SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED MARCH 13, 2002

INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. SHARES OF
VANGUARD INTERNATIONAL EXPLORER FUND AND VANGUARD MID-CAP GROWTH FUND MAY NOT BE
SOLD, NOR MAY OFFERS TO BUY BE ACCEPTED, PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION SHALL NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN A STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
THAT STATE.

PART B

VANGUARD(R) WHITEHALL FUNDS
(THE TRUST)

STATEMENT OF ADDITIONAL INFORMATION

, 2002

This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectuses (dated February 26, 2002, for Vanguard Selected
Value Fund, and , 2002, for Vanguard International Explorer Fund and
Vanguard Mid-Cap Growth Fund). To obtain, without charge, the Prospectuses or
the most recent Annual Reports to Shareholders, which contain the Trust's
financial statements as hereby incorporated by reference, please call:

INVESTOR INFORMATION DEPARTMENT:

1-800-662-7447

TABLE OF CONTENTS

PAGE

DESCRIPTION OF THE TRUST......................................... B-1
INVESTMENT POLICIES.............................................. B-3
INVESTMENT LIMITATIONS........................................... B-8
YIELD AND TOTAL RETURN........................................... B-12
SHARE PRICE...................................................... B-16
PURCHASE OF SHARES............................................... B-16
REDEMPTION OF SHARES............................................. B-17
MANAGEMENT OF THE FUNDS.......................................... B-17
INVESTMENT ADVISORY SERVICES..................................... B-22
PORTFOLIO TRANSACTIONS........................................... B-29
FINANCIAL STATEMENTS............................................. B-30
COMPARATIVE INDEXES.............................................. B-31

B-1

DESCRIPTION OF THE TRUST

ORGANIZATION

The Trust was organized as a Maryland corporation in 1995, and was
reorganized as a Delaware business trust in June, 1998. Prior to its
reorganization as a Delaware business trust, the Trust was known as Vanguard
Whitehall Funds, Inc. The Trust is registered with the United States Securities
and Exchange Commission (the Commission) under the Investment Company Act of
1940 (the 1940 Act) as an open-end, diversified management investment company.
It currently offers the following funds, each of which offers a single class of
shares:

Vanguard Selected Value Fund
Vanguard International Explorer Fund
Vanguard Mid-Cap Growth Fund
(individually, a Fund; collectively, the Funds)

The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that each Fund may
issue.

SERVICE PROVIDERS

CUSTODIAN. The Bank of New York, One Wall Street, New York, NY 10286 serves
as the custodian for Vanguard Selected Value Fund. JPMorgan Chase Bank, 270 Park
Avenue, New York, NY 10017-2070 serves as the custodian for Vanguard
International Explorer Fund and serves as the custodian for Vanguard
Mid-Cap Growth Fund. The custodians are responsible for maintaining the Funds'
assets and keeping all necessary accounts and records of Fund assets.

INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, Two Commerce Square,
Suite 1700, 2001 Market Street, Philadelphia, PA 19103, serves as the Funds'
independent accountants. The accountants audit the Funds' annual financial
statements and provide other related services.

TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, PA 19355.

CHARACTERISTICS OF THE FUNDS' SHARES

RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Funds' shares, other
than the possible future termination of the Funds. The Trust or any of its
fund(s) may be terminated by reorganization into another mutual fund or by
liquidation and distribution of the assets of the affected fund. Unless
terminated by reorganization or liquidation, the Funds will continue
indefinitely.

SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of a Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.

DIVIDEND RIGHTS. The shareholders of a Fund are entitled to receive any
dividends or other distributions declared for such Fund. No shares have priority
or preference over any other shares of the same Fund with respect to
distributions. Distributions will be made from the assets of a Fund, and will be
paid ratably to all shareholders of the Fund according to the number of shares
of such Fund held by shareholders on the record date.

VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various

B-2

circumstances, including to elect or remove trustees upon the written request of
shareholders representing 10% or more of a Fund's net assets, and to change any
fundamental policy of a Fund. Unless otherwise required by applicable law,
shareholders of each Fund receive one vote for each dollar of net asset value
owned on the record date, and a fractional vote for each fractional dollar of
net asset value owned on the record date. However, only the shares of the fund
affected by a particular matter are entitled to vote on that matter. Voting
rights are non-cumulative and cannot be modified without a majority vote.

LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rate share of the applicable Fund's net assets.

PREEMPTIVE RIGHTS. There are no preemptive rights associated with each
Fund's shares.

CONVERSION RIGHTS. There are no conversion rights associated with each
Fund's shares.

REDEMPTION PROVISIONS. Each Fund's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.

SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.

CALLS OR ASSESSMENT. Each Fund's shares, when issued, are fully paid and
non-assessable.

TAX STATUS OF THE FUND

Vanguard Selected Value Fund intends to continue to qualify, and each of
Vanguard International Explorer Fund and Vanguard Mid-Cap Growth Fund expects to
qualify, as a "regulated investment company" under Subchapter M of the Internal
Revenue Code. This special tax status means that a Fund will not be liable for
federal tax on income and capital gains distributed to shareholders. In order to
preserve its tax status, each Fund must comply with certain requirements. If a
Fund fails to meet these requirements in any taxable year, it will be subject to
tax on its taxable income at corporate rates, and all distributions from
earnings and profits, including any distributions of net tax-exempt income and
net long-term capital gains, will be taxable to shareholders as ordinary income.
In addition, the Fund could be required to recognize unrealized gains, pay
substantial taxes and interest, and make substantial distributions before
regaining its tax status as a regulated investment company.

INVESTMENT POLICIES

The following policies supplement the Funds' investment policies set forth
in the Prospectuses:

Vanguard Mid-Cap Growth Fund invests at least 80% of its assets (net assets
plus any borrowings for investment purposes) in common stocks of medium size
companies. This policy may only be changed upon 60 days notice to shareholders.

REPURCHASE AGREEMENTS. Each Fund may invest in repurchase agreements with
commercial banks, brokers, or dealers either for defensive purposes due to
market conditions or to generate income from its excess cash balances. A
repurchase agreement is an agreement under which the Fund acquires a money
market instrument (generally a security issued by the U.S. Government or an
agency thereof, a banker's acceptance or a certificate of deposit) from a
commercial bank, broker or dealer, subject to resale to the seller at an agreed
upon price and date (normally, the next business day). A repurchase agreement
may be considered a loan by the Fund collateralized by securities. The resale
price reflects an agreed upon interest rate effective for the period the
instrument is held by the Fund and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Fund (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by a custodian bank
until repurchased. In addition, the Funds' board of trustees will monitor the
Funds' repurchase agreement transactions generally and will establish guidelines
and standards for review by the investment adviser of the creditworthiness of
any bank, broker, or dealer party to a repurchase agreement.

The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by a Fund not within the control of the Fund
and therefore the realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that a

B-3

Fund may not be able to substantiate its interest in the underlying security and
may be deemed an unsecured creditor of the other party to the agreement. While
the adviser acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.

ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on a Fund's books.

Each Fund may invest in restricted, privately placed securities that, under
the Commission's rules, may be sold only to qualified institutional buyers.
Because these securities can be resold only to qualified institutional buyers,
or after they have been held for a number of years, they may be considered
illiquid securities--meaning that they would be difficult for a Fund to convert
to cash if needed.

If a substantial market develops for a restricted security held by a Fund,
it may be treated as a liquid security, in accordance with procedures and
guidelines approved by the Funds' board of trustees. This generally includes
securities that are unregistered than can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933. While each
Fund's investment adviser determines the liquidity of restricted securities on a
daily basis, the board oversees and retains ultimate responsibility for the
adviser's decisions. Several factors that the board considers in monitoring
these decisions include the valuation of a security, the availability of
qualified institutional buyers, and the availability of information about the
security's issuer.

FOREIGN INVESTMENTS. Each Fund may invest up to 20% of its assets (and
Vanguard International Explorer Fund will invest primarily) in securities of
foreign companies. Investors should recognize that investing in foreign
companies involves certain special considerations which are not typically
associated with investing in U.S. companies.

Currency Risk. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since each fund may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Funds will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the International Explorer and
Mid-Cap Growth Funds permit them to enter into forward foreign currency exchange
contracts in order to hedge holdings and commitments against changes in the
level of future currency rates. Such contracts involve an obligation to purchase
or sell a specific currency at a future date at a price set at the time of the
contract.

Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing, and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of foreign stock exchanges, brokers and
listed companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.

Although each Fund will endeavor to achieve most favorable execution costs
in its portfolio transactions, commissions on many foreign stock exchanges are
generally higher than commissions on U.S. exchanges. In addition, it is expected
that the expenses for custodial arrangements of a Fund's foreign securities will
be somewhat greater than the expenses for custodial arrangements for handling
U.S. securities of equal value.

Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from foreign companies held by a Fund. However, these
foreign withholding taxes are not expected to have a significant impact on the
Funds, since the Funds seek long-term capital appreciation and any income should
be considered incidental.

Emerging Market Investments. Vanguard International Explorer Fund is
permitted to invest a limited portion of its assets in the securities of issuers
domiciled or doing business in emerging market countries. Investing in emerging
market countries involves certain risks not typically associated with investing
in U.S. securities, and imposes risks greater than, or in addition to, risks of
investing in foreign, developed countries.

B-4

These risks include: greater risks of nationalization or expropriation of assets
or confiscatory taxation; currency devaluations and other currency exchange rate
fluctuations; greater social, economic and political uncertainty and instability
(including the risk of war); more substantial government involvement in the
economy; less government supervision and regulation of the securities markets
and participants in those markets; controls on foreign investment and
limitations on repatriation of invested capital and on the fund's ability to
exchange local currencies for U.S. dollars; unavailability of currency hedging
techniques in certain emerging market countries; the fact that companies in
emerging market countries may be smaller, less seasoned and newly organized
companies; the difference in, or lack of, auditing and financial reporting
standards, which may result in unavailability of material information about
issuers; the risk that it may be more difficult to obtain and/or enforce a
judgment in a court outside the United States; and greater price volatility,
substantially less liquidity, and significantly smaller market capitalization of
securities markets. Also, any change in the leadership or politics of emerging
market countries, or the countries that exercise a significant influence over
those countries, may halt the expansion of or reverse the liberalization of
foreign investment policies now occurring and adversely affect existing
investment opportunities. In addition, a number of emerging market countries
restrict, to various degrees, foreign investment in securities. Furthermore,
high rates of inflation and rapid fluctuations in inflation rates have had, and
may continue to have, negative effects on the economies and securities markets
of certain emerging market countries.

Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the
Federal income tax treatment of certain transactions denominated in foreign
currency or determined by reference to the value of one or more foreign
currencies. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option, or similar financial instrument if such
instrument is not marked to market. The disposition of a currency other than the
U.S. dollar by a taxpayer whose functional currency is the U.S. dollar is also
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are generally
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the marking-to-market rules
applicable to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary income or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts, and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle.

The Treasury Department issued regulations under which certain transactions
subject to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by a
fund which is not subject to the special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction. It is anticipated that some of the non-U.S. dollar-denominated
investments and foreign currency contracts the Fund may make or enter into will
be subject to the special currency rules described above.

Foreign Tax Credit. Foreign governments may withhold taxes on dividends and
interest paid with respect to foreign securities. If, at the close of its fiscal
year, more than 50% of Vanguard International Explorer Fund's total assets are
invested in securities of foreign issuers, the Fund may elect to pass through
foreign taxes paid, and thereby allow shareholders to take a tax credit or
deduction on their tax returns. If shareholders meet certain holding period
requirements with respect to Fund shares, an offsetting tax credit may be
available. If shareholders do not meet the holding period requirements, they may
still be entitled to a deduction for certain foreign taxes. In either case, a
shareholder's tax statement will show more taxable income or capital gains than
were actually distributed by the Fund, but will also show the amount of the
available offsetting credit or deduction.

B-5

FUTURES AND OPTIONS CONTRACTS. Each Fund may enter into stock futures
contracts, options, and options on futures contracts for several reasons: to
maintain cash investments while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher investment returns when
a futures contract is priced more attractively than the underlying equity
security or index. Futures contracts provide for the future sale by one party
and purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. Government agency. To the extent required by law, a fund will establish a
segregated account containing liquid assets at least equal in value to the
amount of any obligation assumed by the fund under a futures contract.

Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been sold, or selling a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.

Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.

After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. Each Fund
expects to earn interest income on its margin deposits.

Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. Each Fund intends to use futures contracts
only for bona fide hedging purposes.

Regulations of the CFTC applicable to the Funds require that all of their
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of a Fund's
portfolio. The Funds will only sell futures contracts to protect securities they
own against price declines or purchase contracts to protect against an increase
in the price of securities they intend to purchase. As evidence of this hedging
interest, the Funds expect that approximately 75% of all futures contract
purchases will be "completed;" that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Funds upon sale of open
futures contracts.

Although techniques other than the sale and purchase of futures contracts
could be used to control the Funds' exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
a Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of portfolio securities.

Restrictions on the Use of Futures Contracts. A Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the Fund's
total assets. In addition, the Fund will not enter into futures contracts to the
extent that its outstanding obligations to purchase securities under these
contracts would exceed 20% of the Fund's total assets.

B-6

Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge. Each Fund will minimize the
risk that it will be unable to close out a futures contract by only entering
into futures which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.

The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Funds are engaged in only for hedging purposes, the investment
advisers do not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. A Fund would presumably have
sustained comparable losses if, instead of the futures contract, it had invested
in the underlying financial instrument and sold it after the decline.

Utilization of futures transactions by a Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.

Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.

Federal Tax Treatment of Futures Contracts. Each Fund is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts held as of the end of
the year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term depending on the holding period of the contract. Sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.

In order for a Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or
foreign currencies or other income derived with respect to the Fund's business
of investing in such securities or

B-7

currencies. It is anticipated that any net gain recognized on futures contracts
will be considered qualifying income for purposes of the 90% requirement.

Each Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and shareholders will be advised
on the nature of the transactions.

LENDING OF SECURITIES. Each Fund may lend its investment securities to
qualified institutional investors (typically brokers, dealers, banks or other
financial institutions) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities or completing arbitrage operations. By lending its securities, a Fund
will be attempting to increase its net investment income through the receipt of
interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would be for the account of
the Fund. The terms and the structure and the aggregate amount of such loans
must be consistent with the 1940 Act, and the Rules or interpretations of the
Commission thereunder. These provisions limit the amount of securities a fund
may lend to 33 1/3% of the Fund's total assets (although Vanguard Mid-Cap Growth
Fund has an operating policy of limiting the amount of loans to not more than
25% of the value of the total assets of the Fund), and require that (a) the
borrower pledge and maintain with the Fund collateral consisting of cash, an
irrevocable letter of credit or securities issued or guaranteed by the United
States Government having a value at all times not less than 100% of the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the borrower "marks to the market"
on a daily basis), (c) the loan be made subject to termination by the Fund at
any time and (d) the Fund receive reasonable interest on the loan which may
include the Fund's investing any cash collateral in interest bearing short-term
investments, any distribution on the loaned securities and any increase in their
market value. Loan arrangements made by each Fund will comply with all other
applicable regulatory requirements, including the rules of the New York Stock
Exchange, which rules presently require the borrower, after notice, to redeliver
the securities within the normal settlement time of three business days. All
relevant facts and circumstances, including the creditworthiness of the broker,
dealer, or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Funds' board of trustees.

At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company trustees. In addition, voting rights pass
with the loaned securities, but if a material event occurs that affects the
securities on loan, the fund must call the loan and vote the securities.

VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Funds and other Vanguard funds to participate in Vanguard's
interfund lending program. This program allows the Vanguard funds to borrow
money from and loan money to each other for temporary or emergency purposes. The
program is subject to a number of conditions, including the requirement that no
fund may borrow or lend money through the program unless it receives a more
favorable interest rate than is available from a typical bank for a comparable
transaction. In addition, a fund may participate in the program only if and to
the extent that such participation is consistent with the fund's investment
objective and other investment policies. The boards of trustees of the Vanguard
funds are responsible for ensuring that the interfund lending program operates
in compliance with all conditions of the Commission's exemptive order.

WHEN-ISSUED SECURITIES. When-issued or delayed delivery securities are
subject to market fluctuations due to changes in market interest rates, and it
is possible that the market value at the time of settlement could be higher or
lower than the purchase price if the general level of interest rates has
changed. Although a Fund generally purchases securities on a when-issued or
forward commitment basis with the intention of actually acquiring securities for
its investment portfolio, a Fund may dispose of a when-issued security or
forward commitment prior to settlement if it deems this to be appropriate.

SHORT SALES. To the extent permitted under "Investment Restrictions" below
and in the Prospectus, Vanguard International Explorer Fund may seek to hedge
investments or realize additional gains through short sales. Short sales are
transactions in which the Fund sells a security it does not own, in anticipation
of a decline in the market value of that security. To complete such a
transaction, the Fund must borrow the security to make

B-8

delivery to the buyer. The Fund then is obligated to replace the security
borrowed by purchasing it at the market price at or prior to the time of
replacement. The price at such time may be more or less than the price at which
the security was sold by the Fund. Until the security is replaced, the Fund is
required to repay the lender any dividends or interest that accrue during the
period of the loan. To borrow the security, the Fund also may be required to pay
a premium, which would increase the cost of the security sold. The net proceeds
of the short sale will be retained by the broker (or by the Fund's custodian in
a special custody account), to the extent necessary to meet margin requirements,
until the short position is closed out. The Fund also will incur transaction
costs in effecting short sales.

The Fund will incur a loss as a result of the short sale if the price of
the security increases between the date of the short sale and the date on which
the Fund replaces the borrowed security. The Fund may realize a gain if the
security declines in price between those dates. The amount of any gain will be
decreased, and the amount of any loss increased, by the amount of the premium,
dividends, interest or expenses the Fund may be required to pay in connection
with a short sale. The Fund's loss on a short sale could theoretically be
unlimited in a case where the Fund is unable, for whatever reason, to close out
its short position. There can be no assurance that the Fund will be able to
close out a short position at any particular time or at an acceptable price. In
addition, short positions may result in a loss if a portfolio strategy of which
the short position is a part is otherwise unsuccessful.

TEMPORARY INVESTMENTS. Each Fund may take temporary defensive measures that
are inconsistent with the Fund's normal investment policies and strategies in
response to adverse market, economic, political or other conditions. Such
measures could include investments in (a) highly liquid short-term fixed income
securities issued by or on behalf of municipal or corporate issuers, obligations
of the U.S. Government and its agencies, commercial paper, and bank certificates
of deposit; (b) shares of other investment companies which have investment
objectives consistent with those of the Funds; (c) repurchase agreements
involving any such securities; and (d) other money market instruments. There is
no limit on the extent to which a Fund may take temporary defensive measures. In
taking such measures, the Fund may fail to achieve its investment objective.

INVESTMENT LIMITATIONS

VANGUARD SELECTED VALUE FUND

The Fund is subject to the following FUNDAMENTAL investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the Fund's shares. For these purposes, a "majority" of shares means
shares representing the lesser of: (i) 67% or more of the Fund's net assets
voted, so long as shares representing more than 50% of the Fund's net assets are
present or represented by proxy; or (ii) shares representing more than 50% of
the Fund's net assets.

BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. The Fund may not make any additional investments whenever its
outstanding borrowings exceed 5% of net assets.

COMMODITIES. The Fund may not invest in commodities, except that the Fund
may invest in stock futures contracts, stock options, and options on stock
futures contracts. No more than 5% of the Fund's total assets may be used as
initial margin deposit for futures contracts. Additionally, no more than 20% of
the Fund's total assets may be invested in swap agreements at any time.

DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.

ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.

INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.

B-9

INVESTING FOR CONTROL. The Fund may not invest in a company for purposes of
controlling its management.

INVESTMENT COMPANIES. The Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets
approved by the Fund's shareholders, or to the extent permitted by Section 12 of
the 1940 Act. Investment companies whose shares the Fund acquires pursuant to
Section 12 must have investment objectives and investment policies consistent
with those of the Fund.

LOANS. The Fund may not lend money to any person except by purchasing fixed
income securities that are publicly distributed or customarily purchased by
institutional investors, by lending its portfolio securities, or through
Vanguard's interfund lending program.

MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.

PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
than 15% of its net assets.

REAL ESTATE. The Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate and bonds secured
by real estate.

SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.

UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.

UNSEASONED COMPANIES. The Fund may not invest more than 5% of its assets in
companies that have less than three years operating history (including the
operating history of any predecessors).

