N-CSR/A 1 windsorsncsra.txt VANGUARD WINDSOR FUNDS FORM N-CSRA UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number: 811-834 Name of Registrant: Vanguard Windsor Funds Address of Registrant: P.O. Box 2600 Valley Forge, PA 19482 Name and address of agent for service: R. Gregory Barton, Esquire P.O. Box 876 Valley Forge, PA 19482 Registrant's telephone number, including area code: (610) 669-1000 Date of fiscal year end: October 31 Date of reporting period: November 1, 2002 - April 30, 2003 Item 1: Reports to Shareholders [FRONT COVER] VANGUARD(R) WINDSOR(TM) FUND SEMIANNUAL REPORT APRIL 30, 2003 [SHIP LOGO] [THE VANGUARD GROUP[R]] ETERNAL PRINCIPLES Markets change, but the principles of successful investing do not. During the past few years, radical upheaval in the stock market has displayed the power of this simple truth to dramatic effect. In the late 1990s, stocks experienced one of the greatest bull markets in financial history. Then, in March 2000, the longest downturn since the Great Depression began. In both bull and bear markets, however, the principles of successful investing are identical: balance, diversification, and attention to costs. Balance among stock, bond, and money market funds allows you to pursue long-term growth while moderating your risk. Diversification limits your exposure to the disasters that can befall any one security or sector. Attention to costs means you keep a larger share of any rewards produced by your investments. These principles are timeless. In fact, they're the basis of our very first mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established in 1929. Over time, balance, diversification, and attention to costs have proven to be the master keys to investment success. ================================================================================ SUMMARY * Vanguard Windsor Fund earned an excellent total return of 8.7% during the first half of its 2003 fiscal year. * Stocks rallied at the beginning and end of the six months but struggled in between; the broad stock market returned 5.0%. * Your fund's return was ahead of those of its average peer and its index benchmarks, primarily because of the strong performance of several of its key holdings. ================================================================================ CONTENTS 1 Letter from the Chairman 5 Adviser's Report 8 Fund Profile 9 Glossary of Investment Terms 10 Performance Summary 11 Results of Proxy Voting 12 Financial Statements 23 Advantages of Vanguard.com ================================================================================ LETTER FROM THE CHAIRMAN [PHOTO] [JOHN J. BRENNAN] FELLOW SHAREHOLDER, Vanguard Windsor Fund returned 8.7% during the six months ended April 30, 2003, an excellent result that was well ahead of the returns of its average mutual fund peer and the broad stock market. The fund's solid performance was driven, in general, by the rally in stock prices and, in particular, by big gains in several of its largest holdings. The table at left presents the six-month total returns (capital change plus reinvested distributions) for Windsor Fund, its average peer, and two index benchmarks. Per-share distributions and price changes making up the fund's total return appear on page 4. ================================================================================ TOTAL RETURNS SIX MONTHS ENDED APRIL 30, 2003 -------------------------------------------------------------------------------- VANGUARD WINDSOR FUND Investor Shares 8.7% Admiral Shares 8.7 -------------------------------------------------------------------------------- Average Multi-Cap Value Fund* 5.4 -------------------------------------------------------------------------------- Russell 1000 Value Index 5.3 -------------------------------------------------------------------------------- Wilshire 5000 Index 5.0 ================================================================================ *Derived from data provided by Lipper Inc. STOCKS OPENED AND CLOSED STRONGLY During the six months ended April 30, 2003, the overall U.S. stock market, as measured by the Wilshire 5000 Total Market Index, returned 5.0%, a performance reflecting vigorous rallies at the beginning and end of the period. Inside these bookends, however, stock prices drifted lower, depressed by investor apprehension about geopolitical tensions and the generally glum economic news. Although the U.S. military campaign in Iraq was brief and successful, economic uncertainty remained. Consumer spending remained strong, but the job market deteriorated and the red-hot real estate market began to cool. The broad economy registered anemic growth. Small stocks, as represented by the Russell 2000 Index, performed better than the large stocks in the Russell 1000 Index, while growth stocks (those that are expected to produce rapid earnings growth) and value stocks (those that generally trade at below-market valuations) produced similar returns. Overseas, Asian stock markets were hit especially hard, but as a group, international stocks produced a modest positive return for U.S.-based investors. ================================================================================ ADMIRAL(TM) SHARES A lower-cost share class for investors whose large or long-standing accounts provide economies of scale. ================================================================================ BONDS DEFIED EXPECTATIONS Bonds generated surprisingly strong results, with the Lehman Brothers Aggregate Bond Index--a broad measure of the taxable bond market--returning 4.3%. Bond yields began the fiscal half-year at their 1 lowest levels in 40 years, which would generally portend unimpressive returns, but the bond market rallied further, in part because of a rebound in hard-hit corporate bonds. Long- and intermediate-term interest rates fell modestly during the period, and the yield of the 3-month U.S. Treasury bill--a fair proxy for money market yields--declined 34 basis points (0.34 percentage point) to 1.11%. ================================================================================ MARKET BAROMETER TOTAL RETURNS PERIODS ENDED APRIL 30, 2003 -------------------------------------------------------------------------------- SIX