantec Semiconductor, Inc. 44,800 4,984
* Maxwell Technologies, Inc. 300,000 4,875
* ACT Manufacturing, Inc. 140,700 4,626
* Three-Five Systems, Inc. 128,500 4,433
* Allaire Corp. 605,300 4,426
* MRV Communications Inc. 108,600 4,290
* Plexus Corp. 67,900 4,282
* Digitas Inc. 357,300 4,265
* BSQUARE Corp. 272,000 4,250
* EXE Technologies, Inc. 237,000 4,236
* Mercury Computer
Systems, Inc. 136,600 4,235
* Excalibur Technologies Corp. 71,800 4,227
* Netegrity, Inc. 54,050 4,216
* NetSpeak Corp. 541,000 4,125
* Moldflow Corp. 152,500 3,860
* Broadbase Software Inc. 340,300 3,658
* Iomega Corp. 737,000 3,619
* SonicWALL, Inc. 240,000 3,585
* Caminus Corp. 111,800 3,522
* Interwoven, Inc. 34,800 3,506
* Parlex Corp. 206,300 3,301
* Mercury Interactive Corp. 27,300 3,030
* Proxim, Inc. 49,300 2,989
* WebTrends Corp. 87,900 2,825
* Advanced Digital
Information Corp. 214,900 2,794
* Microsemi Corp. 68,600 2,744
* Alliance Semiconductor Corp. 132,800 2,656
* iVillage Inc. 1,093,700 2,598
* IntraNet Solutions, Inc. 54,900 2,553
Keithley Instruments Inc. 46,800 2,504
* Cognizant Technology
Solutions Corp. 60,800 2,493
* TTM Technologies, Inc. 124,300 2,486
* Pericom Semiconductor Corp. 92,600 2,454
* Glenayre Technologies, Inc. 275,700 2,275
* ONYX Software Corp. 141,300 2,243
* AnswerThink Consulting
Group, Inc. 135,900 2,225
* Integrated Silicon Solution, Inc. 150,500 2,013
* KEMET Corp. 71,900 2,004
* Progress Software Corp. 124,900 1,975
* Coherent, Inc. 56,000 1,949
* JDA Software Group, Inc. 126,900 1,911
* Liberate Technologies, Inc. 100,000 1,906
* Avocent Corp. 26,300 1,866
* Objective Systems
Integrators, Inc. 196,400 1,768
* Clarent Corp. 55,900 1,736
* Celeritek, Inc. 51,400 1,699
* General Semiconductor, Inc. 147,600 1,688
* Black Box Corp. 25,100 1,653
* AXENT Technologies, Inc. 84,000 1,612
* Anixter International Inc. 64,800 1,571
* Amphenol Corp. 24,400 1,568
* F5 Networks, Inc. 50,500 1,565
* SPSS, Inc. 68,900 1,550
* Proxicom, Inc. 112,400 1,517
* LCC International, Inc. Class A 100,800 1,512
* Secure Computing Corp. 65,600 1,509
* HNC Software, Inc. 70,900 1,440
* CSG Systems International, Inc. 30,900 1,435
* Sawtek Inc. 28,200 1,435
20
<PAGE>
--------------------------------------------------------------------------------
Market
Value
Shares (000)
--------------------------------------------------------------------------------
* Packeteer, Inc. 57,600 1,433
* Lattice Semiconductor Corp. 49,100 1,433
* Cyberoptics Corp. 59,950 1,409
* Ciber, Inc. 171,000 1,336
* Zebra Technologies Corp.
