UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT
OF
REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-1530
Name of Registrant: VANGUARD EXPLORER FUND
Address of Registrant: P.O. BOX 2600, VALLEY FORGE, PA 19482
Name and address of agent for service: R. GREGORY BARTON
P.O. BOX 876
VALLEY FORGE, PA 19482
Registrant's telephone number, including area code: (610) 669-1000
Date of fiscal year end: October 31
Date of reporting period: November 1, 2002 - October 31, 2003
ITEM 1: Reports to Shareholders
VANGUARD(R) EXPLORER(TM)FUND
October 31, 2003
Annual Report
[Cover Art]
THE VANGUARD GROUP (R)
HOW TO READ YOUR FUND REPORT
This report contains information that can help you evaluate your investment. It
includes details about your fund's return and presents data and analysis that
provide insight into the fund's performance and investment approach.
By reading the letter from Vanguard's chairman, you'll get an understanding of
how the fund invests and how the market environment affected its performance.
The statistical information that follows can help you understand how the fund's
performance and characteristics stack up against those of similar funds and
market benchmarks.
It's important to keep in mind that any opinions expressed here are just that:
informed opinions. They should not be considered promises or advice. These
opinions, like the statistics, cover the period through the date on the cover of
this report. As things change--and in the financial markets you can be certain
only of change--an investment manager's job is to evaluate new information and
make adjustments, if necessary. Of course, the risks of investing in the fund
are spelled out in the prospectus.
Frequent updates on the fund's performance and information about some of its
holdings are available on Vanguard.com(R).
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CONTENTS
1 LETTER FROM THE CHAIRMAN
6 FUND PROFILE
7 GLOSSARY OF INVESTMENT TERMS
8 PERFORMANCE SUMMARY
10 YOUR FUND'S AFTER-TAX RETURNS
11 ABOUT YOUR FUND'S EXPENSES
12 FINANCIAL STATEMENTS
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SUMMARY
* The Investor Shares of Vanguard Explorer Fund posted a 2003 fiscal-year
return of 41.7%, outpacing the average peer fund but lagging the benchmark
index.
* Small-capitalization stocks led the charge in a broad stock market
recovery.
* While, as a group, the fund's technology stocks contributed almost
one-third of the fund's total return, they lagged the performance of the
benchmark's tech sector.
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LETTER FROM THE CHAIRMAN
Fellow Shareholder,
During the stock market's remarkable recovery from last year's bear market lows,
small-capitalization stocks made the largest gains. In this environment, the
Investor Shares of Vanguard Explorer Fund earned 41.7% for the fiscal year ended
October 31, 2003.
[PICTURES OF JOHN J. BRENNAN]
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2003 TOTAL RETURNS FISCAL YEAR ENDED
OCTOBER 31
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VANGUARD EXPLORER FUND
Investor Shares 41.7%
Admiral Shares 41.9
Russell 2500 Growth Index 44.8
Average Small-Cap Growth Fund* 40.4
Wilshire 5000 Index 24.4
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*Derived from data provided by Lipper Inc.
That stellar result was well above the return of the broad U.S. stock market and
slightly higher than that of the average competing fund. However, Explorer
lagged the Russell 2500 Growth Index, the fund's "best fit" benchmark, by about
3 percentage points during the 12-month period, in part because of its advisors'
subpar stock selections in a few sectors.
The adjacent table shows the total returns (capital changes plus reinvested
distributions) for the fund's Investor and Admiral Shares, for the fund's
comparative measures, and for the broad U.S. stock market, as measured by the
Wilshire 5000 Total Market Index. The table on page 5 provides a breakdown of
the components of your fund's total returns. If you own the Explorer Fund in a
taxable account, see page 10 for a report on the fund's after-tax returns.
STOCKS STAGED A REMARKABLE TURNAROUND
Weak economic data and the prospect of war with Iraq helped depress U.S. stock
prices early in the fiscal year, but the outbreak of fighting in mid-March had a
cathartic effect. The U.S. military's quick advance, combined with rosier
reports on the nation's economy and corporate
1
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ADMIRAL(TM) SHARES
A lower-cost class of shares available to many longtime shareholders and to
those with significant investments in the fund.
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earnings, helped launch a surprisingly strong and sustained rally.
For the full 12 months, the broad U.S. market, as measured by the Wilshire 5000
Index, returned 24.4%. Gains were substantially similar overall for growth and
value stocks (i.e., stocks that sport a premium price for their earnings growth
potential versus those with bargain-basement price tags relative to earnings,
book value, or other measures), but there was a wide divide between stocks of
small and large companies. The 43.4% return of the small-cap Russell 2000 Index
was nearly double the result of the large- and mid-cap Russell 1000 Index. The
gains were equally impressive overseas, particularly in emerging markets and the
Pacific Rim nations. In the aggregate, international markets outpaced the U.S.
market during the 12 months. For U.S.-based investors, the results from abroad
were boosted by a weakening of the dollar against most major currencies.
"JUNK" BOND RETURNS RIVALED THE GAINS OF STOCKS
In the bond market, higher risk correlated with higher returns during the fiscal
year, with below-investment-grade bonds posting results that outpaced those of
the equity markets. The Lehman Brothers High Yield Bond Index surged 33.8%.
Meanwhile, U.S. Treasury securities--considered to be risk-free--posted returns
in the low single digits, with interest income offsetting a decline in prices.
As bond prices fell, yields rose. At the fiscal year-end, the yield of the
10-year Treasury note stood at 4.29%, 40 basis points (0.40 percentage point)
higher than at the start of the period.
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MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2003
------------------------------
ONE THREE FIVE
YEAR YEARS YEARS
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STOCKS
Russell 1000 Index (Large-caps) 22.3% -8.2% 1.1%
Russell 2000 Index (Small-caps) 43.4 3.4 8.3
Wilshire 5000 Index (Entire market) 24.4 -7.1 1.7
MSCI All Country World Index Free
ex USA (International) 30.4 -4.4 1.4
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BONDS
Lehman Aggregate Bond Index 4.9% 8.4% 6.5%
(Broad taxable market)
Lehman Municipal Bond Index 5.1 7.1 5.6
Citigroup 3-Month Treasury Bill Index 1.2 2.6 3.6
================================================================================
CPI
Consumer Price Index 2.0% 2.1% 2.4%
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2
The pattern was different among debt securities with the shortest maturities,
which are influenced more strongly by the Federal Reserve Board's interest rate
moves than by market forces. During the fiscal year, the Fed slashed its target
federal funds rate by 75 basis points to 1.00%, the lowest level since 1958. The
yield of the 3-month Treasury bill, a fair proxy for money market interest
rates, fell by 50 basis points to end the period at 0.95%.
DOUBLE-DIGIT SECTOR RETURNS WERE THE NORM FOR YOUR FUND
In absolute terms, the Explorer Fund had a banner year, in large part because of
the resurgence of technology stocks, which accounted for almost one-third of the
fund's fiscal-year return. Of the five individual stocks that contributed most
to the fund's performance, four--Maxtor, Foundry Networks, Western Digital, and
Red Hat--were in the tech sector, with each more than doubling in price. Small,
fast-growing companies in dynamic industries exemplify the kinds of stocks that
our managers seek for Explorer's portfolio. Collectively, the fund's tech issues
gained 77%.
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FUND ASSETS MANAGED OCTOBER 31, 2003
---------------------
$ MILLION PERCENTAGE
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Granahan Investment Management, Inc. $1,687 26%
Wellington Management Company, llp 1,349 21
Grantham, Mayo, Van Otterloo & Co. LLC 1,335 21
Vanguard Quantitative Equity Group 1,003 16
Chartwell Investment Partners 650 10
Short-Term Reserves* 359 6
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Total $6,383 100%
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*Short-term reserves are invested by The Vanguard Group in equity index products
to simulate investment in stocks. Each advisor may also maintain a modest cash
position.
Even outside of tech, it was a remarkable 12-month period. Out of 12 industry
sectors, only one experienced a decline, a -2% return for the fund's minuscule
stake in integrated oils companies. The fund's consumer staples stocks earned a
"modest" 9%, and each of the fund's remaining sectors posted a double-digit
gain.
Only when compared with the unmanaged benchmark index did the fund fall short.
In a handful of sectors--consumer discretionary (e.g., retailers, restaurants,
and media companies), technology, and materials & processing--the issues in the
Russell 2500 Growth Index outpaced those in the fund. It's worth noting that
your fund has always paid attention to valuations and has never been eager to
3
pay large premiums for speculative growth potential alone. While its
growth-at-a-reasonable-price approach was a boon to the fund's relative
performance during the bear market, it was out of step with the market's
speculative flavor during fiscal 2003. Taken together, a few subpar stock
selections and attention to valuation caused your fund to lag the benchmark by
about 3 percentage points. However, relative to the average small-cap growth
fund, the fund held a slight lead.
As you know, the Explorer Fund has five investment advisors, a structure that
provides additional diversification through complementary management styles and
philosophies. The table on page 3 shows the percentage of assets managed by each
advisor at the fiscal year-end.
TEN-YEAR RECORD EXCEEDS THOSE OF THE BENCHMARKS
Because of short-term fluctuations, one year's performance is an inadequate
gauge of a fund's results. The table below shows the annualized returns and the
final results of a hypothetical $10,000 investment over the past decade in your
fund, its benchmarks, and the broad U.S. stock market.
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TOTAL RETURNS TEN YEARS ENDED
OCTOBER 31, 2003
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AVERAGE FINAL VALUE OF
ANNUAL A $10,000
RETURN INITIAL INVESTMENT
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Explorer Fund
Investor Shares 10.8% $27,857
Russell 2500 Growth Index 7.7 21,058
Average Small-Cap
Growth Fund 10.5 27,045
Wilshire 5000 Index 10.0 25,853
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The roughly 3-percentage-point difference with the Russell 2500 Growth Index
still exists, but over the full ten years it's in your favor, with the fund
earning almost $7,000 more than the index for the same $10,000 investment. This
is a notable achievement, given that indexes have none of the real-world
operating and transaction costs that mutual funds must bear. In addition, your
fund slightly outpaced both the average competing fund and the broad market.
Much of the credit for this fine performance goes to the fund's investment
advisors and to Vanguard's low costs. For a comparison of the fund's expenses
relative to those of its average mutual fund peer, please see page 11. Over
time, incremental differences in costs can make a big impact on your bottom
line.
4
BALANCING YOUR WAY THROUGH VOLATILE MARKETS
Because of the inherent uncertainty of the financial markets, there is only one
way to combine the opportunity for gain with some protection from loss: balance
and diversification. In other words, hold diversified stock, bond, and money
market funds in proportions determined by your unique goals, circumstances, and
risk tolerance. As part of such a diversified portfolio, the Explorer Fund can
play a valuable role.
The stock market's long-awaited recovery is a vindication of the balanced
approach to investing, not a signal that balance is no longer necessary. The
virtues of diversification have never been a secret, but sticking with such a
plan has always been hard because of the temptations and fears wrought by sharp
market fluctuations.
Staying the course is easier if you trust the institution that manages your
money, and this has never been more true than now. In light of the shocking
allegations about market-timing and late trading at some investment management
firms, I feel compelled to close this letter with an assurance that Vanguard has
policies and procedures in place to identify and deter such behavior. In
addition, I have great confidence in the ethics, integrity, and character of the
Vanguard crew--values that receive strong institutional support from our
client-owned corporate structure, which channels all our efforts into the
creation of wealth for our shareholders.
Thank you for entrusting your hard-earned money to us.
Sincerely,
/S/JOHN J. BRENNAN
John J. Brennan
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
NOVEMBER 14, 2003
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YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2002-OCTOBER 31, 2003
DISTRIBUTIONS PER SHARE
-------------------------
STARTING ENDING INCOME CAPITAL
SHARE PRICE SHARE PRICE DIVIDENDS GAINS
- --------------------------------------------------------------------------------
EXPLORER FUND
Investor Shares $44.60 $63.17 $0.005 $0.00
Admiral Shares 41.43 58.71 0.043 0.00
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5
As of 10/31/2003
FUND PROFILE
This Profile provides a snapshot of the fund's characteristics, compared where
indicated with both an appropriate market index and a broad market index. Key
terms are defined on page 7.