ONE FIVE MONTHS YEAR YEARS* -------------------------------------------------------------------------------- STOCKS Russell 1000 Index (Large-caps) 4.8% -13.5% -2.3% Russell 2000 Index (Small-caps) 7.6 -20.8 -2.5 Wilshire 5000 Index (Entire market) 5.0 -13.6 -2.6 MSCI All Country World Index Free ex USA (International) 3.1 -15.2 -4.9 -------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index 4.3% 10.5% 7.6% (Broad taxable market) Lehman Municipal Bond Index 3.6 8.5 6.3 Citigroup 3-Month Treasury Bill Index 0.6 1.5 4.0 -------------------------------------------------------------------------------- CPI Consumer Price Index 1.4% 2.2% 2.5% ================================================================================ *Annualized. SUPERIOR STOCK SELECTION MADE FOR EXCELLENT SIX-MONTH RETURN Vanguard Windsor Fund's robust six-month return was a welcome reversal from the sharp decline the fund suffered in 2002. While a half-year return of 8.7% is excellent in absolute terms, we're especially pleased with the fund's impressive relative performance: Windsor's return topped that of its average mutual fund peer by more than 3 percentage points. Our investment advisers' selections of financial services stocks, which as a group accounted for more than one-quarter of the fund's assets, on average, were favorable, as were their picks among companies in the technology and utilities sectors. (Wellington Management Company and Sanford C. Bernstein & Co. independently manage portions of the fund's assets; see the table at the top of page 3 for a breakdown.) Citigroup, the fund's largest single holding, was a top performer, and Washington Mutual recorded a double-digit return. Windsor's shares in Comcast, the fund's second-largest holding as of April 30, also registered big gains. On the downside, our retailing stocks fared poorly. TJX and Ross Stores, both among the top-ten holdings when the period began, declined sharply during the six months. For details on the fund's investment approach and on specific stocks, see the Adviser's Report, which begins on page 5. Costs are an important factor in any mutual fund's relative performance, both in the short run and, especially, over long periods. In the fiscal half-year, Windsor Fund's Investor Shares had an annualized expense ratio (operating 2 costs as a percentage of average net assets) of 0.49% ($4.90 for every $1,000 invested), nearly a full percentage point below the 1.45% expense ratio of its average competitor. The fund's Admiral Shares had an even lower expense ratio of 0.38%. One of the simplest investing equations is also one of the most powerful: The lower the cost, the more of a fund's gross return goes to its shareholders. ================================================================================ FUND ASSETS MANAGED APRIL 30, 2003 -------------------------------------------------------------------------------- $ MILLION PERCENTAGE -------------------------------------------------------------------------------- Wellington Management Company, llp $ 9,655 70% Sanford C. Bernstein & Co., LLC 3,796 27 Cash Investments* 397 3 -------------------------------------------------------------------------------- Total $13,848 100% ================================================================================ *This cash is invested by The Vanguard Group in equity index products to simulate investment in stocks. Each adviser may also maintain a modest cash position. DIVERSIFICATION: THE PRUDENT RESPONSE The stock market's strong returns in recent months were welcome after what has been a very long downturn. While we hope that this broad-based upturn marks the start of a new performance cycle that will allow investors to recoup some of the losses sustained in recent years, the wisest investment approach is to build a portfolio that can weather any market--up, down, or sideways. That's why we advise investors to establish an allocation of stock, bond, and money market funds consistent with their goals, time horizon, risk tolerance, and unique financial circumstances. Diversification is the most prudent response to the financial markets' inherent uncertainties. Vanguard Windsor Fund, with its value-oriented approach to stock investing and its low costs, can play a valuable role in such a diversified investment program. We thank you for your continued trust and confidence. Sincerely, JOHN J. BRENNAN CHAIRMAN AND CHIEF EXECUTIVE OFFICER MAY 9, 2003 3 ================================================================================ YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2002-APRIL 30, 2003 ================================================================================ DISTRIBUTIONS PER SHARE STARTING ENDING INCOME CAPITAL SHARE PRICE SHARE PRICE DIVIDENDS GAINS -------------------------------------------------------------------------------- WINDSOR FUND Investor Shares $11.81 $12.74 $0.090 $0.000 Admiral Shares 39.88 43.00 0.319 0.000 ================================================================================ 4 ADVISER'S REPORT Vanguard Windsor Fund's total return of 8.7% for the six months ended April 30 was quite good. In fact, it was solidly ahead of both the 4.5% return of the Standard & Poor's 500 Index and the 5.4% return of the average multi-cap value mutual fund. The biggest contributors to our performance were Comcast, Eaton, Citigroup, Petrol Brasil, and Washington Mutual, while the biggest detractors were Aventis, Ross Stores, Micron Technology, TJX Companies, and Oxford Health Plans. Sectorwise, our performance was led by financials, telecommunication services (cable), industrials, and technology. The impressive result of our portfolio was supported by the strong--mostly "bomb-free"--underlying earnings performance of the stocks we own. As investors have become more confident about the overall investment landscape over the past several months, they have also become more receptive to the relatively offbeat and imaginative stocks that we typically hold, and we have benefited accordingly. (Note that Wellington Management Company manages about 70% of the fund's assets; Sanford C. Bernstein & Co. manages about 30%.) On the transaction