Class A 30,100 1,319
* Aspect Communications Corp. 79,800 1,315
* Integrated Device
Technology Inc. 22,700 1,278
* Telxon Corp. 55,700 1,250
* Forrester Research, Inc. 29,400 1,207
* Applied Micro Circuits Corp. 15,722 1,202
* Pharsight Corp. 153,700 1,191
* P-Com, Inc. 210,290 1,183
* ESS Technology, Inc. 74,700 1,158
* Xircom, Inc. 80,800 1,141
* Radiant Systems, Inc. 59,800 1,103
* Avid Technology, Inc. 77,800 1,079
* International FiberCom, Inc. 79,100 1,018
* Kopin Corp. 70,100 990
* Littelfuse, Inc. 33,900 983
* MIPS Technologies, Inc. 24,500 983
* About.Com, Inc. 40,100 962
* Zomax Inc. 158,200 959
* Puma Technology, Inc. 69,900 948
* Phoenix Technologies LTD. 57,100 917
* PLX Technology, Inc. 37,900 910
* Symantec Corp. 23,000 898
* Remedy Corp. 52,000 891
* Manhattan Associates, Inc. 13,900 890
* Globix Corp. 82,500 835
* eXcelon Corp. 101,400 824
* Netopia, Inc. 68,800 748
* Viant Corp. 125,100 743
* RadiSys Corp. 27,000 716
* Informatica Corp. 7,300 690
* Intrusion.com, Inc. 63,600 652
* PurchasePro.com, Inc. 23,900 645
* Mapinfo Corp. 19,700 644
* Retek Inc. 16,283 642
* 02Micro International, Ltd. 63,500 639
* MetaCreations Corp. 62,600 626
* MCSi, Inc. 21,400 615
* Adtran, Inc. 15,900 604
Methode Electronics, Inc.
Class A 16,000 602
* SCM Microsystems, Inc. 15,200 578
* Power Integrations, Inc. 42,700 574
* II-VI, Inc. 27,700 573
* Digital River, Inc. 87,200 570
* Geoworks 115,500 567
* CACI International, Inc. 27,400 565
* Supertex, Inc. 19,500 553
* Neon Communications, Inc. 45,700 551
* Vertel Corp. 97,900 520
* Marimba, Inc. 86,300 512
* Indus International, Inc. 125,500 510
* Brooktrout Technology, Inc. 33,600 485
* Level 8 Systems Inc. 50,200 483
* Westell Technologies, Inc. 87,700 482
* Sanchez Computer
Associates, Inc. 29,900 480
* Corsair Communications, Inc. 78,900 478
* CompuCom Systems, Inc. 230,300 453
* Digital Island Inc. 35,700 451
* Carrier Access Corp. 31,800 397
* Accrue Software, Inc. 84,500 391
* Interact Commerce Corp. 40,200 369
* Superconductor
Technologies Inc. 33,100 335
* Razorfish Inc. 72,200 325
* Informix Corp. 74,700 317
* Spectra-Physics Lasers, Inc. 8,300 293
* Inprise Corp. 45,700 291
* Technology Solutions Co. 119,950 285
* Clarus Corp. 28,300 283
* Project Software &
Development, Inc. 21,300 277
* Cobalt Networks, Inc. 4,700 259
* Juno Online Services, Inc. 92,200 245
* InterVoice-Brite, Inc. 24,600 241
Gerber Scientific, Inc. 28,800 230
* Saga Systems, Inc. 39,700 213
* Tanning Technology Corp. 38,700 209
* InterWorld Corp. 79,600 174
* Net Perceptions, Inc. 47,500 157
* Open Market, Inc. 44,500 147
* Persistence Software, Inc. 9,700 114
* Satcon Technology Corp. 4,300 110
* Proton Energy Systems, Inc. 3,700 99
-----------
1,010,651
-----------
UTILITIES (1.0%)
* Focal Communications Corp. 493,635 7,158
* General Communication, Inc. 699,500 5,465
* Illuminet Holdings, Inc. 216,885 5,222
* Mediacom Communications
Corp. 234,600 3,988
* Price Communications Corp. 172,700 3,735
* SBA Communications Corp. 68,500 3,434
* Leap Wireless International, Inc. 48,700 2,423
* Rural Cellular Corp. Class A 30,500 1,639
* Powertel Inc. 18,200 1,588
* Commonwealth Telephone
Enterprises, Inc. 43,840 1,518
* Motient Corp. 106,300 1,289
Avista Corp. 52,300 1,173
CFW Communications Co. 58,400 1,161
* Mpower Communications Corp. 133,100 865
21
<PAGE>
--------------------------------------------------------------------------------
Market
Value
Explorer Fund Shares (000)
--------------------------------------------------------------------------------
* Metricom 37,800 671
* ITC DeltaCom, Inc. 64,400 521
* TALK.com, Inc. 123,200 381
UniSource Energy Corp. 23,500 351
* CTC Communications
Group, Inc. 33,300 322
* Metrocall, Inc. 173,900 223
* Adelphia Business
Solutions, Inc. 34,700 217
-----------
43,344
-----------
OTHER (0.1%)
Teleflex Inc. 49,700 1,718
U.S. Industries, Inc. 129,600 1,150
Carlisle Co., Inc. 20,500 853
-----------
3,721
-----------
--------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(Cost $3,689,113) 4,130,198
--------------------------------------------------------------------------------
Face
Amount
(000)
--------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (11.2%)(1)
--------------------------------------------------------------------------------
Federal Home Loan Mortgage Corp.