EXPLORER FUND
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PORTFOLIO CHARACTERISTICS
COMPARATIVE BROAD
FUND INDEX* INDEX**
- --------------------------------------------------------------------------------
Number of Stocks 907 1,582 5,270
Median Market Cap $1.6B $1.5B $26.9B
Price/Earnings Ratio 37.8x 37.4x 22.8x
Price/Book Ratio 3.0x 3.6x 2.9x
Yield 0.4% 1.6%
Investor Shares 0.0%
Admiral Shares 0.2%
Return on Equity 12.7% 13.9% 19.7%
Earnings Growth Rate 12.9% 15.4% 7.6%
Foreign Holdings 2.6% 0.0% 0.8%
Turnover Rate 77% -- --
Expense Ratio -- --
Investor Shares 0.72%
Admiral Shares 0.57%
Cash Investments 4% -- --
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- --------------------------------------------------------------------------------
TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS)
Maxtor Corp. 1.1%
(computer technology)
Red Hat, Inc. 0.8
(software)
Foundry Networks, Inc. 0.7
(telecommunications)
Foot Locker, Inc. 0.6
(retail)
Western Digital Corp. 0.6
(computer technology)
The Dun & Bradstreet Corp. 0.5
(financial services)
Coventry Health Care Inc. 0.5
(health products and services)
SICOR, Inc. 0.5
(pharmaceuticals)
Watson Pharmaceuticals, Inc. 0.5
(pharmaceuticals)
Nextel Partners, Inc. 0.5
(telecommunications)
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TOP TEN 6.3%
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The "Ten Largest Holdings" excludes any temporary cash investments and equity
index products.
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VOLATILITY MEASURES
COMPARATIVE BROAD
FUND INDEX* FUND INDEX**
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R-Squared 0.94 1.00 0.84 1.00
Beta 0.81 1.00 1.19 1.00
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SECTOR DIVERSIFICATION (% OF PORTFOLIO)
COMPARATIVE BROAD
FUND INDEX* INDEX**
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Auto & Transportation 4% 4% 3%
Consumer Discretionary 22 23 16
Consumer Staples 1 1 7
Financial Services 11 13 23
Health Care 18 21 13
Integrated Oils 0 0 3
Other Energy 4 4 2
Materials & Processing 4 4 4
Producer Durables 7 7 4
Technology 23 22 15
Utilities 2 1 7
Other 0 0 3
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Cash Investments 4% -- --
- --------------------------------------------------------------------------------
*Russell 2500 Growth Index.
**Wilshire 5000 Index.
- ----------------------
INVESTMENT FOCUS
MARKET CAP SMALL
STYLE GROWTH
- ----------------------
VISIT OUR WEBSITE AT VANGUARD.COM
FOR REGULARLY UPDATED FUND INFORMATION.
6
GLOSSARY OF INVESTMENT TERMS
BETA. A measure of the magnitude of a fund's past share-price fluctuations in
relation to the ups and downs of a given market index. The index is assigned a
beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically
would have seen its share price rise or fall by 12% when the index rose or fell
by 10%. A fund's beta should be reviewed in conjunction with its R-squared (see
definition below). The lower the R-squared, the less correlation there is
between the fund and the index, and the less reliable beta is as an indicator of
volatility.
- --------------------------------------------------------------------------------
CASH INVESTMENTS. The percentage of a fund invested in "cash
equivalents"--highly liquid, short-term, interest-bearing securities. This
figure does not include cash invested in futures contracts or other index-based
products.
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EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the
past five years for the stocks now in a fund.
- --------------------------------------------------------------------------------
EXPENSE RATIO. The percentage of a fund's average net assets used to pay its
annual administrative and advisory expenses. These expenses directly reduce
returns to investors.
- --------------------------------------------------------------------------------
FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks
or depositary receipts of companies based outside the United States.
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MEDIAN MARKET CAP. An indicator of the size of companies in which a fund
invests; the midpoint of market capitalization (market price x shares
outstanding) of a fund's stocks, weighted by the proportion of the fund's assets
invested in each stock. Stocks representing half of the fund's assets have
market capitalizations above the median, and the rest are below it.
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PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book
value, per share. For a fund, the weighted average price/book ratio of the
stocks it holds.
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PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share
earnings over the past year. For a fund, the weighted average P/E of the stocks
it holds. P/E is an indicator of market expectations about corporate prospects;
the higher the P/E, the greater the expectations for a company's future growth.
- --------------------------------------------------------------------------------
R-SQUARED. A measure of how much of a fund's past returns can be explained by
the returns from the market in general, as measured by a given index. If a
fund's total returns were precisely synchronized with an index's returns, its
R-squared would be 1.00. If the fund's returns bore no relationship to the
index's returns, its R-squared would be 0.
- --------------------------------------------------------------------------------
RETURN ON EQUITY. The annual average rate of return generated by a company
during the past five years for each dollar of shareholder's equity (net income
divided by shareholder's equity). For a fund, the weighted average return on
equity for the companies whose stocks it holds.
- --------------------------------------------------------------------------------
TURNOVER RATE. An indication of the fund's trading activity. Funds with high
turnover rates incur higher transaction costs and may be more likely to
distribute capital gains (which may be taxable to investors).
- --------------------------------------------------------------------------------
YIELD. A snapshot of a fund's income from interest and dividends. The yield,
expressed as a percentage of the fund's net asset value, is based on income
earned over the past 30 days and is annualized, or projected forward for the
coming year. The index yield is based on the current annualized rate of income
provided by securities in the index.
- --------------------------------------------------------------------------------
7
AS OF 10/31/2003
PERFORMANCE SUMMARY
All of the returns in this report represent past performance, which cannot be
used to predict future returns that may be achieved by the fund. Note, too, that
both share price and return can fluctuate widely. An investor's shares, when
redeemed, could be worth more or less than their original cost. The returns
shown do not reflect taxes that a shareholder would pay on fund distributions or
on the redemption of fund shares.
EXPLORER FUND
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CUMULATIVE PERFORMANCE OCTOBER 31, 1993-OCTOBER 31, 2003
EXPLORER FUND AVERAGE SMALL-CAP RUSSELL 2500 WILSHIRE 500
INVESTOR GROWTH FUND GROWTH INDEX INDEX
199310 10000 10000 10000 10000
199401 10492 10351 10351 10330
199404 9999 9716 9754 9734
199407 9626 9282 9333 9850
199410 10449 10264 10186 10251
199501 10270 10054 9835 10225
199504 10956 10942 10894 11183
199507 12175 13134 12658 12422
199510 12273 13153 12576 12890
199601 12959 13796 13305 14022
199604 14742 16351 15164 14780
199607 13465 14863 13435 14246
199610 14479 16339 14652 15701
199701 15034 17303 15720 17439
199704 13611 14465 14105 17387
199707 16510 18891 17360 20971
199710 17220 19878 17852 20662
199801 16588 19053 17287 21851
199804 18678 21538 19644 24907
199807 16320 19133 17139 24544
199810 15288 16745 15378 23718
199901 17740 20558 18581 27811
199904 17638 20086 19294 29171
199907 19333 22675 20445 29048
199910 19131 24495 21128 29807
200001 24249 31937 27921 31769
200004 26331 32750 29180 32617
200007 26324 33443 27630 32195
200010 27274 33918 27405 32222
200101 27796 31400 25085 30665
200104 26119 27019 21743 28018
200107 25890 27430 21193 27364
200110 22849 24085 18331 23994
200201 25985 26310 20109 25966
200204 26430 24995 19710 25249
200207 20186 19382 14885 21326
200210 19666 19259 14547 20776
200301 19487 18559 14570 20284
200304 20863 19356 15676 21819
200307 24722 23613 18873 24060
200310 27857 27045 21058 25853
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AVERAGE ANNUAL TOTAL RETURNS
PERIODS ENDED OCTOBER 31, 2003
---------------------------------
FINAL VALUE
ONE FIVE TEN OF A $10,000
YEAR YEARS YEARS INVESTMENT
- --------------------------------------------------------------------------------
Explorer Fund Investor Shares 41.65% 12.75% 0.79% $27,857
Wilshire 5000 Index 24.44 1.74 9.96 25,853
Russell 2500 Growth Index 44.76 6.49 7.73 21,058
Average Small-Cap Growth Fund* 40.43 10.06 10.46 27,045
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FINAL VALUE
ONE SINCE OF A $250,000
YEAR INCEPTION** INVESTMENT
- --------------------------------------------------------------------------------
Explorer Fund Admiral Shares 41.85% 8.67% $294,417
Wilshire 5000 Index 24.44 1.28 256,329
Russell 2500 Growth Index 44.76 5.30 276,754
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- --------------------------------------------------------------------------------
FISCAL-YEAR TOTAL RETURNS (%) OCTOBER 31, 1993-OCTOBER 31, 2003
FISCAL YEAR EXPLORER FUND RUSSELL 2500
GROWTH INDEX
1994 4.5 1.9
1995 17.5 23.5
1996 18 16.5
1997 18.9 21.8
1998 -11.2 -13.9
1999 25.1 37.4
2000 42.6 29.7
2001 -16.2 -33.1
2002 -13.9 -20.6
2003 41.7 44.8
- --------------------------------------------------------------------------------
* Derived from data provided by Lipper Inc.
**November 12, 2001. Note: See Financial Highlights tables on pages 26 and 27
for dividend and capital gains information.
8
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AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED SEPTEMBER 30, 2003
This table presents average annual total returns through the latest calendar
quarter--rather than through the end of the fiscal period. Securities and
Exchange Commission rules require that we provide this information.
TEN YEARS
ONE FIVE ---------------------------
INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------
EXPLORER FUND
Investor Shares 12/11/1967 35.53% 12.34% 9.69% 0.36% 10.05%
Admiral Shares 11/12/2001 35.70 4.28* -- -- --
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*Return since inception.
9
YOUR FUND'S AFTER-TAX RETURNS
This table presents returns for your fund both before and after taxes. The
after-tax returns are shown in two ways: (1) assuming that an investor owned the
fund during the entire period and paid taxes on the fund's distributions, and
(2) assuming that an investor paid taxes on the fund's distributions and sold
all shares at the end of each period.
Calculations are based on the highest individual federal income tax and capital
gains tax rates in effect at the times of the distributions and the hypothetical
sales. State and local taxes were not considered. After-tax returns reflect the
reduced tax rates on ordinary income and short-term capital gains that became
effective as of January 1, 2003, and on long-term capital gains realized on or
after May 6, 2003. However, they do not reflect the reduced rates on "qualified
dividend income." (In the example, returns after the sale of fund shares may be
higher than those assuming no sale. This occurs when the sale would have
produced a capital loss. The calculation assumes that the investor received a
tax deduction for the loss.)
The table shows returns for Investor Shares only; returns for other share
classes will differ. Please note that your actual after-tax returns will depend
on your tax situation and may differ from those shown. Also note that if you own
the fund in a tax-deferred account, such as an individual retirement account or
a 401(k) plan, this information does not apply to you. Such accounts are not
subject to current taxes.
Finally, keep in mind that a fund's performance--whether before or after
taxes--does not indicate how it will perform in the future.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED OCTOBER 31, 2003
ONE YEAR FIVE YEARS TEN YEARS
----------------------------------
EXPLORER FUND INVESTOR SHARES
Returns Before Taxes 41.65% 12.75% 10.79%
Returns After Taxes on Distributions 41.65 10.50 8.43
Returns After Taxes on Distributions
and Sale of Fund Shares 27.07 9.89 8.12
- --------------------------------------------------------------------------------
10
ABOUT YOUR FUND'S EXPENSES
All mutual funds have operating expenses. These expenses include costs for
portfolio management, administrative services, and shareholder reports (like
this one), among others. Operating expenses, which are deducted from a fund's
gross income, directly reduce the investment return of the fund. A fund's
expenses are expressed as a percentage of its net assets. This figure is known
as the expense ratio.
A HYPOTHETICAL EXAMPLE
We believe it is important for you to understand the impact of costs on your
investment. The following example illustrates the costs that you would incur
over a 12-month period if you invested $10,000 in the fund, using the fund's
actual return and operating expenses for the fiscal year ended October 31, 2003.
The cost in dollars is calculated by applying the expense ratio to the average
balance in the hypothetical account. For comparative purposes, we also list the
average expense ratio for the fund's peer group, which is derived from data
provided by Lipper Inc.
- --------------------------------------------------------------------------------
COST OF $10,000 FUND PEER GROUP*
INVESTMENT IN FUND EXPENSE RATIO EXPENSE RATIO
- --------------------------------------------------------------------------------
EXPLORER FUND
Investor Shares $87 0.72% 1.74%
Admiral Shares 69 0.57 --
- --------------------------------------------------------------------------------
*Average Small-Cap Growth Fund.
The fund does not charge transaction fees; these results apply whether or not
you redeemed your investment at the end of the given period. Your actual costs
may have been higher or lower, depending on the amount of your investment and
your holding period. Peer-group ratio captures data through year-end 2002.
You can find more information about the fund's expenses, including annual
expense ratios for the past five years, in the Financial Statements section of
this report. For additional information on operating expenses and other
shareholder costs, please refer to the fund's prospectus. The prospectus
presents hypothetical shareholder costs over various time periods based upon a
$10,000 investment and a return of 5% a year. This standardized example, which
appears in all mutual fund prospectuses, may be useful to you in comparing the
costs of investing in different funds.
