N-30D 1 vanguardwindsor.txt VANGUARD WINDSOR FUNDS 2002 ANNUAL REPORT VANGUARD WINDSOR(TM) FUND ANNUAL REPORT * OCTOBER 31, 2002 EARNING YOUR TRUST EVERY DAY The latter part of 2001 and the first half of 2002 brought news of too many corporate scandals, with tales of greed and deception tarnishing Enron, Arthur Andersen, and WorldCom, among others. Given the questionable business dealings at some high-profile companies, investors can hardly be blamed for wondering whom they can trust. Vanguard is a name that should stand out. Why? Our unique corporate structure--The Vanguard Group is owned by each of its independently operated mutual funds and is charged with solely serving the funds' shareholders--ensures that our interests are aligned with yours. We have no other constituency to serve. We are client-focused because, quite frankly, it makes good business sense. Your trust is our most valuable asset, and every one of our crew members understands that his or her actions must meet the highest standards of ethical behavior and fiduciary responsibility. When you assess the combination of our organizational structure, the independent nature of each of our funds, our long track record of conducting business with integrity, and our total commitment to ethical behavior, we hope you will feel completely secure in entrusting your assets to us. There is no better place for them. --JOHN J. BRENNAN CHAIRMAN AND CHIEF EXECUTIVE OFFICER SUMMARY * The Investor Shares of Vanguard Windsor Fund returned -14.5% for the 2002 fiscal year, falling short of the results for our benchmarks, which also saw severe declines. * The stock market was plagued by weak corporate earnings, a tepid economy, and talk of war with Iraq. Broad indexes hit multiyear lows in early October. * The fund's positions in WorldCom, Adelphia Communications, and Tyco International did the worst damage to its return in the 12 months ended October 31. CONTENTS 1 Letter from the Chairman 6 Adviser's Report 9 Fund Profile 10 Glossary of Investment Terms 11 Performance Summary 12 Your Fund's After-Tax Returns 13 Financial Statements LETTER FROM THE CHAIRMAN Fellow Shareholder, VANGUARD(R) WINDSOR(TM) FUND experienced a very disappointing 2002 fiscal year, with its Investor Shares returning -14.5%. (The fund's Admiral(TM) Shares, which were launched on November 12, 2001, returned -17.6%. For shareholders who converted from Investor to Admiral Shares the full fiscal-year return also was -14.5%.) Most stock market investments declined sharply in the period--the Wilshire 5000 Total Market Index returned -13.4%--but Windsor Fund fell somewhat farther than its comparative standards. The fund contended not only with the brutal market, but also with allegations of massive fraud perpetrated by the executives at some of its large holdings. -------------------------------------------------------------------------------- 2002 TOTAL RETURNS FISCAL YEAR ENDED OCTOBER 31 -------------------------------------------------------------------------------- VANGUARD WINDSOR FUND Investor Shares -14.5% Admiral Shares* -17.6 Average Multi-Cap Value Fund** -12.6 Russell 1000 Value Index -10.0 Wilshire 5000 Index -13.4 -------------------------------------------------------------------------------- *Since inception on November 12, 2001. **Derived from data provided by Lipper Inc. During the past 12 months, the average multi-capitalization value fund returned -12.6% and the Russell 1000 Value Index, -10.0%. Although Windsor Fund's performance fell short of the results for these comparative standards, clearly investors had little to celebrate in any of them. The per-share distributions and price changes that make up your fund's total returns appear on page 5. If you hold Vanguard Windsor Fund in a taxable account, you may wish to review our report on the fund's after-tax returns on page 12. STOCKS FALTERED; THE FED CUT INTEREST RATES Weak corporate earnings, a tepid economy, and talk of war with Iraq plagued the stock market during the fiscal year, with broad indexes hitting multiyear lows in early October. A strong rebound in the final weeks mitigated some of the damage, but the overall U.S. equity market finished the period with a double-digit decline. The troubles were widespread, but smaller companies held up better than large companies. And value stocks--those considered "cheap" when measured against earnings, book value, or other standards--lost less ground than growth issues. ---------------------------- ADMIRAL SHARES A LOWER-COST SHARE CLASS FOR INVESTORS WHOSE LARGE OR LONG-STANDING ACCOUNTS PROVIDE ECONOMIES OF SCALE. ---------------------------- 1 International markets did not provide much shelter. Stocks outside the United States, as measured by the Morgan Stanley Capital International All Country World Index Free ex USA, declined -10.9% overall in U.S. dollar terms. That figure would have been worse had it not been for the emerging markets, which defied the trend by providing positive returns as a group. -------------------------------------------------------------------------------- MARKET BAROMETER AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED OCTOBER 31, 2002 ------------------------------ ONE THREE FIVE YEAR YEARS YEARS -------------------------------------------------------------------------------- STOCKS Russell 1000 Index (Large-caps) -14.6% -11.7% 0.7% Russell 2000 Index (Small-caps) -11.6 -3.2 -1.7 Wilshire 5000 Index (Entire market) -13.4 -11.3 0.1 MSCI All Country World Index Free ex USA (International) -10.9 -13.1 -3.0 -------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index 5.9% 9.2% 7.4% (Broad taxable market) Lehman 10 Year Municipal Bond Index 6.2 8.2 6.3 Salomon Smith Barney 3-Month U.S. Treasury Bill Index 1.9 4.1 4.4 -------------------------------------------------------------------------------- CPI Consumer Price Index 2.0% 2.5% 2.3% -------------------------------------------------------------------------------- The U.S. economy recovered from 2001's recession, but its expansion was less than robust. Nevertheless, in a promising sign, business spending on computer hardware and software grew modestly in the second half of the fiscal year after a lengthy period of steep declines. And corporate profits in the third calendar quarter of 2002 were, on average, up modestly from the weak numbers reported a year earlier. Meanwhile, near-stable prices allowed the Federal Reserve Board to continue cutting interest rates to spur the economy. Early in the fiscal year, the Fed twice cut its target for the federal funds rate--the interest charged on overnight loans between banks--by a total of 75 basis points (0.75 percentage point) to 1.75%, the lowest level in four decades. (Just after the fiscal year-end, the Fed made yet another cut, bringing the target rate to 1.25%.) DOWNGRADES AND DEFAULTS ROSE, BUT BONDS POSTED SOLID RETURNS Bonds generated respectable returns, with the Lehman Brothers Aggregate Bond Index--a proxy for taxable investment-grade bonds--gaining 5.9%. But corporate issues were dogged by downgrades and defaults. For every issuer that received a higher credit rating during the third calendar quarter of 2002, five saw downgrades, according to Moody's Investors Service. The credit problems in the corporate sector made government and agency securities, which have essentially no credit risk (or very little), especially appealing to investors, and they posted the bond market's highest returns. In early October, the yield of the 10-year U.S. -------------------- BONDS GENERATED RESPECTABLE RETURNS, BUT CORPORATE ISSUES WERE DOGGED BY DOWNGRADES AND DEFAULTS. -------------------- 2 Treasury note fell to 3.61%--its lowest level in more than 40 years. (Yields move in the opposite direction from bond prices.) At the fiscal year-end, the 10-year Treasury's yield was 3.89%, down 34 basis points from the start of the period. ----------------------------- THE FUND'S PROBLEMS WERE COMPOUNDED BY ITS SIZABLE INVESTMENTS IN WORLDCOM, TYCO INTERNATIONAL, AND ADELPHIA COMMUNICATIONS-- HIGH-PROFILE MALEFACTORS IN THE CORPORATE SCANDALS THAT ROILED THE MARKETS. ----------------------------- FOR THE FUND, BIG FAILURES OVERSHADOWED NOTABLE SUCCESSES During the past 12 months, Vanguard Windsor Fund faced the same tough environment confronted by all stock investors. Unfortunately, the fund's problems were compounded by its sizable investments in WorldCom, Tyco International, and Adelphia Communications--high-profile malefactors in the corporate scandals that roiled the markets in 2001 and 2002. WorldCom and Adelphia went bankrupt, their financial statements revealed as a fiction. Tyco came under siege for allegations of fraud perpetrated by its former executives. These three stocks alone pruned more than six percentage points from the value of Windsor Fund's shares during fiscal 2002. Although Windsor also sustained notable losses among its holdings in the integrated oils and technology sectors, for the most part the fund's other stocks performed reasonably well, both on an absolute basis and relative to comparative standards. Your fund booked solid gains in its health care and consumer discretionary stocks--two sectors of the market in which competing fund managers struggled to produce value for their investors. One encouraging development was the fund's success with positions in the pharmaceuticals giant Pharmacia and the packaging company Jefferson Smurfit Group. Both companies received acquisition offers in the 12-month period, powering their stock prices higher. Your fund's primary adviser, Wellington Management Company, beat the crowd in identifying these good businesses selling at reasonable prices and reaped the rewards when other investors caught up. YOUR FUND'S FOCUS ON VALUE HAS YIELDED LONG-TERM REWARDS The past 12 months were among the toughest periods on record for stock investors, a time made even tougher -------------------------------------------------------------------------------- FUND ASSETS MANAGED OCTOBER 31, 2002 ---------------------- $ MILLION PERCENTAGE -------------------------------------------------------------------------------- Wellington Management Company, LLP $ 9,272 70% Sanford C. Bernstein & Co., LLC 3,600 27 Cash Investments* 354 3 -------------------------------------------------------------------------------- Total $13,226 100% -------------------------------------------------------------------------------- *This cash is invested by The Vanguard Group in equity index products to simulate investment in stocks. Each adviser also may maintain a modest cash position. 3 -------------------------------------------------------------------------------- TOTAL RETURNS TEN YEARS ENDED OCTOBER 31, 2002 ---------------------------- AVERAGE FINAL VALUE OF ANNUAL A $10,000 RETURN INITIAL INVESTMENT -------------------------------------------------------------------------------- Windsor Fund Investor Shares 10.4% $26,962 Average Multi-Cap Value Fund 9.2 24,085 Russell 1000 Value Index 11.2 29,015 Wilshire 5000 Index 9.4 24,463 -------------------------------------------------------------------------------- by the corporate governance scandals that contributed to Windsor's poor showing. But a longer-term review provides some perspective. Windsor's aggressive approach to investing in stocks that its two advisers consider undervalued has yielded good results over the past decade. During the ten years ended October 31, a $10,000 investment in Vanguard Windsor Fund would have grown to $26,962, as shown in the above table. Value stocks in general did well over the period, with the Russell 1000 Value Index providing the highest return shown, but your fund performed commendably relative to the broad market and the average competing mutual fund. A $10,000 investment in your fund's average peer would have increased to $24,085. Windsor's $2,877 margin of superiority reflects both the skill of the advisers--Wellington Management and Sanford C. Bernstein & Co.--and the fund's modest operating costs. While the average peer fund extracted 1.46% (or $14.60 for every $1,000 invested) for expenses from the fund's average net assets over the past year, Windsor charged just 0.45%. This 1.01-percentage-point difference winds up in shareholders'--not fund managers'--pockets. KEEP YOUR EYES ON THE PLAN For investors, the most counterproductive approach to the stock market's grueling downturn would be to panic and abandon stocks. Investing is a long-term undertaking, and building the wealth necessary to meet significant long-term goals takes time and the ability to withstand the stock market's downs in order to profit from its ups. It seems like quite a while since investors have enjoyed the ups, but stock prices, and the performance of Vanguard Windsor Fund, will see better days. Unfortunately, no one can say when. A wise approach to this uncertainty is to develop and stick with a sensible long-term investment plan, which includes a mix of stock, bond, and money market funds in proportions suited to your goals and circumstances. Vanguard Windsor Fund can be one component of that plan, serving as a true-blue value fund. By ignoring the market's daily noise and focusing on the fundamental elements of a sensible investing program--asset allocation, diversification, and cost control--you enhance your prospects of success. ---------------------- TO BUILD WEALTH, INVESTORS MUST BE ABLE TO WITHSTAND THE MARKET'S INEVITABLE-- BUT UNPREDICTABLE-- DOWNTURNS. ---------------------- 4 We thank you for entrusting your assets to us and for your steadfastness in the face of challenging equity markets. Sincerely, /S/ JOHN J. BRENNAN JOHN J. BRENNAN CHAIRMAN AND CHIEF EXECUTIVE OFFICER NOVEMBER 12, 2002 -------------------------------------------------------------------------------- YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2001-OCTOBER 31, 2002 DISTRIBUTIONS PER SHARE ------------------------- STARTING ENDING INCOME CAPITAL SHARE PRICE SHARE PRICE DIVIDENDS GAINS -------------------------------------------------------------------------------- Windsor Fund Investor Shares $14.27 $11.81 $0.169 $0.312 Admiral Shares 50.00* 39.88 0.592 1.054 -------------------------------------------------------------------------------- *At inception on November 12, 2001. 