(3) 6.46%, 11/7/2000 $ 2,900 2,897
(3) 6.54%, 1/11/2001 8,000 7,898
(3) 6.54%, 1/25/2001 8,900 8,763
Federal National Mortgage Assn.
(3) 6.49%, 11/2/2000 2,400 2,400
U.S. TREASURY BILL
(3) 6.00%, 12/7/2000 300 298
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
6.56%, 11/1/2000 457,273 457,273
6.58%, 11/1/2000--Note G 31,407 31,407
--------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $510,939) 510,936
--------------------------------------------------------------------------------
TOTAL INVESTMENTS (101.7%)
(Cost $4,200,052) 4,641,134
--------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-1.7%)
--------------------------------------------------------------------------------
Other Assets--Note C $ 55,786
Liabilities--Note G (131,078)
-----------
(75,292)
-----------
--------------------------------------------------------------------------------
NET ASSETS (100%)
--------------------------------------------------------------------------------
Applicable to 59,085,594 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $4,565,842
================================================================================
NET ASSET VALUE PER SHARE $77.28
================================================================================
.See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1)The fund invests a portion of its reserves in equity markets through the use
of index futures contracts. After giving effect to futures investments, the
fund's effective common stock and temporary cash investment positions represent
95.7% and 6.0%, respectively, of net assets. See Note F in Notes to Financial
Statements.
(2)Considered an affiliated company as the fund owns more than 5% of the
outstanding voting securities of such company. The total market value of
investments in affiliated companies was $72,207,000.
(3)Securities with an aggregate value of $22,256,000 have been segregated as
initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
--------------------------------------------------------------------------------
AT OCTOBER 31, 2000, NET ASSETS CONSISTED OF:
--------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
--------------------------------------------------------------------------------
Paid in Capital--Note E $ 3,280,948 $55.53
Undistributed Net
Investment Income--Note E 9,391 .16
Accumulated Net
Realized Gains--Note E 847,453 14.34
Unrealized Appreciation
(Depreciation)--Note F
Investment Securities 441,082 7.47
Futures Contracts (13,032) (.22)
--------------------------------------------------------------------------------
NET ASSETS $4,565,842 $77.28
================================================================================
22
<PAGE>
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the fund during the
reporting period, and details the operating expenses charged to the fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
fund invested in futures contracts during the period, the results of these
investments are shown separately.
--------------------------------------------------------------------------------
EXPLORER FUND
Year Ended October 31, 2000
(000)
--------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends* $ 14,542
Interest 25,441
Security Lending 1,292
--------------------------------------------------------------------------------
Total Income 41,275
--------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 7,222
Performance Adjustment 2,115
The Vanguard Group--Note C
Management and Administrative 17,486
Marketing and Distribution 394
Custodian Fees 236
Auditing Fees 10
Shareholders' Reports 111
Trustees' Fees and Expenses 6
--------------------------------------------------------------------------------
Total Expenses 27,580
Expenses Paid Indirectly--Note D (225)
--------------------------------------------------------------------------------
Net Expenses 27,355
--------------------------------------------------------------------------------
NET INVESTMENT INCOME 13,920
--------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold* 979,326
Futures Contracts 31,032
--------------------------------------------------------------------------------
REALIZED NET GAIN 1,010,358
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 32,536
Futures Contracts (11,221)
--------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 21,315
--------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,045,593
================================================================================
*Dividend income and realized net loss from affiliated companies were $19,000
and $(25,824,000), respectively.
23
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the amount shareholders invested in the
fund, either by purchasing shares or by reinvesting distributions, as well as
the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed
are shown at the end of the Statement.