side of things, we added substantially to our holdings in Comcast, Oxford Health, Wyeth, and Fannie Mae, and built a new position in HCA. Sales included profit-taking in our successful Pharmacia and Staples holdings, and the elimination of CIGNA, which has been a disappointment, from our portion of the portfolio. Currently, we find the best opportunities in economically sensitive, or cyclical, stocks. About 53% of the fund's assets are invested in these types of stocks, compared with about 43% of the S&P 500. Our research has led us to a selected group of undervalued stocks in the transportation, technology, materials, consumer cyclical, and capital goods sectors, as well as to brokerages, finance companies, and money center banks. ================================================================================ 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. ================================================================================ OUR VIEW OF THE ECONOMY One reason for our present emphasis on cyclicals is that our view of the U.S. economy is more constructive than is the fairly gloomy consensus view. We think that the economy will be running at a sustainable 3 1/2%-4% annualized growth rate by 5 year-end. If this prediction proves right, our overweighting in economically sensitive stocks should prove rewarding to our shareholders. We think that a variety of factors are setting the stage for an economic rebound: low inflation, low interest rates, looming tax cuts, declining energy prices, a weakening dollar, and historically low levels of capital expenditures and inventories. The biggest problem is negative business sentiment. This negativity started when corporate profits and the stock market began their descent several years ago, and was intensified as a result of the long, high-anxiety prewar period of late 2002 and early 2003. With the war over and the stock market and corporate profits now rebounding--first-quarter S&P 500 operating profits were up nearly 14% year over year--we believe that business sentiment will improve, and that previously postponed hiring and discretionary spending decisions will be acted upon and will get the economic ball rolling. The economy would further benefit if we are right in our view that the price of oil, which has already declined from a peak of $40 per barrel to $28 at this writing, will decline further to the $18-$20 range by year-end. TAX CUTS ARE POSITIVE FOR STOCKS The new tax-cut legislation reduces the tax burden on common stock dividends--and should be a positive for stocks in general. The tendency is to think of higher-yielding stocks such as utilities and telephone companies as the way to "play" this change. To some extent, these stocks already got some lift when talk of a tax cut on dividends first started brewing a few months ago. Another frontier that has not been exploited is high return-on-equity companies with dividend payout ratios (percentage of earnings paid to shareholders as dividends) that can be increased, given a company's moderate reinvestment needs. Citigroup is a shining example of such a company. This attribute, combined with its many other investment attractions, makes Citigroup our largest holding. It has a 20% return on equity--of which maybe 40% must be reinvested for organic growth--and a dividend payout ratio of only 25%. We believe that if dividend taxation relief becomes a reality, Citigroup can and will increase the dividend payout ratio; if it does, the stock price would clearly benefit. In contrast, SBC, which already pays out about 65% of earnings as dividends and has limited earnings growth prospects, doesn't really have the flexibility to increase its dividend--assuming the company wanted to. So, Citigroup, which currently yields 2.0%, might well be a better way to play dividend tax relief than SBC, which yields 4.4%. Though we outperformed the market during the past six months, in our view our portfolio still offers considerable relative value. The price/earnings ratio of our portfolio, based on projected 2003 earnings, is 13.6, a substantial 27% discount to the market P/E of 18.7. On the other hand, our prospective 6 total return of about 13.0% (1.3% dividend yield, plus 11.5% projected five-year earnings growth) is fully competitive with the market's prospective total return of 12.8% (1.8% dividend yield, plus 11% earnings growth). Therefore, if the discount on our P/E closes, as we expect it will at some point, our shareholders would enjoy relative outperformance. That is our value proposition. Charles T. Freeman, Portfolio Manager David R. Fassnacht, Assistant Portfolio Manager Wellington Management Company, llp May 19, 2003 7 FUND PROFILE AS OF APRIL 30, 2003 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 9. WINDSOR FUND ================================================================================ PORTFOLIO CHARACTERISTICS -------------------------------------------------------------------------------- COMPARATIVE BROAD FUND INDEX* INDEX** -------------------------------------------------------------------------------- Number of Stocks 165 744 5,546 Median Market Cap $11.7B $21.8B $28.2B Price/Earnings Ratio 17.1x 17.2x 20.8x Price/Book Ratio 2.0x 2.0x 2.6x Yield 2.5% 1.7% Investor Shares 1.3% Admiral Shares 1.4% Return on Equity 19.2% 18.3% 20.9% Earnings Growth Rate 6.8% 3.9% 8.6% Foreign Holdings 10.5% 0.0% 0.3% Turnover Rate 28%Y -- -- Expense Ratio -- -- Investor Shares 0.49%Y Admiral Shares 0.38%Y Cash Investments 1.7% -- -- ================================================================================ ================================================================================ TEN LARGEST HOLDINGS (% of total net assets) -------------------------------------------------------------------------------- Citigroup, Inc. 5.7% (banking) Comcast Corp. 4.0 (telecommunications) Washington Mutual, Inc. 3.7 (banking) Alcoa Inc. 2.9 (metals and mining) International Business Machines Corp. 2.8 (computer hardware) TJX Cos., Inc. 2.6 (retail) Tyco International Ltd. 2.4 (conglomerate) Pfizer, Inc. 2.2 (pharmaceuticals) Canadian National Railway Co. 2.0 (transportation) Eaton Corp. 1.9 (manufacturing) -------------------------------------------------------------------------------- Top Ten 30.2% ================================================================================ The "Ten Largest Holdings" excludes any temporary cash investments and equity index products. ================================================================================ VOLATILITY MEASURES COMPARATIVE BROAD FUND INDEX* FUND INDEX** -------------------------------------------------------------------------------- R-Squared 0.94 1.00 0.68 1.00 Beta 1.17 1.00 0.83 1.00 -------------------------------------------------------------------------------- ================================================================================ INVESTMENT FOCUS MARKET CAP == MEDIUM STYLE == BLEND -------------------------------------------------------------------------------- ================================================================================ SECTOR DIVERSIFICATION (% OF COMMON STOCKS) -------------------------------------------------------------------------------- COMPARATIVE BROAD FUND INDEX* INDEX** -------------------------------------------------------------------------------- Auto & Transportation 5.6% 3.3% 2.6% Consumer Discretionary 11.2 10.5 15.6 Consumer Staples 0.8 4.9 6.8 Financial Services 29.9 34.8 22.5 Health Care 10.2 3.7 14.2 Integrated Oils 5.1 8.8 3.6 Other Energy 1.2 1.8 2.1 Materials & Processing 10.5 5.9 3.7 Producer Durables 4.0 4.4 3.9 Technology 8.0 5.9 13.2 Utilities 9.2 14.6 6.9 -------------------------------------------------------------------------------- Other 4.3 1.4 4.9 ================================================================================ VISIT OUR WEBSITE AT WWW.VANGUARD.COM FOR REGULARLY UPDATED FUND INFORMATION. *Russell 1000 Value Index. **Wilshire 5000 Index. YAnnualized. 8 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 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. However, a fund's beta should be reviewed in conjunction with its R-squared (see definition below). The lower the R-squared, the less correlation there is between the fund and the benchmark, and the less reliable beta is as an indicator of volatility. ================================================================================ 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. ================================================================================ 9 PERFORMANCE SUMMARY AS OF APRIL 30, 2003 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 ================================================================================ FISCAL-YEAR TOTAL RETURNS (%) OCTOBER 31, 1992-APRIL 30, 2003 -------------------------------------------------------------------------------- FUND INDEX -------------------------------------------------------------------------------- 1993 28.3 25.2 1994 6.3 0.8 1995 17.8 24.7 1996 23.2 23.7 1997 27.0 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 -10.0 2003** 8.7 5.3 ================================================================================ *Six months ended April 30, 2003. Note: See Financial Highlights tables on pages 18 and 19 for dividend and capital gains information. AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED MARCH 31, 2003 This table presents average annual total returns through the latest calendar quarter--rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information. ================================================================================ ONE FIVE TEN YEARS INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL -------------------------------------------------------------------------------- WINDSOR FUND -------------------------------------------------------------------------------- Investor Shares 10/23/1958 -25.88% -1.79% 6.35% 2.17% 8.52% Admiral Shares 11/12/2001 -25.87 -14.05* -- -- -- ================================================================================ *Return since inception. 10 NOTICE TO SHAREHOLDERS At a special meeting of shareholders on December 3, 2002, fund shareholders approved the following proposals: o Elect trustees for the fund.* The individuals listed in the table below were elected as trustees for the fund. All trustees served as trustees to the fund prior to the shareholder meeting. ================================================================================ TRUSTEE FOR WITHHELD PERCENTAGE FOR -------------------------------------------------------------------------------- John J. Brennan 21,968,861,577 369,346,637 98.3% Charles D. Ellis 21,957,445,039 380,763,175 98.3 Rajiv L. Gupta 21,915,253,073 422,955,141 98.1 JoAnn Heffernan Heisen 21,954,237,911 383,970,303 98.3 Burton G. Malkiel 21,912,296,197 425,912,017 98.1 Alfred M. Rankin, Jr. 21,967,224,550 370,983,664 98.3 J. Lawrence Wilson 21,924,527,426 413,680,788 98.1 ================================================================================ *Results are for all funds within the same trust. o Change the fund's policy on investing in other mutual funds. This change enables the fund to invest its cash reserves in specially created money market and short-term bond funds. This new cash management program, which is similar to those of other large mutual fund complexes, should help the fund to achieve greater diversification and to earn modestly higher returns on its cash reserves. The fund will need Securities and Exchange Commission approval before implementing this new cash management program. ================================================================================ BROKER PERCENTAGE FOR AGAINST ABSTAIN NON-VOTES FOR -------------------------------------------------------------------------------- 7,363,170,023 644,566,609 319,043,157 220,771,745 86.1% -------------------------------------------------------------------------------- Note: Vote tabulations are rounded to the nearest whole number. 