5 ADVISER'S REPORT Vanguard Windsor Fund had a disappointing result for the year ended October 31, 2002. The -14.5% return of the fund's Investor Shares was only a little better than the -15.1% decline turned in by the Standard & Poor's 500 Index, a benchmark of large-cap stocks, and worse than the -12.6% showing of the average multi-cap value fund. We were able to get through the tough markets of 2000 and 2001 in good absolute and relative shape, but, unfortunately, not in 2002. The result for the year was significantly affected by the disastrous collapse of WorldCom and Adelphia Communications. Our investment case for WorldCom was that the enterprise long-distance business was cyclically depressed, that it would recover with the economy, and that, as one of the two big players in long distance, WorldCom offered a solid way to play that recovery. As for Adelphia, we like the cable industry for its double-digit growth prospects on the back of new service rollouts, and Adelphia presented an attractive way to participate in that growth. Until the discovery of massive fraud at both companies, we had no sense that WorldCom was improperly capitalizing billions of dollars of expenses that should have been reported in its income statement, or that the Adelphia managers were looting and encumbering the company (not to mention padding subscriber counts, running two sets of capital expenditure books, and more) to benefit themselves at the expense of the public shareholders. Fraud or not, the bottom line is we lost a lot of money on these two stocks, and they were quite a significant detriment to the fund's performance. -------------------------------------------------------------------------------- INVESTMENT PHILOSOPHY THE FUND REFLECTS A BELIEF THAT SUPERIOR LONG-TERM INVESTMENT RESULTS CAN BE ACHIEVED BY EMPHASIZING COMMON STOCKS THAT ARE GENERALLY MISUNDERSTOOD, OUT OF FAVOR, OR UNDERVALUED BY FUNDAMENTAL MEASURES SUCH AS PRICE/EARNINGS RATIO OR DIVIDEND YIELD. THE FUND MAY CONCENTRATE A LARGE PORTION OF ASSETS IN THOSE SECURITIES OR INDUSTRIES THE ADVISERS BELIEVE OFFER THE BEST RETURN POTENTIAL. -------------------------------------------------------------------------------- Once you get past the WorldCom and Adelphia disasters, the fund was down a bit less than the average multi-cap value fund, but down nonetheless. Fundamentally, the rest of the portfolio performed well, and the underlying earnings met our expectations, for the most part. The net result--lower market prices, but earnings that held up--is that the portfolio is currently very cheap, even by Windsor standards, and we think it offers unusual upside appreciation potential. Our portfolio trades at a very low 11 times 2003 earnings, a substantial discount to the S&P 500 Index's price/earnings ratio of nearly 17. And yet 6 the average projected five-year earnings growth rate of our companies is slightly greater than that of the S&P 500 Index--12.3% versus 11.8%. Given market-type earnings growth, we'd look for our portfolio's P/E to move from a 35% discount to the market to a level more in line with the market, which would result in attractive returns for Windsor shareholders. Within our dirt-cheap portfolio, there are some large holdings that are particularly "beaten up," and in general, we are looking to these names to lead the rebound that we expect in our performance. These include Citigroup, Alcoa, Tyco, Petrol Brasil, AOL Time Warner, CIT, Comcast, and our tech holdings except for IBM. These stocks total almost 30% of our portion of the portfolio and offer 55% to 80% appreciation potential based on our target prices. A shining example of a company whose fundamentals have been coming through even while the stock price is under a lot of pressure is Citigroup, the fund's largest holding. Through October 31, the stock was down -22%, but earnings were right on track, notwithstanding the challenging environment for some of Citigroup's businesses--the same environment that has wreaked havoc on competitors such as J.P. Morgan Chase. Citi now trades at only 11 times next year's earnings. With earnings growth prospects of 12% per year, we think Citigroup is worth a market-level P/E once we see the return of a more confident market environment, which we expect in due course. That's a 55% upside from where the stock is now trading. Certainly the stock has been buffeted by a steady stream of negative headlines related to ex-Citi analyst Jack Grubman and to the bank's financing of Enron and WorldCom, but we think the bank's actual liability in these matters is limited. We expect Citi to wind up settling them for something on the order of $2 billion, which pales in comparison to the tens of billions of dollars taken out of its market capitalization on account of these problems. We had some large holdings that were "good guys" during the year. These included two buyouts--Pharmacia, which is being acquired by Pfizer, and Jefferson Smurfit Group, which was taken over by a leveraged buyout firm. Other good stocks were TJX Companies and Ross Stores, our two discounters, and Washington Mutual and Golden West, our two big savings-and-loan holdings. We are still constructive on the U.S. economy, at a time when many are forecasting a "double-dip" recession. We think that consumer spending will continue to grow, supported by ongoing 3% growth in real disposable income, and that capital spending will start to rebound to some degree. As a result, we anticipate 3% or so real GDP growth next year, and a 10% growth in corporate profits. We also anticipate a gradual return of investor confidence, as the quality and reliability of financial statements improve and as corporate governance is strengthened. All this should make for a more confident market 7 environment, one in which our characteristically somewhat offbeat and imaginative fare will prosper. In sum, we are disappointed with our results this year, but we remain confident that we can deliver an outstanding longer-term return to you. We are committed to that end. CHARLES T. FREEMAN, PORTFOLIO MANAGER DAVID R. FASSNACHT, ASSISTANT PORTFOLIO MANAGER WELLINGTON MANAGEMENT COMPANY, LLP NOVEMBER 12, 2002 8 -------------------------------------------------------------------------------- FUND PROFILE AS OF OCTOBER 31, 2002 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 10. WINDSOR FUND -------------------------------------------------------------------------------- PORTFOLIO CHARACTERISTICS COMPARATIVE BROAD FUND INDEX* INDEX** -------------------------------------------------------------------------------- Number of Stocks 165 752 5,691 Median Market Cap $11.1B $22.7B $28.0B Price/Earnings Ratio 19.4x 18.8x 22.6x Price/Book Ratio 1.8x 1.9x 2.5x Yield 2.6% 1.7% Investor Shares 1.5% Admiral Shares 1.5% Return on Equity 19.1% 19.2% 21.4% Earnings Growth Rate 13.6% 5.1% 9.3% Foreign Holdings 8.1% 0.0% 0.3% Turnover Rate 30% -- -- Expense Ratio -- -- Investor Shares 0.45% Admiral Shares 0.40%+ Cash Investments 0.5% -- -- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) Citigroup, Inc. 5.7% (banking) Washington Mutual, Inc. 3.6 (banking) TJX Cos., Inc. 3.2 (retail) Alcoa Inc. 3.1 (metals & mining) Pharmacia Corp. 3.1 (pharmaceuticals) International Business Machines Corp. 3.0 (computer hardware) Tyco International Ltd. 2.3 (conglomerate) Comcast Corp. 2.0 (telecommunications) Eaton Corp. 2.0 (manufacturing) Ross Stores, Inc. 2.0 (retail) -------------------------------------------------------------------------------- Top Ten 30.0% -------------------------------------------------------------------------------- The "Ten Largest Holdings" excludes any temporary cash investments and equity index products. -------------------------------------------------------------------------------- VOLATILITY MEASURES COMPARATIVE BROAD FUND INDEX* FUND INDEX** -------------------------------------------------------------------------------- R-Squared 0.92 1.00 0.55 1.00 Beta 1.15 1.00 0.77 1.00 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- INVESTMENT FOCUS Market Cap Medium Style Value -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECTOR DIVERSIFICATION (% OF COMMON STOCKS) COMPARATIVE BROAD FUND INDEX* INDEX** -------------------------------------------------------------------------------- Auto & Transportation 5.2% 3.2% 2.6% Consumer Discretionary 13.0 10.6 15.4 Consumer Staples 0.9 5.6 7.7 Financial Services 29.8 34.4 22.6 Health Care 9.9 3.7 14.2 Integrated Oils 5.1 8.9 3.6 Other Energy 1.5 1.6 2.0 Materials & Processing 11.6 5.8 3.6 Producer Durables 4.2 4.2 3.8 Technology 7.1 5.5 12.7 Utilities 6.8 14.7 6.8 Other 4.9 1.8 5.0 -------------------------------------------------------------------------------- *Russell 1000 Value Index. **Wilshire 5000 Index. +Annualized. VISIT OUR WEBSITE AT WWW.VANGUARD.COM FOR REGULARLY UPDATED FUND INFORMATION. 9 GLOSSARY OF INVESTMENT TERMS BETA. A measure of the magnitude of a fund's past share-price fluctuations in relation to the ups and downs of the fund's "best fit" index benchmark and an overall market index. Each index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 would have seen its share price rise or fall by 12% when the index rose or fell by 10%. -------------------------------------------------------------------------------- CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash equivalents"--highly liquid, short-term, interest-bearing securities. This figure does not include cash invested in futures contracts to simulate stock investment. -------------------------------------------------------------------------------- EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the past five years for the stocks now in a fund. -------------------------------------------------------------------------------- EXPENSE RATIO. The percentage of a fund's average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors. -------------------------------------------------------------------------------- FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks or American Depositary Receipts of companies based outside the United States. -------------------------------------------------------------------------------- MEDIAN MARKET CAP. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it. -------------------------------------------------------------------------------- PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds. -------------------------------------------------------------------------------- PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company's future growth. -------------------------------------------------------------------------------- R-SQUARED. A measure of how much of a fund's past returns can be explained by the returns from the market in general, as measured by the fund's "best fit" index benchmark and by an overall market index. If a fund's total returns were precisely synchronized with an index's returns, its R-squared would be 1.00. If the fund's returns bore no relationship to the index's returns, its R-squared would be 0. -------------------------------------------------------------------------------- RETURN ON EQUITY. The annual average rate of return generated by a company during the past five years for each dollar of 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 are more likely to distribute capital gains (which are 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 dividends paid on stocks in the index. (degree) -------------------------------------------------------------------------------- 10 PERFORMANCE SUMMARY AS OF OCTOBER 31, 2002 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. WINDSOR FUND -------------------------------------------------------------------------------- CUMULATIVE PERFORMANCE OCTOBER 31, 1992-OCTOBER 31, 2002 AVERAGE WINDSOR FUND MULTI-CAP RUSSELL 1000 WILSHIRE INVESTOR VALUE FUND VALUE INDEX 5000 INDEX 199210 10000 10000 10000 10000 199301 11383 10771 10881 10730 199304 11679 10956 11448 10746 199307 12262 11335 12069 11132 199310 12829 11953 12516 11778 199401 13646 12457 12963 12167 199404 12731 11854 12285 11464 199407 13465 12051 12506 11601 199410 13643 12390 12612 12073 199501 13096 12193 12619 12043 199504 14453 13284 13829 13172 199507 16113 14566 15115 14631 199510 16072 14928 15725 15183 199601 17195 16217 17465 16515 199604 18288 16934 17965 17408 199607 17813 16381 17516 16780 199610 19794 18008 19457 18493 199701 22429 19828 21601 20540 199704 22480 19731 22018 20478 199707 26303 23451 26069 24700 199710 25145 23194 25915 24336 199801 25743 23918 27456 25736 199804 29581 26588 31305 29335 199807 26948 25238 30684 28908 199810 24948 24307 29756 27935 199901 25901 26253 32460 32756 199904 30437 27824 35715 34358 199907 29619 28009 35284 34213 199910 28377 27156 34674 35107 200001 27024 26699 33442 37417 200004 29125 27735 34330 38416 200007 29280 27698 33521 37921 200010 31669 30127 36587 37953 200101 34915 31307 37136 36101 200104 35420 30356 36536 32988 200107 35510 30485 36450 32216 200110 31552 27566 32247 28249 200201 34680 29620 34656 30573 200204 33954 29443 35108 29730 200207 28035 24970 30166 25109 200210 26962 24085 29015 24463 -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED OCTOBER 31, 2002 ------------------------------ FINAL VALUE ONE FIVE TEN OF A $10,000 YEAR YEARS YEARS INVESTMENT -------------------------------------------------------------------------------- Windsor Fund Investor Shares -14.55% 1.40% 10.43% $26,962 Average Multi-Cap Value Fund* -12.63 0.76 9.19 24,085 Russell 1000 Value Index -10.02 2.29 11.24 29,015 Wilshire 5000 Index -13.40 0.10 9.36 24,463 -------------------------------------------------------------------------------- FINAL VALUE SINCE OF A $250,000 INCEPTION** INVESTMENT -------------------------------------------------------------------------------- Windsor Fund Admiral Shares -17.61% $205,985 Russell 1000 Value Index -13.52 216,206 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FISCAL-YEAR TOTAL RETURNS (%) OCTOBER 31, 1992-OCTOBER 31, 2002. FUND INDEX 1993 28.3 25.2 1994 6.3 0.8 1995 17.8 24.7 1996 23.2 23.7 1997 27 33.2 1998 -0.8 14.8 1999 13.7 16.5 2000 11.6 5.5 2001 -0.4 -11.9 2002 -14.5 -10 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED SEPTEMBER 30, 2002. 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 -------------------------------------------------------------------------------- Windsor Fund Investor Shares 10/23/1958 -20.21% -1.46% 7.32% 2.27% 9.59% Admiral Shares 11/12/2001 -24.34** -- -- -- -- -------------------------------------------------------------------------------- *Derived from data provided by Lipper Inc. **Return is since inception on November 12, 2001. Note: See Financial Highlights tables on pages 19 and 20 for dividend and capital gains information. 11 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. (In the example that assumes all fund shares were sold, a negative pre-tax total return translates into a higher after-tax return. This is because the calculation assumes that the investor received a tax deduction for the loss incurred on the sale.) 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, 2002 ONE YEAR FIVE YEARS TEN YEARS -------------------------------- Windsor Fund Investor Shares Returns Before Taxes -14.55% 1.40% 10.43% Returns After Taxes on Distributions -15.28 -1.44 7.29 Returns After Taxes on Distributions and Sale of Fund Shares -8.43 0.58 7.64 -------------------------------------------------------------------------------- 12 FINANCIAL STATEMENTS AS OF OCTOBER 31, 2002 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* WINDSOR FUND SHARES (000) -------------------------------------------------------------------------------- COMMON STOCKS (96.8%)(1) -------------------------------------------------------------------------------- AUTO & TRANSPORTATION (5.1%) Canadian National Railway Co. 5,975,600 254,979 * Compagnie Generale des Etablissements Michelin Class B 2,891,686 84,078 Norfolk Southern Corp. 2,743,600 55,421 Genuine Parts Co. 1,712,900 50,599 Burlington Northern Santa Fe Corp. 1,949,000 50,148 CSX Corp. 1,619,900 44,709 Magna International, Inc. Class A 638,700 34,522 *(2) Continental Airlines, Inc. Class B 5,116,400 32,489 * Northwest Airlines Corp. Class A 2,809,700 19,246 Dana Corp. 1,550,200 15,502 * Lear Corp. 362,500 13,249 The Goodyear Tire & Rubber Co. 897,000 6,369 Delta Air Lines, Inc. 578,300 5,829 ---------- 667,140 ---------- CONSUMER DISCRETIONARY (12.6%) TJX Cos., Inc. 20,305,700 416,673 (2) Ross Stores, Inc. 6,167,600 258,114 * AOL Time Warner Inc. 15,850,600 233,796 * Republic Services, Inc. Class A 8,167,000 168,077 * Staples, Inc. 10,780,100 167,092 * BearingPoint, Inc. 8,943,400 69,759 * Accenture Ltd. 2,850,600 48,118 Gannett Co., Inc. 578,300 43,910 Leggett & Platt, Inc. 2,013,600 41,984 May Department Stores Co. 1,780,400 41,572 VF Corp. 994,300 36,610 * Federated Department Stores, Inc. 1,100,300 33,779 Liz Claiborne, Inc. 1,077,000 32,008 Whirlpool Corp. 629,800 29,355 * TMP Worldwide, Inc. 1,550,000 23,994 Sears, Roebuck & Co. 841,800 22,106 ---------- 1,666,947 ---------- CONSUMER STAPLES (0.9%) Philip Morris Cos., Inc. 1,902,900 77,543 Tyson Foods, Inc. 1,911,500 21,160 SuperValu Inc. 942,100 15,827 ---------- 114,530 ---------- FINANCIAL SERVICES (28.8%) BANKS--NEW YORK CITY (0.1%) J.P. Morgan Chase & Co. 415,800 8,628 BANKS--OUTSIDE NEW YORK CITY (6.3%) UnionBanCal Corp. 4,164,100 177,807 Bank of America Corp. 2,313,500 161,482 U.S. Bancorp 5,954,821 125,587 Wachovia Corp. 2,531,300 88,064 Bank One Corp. 2,220,900 85,660 FleetBoston Financial Corp. 2,700,704 63,169 National City Corp. 2,185,700 59,298 13 -------------------------------------------------------------------------------- MARKET VALUE* WINDSOR FUND SHARES (000) -------------------------------------------------------------------------------- Regions Financial Corp. 1,533,450 51,938 Wells Fargo & Co. 510,000 25,740 DIVERSIFIED FINANCIAL SERVICES (6.9%) Citigroup, Inc. 20,240,246 747,877 * CIT Group Inc. 5,191,700 92,464 Metropolitan Life Insurance Co. 1,773,100 42,342 * Promise Co. Ltd. 866,200 28,070 * Takefuji Corp. 96,450 4,047 Morgan Stanley 76,400 2,973 FINANCIAL--MISCELLANEOUS (2.2%) Fannie Mae 2,481,300 165,900 Freddie Mac 1,842,300 113,449 (2) Metris Cos., Inc. 6,226,700 17,746 INSURANCE--MULTILINE (2.5%) CIGNA Corp. 3,265,400 118,012 The Hartford Financial Services Group Inc. 2,566,700 101,385 Torchmark Corp. 1,182,800 42,344 American International Group, Inc. 550,000 