--------------------------------------------------------------------------------
EXPLORER FUND
YEAR ENDED OCTOBER 31,
-----------------------
2000 1999
(000) (000)
--------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income $ 13,920 $ 8,535
Realized Net Gain 1,010,358 334,544
Change in Unrealized Appreciation (Depreciation) 21,315 177,769
--------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from
Operations 1,045,593 520,848
--------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income (9,304) (8,697)
Realized Capital Gain (324,836) (13,054)
--------------------------------------------------------------------------------
Total Distributions (334,140) (21,751)
--------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS1
Issued 2,299,593 581,427
Issued in Lieu of Cash Distributions 329,593 21,406
Redeemed (1,258,958) (813,686)
--------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 1,370,228 (210,853)
--------------------------------------------------------------------------------
Total Increase 2,081,681 288,244
--------------------------------------------------------------------------------
NET ASSETS
Beginning of Year 2,484,161 2,195,917
End of Year $4,565,842 $2,484,161
================================================================================
1Shares Issued (Redeemed)
Issued 30,217 10,222
Issued in Lieu of Cash Distributions 5,360 403
Redeemed (16,891) (14,495)
--------------------------------------------------------------------------------
Net Increase (Decrease) in Shares Outstanding 18,686 (3,870)
================================================================================
24
<PAGE>
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis. It also presents the fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the fund's total return; how much it costs to operate the fund;
and the extent to which the fund tends to distribute capital gains. The table
also shows the Portfolio Turnover Rate, a measure of trading activity. A
turnover rate of 100% means that the average security is held in the fund for
one year.
<TABLE>
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------
EXPLORER FUND
YEAR ENDED OCTOBER 31,
-----------------------------------------------
For a Share Outstanding Throughout Each Year 2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $61.49 $49.60 $62.31 $55.44 $51.05
-------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .25 .21 .21 .26 .26
Net Realized and Unrealized Gain (Loss) on Investments 23.80 12.18 (6.82) 9.71 8.37
-------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 24.05 12.39 (6.61) 9.97 8.63
-------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.20) (.25) (.27) (.24)
Distributions from Realized Capital Gains (8.03) (.30) (5.85) (2.83) (4.00)
-------------------------------------------------------------------------------------------------------------------
Total Distributions (8.26) (.50) (6.10) (3.10) (4.24)
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $77.28 $61.49 $49.60 $62.31 $55.44
===================================================================================================================
TOTAL RETURN 42.56% 25.14% -11.22% 18.93% 17.97%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $4,566 $2,484 $2,196 $2,550 $2,186
Ratio of Total Expenses to Average Net Assets 0.71% 0.74% 0.62% 0.62% 0.63%
Ratio of Net Investment Income to Average Net Assets 0.36% 0.36% 0.37% 0.45% 0.51%
Portfolio Turnover Rate 123% 79% 72% 84% 51%
===================================================================================================================
</TABLE>
NOTES TO FINANCIAL STATEMENTS
Vanguard Explorer Fund is registered under the Investment Company Act of 1940 as
a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. Security Valuation: Equity securities are valued at the latest quoted
sales prices as of the close of trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on the valuation date; such securities not
traded on the valuation date are valued at the mean of the latest quoted bid and
asked prices. Prices are taken from the primary market in which each security
trades. Temporary cash investments acquired over 60 days to maturity are valued
using the latest bid prices or using valuations based on a matrix system (which
considers such factors as security prices, yields, maturities, and ratings),
both as furnished by independent pricing services. Other temporary cash
investments are valued at amortized cost, which approximates market value.
Securities for which market quotations are not readily available are valued by
methods deemed by the board of trustees to represent fair value.
25
<PAGE>
NOTES TO FINANCIAL STATEMENT (CONTINUED)
2. Federal Income Taxes: The fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for federal income taxes is required in the financial
statements.
3. Repurchase Agreements: The fund, along with other members of The
Vanguard Group, transfers uninvested cash balances to a pooled cash account,
which is invested in repurchase agreements secured by U.S. government
securities. Securities pledged as collateral for repurchase agreements are held
by a custodian bank until the agreements mature. Each agreement requires that
the market value of the collateral be sufficient to cover payments of interest
and principal; however, in the event of default or bankruptcy by the other party
to the agreement, retention of the collateral may be subject to legal
proceedings.