11
AS OF 10/31/2003
FINANCIAL STATEMENTS
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.) and by
industry sector. Other assets are added to, and liabilities are subtracted from,
the value of Total Investments to calculate the fund's Net Assets. Finally, Net
Assets are divided by the outstanding shares of the fund to arrive at its share
price, or Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying the
composition of the fund's net assets. Because all income and any realized gains
must be distributed to shareholders each year, the bulk of net assets consists
of Paid-in Capital (money invested by shareholders). The amounts shown for
Undistributed Net Investment Income and Accumulated Net Realized Gains usually
approximate the sums the fund had available to distribute to shareholders as
income dividends or capital gains as of the statement date, but may differ
because certain investments or transactions may be treated differently for
financial statement and tax purposes. Any Accumulated Net Realized Losses, and
any cumulative excess of distributions over net income or net realized gains,
will appear as negative balances. Unrealized Appreciation (Depreciation) is the
difference between the market value of the fund's investments and their cost,
and reflects the gains (losses) that would be realized if the fund were to sell
all of its investments at their statement-date values.
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
COMMON STOCKS (91.7%)(1)
- --------------------------------------------------------------------------------
AUTO & Transportation (3.7%)
C.H. Robinson Worldwide, Inc. 748,600 $ 29,330
Polaris Industries, Inc. 211,200 18,079
CNF Inc. 467,600 16,375
*Northwest Airlines Corp.
Class A 1,159,400 15,872
Tidewater Inc. 538,700 14,765
Heartland Express, Inc. 581,960 14,456
BorgWarner, Inc. 178,100 14,175
* EGL, Inc. 778,100 12,691
* JetBlue Airways Corp. 162,300 9,361
* AirTran Holdings, Inc. 568,100 9,209
* Pacer International, Inc. 397,576 8,197
* J.B. Hunt Transport 288,300 7,317
* Swift Transportation 293,272 6,578
Thor Industries, Inc. 99,300 6,367
Delta Air Lines, Inc. 467,700 6,089
* Navistar International Corp. 133,500 5,397
* Continental Airlines, Inc.
Class B 280,300 5,354
* AMR Corp. 392,900 5,218
* Mesa Air Group Inc. 446,500 4,809
Oshkosh Truck Corp. 100,400 4,601
* Lear Corp. 76,500 4,444
* ExpressJet Holdings, Inc. 180,500 2,762
Overseas Shipholding Group Inc. 86,700 2,363
* General Maritime Corp. 171,000 2,163
* Landstar System, Inc. 25,400 1,855
Superior Industries
International, Inc. 42,900 1,823
* Atlantic Coast Airlines
Holdings Inc. 157,700 1,746
* Covenant Transport, Inc. 72,900 1,390
ArvinMeritor, Inc. 80,200 1,347
* Old Dominion Freight Line, Inc. 23,800 763
Winnebago Industries, Inc. 6,700 391
* RailAmerica, Inc. 35,500 377
* Keystone Automotive
Industries, Inc. 13,300 329
-------
235,993
--------
CONSUMER DISCRETIONARY (21.0%)
ADVERTISING AGENCIES (0.4%)
* Lamar Advertising Co. Class A 447,000 13,544
* Catalina Marketing Corp. 305,600 5,394
* ValueClick, Inc. 204,175 1,646
* aQuantive, Inc. 128,202 1,346
Grey Global Group Inc. 1,400 938
CABLE TELEVISION SERVICES (0.2%)
* Insight Communications Co., Inc. 795,100 7,705
* TiVo Inc. 464,400 3,724
* Charter Communications, Inc. 176,000 752
12
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
CASINOS & Gambling (0.7%)
* Shuffle Master, Inc. 517,800 $ 15,762
GTECH Holdings Corp. 253,500 11,326
Station Casinos, Inc. 214,900 6,393
* Scientific Games Corp. 250,100 3,326
* Isle of Capri Casinos, Inc. 158,000 3,294
* Multimedia Games Inc. 61,300 2,305
* Ameristar Casinos, Inc. 94,700 2,000
* MTR Gaming Group Inc. 77,200 844
COMMERCIAL INFORMATION SERVICES (0.2%)
* Ask Jeeves, Inc. 378,500 7,252
* ProQuest Co. 58,800 1,746
* LookSmart, Ltd. 649,094 1,123
* infoUSA Inc. 132,328 1,085
COMMUNICATIONS & Media
* Gemstar-TV Guide
International, Inc. 74,250 348
CONSUMER ELECTRONICS (1.0%)
* NetFlix.com, Inc. 428,700 24,565
* Earthlink, Inc. 868,100 7,943
* Take-Two Interactive
Software, Inc. 169,900 6,720
* VeriSign, Inc. 411,200 6,526
* CNET Networks, Inc. 652,500 5,311
* iVillage Inc. 1,720,400 5,041
* DoubleClick Inc. 470,400 3,918
* United Online, Inc. 128,614 3,703
* FindWhat.com 112,700 1,883
* Activision, Inc. 19,800 299
CONSUMER PRODUCTS (0.4%)
Blyth, Inc. 141,800 3,968
* USANA Health Sciences, Inc. 91,100 3,040
* The Yankee Candle Co., Inc. 94,200 2,636
The Nautilus Group, Inc. 165,900 2,590
* Jarden Corp. 51,600 2,131
Oakley, Inc. 191,700 2,080
Matthews International Corp. 71,342 1,926
The Topps Co., Inc. 170,000 1,737
* RC2 Corp. 70,600 1,497
COSMETICS (0.3%)
* Helen of Troy Ltd. 516,100 11,576
* Elizabeth Arden, Inc. 90,157 1,803
EDUCATION--SERVICES (1.2%)
* Education Management Corp. 309,435 19,550
* ITT Educational Services, Inc. 267,600 13,326
* Corinthian Colleges, Inc. 214,163 13,261
* DeVry, Inc. 544,100 13,205
* Career Education Corp. 224,000 11,995
* Sylvan Learning Systems, Inc. 117,900 3,337
* Bright Horizons Family
Solutions, Inc. 29,900 1,285
* Renaissance Learning, Inc. 9,000 226
ENTERTAINMENT (1.0%)
*(2)LodgeNet Entertainment Corp. 889,700 16,175
* Movie Gallery, Inc. 704,700 14,573
* AMC Entertainment, Inc. 1,052,000 14,307
* Hollywood Entertainment Corp. 726,200 11,038
* Pixar, Inc. 79,700 5,484
* Alliance Gaming Corp. 30,930 750
HOTEL/MOTEL (0.4%)
The Marcus Corp. 673,600 10,070
Intrawest Corp. 450,000 7,565
Hilton Hotels Corp. 416,050 6,590
HOUSEHOLD FURNISHINGS (0.6%)
* Select Comfort Corp. 737,400 23,081
Furniture Brands
International Inc. 509,600 12,363
Ethan Allen Interiors, Inc. 51,200 1,884
American Woodmark Corp. 38,169 1,874
* Bombay Co. 110,400 1,455
JEWELRY, WATCHES & Gems (0.2%)
Tiffany & Co. 250,000 11,863
* Fossil, Inc. 104,800 2,830
LEISURE TIME (0.4%)
Callaway Golf Co. 1,396,700 22,696
* SCP Pool Corp. 76,900 2,692
* Penn National Gaming, Inc. 85,700 2,030
* Bally Total Fitness Holding Corp. 155,200 1,034
MISCELLANEOUS BUSINESS &
CONSUMER DISCRETIONARY (0.3%)
Techtronic Industries
Co. Ltd. ADR 1,489,200 20,519
PRINTING & COPYING SERVICES
Bowne & Co., Inc. 13,000 195
PUBLISHING--MISCELLANEOUS (0.4%)
* Playboy Enterprises, Inc.
Class B 1,073,300 16,625
(2)Hollywood Media Corp. 1,398,823 2,784
13
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
Reader's Digest Association, Inc. 126,900 $ 1,869
* PRIMEDIA Inc. 443,500 1,193
* Journal Register Co. 53,000 1,062
Courier Corp. 6,000 329
RADIO & TELEVISION BROADCASTERS (0.9%)
* Entercom Communications Corp. 412,915 18,916
* XM Satellite Radio Holdings, Inc. 862,400 17,472
Gray Television, Inc. 842,100 10,711
* Cumulus Media Inc. 295,432 5,533
* Westwood One, Inc. 100,000 2,993
* Emmis Communications, Inc. 75,200 1,668
* Sinclair Broadcast Group, Inc. 139,400 1,623
* Spanish Broadcasting
System, Inc. 61,800 556
* Paxson Communications Corp. 78,700 407
* Beasley Broadcast Group, Inc. 7,200 105
World Wrestling
Entertainment, Inc. 5,200 58
RENT/LEASE SERVICES--CONSUMER (0.3%)
* Rent-A-Center, Inc. 510,500 15,958
Aaron Rents, Inc. Class B 83,250 1,823
RESTAURANTS (1.4%)
* Rare Hospitality International Inc. 731,375 18,138
Applebee's International, Inc. 426,470 15,997
Ruby Tuesday, Inc. 548,900 15,012
CBRL Group, Inc. 269,300 10,435
* California Pizza Kitchen, Inc. 324,100 6,028
* CEC Entertainment Inc. 100,800 4,929
* P.F. Chang's China Bistro, Inc. 92,300 4,499
Wendy's International, Inc. 118,859 4,404
* Papa John's International, Inc. 131,100 3,449
Outback Steakhouse 72,500 3,045
* Jack in the Box Inc. 93,000 1,692
* Ryan's Family Steak Houses, Inc. 102,050 1,423
* Brinker International, Inc. 37,900 1,206
Bob Evans Farms, Inc. 23,000 680
Triarc Cos., Inc. Class A 49,687 518
IHOP Corp. 3,100 115
RETAIL (6.6%)
Foot Locker, Inc. 2,104,400 37,669
* Chico's FAS, Inc. 601,700 22,588
* Fisher Scientific
International Inc. 418,315 16,837
* Hot Topic, Inc. 523,137 15,019
* Dick's Sporting Goods, Inc. 303,700 13,964
Ross Stores, Inc. 278,700 13,938
* Borders Group, Inc. 610,600 13,830
* Abercrombie & Fitch Co. 467,800 13,331
Fred's, Inc. 350,750 13,216
MSC Industrial Direct Co., Inc.
Class A 543,800 12,861
* Cost Plus, Inc. 267,100 12,252
PETsMART, Inc. 439,650 11,259
* Hibbett Sporting Goods, Inc. 399,900 10,921
Claire's Stores, Inc. 273,300 10,577
* Toys R Us, Inc. 772,300 10,040
* Pacific Sunwear of
California, Inc. 412,925 9,534
* O'Reilly Automotive, Inc. 220,000 9,524
* Aeropostale, Inc. 294,200 9,076
* Williams-Sonoma, Inc. 244,425 8,635
* American Eagle Outfitters, Inc. 514,800 8,232
* Urban Outfitters, Inc. 244,400 8,153
CDW Corp. 135,720 8,150
* Insight Enterprises, Inc. 470,900 7,921
* Tractor Supply Co. 188,800 7,913
* AnnTaylor Stores Corp. 205,000 7,339
Blockbuster Inc. Class A 341,200 6,575
* Too Inc. 382,400 6,310
* Advance Auto Parts, Inc. 77,400 6,054
* FreeMarkets, Inc. 920,500 5,762
* Tuesday Morning Corp. 170,300 5,431
* Sharper Image Corp. 171,500 4,939
* Global Imaging Systems, Inc. 160,200 4,654
* Priceline.com, Inc. 163,000 4,574
* Cache, Inc. 177,400 4,495
* Guitar Center, Inc. 135,700 4,417
* Barnes & Noble, Inc. 136,300 4,062
* The Children's Place
Retail Stores, Inc. 128,400 3,865
* Men's Wearhouse, Inc. 127,000 3,741
* bebe stores, inc. 118,300 3,301
* BJ's Wholesale Club, Inc. 123,900 3,183
* A.C. Moore Arts & Crafts, Inc. 127,550 2,950
Pier 1 Imports Inc. 126,200 2,915
* Ultimate Electronics, Inc. 311,394 2,799
* Genesco, Inc. 145,100 2,445
* School Specialty, Inc. 87,200 2,431
* Dollar Tree Stores, Inc. 59,100 2,256
* The Neiman Marcus Group, Inc.