34,402 St. Paul Cos., Inc. 900,000 29,520 INSURANCE--PROPERTY-CASUALTY (4.2%) RenaissanceRe Holdings Ltd. 3,231,100 132,475 Ace, Ltd. 4,039,900 124,227 *(2) IPC Holdings Ltd. 2,713,000 84,564 PartnerRe Ltd. 1,563,700 82,876 The Chubb Corp. 907,500 51,192 * Travelers Property Casualty Corp. Class A 2,963,664 39,328 * Travelers Property Casualty Corp. Class B 1,473,837 19,926 The PMI Group Inc. 612,100 18,241 REAL ESTATE INVESTMENT TRUSTS (0.7%) Liberty Property Trust REIT 3,326,300 97,594 SAVINGS & LOAN (5.5%) Washington Mutual, Inc. 13,463,019 481,438 Golden West Financial Corp. 2,737,800 189,072 Charter One Financial, Inc. 1,780,650 53,918 * Dime Bancorp Inc. Litigation Tracking Warrants 7,762,100 776 SECURITIES BROKERS & Services (0.4%) Lehman Brothers Holdings, Inc. 912,900 48,630 ---------- 3,812,161 ---------- HEALTH CARE (9.5%) Pharmacia Corp. 9,405,604 404,441 *(2) Health Net Inc. 10,504,860 245,814 Abbott Laboratories 4,112,400 172,186 Aventis SA ADR 2,403,850 142,308 * Oxford Health Plans, Inc. 3,758,400 133,649 Merck & Co., Inc. 1,603,000 86,947 Aetna Inc. 875,400 35,279 Wyeth 882,400 29,560 * PacifiCare Health Systems, Inc. 201,400 5,953 Aventis SA Class A 96,171 5,757 ---------- 1,261,894 ---------- INTEGRATED OILS (4.9%) ConocoPhillips 3,166,499 153,575 ExxonMobil Corp. 4,459,008 150,090 Petrol Brasil ADR 9,368,700 123,948 Occidental Petroleum Corp. 2,623,200 74,840 ChevronTexaco Corp. 816,739 55,236 Petro Canada 1,931,900 54,422 Petrol Brasil Series A ADR 3,311,400 39,935 ---------- 652,046 ---------- OTHER ENERGY (1.5%) GlobalSantaFe Corp. 3,078,600 73,579 Valero Energy Corp. 1,700,500 59,875 Devon Energy Corp. 618,326 31,225 EnCana Corp. 1,051,950 30,612 * Reliant Resources, Inc. 87,400 164 ---------- 195,455 ---------- MATERIALS & Processing (11.2%) Alcoa Inc. 18,611,768 410,576 (2) Engelhard Corp. 9,566,700 211,902 Air Products & Chemicals, Inc. 3,319,200 146,709 Abitibi-Consolidated, Inc. 14,625,389 92,871 * Packaging Corp. of America 4,985,200 86,643 * Smurfit-Stone Container Corp. 4,922,663 64,044 Monsanto Co. 3,596,900 59,457 International Paper Co. 1,497,281 52,300 Dow Chemical Co. 1,854,900 48,209 Sonoco Products Co. 1,942,300 45,644 * Pechiney SA ADR A 2,757,128 41,936 Rohm & Haas Co. 1,222,800 40,683 MeadWestvaco Corp. 1,835,400 38,452 Georgia Pacific Group 1,939,371 23,660 Eastman Chemical Co. 600,500 21,822 Temple-Inland Inc. 467,800 19,189 Ashland, Inc. 607,000 15,934 * Owens-Illinois, Inc. 1,303,800 15,633 * AK Steel Corp. 1,672,452 12,109 Boise Cascade Corp. 473,900 11,274 Sherwin-Williams Co. 380,450 10,405 * Crown Cork & Seal Co., Inc. 1,398,300 8,949 * Phosphate Resources Partners LP 3,887,000 7,852 ---------- 1,486,253 ---------- 14 -------------------------------------------------------------------------------- MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- PRODUCER DURABLES (4.0%) KB HOME 2,400,900 113,322 *(2) Toll Brothers, Inc. 5,096,332 104,373 (2) MDC Holdings, Inc. 1,742,783 65,424 Parker Hannifin Corp. 975,600 42,565 Pulte Homes, Inc. 861,900 39,578 Centex Corp. 840,400 38,221 *(2) Axcelis Technologies, Inc. 6,700,589 36,049 * Teradyne, Inc. 2,698,400 32,678 Cooper Industries, Inc. Class A 1,032,400 32,510 * Varian Semiconductor Equipment Associates, Inc. 579,500 13,804 * Thomas & Betts Corp. 648,600 10,741 CNH Global NV 827,400 2,524 * Beazer Homes USA, Inc. 8,300 546 ---------- 532,335 ---------- TECHNOLOGY (6.9%) International Business Machines Corp. 5,067,700 400,044 *(2) Arrow Electronics, Inc. 10,227,100 134,282 Hewlett-Packard Co. 5,261,300 83,129 * Flextronics International Ltd. 6,331,400 52,930 * Nortel Networks Corp. 36,206,200 44,534 Avnet, Inc. 4,450,400 41,389 * Cisco Systems, Inc. 2,907,800 32,509 * Tellabs, Inc. 3,970,900 30,496 * Ingram Micro, Inc. Class A 1,470,500 21,072 * Vishay Intertechnology, Inc. 2,044,621 21,060 * Unisys Corp. 2,409,700 21,037 * Corning, Inc. 8,272,200 15,469 * Solectron Corp. 6,169,600 13,882 ---------- 911,833 ---------- UTILITIES (6.6%) * Comcast Corp.-Special Class A 11,037,600 253,975 * Cox Communications, Inc. Class A 4,878,200 133,663 SBC Communications Inc. 2,812,720 72,174 Ameren Corp. 1,272,300 51,401 Verizon Communications 1,245,442 47,028 PPL Corp. 1,225,000 42,397 Cinergy Corp. 1,334,900 41,529 American Electric Power Co., Inc. 1,515,400 38,855 Constellation Energy Group, Inc. 1,506,425 38,534 BellSouth Corp. 1,386,600 36,260 * Qwest Communications International Inc. 9,514,550 32,254 Entergy Corp. 609,600 26,877 * AT&T Wireless Services Inc. 2,704,268 18,578 * Comcast Corp. Class A 643,900 15,093 * Mediacom Communications Corp. 2,027,200 11,048 Puget Energy, Inc. 273,200 5,816 Sempra Energy 167,300 3,704 AT&T Corp. 262,700 3,426 * AT&T Comcast Corp. 117,200 2,724 * McLeod USA Inc. 3,500,208 1,540 ---------- 876,876 ---------- OTHER (4.3%) Tyco International Ltd. 20,699,900 299,321 (2) Eaton Corp. 3,880,500 265,387 ---------- 564,708 ---------- MISCELLANEOUS (0.5%) 59,717 ---------- -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $13,461,911) 12,801,895 -------------------------------------------------------------------------------- TEMPORARY INVESTMENTS (3.5%)(1) -------------------------------------------------------------------------------- Vanguard Index Participation Equity Receipts-- Total Stock Market 3,167,900 261,352 FACE AMOUNT (000) ----------- FEDERAL NATIONAL MORTGAGE ASSN. (3) 1.56-1.66%, 1/8/2003 $ 12,000 11,964 REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 1.92%, 11/1/2002 164,816 164,816 1.92%, 11/1/2002--Note G 21,748 21,748 -------------------------------------------------------------------------------- TOTAL TEMPORARY INVESTMENTS (Cost $469,634) 459,880 -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.3%) (Cost $13,931,545) 13,261,775 -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES--NET (-0.3%) (36,189) -------------------------------------------------------------------------------- NET ASSETS (100%) $13,225,586 ================================================================================ *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 and exchange-traded funds. After giving effect to these investments, the fund's effective common stock and temporary cash investment positions represent 99.5% and 0.8%, respectively, of net assets. See Note F 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 $1,456,144,000. (3)Security segregated as initial margin for open futures contracts. ADR--American Depositary Receipt. REIT--Real Estate Investment Trust. 15 -------------------------------------------------------------------------------- MARKET VALUE* WINDSOR FUND (000) -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------------------------------------------- ASSETS Investments in Securities, at Value $ 13,261,775 Receivables for Investment Securities Sold 18,108 Other Assets--Note C 35,173 Total Assets 13,315,056 LIABILITIES Payables for Investment Securities Purchased 26,117 Other Liabilities--Note G 63,353 Total Liabilities 89,470 -------------------------------------------------------------------------------- NET ASSETS (100%) $13,225,586 ================================================================================ -------------------------------------------------------------------------------- MARKET VALUE* WINDSOR FUND (000) -------------------------------------------------------------------------------- AT OCTOBER 31, 2002, NET ASSETS CONSISTED OF: -------------------------------------------------------------------------------- Paid-in Capital $14,966,049 Undistributed Net Investment Income 50,588 Accumulated Net Realized Losses--Note F (1,125,342) Unrealized Appreciation (Depreciation)--Note F Investment Securities (669,770) Futures Contracts 4,061 -------------------------------------------------------------------------------- NET ASSETS $13,225,586 ================================================================================ Investor Shares--Net Assets Applicable to 932,069,931 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $11,012,005 -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- INVESTOR SHARES $11.81 ================================================================================ Admiral Shares--Net Assets Applicable to 55,512,168 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $2,213,581 -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $39.88 ================================================================================ 16 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. -------------------------------------------------------------------------------- Windsor Fund Year Ended October 31, 2002 (000) -------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends* $ 246,872 Interest 5,632 Security Lending 1,251 -------------------------------------------------------------------------------- Total Income 253,755 -------------------------------------------------------------------------------- Expenses Investment Advisory Fees--Note B Basic Fee 19,902 Performance Adjustment 12,567 The Vanguard Group--Note C Management and Administrative Investor Shares 32,336 Admiral Shares 3,880 Marketing and Distribution Investor Shares 1,803 Admiral Shares 179 Custodian Fees 234 Auditing Fees 12 Shareholders' Reports and Proxies Investor Shares 373 Admiral Shares 5 Trustees' Fees and Expenses 18 -------------------------------------------------------------------------------- Total Expenses 71,309 Expenses Paid Indirectly--Note D (4,159) -------------------------------------------------------------------------------- Net Expenses 67,150 -------------------------------------------------------------------------------- NET INVESTMENT INCOME 186,605 -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold* (1,104,940) Futures Contracts (18,371) -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) (1,123,311) -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities (1,403,165) Futures Contracts 3,443 -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (1,399,722) -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(2,336,428) ================================================================================ *Dividend income and realized net gain (loss) from affiliated companies of the fund were $31,148,000 and $(386,325,000), respectively. 17 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. -------------------------------------------------------------------------------- Windsor Fund ----------------------- Year Ended October 31, ----------------------- 2002 2001 (000) (000) -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 186,605 $ 230,086 Realized Net Gain (Loss) (1,123,311) 389,211 Change in Unrealized Appreciation (Depreciation) (1,399,722) (714,033) -------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (2,336,428) (94,736) -------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income Investor Shares (166,896) (255,334) Admiral Shares (24,281) -- Realized Capital Gain* Investor Shares (316,967) (1,780,680) Admiral Shares (27,793) -- -------------------------------------------------------------------------------- Total Distributions (535,937) (2,036,014) -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS - NOTE H Investor Shares (2,563,202) 1,957,027 Admiral Shares 2,900,091 -- -------------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 336,889 1,957,027 -------------------------------------------------------------------------------- Total Increase (Decrease) (2,535,476) (173,723) -------------------------------------------------------------------------------- NET ASSETS Beginning of Period 15,761,062 15,934,785 -------------------------------------------------------------------------------- End of Period $13,225,586 $15,761,062 -------------------------------------------------------------------------------- *Includes short-term gain distributions totaling $110,500,000 and $0, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. 18 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. WINDSOR FUND INVESTOR SHARES
----------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, ---------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2002 2001 2000 1999 1998 ----------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $14.27 $16.44 $16.91 $16.34 $19.55 ----------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .164 .22 .28 .27 .23 Net Realized and Unrealized Gain (Loss) on Investments (2.143) (.29) 1.44 1.77 (.32) ----------------------------------------------------------------------------------------- Total from Investment Operations (1.979) (.07) 1.72 2.04 (.09) ----------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.169) (.25) (.29) (.24) (.24) Distributions from Realized Capital Gains (.312) (1.85) (1.90) (1.23) (2.88) ----------------------------------------------------------------------------------------- Total Distributions (.481) (2.10) (2.19) (1.47) (3.12) ----------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $11.81 $14.27 $16.44 $16.91 $16.34 ========================================================================================= TOTAL RETURN -14.55% -0.37% 11.60% 13.74% -0.78% ========================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $11,012 $15,761 $15,935 $16,824 $18,355 Ratio of Total Expenses to Average Net Assets 0.45% 0.41% 0.31% 0.28% 0.27% Ratio of Net Investment Income to Average Net Assets 1.16% 1.37% 1.75% 1.56% 1.31% Portfolio Turnover Rate 30% 33% 41% 56% 48% =========================================================================================
19 FINANCIAL HIGHLIGHTS (CONTINUED) WINDSOR FUND ADMIRAL SHARES -------------------------------------------------------------------------------- NOV. 12, 2001* TO FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD OCT. 31, 2002 -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $50.00 -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .556 Net Realized and Unrealized Gain (Loss) on Investments (9.030) -------------------------------------------------------------------------------- Total from Investment Operations (8.474) -------------------------------------------------------------------------------- DISTRIBUTION Dividends from Net Investment Income (.592) Distributions from Realized Capital Gains (1.054) -------------------------------------------------------------------------------- Total Distributions (1.646) -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $39.88 ================================================================================ TOTAL RETURN -17.61% ================================================================================ RATIOS/SUPPLEMETNAL DATA Net Assets, End of Period (Millions) $2,214 Ratio of Total Expenses to Average Net Assets 0.40%** Ratio of Net Investment Income to Average Net Assets 1.22%** Portfolio Turnover Rate 30% ================================================================================ *Inception. **Annualized. NOTES TO FINANCIAL STATEMENTS Vanguard Windsor 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: Equity securities are valued at the latest quoted sales prices as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices are taken from the primary market in which each security trades. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value. Securities for which market quotations are not readily available are valued by methods deemed by the board of trustees to represent fair value. 2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements. 3. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard Group, transfers uninvested cash balances to a pooled cash account, which is invested in repurchase agreements secured by U.S. government securities. Securities pledged as collateral for repurchase 20 agreements are held by a custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. 4. FUTURES CONTRACTS: The fund uses S&P 500 Index and S&P MidCap 400 Index futures contracts to a limited extent, with the objective 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 futures gains (losses). 5. DISTRIBUTIONS: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. 6. OTHER: Dividend income is recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. 