PUTS AND CALLS. The Fund may not purchase or sell put options or call
options, except as provided in the prospectus.

VANGUARD INTERNATIONAL EXPLORER FUND

BORROWING. The Fund may borrow money or issue senior securities only as
permitted under the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.

COMMODITIES. The Fund may not purchase or sell physical commodities unless
acquired as a result of ownership of securities or other instruments. This
limitation shall not prevent the Fund from purchasing, selling or entering into
securities or other instruments backed by physical commodities, foreign
currencies, foreign currency forward contracts, foreign currency options,
futures contracts, options on futures contracts, swap agreements, or other
derivative instruments, subject to compliance with applicable provisions of the
federal securities and commodities laws.

DIVERSIFICATION. The Fund may not change its classification as a
"management company" or its subclassifications as an "open-end company" and as a
"diversified company" as each such term is defined in the Investment Company Act
of 1940, as amended, and as interpreted, modified, or otherwise permitted by
regulatory authority having jurisdiction, from time to time.

INDUSTRY CONCENTRATION. The Fund may not concentrate its investments in a
particular industry or group of industries, within the meaning of the Investment
Company Act of 1940, as amended, and as interpreted, modified, or otherwise
permitted by regulatory authority having jurisdiction, from time to time.

LOANS. The Fund may make loans only as permitted under the Investment
Company Act of 1940, as amended, and as interpreted, modified, or otherwise
permitted by regulatory authority having jurisdiction, from time to time.

B-10

REAL ESTATE. The Fund may not purchase or sell real estate unless acquired
as a result of ownership of securities or other instruments. This limitation
shall not prevent the Fund from investing in securities or other instruments
backed by real estate or securities issued by any company engaged in the real
estate business.

SENIOR SECURITIES. The Fund may borrow money or issue senior securities
only as permitted under the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.

UNDERWRITING. The Fund may not act as an underwriter of another issuer's
securities, except to the extent that the Fund may be deemed to be an
underwriter within the meaning of the Securities Act of 1933, as amended, in
connection with the purchase and sale of portfolio securities.

The Fund also has the following operational, NON-FUNDAMENTAL policies:

COMMODITIES. No more than 5% of the Fund's total assets may be used as
initial margin deposit for futures contracts and no more than 20% of the Fund's
total assets may be obligated under futures contracts, options, swap agreements,
or other derivative instruments at any time.

ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.

INDUSTRY CONCENTRATION. The fundamental investment limitation governing
concentration of the Fund's investments in a particular industry or group of
industries shall not be deemed to (1) limit the ability of the Fund to invest in
securities issued by any company or group of companies located in any country or
group of countries, or (2) limit the ability of the Fund to invest in
obligations issued or guaranteed by any government, or any agency or
instrumentality of any government, of any country.

MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.

PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
than 15% of its net assets.

PUTS AND CALLS. The Fund may not purchase or sell put options or call
options, except as provided in the prospectus.

VANGUARD MID-CAP GROWTH FUND

B-11

The Fund also has the following operational, non-fundamental policies:

ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.

INVESTING FOR CONTROL. The Fund may not investment in a company for
purposes of controlling its management.

INVESTMENT COMPANIES. The Fund may invest in any other investment company
only as permitted under the Investment Company Act of 1940, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.

MARGIN. The Fund may purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.

PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more
than 15% of its nets assets.

PURCHASES ON MARGIN. The Fund may not purchase securities on margin.

B-12

PUTS AND CALLS. The Fund may not purchase or sell put options or call
options, except as provided in the prospectus.

SHORT SALES. The Fund may not sell securities short.

The above-mentioned investment limitations for each Fund are considered at
the time investment securities are purchased. If a percentage restriction is
adhered to at the time the investment is made, a later increase in percentage
resulting from a change in the market value of assets will not constitute a
violation of such restriction. None of these limitations prevents a Fund from
participating in The Vanguard Group, Inc. (Vanguard). As a member of The
Vanguard Group of Investment Companies, each Fund may own securities issued by
Vanguard, make loans to Vanguard, and contribute to Vanguard's costs or other
financial requirements. See "Management of the Funds" for more information.

YIELD AND TOTAL RETURN

The yield of Vanguard Selected Value Fund and Vanguard Mid-Cap Growth Fund
for the 30-day period ended October 31, 2001, was x.xx% and x.xx%, respectively.
The average annual total returns (both before and after taxes) of each Fund for
certain periods ended October 31, 2001, are set forth below:

1 YEAR ENDED 5 YEARS ENDED SINCE
10/31/2001 10/31/2001 INCEPTION**
---------- ---------- -----------

VANGUARD SELECTED VALUE FUND*
Return Before Taxes x.xx% x.xx% x.xx%
Return After Taxes on Distributions x.xx x.xx x.xx
Return After Taxes on
Distributions and Sale of Fund Shares x.xx x.xx x.xx
VANGUARD INTERNATIONAL
EXPLORER FUND
Return Before Taxes x.xx% x.xx% x.xx%
Return After Taxes on Distributions x.xx x.xx x.xx
Return After Taxes on
Distributions and Sale of Fund Shares x.xx x.xx x.xx
VANGUARD MID-CAP GROWTH FUND
Return Before Taxes x.xx% x.xx% x.xx%
Return After Taxes on Distributions x.xx x.xx x.xx
Return After Taxes on
Distributions and Sale of Fund Shares x.xx x.xx x.xx

* Reflective of the 1% fee that is assessed on redemptions of shares
purchased on or after August 7, 2001, and held for less than five years.

** February 15, 1996, for Selected Value Fund; November 4, 1996, for
International Explorer Fund; and December 31, 1997, for Mid-Cap Growth
Fund.

B-13

AVERAGE ANNUAL TOTAL RETURN

Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years or the life of the fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in fund shares. Average annual total returns are quoted to the
nearest hundredth of one percent.

AVERAGE ANNUAL TOTAL RETURN (BEFORE TAXES)

Average annual total return is calculated by finding the average annual
compounded rates of return over the 1-, 5-, and 10-year periods (or for the
periods of the fund's operations) that would equate the initial amount invested
to the ending redeemable value, according to the following formula:

T = (ERV/P)[to the power (1/N)]- 1

Where:

T = average annual total return
P = a hypothetical initial investment of $1,000
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 investment
made at the beginning of the 1-, 5-, or 10-year periods at the
end of the 1-, 5-, and 10-year periods (or fraction portion
thereof)

Instructions:

1. Assume the maximum sales load (or other charges deducted from payments) is
deducted from the initial $1,000 investment.

2. Assume all distributions by the fund are reinvested at the price stated in
the prospectus (including any sales load imposed upon reinvestment of
dividends) on the reinvestment dates during the period. Adjustments may be
made for subsequent re-characterizations of distributions.

3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the fund's mean (or median) account size. Reflect, as
appropriate, any recurring fees charged to shareholder accounts that are
paid other than by redemption of the fund's shares.

4. Determine the ending value by assuming a complete redemption at the end of
the 1-, 5-, or 10-year periods (or fractional portion thereof) and the
deduction of all nonrecurring charges deducted at the end of each period.
If shareholders are assessed a deferred sales load, assume the maximum
deferred sales load is deducted at the times, in the amounts, and under the
terms disclosed in the prospectus.

AVERAGE ANNUAL TOTAL RETURN (AFTER TAXES ON DISTRIBUTIONS)

We calculate a fund's average annual total return (after taxes on
distributions) by finding the average annual compounded rates of return over the
1-, 5-, and 10-year periods (or for the periods of the fund's operations) that
would equate the initial amount invested to the after-tax ending value,
according to the following formulas:

T = (ATV [sub]D/P)[to the power(1/N)] - 1

Where:

T = average annual total return (after taxes on distributions)
P = a hypothetical initial investment of $1,000
n = number of years

ATV[sub]D = ending value of a hypothetical $1,000 investment made at the
beginning of the 1-, 5-, or 10-year periods at the end of
the 1-, 5-, or 10-year periods (or fractional portion
thereof), after taxes on fund distributions but not after
taxes on redemption

Instructions:

1. Assume the maximum sales load (or other charges deducted from payments) is
deducted from the initial $1,000 investment.

B-14

2. Assume all distributions by the fund--less the taxes due on such
distributions--are reinvested at the price stated in the prospectus
(including any sales load imposed upon reinvestment of dividends) on the
reinvestment dates during the period.

3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees. Reflect, as appropriate, any recurring fees
charged to shareholder accounts that are paid other than by redemption of
the fund's shares.

4. Calculate the taxes due on any distributions by the fund by applying the
highest individual marginal federal income tax rates in effect on the
reinvest date, to each component of the distributions on the reinvestment
date (e.g., ordinary income, short-term capital gain, long-term capital
gain). For periods after December 31, 1997, the federal marginal tax rates
used for the calculations are 39.6% for ordinary income and short-term
capital gains and 20% for long-term capital gains. Note that the applicable
tax rates may vary over the measurement period. Distributions should be
adjusted to reflect the federal tax impact the distribution would have on
an individual taxpayer on the reinvestment date. Assume no taxes are due on
the portion of any distribution that would not result in federal income tax
on an individual, e.g., tax-exempt interest or non-taxable returns of
capital. The effect of applicable tax credits, such as the foreign tax
credit, should be taken into account in accordance with federal tax law.
Disregard any potential tax liabilities other than federal tax liabilities
(e.g., state and local taxes); the effect of phaseouts of certain
exemptions, deductions, and credits at various income levels; and the
impact of the federal alternative minimum tax.

5. Determine the ending value by assuming a complete redemption at the end of
the 1-, 5-, or 10-year periods (or fractional portion thereof) and the
deduction of all nonrecurring charges deducted at the end of each period.
If shareholders are assessed a deferred sales load, assume the maximum
deferred sales load is deducted at the times, in the amounts, and under the
terms disclosed in the prospectus. Assume that the redemption has no tax
consequences.

AVERAGE ANNUAL TOTAL RETURN (AFTER TAXES ON DISTRIBUTIONS AND REDEMPTION)

We calculate a fund's average annual total return (after taxes on
distributions and redemption) by finding the average annual compounded rates of
return over the 1-, 5-, and 10-year periods (or for the periods of the fund's
operations) that would equate the initial amount invested to the after-tax
ending value, according to the following formulas:

T = (ATV [sub]DR/P)[to the power (1/N)]-1

Where:

T = average annual total return (after taxes on distributions
and redemption)
P = a hypothetical initial investment of $1,000
n = number of years
ATV[sub]DR = ending value of a hypothetical $1,000 investment made at
the beginning of the 1-, 5-, or 10-year periods at the end
of the 1-, 5-, or 10-year periods (or fractional portion
thereof), after taxes on fund distributions and redemption

Instructions:

1. Assume the maximum sales load (or other charges deducted from payments) is
deducted from the initial $1,000 investment.