Class A 47,300 2,249
* Jo-Ann Stores, Inc. Class A 73,600 2,209
* Jos. A. Bank Clothiers, Inc. 50,800 2,203
* PETCO Animal Supplies, Inc. 65,700 2,180
Brown Shoe Co., Inc. 60,100 2,079
* GameStop Corp. 118,000 1,985
* Electronics Boutique
Holdings Corp. 53,100 1,511
14
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
* Mothers Work, Inc. 52,700 $ 1,481
* GSI Commerce, Inc. 145,300 1,418
* Payless ShoeSource, Inc. 95,900 1,269
* Linens 'n Things, Inc. 42,600 1,258
* United Auto Group, Inc. 33,200 862
* Stein Mart, Inc. 110,800 797
* The Dress Barn, Inc. 35,800 501
Sonic Automotive, Inc. 21,000 477
Christopher & Banks Corp. 16,000 467
* barnesandnoble.com inc. 70,200 161
SERVICES--COMMERCIAL (2.7%)
* The Corporate Executive
Board Co. 493,700 25,184
Sabre Holdings Corp. 586,100 12,841
* Tetra Tech, Inc. 516,050 11,600
* Getty Images, Inc. 236,600 10,576
* DiamondCluster
International, Inc. 1,167,500 10,391
* Monster Worldwide Inc. 345,200 8,792
Regis Corp. 199,700 7,593
* The Advisory Board Co. 189,150 6,883
* Kroll Inc. 283,225 6,588
* CoStar Group, Inc. 156,600 5,896
* West Corp. 214,800 5,205
* Navigant Consulting, Inc. 314,000 5,159
* FTI Consulting, Inc. 256,600 5,106
* ChoicePoint Inc. 130,930 4,588
* Charles River Associates Inc. 144,312 4,433
* Harris Interactive Inc. 528,003 3,511
* Integrated Alarm Services
Group, Inc. 395,300 3,483
* Right Management
Consultants, Inc. 190,750 3,443
* Weight Watchers
International, Inc. 82,625 3,049
* Exult Inc. 323,400 2,565
* 4Kids Entertainment Inc. 97,700 2,389
* Gartner, Inc. Class B 185,300 2,259
* MAXIMUS, Inc. 61,200 2,136
* Pre-Paid Legal Services, Inc. 78,600 2,135
Rollins, Inc. 94,950 1,929
* Waste Connections, Inc. 51,100 1,772
* Forrester Research, Inc. 95,900 1,635
* Lightbridge, Inc. 62,947 1,564
* Corrections Corp. of
America REIT 61,600 1,513
* MPS Group, Inc. 154,600 1,476
* MemberWorks, Inc. 49,200 1,421
World Fuel Services Corp. 44,000 1,261
* Teletech Holdings Inc. 168,900 1,111
Labor Ready, Inc. 75,700 823
* Resources Connection, Inc. 27,200 673
* BearingPoint, Inc. 30,500 287
* Heidrick & Struggles
International, Inc. 9,432 186
* AMN Healthcare Services, Inc. 1,272 170
* FTD, Inc. 2,400 59
SHOES (0.5%)
*(2)Vans, Inc. 1,034,240 11,615
Reebok International Ltd. 143,900 5,605
* Finish Line, Inc. 162,500 4,976
* Steven Madden, Ltd. 151,700 3,251
Kenneth Cole Productions, Inc. 101,500 3,004
* Timberland Co. 46,100 2,395
K-Swiss, Inc. 44,500 1,955
* Skechers U.S.A., Inc. 127,300 959
TEXTILES & APPAREL MANUFACTURING (0.7%)
* Quiksilver, Inc. 1,130,000 19,402
* Coach, Inc. 254,000 9,009
Phillips-Van Heusen Corp. 501,700 8,599
* Columbia Sportswear Co. 87,500 5,096
TOYS (0.1%)
* Marvel Enterprises Inc. 297,800 8,770
WHOLESALERS (0.1%)
* United Stationers, Inc. 177,600 6,608
* Brightpoint, Inc. 91,650 2,626
---------
1,341,854
---------
CONSUMER STAPLES (0.9%)
* Constellation Brands, Inc.
Class A 475,300 14,910
* Wild Oats Markets Inc. 1,160,700 12,048
* Smithfield Foods, Inc. 460,200 9,784
* Rite Aid Corp. 1,544,800 8,852
* 7-Eleven, Inc. 173,100 2,761
* Chiquita Brands
International, Inc. 105,200 1,946
Universal Corp. (VA) 44,500 1,939
Tootsie Roll Industries, Inc. 34,000 1,122
* NBTY, Inc. 34,200 932
* Performance Food Group Co. 20,900 779
* Peet's Coffee & Tea Inc. 18,695 315
Church & Dwight, Inc. 6,700 250
* J & J Snack Foods Corp. 4,300 153
-------
55,791
FINANCIAL SERVICES (9.9%)
* The Dun & Bradstreet Corp. 719,100 33,474
* CheckFree Corp. 1,101,700 30,330
15
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
Legg Mason Inc. 298,700 $ 24,867
Jefferies Group, Inc. 699,900 21,697
Avalonbay Communities,
Inc. REIT 463,400 21,163
Regency Centers Corp. REIT 562,000 20,839
* eSPEED, Inc. Class A 728,255 19,845
IndyMac Bancorp, Inc. REIT 637,600 18,745
* Investment Technology
Group, Inc. 911,200 18,096
* Providian Financial Corp. 1,620,800 18,007
* Alliance Data Systems Corp. 607,900 16,887
Manufactured Home
Communities, Inc. REIT 435,950 16,566
Westcorp, Inc. 436,600 16,512
Fair, Isaac, Inc. 247,270 15,771
City National Corp. 240,600 14,487
* E*TRADE Financial Corp. 1,345,250 13,856
Prentiss Properties Trust RE 423,700 12,813
Reinsurance Group of
America, Inc. 315,500 12,604
The Chicago
Mercantile Exchange 184,100 12,510
Friedman, Billings, Ramsey
Group, Inc. 623,800 12,426
Sun Communities, Inc. REIT 340,100 12,397
* Host Marriott Corp. REIT 1,134,300 11,853
Redwood Trust, Inc. REIT 188,300 9,340
John H. Harland Co. 338,400 9,215
New Century Financial Corp. 246,600 9,144
* Ameritrade Holding Corp. 653,300 8,911
* Affiliated Computer
Services, Inc. Class A 179,670 8,791
* Knight Trading Group, Inc. 574,600 7,952
Flagstar Bancorp, Inc. 354,700 7,910
MFA Mortgage Investments,
Inc. REIT 750,100 7,178
UCBH Holdings, Inc. 192,500 6,874
* WellChoice Inc. 207,900 6,757
FactSet Research Systems Inc. 154,100 6,725
* Digital Insight Corp. 300,800 6,311
New York Community
Bancorp, Inc. 158,766 5,747
* CapitalSource Inc. 262,900 5,718
Fidelity National Financial, Inc. 176,303 5,451
* CompuCredit Corp. 270,658 5,351
* BISYS Group, Inc. 371,000 5,305
Everest Re Group, Ltd. 60,311 5,003
* AmeriCredit Corp. 355,500 4,764
Fremont General Corp. 241,300 4,013
Certegy, Inc. 110,100 3,706
Global Payments Inc. 86,900 3,619
Odyssey Re Holdings Corp. 165,000 3,462
Brown & Brown, Inc. 112,500 3,426
Platinum Underwriters
Holdings, Ltd. 114,300 3,285
International Bancshares Corp. 70,950 3,258
* Affiliated Managers Group, Inc. 42,300 3,067
* Portal Software, Inc. 181,840 2,909
Student Loan Corp. 22,200 2,875
Hudson United Bancorp 77,700 2,820
Pacific Capital Bancorp 81,600 2,779
* Accredited Home Lenders
Holding Co. 95,300 2,727
* First Federal Financial Corp. 60,500 2,723
Independent Bank Corp. (MI) 91,716 2,653
The South Financial Group, Inc. 97,800 2,556
* WFS Financial, Inc. 57,865 2,523
* Interactive Data Corp. 145,000 2,494
Net.Bank, Inc. 180,400 2,473
* Arch Capital Group Ltd. 67,100 2,449
Arthur J. Gallagher & Co. 80,900 2,361
* HealthExtras, Inc. 199,975 2,342
* Triad Guaranty, Inc. 45,700 2,254
Dime Community Bancshares 80,800 2,253
Irwin Financial Corp. 79,300 2,223
Max Re Capital Ltd. 115,625 2,134
First American Corp. 71,300 2,043
* eFunds Corp. 117,500 1,881
* Kronos, Inc. 29,500 1,770
Raymond James Financial, Inc. 42,600 1,738
Hudson River Bancorp. Inc. 41,904 1,400
* Sterling Financial Corp. (Spokane) 42,447 1,329
PFF Bancorp, Inc. 33,600 1,253
Westamerica Bancorporation 24,600 1,231
PrivateBancorp, Inc. 29,900 1,211
* Gabelli Asset Management Inc. 31,700 1,116
Waddell & Reed Financial, Inc. 49,000 1,087
* Financial Federal Corp. 32,200 1,080
* Local Financial Corp. 55,200 1,071
* NCO Group, Inc. 41,600 990
McGrath Rent Corp. 34,200 975
Bank of the Ozarks, Inc. 22,431 956
WSFS Financial Corp. 22,400 955
Community First Bankshares, Inc. 34,200 929
CB Bancshares Inc. (HI) 13,500 851
East West Bancorp, Inc. 16,100 790
* PRG-Schultz International, Inc. 138,700 659
Harleysville National Corp. 21,750 657
Hanmi Financial Corp. 28,100 596
Quaker City Bancorp, Inc. 13,600 581
* The First Marblehead Corp. 25,950 575
* Silicon Valley Bancshares 14,400 505
16
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
* CCC Information Services Group 26,500 $ 445
Connecticut Bancshares, Inc. 7,500 388
Apex Mortgage Capital, Inc. REIT 51,300 303
Franklin Financial Corp. 5,500 170
Jack Henry & Associates Inc. 6,700 134
------
631,245
HEALTH CARE (17.6%)
BIOTECH RESEARCH & PRODUCTION (3.4%)
* Invitrogen Corp. 310,000 19,713
* Chiron Corp. 355,000 19,394
* Millennium
Pharmaceuticals, Inc. 1,040,100 16,558
* Biogen, Inc. 350,000 14,165
* Telik, Inc. 652,468 13,258
* Human Genome Sciences, I 866,200 12,049
* Abgenix, Inc. 967,100 11,847
* Protein Design Labs, Inc 850,300 11,462
* OSI Pharmaceuticals, Inc. 334,500 9,366
* Zymogenetics, Inc. 712,000 8,765
* Martek Biosciences Corp. 174,800 8,462
* Celgene Corp. 192,400 8,021
* ImClone Systems, Inc. 218,900 7,607
* IDEXX Laboratories Corp. 151,000 7,142
* NPS Pharmaceuticals Inc. 238,700 6,285
* Digene Corp. 142,237 5,007
* Transkaryotic Therapies, Inc. 378,000 4,956
* Neurocrine Biosciences, Inc. 91,800 4,299
* Flamel Technologies SA ADR 154,100 3,891
* Cephalon, Inc. 82,350 3,867
* Immunomedics Inc. 415,390 3,531
* Cell Genesys, Inc. 273,300 3,509
* Genta Inc. 262,202 2,806
* Charles River Laboratories, Inc. 82,400 2,657
* Neurochem, Inc. 156,700 2,195
* Tanox, Inc. 104,100 1,869
* Corixa Corp. 172,700 1,031
* VaxGen, Inc. 102,400 966
* Albany Molecular Research, Inc. 57,700 848
* Serologicals Corp. 28,800 461
* ICOS Corp. 9,100 425
* Kensey Nash Corp. 7,819 169
* Pharmacopeia, Inc. 6,600 82
* Organogenesis, Inc. 44,300 --
DRUGS & PHARMACEUTICALS (4.7%)
* SICOR, Inc. 1,232,100 33,020
* Watson Pharmaceuticals, Inc. 825,600 32,421
* Pharmaceutical Resources, Inc. 320,300 23,151
* Barr Laboratories, Inc. 231,115 17,743
* Amylin Pharmaceuticals, Inc. 467,400 12,774
* Kissei Pharmaceutical Co., Ltd. 783,000 12,436
* Salix Pharmaceuticals, Ltd. 506,600 10,031
* MGI Pharma, Inc. 257,400 9,668
* Taro Pharmaceutical
Industries Ltd. 143,450 9,217
* Sepracor Inc. 327,920 8,733
* American Pharmaceuticals
Partners, Inc. 355,982 8,668
* Tularik, Inc. 628,000 7,894
* MedImmune Inc. 292,400 7,795
* Vertex Pharmaceuticals, Inc. 564,400 7,405
* The Medicines Co. 275,700 7,347
* Kos Pharmaceuticals, Inc. 168,485 6,691
* Endo Pharmaceuticals
Holdings, Inc. 395,900 6,477
* Regeneron Pharmaceuticals, Inc. 422,500 5,847
* Eon Labs, Inc. 137,580 5,793
Mylan Laboratories, Inc. 227,310 5,490
* CV Therapeutics, Inc. 295,700 5,213
* IVAX Corp. 251,200 4,838
* Alkermes, Inc. 365,086 4,735
Medicis Pharmaceutical Corp. 67,000 4,244
* Chattem, Inc. 232,090 3,405
* ILEX Oncology, Inc. 151,490 3,160
* ImmunoGen, Inc. 652,000 3,032
* Inspire Pharmaceuticals, Inc. 154,900 2,884
* Connetics Corp. 151,083 2,706
* Medarex, Inc. 374,000 2,674
* SciClone Pharmaceuticals, Inc. 317,100 2,530
* Priority Healthcare Corp. Class B 102,500 2,217