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. Wellington Management Company, llp, and Sanford C. Bernstein & Co., LLC, provide investment advisory services to the fund for fees calculated at an annual percentage rate of average net assets. The basic fee of Wellington Management Company, llp, is subject to quarterly adjustments based on performance for the preceding three years relative to the S&P 500 Index. The basic fee of Sanford C. Bernstein & Co., LLC, is subject to quarterly adjustments based on performance relative to the Russell 1000 Value Index. The Vanguard Group manages the cash reserves of the fund on an at-cost basis. For the year ended October 31, 2002, the aggregate investment advisory fee represented an effective annual basic rate of 0.12% of the fund's average net assets before an increase of $12,567,000 (0.08%) 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, 2002, the fund had contributed capital of $2,451,000 to Vanguard (included in Other Assets), representing 0.02% of net assets and 2.45% of Vanguard's capitalization. The fund's trustees and officers are also directors and officers of Vanguard. D. The fund has asked its investment advisers to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund's management and 21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) administrative expenses. The fund's custodian bank has also agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the year ended October 31, 2002, directed brokerage and custodian fee offset arrangements reduced expenses by $4,158,000 and $1,000, respectively. The total expense reduction represented an effective annual rate of 0.03% of the fund's average net assets. E. During the year ended October 31, 2002, the fund purchased $4,798,607,000 of investment securities and sold $4,756,349,000 of investment securities, other than temporary cash investments. F. At October 31, 2002, the fund had available a capital loss carryforward of $1,117,657,000 to offset future net capital gains through October 31, 2010. At October 31, 2002, net unrealized depreciation of investment securities for financial reporting and federal income tax purposes was $669,770,000, consisting of unrealized gains of $2,378,192,000 on securities that had risen in value since their purchase and $3,047,962,000 in unrealized losses on securities that had fallen in value since their purchase. At October 31, 2002, the aggregate settlement value of open futures contracts expiring in December 2002 and the related unrealized appreciation (depreciation) were: -------------------------------------------------------------------------------- (000) ------------------------ AGGREGATE UNREALIZED NUMBER OF SETTLEMENT APPRECIATION FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION) -------------------------------------------------------------------------------- S&P 500 Index 399 $88,319 $4,678 S&P MidCap 400 Index 46 9,771 (617) -------------------------------------------------------------------------------- Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes. G. The market value of securities on loan to broker/dealers at October 31, 2002, was $20,480,000, for which the fund held cash collateral of $21,748,000. 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, ---------------------------------------- 2002 2001 ---------------- ---------------- AMOUNT SHARES AMOUNT SHARES (000) (000) (000) (000) -------------------------------------------------------------------------------- Investor Shares Issued $1,380,759 97,131 $1,852,074 118,941 Issued in Lieu of Cash Distributions 457,704 30,770 1,910,548 133,500 Redeemed (4,401,665) (300,286) (1,805,595) (117,276) Net Increase (Decrease)-- Investor Shares (2,563,202) (172,385) 1,957,027 135,165 Admiral Shares Issued 3,178,513 61,845 -- -- Issued in Lieu of Cash Distributions 48,252 978 -- -- Redeemed (326,674) (7,311) -- -- Net Increase (Decrease)-- Admiral Shares 2,900,091 55,512 -- -- -------------------------------------------------------------------------------- 22 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Trustees of Vanguard Windsor Fund: In our opinion, the accompanying statement of net assets (and statement of assets and liabilities) 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 Windsor Fund (the "Fund") at October 31, 2002, 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, 2002 by correspondence with the custodian and broker, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania December 4, 2002 -------------------------------------------------------------------------------- SPECIAL 2002 TAX INFORMATION (UNAUDITED) FOR VANGUARD WINDSOR FUND This information for the fiscal period ended October 31, 2002, is included pursuant to provisions of the Internal Revenue Code. The fund distributed $234,260,000 as capital gain dividends (from net long-term capital gains) to shareholders during the fiscal period, all of which is designated as a 20% rate gain distribution. For corporate shareholders, 100% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction. 23 [graphic] 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
NAME POSITION(S) HELD WITH FUND (YEAR OF BIRTH) (NUMBER OF VANGUARD FUNDS TRUSTEE/OFFICER SINCE OVERSEEN BY TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------------------ JOHN J. BRENNAN* Chairman of the Board, Chairman of the Board, Chief Executive Officer, and Director/Trustee (1954) Chief Executive Officer, of The Vanguard Group, Inc., and of each of the investment companies May 1987 and Trustee served by The Vanguard Group. (112) ------------------------------------------------------------------------------------------------------------------------------------ Independent Trustees CHARLES D. ELLIS Trustee The Partners of '63 (pro bono ventures in education); Senior Adviser (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) (90) Chairman (January-September 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; Trustee of Drexel University. ------------------------------------------------------------------------------------------------------------------------------------ JOANN HEFFERNAN HEISEN Trustee Vice President, Chief Information Officer, and Member of the Executive (1950) (112) Committee of Johnson & Johnson (pharmaceuticals/consumer products); July 1998 Director of the Medical Center at Princeton and Women's 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 investment fund) (since May 1977 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). ------------------------------------------------------------------------------------------------------------------------------------ ALFRED M. RANKIN, Jr. Trustee Chairman, President, Chief Executive Officer, and Director of NACCO (1941) (112) Industries, Inc. (forklift trucks/housewares/lignite); Director of Goodrich January 1993 Corporation (industrial products/aircraft systems and services); Director of Standard Products Company (a 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. (pharmaceutical distribution); Trustee of Vanderbilt University. ------------------------------------------------------------------------------------------------------------------------------------
24 activities of the funds. Among board members' responsibilities are selecting investment advisers for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers. 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.
------------------------------------------------------------------------------------------------------------------------------------ NAME POSITION(S) HELD WITH FUND (YEAR OF BIRTH) (NUMBER OF VANGUARD FUNDS PRINCIPAL OCCUPATION(S) TRUSTEE/OFFICER SINCE OVERSEEN BY TRUSTEE/OFFICER) DURING THE PAST FIVE YEARS ------------------------------------------------------------------------------------------------------------------------------------ EXECUTIVE OFFICERS* R. GREGORY BARTON Secretary Managing Director and General Counsel of The Vanguard Group, Inc. (1951) (112) (since September 1997); Secretary of The Vanguard Group and of June 2001 each of the investment companies served by The Vanguard Group; Principal of The Vanguard Group (prior to September 1997). 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. F. WILLIAM MCNABB, III, Institutional Investor Group. JAMES H. GATELY, Direct Investor Services. MICHAEL S. MILLER, Planning and Development. KATHLEEN C. GUBANICH, Human Resources. RALPH K. PACKARD, Finance. IAN A. MACKINNON, Fixed Income Group. GEORGE U. SAUTER, Quantitative Equity Group.
-------------------------------------------------------------------------------- JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996. -------------------------------------------------------------------------------- Vanguard, The Vanguard Group, Vanguard.com, Admiral, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. [graphic] THE VANGUARD GROUP(R) Post Office Box 2600 Valley Forge, PA 19482-2600 ABOUT OUR COVER The photographs of the sails and ship that appear on the cover of this report are copyrighted by Michael Kahn. FOR MORE INFORMATION This report is intended for the funds' 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 funds or other Vanguard funds, please contact us at one of the adjacent telephone numbers or by e-mail through VANGUARD.COM(R). 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)2002 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. Q220 122002 Vanguard Windsor(TM) II Fund Annual Report October 31, 2002 [THE VANGUARD GROUP LOGO] EARNING YOUR TRUST EVERY DAY The latter part of 2001 and the first half of 2002 brought news of too many corporate scandals, with tales of greed and deception tarnishing Enron, Arthur Andersen, and WorldCom, among others. Given the questionable business dealings at some high-profile companies, investors can hardly be blamed for wondering whom they can trust. Vanguard is a name that should stand out. Why? Our unique corporate structure--The Vanguard Group is owned by each of its independently operated mutual funds and is charged with solely serving the funds' shareholders--ensures that our interests are aligned with yours. We have no other constituency to serve. We are client-focused because, quite frankly, it makes good business sense. Your trust is our most valuable asset, and every one of our crew members understands that his or her actions must meet the highest standards of ethical behavior and fiduciary responsibility. When you assess the combination of our organizational structure, the independent nature of each of our funds, our long track record of conducting business with integrity, and our total commitment to ethical behavior, we hope you will feel completely secure in entrusting your assets to us. There is no better place for them. --John J. Brennan CHAIRMAN AND CHIEF EXECUTIVE OFFICER -------------------------------------------------------------------------------- SUMMARY * The Investor Shares of Vanguard Windsor II Fund returned -12.5% during the 12 months ended October 31, 2002. * The stock market was plagued by weak corporate earnings, accounting scandals, a tepid economy, and talk of war with Iraq. Broad indexes hit multiyear lows in early October. * Over time, Windsor II's value-oriented investment philosophy has proved a rewarding approach to the markets. -------------------------------------------------------------------------------- CONTENTS 1 Letter from the Chairman 6 Adviser's Report 9 Fund Profile 10 Glossary of Investment Terms 11 Performance Summary 13 Your Fund's After-Tax Returns 14 Financial Statements 28 Advantages of Vanguard.com -------------------------------------------------------------------------------- LETTER FROM THE CHAIRMAN Fellow Shareholder, Vanguard(R) Windsor(TM) II Fund provided little shelter from the stock market's continued retreat during the 12 months ended October 31, 2002. Precipitous declines in utilities and energy-trading stocks overwhelmed the better results that your fund generated in consumer staples and conglomerate stocks. For the year, the Investor Shares of Windsor II returned -12.5%, compared with the -13.4% return recorded by the Wilshire 5000 Total Market Index, a measure of the broad stock market. -------------------------------------------------------------------------------- 2002 Total Returns Fiscal Year Ended October 31 ------------------------------------------------------------------------------- VANGUARD WINDSOR II FUND Investor Shares -12.5% Admiral Shares -12.4 Average Large-Cap Value Fund* -14.0 Russell 1000 Value Index -10.0 Wilshire 5000 Index -13.4 -------------------------------------------------------------------------------- *Derived from data provided by Lipper Inc. Windsor II declined less than the average large-capitalization value stock fund, but more than the Russell 1000 Value Index, our primary performance benchmark. The adjacent table presents the total returns of the fund and its comparative standards. The per-share distributions and price change that make up your fund's total returns appear on page 5. If you hold Vanguard Windsor II in a taxable account, you may wish to review the fund's after-tax returns, which appear on page 13. STOCKS FALTERED; THE FED CUT INTEREST RATES Weak corporate earnings, accounting scandals, a tepid economy, and talk of war with Iraq plagued the stock market, with broad indexes hitting multiyear lows in early October. A strong rebound in the final weeks of the fiscal year mitigated some of the damage, but not enough to lift the broad market out of a double-digit loss. The troubles were widespread, but smaller companies held up better than large companies. And value stocks lost less ground than growth issues, those stocks whose valuations are based on expectations of above-average earnings increases. ADMIRAL(TM) SHARES A lower-cost class of shares available to many longtime shareholders and to those with significant investments in the fund. International markets did not provide much shelter. Stocks outside the United States, as measured by the Morgan Stanley Capital International 1 -------------------------------------------------------------------------------- Market Barometer Average Annual Total Returns Periods Ended October 31, 2002 ------------------------------ One Three Five Year Years Years -------------------------------------------------------------------------------- STOCKS Russell 2000 Index (Small-caps) -11.6 -3.2 -1.7 Wilshire 5000 Index (Entire market) -13.4 -11.3 0.1 MSCI All Country World Index Free ex USA (International) -10.9 -13.1 -3.0 -------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index 5.9% 9.2% 7.4% (Broad taxable market) Lehman 10 Year Municipal Bond Index 6.2 8.2 6.3 Salomon Smith Barney 3-Month U.S. Treasury Bill Index 1.9 4.1 4.4 -------------------------------------------------------------------------------- CPI Consumer Price Index 2.0% 2.5% 2.3% -------------------------------------------------------------------------------- All Country World Index Free ex USA, declined -10.9% overall in U.S. dollar terms. That figure would have been worse had it not been for the emerging markets, which defied the trend by providing positive returns as a group. The U.S. economy recovered from 2001's recession, but economic expansion was less than robust. Nevertheless, in a promising sign, business spending on computer hardware and software grew modestly in the second half of the fiscal year after a lengthy period of steep declines. And corporate profits in the third calendar quarter of 2002 were, on average, up modestly from the weak numbers reported a year earlier. Meanwhile, near-stable prices allowed the Federal Reserve Board to continue cutting interest rates to spur the economy. Early in the fiscal year, the Fed twice cut its target for the federal funds rate--the interest charged on overnight loans between banks--by a total of 75 basis points (0.75 percentage point), to 1.75%, the lowest level in four decades. (Just after the fiscal year-end, the Fed made yet another cut, bringing the target rate to 1.25%.) DOWNGRADES AND DEFAULTS ROSE, BUT BONDS POSTED SOLID RETURNS Bonds generated respectable returns, with the Lehman Brothers Aggregate Bond Index--a proxy for taxable investment-grade bonds--gaining 5.9%. But corporate issues were dogged by downgrades and defaults. The credit problems in the corporate sector made government and agency securities, which have essentially no credit risk (or very little), especially appealing to investors, and they posted the bond market's highest returns. In early October, the yield of the 10-year U.S. Treasury