4. Futures Contracts: The fund uses S&P MidCap 400 and Russell 2000 Index
futures contracts to a limited extent, with the objectives of maintaining full
exposure to the stock market while maintaining liquidity. The fund may purchase
or sell futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital shares transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
5. Distributions: Distributions to shareholders are recorded on the
ex-dividend date. Distributions are determined on a tax basis and may differ
from net investment income and realized capital gains for financial reporting
purposes.
6. Other: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
B. Granahan Investment Management, Inc., Wellington Management Company, LLP,
Chartwell Investment Partners, and as of April 3, 2000, Grantham, Mayo, Van
Otterloo & Co. LLC provide investment advisory services to the fund for fees
calculated at an annual percentage rate of average net assets. The basic fees of
Granahan and Wellington are subject to quarterly adjustments based on
performance for the preceding three years relative to the Russell 2000 Index and
the Small Company Growth Fund Stock Index (an index of the stocks held by the
largest small-capitalization stock mutual funds). The basic fee of Chartwell is
subject to quarterly adjustments based on performance relative to the Small
Company Growth Fund Stock Index.
The Vanguard Group provides investment advisory services to a portion of
the fund an at-cost basis; the fund paid Vanguard advisory fees of $138,000 for
the year ended October 31, 2000.
For the year ended October 31, 2000, the aggregate investment advisory fee
represented an effective annual basic rate of 0.19% of the fund's average net
assets before an increase of $2,115,000 (0.05%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At October 31, 2000, the fund had contributed capital of $868,000 to
Vanguard (included in Other Assets), representing 0.02% of the fund's net assets
and 0.9% of Vanguard's capitalization. The fund's trustees and officers are also
directors and officers of Vanguard.
26
<PAGE>
D. The fund has asked its investment advisers to direct certain security trades,
subject to obtaining the best price and execution, to brokers who have agreed to
rebate to the fund part of the commissions generated. Such rebates are used
solely to reduce the fund's management and administrative expenses. The fund's
custodian bank has also agreed to reduce its fees when the fund maintains cash
on deposit in the non-interest-bearing custody account. For the year ended
October 31, 2000, directed brokerage and custodian fee offset arrangements
reduced expenses by $167,000 and $58,000, respectively. The total expense
reduction represented an effective annual rate of 0.01% of the fund's average
net assets.
E. During the year ended October 31, 2000, the fund purchased $5,155,232,000 of
investment securities and sold $4,283,242,000 of investment securities, other
than temporary cash investments.
The fund used a tax accounting practice to treat a portion of the price of
capital shares redeemed during the year as distributions from net investment
income and realized capital gains. Accordingly, the fund has reclassified
$1,511,000 from undistributed net investment income, and $164,204,000 from
accumulated net realized gains, to paid in capital.
F. At October 31, 2000, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $441,082,000, consisting
of unrealized gains of $931,225,000 on securities that had risen in value since
their purchase and $490,143,000 in unrealized losses on securities that had
fallen in value since their purchase.
At October 31, 2000, the aggregate settlement value of open futures
contracts expiring in December 2000, and the related unrealized depreciation
were:
--------------------------------------------------------------------------------
(000)
---------------------------
Aggregate
Number of Settlement Unrealized
Futures Contracts Long Contracts Value Depreciation
--------------------------------------------------------------------------------
S&P MidCap 400 Index 295 $ 76,884 $(3,643)
Russell 2000 Index 642 160,661 (9,389)
--------------------------------------------------------------------------------
Unrealized depreciation on open futures contracts is required to be treated as
realized loss for tax purposes.
G. The market value of securities on loan to broker/dealers at October 31, 2000,
was $30,085,000, for which the fund held cash collateral of $31,407,000. The
fund invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
27
<PAGE>
REPORT
OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Trustees of Vanguard Explorer Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Explorer Fund (the "Fund") at October 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at October 31, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
November 29, 2000
--------------------------------------------------------------------------------
SPECIAL 2000 TAX INFORMATION (UNAUDITED) FOR
VANGUARD EXPLORER FUND
This information for the fiscal year ended October 31, 2000, is included
pursuant to provisions of the Internal Revenue Code.
The fund distributed $331,394,000 as capital gain dividends (from net
long-term capital gains) to shareholders during the fiscal year, all of which is
designated as a 20% rate gain distribution.