3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.

B-15

Reflect, as appropriate, any recurring fees charged to shareholder accounts
that are paid other than by redemption of the fund's shares.

6. Determine the ending value by subtracting capital gains taxes resulting
from the redemption and adding the tax benefit from capital losses
resulting from the redemption.

(a) Calculate the capital gain or loss upon redemption by subtracting the
tax basis from the redemption proceeds (after deducting any
nonrecurring charges as specified by Instruction 5).

(b) The fund should separately track the basis of shares acquired through
the $1,000 initial investment and each subsequent purchase through
reinvested distributions. In determining the basis for a reinvested
distribution, include the distribution net of taxes assumed paid from
the distribution, but not net of any sales loads imposed upon
reinvestment. Tax basis should be adjusted for any distributions
representing returns of capital and any other tax basis adjustments
that would apply to an individual taxpayer, as permitted by applicable
federal tax law.

(c) The amount and character (e.g., short-term or long-term) of capital
gain or loss upon redemption should be separately determined for
shares acquired through the $1,000 initial investment and each
subsequent purchase through reinvested distributions. The fund should
not assume that shares acquired through reinvestment of distributions
have the same holding period as the initial $1,000 investment. The tax
character should be determined by the length of the measurement period
in the case of the initial $1,000 investment and the length of the
period between reinvestment and the end of the measurement period in
the case of reinvested distributions.

(d) Calculate the capital gains taxes (or the benefit resulting from tax
losses) using the highest federal individual capital gains tax rate
for gains of the appropriate character in effect on the redemption
date and in accordance with federal tax law applicable on the
redemption date. For example, applicable federal tax law should be
used to determine whether and how gains and losses from the sale of
shares with different holding periods should be netted, as well as the
tax character (e.g., short-term or long-term) of any resulting gains
or losses. Assume that a shareholder has sufficient capital gains of
the same character from other investments to offset any capital losses
from the redemption so that the taxpayer may deduct the capital losses
in full.

CUMULATIVE TOTAL RETURN

Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):

C = (ERV/P) - 1

B-16

Where:

C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period

SEC YIELD

Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:

YIELD = 2[((A-B)/CD+1)[to the power 6] - 1]

Where:

a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period

SHARE PRICE

Each Fund's share price, called its net asset value, or NAV, is calculated
each business day after the close of regular trading on the New York Stock
Exchange, generally 4 p.m., Eastern time. Net asset value per share is computed
by dividing the net assets of the Fund by the number of Fund shares outstanding.
On holidays or other days when the Exchange is closed, the NAV is not
calculated, and the Fund does not transact purchase or redemption requests.
However, on those days the value of the Fund's assets may be affected to the
extent that the Fund holds foreign securities that trade on foreign markets that
are open.

Stocks held by a Vanguard fund are valued at their market value when
reliable market quotations are readily available. Certain short-term debt
instruments used to manage a fund's cash are valued on the basis of amortized
cost. The values of any foreign securities held by a fund are converted into
U.S. dollars using an exchange rate obtained from an independent third party.

When reliable market quotations are not readily available, securities are
priced at their fair value, calculated according to procedures adopted by the
board of trustees. A fund also may use fair-value pricing if the value of a
security it holds is materially affected by events occurring after the close of
the primary markets or exchanges on which the security is traded. This most
commonly occurs with foreign securities, but may occur in other cases as well.
When fair-value pricing is employed, the prices of securities used by a fund to
calculate its net asset value may differ from quoted or published prices for the
same securities.

Vanguard fund share prices can be found daily in the mutual fund listings
of most major newspapers under various "Vanguard" headings.

PURCHASE OF SHARES

The purchase price of shares of each Fund is the net asset value per share
next determined after the order is received. The net asset value per share is
calculated as of the regular close of the Exchange on each day the Exchange is
open for business. An order received prior to the close of the Exchange will be
executed at the price computed on the date of receipt; and an order received
after the close of the Exchange will be executed at the price computed on the
next day the Exchange is open.

Each Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments for certain fiduciary accounts, such as employee
benefit plans, or under circumstances where certain economies can be achieved in
sales of the Fund's shares.

B-17

REDEMPTION OF SHARES

Each Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the Commission as a result of
which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for such
other periods as the Commission may permit.

Each Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.

There is no charge for share redemptions from International Explorer and P
Funds. For Selected Value Fund, there is a 1% fee assessed on redemptions of
shares purchased on or after August 7, 2001, and held for less than five years,
and there is a 2% fee assessed on redemptions of shares purchased on or after
August 7, 2001, and held for less than one year. Shares redeemed may be worth
more or less than what was paid for them, depending on the market value of the
securities held by the Fund.

We will always redeem your oldest shares first. In addition, in the event
that you transfer your shares to a different account registration, the shares
will retain their redemption fee status. If you transfer less than 100% of your
account, we will carry over the redemption fee status of your shares on a
proportionate basis.

For example, assume that John and Mary Doe hold 200 Fund shares in a
jointly registered account, with 150 shares (75% of the total shares) currently
subject to the redemption fee, and 50 shares (25% of the total shares) currently
exempt from the redemption fee. If the Does transfer 50 of their 200 shares to
an account registered in one of their individual names, 25% of the transferred
shares (or, 12.5 shares) will be exempt from the redemption fee, and 75% of the
transferred shares (or 37.5 shares) will continue to be subject to the
redemption fee. Following the share transfer, the jointly registered account
will hold 150 shares, with 25% of those shares (or, 37.5 shares) exempt from the
redemption fee, and 75% of those shares (or, 112.5 shares) still subject to the
redemption fee. This same procedure would apply if, rather than transferring
shares to a different account registration, the Does were to convert a portion
of their shares to a different share class.

All shares become exempt from the redemption fee based on their initial
purchase date, regardless of whether such shares are subsequently transferred to
a different account registration or converted to a different share class.

From time to time, the Fund may waive or modify redemption fees for
certain categories of investors.

MANAGEMENT OF THE FUNDS

THE VANGUARD GROUP

Each Fund is a member of The Vanguard Group of Investment Companies which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Funds and the other funds in The Vanguard
Group obtain at cost virtually all of their corporate management,
administrative, and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to several of the Vanguard funds.

Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings, and equipment.
Each fund pays its share of Vanguard's total expenses which are allocated among
the funds under procedures approved by the trustees of each fund. In addition,
each fund bears its own direct expenses such as legal, auditing, and custodian
fees.

The Funds' officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own any securities of any external adviser
for the funds.

Vanguard, Vanguard Marketing Corporation, the funds' advisers, and the
funds have adopted Codes of Ethics designed to prevent employees who may have
access to nonpublic information about the trading activities of the funds
(access persons) from profiting from that information. The Codes permit access
persons

B-18

to invest in securities for their own accounts, including securities that may be
held by the funds, but places substantive and procedural restrictions on their
trading activities. For example, the Codes require that access persons of the
funds receive advance approval for every securities trade to ensure that there
is no conflict with the trading activities of the funds.

Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The amounts which each of the funds has invested are adjusted from time to time
in order to maintain the proportionate relationship between each fund's relative
net assets and its contribution to Vanguard's capital. The Amended and Restated
Funds' Service Agreement provides as follows: (a) each Vanguard fund may be
called upon to invest up to 0.40% of its current net assets in Vanguard, and (b)
there is no other limitation on the dollar amount that each Vanguard fund may
contribute to Vanguard's capitalization. At October 31, 2001, Vanguard Selected
Value Fund had contributed capital of $185,000, to Vanguard, representing 0.02%,
of the Fund's net assets, and 0.20% of Vanguard's capitalization. Vanguard
International Explorer Fund and Vanguard Mid-Cap Growth Fund had not commenced
operations as a Vanguard fund as of October 31, 2001.

MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Vanguard funds by third parties.

DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the funds in the Group. The principal distribution expenses are for advertising,
promotional materials, and marketing personnel. Distribution services may also
include organizing and offering to the public, from time to time, one or more
new investment companies which will become members of The Vanguard Group. The
trustees review and approve the amount to be spent annually on distribution
activities and the manner and amount to be spent on each fund. The trustees also
determine whether to organize new investment companies.

One half of the distribution expenses of a marketing and promotional nature
is allocated among the funds based upon their relative net assets. The remaining
one half of these expenses is allocated among the funds based upon each fund's
sales for the preceding 24 months relative to the total sales of the funds as a
Group. Provided, however, that no fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of the average distribution expense rate for The Vanguard
Group, and that no fund shall incur annual distribution expenses in excess of
0.20 of 1% of its average month-end net assets.

During the fiscal years ended October 31, 1999, 2000, and 2001, Vanguard
Selected Value Fund incurred approximately $854,000, $706,000, and $2,304,000,
respectively, of The Vanguard Group's management and administrative (including
transfer agency), distribution, and marketing expenses.

Prior to joining the Vanguard Group, Vanguard International Explorer Fund
was party to administrative agreements, under which, for the fiscal years ended
October 31, 1999, 2000, and 2001, the Fund paid the following administrative
fees, net of waivers: $18,439, $59,760, and $87,205, respectively.

Prior to joining the Vanguard Group, Vanguard Mid-Cap Growth Fund was party
to an administrative agreement, under which, for the fiscal years ended October
31, 1999, 2000, and 2001, the Fund paid the following administrative fees:
$45,625, $45,552, and $, respectively.

Prior to joining the Vanguard Group, Vanguard Mid-Cap Growth Fund was party
to a distribution agreement, under which, for the fiscal year ended October 31,
2001, the aggregate sales commissions received by the Distributor were $. For
the fiscal year ended October 31, 2001, the Fund paid $ under its
distribution plan, of which $ was paid as compensation to broker-dealers, $
was compensation to sales personnel, $ was for reimbursement of advertising
and marketing materials, $ was for reimbursement of printing and postage
expenses, and $ was for miscellaneous other expenses.

Prior to joining the Vanguard Group, Vanguard Mid-Cap Growth Fund was party
to a shareholder services plan under which, for the fiscal year ended October
31, 2001, the Fund paid $ in shareholder servicing fees.