note fell to 3.61%--its lowest level in more than 40 years. (Yields move in the opposite direction from bond prices.) At fiscal year-end, the 10-year Treasury's yield was 3.89%, down 34 basis points from the start of the period. THE FUND STARTED STRONGLY, BUT WAS DRAGGED DOWN BY A PLUNGING MARKET Windsor II started the fiscal year strongly, earning positive returns in the financial services, consumer discretionary, and consumer staples sectors. Even as 2 previously fast-growing, high-priced stocks tumbled, your fund benefited from an emphasis on basic businesses trading at low multiples of corporate earnings and book value--holdings emblematic of Windsor II's value-oriented investment philosophy. During the second half of the year, however, the bottom seemed to fall out of the stock market, taking down both aggressive stocks and the more defensive investments favored by your fund. Windsor II sustained some of its worst losses in the utilities, consumer discretionary, and "other energy" sectors. In the "other energy" group, the fund's holdings included energy-trading companies that were hit hard both by post-Enron skepticism and by investigations into the role these firms played in California's 2001 energy crisis. These controversies reverberated in the utilities sector as well. Consumer discretionary stocks tottered as the sluggish economic recovery threatened to pinch consumer spending. Your fund enjoyed better returns from consumer staples stocks, which include businesses that tend to thrive in good times and bad by supplying consumers with food and other basic necessities. Windsor II also logged good results from timely investments in Tyco, the embattled conglomerate, and ITT Industries, both of which are diversified businesses that reside in the "other" sector. A LONGER PERSPECTIVE OFFERS A BETTER VIEW The past 12 months were one of the toughest periods on record for stock market investors. Very few investment strategies weathered the period unscathed. Over time, however, Windsor II's emphasis on out-of-favor stocks with below-average price/earnings ratios and above-average dividend yields has produced more successes than disappointments. The table below compares the growth of a hypothetical $10,000 investment in Windsor II with the performance of similar investments in the fund's comparative benchmarks. During the ten years ended October 31, 2002, a $10,000 investment in Windsor II's Investor Shares would have grown to $27,286. A similar investment in the broad stock market, as represented by the Wilshire 5000 Index, would have increased to just $24,463. The Russell 1000 Value Index produced a better return than Windsor II, but the return of the average large-cap value fund shows that Windsor II stood out among its peers. An initial investment of $10,000 in the average large-cap value fund would have TOTAL RETURNS TEN YEARS ENDED OCTOBER 31, 2002 ----------------------------- AVERAGE FINAL VALUE OF ANNUAL A $10,000 RETURN INITIAL INVESTMENT Windsor II Fund Investor Shares 10.6% $27,286 Average Large-Cap Value Fund 9.5 24,874 Russell 1000 Value Index 11.2 29,015 Wilshire 5000 Index 9.4 24,463 -------------------------------------------------------------------------------- 3 grown to $24,874-- a $2,412 shortfall to the Windsor II investment. This difference is a reflection of both the skill of your fund's four investment advisers (listed in the adjacent table) and the fund's low operating costs. -------------------------------------------------------------------------------- $ Million Percentage Barrow, Hanley, Mewhinney & Strauss, Inc. $12,326 61% Tukman Capital Management, Inc. 2,874 14 Equinox Capital Management, LLC 2,872 14 Vanguard Quantitative Equity Group 1,353 7 Cash Investments* 793 4 -------------------------------------------------------------------------------- Total $20,218 100% -------------------------------------------------------------------------------- *This cash is invested by The Vanguard Group in equity index products to simulate investment in stocks. Each adviser also may maintain a modest cash position. You should not underestimate the power of low costs. In fiscal 2002, Windsor II's Investor Shares carried an expense ratio (annual operating costs as a percentage of average net assets) of 0.42%; for the Admiral Shares, the figure was 0.35%. The average large-cap value fund charged 1.38%. Fund Assets Managed October 31, 2002 FOCUS ON THE PLAN, NOT PERFORMANCE For almost three years, the declining stock market has been a source of anxiety for investors. The most counterproductive approach to these worries would be to panic and abandon stocks. Investing is a long-term undertaking, and building the wealth necessary to meet significant long-term goals takes time and perspective. To put it another way, we need the ability to withstand the stock market's downs in order to profit from its ups. It seems like quite a while since investors have enjoyed the "ups," but stock prices and the performance of Vanguard Windsor II Fund will enjoy better days. Unfortunately, no one can say when. A wise approach to this uncertainty is to develop and stick with a sensible long-term investment plan, one that includes a mix of stock, bond, and money market funds in proportions suited to your circumstances and your goals. By focusing on your goals, and ignoring the financial markets' daily moves, you enhance your prospects of success. We thank you for entrusting your assets to us, and for your steadfastness in these difficult equity markets. Sincerely, John J. Brennan Chairman and Chief Executive Officer November 11, 2002 4 -------------------------------------------------------------------------------- Your Fund's Performance at a Glance October 31, 2001-October 31, 2002 Distributions Per Share ----------------------- Starting Ending Income Capital Share Price Share Price Dividends Gains -------------------------------------------------------------------------------- Windsor II Fund Investor Shares $24.50 $20.87 $0.520 $0.150 Admiral Shares 43.50 37.05 0.962 0.265 -------------------------------------------------------------------------------- 5 -------------------------------------------------------------------------------- ADVISER'S REPORT The Investor Shares of Vanguard Windsor II Fund returned -12.5% during the 12-month period ended October 31, 2002, compared with a -10.0% return for the Russell 1000 Value Index. The past year was indeed difficult. Starting in July, there seemed to be no place to hide. "What should I do?" many people are wondering. We recommend that investors take a long-term view, stay in the race, and don't tamper with their asset allocations. Use equities for return and fixed income for stability. THE INVESTMENT ENVIRONMENT It's been said that "the opera isn't over 'til the fat lady sings." We also have long heard that a bear market isn't over until investors capitulate. One is easy to hear; the other is more problematic. No loud bell will ring when investors finally give up hope, but we can certainly listen for any tinkling sounds. According to the Investment Company Institute, the level of cash departing from equity funds reached an all-time high in the three months ended September 30. Money flows usually follow performance: For the first nine months of 2002, investments in bond funds were up 73% over 2001's brisk pace for the same period. But these investments will generate low absolute and relative returns going forward because interest rates have fallen so low. More tinkling sounds, perhaps: Consumer confidence indicators fell by a record amount in October. And in the middle of the month, the interest rate spread between the highest-quality credits (U.S. Treasuries) and the lowest investment-grade credits was the largest since the Great Depression. Corporate America now lives in fear of the credit-rating agencies. Rating pronouncements, which in the past were lagging indicators of a company's health, are dictating corporate policies, including dividends. This is a reaction to the tragedies of Enron, WorldCom, et al. Investment Philosophy The fund reflects a belief that superior long-term investment results can be achieved by holding a diversified portfolio out-of-favor stocks with below-average dividend yiels, and the prospect of above-average total returns On October 10, the Dow traded in a 5% range on light volume. We sensed lots of fear. At about the same time, some well-known bond fund managers were vocal in forecasting sharply lower equity prices--perhaps a little self-serving? Dividend yields, while lower than during some other market bottoms, are higher than the year-over-year Consumer Price Index for the first time since the 1960s. The Treasury bill rate is below the CPI, something that usually occurs 6 only when inflation is very high. Price/earnings (P/E) ratios, while not at an all-time low, are consistent with other bottoms when adjusted for interest rates and inflation. The spread between 10-year Treasury notes and top- quality, Aaa-rated corporate bonds is higher than it's been in 100 years. While difficult to measure, market volatility seems extreme. Today, we feel it is possible that the severe pressure from the credit markets is easing and that the worst is over. However, because of the fundamentals of the economy, any equity recovery is likely to be tepid. OUR SUCCESSES Our successes, if any, in fiscal 2002 were in companies that saw their earnings exceed expectations. These companies included Allstate, Imperial Tobacco, Bank of America, Occidental Petroleum, ITT Industries, and Newell Rubbermaid. They also had depressed P/E ratios. Our Shortfalls If it could go wrong, it did in our significant shortfalls. These included Mirant, Williams Companies, Watson Pharmaceuticals, and J.P. Morgan Chase. Their problems resulted not only from short-term developments and energy prices but also from management's inability to be credible in times of crisis. Our Portfolio Positioning Our portfolio's P/E ratio is lower than that of the broad market, and the companies represented in the fund are doing better than the averages in terms of earnings. In the current environment, a portfolio with a P/E below the market average and a dividend yield much higher than the market's could generate a reasonable total return--not the 20% expected in the late 1990s, but well above the current 2% to 3% yields for short- to intermediate-term government bonds. We feel the fund is positioned to generate good relative returns in this kind of stock market. JAMES P. BARROW, PORTFOLIO MANAGER BARROW, HANLEY, MEWHINNEY & Strauss, Inc. November 13, 2002 (A table showing significant portfolio changes is on the next page.) 7 -------------------------------------------------------------------------------- PORTFOLIO CHANGES FISCAL YEAR ENDED OCTOBER 31, 2002 COMMENTS -------------------------------------------------------------------------------- ADDITIONS -------------------------------------------------------------------------------- ChevronTexaco We bought it to increase our exposure to the energy business. ChevronTexaco has a well-secured 3.7% dividend yield, and the stock sells at 16 times 2002 earnings and 14 times projected 2003 earnings. We think it can perform well in a difficult market. -------------------------------------------------------------------------------- Carnival* The dominant company in the cruise business has been under selling pressure while making a takeover bid for Princess. The combined company will become even more dominant, with a significant balance-sheet advantage. We found the price most attractive: The P/E ratio on forward earnings was 12.6 and the price/book ratio was 2.1. Carnival does not pay a dividend. -------------------------------------------------------------------------------- Cooper Industries This company was purchased as a way to participate in an improving economy, whenever that happens. The stock is down significantly from its high, sells at about 12 times depressed 2002 earnings, and has an attractive 4.7% dividend yield. ------------------------------------------------------------------------------- Wyeth This company is recovering from the legal problems connected with the Redux and Pondimin diet drugs. Claims must be filed by early 2003, and most of the impact has already been felt. We are optimistic about the future of blood-related products and feel that, at 16 times lagging earnings, Wyeth has excellent long-term prospects. -------------------------------------------------------------------------------- Reductions -------------------------------------------------------------------------------- Honeywell International We sold this stock because of concerns about 2003 earnings in Honeywell's important business-jet division. The selling price was 18 times 2003 earnings, with a 2.6% yield. If the stock gets lower, we would be interested again because of the company's defense business. -------------------------------------------------------------------------------- Williams Companies We eliminated our small holding to escape the constant credit downgrades by Moody's and Standard & Poor's. We feared the company could be frozen out of the credit market. -------------------------------------------------------------------------------- SBC Communications This holding was sold because in general the profitability of the Baby Bells has been declining due to excess capacity and a tendency to invest in high-growth-but-no-return ventures. The company said its balance sheet could take on more debt, and we were afraid of a dilutive acquisition. As it turns out, this was a good sale. -------------------------------------------------------------------------------- *New holding. SEE PAGE 14 FOR A COMPLETE LISTING OF THE FUND'S HOLDINGS. 8 FUND PROFILE AS OF OCTOBER 31, 2002 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 10. WINDSOR II FUND -------------------------------------------------------------------------------- PORTFOLIO CHARACTERISTICS Comparative Broad Fund Index* Index** Number of Stocks 352 752 5,691 Median Market Cap $23.8B $22.7B $28.0B Price/Earnings Ratio 18.3x 18.8x 22.6x Price/Book Ratio 2.0x 1.9x 2.5x Yield 2.6% 1.7% Investor Shares 2.5% Admiral Shares 2.5% Return on Equity 20.1% 19.2% 21.4% Earnings Growth Rate 7.3% 5.1% 9.3% Foreign Holdings 5.4% 0.0% 0.3% Turnover Rate 41% -- -- Expense Ratio -- -- Investor Shares 0.42% Admiral Shares 0.35% Cash Investments 1.9% -- -- -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- VOLATILITY MEASURES COMPARATIVE BROAD FUND INDEX* FUND INDEX** -------------------------------------------------------------------------------- R-Squared 0.92 1.00 0.34 1.00 Beta 0.99 1.00 0.52 1.00 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECTOR DIVERSIFICATION (% of common stocks) Comparative Broad Fund Index* Index** Auto & Transportation 0.2% 3.2% 2.6% Consumer Discretionary 14.7 10.6 15.4 Consumer Staples 10.9 5.6 7.7 Financial Services 29.5 34.4 22.6 Health Care 5.3 3.7 14.2 Integrated Oils 10.1 8.9 3.6 Other Energy 1.9 1.6 2.0 Materials & Processing 2.8 5.8 3.6 Producer Durables 5.1 4.2 3.8 Technology 3.0 5.5 12.7 Utilities 11.8 14.7 6.8 Other 4.7 1.8 5.0 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS (% of total net assets) Citigroup, Inc. 2.9% (banking) Allstate Corp. 2.9 (insurance) ConocoPhillips 2.5 (oil) Cendant Corp. 2.4 (commercial services) ChevronTexaco Corp. 2.4 (oil) Entergy Corp. 2.3 (electric utilities) Bank of America Corp. 2.3 (banking) Occidental Petroleum Corp. 2.2 (oil) Philip Morris Cos., Inc. 2.2 (tobacco) Verizon Communications 2.1 (telecommunications) -------------------------------------------------------------------------------- Top Ten 24.2% -------------------------------------------------------------------------------- The "Ten Largest Holdings" excludes any temporary cash investments and equity index products. -------------------------------------------------------------------------------- --------------------------- INVESTMENT FOCUS MARKET CAP LARGE STYLE VALUE --------------------------- Visit our website at *Russell 1000 Value Index. www.vanguard.com **Wilshire 5000 Index. for regularly updated fund information. 