* Impax Laboratories, Inc. 186,315 2,210
* Esperion Therapeutics, Inc. 86,200 2,058
* Novavax, Inc. 271,300 1,848
Perrigo Co. 116,400 1,566
* BioMarin Pharmaceutical Inc. 221,700 1,552
* CIMA Labs Inc. 47,900 1,504
* Enzo Biochem, Inc. 74,800 1,384
* aaiPharma Inc. 73,850 1,336
* Nektar Therapeutics 86,400 1,135
* Noven Pharmaceuticals, Inc. 95,100 960
* AtheroGenics, Inc. 42,847 707
* K-V Pharmaceutical Co. Class A 25,950 623
* Lannett Company, Inc. 26,803 493
* Andrx Group 17,800 354
* Atrix Laboratories, Inc. 14,400 289
ELECTRONICS--MEDICAL SYSTEMS (0.6%)
* Varian Medical Systems, Inc. 193,455 12,370
* I-STAT Corp. 769,300 9,055
* eResearch Technology, Inc. 121,000 5,565
* VISX Inc. 161,100 3,908
* Intuitive Surgical, Inc. 248,640 3,603
* Affymetrix, Inc. 44,500 1,141
17
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
HEALTH & PERSONAL CARE (1.1%)
* IDX Systems Corp. 614,800 $ 16,108
Omnicare, Inc. 370,000 14,186
*(2)Matria Healthcare, Inc. 714,100 11,997
* Stericycle, Inc. 141,200 6,521
* Lincare Holdings, Inc. 131,000 5,101
* Odyssey Healthcare, Inc. 171,600 4,760
* Apria Healthcare Group Inc. 153,800 4,460
* Dynacq International, Inc. 104,700 1,752
* Inveresk Research Group Inc. 58,700 1,362
* LabOne, Inc. 42,900 1,181
HEALTH CARE FACILITIES (1.4%)
Manor Care, Inc. 742,800 24,720
* Triad Hospitals, Inc. 686,166 21,086
* American Healthways Inc. 301,600 12,501
* Beverly Enterprises, Inc. 1,865,900 11,326
* Renal Care Group, Inc. 158,100 5,930
* DaVita, Inc. 153,300 5,381
* United Surgical Partners
International, Inc. 167,900 5,064
* Pharmaceutical Product
Development, Inc. 95,896 2,884
* Sunrise Senior Living, Inc. 78,000 2,254
* National Healthcare Corp. 4,900 94
HEALTH CARE MANAGEMENT SERVICES (1.8%)
IMS Health, Inc. 950,000 22,354
* Humana Inc. 1,072,300 21,757
* Caremark Rx, Inc. 731,000 18,312
* Mid Atlantic Medical
Services, Inc. 199,600 11,657
* Pediatrix Medical Group, Inc. 131,600 7,034
* AMERIGROUP Corp. 120,400 5,035
* First Health Group Corp. 201,000 4,906
* WebMD Corp. 619,700 4,827
* Centene Corp. 139,750 4,278
* Sierra Health Services, Inc. 146,400 3,410
* Select Medical Corp. 100,800 3,384
* Per-Se Technologies, Inc. 199,900 2,719
* AmSurg Corp. 63,700 2,293
* IMPAC Medical Systems, Inc. 87,775 2,066
* Eclipsys Corp. 151,500 1,795
* CorVel Corp. 17,900 646
MEDICAL & DENTAL INSTRUMENTS & Supplies (4.0%)
* Henry Schein, Inc. 508,700 31,565
Bausch & Lomb, Inc. 655,000 31,545
Mentor Corp. 1,068,400 21,635
Arrow International, Inc. 738,228 19,474
Cooper Cos., Inc. 409,700 17,801
DENTSPLY International Inc. 394,050 17,413
* CONMED Corp. 767,500 15,619
* INAMED Corp. 119,400 10,313
* Immucor Inc. 258,525 7,606
* STERIS Corp. 270,300 5,628
* Cytyc Corp. 410,703 5,310
PolyMedica Corp. 169,000 4,986
* Thoratec Corp. 293,600 4,519
* Merit Medical Systems, Inc. 171,067 4,480
* Conceptus, Inc. 350,100 4,289
* Advanced Neuromodulation
Systems, Inc. 97,700 4,006
Invacare Corp. 92,401 3,790
* ResMed Inc. 83,600 3,492
Beckman Coulter, Inc. 69,200 3,436
* Gen-Probe Inc. 128,000 3,427
* Sybron Dental Specialties, Inc. 141,600 3,257
* Advanced Medical Optics, Inc. 148,800 3,001
* Kyphon Inc. 100,800 2,777
* Bio-Rad Laboratories, Inc.
Class A 52,600 2,748
* Align Technology, Inc. 163,784 2,526
* PSS World Medical, Inc. 270,578 2,522
* ALARIS Medical Systems, Inc. 157,300 2,440
* Cyberonics, Inc. 88,300 2,415
* Ocular Sciences, Inc. 78,000 2,179
* Synovis Life Technologies, Inc. 92,100 2,177
* Biosite Inc. 75,800 1,956
* Apogent Technologies Inc. 86,600 1,901
* Sola International Inc. 104,900 1,799
* Respironics, Inc. 36,800 1,534
* Edwards Lifesciences Corp. 51,200 1,485
* Techne Corp. 29,800 1,038
* Ventana Medical Systems, Inc. 19,000 795
* OraSure Technologies, Inc. 80,800 680
MEDICAL SERVICES (0.6%)
* Coventry Health Care Inc. 603,630 33,049
* Covance, Inc. 229,200 5,966
* Hanger Orthopedic Group, Inc. 98,700 1,683
* RehabCare Group, Inc. 19,800 309
---------
1,124,275
---------
MATERIALS & PROCESSING (3.2%)
* Pactiv Corp. 950,750 20,964
Chicago Bridge & Iron Co. N.V. 563,600 15,358
Minerals Technologies, Inc. 253,500 13,892
Great Lakes Chemical Corp. 629,500 13,534
* Cytec Industries, Inc. 366,100 12,781
Bowater Inc. 304,700 12,441
Fluor Corp. 325,700 12,077
* Croda International PLC 2,651,500 11,811
18
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
* Dycom Industries, Inc. 529,900 $ 11,451
Watsco, Inc. 493,400 10,564
Hughes Supply, Inc. 254,900 9,852
Precision Castparts Corp. 200,000 8,226
IMC Global Inc. 1,053,800 7,366
* URS Corp. 271,000 5,932
Valmont Industries, Inc. 240,950 5,012
* Energizer Holdings, Inc. 126,300 4,648
* Washington Group
International, Inc. 109,900 3,046
Catellus Development Corp. 135,500 3,018
* Steel Dynamics, Inc. 138,800 2,586
* Cabot Microelectronics Corp. 42,900 2,445
Lennox International Inc. 128,500 2,125
MacDermid, Inc. 68,000 2,032
* Mobile Mini, Inc. 93,906 1,980
Airgas, Inc. 98,800 1,892
* Trex Co., Inc. 50,000 1,850
* Jones Lang Lasalle Inc. 87,300 1,663
* Scotts Co. 27,000 1,559
Delta & Pine Land Co. 55,450 1,268
Forest City Enterprise Class A 28,400 1,258
LNR Property Corp. 29,700 1,215
* Hecla Mining Co. 204,200 1,205
* Simpson Manufacturing Co. 16,200 725
* Interface, Inc. 103,100 572
* GrafTech International Ltd. 44,200 459
Deltic Timber Corp. 13,400 384
* Rogers Corp. 7,300 292
AptarGroup Inc. 8,100 290
* Lydall, Inc. 14,100 168
Brookfield Homes Corp. 5,500 119
* Avatar Holding, Inc. 2,300 75
-------
208,135
-------
OTHER ENERGY (3.5%)
St. Mary Land & Exploration Co. 731,500 19,092
Chesapeake Energy Corp. 1,413,772 16,866
Sunoco, Inc. 334,900 14,655
CARBO Ceramics Inc. 337,200 14,162
* Grey Wolf, Inc. 3,492,100 11,210
* Unit Corp. 557,800 10,816
* TETRA Technologies, Inc. 475,800 10,758
Helmerich & Payne, Inc. 398,000 10,551
* Denbury Resources, Inc. 720,800 9,096
* IHC Caland NV 200,098 8,537
Patina Oil & Gas Corp. 192,474 8,119
* Core Laboratories NV 467,700 7,160
* Key Energy Services, Inc. 791,000 6,905
XTO Energy, Inc. 273,333 6,470
* Comstock Resources, Inc. 426,150 6,362
* Evergreen Resources, Inc. 192,400 5,276
Pogo Producing Co. 115,600 4,833
* Smith International, Inc. 127,500 4,747
* Newfield Exploration Co. 113,200 4,497
* Stone Energy Corp. 108,000 3,903
Peabody Energy Corp. 101,900 3,396
* Ultra Petroleum Corp. 173,100 3,168
* FMC Technologies Inc. 157,400 3,161
* Houston Exploration Co. 87,800 3,073
* Tesoro Petroleum Corp. 229,500 2,616
Vintage Petroleum, Inc. 206,000 2,379
* Plains Exploration &
Production Co. 174,200 2,364
* Forest Oil Corp. 97,000 2,275
* Premcor, Inc. 96,000 2,266
* Cimarex Energy Co. 102,000 2,086
* Prima Energy Corp. 67,900 1,889
* Oceaneering International, Inc. 76,800 1,771
Frontier Oil Corp. 96,900 1,546
Cabot Oil & Gas Corp. 57,600 1,472
* Tom Brown, Inc. 51,800 1,400
* Remington Oil & Gas Corp. 50,000 893
* Varco International, Inc. 38,100 670
Holly Corp. 26,700 665
* Global Power Equipment
Group Inc. 111,600 660
* Spinnaker Exploration Co. 21,100 540
* Encore Acquisition Co. 7,300 168
-------
222,473
-------
PRODUCER DURABLES (7.0%)
* Garmin Ltd. 457,500 22,889
* Plantronics, Inc. 781,600 21,736
Donaldson Co., Inc. 376,200 21,526
* Photon Dynamics, Inc. 517,500 19,572
* Mettler-Toledo International Inc. 500,400 19,185
* Ultratech, Inc. 512,400 15,992
* Photronics Inc. 730,900 15,744
* AGCO Corp. 869,600 15,653
* Moog Inc. 328,300 13,920
* Triumph Group, Inc. 408,200 13,328
* MKS Instruments, Inc. 498,700 12,966
Kennametal, Inc. 337,500 12,447
* Crown Castle International Corp. 868,600 10,996
* Rudolph Technologies, Inc. 379,215 9,916
* Philippine Long Distance
Telephone Co. ADR 694,000 9,577
* Palm Harbor Homes, Inc. 513,293 9,522
* LAM Research Corp. 327,250 9,405
Lindsay Manufacturing Co. 389,550 9,034
Ryland Group, Inc. 98,100 8,721
* American Tower Corp. Class A 750,200 8,702
* ASML Holding (New York) 481,645 8,453
* Hovnanian Enterprises Inc.
Class A 102,400 8,323
19
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
* Zygo Corp. 540,200 $ 8,135
* NVR, Inc. 16,600 8,124
Engineered Support
Systems, Inc. 109,200 7,383
* DuPont Photomasks, Inc. 296,600 6,875
* KLA-Tencor Corp. 107,725 6,176
* ATMI, Inc. 246,600 5,669
* Dionex Corp. 126,800 5,394
* SpectraLink Corp. 295,000 5,192
* Polycom, Inc. 258,200 5,172
Ametek, Inc. 98,300 4,625
Cummins Inc. 90,600 4,294
* United Defense Industries Inc. 120,900 3,917
* Applied Films Corp. 120,000 3,762
* Varian Semiconductor
Equipment Associates, Inc. 72,900 3,525
Graco, Inc. 86,600 3,299
HON Industries, Inc. 78,800 3,231
CTS Corp. 280,800 3,108
* Champion Enterprises, Inc. 388,300 2,757
* Interdigital Communications Corp. 156,900 2,666
* Toll Brothers, Inc. 72,200 2,660
* Andrew Corp. 203,300 2,659
* Cable Design Technologies Corp. 275,100 2,652
* Kulicke & Soffa Industries, Inc. 179,800 2,639
* Mykrolis Corp. 176,900 2,609
* Joy Global Inc. 122,600 2,337
* Meritage Corp. 39,000 2,305
JLG Industries, Inc. 186,100 2,222
* Asyst Technologies, Inc. 118,700 2,214
M/I Schottenstein Homes, Inc. 52,700 2,194
* Metrologic Instruments, Inc. 85,200 1,996
* Headwaters Inc. 102,800 1,926
* C-COR Electronics, Inc. 186,300 1,878
Herman Miller, Inc. 81,000 1,861
Lincoln Electric Holdings, Inc. 76,100 1,856
* Actuant Corp. 56,800 1,831
* General Cable Corp. 190,900 1,812
Cohu, Inc. 89,800 1,802
* Power-One, Inc. 198,800 1,801
* Technitrol, Inc. 75,400 1,644
* Itron, Inc. 78,200 1,602
The Manitowoc Co., Inc. 71,200 1,545
Helix Technology Corp. 75,800 1,361
C & D Technologies, Inc. 67,500 1,345
* Audiovox Corp. 110,330 1,324
* Electro Scientific Industries, Inc. 50,700 1,245
* Teledyne Technologies, Inc. 70,900 1,169
* Rayovac Corp. 53,600 881
Cognex Corp. 32,700 878
* Entegris Inc. 60,900 801
* Semitool, Inc. 87,700 800
Curtiss-Wright Corp. 10,200 755
Stewart & Stevenson
Services, Inc. 44,200 739
* Cymer, Inc. 11,600 530
Roper Industries Inc. 6,800 336
* WilTel Communications, Inc. 5,100 90
* Optical Cable Corp.