B-19

Each Fund has asked its investment adviser 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 and are
not reflected in these totals.

INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to many Vanguard funds. These services are provided on an at-cost basis
from a money management staff employed directly by Vanguard.

OFFICERS AND TRUSTEES

The officers of the Funds manage their day-to-day operations under the
direction of the Funds' board of trustees. The trustees set broad policies for
the Funds and choose the Funds' officers. Each trustee serves each Fund until
its termination; until the trustee's retirement, resignation, death; or
otherwise as specified in the Trust's organizational documents. Any trustee may
be removed at a meeting of shareholders by a vote representing two-thirds of the
total net asset value of all shares of each Fund. Each trustee also serves as a
director of The Vanguard Group, Inc.

The following chart shows information for each trustee and executive
officer of the Funds. The mailing address of the trustees and officers is P.O.
Box 876, Valley Forge, PA 19482.

NUMBER OF
VANGUARD FUNDS
POSITION(S) HELD TRUSTEE/OFFICER PRINCIPAL OCCUPATION(S) DURING OVERSEEN BY
NAME, DATE OF BIRTH WITH FUND SINCE THE PAST FIVE YEARS TRUSTEE/OFFICER
- -----------------------------------------------------------------------------------------------------------------------------------

John J. Brennan* Chairman of the May, 1987 Chairman of the Board, Chief Executive 106
(July 29, 1954) Board, Chief Officer, and Director(Trustee) of The
Executive Officer Vanguard Group, Inc. and each of the
and Trustee investment companies served by The
Vanguard Group, Inc.

- -----------------------------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
Charles D. Ellis Trustee January, 2001 The Partners of '63 (pro bono ventures in 106
(October 23, 1937) education); Senior Advisor to Greenwich
Associates (international business strategy
consulting); Successor Trustee of Yale
University; Overseer of the Stern School
of Business at New York University;
Trustee of the Whitehead Institute for
Biomedical Research.

Rajiv L. Gupta Trustee December, 2001 Chairman and Chief Executive Officer 84
(December 23, 1945) (since October, 1999), Vice Chairman
(January-September 1999), and Vice
President (prior to September, 1999) of
Rohm and Haas Co. (chemicals); Director
of Technitrol, Inc. (electronic components)
and AgereSystems (communication
components); Board Member of American
Chemistry Council; Trustee of Drexel
University.

JoAnn Heffernan Heisen Trustee July, 1998 Vice President, Chief Information Officer, 106
(January 25, 1950) and Member of the Executive Committee of
Johnson & Johnson (pharmaceuticals/ consumer
products); Director of the Medical Center
at Princeton and Women's Research and
Education Institute.

* Officers of the Fund are "Interested persons" as defined in the 1940 Act.

B-20

Burton G. Malkiel Trustee May, 1977 Chemical Bank Chairman's Professor of 106
(August 28, 1932) Economics, Princeton University; Director of
Prudential Insurance Co. of America, BKF
Capital (investment management), The Jeffrey
Co. (holding company), and NeuVis, Inc.
(software company).

Alfred M. Rankin, Jr. Trustee January, 1993 Chairman, President, Chief Executive 108
(October 8, 1941) Officer, and Director of NACCO Industries,
Inc. (forklift trucks/housewares/lignite);
Director of Goodrich Corporation
(industrial products/aircraft systems and
services). Director of the Standard
Products Company (supplier for
automotive industry) until 1998.

J. Lawrence Wilson Trustee April, 1985 Retired Chairman and Chief Executive 108
(March 2, 1936) Officer of Rohm and Haas Co. (chemicals);
Director of Cummins Inc. (diesel engines),
The Mead Corp. (paper products),
and AmerisourceBergen Corp.
(pharmaceutical distribution); Trustee of
Vanderbilt University.

- -----------------------------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS
R. Gregory Barton* Secretary June, 2001 Managing Director and General Counsel 108
(April 25, 1951) of The Vanguard Group, Inc. (since
September, 1997); Secretary of The
Vanguard Group, Inc. and of each of the
investment companies served by The
Vanguard Group, Inc. (since June, 2001);
Principal of The Vanguard Group, Inc.
(prior to September, 1997).

Thomas J. Higgins* Treasurer July, 1998 Principal of The Vanguard Group, Inc.; 108
(May 21, 1957) Treasurer of each of the investment
companies served by The Vanguard
Group, Inc. (since July, 1998).

*Officers of the Fund are "Interested persons" as defined in the 1940 Act.

Mr. Ellis is a Senior Advisor to Greenwich Associates, a firm that consults
on business strategy to professional financial services organizations in markets
around the world. A large number of financial service providers, including The
Vanguard Group, Inc., subscribe to programs of research-based consulting.
Vanguard has paid Greenwich subscription fees amounting to less than $200,000
since January 1, 1999. Vanguard's subscription rates are similar to those of
other subscribers.

Board Committees: Each Fund's board has the following committees:

- - Audit Committee: This committee oversees the accounting and financial
reporting policies, the systems of internal controls, and the independent
audits of the Funds and The Vanguard Group, Inc. All independent trustees
serve as members of the committee. The committee held three meetings during
the Funds' last fiscal year.

- - Compensation Committee: This committee oversees the compensation programs
established by the Funds and The Vanguard Group, Inc., for the benefit of
their employees, officers, and trustees/directors. All independent trustees
serve as members of the committee. The committee held two meetings during
the Funds' last fiscal year.

B-21

- - Nominating Committee: This committee nominates candidates for election to
the board of directors of The Vanguard Group, Inc. and the board of
trustees of the Funds (collectively, the "Vanguard boards"). The committee
also has the authority to recommend the removal of any director or trustee
from the Vanguard boards. All independent trustees serve as members of the
committee. The committee held two meetings during the Fund's last fiscal
year.

The Nominating Committee will consider shareholder recommendations for
trustee nominees. Shareholders may send recommendations to Mr. Wilson, Chairman
of the Committee.

TRUSTEES' OWNERSHIP OF FUND SHARES

All trustees allocate their investments among the various Vanguard funds
based on their own investment needs. The following table shows each trustee's
ownership of shares of the Funds and of all Vanguard funds served by the trustee
as of December 31, 2001. As a group, the Funds' trustees and officers own less
than 1% of the outstanding shares of the Fund.

DOLLAR RANGE OF AGGREGATE DOLLAR RANGE
FUND SHARES OF VANGUARD FUND SHARES
NAME OF FUND NAME OF TRUSTEE OWNED BY TRUSTEE OWNED BY TRUSTEE
- ------------------------------------------------------------------------------------------

Vanguard Selected John J. Brennan None Over $100,000
Value Fund Charles D. Ellis None Over $100,000
Rajiv L. Gupta None Over $100,000
JoAnn Heffernan Heisen None Over $100,000
Burton G. Malkiel None Over $100,000
Alfred M. Rankin, Jr. None Over $100,000
J. Lawrence Wilson None Over $100,000

TRUSTEE COMPENSATION

The same individuals serve as trustees of all Vanguard funds (with three
exceptions, which are noted in the table on page B-20), and each fund pays a
proportionate share of the trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by The
Vanguard Group, Inc., not the funds.

INDEPENDENT TRUSTEES. The funds compensate their independent trustees--that
is, the ones who are not also officers of the fund--in three ways:

- - The independent trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled board
meetings.

- - The independent trustees are reimbursed for the travel and other expenses
that they incur in attending board meetings.

- - Upon retirement (after attaining age 65 and completing five years of
service), the independent trustees who began their service prior to January
1, 2001, receive a retirement benefit under a separate account arrangement.
As of January 1, 2001, the opening balance of each eligible trustee's
separate account was generally equal to the net present value of the
benefits he or she had accrued under the trustees' former retirement plan.
Each eligible trustee's separate account will be credited annually with
interest at a rate of 7.5% until the trustee receives his or her final
distribution. Those independent trustees who began their service on or
after January 1, 2001, are not eligible to participate in the plan.

"INTERESTED" TRUSTEES. Mr. Brennan serves as a trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.

COMPENSATION TABLE. The following table provides compensation details for
each of the trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Funds for each trustee. In addition, the table shows
the total amount of benefits that we expect each trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each trustee by all Vanguard funds.

B-22

VANGUARD WHITEHALL FUNDS
COMPENSATION TABLE

PENSION OR
RETIREMENT
BENEFITS ACCRUED TOTAL
AGGREGATE AS PART OF VANGUARD COMPENSATION
COMPENSATION SELECTED VALUE ESTIMATED ANNUAL FROM ALL VANGUARD
NAMES OF TRUSTEE FROM VANGUARD FUND'S BENEFITS UPON FUNDS PAID TO
SELECTED VALUE FUND(1) EXPENSES(1) RETIREMENT TRUSTEE(2)
- ----------------------------------------------------------------------------------------------------------------

John J. Brennan None None None None
Charles D. Ellis(3) $ 81 None None $104,000
Rajiv L. Gupta(4) N/A N/A N/A N/A
JoAnn Heffernan Heisen 100 $11 $23,607 104,000
Bruce K. MacLaury(5) 104 10 78,176 99,000
Burton G. Malkiel 100 10 90,680 104,000
Alfred M. Rankin, Jr. 100 7 46,267 104,000
James O. Welch, Jr.(5) 100 12 97,720 104,000
J. Lawrence Wilson 100 4 67,240 119,000

(1) The amounts shown in this column are based on Vanguard Selected Value
Fund's fiscal year ended October 31, 2001. Vanguard International Explorer
Fund and Vanguard Mid-Cap Growth Fund did not commence operation until,
2002.

(2) The amounts reported in this column reflect the total compensation paid to
each trustee for his or her service as trustee of 106 Vanguard funds (104
in the case of Mr. Malkiel; 86 in the case of Mr. MacLaury; and 84 in the
case of Mr. Gupta) for the 2001 calendar year.

(3) Mr. Ellis joined the Fund's board effective January 1, 2001.

(4) Mr. Gupta joined the Fund's board effective December 31, 2001.

(5) Mr. MacLaury and Mr. Welch retired from the Fund's board effective December
31, 2001.