9 -------------------------------------------------------------------------------- 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 comparative index and an overall market index. Each index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 would have seen its share price rise or fall by 12% when the index rose or fell by 10%. -------------------------------------------------------------------------------- CASH INVESTMENTS. The percentage of a fund's net assets invested in "cash equivalents"--highly liquid, short-term, interest-bearing securities. This figure does not include cash invested in futures contracts or other equity index products to simulate stock investment. -------------------------------------------------------------------------------- Earnings Growth Rate. The average annual rate of growth in earnings over the past five years for the stocks now in a fund. -------------------------------------------------------------------------------- EXPENSE RATIO. The percentage of a fund's average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors. -------------------------------------------------------------------------------- FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks or American Depositary Receipts of companies based outside the United States. -------------------------------------------------------------------------------- MEDIAN MARKET CAP. An indicator of the size of companies in which a fund invests; the midpoint of market capitalization (market price x shares outstanding) of a fund's stocks, weighted by the proportion of the fund's assets invested in each stock. Stocks representing half of the fund's assets have market capitalizations above the median, and the rest are below it. -------------------------------------------------------------------------------- PRICE/BOOK RATIO. The share price of a stock divided by its net worth, or book value, per share. For a fund, the weighted average price/book ratio of the stocks it holds. -------------------------------------------------------------------------------- PRICE/EARNINGS RATIO. The ratio of a stock's current price to its per-share earnings over the past year. For a fund, the weighted average P/E of the stocks it holds. P/E is an indicator of market expectations about corporate prospects; the higher the P/E, the greater the expectations for a company's future growth. -------------------------------------------------------------------------------- R-SQUARED. A measure of how much of a fund's past returns can be explained by the returns from the market in general, as measured by a comparative index or an overall market index. If a fund's total returns were precisely synchronized with an index's returns, its R-squared would be 1.00. If the fund's returns bore no relationship to the index's returns, its R-squared would be 0. -------------------------------------------------------------------------------- RETURN ON EQUITY. The annual average rate of return generated by a company during the past five years for each dollar of 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 are more likely to distribute capital gains (which are 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 dividends paid on stocks in the index. (degree) -------------------------------------------------------------------------------- 10 -------------------------------------------------------------------------------- PERFORMANCE SUMMARY As of October 31, 2002 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. WINDSOR II FUND -------------------------------------------------------------------------------- CUMULATIVE PERFORMANCE OCTOBER 31, 1992-OCTOBER 31, 2002 QUARTER WINDSOR II AVERAGE ENDED FUND INVESTOR LARGE-CAP RUSSELL 1000 WILSHIRE SHARES VALUE FUND VALUE INDEX 5000 INDEX -------------------------------------------------------------------------------- 199210 10000 10000 10000 10000 199301 10666 10661 10881 10730 199304 10928 10871 11448 10746 199307 11392 11149 12069 11132 199310 11951 11794 12516 11778 199401 12274 12235 12963 12167 199404 11640 11591 12285 11464 199407 11906 11781 12506 11601 199410 12216 12124 12612 12073 199501 12140 12063 12619 12043 199504 13334 13183 13829 13172 199507 14354 14320 15115 14631 199510 15036 14795 15725 15183 199601 16879 16196 17465 16515 199604 17597 16795 17965 17408 199607 17284 16403 17516 16780 199610 19121 18084 19457 18493 199701 21169 20022 21601 20540 199704 21398 20268 22018 20478 199707 25195 23972 26069 24700 199710 25101 23233 25915 24336 199801 26429 24537 27456 25736 199804 30583 27433 31305 29335 199807 29820 26928 30684 28908 199810 29246 26571 29756 27935 199901 31395 29775 32460 32756 199904 34297 31485 35715 34358 199907 32975 31182 35284 34213 199910 30583 31250 34674 35107 200001 28336 31181 33442 37417 200004 29558 32250 34330 38416 200007 29747 31669 33521 37921 200010 32791 33472 36587 37953 200101 34257 33532 37136 36101 200104 35114 33059 36536 32988 200107 34980 32768 36450 32216 200110 31187 28920 32247 28249 200201 32404 30397 34656 30573 200204 33556 30474 35108 29730 200207 28502 26155 30166 25109 200210 27286 24874 29015 24463 -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS PERIODS ENDED OCTOBER 31, 2002 --------------------------------- FINAL VALUE ONE FIVE TEN OF A $10,000 YEAR YEARS YEARS INVESTMENT Windsor II Fund Investor Shares -12.51% 1.68% 10.56% $27,286 Average Large-Cap Value Fund* -13.99 1.37 9.54 24,874 Russell 1000 Value Index -10.02 2.29 11.24 29,015 Wilshire 5000 Index -13.40 0.10 9.36 24,463 -------------------------------------------------------------------------------- FINAL VALUE ONE SINCE OF A $250,000 YEAR INCEPTION** INVESTMENT -------------------------------------------------------------------------------- Windsor II Fund Admiral Shares -12.44% -16.40% $192,278 Russell 1000 Value Index -10.02 -14.98 197,078 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- FISCAL-YEAR TOTAL RETURNS (%) OCTOBER 31, 1992-OCTOBER 31, 2002 SCALE -20% -- 40% WINDSOR II FUND INVESTOR SHARES RUSSELL 1000 VALUE INDEX 1993 19.5 25.2 1994 2.2 0.8 1995 23.1 24.7 1996 27.2 23.7 1997 31.3 33.2 1998 16.5 14.8 1999 4.6 16.5 2000 7.2 5.5 2001 -4.9 -11.9 2002 -12.5 -10.0 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- *Derived from data provided by Lipper Inc. **May 14, 2001. Note: See Financial Highlights tables on pages 22 and 23 for dividend and capital gains information. * * 11 Performance Summary (continued) -------------------------------------------------------------------------------- Average Annual Total Returns for periods ended September 30, 2002 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 Windsor II Fund Investor Shares 6/24/1985 -17.02% 0.28% 7.16% 2.78% 9.94% Admiral Shares 5/14/2001 -16.94 -20.00* -- -- -- -------------------------------------------------------------------------------- *Return since inception. 12 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. (In the example that assumes all fund shares were sold, a negative pre-tax total return translates into a higher after-tax return. This is because the calculation assumes that the investor received a tax deduction for the loss incurred on the sale.) 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, 2002 ONE YEAR FIVE YEARS TEN YEARS WINDSOR II FUND INVESTOR SHARES Returns Before Taxes -12.51% 1.68% 10.56% Returns After Taxes on Distributions -13.25 -0.61 8.23 Returns After Taxes on Distributions and Sale of Fund Shares -7.42 0.85 8.05 -------------------------------------------------------------------------------- 13 -------------------------------------------------------------------------------- FINANCIAL STATEMENTS AS OF OCTOBER 31, 2002 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* WINDSOR II FUND SHARES (000) -------------------------------------------------------------------------------- COMMON STOCKS (94.1%)(1) -------------------------------------------------------------------------------- AUTO & Transportation (0.2%) Union Pacific Corp. 132,600 7,830 FedEx Corp. 119,900 6,378 General Motors Corp. 184,668 6,140 * Lear Corp. 110,300 4,031 Ford Motor Co. 420,653 3,559 Southwest Airlines Co. 188,000 2,745 ArvinMeritor, Inc. 113,900 1,726 * JetBlue Airways Corp. 35,900 1,450 Burlington Northern Santa Fe Corp. 50,200 1,292 Dana Corp. 121,400 1,214 * American Axle & Manufacturing Holdings, Inc. 48,400 1,147 TRW, Inc. 21,300 1,135 PACCAR, Inc. 24,700 1,090 Norfolk Southern Corp. 27,200 549 CNF Inc. 17,000 547 Delphi Corp. 53,700 374 ------- 41,207 ------- CONSUMER DISCRETIONARY (13.9%) * Cendant Corp. 42,239,162 485,750 Newell Rubbermaid, Inc. 11,111,000 360,219 Sears, Roebuck & Co. 13,151,700 345,364 Waste Management, Inc. 14,781,397 340,268 Gannett Co., Inc. 3,799,200 288,473 Carnival Corp. 11,000,000 287,320 Wal-Mart Stores, Inc. 3,738,400 200,191 Eastman Kodak Co. 3,377,200 111,279 * AOL Time Warner Inc. 6,321,299 93,239 * (2)Service Corp. International 28,414,400 89,505 The Walt Disney Co. 4,755,132 79,411 * Viacom Inc. Class B 308,891 13,780 McDonald's Corp. 418,300 7,575 * Liberty Media Corp. 652,500 5,396 * Federated Department Stores, Inc. 156,100 4,792 * Jones Apparel Group, Inc. 135,600 4,697 Liz Claiborne, Inc. 156,200 4,642 VF Corp. 124,700 4,591 * Clear Channel Communications, Inc. 121,700 4,509 Kimberly-Clark Corp. 85,500 4,403 * Republic Services, Inc. Class A 207,400 4,268 * AutoNation, Inc. 389,800 4,136 * Borders Group, Inc. 229,800 3,959 * MGM Mirage, Inc. 120,000 3,732 Whirlpool Corp. 79,800 3,719 Gillette Co. 118,100 3,529 * Harrah's Entertainment, Inc. 79,800 3,352 * Office Depot, Inc. 215,300 3,098 * Yum! Brands, Inc. 130,000 2,929 Tribune Co. 59,600 2,864 The McClatchy Co. Class A 45,800 2,846 * Outback Steakhouse 80,200 2,731 * Reebok International Ltd. 91,600 2,588 * Fox Entertainment Group, Inc. Class A 86,000 2,099 Limited Brands, Inc. 133,200 2,087 14 -------------------------------------------------------------------------------- MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- J.C. Penney Co., Inc. (Holding Company) 103,200 1,966 * Park Place Entertainment Corp. 256,100 1,857 Nordstrom, Inc. 84,500 1,683 Washington Post Co. Class B 2,200 1,601 * Brinker International, Inc. 53,300 1,513 * Ticketmaster Class B 61,900 1,461 Mattel, Inc. 77,600 1,425 * Mandalay Resort Group 44,000 1,245 Pittston Brink's Group 58,000 1,228 * GTECH Holdings Corp. 46,400 1,206 La-Z-Boy Inc. 50,400 1,200 Dillard's Inc. 58,700 968 * Saks Inc. 81,100 880 * Furniture Brands International Inc. 29,500 667 * Rent-A-Center, Inc. 13,300 590 Pier 1 Imports Inc. 29,600 558 May Department Stores Co. 23,300 544 * Getty Images, Inc. 18,400 527 * Polo Ralph Lauren Corp. 25,500 486 American Greetings Corp. Class A 29,300 441 Belo Corp. Class A 17,900 414 IKON Office Solutions, Inc. 43,500 308 ---------- 2,806,109 ---------- CONSUMER STAPLES (10.2%) Philip Morris Cos., Inc. 10,827,100 441,204 Imperial Tobacco Group ADR 12,840,000 400,351 ConAgra Foods, Inc. 14,275,200 346,174 Anheuser-Busch Cos., Inc. 5,335,200 281,485 The Procter & Gamble Co. 2,622,700 231,978 PepsiCo, Inc. 3,364,100 148,357 Sara Lee Corp. 4,918,800 112,296 H.J. Heinz Co. 2,208,100 71,013 Kraft Foods Inc. 162,100 6,403 CVS Corp. 148,000 4,104 The Coca-Cola Co. 72,700 3,379 R.J. Reynolds Tobacco Holdings, Inc. 76,200 3,090 PepsiAmericas, Inc. 164,600 2,527 * The Kroger Co. 165,900 2,462 SuperValu Inc. 141,000 2,369 * Safeway, Inc. 94,800 2,190 The Clorox Co. 35,700 1,604 Carolina Group 61,000 1,220 Coca-Cola Enterprises, Inc. 50,400 1,202 Colgate-Palmolive Co. 20,800 1,144 Dole Food Co. 12,900 379 ---------- 2,064,931 ---------- FINANCIAL SERVICES (27.7%) BANKS--NEW YORK CITY (1.7%) J.P. Morgan Chase & Co. 16,724,004 347,023 The Bank of New York Co., Inc. 117,000 3,042 BANKS--OUTSIDE NEW YORK CITY (9.1%) Bank of America Corp. 6,609,712 461,358 PNC Financial Services Group 9,524,422 387,263 Wells Fargo & Co. 6,455,400 325,804 National City Corp. 10,415,900 282,583 Wachovia Corp. 3,258,102 113,349 FleetBoston Financial Corp. 4,829,042 112,951 KeyCorp 2,816,900 68,817 Bank One Corp. 401,900 15,501 U.S. Bancorp 630,122 13,289 Union Planters Corp. 210,300 5,943 First Tennessee National Corp. 137,500 5,099 UnionBanCal Corp. 94,774 4,047 AmSouth Bancorp 194,400 3,810 North Fork Bancorp, Inc. 94,500 3,634 BB&T Corp. 93,700 3,397 Regions Financial Corp. 96,900 3,282 Hibernia Corp. Class A 149,700 2,951 SunTrust Banks, Inc. 47,600 2,896 Commerce Bancshares, Inc. 69,204 2,878 Marshall & Ilsley Corp. 88,100 2,481 Trustmark Corp. 106,700 2,413 Hudson United Bancorp 76,800 2,339 Cullen/Frost Bankers, Inc. 58,100 2,012 Whitney Holdings Corp. 56,700 1,926 BancorpSouth, Inc. 100,600 1,906 First Virginia Banks, Inc. 41,550 1,555 Greater Bay Bancorp 81,700 1,245 City National Corp. 26,100 1,181 Diversified Financial Services (6.0%) Citigroup, Inc. 16,025,573 592,145 John Hancock Financial Services, Inc. 8,781,900 257,310 The Goldman Sachs Group, Inc. 2,056,400 147,238 Morgan Stanley 3,091,060 120,304 Merrill Lynch & Co., Inc. 2,257,700 85,680 American Express Co. 146,100 5,314 Leucadia National Corp. 99,200 3,721 Household International, Inc. 124,200 2,951 Metropolitan Life Insurance Co. 116,500 2,782 Marsh & McLennan Cos., Inc. 10,000 467 FINANCIAL--DATA PROCESSING SERVICES (0.4%) Automatic Data Processing, Inc. 2,007,100 85,362 * CheckFree Corp. 78,100 1,271 FINANCIAL--SMALL LOAN (1.5%) SLM Corp. 2,911,300 299,107 Financial--Miscellaneous (1.4%) Fannie Mae 3,883,400 259,644 Fidelity National Financial, Inc. 169,213 5,110 15 -------------------------------------------------------------------------------- MARKET VALUE* WINDSOR II FUND SHARES (000) -------------------------------------------------------------------------------- Radian Group, Inc. 110,700 3,904 Freddie Mac 37,800 2,328 MGIC Investment Corp. 45,600 1,913 INSURANCE--LIFE * Prudential Financial, Inc. 166,900 4,874 * The Principal Financial Group, Inc. 28,400 797 INSURANCE--MULTILINE (5.2%) Allstate Corp. 14,786,544 588,209 American International Group, Inc. 4,405,201 275,545 St. Paul Cos., Inc. 2,715,800 89,078 The Hartford Financial Services Group Inc. 2,130,927 84,172 Old Republic International Corp. 57,000 4,680 Loews Corp. 89,200 3,848 Torchmark Corp. 70,200 2,513 CIGNA Corp. 65,800 2,378 AFLAC Inc. 64,300 1,957 American Financial Group, Inc. 27,800 644 INSURANCE--PROPERTY-CASUALTY (0.1%) Progressive Corp. of Ohio 97,300 5,352 * Travelers Property Casualty Corp. Class B 225,872 3,054 The PMI Group Inc. 69,800 2,080 W.R. Berkley Corp. 53,300 1,980 * Travelers Property Casualty Corp. Class A 84,972 1,128 REAL ESTATE INVESTMENT TRUSTS (0.1%) Public Storage, Inc. REIT 108,100 3,180 Boston Properties, Inc. REIT 77,500 2,767 Hospitality Properties Trust REIT 81,200 2,657 Simon Property Group, Inc. REIT 76,700 2,619 Liberty Property Trust REIT 75,300 2,209 Kimco Realty Corp. REIT 59,700 1,809 Duke Realty Corp. REIT 52,200 1,268 Archstone-Smith Trust REIT 52,400 1,202 Equity Office Properties Trust REIT 48,600 1,170 iStar Financial Inc. REIT 39,800 1,130 Annaly Mortgage Management Inc. REIT 58,600 1,027 General Growth Properties Inc. REIT 19,400 933 CenterPoint Properties Corp. REIT 15,600 841 First Industrial Realty Trust REIT 27,400 741 Mack-Cali Realty Corp. REIT 21,300 615 Developers Diversified Realty Corp. REIT 25,800 552 Cousins Properties, Inc. REIT 17,200 385 Weingarten Realty Investors REIT 9,700 360 Trizec Properties, Inc. REIT 32,500 330 RENT & LEASE SERVICES--COMMERCIAL Ryder System, Inc. 102,700 2,357 SAVINGS & LOAN (2.1%) Washington Mutual, Inc. 11,262,549 402,749 Golden West Financial Corp. 74,100 5,117 Sovereign Bancorp, Inc. 363,000 5,111 Green Point Financial Corp. 115,500 5,032 Charter One Financial, Inc. 157,815 4,779 Roslyn Bancorp, Inc. 209,500 3,469 Washington Federal Inc. 138,640 3,419 Webster Financial Corp. 37,900 1,228 Hudson City Bancorp, Inc. 32,000 597 SECURITIES BROKERS & Services (0.1%) Countrywide Credit Industries, Inc. 109,009 5,484 Lehman Brothers Holdings, Inc. 43,600 2,323 Bear Stearns Co., Inc. 33,500 2,045 First American Corp. 52,800 1,080 --------- 5,605,400 --------- HEALTH CARE (5.0%) Merck & Co., Inc. 6,469,900 350,927 Bristol-Myers Squibb Co. 14,147,700 348,175 Wyeth 3,373,500 113,012 Schering-Plough Corp. 4,600,700 98,225 HCA Inc. 1,953,400 84,953 Mylan Laboratories, Inc. 131,700 4,145 * Health Net Inc. 75,000 1,755 * STERIS Corp. 51,700 1,372 * Renal Care Group, Inc. 39,100 1,238 ICN Pharmaceuticals, Inc. 145,900 1,218 * Anthem, Inc. 18,800 1,184 * Invitrogen Corp. 39,100 1,088 * HealthSouth Corp. 192,700 838 * WebMD Corp. 74,300 469 * Humana Inc. 37,700 459 * Coventry