11 FINANCIAL STATEMENTS APRIL 30, 2003 (UNAUDITED) 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 (95.5%)(1) -------------------------------------------------------------------------------- AUTO & TRANSPORTATION (5.3%) Canadian National Railway Co. 5,634,700 $ 274,015 * Compagnie Generale des Etablissements Michelin Class B 2,744,386 101,532 Norfolk Southern Cor 2,743,600 58,192 Burlington Northern Santa Fe Corp. 1,949,000 54,884 Genuine Parts Co. 1,712,900 54,761 CSX Corp. 1,619,900 51,804 *(2)Continental Airlines, Inc. Class B 4,824,700 44,001 Magna International, Inc. Class A 638,700 37,447 * Northwest Airlines Corp. Class A 3,274,300 26,947 * Lear Corp. 362,500 14,406 Dana Corp. 1,550,200 14,401 Delta Air Lines, Inc. 545,500 6,977 ----------------------- 739,367 ----------------------- CONSUMER DISCRETIONARY (10.7%) TJX Cos., Inc. 19,049,400 366,701 (2) Ross Stores, Inc. 5,339,800 202,378 * AOL Time Warner Inc. 14,068,400 192,456 * Republic Services, Inc. Class A 7,701,200 165,268 * Staples, Inc. 6,427,800 122,385 * BearingPoint, Inc. 8,433,500 68,902 Sears, Roebuck & Co. 1,856,000 52,599 * Accenture Ltd. 2,688,000 43,062 Leggett & Platt, Inc. 2,013,600 41,581 Gannett Co., Inc. 545,500 41,305 VF Corp. 994,300 39,116 May Department Stores Co. 1,780,400 38,492 Liz Claiborne, Inc. 1,077,000 35,035 * Federated Department Stores, Inc. 1,100,300 33,691 Whirlpool Corp. 629,800 33,688 ----------------------- 1,476,659 ----------------------- CONSUMER STAPLES (0.7%) Altria Group, Inc. 1,902,900 58,533 Tyson Foods, Inc. 1,911,500 18,408 SuperValu Inc. 942,100 15,516 * Safeway, Inc. 639,500 10,628 ----------------------- 103,085 ----------------------- FINANCIAL SERVICES (28.5%) Banks--New York City (0.1%) J.P. Morgan Chase & Co. 415,800 12,204 BANKS--OUTSIDE NEW YORK CITY (5.2%) Bank of America Corp. 2,313,500 171,315 UnionBanCal Corp. 3,926,500 158,631 Wachovia Corp. 2,531,300 96,721 U.S. Bancorp 3,446,421 76,338 FleetBoston Financial Corp. 2,700,704 71,623 National City Corp. 2,185,700 65,484 Regions Financial Corp. 1,533,450 51,693 Wells Fargo & Co. 510,000 24,613 12 ================================================================================ MARKET VALUE* SHARES (000) ================================================================================ DIVERSIFIED FINANCIAL SERVICES (7.4%) Citigroup, Inc. 20,240,246 $ 794,430 CIT Group Inc. 4,992,800 101,703 Morgan Stanley 1,184,800 53,020 Metropolitan Life Insurance Co. 1,773,100 50,941 * Promise Co. Ltd. 816,800 26,711 * Takefuji Corp. 90,960 4,736 FINANCE COMPANIES (0.4%) Capital One Financial Corp. 1,449,900 60,707 FINANCIAL--MISCELLANEOUS (2.7%) Fannie Mae 3,457,900 250,317 Freddie Mac 1,547,900 89,623 (2) Metris Cos., Inc. 5,871,600 21,196 MBNA Corp. 636,300 12,026 INSURANCE--MULTILINE (2.3%) The Hartford Financial Services Group Inc. 2,716,000 110,704 Allstate Corp. 1,413,100 53,401 CIGNA Corp. 940,900 49,209 Torchmark Corp. 1,182,800 45,834 St. Paul Cos., Inc. 900,000 30,906 American International Group, Inc. 435,200 25,220 INSURANCE--PROPERTY-CASUALTY (4.2%) (2)RenaissanceRe Holdings Ltd. 3,635,100 160,999 Ace, Ltd. 3,809,700 126,025 PartnerRe Ltd. 1,854,600 99,221 (2)IPC Holdings Ltd. 2,558,300 87,878 The Chubb Corp. 907,500 47,998 Travelers Property Casualty Corp. Class A 2,179,364 35,371 The PMI Group Inc. 577,400 17,795 Travelers Property Casualty Corp. Class B 463,437 7,531 REAL ESTATE INVESTMENT TRUSTS (0.3%) Liberty Property Trust REIT 1,406,300 44,003 SAVINGS & LOAN (5.5%) Washington Mutual, Inc. 12,853,419 507,710 Golden West Financial Corp. 2,643,900 199,403 Charter One Financial, Inc. 1,679,150 48,779 * Dime Bancorp Inc.- Litigation Tracking Warrants 7,457,300 1,044 SECURITIES BROKERS & Services (0.4%) Lehman Brothers Holdings, Inc. 912,900 57,485 ----------------------- 3,950,548 ----------------------- HEALTH CARE (9.7%) Pfizer, Inc. 9,707,185 298,496 *(2)Health Net Inc. 9,905,860 258,444 Aventis SA ADR 3,877,500 195,193 *(2)Oxford Health Plans, Inc. 6,602,800 193,264 Wyeth 2,825,000 122,972 Abbott Laboratories 2,699,300 109,673 HCA Inc. 2,250,000 72,225 Aetna Inc. 875,400 43,595 GlaxoSmithKline PLC ADR 1,007,700 40,832 * PacifiCare Health Systems, Inc. 201,400 6,413 * Aventis SA Class A 91,771 4,661 ----------------------- 1,345,768 ----------------------- INTEGRATED OILS (4.8%) ExxonMobil Corp. 4,459,008 156,957 Petrol Brasil ADR 7,891,500 146,387 ConocoPhillips 1,961,899 98,684 Petro Canada 1,821,800 60,119 Royal Dutch Petroleum Co. ADR 1,320,100 53,966 Petrol Brasil Series A ADR 3,122,600 53,428 ChevronTexaco Corp. 816,739 51,299 Occidental Petroleum Corp. 1,588,200 47,408 ----------------------- 668,248 ----------------------- OTHER ENERGY (1.1%) GlobalSantaFe Corp. 2,903,200 61,432 EnCana Corp. 1,858,922 61,159 Valero Energy Corp. 860,000 31,605 ----------------------- 154,196 ----------------------- MATERIALS & PROCESSING (10.1%) Alcoa Inc. 17,499,368 401,261 (2) Engelhard Corp. 9,021,100 221,468 Air Products & Chemicals, Inc. 2,637,400 113,593 Abitibi-Consolidated, Inc. 13,791,389 96,540 * Packaging Corp. of America 4,512,300 84,876 * Smurfit-Stone Container Corp. 5,005,363 70,425 Dow Chemical Co. 1,853,300 60,492 MeadWestvaco Corp. 1,835,400 43,297 Sonoco Products Co. 1,942,300 42,439 Monsanto Co. 2,260,200 39,327 Pechiney SA ADR A 2,616,828 38,860 Georgia Pacific Group 1,939,371 29,944 Rohm & Haas Co. 692,600 22,932 Temple-Inland Inc. 467,800 21,191 International Paper Co. 557,100 19,916 Eastman Chemical Co. 600,500 18,333 Ashland, Inc. 607,000 17,998 * Owens-Illinois, Inc. 1,303,800 11,591 Martin Marietta Materials, Inc. 376,200 11,124 Boise Cascade Corp. 473,900 10,885 * Crown Holdings, Inc. 1,398,300 7,411 13 ================================================================================ MARKET VALUE* WINDSOR FUND SHARES (000) ================================================================================ * Phosphate Resources Partners LP 3,665,500 $ 5,132 CNH Global NV 155,980 1,362 ----------------------- 1,390,397 ----------------------- PRODUCER DURABLES (3.8%) *(2)Toll Brothers, Inc. 4,805,732 111,733 KB HOME 2,263,900 111,542 (2) MDC Holdings, Inc. 1,643,383 75,760 Pulte Homes, Inc. 861,900 49,982 Parker Hannifin Corp. 975,600 39,687 *(2) Axcelis Technologies, Inc. 6,318,589 35,890 Cooper Industries, Inc. Class A 936,000 34,726 * Teradyne, Inc. 2,544,500 29,516 * Applied Materials, Inc. 979,000 14,293 * Varian Semiconductor Equipment Associates, Inc. 546,700 12,601 * Thomas & Betts Corp. 648,600 10,254 ----------------------- 525,984 ----------------------- TECHNOLOGY (7.7%) International Business