Warrants Exp. 10/24/2007 8,892 16
-------
449,226
-------
TECHNOLOGY (22.5%)
COMMUNICATIONS TECHNOLOGY (4.5%)
* Foundry Networks, Inc. 1,874,800 43,608
ADTRAN Inc. 324,760 22,093
* 3Com Corp. 2,566,500 18,479
* WebEx Communications, Inc. 830,200 18,339
* Extreme Networks, Inc. 2,000,600 17,205
* Juniper Networks, Inc. 851,300 15,315
* Brocade Communications
Systems, Inc. 2,258,600 14,794
* Comverse Technology, Inc. 815,300 14,708
* Sonus Networks, Inc. 1,535,192 12,604
* Avaya Inc. 747,700 9,675
* TIBCO Software Inc. 1,440,000 9,274
Scientific-Atlanta, Inc. 302,900 8,966
* Avocent Corp. 233,200 8,815
* j2 Global Communications, Inc. 307,000 8,694
* CIENA Corp. 1,101,400 7,060
* UTStarcom, Inc. 207,300 6,530
* Stratex Networks, Inc. 1,850,600 5,922
* KVH Industries, Inc. 165,100 4,613
* Ulticom, Inc. 431,300 4,572
* Sycamore Networks, Inc. 849,300 4,247
* Tekelec 243,000 3,910
Black Box Corp. 90,548 3,899
* Packeteer, Inc. 212,600 3,716
* Network Associates, Inc. 237,665 3,311
* Standard Microsystem Corp. 82,600 2,478
* Westell Technologies, Inc. 292,700 2,438
* Secure Computing Corp. 165,000 2,373
Inter-Tel, Inc. 83,900 2,113
* CommScope, Inc. 119,500 1,851
* Advanced Fibre
Communications, Inc. 57,400 1,382
* SeaChange International, Inc. 84,669 1,304
* Enterasys Networks, Inc. 313,200 1,221
* Inet Technologies, Inc. 86,200 1,159
* Catapult Communications Corp. 81,300 1,108
Bel Fuse, Inc. Class B 15,500 407
COMPUTER SERVICES SOFTWARE & Systems (6.8%)
* Red Hat, Inc. 3,531,400 53,112
* Hyperion Solutions Corp. 669,400 22,418
20
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
Digitas Inc. 2,126,100 $ 18,497
* Citrix Systems, Inc. 725,400 18,338
* Acxiom Corp. 1,081,850 17,201
* CACI International, Inc. 257,300 12,744
* Siebel Systems, Inc. 1,008,200 12,693
* ManTech International Corp. 511,200 12,504
* Sapient Corp. 2,270,000 12,440
* Electronics for Imaging, Inc. 434,225 11,767
* Ceridian Corp. 557,650 11,711
* Agile Software Corp. 1,059,200 11,619
* Verity, Inc. 814,600 11,445
* SonicWALL, Inc. 1,380,000 11,178
* Netscreen Technologies, Inc. 419,900 11,178
* Cognizant Technology
Solutions Corp. 217,900 9,890
* The TriZetto Group, Inc. 1,336,500 9,088
* Openwave Systems Inc. 687,367 8,970
* Cadence Design Systems, Inc. 570,000 8,772
* Amdocs Ltd. 378,400 8,120
* BEA Systems, Inc. 537,300 7,468
* Mentor Graphics Corp. 445,700 7,465
* Macromedia, Inc. 388,900 7,432
* Ascential Software Corp. 278,795 6,186
* Digital River, Inc. 200,300 5,484
* MicroStrategy Inc. 96,500 5,308
* At Road, Inc. 397,200 5,124
* Borland Software Corp. 540,900 4,803
* MICROS Systems, Inc. 117,100 4,741
* ActivCard Corp. 509,225 4,303
* Altiris, Inc. 113,600 3,906
* Dendrite International, Inc. 255,500 3,858
* Manhattan Associates, Inc. 136,800 3,809
* ANSYS, Inc. 102,800 3,664
* Interwoven, Inc. 913,900 3,464
* Anteon International Corp. 99,000 3,380
* Informatica Corp. 294,372 3,209
* WatchGuard Technologies, Inc. 548,500 3,154
* PC-Tel, Inc. 284,500 2,882
* Lionbridge Technologies, Inc. 304,400 2,749
* American Management
Systems, Inc. 185,046 2,739
* Sybase, Inc. 145,300 2,601
* Micromuse Inc. 318,000 2,560
* Tier Technologies, Inc. 246,000 2,522
* Tyler Technologies, Inc. 300,300 2,378
* Compuware Corp. 409,400 2,301
* SPSS, Inc. 122,600 2,231
* Macrovision Corp. 100,200 2,201
* Keane, Inc. 167,400 2,200
* Opsware, Inc. 253,471 2,109
* OPNET Technologies, Inc. 142,535 2,001
Lawson Software Inc. 237,000 1,977
* Progress Software Corp. 80,700 1,781
* eCollege.com Inc. 80,400 1,744
* MSC.Software Corp. 155,700 1,604
* SERENA Software, Inc. 89,500 1,544
* F5 Networks, Inc. 59,300 1,483
* Zoran Corp. 88,800 1,479
* EPIQ Systems, Inc. 85,000 1,437
Autodesk, Inc. 74,000 1,425
* Zomax Inc. 190,100 1,177
* Pegasystems Inc. 139,300 1,060
* Novell, Inc. 176,700 1,037
* Ariba, Inc. 240,800 783
Syntel, Inc. 31,000 769
* Gartner, Inc. Class A 52,500 667
* Moldflow Corp. 53,300 533
* Verint Systems Inc. 21,700 486
* Vignette Corp. 180,427 453
* Rainbow Technologies, Inc. 22,675 279
* Datastream Systems, Inc. 26,800 208
* Group 1 Software, Inc. 5,200 94
COMPUTER TECHNOLOGY (3.8%)
* Maxtor Corp. 5,215,980 71,302
* Western Digital Corp. 2,711,400 36,468
* Cray Inc. 1,702,600 22,168
* Hutchinson Technology, Inc. 657,300 22,026
* Ingram Micro, Inc. Class A 1,249,300 18,490
* SanDisk Corp. 191,700 15,451
* McDATA Corp. Class A 794,465 8,207
* Lexar Media, Inc. 329,470 7,548
* Synopsys, Inc. 222,000 7,042
* RSA Security Inc. 537,900 6,977
* Emulex Corp. 212,075 6,006
Imation Corp. 131,500 4,478
* Advanced Digital
Information Corp. 217,500 3,534
* RadiSys Corp. 130,000 2,542
* Stratasys, Inc. 51,300 2,442
* Computer Network
Technology Corp. 238,000 2,356
* UNOVA, Inc. 92,900 2,017
* Adaptec, Inc. 203,300 1,730
* Synaptics Inc. 18,800 244
ELECTRICAL & ELECTRONICS (0.3%)
* Power Integrations, Inc. 273,100 9,509
* TTM Technologies, Inc. 305,700 4,922
* InVision Technologies, Inc. 102,600 2,788
* Benchmark Electronics, Inc. 54,200 2,641
* OSI Systems Inc. 28,500 524
21
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
ELECTRONICS (1.0%)
* FLIR Systems, Inc. 673,552 $ 21,055
* Semtech Corp. 611,500 13,575
* Avid Technology, Inc. 231,800 11,993
* Aeroflex, Inc. 781,600 7,253
* Sanmina-SCI Corp. 680,700 7,181
* Daktronics, Inc. 116,200 1,800
* Parlex Corp. 168,600 1,396
ELECTRONICS--OTHER (0.3%)
* Epcos AG ADR 784,900 16,169
ELECTRONICS--SEMICONDUCTORS/COMPONENTS (5.1%)
* Fairchild Semiconductor
Int1, Inc. 1,194,500 6,996
* Agere Systems Inc.Class A 5,772,400 20,088
* DSP Group Inc. 797,700 19,049
* Silicon Labortories Inc. 344,400 18,591
* Cypress Semiconductor Corp. 693,300 14,878
* PMC Sierra Inc. 784,100 14,247
* ON Semiconductor Corp. 2,980,800 12,817
* Exar Corp. 718,800 11,565
* Rambu Inc. 450,359 11,151
PerkinElmer, Inc. 588,500 10,599
* GlobespanVirata, Inc. 1,692,850 10,428
* Amkor Technology, Inc. 550,600 10,379
* Artisan Components, Inc. 501,400 10,284
* Cree, Inc. 545,100 9,681
* Skyworks Solutions, Inc. 989,050 8,563
* OmniVision Technologies 148,600 8,440
* Conexant Systems, Inc. 1,370,902 7,992
* ChipPAC, Inc. 853,800 7,121
* Jabil Circut, Inc. 235,675 6,564
* Monolithic System
Technology, Inc. 763,500 6,223
Microchip Technology, Inc. 188,840 6,177
AU Optronics Corp.ADR 448,329 6,088
* International Rectifier Corp. 124,700 5,952
* Silicon Storage Technology Inc. 486,300 5,437
* Marvell Technology Group Ltd. 119,150 5,227
* Microsemi Corp. 249,664 5,168
* Silicon Image, Inc. 660,075 4,640
* LSI Logic Corp. 493,500 4,560
* Arrow Electronics 210,700 4,498
* MEMC Electronic Materials, Inc. 389,100 4,358
* Virag Logic Corp. 427,700 4,234
* Actel Corp. 155,100 4,185
* Integrated Circuit Systems,Inc. 91,800 3,082
* ESS Technology, Inc. 197,500 2,741
* Silicnix Inc. 35,657 1,810
* Genesis Microchip, Inc. 108,400 1,797
* Lattice Semiconductor Corp. 175,500 1,369
* Pixwlworks, Inc. 100,800 1,218
* Planar Systems, Inc. 37,822 875
* Excel Technology, Inc. 29,900 842
* Applied Micro Circuits Corp. 131,500 765
* Vitesse Semiconductor Corp. 108,500 764
* Integrated Device Technology Inc. 38,900 611
* Atmel Corp. 78,200 441
ELECTRONICS--TECHNOLOGY (0.5%)
* Trimble Navigation, Ltd. 520,496 14,392
* Solectron Corp. 2,343,400 12,982
Cubic Corp. 50,800 1,443
* Herley Inductries Inc. 63,700 1,204
* DRS Technologies, Inc. 46,228 1,112
SCIENTIFIC EQUIPMENT & SUPPLIES (0.2%)
Applera Corp.-
Applied Biosystems Group 400,000 9,232
* Varian, Inc. 72,800 2,607
---------
1,429,421
---------
UTILITIES (2.1%)
* Nextel Partners, Inc. 2,680,000 32,214
* Qwest Communications
International Inc. 4,625,600 16,328
* General Communications, Inc. 1,153,200 11,371
* United GlobalCom Inc. Class A 1,525,300 10,799
* Western Wireless Corp.
Class A 426,700 8,278
* AES Corp. 807,500 7,066
* Cablevision Systems NY Group
Class A 342,300 6,914
* NII Holdings, Inc. 82,500 6,360
* Citizens Communications Co. 431,300 5,370
* Cincinnati Bell Inc. 907,300 4,958
Energen Corp. 119,700 4,413
* Commonwealth Telephone
Enterprises, Inc. 89,143 3,633
UGI Corp. Holding Co. 111,550 3,436
* Southwestern Energy Co. 152,800 2,964
* Boston Communications
Group, Inc. 304,581 2,869
* NTL Inc. 37,500 2,315
* Intrado Inc. 123,500 2,233
* Talk America Holdings, Inc. 171,253 2,137
* IDT Corp. 93,900 1,742
* Time Warner Telecom Inc. 81,000 838
* IDT Corp. Class B 25,100 480
Surewest Communications 2,209 88
-------
136,806
-------
22
- --------------------------------------------------------------------------------
MARKET
VALUE*
EXPLORER FUND SHARES (000)
- --------------------------------------------------------------------------------
OTHER (0.3%)
Brunswick Corp. 512,700 $ 15,212
Lancaster Colony Corp. 124,800 4,956
GenCorp, Inc. 33,100 313
------
20,481
------
- --------------------------------------------------------------------------------
TOTAL COMMON STOCKS
(COST $4,579,052) 5,855,700
- --------------------------------------------------------------------------------
FACE
AMOUNT
(000)
- --------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (11.4%)(1)
- --------------------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSN.