Health Care Inc. 13,400 448 Omnicare, Inc. 20,400 443 Eli Lilly & Co. 6,700 372 --------- 1,010,321 --------- INTEGRATED OILS (9.5%) ConocoPhillips 10,474,434 508,010 ChevronTexaco Corp. 7,044,243 476,402 Occidental Petroleum Corp. 15,834,800 451,767 BP PLC ADR 9,473,972 364,274 ExxonMobil Corp. 3,578,756 120,461 Amerada Hess Corp. 77,200 3,960 Unocal Corp. 101,600 2,808 --------- 1,927,682 --------- 16 -------------------------------------------------------------------------------- MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- OTHER ENERGY (1.8%) Transocean Inc. 11,940,031 262,442 El Paso Corp. 7,184,100 55,677 * Reliant Resources, Inc. 10,972,040 20,627 Apache Corp. 115,000 6,217 Burlington Resources, Inc. 146,800 6,048 XTO Energy, Inc. 165,400 3,978 Devon Energy Corp. 68,900 3,479 * Varco International, Inc. 71,200 1,171 * Newfield Exploration Co. 32,600 1,141 Equitable Resources, Inc. 25,800 919 Ocean Energy, Inc. 25,800 481 Anadarko Petroleum Corp. 6,600 294 362,474 MATERIALS & Processing (2.7%) (2) Hanson PLC ADR 7,826,950 179,237 Monsanto Co. 5,633,200 93,117 Dow Chemical Co. 3,347,800 87,009 (2) Millennium Chemicals, Inc. 7,368,142 68,303 (2) Crompton Corp. 6,238,569 41,362 E.I. du Pont de Nemours & Co. 327,387 13,505 International Paper Co. 270,400 9,445 Alcoa Inc. 235,000 5,184 Praxair, Inc. 93,900 5,118 * American Standard Cos., Inc. 58,900 3,929 Weyerhaeuser Co. 71,700 3,248 PPG Industries, Inc. 68,400 3,217 Masco Corp. 152,400 3,133 Sherwin-Williams Co. 112,400 3,074 Air Products & Chemicals, Inc. 61,800 2,732 * Pactiv Corp. 125,200 2,484 Lubrizol Corp. 70,400 2,042 Georgia Pacific Group 122,000 1,488 * Smurfit-Stone Container Corp. 112,400 1,462 * Owens-Illinois, Inc. 107,800 1,293 Eastman Chemical Co. 31,600 1,148 Lafarge North America Inc. 37,700 1,118 Albemarle Corp. 37,300 1,049 Precision Castparts Corp. 53,500 1,038 * Shaw Group, Inc. 66,900 1,001 * Sealed Air Corp. 54,700 838 Archer-Daniels-Midland Co. 45,700 622 * Energizer Holdings, Inc. 13,600 406 The Timken Co. 21,300 388 Ball Corp. 7,000 339 --------- 538,329 --------- PRODUCER DURABLES (4.8%) The Boeing Co. 13,357,500 397,386 Emerson Electric Co. 5,760,200 277,526 Cooper Industries, Inc. Class A 4,000,000 125,960 United Technologies Corp. 1,995,896 123,087 Lockheed Martin Corp. 157,900 9,142 * Thermo Electron Corp. 253,300 4,658 Deere & Co. 84,000 3,897 Rockwell Collins, Inc. 125,700 2,832 * Xerox Corp. 420,800 2,794 * Novellus Systems, Inc. 82,200 2,598 Pitney Bowes, Inc. 60,400 2,026 Pentair, Inc. 60,600 2,002 Goodrich Corp. 129,700 1,958 HON Industries, Inc. 51,400 1,313 KB HOME 20,300 958 Illinois Tool Works, Inc. 15,300 939 Lennar Corp. 14,200 783 Caterpillar, Inc. 19,100 780 Northrop Grumman Corp. 6,400 660 Molex, Inc. 21,400 565 --------- 961,864 --------- TECHNOLOGY (2.8%) International Business Machines Corp. 2,255,000 178,010 Hewlett-Packard Co. 7,494,472 118,413 Raytheon Co. 3,242,600 95,657 * Celestica, Inc. 6,421,900 88,622 Texas Instruments, Inc. 3,612,400 57,293 * Storage Technology Corp. 241,800 4,275 * Computer Sciences Corp. 128,700 4,156 Rockwell Automation, Inc. 170,000 2,814 Motorola, Inc. 255,800 2,346 Scientific-Atlanta, Inc. 189,700 2,316 Applera Corp.-Applied Biosystems Group 74,000 1,497 * 3Com Corp. 334,000 1,409 * Emulex Corp. 71,500 1,283 * Unisys Corp. 113,200 988 * EMC Corp. 185,800 949 * Jabil Circuit, Inc. 52,700 813 * Vishay Intertechnology, Inc. 72,400 746 * Fairchild Semiconductor Corp. 57,300 682 * PanAmSat Corp. 30,600 597 * Adaptec, Inc. 93,900 560 * Arrow Electronics, Inc. 29,500 387 Electronic Data Systems Corp. 24,600 371 * Perot Systems Corp. 32,100 342 --------- 564,526 --------- UTILITIES (11.1%) Entergy Corp. 10,498,100 462,861 Verizon Communications 11,202,454 423,005 (2)Public Service Enterprise Group, Inc. 11,885,000 340,505 Southern Co. 9,792,400 290,834 American Electric Power Co., Inc. 8,842,760 226,728 (2 CenterPoint Energy Inc. 15,899,700 112,570 17 -------------------------------------------------------------------------------- MARKET VALUE* WINDSOR II FUND SHARES (000) -------------------------------------------------------------------------------- Exelon Corp. 1,785,300 89,979 Duke Energy Corp. 3,910,300 80,122 *(2) Mirant Corp. 28,956,600 61,967 SBC Communications Inc. 1,575,749 40,434 AT&T Corp. 2,497,045 32,561 BellSouth Corp. 641,300 16,770 Sprint Corp. 617,500 7,669 * Comcast Corp.-Special Class A 263,800 6,070 Sempra Energy 250,300 5,542 Constellation Energy Group, Inc. 199,200 5,096 Consolidated Edison Inc. 99,500 4,236 Dominion Resources, Inc. 87,600 4,205 CenturyTel, Inc. 141,200 4,000 * PG&E Corp. 360,600 3,913 FirstEnergy Corp. 100,100 3,248 * Edison International 322,000 3,236 Ameren Corp. 75,200 3,038 * AT&T Wireless Services Inc. 368,300 2,530 * Cox Communications, Inc. Class A 88,600 2,428 Wisconsin Energy Corp. 98,000 2,252 Questar Corp. 83,400 2,152 NiSource, Inc. 111,800 1,847 Pinnacle West Capital Corp. 45,900 1,308 FPL Group, Inc. 19,400 1,144 Energy East Corp. 52,600 1,120 NICOR Inc. 33,800 1,049 TXU Corp. 56,600 812 CMS Energy Corp. 102,600 803 ALLTEL Corp. 15,200 756 * Qwest Communications International Inc. 211,300 716 Hawaiian Electric Industries Inc. 10,800 517 Scana Corp. 12,000 350 * Adelphia Communications Corp. Class A 74,500 10 ---------- 2,248,383 ---------- OTHER (4.4%) (2) ITT Industries, Inc. 5,869,900 381,426 Tyco International Ltd. 18,782,000 271,588 General Electric Co. 5,506,200 139,032 Textron, Inc. 2,046,600 83,911 Honeywell International Inc. 274,700 6,576 Fortune Brands, Inc. 119,900 6,002 3M Co. 35,500 4,506 Johnson Controls, Inc. 26,100 2,036 Teleflex Inc. 38,400 1,615 Lancaster Colony Corp. 16,500 750 ---------- 897,442 ---------- -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $18,923,903) 19,028,668 -------------------------------------------------------------------------------- TEMPORARY INVESTMENTS (6.2%)(1) -------------------------------------------------------------------------------- Vanguard Index Participation Equity Receipts-- Total Stock Market 4,882,800 $ 402,831 Face Amount (000) ---------- FEDERAL NATIONAL MORTGAGE ASSN. (3) 1.56%, 1/8/2003 $ 32,000 31,903 REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 1.92%, 11/1/2002 741,016 741,016 1.92%, 11/1/2002--Note G 82,816 82,816 -------------------------------------------------------------------------------- TOTAL TEMPORARY INVESTMENTS (Cost $1,305,174) 1,258,566 -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.3%) (Cost $20,229,077) 20,287,234 -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES--NET (-0.3%) (68,939) -------------------------------------------------------------------------------- NET ASSETS (100%) $20,218,295 ================================================================================ *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 and exchange-traded funds. After giving effect to these investments, the fund's effective common stock and temporary cash investment positions represent 98.1% and 2.2%, respectively, of net assets. See Note F 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 $1,274,875,000. (3)Security segregated as initial margin for open futures contracts. ADR--American Depositary Receipt. REIT--Real Estate Investment Trust. -------------------------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES -------------------------------------------------------------------------------- ASSETS Investments in Securities, at Value $20,287,234 Receivables for Capital Shares Sold 30,065 Other Assets--Note C 113,386 ------------- Total Assets 20,430,685 ------------- LIABILITIES Payables for Investment Securities Purchased 59,294 Security Lending Collateral Payable to Brokers--Note G 82,816 Other Liabilities 70,280 ------------- Total Liabilities 212,390 ------------- -------------------------------------------------------------------------------- NET ASSETS (100%) $20,218,295 ================================================================================ 18 Amount (000) -------------------------------------------------------------------------------- AT OCTOBER 31, 2002, NET ASSETS CONSISTED OF: -------------------------------------------------------------------------------- Paid-in Capital $20,943,592 Undistributed Net Investment Income 149,380 Accumulated Net Realized Losses--Note F (932,350) Unrealized Appreciation (Depreciation)--Note F Investment Securities 58,157 Futures Contracts (484) -------------------------------------------------------------------------------- NET ASSETS $20,218,295 ================================================================================ Investor Shares--Net Assets Applicable to 849,754,936 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $17,734,541 -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- INVESTOR SHARES $20.87 ================================================================================ Admiral Shares--Net Assets Applicable to 67,038,594 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $2,483,754 -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $37.05 19 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. -------------------------------------------------------------------------------- WINDSOR II FUND YEAR ENDED OCTOBER 31, 2002 (000) -------------------------------------------------------------------------------- INVESTMENT INCOME Income Dividends* $ 570,055 Interest 23,862 Security Lending 89 -------------------------------------------------------------------------------- Total Income 594,006 ------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B Basic Fee 29,532 Performance Adjustment 5,253 The Vanguard Group--Note C Management and Administrative Investor Shares 52,658 Admiral Shares 4,816 Marketing and Distribution Investor Shares 2,956 Admiral Shares 254 Custodian Fees 352 Auditing Fees 11 Shareholders' Reports and Proxies Investor Shares 767 Admiral Shares 8 Trustees' Fees and Expenses 28 -------------------------------------------------------------------------------- Total Expenses 96,635 Expenses Paid Indirectly--Note D (4,717) -------------------------------------------------------------------------------- Net Expenses 91,918 -------------------------------------------------------------------------------- NET INVESTMENT INCOME 502,088 -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold* (764,472) Futures Contracts (219,380) -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) (983,852) -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities (2,580,878) Futures Contracts 51,923 -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) (2,528,955) ------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(3,010,719) ================================================================================ *Dividend income and realized net gain (loss) from affiliated companies of the fund were $131,269,000 and $(385,585,000), respectively. 20 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. -------------------------------------------------------------------------------- Windsor II Fund ------------------------ Year Ended October 31, ------------------------ 2002 2001 (000) (000) INCREASE (DECREASE) IN NET ASSETS Operations Net Investment Income $ 502,088 $ 529,168 Realized Net Gain (Loss) (983,852) 172,366 Change in Unrealized Appreciation (Depreciation) (2,528,955) (1,976,080) -------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations (3,010,719) (1,274,546) -------------------------------------------------------------------------------- Distributions Net Investment Income Investor Shares (454,070) (521,004) Admiral Shares (53,970) (11,567) Realized Capital Gain Investor Shares (130,500) (1,083,480) Admiral Shares (13,444) -- -------------------------------------------------------------------------------- Total Distributions (651,984) (1,616,051) -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS--NOTE H Investor Shares (543,843) 52,333 Admiral Shares 890,245 2,302,955 -------------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 346,402 2,355,288 -------------------------------------------------------------------------------- Total Increase (Decrease) (3,316,301) (535,309) -------------------------------------------------------------------------------- NET ASSETS Beginning of Period 23,534,596 24,069,905 -------------------------------------------------------------------------------- End of Period $20,218,295 $23,534,596 -------------------------------------------------------------------------------- 21 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. Windsor II Fund Investor Shares WINDSOR FUND INVESTOR SHARES
----------------------------------------------------------------------------------------- YEAR ENDED OCTOBER 31, ---------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2002 2001 2000 1999 1998 ----------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $24.50 $27.58 $29.03 $31.07 $29.36 ----------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .51 .564 .64 .64 .65 Net Realized and Unrealized Gain (Loss) on Investments (3.47) (1.819) 1.08 .73 3.91 ----------------------------------------------------------------------------------------- Total from Investment Operations (2.96) (1.225) 1.72 1.37 4.56 ----------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.52) (.585) (.67) (.74) (.66) Distributions from Realized Capital Gains (.15) (1.240) (2.50) (2.67) (2.19) ----------------------------------------------------------------------------------------- Total Distributions (.67) (1.825) (3.17) (3.41) (2.85) ----------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $20.87 $24.50 $27.58 $29031 $31.07 ========================================================================================= TOTAL RETURN -12.51% -4.89% 7.22% 4.57% 16.51% ========================================================================================= RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $17,735 $21,495 $24,070 $30,541 $29,639 Ratio of Total Expenses to Average Net Assets 0.42% 0.40% 0.37% 0.37% 0.41% Ratio of Net Investment Income to Average Net Assets 2.12% 2.10% 2.36% 2.08% 2.16% Portfolio Turnover Rate 41% 33% 26% 26% 31% =========================================================================================