For corporate shareholders, 1.3% of investment income (dividend income plus
short-term gains, if any) qualifies for the dividends-received deduction.
28
<PAGE>
THE PEOPLE
WHO GOVERN YOUR FUND
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, which is owned by the funds and exists solely to provide
services to them on an at-cost basis.
Six of Vanguard's seven board members are independent, meaning that they
have no affiliation with Vanguard or the funds they oversee, apart from the
sizable personal investments they have made as private individuals. They bring
distinguished backgrounds in business, academia, and public service to their
task of working with Vanguard officers to establish the policies and oversee the
activities of the funds.
Among board members' responsibilities are selecting investment advisers for
the funds; monitoring fund operations, performance, and costs; reviewing
contracts; nominating and selecting new trustees/ directors; and electing
Vanguard officers.
The list below provides a brief description of each trustee's professional
affiliations. The year in which the trustee joined the Vanguard board is noted
in parentheses.
--------------------------------------------------------------------------------
TRUSTEES
JOHN J. BRENNAN (1987) Chairman of the Board, Chief Executive Officer, and
Director/Trustee of The Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN (1998) Vice President, Chief Information Officer, and a
member of the Executive Committee of Johnson & Johnson; Director of Johnson &
Johnson*Merck Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY (1990) President Emeritus of The Brookings Institution;
Director of American Express Bank Ltd., The St. Paul Companies, Inc., and
National Steel Corp.
BURTON G. MALKIEL (1977) Chemical Bank Chairman's Professor of Economics,
Princeton University; Director of Prudential Insurance Co. of America, Banco
Bilbao Argentaria, Gestion, BKF Capital, The Jeffrey Co., NeuVis, Inc., and
Select Sector SPDR Trust.
ALFRED M. RANKIN, JR. (1993) Chairman, President, Chief Executive Officer, and
Director of NACCO Industries, Inc.; Director of The BFGoodrich Co.
JAMES O. WELCH, JR. (1971) Retired Chairman of Nabisco Brands, Inc. (Food
Products); retired Vice Chairman and Director of RJR Nabisco (Food and Tobacco
Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON (1985) Retired Chairman and Chief Executive Officer of Rohm &
Haas Co.; Director of AmeriSource Health Corporation, Cummins Engine Co., and
The Mead Corp.; Trustee of Vanderbilt University.
--------------------------------------------------------------------------------
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Managing Director and Secretary of The Vanguard
Group, Inc.; Secretary of each of the investment companies in The Vanguard
Group.
THOMAS J. HIGGINS, Treasurer; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
--------------------------------------------------------------------------------
VANGUARD MANAGING DIRECTORS
R. GREGORY BARTON, Legal Department.
ROBERT A. DISTEFANO, Information Technology.
JAMES H. GATELY, Direct Investor Services.
KATHLEEN C. GUBANICH, Human Resources.
IAN A. MACKINNON, Fixed Income Group.
F. WILLIAM MCNABB, III, Institutional Investor Group.
MICHAEL S. MILLER, Planning and Development.
RALPH K. PACKARD, Chief Financial Officer.
GEORGE U. SAUTER, Quantitative Equity Group.
--------------------------------------------------------------------------------
JOHN C. BOGLE
Founder; Chairman and Chief Executive, 1974-1996.
<PAGE>
[SHIP LOGO]
THE VANGUARD GROUP
Post Office Box 2600
Valley Forge, PA 19482-2600
ABOUT OUR COVER
Our cover art evokes both Vanguard's rich past and the course we've set for the
future--our determination to provide superior investment performance and
top-notch service. The image is based on two works: a painting titled The First
Journey of 'Victory,' by the English artist W.L. Wyllie (1851-1931), and a
sculpture of a compass rose on Vanguard's campus near Valley Forge,
Pennsylvania.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
Standard & Poor's(R), S&P(R), S&P 500(R), Standard & Poor's 500, 500, S&P MidCap
400, and S&P SmallCap 600 are trademarks of The McGraw-Hill Companies, Inc. All
other index names may contain trademarks and are exclusive property of their
respective owners.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
INDIVIDUAL ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR SERVICES
1-800-523-1036
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
(C)2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
Q240 122000