INVESTMENT ADVISORY SERVICES

VANGUARD SELECTED VALUE FUND

Vanguard Selected Value Fund is managed by Barrow, Hanley, Mewhinney &
Strauss, Inc. (Barrow, Hanley), One McKinney Plaza, 3232 McKinney Avenue, 15th
Floor, Dallas, TX 75204 under the terms of an agreement. The investment
philosophy of Barrow, Hanley is to use fundamental research to identify
undervalued stocks. James P. Barrow has been designated as portfolio manager for
the assets of the Fund. Jim has managed portfolio investments since 1963; with
Barrow, Hanley since 1979.

For the services rendered by Barrow, Hanley, the Fund pays Barrow, Hanley a
base advisory fee (the Basic Fee), at the end of each quarter, adjusted by a
performance fee adjustment reflecting the investment performance of the Fund
relative to the total return of the Russell Midcap Index and the Russell Midcap
Value Index. The Russell Midcap Index and the Russell Midcap Value Index are
prepared by Frank Russell Company (which is not affiliated with the Fund or any
of the Fund's affiliates). The Russell Midcap Index is composed of the 800
smallest stocks (by market capitalization) in the Russell 1000 Index. The
Russell Midcap Value Index measures the performance of those companies in the
Russell Midcap Index with lower price-to-book ratios and lower forecasted growth
values. Barrow, Hanley's fees are calculated according to the following rules:

(a) TOTAL QUARTERLY FEE PAYABLE. The total quarterly fee payable by the
Fund to Barrow, Hanley is the Basic Fee for the quarter plus the adjustment
(which may be negative).

(b) BASIC FEE FOR THE QUARTER. The Basic Fee for the quarter is calculated
by applying a quarterly rate based on the following annual percentage rates to
the average month-end assets of the Fund for the quarter:

NET ASSETS ANNUAL RATE
---------- -----------

First $100 million. . . . . 0.40%
Next $200 million . . . . . 0.35%
Next $300 million . . . . . 0.25%
Next $400 million . . . . . 0.20%
Over $1 billion . . . . . . 0.15%

B-23

(c)PERFORMANCE ADJUSTMENT. The adjustment is based on the cumulative
investment performance of the Fund over a trailing 36-month period relative to
that of the Russell Midcap Index (the Prior Index), prior to August 1, 2001, and
the Russell Midcap Value Index (the Index), on and after August 1, 2001, over
the same period. The adjustment, which will be based upon the relative
applicability of the Prior Index and the Index (such applicable performance
index, the Benchmark), applies as follows:

CUMULATIVE 36-MONTH PERFORMANCE OF THE ADJUSTMENT AS A
BHMS PORTFOLIO VS. BENCHMARK PERCENTAGE OF BASIC FEE*
---------------------------- ------------------------

Equal to or greater than +12%................... +50%
Equal to or greater than +6% but less than +12%. +25%
Equal to or greater than -6% but less than +6%.. 0%
Greater than -12% but less than -6%............. -25%
Equal to or less than -12%...................... -50%

- ---------

* For purposes of the adjustment calculation, the basic fee is calculated by
applying the above rate schedule against the average net assets of the Fund
over the same period for which the performance is measured

The Index will not be fully operable as the sole Benchmark used to
determine the adjustment until the quarter ending July 31, 2004. Until that
date, the adjustment will be determined by linking the investment performance of
the Prior Index with that of the Index over a trailing 36-month period as
follows:

(a) QUARTER ENDED OCTOBER 31, 2001. The adjustment was determined by
linking the investment performance of the Prior Index for the eleven quarters
ended July 31, 2001, with that of the Index for the one quarter ended October
31, 2001.

(b) QUARTER ENDED JANUARY 31, 2002. The adjustment was determined by
linking the investment performance of the Prior Index for the ten quarters ended
July 31, 2001, with that of the Index for the two quarters ended January 31,
2002.

(c) QUARTER ENDING APRIL 30, 2002. The adjustment will be determined by
linking the investment performance of the Prior Index for the nine quarters
ended July 31, 2001, with that of the Index for the three quarters ending April
30, 2002.

(d) QUARTER ENDING JULY 31, 2002. The adjustment will be determined by
linking the investment performance of the Prior Index for eight quarters ended
July 31, 2001, with that of the Index for the four quarters ending July 31,
2002.

(e) QUARTER ENDING OCTOBER 31, 2002. The adjustment will be determined by
linking the investment performance of the Prior Index for the seven quarters
ended July 31, 2001, with that of the Index for the five quarters ending October
31, 2002.

(f) QUARTER ENDING JANUARY 31, 2003. The adjustment will be determined by
linking the investment performance of the Prior Index for the six quarters ended
July 31, 2001, with that of the Index for the six quarters ending January 31,
2003.

(g) QUARTER ENDING APRIL 30, 2003. The adjustment will be determined by
linking the investment performance of the Prior Index for the five quarters
ended July 31, 2001, with that of the Index for the seven quarters ending April
30, 2003.

(h) QUARTER ENDING JULY 31, 2003. The adjustment will be determined by
linking the investment performance of the Prior Index for four quarters ended
July 31, 2001, with that of the Index for the eight quarters ending July 31,
2003.

(i) QUARTER ENDING OCTOBER 31, 2003. The adjustment will be determined by
linking the investment performance of the Prior Index for the three quarters
ended July 31, 2001, with that of the Index for the nine quarters ending October
31, 2003.

B-24

(j) QUARTER ENDING JANUARY 31, 2004. The adjustment will be determined by
linking the investment performance of the Prior Index for the two quarters ended
July 31, 2001, with that of the Index for the ten quarters ending January 31,
2004.

(k) QUARTER ENDING APRIL 30, 2004. The adjustment will be determined by
linking the investment performance of the Prior Index for the one quarter ended
July 31, 2001, with that of the Index for the eleven quarters ending April 30,
2004.

(l) QUARTER ENDING JULY 31, 2004. The Index will be fully operable as the
sole Benchmark for determining the adjustment.

CALCULATING RELATIVE INVESTMENT PERFORMANCE. The investment performance of
the Fund for a period, expressed as a percentage of the net asset value per
share of the Fund at the beginning of such period, shall be the sum of: (i) the
change in the net asset value per share of the Fund during such period; (ii) the
value of the cash distributions per share of the Fund having an ex-dividend date
occurring within such period; and (iii) the value of capital gains taxes per
share paid or payable by the Fund on undistributed realized long-term capital
gains accumulated to the end of such period. The investment record of the
Russell Midcap Index, or the Russell Midcap Value Index, for a period will be
calculated by adding (i) the change in the level of the Index during the period,
and (ii) the value of cash distributions having an ex-dividend date occurring
within such period made by companies within the Index. For the fiscal years
ended October 31, 1999, 2000, and 2001, the Fund incurred investment advisory
fees of $668,000, $622,000, and $1,841,000 (before a performance-based decrease
of $294,000, $358,000, and $156,000, respectively).

RELATED INFORMATION CONCERNING BARROW, HANLEY. Barrow, Hanley, a Nevada
corporation, is an investment management firm founded in 1979 which provides
investment advisory services to individuals, employee benefit plans, investment
companies, and other institutions. Barrow, Hanley is a subsidiary of Old Mutual
Asset Managers (US) LLC, which is a subsidiary of Old Mutual plc. As of October
31, 2001, Barrow, Hanley provided investment advisory services to clients having
assets with an approximate value of $27 billion.

VANGUARD INTERNATIONAL EXPLORER FUND

Vanguard International Explorer Fund employs Schroder Investment Management
North America Inc. (Schroder), 875 Third Avenue, 22nd Floor, New York, NY
10022-6225, to manage the Fund's assets (the "Schroder Portfolio") under the
terms of an agreement.

For the services to be rendered by Schroder as provided in the Investment
Advisory Agreement between the Fund and the adviser, the Fund will pay to
Schroder at the end of each of the Fund's fiscal quarters an amount (the
Adjusted Fee) equal to a basic fee (Basic Fee) plus a performance adjustment
amount (the Adjustment Amount). For purposes of the calculations, both the Basic
Fee and the Adjustment Amount will incorporate an asset-based Fee (the Asset
Fee) that is determined by applying a quarterly rate, calculated based on the
following annual percentage rate schedule, to the average month-end net assets
of the Schroder Portfolio over the applicable time period:

ANNUAL
PERCENTAGE AVERAGE MONTH-END NET
RATE ASSETS
---- ------

0.30% On the first $500 million
0.22% On the next $500 million
0.15% Over $1 billion

The Basic Fee is equal to the Asset Fee as computed over the fiscal quarter
for which the Adjusted Fee is being calculated (the Relevant Fiscal Quarter).

Subject to the transition rules described below, the Adjustment Amount is
equal to the product of an adjustment percentage (the Adjustment Percentage) and
the Asset Fee as computed over the 36-month period ending with the Relevant
Fiscal Quarter (the Relevant 36-Month Period). The Adjustment Percentage will
vary based on the investment performance of the Schroder Portfolio relative to
the investment performance of the

B-25

Salomon Smith Barney Extended Market EPAC Index (the Index) as determined for
the Relevant 36-Month Period.

The Adjustment Percentage applies as follows:

CUMULATIVE PERFORMANCE OF THE SCHRODER PORTFOLIO
VS. INDEX OVER RELEVANT 36-MONTH PERIOD ADJUSTMENT PERCENTAGE
--------------------------------------- ---------------------

Less than -12%...................... -50%
From -12% up to and including -6% -25%
Between -6% and +6%................. 0%
From +6% up to and including +12% +25%
More than +12%...................... +50%

The Adjustment Amount will not be fully incorporated into the determination
of the Adjusted Fee until the close of the quarter ending July 31, 2005. Until
that date, the following transition rules will apply:

1. DATE OF REORGANIZATION THROUGH APRIL 30, 2003. The Adjusted Fee will be
equal to the Basic Fee. No Adjustment Amount will apply during this period.

2. MAY 1, 2003 THROUGH JULY 31, 2005. Beginning May 1, 2003, the Adjusted
Fee will be equal to the Basic Fee plus the Adjustment Amount as calculated on
the following basis. The Adjustment Amount for the Relevant Fiscal Quarter will
be determined on a progressive basis with regards to the number of months
elapsed between July 31, 2002, and the end of the Relevant Fiscal Quarter (the
progressive adjustment period). During the progressive adjustment period, the
Asset Fee for purposes of calculating the Adjustment Amount will be determined
with respect to the period from July 31, 2002, through and including the end of
the Relevant Fiscal Quarter. Similarly, the Adjustment Percentage will be
calculated with respect to the cumulative performance of the Fund and the Index
from August 1, 2002, through and including the end of the Relevant Fiscal
Quarter. For these purposes, the endpoints and size of the range over which a
positive or negative Adjustment Percentage applies and the corresponding maximum
adjusted percentage will be multiplied by a fractional time-elapsed Adjustment
Percentage. The fraction will equal the number of months elapsed since July 31,
2002, divided by thirty-six.