(3) 1.05%, 1/20/2004 $ 16,000 15,964
(3) 1.05%, 1/21/2004 3,000 2,993
REPURCHASE AGREEMENTS
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
1.06%, 11/3/2003 571,927 571,927
1.06%, 11/3/2003-NOTE G 135,019 135,019
- --------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $725,903) 725,903
- --------------------------------------------------------------------------------
TOTAL INVESTMENTS (103.1%)
(Cost $5,304,955) 6,581,603
- --------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-3.1%)
- --------------------------------------------------------------------------------
(3)Other Assets--Note C 91,118
Security Lending Collateral
Payable to Brokers--Note G (135,019)
Other Liabilities (154,857)
---------
(198,758)
---------
- --------------------------------------------------------------------------------
NET ASSETS (100%) $6,382,845
================================================================================
*See Note A in Notes to Financial Statements.
*Non-income-producing security.
(1)The fund invests a portion of its cash reserves in equity markets through the
use of index futures contracts. After giving effect to futures investments, the
fund's effective common stock and temporary cash investment positions represent
97.4% and 5.7%, respectively, of net assets. See Note E in Notes to Financial
Statements.
(2)Considered an affiliated company of the fund as the fund owns more than 5% of
the outstanding voting securities of such company. The total market value of
investments in affiliated companies was $42,571,000.
(3)Securites with an aggregate value of $18,957,000 and cash of $2,616,000 have
been segregated as initial margin for open futures contracts.
ADR--American Depositary Receipt.
REIT--Real Estate Investment Trust.
- --------------------------------------------------------------------------------
AMOUNT
(000)
- --------------------------------------------------------------------------------
AT OCTOBER 31, 2003, NET ASSETS CONSISTED OF:
- --------------------------------------------------------------------------------
Paid-in Capital $5,705,040
Accumulated Net Investment Losses (5,919)
Accumulated Net Realized Losses (602,605)
Unrealized Appreciation
Investment Securities 1,276,648
Futures Contracts 9,681
- --------------------------------------------------------------------------------
NET ASSETS $6,382,845
================================================================================
Investor Shares--Net Assets
Applicable to 89,637,790 outstanding $.001
par value shares of beneficial
(unlimited authorization) $5,662,149
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
INVESTOR SHARES $63.17
================================================================================
Admiral Shares--Net Assets
Applicable to 12,275,255 outstanding $.001
par value shares of beneficial interest
(unlimited authorization) $720,696
- --------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE--
ADMIRAL SHARES $58.71
================================================================================
See Note E in Notes to Financial Statements for the tax-basis components of net
assets.
23
STATEMENT OF OPERATIONS
This Statement shows the types of income earned by the fund during the reporting
period, and details the operating expenses charged to each class of its shares.
These expenses directly reduce the amount of investment income available to pay
to shareholders as income dividends. This Statement also shows any Net Gain
(Loss) realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) of investments during the period.
- --------------------------------------------------------------------------------
EXPLORER FUND
YEAR ENDED OCTOBER 31, 2003
(000)
- --------------------------------------------------------------------------------
INVESTMENT INCOME
INCOME
Dividends $ 21,773
Interest 4,712
Security Lending 1,564
- --------------------------------------------------------------------------------
Total Income 28,049
- --------------------------------------------------------------------------------
EXPENSES
Investment Advisory Fees--Note B
Basic Fee 9,247
Performance Adjustment 3,181
The Vanguard Group--Note C
Management and Administrative
Investor Shares 17,116
Admiral Shares 1,287
Marketing and Distribution
Investor Shares 537
Admiral Shares 47
Custodian Fees 92
Auditing Fees 16
Shareholders' Reports and Proxies
Investor Shares 256
Admiral Shares 1
Trustees' Fees and Expenses 7
- --------------------------------------------------------------------------------
Total Expenses 31,787
Expenses Paid Indirectly--Note D (758)
- --------------------------------------------------------------------------------
Net Expenses 31,029
- --------------------------------------------------------------------------------
NET INVESTMENT INCOME (LOSS) (2,980)
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS)
Investment Securities Sold* (81,646)
Futures Contracts 57,598
- --------------------------------------------------------------------------------
REALIZED NET GAIN (LOSS) (24,048)
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 1,697,798
Futures Contracts 13,634
- --------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,711,432
- --------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,684,404
================================================================================
*Realized net gain (loss) from affiliated companies of the fund was
$(8,520,000).
24
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the fund's total net assets changed during the two most
recent reporting periods. The Operations section summarizes information detailed
in the Statement of Operations. The amounts shown as Distributions to
shareholders from the fund's net income and capital gains may not match the
amounts shown in the Operations section, because distributions are determined on
a tax basis and may be made in a period different from the one in which the
income was earned or the gains were realized on the financial statements. The
Capital Share Transactions section shows the net amount shareholders invested in
or redeemed from the fund. Distributions and Capital Share Transactions are
shown separately for each class of shares.
- --------------------------------------------------------------------------------
EXPLORER FUND
------------------------
YEAR ENDED OCTOBER 31,
------------------------
2003 2002
(000) (000)
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net Investment Income (Loss) $ (2,980) $ (332)
Realized Net Gain (Loss) (24,048) (380,998)
Change in Unrealized Appreciation (Depreciation) 1,711,432 (270,988)
- --------------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
from Operations 1,684,404 (652,318)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Net Investment Income
Investor Shares (389) (8,068)
Admiral Shares (309) (188)
Realized Capital Gain
Investor Shares -- --
Admiral Shares -- --
- --------------------------------------------------------------------------------
Total Distributions (698) (8,256)
- --------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS--NOTE H
Investor Shares 717,013 9,090
Admiral Shares 257,582 379,967
- --------------------------------------------------------------------------------
Net Increase (Decrease) from Capital
Share Transactions 974,595 389,057
- --------------------------------------------------------------------------------
Total Increase (Decrease) 2,658,301 (271,517)
- --------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 3,724,544 3,996,061
- --------------------------------------------------------------------------------
End of Period $6,382,845 $3,724,544
================================================================================
25
FINANCIAL HIGHLIGHTS
This table summarizes the fund's investment results and distributions to
shareholders on a per-share basis for each class of shares. It also presents the
Total Return and shows net investment income and expenses as percentages of
average net assets. These data will help you assess: the variability of the
fund's net income and total returns from year to year; the relative
contributions of net income and capital gains to the fund's total return; how
much it costs to operate the fund; and the extent to which the fund tends to
distribute capital gains. The table also shows the Portfolio Turnover Rate, a
measure of trading activity. A turnover rate of 100% means that the average
security is held in the fund for one year.
- -----------------------------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
-------------------------------------
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001 2000 1999
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $ 44.60 $ 51.91 $ 77.28 $61.49 $49.60
- -----------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income (Loss) (.012) (.005) .15 .25 .21
Net Realized and Unrealized Gain (Loss) on Investment 18.587 (7.200) (11.36) 23.80 12.18
- -----------------------------------------------------------------------------------------------------
Total from Investment Operations 18.575 (7.205) (11.21) 24.05 12.39
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.005) (.105) (.25) (.23) (.20)
Distributions from Realized Capital Gains -- -- 13.91) (8.03) (.30)
- -----------------------------------------------------------------------------------------------------
Total Distributions (.005) (.105) (14.16) (8.26) (.50)
- -----------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 63.17 $ 44.60 $ 51.91 $77.28 $61.49
=====================================================================================================
TOTAL RETURN 41.65% -13.93% -16.22% 42.56% 25.14%
=====================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 5,662 $ 3,432 $ 3,996 $4,566 $2,484
Ratio of Total Expenses to Average Net Assets 0.72% 0.70% 0.72% 0.71% 0.74%
Ratio of Net Investment Income (Loss) to
Average Net Assets (0.08%) 0.01%) 0.24% 0.36% 0.36%
Portfolio Turnover Rate 77% 69% 77% 123% 79%
=====================================================================================================
26
EXPLORER FUND ADMIRAL SHARES
- --------------------------------------------------------------------------------
YEAR NOV. 12
ENDED 2001* TO
OCT. 31, OCT. 31,
FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002
- --------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $41.43 $50.00
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .064 .035
Net Realized and Unrealized Gain (Loss)
on Investments 17.259 (8.498)
- --------------------------------------------------------------------------------
Total from Investment Operations 17.323 (8.463)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.043) (.107)
Distributions from Realized Capital Gains -- --
- --------------------------------------------------------------------------------
Total Distributions (.043) (.107)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $58.71 $41.43
================================================================================
TOTAL RETURN 41.85% -16.98%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $721 $293
Ratio of Total Expenses to Average Net Assets 0.57% 0.61%**
Ratio of Net Investment Income to Average Net Assets 0.05% 0.13%**
Portfolio Turnover Rate 77% 69%
================================================================================
*Inception.
**Annualized.
SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
27
NOTES TO FINANCIAL STATEMENTS
Vanguard Explorer Fund is registered under the Investment Company Act of 1940 as
an open-end investment company, or mutual fund. The fund offers two classes of
shares, Investor Shares and Admiral Shares. Investor Shares are available to any
investor who meets the fund's minimum purchase requirements. Admiral Shares were
first issued on November 12, 2001, and are designed for investors who meet
certain administrative, servicing, tenure, and account-size criteria.
A. The following significant accounting policies conform to generally accepted
accounting principles for U.S. mutual funds. The fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities are valued as of the close of trading on the
New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation
date. Equity securities are valued at the latest quoted sales prices or official
closing prices taken from the primary market in which each security trades; such
securities not traded on the valuation date are valued at the mean of the latest
quoted bid and asked prices. Securities for which market quotations are not
readily available, or whose values have been materially affected by events
occurring before the fund's pricing time but after the close of the securities'
primary markets, are valued by methods deemed by the board of trustees to
represent fair value. Temporary cash investments acquired over 60 days to
maturity are valued using the latest bid prices or using valuations based on a
matrix system (which considers such factors as security prices, yields,
maturities, and ratings), both as furnished by independent pricing services.
Other temporary cash investments are valued at amortized cost, which
approximates market value.
2. FUTURES CONTRACTS: The fund uses S&P MidCap 400 and Russell 2000 Index
futures contracts to a limited extent, with the objectives of maintaining full
exposure to the stock market while maintaining liquidity. The fund may purchase
or sell futures contracts to achieve a desired level of investment, whether to
accommodate portfolio turnover or cash flows from capital share transactions.
The primary risks associated with the use of futures contracts are imperfect
correlation between changes in market values of stocks held by the fund and the
prices of futures contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized gains (losses) on futures contracts.
3. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard
Group, transfers uninvested cash balances to a pooled cash account, which is
invested in repurchase agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a regulated
investment company and distribute all of its taxable income. Accordingly, no
provision for federal income taxes is required in the financial statements.
5. DISTRIBUTIONS: Distributions to shareholders are recorded on the ex-dividend
date.
6. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
28
Each class of shares has equal rights as to assets and earnings, except that
each class separately bears certain class-specific expenses related to
maintenance of shareholder accounts (included in Management and Administrative
expenses), shareholder reporting, and proxies. Marketing and distribution
expenses are allocated to each class of shares based on a method approved by the
board of trustees. Income, other non-class-specific expenses, and gains and
losses on investments are allocated to each class of shares based on its
relative net assets.
B. Granahan Investment Management, Inc., Wellington Management Company, llp,
Grantham, Mayo, Van Otterloo & Co. LLC ("GMO"), and Chartwell Investment
Partners each provide investment advisory services to a portion of the fund for
a fee calculated at an annual percentage rate of average net assets managed by
the advisor. The basic fees of each advisor are subject to quarterly adjustments
based on performance for the preceding three years relative to the Russell 2000
Growth Index for periods prior to January 31, 2003, and their new benchmark, the
Russell 2500 Growth Index, beginning January 31, 2003. The benchmark changes
will be fully phased in by January 2006.
The Vanguard Group provides investment advisory services to a portion of
the fund on an at-cost basis; the fund paid Vanguard advisory fees of $532,000
for the year ended October 31, 2003.
For the year ended October 31, 2003, the aggregate investment advisory fee
represented an effective annual basic rate of 0.20% of the fund's average net
assets before an increase of $3,181,000 (0.07%) based on performance.