Machines Corp. 4,604,800 390,948 *(2) Arrow Electronics, Inc. 9,699,200 163,723 Hewlett-Packard Co. 5,261,300 85,759 * Nortel Networks Corp. 30,754,500 79,347 Seagate Technology 4,679,600 56,576 * Avnet, Inc. 4,266,800 54,402 * Flextronics International Ltd. 5,970,300 52,240 * Cisco Systems, Inc. 2,741,900 41,238 * Solectron Corp. 7,816,900 24,937 * Tellabs, Inc. 3,970,900 24,540 * Vishay Intertechnology, Inc. 1,928,121 24,102 * Unisys Corp. 2,272,400 23,633 * Corning, Inc. 2,980,400 16,154 * Ingram Micro, Inc. Class A 1,470,500 14,705 Intel Corp. 569,500 10,479 ----------------------- 1,062,783 ----------------------- UTILITIES (8.8%) * Comcast Corp. Special Class A 18,337,800 551,234 * Cox Communications, Inc. Class A 3,099,900 102,607 Ameren Corp. 1,272,300 52,139 Verizon Communications 1,245,442 46,555 Cinergy Corp. 1,334,900 45,573 PPL Corp. 1,225,000 44,345 Constellation Energy Group, Inc. 1,506,425 44,108 Sempra Energy 1,571,700 42,184 American Electric Power Co., Inc. 1,515,400 39,976 Sprint Corp. 3,407,500 39,220 SBC Communications Inc. 1,569,800 36,671 * Qwest Communications International Inc. 9,514,550 35,870 BellSouth Corp. 1,386,600 35,344 AT&T Corp. 2,039,740 34,778 Entergy Corp. 609,600 28,413 * Mediacom Communications Corp. 1,911,700 19,098 Puget Energy, Inc. 273,200 5,770 Northeast Utilities 239,000 3,566 * Comcast Corp. Class A 84,983 2,712 * McLeod USA Inc. 3,234,108 2,005 ----------------------- 1,212,168 ----------------------- OTHER (4.3%) Tyco International Ltd. 21,405,400 333,924 Eaton Corp. 3,187,700 261,615 ----------------------- 595,539 ----------------------- -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $12,652,739) 13,224,742 ================================================================================ TEMPORARY INVESTMENTS (5.1%)(1) -------------------------------------------------------------------------------- Vanguard Index Participation Equity Receipts-- Total Stock Market 2,908,800 250,855 FACE AMOUNT (000) -------------------------------------------------------------------------------- Federal National Mortgage Assn. (3) 1.168%, 7/2/2003 $ 9,000 8,982 (3) 1.183%, 7/16/2003 2,000 1,995 -------------------------------------------------------------------------------- Repurchase Agreements Collateralized by U.S. Government Obligations in a Pooled Cash Account 1.32%, 5/1/2003 326,480 326,480 1.32%, 5/1/2003--Note G 119,645 119,645 -------------------------------------------------------------------------------- TOTAL TEMPORARY INVESTMENTS (Cost $692,663) 707,957 -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.6%) (Cost $13,345,402) 13,932,699 -------------------------------------------------------------------------------- 14 ================================================================================ MARKET VALUE* WINDSOR FUND (000) ================================================================================ OTHER ASSETS AND LIABILITIES--NET (-0.6%) (84,936) -------------------------------------------------------------------------------- NET ASSETS (100%) $13,847,763 ================================================================================ *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 98.3% and 2.3%, respectively, of net assets. See Note E in Notes to Financial Statements. (2)Considered an affiliated company of the fund, as the fund owns more than 5% of the outstanding voting securities of such company. The total market value of investments in affiliated companies was $1,576,734,000. (3)Securities with an aggregate value of $10,977,000 have been 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 $ 13,932,699 Receivables for Investment Securities Sold 61,606 Other Assets--Note C 38,771 -------------------------------------------------------------------------------- Total Assets 14,033,076 -------------------------------------------------------------------------------- LIABILITIES Payables for Investment Securities Purchased 27,360 Security Lending Collateral Payable to Brokers--Note G 119,645 Other Liabilities 38,308 -------------------------------------------------------------------------------- Total Liabilities 185,313 -------------------------------------------------------------------------------- NET ASSETS (100%) $13,847,763 ================================================================================ AMOUNT (000) ================================================================================ AT APRIL 30, 2003, NET ASSETS CONSISTED OF: -------------------------------------------------------------------------------- Paid-in Capital $14,583,533 Undistributed Net Investment Income 36,794 Accumulated Net Realized Losses (1,367,103) Unrealized Appreciation Investment Securities 587,297 Futures Contracts 7,242 -------------------------------------------------------------------------------- NET ASSETS $13,847,763 -------------------------------------------------------------------------------- Investor Shares--Net Assets Applicable to 895,356,052 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $11,406,140 -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- INVESTOR SHARES $12.74 ================================================================================ Admiral Shares--Net Assets Applicable to 56,777,775 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $2,441,623 -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $43.00 ================================================================================ See Note E in Notes to Financial Statements for the tax-basis components of net assets. 