Example: Assume that Schroder's compensation is being calculated for the
quarter ended January 31, 2004, and that the cumulative performance of the
Schroder Portfolio versus the Index for the applicable period is +4%. In this
case, an Adjustment Percentage of 12.5% of the Asset Fee calculated over the
18-month period would apply. Each performance breakpoint would be scaled by
18/36 = 0.5, and the performance Adjustment Percentage would also be scaled by
18/36 = 0.5. Hence, 4% cumulative outperformance for the 18 months ending
January 31, 2004, would result in a 12.5% adjustment. (Note that this example
reflects rounding. In practice, calculations will be extended to the eighth
decimal point. Performance shortfalls versus the Index are treated in a
symmetric manner to the example provided.)

3. ON AND AFTER AUGUST 1, 2005. The Adjusted Fee will be equal to the Basic
Fee plus the Adjustment Amount as determined for the relevant 36-month period.

During the fiscal years ended October 31, 1999, 2000, and 2001, Vanguard
International Explorer Fund incurred the following investment advisory fees:**

1999 2000 2001
---- ---- ----

Basic Fee............ $ 0 $ 4,665 $34,595
Advisory Fee Waived 77,451 129,685 144,117

** These fees were paid under a prior investment advisory fee structure.

RELATED INFORMATION CONCERNING SCHRODER. Schroder is a wholly owned
subsidiary of Schroder U.S. Holdings Inc., which currently engages through its
subsidiary firms in the asset management business. Affiliates of Schroder U.S.
Holdings Inc. (or their predecessors) have been investment managers since 1927.
Schroder U.S. Holdings Inc. is an indirect, wholly owned U.S. subsidiary of
Schroders plc, a publicly owned

B-26

holding company organized under the laws of England. Schroders plc and its
affiliates currently engage in the asset management business, and as of December
31, 2001, had under management assets of approximately $160.1 billion.

VANGUARD MID-CAP GROWTH FUND

The Fund employs Provident Investment Counsel (Provident), 300 North Lake
Avenue, Pasadena, CA 91101, under the terms of an agreement.

For the services rendered by Provident, the Fund pays to Provident at the
end of each of the Fund's fiscal quarters an amount (the Adjusted Fee) equal to
a Basic Fee (the Basic Fee) plus a performance Adjustment Amount (the Adjustment
Amount). For purposes of the calculations, both the Basic Fee and the Adjustment
Amount will incorporate an asset-based fee (the Asset Fee) that is determined by
applying a quarterly rate, calculated based on the following annual percentage
rate schedule, to the average month-end net assets of the Provident Portfolio
over the applicable time period:

ANNUAL
PERCENTAGE AVERAGE MONTH-END NET
RATE ASSETS
---- ------

0.500% On the first $50 million
0.250% On the next $200 million
0.175% On the next $750 million
0.125% Over $1 billion

The Basic Fee is equal to the Asset Fee as computed over the fiscal quarter
for which the Adjusted Fee is being calculated (the Relevant Fiscal Quarter).

Subject to the transition rules described below, the Adjustment Amount is
equal to the product of an Adjustment Percentage and the Asset Fee as computed
over the 36-month period ending with the Relevant Fiscal Quarter (the relevant
36-month period). The Adjustment Percentage will change proportionately with the
investment performance of the Provident Portfolio relative to the investment
performance of the Russell Mid-Cap Growth Index (the Index) as determined for
the Relevant 36-Month Period.

The Adjustment Percentage applies as follows:

CUMULATIVE PERFORMANCE OF PROVIDENT
PORTFOLIO VS. INDEX OVER RELEVANT ADJUSTMENT
36-MONTH PERIOD PERCENTAGE
----------------------------------- --------------------------------

Less than -7.5%.................... -60%
From -7.5% up to and including 0%.. Linear increase from -60% to 0%
Greater than 0% and up to +7.5%.... Linear increase from 0% to +60%
More than +7.5%.................... +60%

(a) DATE OF REORGANIZATION THROUGH APRIL 30, 2003. The Adjusted Fee will be
equal to the Basic Fee. No Adjustment Amount will apply during this period.

(b) MAY 1, 2003 THROUGH JULY 31, 2005. Beginning May 1, 2003, the Adjusted
Fee will be equal to the Basic Fee plus the Adjustment Amount as calculated on
the following basis. The Adjustment Amount for the Relevant Fiscal Quarter will
be determined on a progressive basis with regards to the number of months
elapsed between July 31, 2002, and the end of the Relevant Fiscal Quarter
(progressive adjustment period). During the progressive adjustment period, the
Asset Fee for purposes of calculating the Adjustment Amount will be determined
with respect to the period from July 31, 2002, through and including the end of
the Relevant Fiscal Quarter. Similarly, the Adjustment Percentage will be
calculated with respect to the cumulative

B-27

performance of the Fund and the Index from August 1, 2002, through and including
the end of the Relevant Fiscal Quarter. For these purposes, the endpoints and
size of the range over which a positive or negative Adjustment Percentage
applies and the corresponding maximum adjusted percentage will be multiplied by
a fractional time-elapsed Adjustment Percentage. The fraction will equal the
number of months elapsed since July 31, 2002, divided by thirty-six.

Example: Assume that Provident's compensation is being calculated for the
quarter ended January 31, 2004, and that the cumulative performance of the Fund
versus the Index for the applicable period is +3%. In this case, an Adjustment
Percentage of 24% of the Asset Fee calculated over the 18-month period would
apply. This would be calculated as [(a/c) x d], where a equals the percentage
amount by which the performance of the Fund has exceeded the Index (e.g., 3%), c
equals the size of the adjusted range over which the linear adjustment applies,
and d is the adjusted maximum Adjustment Percentage. The adjusted range in this
case is determined as [(18/36) x 0%] to [(18/36) x 7.5%] = 0% to 3.75%. The size
of the adjusted range is then 3.75% minus 0% = c. The maximum Adjustment
Percentage is determined as [(18/36) x 60%] = 30% = d. The Adjustment Amount as
a percentage of the Basic Fee is then computed as [(3/3.75) x 30%] = 24%. (Note
that this example reflects rounding. In practice, calculations will be extended
to the eighth decimal point. Performance shortfalls versus the Index are treated
in a symmetric manner to the example provided.)

(c) ON AND AFTER AUGUST 1, 2005. The Adjusted Fee will be equal to the
Basic Fee plus the Adjustment Amount as determined for the relevant 36-month
period.

During the fiscal years ended October 31, 1999, 2000, and 2001, Vanguard
Mid-Cap Growth Fund incurred the following investment advisory fees:**

1999 2000 2001
---- ---- ----

Basic Fee.......... $58,869 $226,135 $xx,xxx
Advisory Fee Waived 58,869 104,920 xx,xxx

The adviser formerly provided certain administrative services to the Fund
pursuant to Administration Agreements, and earned a fee for providing such
services. During the fiscal years ended October 31, 1999, 2000, and 2001, the
adviser earned $16,589, $52,271, and $*), respectively.

** These advisory and administrative fees were paid under prior fee structures.

RELATED INFORMATION CONCERNING PROVIDENT. Provident is an indirect, wholly
owned subsidiary of Old Mutual plc, a public limited company based in the United
Kingdom. Old Mutual is a financial services group with a substantial life
assurance business in South Africa and other southern African countries and an
integrated, international portfolio of activities in asset management, banking,
and general insurance. As of December 31, 2001, Provident had under management
assets of approximately $xxx billion.

DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS.

Vanguard Selected Value Fund's current agreement with its adviser is
renewable for successive one-year periods, and Vanguard International Explorer
Fund and Vanguard Mid-Cap Growth Fund's current agreements with their advisers
in effect for initial to-year periods, and are renewable for successive one-year
periods, only if (1) each renewal is specifically approved by a vote of the
Fund's board of trustees, including the affirmative votes of a majority of the
trustees who are not parties to the agreement or "interested persons" (as
defined in the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of considering such approval, or (2) each renewal is
specifically approved by a vote of a majority of the Fund's outstanding voting
securities. An agreement is automatically terminated if assigned, and may be
terminated without penalty at any time (1) by vote of the board of trustees of
the Fund on sixty (60) days' written notice to the adviser, (2) by a vote of a
majority of the Fund's outstanding voting securities on sixty (60) days' written
notice (thirty (30) days' for Vanguard Mid-Cap Growth Fund) to the adviser, or
(3) by the adviser upon ninety (90) days' written notice to the Fund.

BOARD REVIEW OF INVESTMENT ADVISORY AGREEMENT.

Each fund's board of trustees is responsible for overseeing the performance
of the Fund's investment advisers and determining whether to renew the Fund's
investment advisory arrangements. The board has a

B-28

standing request that Vanguard and the advisers provide the board with certain
information the board has deemed important to evaluating the short- and
long-term performance of the advisers. This information includes a monthly Fund
performance analysis and status report from Vanguard and quarterly
self-evaluations by the advisers. Vanguard also provides the board with written
analyses of each adviser's performance on a periodic basis. Each Fund's
portfolio managers also meet with the board from time to time to discuss the
management and performance of the Fund and respond to the board's questions
concerning the performance of the advisers.

When the board considers whether to renew an investment advisory contract,
the board takes into account numerous factors, including:

- - The nature, extent and quality of the services provided by the adviser.

- - The investment performance of the Fund's assets managed by the adviser.

- - The fair market value of the services provided by the adviser.

- - A comparative analysis of expense ratios of, and advisory fees paid by,
similar funds.

- - The extent to which the adviser has realized or will realize economies of
scale as the Fund grows.

- - Other sources of revenue to the adviser or its affiliates from its
relationship with the Fund and intangible or "fall-out" benefits that
accrue to the adviser and its affiliates, if relevant.

- - The adviser's control of the operating expenses of the fund, such as
transaction costs, including ways in which portfolio transactions for the
Fund are conducted and brokers are selected.