C. The Vanguard Group furnishes at cost corporate management, administrative,
marketing, and distribution services. The costs of such services are allocated
to the fund under methods approved by the board of trustees. The fund has
committed to provide up to 0.40% of its net assets in capital contributions to
Vanguard. At October 31, 2003, the fund had contributed capital of $944,000 to
Vanguard (included in Other Assets), representing 0.01% of the fund's net assets
and 0.94% of Vanguard's capitalization. The fund's trustees and officers are
also directors and officers of Vanguard.
D. The fund has asked its investment advisors 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. For the year
ended October 31, 2003, these arrangements reduced the fund's expenses by
$758,000 (an annual rate of 0.02% of average net assets).
E. Distributions are determined on a tax basis and
may differ from net investment income and realized capital gains for financial
reporting purposes. Differences may be permanent or temporary. Permanent
differences are reclassified among capital accounts in the financial statements
to reflect their tax character. Temporary differences arise when certain items
of income, expense, gain, or loss are recognized in different periods for
financial statement and tax purposes; these differences will reverse at some
time in the future. Differences in classification may also result from the
treatment of short-term gains as ordinary income for tax purposes.
For tax purposes, the fund had a net operating loss of $1,750,000 for the
year ended October 31, 2003; this amount has been reclassified from accumulated
net investment losses to paid-in capital.
The fund had available realized losses of $591,459,000 to offset future net
capital gains of $201,887,000 through October 31, 2009, $378,066,000 through
October 31, 2010, and $11,506,000 through October 31, 2011.
At October 31, 2003, net unrealized appreciation of investment securities
for tax purposes was $1,276,648,000, consisting of unrealized gains of
$1,472,089,000 on securities that had risen in value since their purchase and
$195,441,000 in unrealized losses on securities that had fallen in value since
their purchase.
29
NOTES TO FINANCIAL STATEMENS (CONTINUED)
At October 31, 2003, the aggregate settlement value of open futures contracts
expiring in December 2003 and the related unrealized appreciation were:
- --------------------------------------------------------------------------------
(000)
-----------------------------------
AGGREGATE UNREALIZED
NUMBER OF SETTLEMENT APPRECIATION
FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION)
- --------------------------------------------------------------------------------
S&P MidCap 400 Index 445 $122,030 $5,855
Russell 2000 Index 908 239,871 3,826
- --------------------------------------------------------------------------------
Unrealized appreciation on open futures contracts is required to be treated as
realized gain for tax purposes.
F. During the year ended October 31, 2003, the fund purchased $4,008,370,000 of
investment securities and sold $3,196,521,000 of investment securities, other
than temporary cash investments.
G. The market value of securities on loan to broker/dealers at October 31, 2003,
was $126,625,000, for which the fund held cash collateral of $135,019,000. The
fund invests cash collateral received in repurchase agreements, and records a
liability for the return of the collateral, during the period the securities are
on loan.
H. Capital share transactions for each class of shares were:
- --------------------------------------------------------------------------------
YEAR ENDED OCTOBER 31,
--------------------------------------------
2003 2002
-------------------- --------------------
AMOUNT SHARES AMOUNT SHARES
(000) (000) (000) (000)
- --------------------------------------------------------------------------------
Investor Shares
Issued $1,492,083 28,092 $ 1,165,688 21,456
Issued in Lieu of Cash 380 8 7,898 133
Distributions
Redeemed (775,450) (15,403) (1,164,496) (21,632)
---------------------------------------------------
Net Increase (Decrease)--
Investor Shares 717,013 12,697 9,090 (43)
---------------------------------------------------
Admiral Shares
Issued 374,098 7,567 434,053 8,238
Issued in Lieu of Cash 287 7 169 3
Redeemed (116,803) (2,363) (54,255) (1,177)
------------------------------------------------
Net Increase (Decrease)--
Admiral Shares 257,582 5,211 379,967 7,064
- --------------------------------------------------------------------------------
30
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Trustees of Vanguard Explorer Fund:
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Explorer Fund (the "Fund") at October 31, 2003, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at October 31, 2003 by correspondence with the custodian and
broker, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
December 8, 2003
31
THE PEOPLE WHO GOVERN YOUR FUND
The trustees of your mutual fund are there to see that the fund is operated and
managed in your best interests since, as a shareholder, you are a part owner of
the fund. Your fund trustees also serve on the board of directors of The
Vanguard Group, Inc., which is owned by the Vanguard funds and provides services
to them on an at-cost basis.
A majority of Vanguard's board members are independent, meaning that they have
no affiliation with Vanguard or the funds they oversee, apart from the sizable
personal investments they have made as private individuals.
Our independent board members bring distinguished backgrounds in business,
academia, and public service to their task of working with Vanguard officers to
establish the policies and oversee the activities of
- ------------------------------------------------------------------------------------------------------------
POSITION(S) HELD WITH
NAME FUND (NUMBER OF
(YEAR OF BIRTH) VANGUARD FUNDS
TRUSTEE/OFFICER OVERSEEN BY
SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
JOHN J. BRENNAN* Chairman of the Chairman of the Board, Chief Executive Officer, and Director/Trustee
(1954) Board, Chief of The Vanguard Group, Inc., and of each of the investment companies
May 1987 Executive Officer, served by The Vanguard Group.
and Trustee
(112)
- ------------------------------------------------------------------------------------------------------------
INDEPENDENT TRUSTEES
CHARLES D. ELLIS Trustee The Partners of '63 (pro bono ventures in education); Senior Advisor
(1937) (112) to Greenwich Associates (international business strategy consulting);
January 2001 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 Chairman and Chief Executive Officer (since October 1999), Vice
(1945) (112) Chairman (JanuarySeptember 1999), and Vice President (prior to
December 2001 September 1999) of Rohm and Haas Co. (chemicals); Director of
Technitrol, Inc. (electronic components), and Agere Systems
(communications components); Board Member of the American Chemistry
Council; and Trustee of Drexel University.
- ------------------------------------------------------------------------------------------------------------
JOANN HEFFERNAN Trustee Vice President, Chief Information Officer, and Member of the
HEISEN (112) Executive Committee of Johnson & Johnson (pharmaceuticals/consumer
(1950) products); Director of the Medical Center at Princeton and Women's
July 1998 Research and Education Institute.
- ------------------------------------------------------------------------------------------------------------
BURTON G. MALKIEL TRUSTEE Chemical Bank Chairman's Professor of Economics,Princeton University;
(1932) (110) Director of Vanguard Investment Series plc (Irish invest-ment fund)
May 1977 (since November 2001), Vanguard Group (Ireland)Limited (Irish
investment management firm)(since November 2001),Prudential Insurance
Co. of America, BKF Capital (investment management), The Jeffrey Co.
(holding company), and NeuVis, Inc.(software company).
- ------------------------------------------------------------------------------------------------------------
the funds. Among board members' responsibilities are selecting investment
advisors for the funds; monitoring fund operations, performance, and costs;
reviewing contracts; nominating and selecting new trustees/directors; and
electing Vanguard officers.
Each trustee serves a fund until its termination; or until the trustee's
retirement, resignation, or death; or otherwise as specified in the fund's
organizational documents. Any trustee may be removed at a shareholders' meeting
by a vote representing two-thirds of the net asset value of all shares of the
fund together with shares of other Vanguard funds organized within the same
trust. The table on these two pages shows information for each trustee and
executive officer of the fund. The mailing address of the trustees and officers
is P.O. Box 876, Valley Forge, PA 19482.
POSITION(S) HELD WITH
NAME FUND (NUMBER OF
(YEAR OF BIRTH) VANGUARD FUNDS
TRUSTEE/OFFICER OVERSEEN BY
SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS
- ------------------------------------------------------------------------------------------------------------
Alfred M. Rankin, Jr. Trustee Chairman, President, Chief Executive Officer, and Director of NACCO
(1941) (112) Industries, Inc. (forklift trucks/housewares/lignite); Director of
January 1993 Goodrich Corporation (industrial products/aircraft systems and
services); Director of Standard Products Company (supplier for
the automotive industry) until 1998.
- ------------------------------------------------------------------------------------------------------------
J. Lawrence Wilson Trustee Retired Chairman and Chief Executive Officer of Rohm and Haas Co.
(1936) (112) (chemicals); Director of Cummins Inc. (diesel engines), The Mead
April 1985 Corp. (paper products), and AmerisourceBergen Corp. (pharmaceuti-cal
distribution); Trustee of Vanderbilt University.
- ------------------------------------------------------------------------------------------------------------
EXECUTIVE OFFICERS*
R. Gregory Barton Secretary Managing Director and General Counsel of The Vanguard Group, Inc.;
(1951) (112) Secretary of The Vanguard Group and of each of the investment
June 2001 companies served by The Vanguard Group.
- ------------------------------------------------------------------------------------------------------------
Thomas J. Higgins Treasurer Principal of The Vanguard Group, Inc.; Treasurer of each of the
(1957) (112) investment companies served by The Vanguard Group.
July 1998
- ------------------------------------------------------------------------------------------------------------
*Officers of the funds are "interested persons" as defined in the Investment
Company Act of 1940.
More information about the trustees is in the Statement of Additional
Information, available from The Vanguard Group.
- ------------------------------------------------------------------------------------------------------------
VANGUARD SENIOR MANAGEMENT TEAM
MORTIMER J. BUCKLEY, Information Technology. MICHAEL S. MILLER, Planning and Development.
JAMES H. GATELY, Investment Programs and Services. RALPH K. PACKARD, Finance.
KATHLEEN C. GUBANICH, Human Resources. GEORGE U. SAUTER, Chief Investment Officer.
F. WILLIAM MCNABB, III, Client Relationship Group.
- ------------------------------------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996.
- ------------------------------------------------------------------------------------------------------------
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
Vanguard, The Vanguard Group, Vanguard.com, Admiral, Explorer, and the ship logo
are trademarks of The Vanguard Group, Inc.
All other marks are the exclusive property of their respective owners.
ABOUT OUR COVER
The photographs that appear on the cover of this report are copyrighted by
Michael Kahn.
FOR MORE INFORMATION
This report is intended for the fund's shareholders. It may not be distributed
to prospective investors unless it is preceded or accompanied by the current
fund prospectus.
To receive a free copy of the prospectus or the Statement of Additional
Information, or to request additional information about the fund or other
Vanguard funds, please contact us at one of the adjacent telephone numbers or by
e-mail through VANGUARD.COM. Prospectuses may also be viewed online.
All comparative mutual fund data are from Lipper Inc. or Morningstar, Inc.,
unless otherwise noted.
WORLD WIDE WEB
www.vanguard.com
FUND INFORMATION
1-800-662-7447
DIRECT INVESTOR
ACCOUNT SERVICES
1-800-662-2739
INSTITUTIONAL INVESTOR
SERVICES
1-800-523-1036
TEXT TELEPHONE
1-800-952-3335
(C) 2003 THE VANGUARD GROUP, INC.
ALL RIGHTS RESERVED.
VANGUARD MARKETING
CORPORATION, DISTRIBUTOR.
Q240 122003
ITEM 2: Code of Ethics. The Board of Trustees has adopted a code of ethics that
applies to the principal executive officer, principal financial officer,
principal accounting officer or controller of the Registrant and The Vanguard
Group, Inc., and to persons performing similar functions.
ITEM 3: Audit Committee Financial Expert. All of the members of the Audit
Committee have been determined by the Registrant's Board of Trustees to be Audit
Committee Financial Experts. The members of the Audit Committee are: Charles D.
Ellis, Rajiv L. Gupta, JoAnn Heffernan Heisen, Burton G. Malkiel, Alfred M.
Rankin, Jr., and J. Lawrence Wilson. All Audit Committee members are independent
under applicable rules.
ITEM 4: Not applicable.
ITEM 5: Not applicable.
ITEM 6: Reserved.
ITEM 7: Not applicable.
ITEM 8: Reserved.
ITEM 9: CONTROLS AND PROCEDURES.
(a) Disclosure Controls and Procedures. The Principal Executive and
Financial Officers concluded that the Registrant's Disclosure Controls and
Procedures are effective based on their evaluation of the Disclosure Controls
and Procedures as of a date within 90 days of the filing date of this report.
(b) Internal Control Over Financial Reporting. There were no significant
changes in Registrant's internal control over financial reporting or in other
factors that could significantly affect this control subsequent to the date of
the evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
ITEM 10: EXHIBITS. The following exhibits are attached hereto:
(a) code of ethics
(b) certifications
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
VANGUARD EXPLORER FUND
BY:_____________(signature)________________
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: December 12, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
VANGUARD EXPLORER FUND
BY:_____________(signature)________________
(HEIDI STAM)
JOHN J. BRENNAN*
CHIEF EXECUTIVE OFFICER
Date: December 12, 2003
VANGUARD EXPLORER FUND
BY:_____________(signature)________________
(HEIDI STAM)
THOMAS J. HIGGINS*
TREASURER
Date: December 12, 2003
*By Power of Attorney. See File Number 2-57689, filed on December 26, 2002.
Incorporated by Reference.