15 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 SIX MONTHS ENDED APRIL 30, 2003 (000) -------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends* $ 114,710 Interest 1,469 Security Lending 528 -------------------------------------------------------------------------------- Total Income 116,707 -------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B Basic Fee 8,296 Performance Adjustment 6,072 The Vanguard Group--Note C Management and Administrative Investor Shares 13,657 Admiral Shares 1,708 Marketing and Distribution Investor Shares 647 Admiral Shares 121 Custodian Fees 145 Shareholders' Reports and Proxies Investor Shares 252 Admiral Shares 1 Trustees' Fees and Expenses 10 -------------------------------------------------------------------------------- Total Expenses 30,909 -------------------------------------------------------------------------------- Expenses Paid Indirectly--Note D (817) Net Expenses 30,092 -------------------------------------------------------------------------------- NET INVESTMENT INCOME 86,615 -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold* (248,926) Futures Contracts 7,165 -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) (241,761) -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities 1,257,067 Futures Contracts 3,181 -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,260,248 -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,105,102 ================================================================================ *Dividend income and realized net gain (loss) from affiliated companies of the fund were $6,587,000 and $(17,376,000), respectively. 16 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 ================================================================================ SIX MONTHS YEAR ENDED ENDED APR. 30, 2003 OCT. 31, 2002 (000) (000) -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 86,615 $ 186,605 Realized Net Gain (Loss) (241,761) (1,123,311) Change in Unrealized Appreciation (Depreciation) 1,260,248 (1,399,722) -------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 1,105,102 (2,336,428) -------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income Investor Shares (82,644) (166,896) Admiral Shares (17,765) (24,281) Realized Capital Gain* Investor Shares -- (316,967) Admiral Shares -- (27,793) -------------------------------------------------------------------------------- Total Distributions (100,409) (535,937) -------------------------------------------------------------------------------- Capital Share Transactions--Note H Investor Shares (436,183) (2,563,202) Admiral Shares 53,667 2,900,091 -------------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions (382,516) 336,889 -------------------------------------------------------------------------------- Total Increase (Decrease) 622,177 (2,535,476) -------------------------------------------------------------------------------- NET ASSETS Beginning of Period 13,225,586 15,761,062 -------------------------------------------------------------------------------- End of Period $13,847,763 $13,225,586 ================================================================================ *Includes fiscal 2003 and 2002 short-term gain distributions totaling $0 and $110,500,000, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. 17 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 ======================================================================================================================== SIX MONTHS FOR A SHARE OUTSTANDING ENDED OCTOBER 31, THROUGHOUT EACH PERIOD APR. 30, 2003 2002 2001 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $11.81 $14.27 $16.44 $16.91 $16.34 $19.55 ------------------------------------------------------------------------------------------------------------------------ INVESTMENT OPERATIONS Net Investment Income .08 .164 .22 .28 .27 .23 Net Realized and Unrealized Gain (Loss) on Investments .94 (2.143) (.29) 1.44 1.77 (.32) ------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations 1.02 (1.979) (.07) 1.72 2.04 (.09) ------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS Dividends from Net Investment Income (.09) (.169) (.25) (.29) (.24) (.24) Distributions from Realized Capital Gains - (.312) (1.85) (1.90) (1.23) (2.88) ------------------------------------------------------------------------------------------------------------------------ Total Distributions (.09) (.481) (2.10) (2.19) (1.47) (3.12) ------------------------------------------------------------------------------------------------------------------------ Net Asset Value, End of Period $12.74 $11.81 $14.27 $16.44 $16.91 $16.34 ------------------------------------------------------------------------------------------------------------------------ TOTAL RETURN 8.67% -14.55% -0.37% 11.60% 13.74% -0.78% ------------------------------------------------------------------------------------------------------------------------ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $11,406 $11,012 $15,761 $15,935 $16,824 $18,355 Ratio of Total Expenses to Average Net Assets 0.49%* 0.45% 0.41% 0.31% 0.28% 0.27% Ratio of Net Investment Income to Average Net Assets 1.30%* 1.16% 1.37% 1.75% 1.56% 1.31% Portfolio Turnover Rate 28%* 30% 33% 41% 56% 48% ========================================================================================================================
*Annualized. 18 WINDSOR FUND ADMIRAL SHARES ================================================================================ SIX MONTHS NOV. 12, ENDED 2001* TO APR. 30, OCT. 31, FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $39.88 $50.00 -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .287 .556 Net Realized and Unrealized Gain (Loss) on Investments 3.152 (9.030) -------------------------------------------------------------------------------- Total from Investment Operations 3.439 (8.474) -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.319) (.592) Distributions from Realized Capital Gains -- (1.054) -------------------------------------------------------------------------------- Total Distributions (.319) (1.646) -------------------------------------------------------------------------------- Net Asset Value, End of Period $43.00 $39.88 -------------------------------------------------------------------------------- Total Return 8.66% -17.61% -------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,422 $2,214 Ratio of Total Expenses to Average Net Assets 0.38%** 0.40%** Ratio of Net Investment Income to Average Net Assets 1.41%** 1.22%** Portfolio Turnover Rate 28% 30% ================================================================================ *Inception. **Annualized. 