The primary factors underlying the board's determination to renew each
Fund's advisory agreements were as follows:

VANGUARD SELECTED VALUE FUND (BARROW, HANLEY, MEWHINNEY & STRAUSS, INC.):

The board determined that the performance results of the Fund were
reasonable, as compared with relevant performance standards, including: (a) the
Russell Midcap Index; (b) the average mid-cap value fund (derived from data
provided by Lipper Inc.); and (c) other appropriate market indexes.

- - The board assessed that the advisory fee paid by the Fund was reasonable
based on the average advisory fee for the Fund's Lipper peer group. The
board also took into account the nature of the fee arrangements which
include breakpoints that will adjust the fee downward as the size of the
Fund increases and a performance adjustment that is designed to benefit
shareholders by aligning the adviser's fee with the investment returns
delivered to shareholders.

- - The board evaluated the adviser's investment staff and portfolio management
process, and reviewed the composition and overall performance of the Fund
on both a short-term and long-term basis. The board considered whether the
Fund should obtain alternative portfolio management services and concluded
that, under all the circumstances and based on its informed business
judgement, the most appropriate course of action in the best interest of
the Fund's shareholders was to renew the agreement with Barrow, Hanley.

Vanguard has adopted specific policies regarding the adviser's selection of
brokers. For additional information, please see the Portfolio Transactions
section of this Statement of Additional Information.

VANGUARD INTERNATIONAL EXPLORER FUND (SCHRODER INVESTMENT MANAGEMENT NORTH
AMERICA INC.):

- - The board determined that performance results for Schroder International
Smaller Companies Fund, the name of the Fund prior to , 2002,
when the Fund was reorganized and became a member of The Vanguard
Group, were reasonable as compared with the relevant performance
standards, including the performance results of: (a) Salomon Smith
Barney Extended Market EPAC Index for the same periods; (b) the average
actively managed international equity mutual fund (derived from data
provided by Lipper Inc.), and (c) other appropriate market indexes.

- - The board assessed that the advisory fee to be paid by the Fund was
reasonable based on the average advisory fee for the Fund's Lipper peer
group. The board also took into account the nature of the fee arrangements
which include breakpoints that will adjust the fee downward as the size of
the adviser's portfolio increases and a performance adjustment that is
designed to benefit shareholders by aligning the adviser's fee with the
investment returns delivered to shareholders.

B-29

- - The board evaluated the adviser's investment staff and portfolio management
process and concluded that, under all the circumstances and based on its
informed business judgement, the most appropriate course of action in the
best interest of the Fund's shareholders was to approve the agreement with
Schroder.

VANGUARD MID-CAP GROWTH FUND (PROVIDENT INVESTMENT COUNSEL):

- - The board determined that performance results Provident Investment Counsel
Mid Cap Fund A, the name of the Fund prior to , 2002, when the Fund
was reorganized and became a member of The Vanguard Group, were reasonable
as compared with the relevant performance standards, including the
performance results of: (a) Russell Midcap Growth Index for the same
periods; (b) the average mid-cap growth mutual fund (derived from data
provided by Lipper Inc.), and (c) other appropriate market indexes.

PORTFOLIO TRANSACTIONS

Barrow, Hanley, Schroder, and Provident are authorized to (with the
approval of the board of trustees) select the brokers or dealers that will
execute the purchases and sales of portfolio securities for the respective Fund.
The investment advisory agreements direct the advisers to use their best efforts
to obtain the best available price and most favorable execution as to all
transactions. Each investment adviser has undertaken to execute each investment
transaction at a price and commission which provides the most favorable total
cost or proceeds reasonably obtainable under the circumstances.

In placing portfolio transactions, each investment adviser will use its
best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain the best available price and most favorable
execution. The full range and quality of brokerage services available will be
considered in making these determinations. In those instances where it is
reasonably determined that more than one broker can offer the brokerage services
needed to obtain the best available price and most favorable execution,
consideration may be given to those brokers which supply investment research and
statistical information and provide other services in addition to execution
services to the Fund and/or the investment adviser. Each investment adviser
considers such information useful in the performance of its obligations under
the agreement, but is unable to determine the amount by which such services may
reduce its expenses.

The investment advisory agreements also incorporate the concepts of Section
28(e) of the Securities Exchange Act of 1934 by providing that, subject to the
approval of the board of trustees, each investment adviser may cause the Fund to
pay a broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction; provided that such commission is deemed
reasonable in terms of either that particular transaction or the overall
responsibilities of the adviser to the Funds and the other funds in the Group.

Currently, it is each Fund's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions that
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of the Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to an investment adviser and/or the Fund.
However, the investment advisers have informed the Fund that they generally will
not pay higher commission rates specifically for the purpose of obtaining
research services.

Some securities that are considered for investment by a Fund may also be
appropriate for other Vanguard funds or for other clients served by the
advisers. If such securities that are compatible with the investment

B-30

policies of the Funds and one or more of an adviser's other clients and are
considered for purchase or sale at or about the same time, then transactions in
such securities will be aggregated by that adviser and the purchased securities
or sale proceeds will be allocated among the participating Vanguard funds and
the other participating clients of the adviser in a manner deemed equitable by
the adviser. Although there may be no specified formula for allocating such
transactions, the allocation methods used, and the results of such allocations,
will be subject to periodic review by the Fund's board of trustees.

During the fiscal years ended October 31, 1999, 2000, and 2001, the Funds
paid the following approximate amounts in brokerage commissions.

FUND 1999 2000 2001
---- ---- ---- ----

Selected Value Fund $717,000 $343,000 $2,710,000
International Explorer Fund 29,000 62,000 65,000
Mid-Cap Growth Fund 22,000 53,000 xx,000

5% SHAREHOLDERS

As of March 31, 2002, the following persons were the only persons who were
record owners (or to the knowledge of the Trust, beneficial owners) of 5% or
more of the outstanding shares of the Vanguard International Explorer Fund. The
Trust believes that most of the shares referred to below were held by the
persons indicated in accounts for their fiduciary, agency, or custodial
customers:

SHAREHOLDER PERCENTAGE
----------- ----------

x.x%

As of March 31, 2002, the following persons were the only persons who were
record owners (or to the knowledge of the Trust, beneficial owners) of 5% or
more of the outstanding shares of the Vanguard Mid-Cap Growth Fund. The Trust
believes that most of the shares referred to below were held by the persons
indicated in accounts for their fiduciary, agency, or custodial customers:

SHAREHOLDER PERCENTAGE
----------- ----------

x.x%

FINANCIAL STATEMENTS

Vanguard Selected Value Fund's Financial Statements for the fiscal year
ended October 31, 2001, appearing in the Fund's 2001 Annual Report Shareholders,
and the report thereon of PricewaterhouseCoopers LLP, independent accountants,
also appearing therein, are incorporated by reference in this Statement of
Additional Information. The financial statements of Schroder International
Smaller Companies Fund for the fiscal year ended October 31, 2001, including
notes thereto and the report of PricewaterhouseCoopers LLP, independent
accountants, also appearing therein, are also incorporated by reference in this
Statement of Additional Information. (Prior to , 2002, Vanguard
International Explorer Fund was organized as Schroder International Smaller
Companies Fund.) The financial statements of Provident Mid Cap Fund A for the
fiscal year ended October 31, 2001, including notes thereto and the report of
PricewaterhouseCoopers LLP, independent accountants, also appearing therein, are
also incorporated by reference in this Statement of Additional Information.
(Prior to , 2002, Vanguard Mid-Cap Growth Fund was organized as
Provident Mid Cap Fund A.) For a more complete discussion of the performance,
please see each Fund's Annual Report to Shareholders, which may be obtained
without charge.

COMPARATIVE INDEXES

Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.

B-31

Each of the investment company members of The Vanguard Group, including
Vanguard Selected Value Fund use one or more of the following unmanaged indexes
for comparative performance purposes.

STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading industries and to reflect
the U.S. stock market.

STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.

STANDARD & POOR'S SMALL CAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.

STANDARD & POOR'S SMALL CAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.

WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.

WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard & Poor's 500 Index.

RUSSELL 3000 STOCK INDEX--a diversified portfolio of approximately 3,000 common
stocks accounting for over 90% of the market value of publicly traded stocks in
the U.S.

RUSSELL 2000 STOCK INDEX--composed of the 2,000 smallest stocks contained in the
Russell 3000 Index, representing approximately 7% of the Russell 3000 total
market capitalization.

RUSSELL 2000 VALUE INDEX--contains stocks from the Russell 2000 Index with a
less-than-average growth orientation.

RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.

RUSSELL MIDCAP INDEX--composed of all medium and medium/small companies in the
Russell 1000 Index.

RUSSELL MIDCAP GROWTH INDEX--measures the performance of those Russell Midcap
Index companies with higher price/book ratios and higher predicted growth rates.

MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX--is an arithmetic average of the
performance of over 1,000 securities listed on the stock exchanges of countries
in Europe, Australia, Asia, and the Far East.

SALOMON SMITH BARNEY EXTENDED MARKET EPAC INDEX--tracks the bottom 20% by total
market capitalization of the Europe Pan Asia Index.

GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.

SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.

SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.

LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that
contains individually priced U.S. Treasury securities with maturities of ten
years or greater.

LEHMAN BROTHERS CREDIT (Baa) BOND INDEX--all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $100 million outstanding. This index
includes over 1,500 issues.

LEHMAN BROTHERS LONG CREDIT BOND INDEX--is a subset of the Lehman Brothers
Credit Bond Index.

STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
of four high-grade, non-callable preferred stock issues.

B-32

NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.

LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$5 trillion.

LEHMAN BROTHERS CREDIT A OR BETTER BOND INDEX--consists of all publicly issued,
investment-grade corporate bonds rated A or better, of all maturity levels.

LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CREDIT INDEX--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate investment grade bonds rated BBB- or better with maturities between
one and five years. The index has a market value of over $1.6 trillion.

LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CREDIT INDEX--is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between five and
ten years. The index has a market value of over $800 billion.

LEHMAN BROTHERS LONG (10+) GOVERNMENT/CREDIT INDEX--is a market weighted index
that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than ten years. The
index has a market value of over $1.1 trillion.

LIPPER SMALL-CAP GROWTH FUND AVERAGE--an industry benchmark of average mutual
funds that by prospectus or portfolio practice invest primarily in growth
companies with market capitalizations less than $1 billion at the time of
purchase.

LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Inc.

LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.

LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Inc.

B-33

SAI934 062002