-------------------------------------------------------------------------------- WINDSOR II FUND ADMIRAL SHARES YEAR ENDED MAY 14* TO OCT. 31, OCT. 31, -------------------------------------------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2002 2001 -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $43.50 $50.00 -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .944 .408 Net Realized and Unrealized Gain (Loss) on Investments (6.167) (6.433) -------------------------------------------------------------------------------- Total from Investment Operations (5.223) (6.025) -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.962) (.475) Distributions from Realized Capital Gains (.265) -- -------------------------------------------------------------------------------- Total Distributions (1.227) (.475) -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $37.05 $43.50 ================================================================================ TOTAL RETURN -12.44% -12.16% ================================================================================ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,484 $2,039 Ratio of Total Expenses to Average Net Assets 0.35% 0.35%** Ratio of Net Investment Income to Average Net Assets 2.18% 1.83%** Portfolio Turnover Rate 41% 33% ================================================================================ *Inception. **Annualized. 23 NOTES TO FINANCIAL STATEMENTS Vanguard Windsor II 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 May 14, 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: Equity securities are valued at the latest quoted sales prices as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Prices are taken from the primary market in which each security trades. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value. Securities for which market quotations are not readily available are valued by methods deemed by the board of trustees to represent fair value. 2. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements. 3. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard Group, transfers uninvested cash balances to a pooled cash account, which is invested in repurchase agreements secured by U.S. government securities. Securities pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. 4. FUTURES CONTRACTS: The fund uses S&P 500 Index and S&P MidCap 400 Index futures contracts to a limited extent, with the objective 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 futures gains (losses). 5. DISTRIBUTIONS: Distributions to shareholders are recorded on the ex-dividend date. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. 6. OTHER: Dividend income is recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. 24 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. Barrow, Hanley, Mewhinney & Strauss, Inc.; Equinox Capital Management, LLC; and Tukman Capital Management, Inc., provide investment advisory services to the fund for fees calculated at an annual percentage rate of average net assets. The basic fees thus computed for each adviser are subject to quarterly adjustments based on performance for the preceding three years relative to a designated market index: for Barrow, Hanley, Mewhinney & Strauss, Inc., the S&P 500/Barra Value Index; for Equinox Capital Management, LLC, the Russell 1000 Value Index; and for Tukman Capital Management, Inc., the S&P 500 Index. 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 $624,000 for the year ended October 31, 2002. For the year ended October 31, 2002, the aggregate investment advisory fee represented an effective annual basic rate of 0.13% of average net assets before an increase of $5,253,000 (0.02%) 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, 2002, the fund had contributed capital of $3,885,000 to Vanguard (included in Other Assets), representing 0.02% of the fund's net assets and 3.88% of Vanguard's capitalization. The fund's trustees and officers are also directors and officers of Vanguard. D. The fund has asked its investment advisers to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund's management and administrative expenses. The fund's custodian bank has also agreed to reduce its fees when the fund maintains cash on deposit in the non-interest-bearing custody account. For the year ended October 31, 2002, directed brokerage and custodian fee offset arrangements reduced expenses by $4,702,000 and $15,000, respectively. The total expense reduction represented an effective annual rate of 0.02% of the fund's average net assets. E. During the year ended October 31, 2002, the fund purchased $9,849,293,000 of investment securities and sold $9,193,131,000 of investment securities, other than temporary cash investments. F. At October 31, 2002, the fund had available a capital loss carryforward of $918,354,000 to offset future net capital gains through October 31, 2010. At October 31, 2002, net unrealized appreciation of investment securities for financial reporting and federal income tax purposes was $58,157,000, consisting of unrealized gains of $3,922,598,000 on securities that had risen in value since their purchase and $3,864,441,000 in unrealized losses on securities that had fallen in value since their purchase. 25 Notes to Financial Statements (continued) At October 31, 2002, the aggregate settlement value of open futures contracts expiring in December 2002 and the related unrealized appreciation (depreciation) were: -------------------------------------------------------------------------------- (000) -------------------------------- AGGREGATE UNREALIZED NUMBER OF SETTLEMENT APPRECIATION FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION) -------------------------------------------------------------------------------- S&P 500 Index 1,629 $360,579 $ 1,250 S&P MidCap 400 Index 180 38,237 (1,734) -------------------------------------------------------------------------------- Unrealized appreciation (depreciation) on open futures contracts is required to be treated as realized gain (loss) for tax purposes. G. The market value of securities on loan to broker/dealers at October 31, 2002, was $79,509,000, for which the fund held cash collateral of $82,816,000. 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, ----------------------------------------------------- 2002 2001 --------------------- ----------------------- AMOUNT SHARES AMOUNT SHARES (000) (000) (000) (000) -------------------------------------------------------------------------------- Investor Shares Issued $ 2,838,280 116,530 $ 3,899,774 144,533 Issued in Lieu of Cash Distributions 561,971 22,591 1,532,452 58,813 Redeemed (3,944,094) (166,688) (5,379,893) (198,642) ----------------------------------------------------- Net Increase (Decrease)-- Investor Shares (543,843) (27,567) 52,333 4,704 ----------------------------------------------------- Admiral Shares Issued 1,159,318 26,681 2,342,727 47,778 Issued in Lieu of Cash Distributions 60,629 1,376 9,811 200 Redeemed (329,702) (7,895) (49,583) (1,102) Net Increase (Decrease)-- Admiral Shares 890,245 20,162 2,302,955 46,876 -------------------------------------------------------------------------------- 26 REPORT OF INDEPENDENT ACCOUNTANTS TO THE SHAREHOLDERS AND TRUSTEES OF VANGUARD WINDSOR II FUND: In our opinion, the accompanying statement of net assets (and the statement of assets and liabilities) 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 Windsor II Fund (the "Fund") at October 31, 2002, 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, 2002 by correspondence with the custodian and broker, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP Philadelphia, Pennsylvania December 4, 2002 -------------------------------------------------------------------------------- SPECIAL 2002 TAX INFORMATION (UNAUDITED) FOR VANGUARD WINDSOR II FUND This information for the fiscal year ended October 31, 2002, is included pursuant to provisions of the Internal Revenue Code. The fund distributed $143,944,000 as capital gain dividends (from net long-term capital gains) to shareholders during the fiscal year, all of which is designated as a 20% rate gain distribution. For corporate shareholders, 100% of investment income (dividend income plus short-term gains, if any) qualifies for the dividends-received deduction. -------------------------------------------------------------------------------- 27 -------------------------------------------------------------------------------- INVESTING IS FAST AND EASY ON VANGUARD.COM If you're like many Vanguard investors, you believe in planning and taking control of your own investments. Vanguard.com was built for you--and it's getting better all the time. Manage Your Investments With Ease Log on to Vanguard.com and: * See what you own (at Vanguard and elsewhere) and how you're doing by using our Consolidated View(TM) tool. * Check your overall asset allocation, no matter where your assets are held. * Compare your holdings with industry benchmarks. * Analyze your personal performance. * Invest online and even manage the mail you get from us. (Prefer to get fund reports like this one online? Just let us know!) * Set up a Watch List to make it easy to track funds and securities of interest. Plan Your Investments With Confidence Go to our Planning & Advice and Research Funds & Stocks sections and: * Take our Investor Questionnaire to find out what asset allocation might best suit your needs. * Find out how much you should save for retirement and for college costs. * Discover how investment costs affect your bottom line by using our Compare Fund Costs tool. * Find out how to maximize your after-tax returns in our PlainTalk(R) guide Be a Tax-Savvy Investor. * Attend our quarterly PlainTalk webcasts on investing. Find out what Vanguard.com can do for you. Log on today! 28 THE VANGUARD(R) Family of Funds STOCK FUNDS 500 Index Fund Calvert Social Index(TM) Fund Capital Opportunity Fund Convertible Securities Fund Developed Markets Index Fund Emerging Markets Stock Index Fund Energy Fund Equity Income Fund European Stock Index Fund Explorer(TM) Fund Extended Market Index Fund Global Equity Fund Gold and Precious Metals Fund Growth and Income Fund Growth Equity Fund Growth Index Fund Health Care Fund Institutional Developed Markets Index Fund Institutional Index Fund International Growth Fund International Value Fund Mid-Cap Index Fund Morgan(TM) Growth Fund Pacific Stock Index Fund PRIMECAP Fund REIT Index Fund Selected Value Fund Small-Cap Growth Index Fund Small-Cap Index Fund Small-Cap Value Index Fund Strategic Equity Fund Tax-Managed Capital Appreciation Fund Tax-Managed Growth and Income Fund Tax-Managed International Fund Tax-Managed Small-Cap Fund Total International Stock Index Fund Total Stock Market Index Fund U.S. Growth Fund U.S. Value Fund Utilities Income Fund Value Index Fund Windsor(TM) Fund Windsor(TM) II Fund BALANCED FUNDS Asset Allocation Fund Balanced Index Fund Global Asset Allocation Fund LifeStrategy(R) Conservative Growth Fund LifeStrategy(R) Growth Fund LifeStrategy(R) Income Fund LifeStrategy(R) Moderate Growth Fund STAR(TM) Fund Tax-Managed Balanced Fund Wellesley(R) Income Fund Wellington(TM) Fund BOND FUNDS Admiral(TM) Intermediate-Term Treasury Fund Admiral(TM) Long-Term Treasury Fund Admiral(TM) Short-Term Treasury Fund GNMA Fund High-Yield Corporate Fund High-Yield Tax-Exempt Fund Inflation-Protected Securities Fund Insured Long-Term Tax-Exempt Fund Intermediate-Term Bond Index Fund Intermediate-Term Corporate Fund Intermediate-Term Tax-Exempt Fund Intermediate-Term Treasury Fund Limited-Term Tax-Exempt Fund Long-Term Bond Index Fund Long-Term Corporate Fund Long-Term Tax-Exempt Fund Long-Term Treasury Fund Preferred Stock Fund Short-Term Bond Index Fund Short-Term Corporate Fund Short-Term Federal Fund Short-Term Tax-Exempt Fund Short-Term Treasury Fund StateTax-Exempt Bond Funds (California, Florida, Massachusetts, New Jersey, New York, Ohio, Pennsylvania) Total Bond Market Index Fund MONEY MARKET FUNDS Admiral(TM) Treasury Money Market Fund Federal Money Market Fund Prime Money Market Fund StateTax-Exempt Money Market Funds (California, New Jersey, New York, Ohio, Pennsylvania) Tax-Exempt Money Market Fund Treasury Money Market Fund VARIABLE ANNUITY PLAN Balanced Portfolio Capital Growth Portfolio Diversified Value Portfolio Equity Income Portfolio Equity Index Portfolio Growth Portfolio High-Grade Bond Portfolio High Yield Bond Portfolio International Portfolio Mid-Cap Index Portfolio Money Market Portfolio REIT Index Portfolio Short-Term Corporate Portfolio Small Company Growth Portfolio Total Bond Market Index Portfolio Total Stock Market Portfolio For information about Vanguard funds and annuities, including charges and expenses, obtain a prospectus from The Vanguard Group, P.O. Box 2600, Valley Forge, PA 19482-2600. Read it carefully before you invest or send money. 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
----------------------------------------------------------------------------------------------------------------------------------- NAME POSITION(S) HELD WITH FUND (DATE OF BIRTH) (NUMBER OF VANGUARD FUNDS TRUSTEE/OFFICER SINCE OVERSEEN BY TRUSTEE) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS ----------------------------------------------------------------------------------------------------------------------------------- Chairman of the Board, Chairman of the Board, Chief Executive Officer, and JOHN J. BRENNAN* Chief Executive Officer, Director/Trustee of The Vanguard Group, Inc., and of each of the investment (July 29, 1954) and Trustee companies served by The Vanguard Group. May 1987 (112) ----------------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES CHARLES D. ELLIS Trustee The Partners of '63 (pro bono ventures in education); Senior Adviser (October 23, 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 (December 23, 1945) (90) Chairman (January-September 1999), and Vice President (prior to December 2001 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 HEISEN Trustee Vice President, Chief Information Officer, and Member of the Executive (January 25, 1950) (112) Committee of Johnson & Johnson (pharmaceuticals/consumer products); July 1998 Director of the Medical Center at Princeton and Women's Research and Education Institute. ----------------------------------------------------------------------------------------------------------------------------------- BURTON G. MALKIEL Trustee Chemical Bank Chairman's Professor of Economics, Princeton (August 28, 1932) (110) University; Director of Prudential Insurance Co. of America, BKF Capital May 1977 (investment management), The Jeffrey Co. (a holding company), and NeuVis, Inc. (a software company). ----------------------------------------------------------------------------------------------------------------------------------- ALFRED M. RANKIN, JR. Trustee Chairman, President, Chief Executive Officer, and Director of NACCO (October 8, 1941) (112) Industries, Inc. (forklift trucks/housewares/lignite); Director of Goodrich January 1993 Corporation (industrial products/aircraft systems and services); Director of the Standard Products Company (a supplier for the automotive industry) until 1998. ----------------------------------------------------------------------------------------------------------------------------------- J. LAWRENCE WILSON Trustee Retired Chairman and Chief Executive Officer of Rohm and Haas Co. (March 2, 1936) (112) (chemicals); Director of Cummins Inc. (diesel engines), The Mead April 1985 Corp. (paper products), and AmerisourceBergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University.
activities of the funds. Among board members' responsibilities are selecting investment advisers for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers. 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.
----------------------------------------------------------------------------------------------------------------------------------- NAME POSITION(S) HELD WITH FUND (DATE OF BIRTH) (NUMBER OF VANGUARD FUNDS TRUSTEE/OFFICER SINCE OVERSEEN BY TRUSTEE) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS ----------------------------------------------------------------------------------------------------------------------------------- R. GREGORY BARTON Secretary Managing Director and General Counsel of The Vanguard Group, Inc. (April 25, 1951) (112) (since September 1997); Secretary of The Vanguard Group, and of each June 2001 of the investment companies served by The Vanguard Group; Principal of The Vanguard Group (prior to September 1997). ----------------------------------------------------------------------------------------------------------------------------------- THOMAS J. HIGGINS Treasurer Principal of The Vanguard Group, Inc.; Treasurer of each of the investment (May 21, 1957) (112) 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 MORTIMOR J. BUCKLEY, Information Technology. JAMES H. GATELY, Director Investor Services. KATHLEEN C. GUBANICH, Human Resources. IAN A. MACKINNON, Fixed Income Group. F. WILLIAM MCNABB, III, Instititional Investor Group. MICHAEL S. MILLER, Planning and Developement. RALPH K. PACKARD, Chief Finanaicl Officer. GEORGE U. SAUTER, Quantitative Equity Group. -------------------------------------------------------------------------------- JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996. -------------------------------------------------------------------------------- Vanguard, The Vanguard Group, Vanguard.com, Admiral, Explorer, Morgan, LifeStrategy, STAR, Wellesley, Wellington, Windsor, Consolidated View, PlainTalk, and the ship logo are trademarks of The Vanguard Group, Inc. S&P 500(R) and S&P MidCap 400 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds. Calvert Social Index is a trademark of Calvert Group, Ltd., and has been licensed for use by The Vanguard Group, Inc. Vanguard Calvert Social Index Fund is not sponsored, endorsed, sold, or promoted by Calvert Group, Ltd., and Calvert Group, Ltd., makes no representation regarding the advisability of investing in the fund. All other marks are the exclusive property of their respective owners. [SHIP] [THE VANGUARD GROUP LOGO] Post Office Box 2600 Valley Forge, PA 19482-2600 ABOUT OUR COVER The photographs of the sails and ship 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(R). 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)2002 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. Q730 122002