19 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: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund's pricing time but after the close of their primary markets, are valued by methods deemed by the board of trustees to represent fair value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value. 2. Futures Contracts: The fund uses S&P 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). 3. Repurchase Agreements: The fund, along with other members of The Vanguard Group, transfers uninvested cash balances to a pooled cash account, which is invested in repurchase agreements secured by U.S. government securities. Securities pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. 4. Federal Income Taxes: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements. 5. Distributions: Distributions to shareholders are recorded on the ex-dividend date. 6. Other: Dividend income is recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. 20 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, each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the adviser. The basic fees of each adviser are subject to quarterly adjustments based on performance for the preceding three years relative to a designated market index: for Wellington Management Company, llp, the S&P 500 Index; and for Sanford C. Bernstein & Co., LLC, the Russell 1000 Value Index. The Vanguard Group manages the cash reserves of the fund on an at-cost basis. For the six months ended April 30, 2003, the aggregate investment advisory fee represented an effective annual basic rate of 0.13% of the fund's average net assets before an increase of $6,072,000 (0.09%) 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 April 30, 2003, the fund had contributed capital of $2,378,000 to Vanguard (included in Other Assets), representing 0.02% of net assets and 2.38% 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. For the six months ended April 30, 2003, these arrangements reduced the fund's expenses by $817,000 (an annual rate of 0.01% of average net assets). E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. The fund's tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at October 31, 2002, the fund had available realized losses of $1,117,657,000 to offset future net capital gains through October 31, 2010. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2003; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balances above. At April 30, 2003, net unrealized appreciation of investment securities for tax purposes was $587,297,000, consisting of unrealized gains of $2,698,265,000 on securities that had risen in value since their purchase and $2,110,968,000 in unrealized losses on securities that had fallen in value since their purchase. 21 NOTES TO FINANCIAL STATEMENTS (CONTINUED) At April 30, 2003, the aggregate settlement value of open futures contracts expiring in June 2003 and the related unrealized appreciation were: -------------------------------------------------------------------------------- (000) -------------------------------------------------------------------------------- AGGREGATE UNREALIZED NUMBER OF SETTLEMENT APPRECIATION FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION) -------------------------------------------------------------------------------- S&P 500 Index 564 $129,170 $6,232 S&P MidCap 400 Index 46 10,091 1,010 ================================================================================ Unrealized appreciation on open futures contracts is required to be treated as realized gain for tax purposes. F. During the six months ended April 30, 2003, the fund purchased $1,799,218,000 of investment securities and sold $2,393,864,000 of investment securities, other than temporary cash investments. G. The market value of securities on loan to broker/dealers at April 30, 2003, was $114,955,000, for which the fund held cash collateral of $119,645,000. 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:
====================================================================================================================== SIX MONTHS ENDED YEAR ENDED APRIL 30, 2003 OCTOBER 31, 2002 ---------------------------------------------------------------------------------------------------------------------- AMOUNT SHARES AMOUNT SHARES (000) (000) (000) (000) ---------------------------------------------------------------------------------------------------------------------- INVESTOR SHARES Issued $ 430,070 35,920 $ 1,380,759 97,131 Issued in Lieu of Cash Distributions 77,596 6,360 457,704 30,770 Redeemed (943,849) (78,994) (4,401,665) (300,286) ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease)-- Investor Shares (436,183) (36,714) (2,563,202) (172,385) ---------------------------------------------------------------------------------------------------------------------- ADMIRAL SHARES Issued 183,456 4,511 3,178,513 61,845 Issued in Lieu of Cash Distributions 16,499 401 48,252 978 Redeemed (146,288) (3,646) (326,674) (7,311) ---------------------------------------------------------------------------------------------------------------------- Net Increase (Decrease)--Admiral Shares 53,667 1,266 2,900,091 55,512 ======================================================================================================================
22 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(R) 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! 23 CAPITALIZE ON YOUR IRA Are you taking full advantage of your individual retirement account? You really should be. The contribution limits on IRAs were recently raised, making these tax-deferred accounts more powerful options for retirement savers. Here's how you can exploit your IRA--and improve your chances of having the retirement of your dreams. o Contribute the maximum amount each year. It may be an obvious point, but if you invest as much in your IRA as the law allows--currently $3,000 per tax year if you are under age 50 and $3,500 if you are age 50 or over--you will increase the odds of meeting your retirement goals. "Max out" every year you can. o Make it automatic. Put your IRA on autopilot by taking advantage of Vanguard's Automatic Investment Plan. Your IRA contributions will be deducted from your bank account on a schedule of your choosing, making retirement investing a healthy habit. o Consider cost. The owners of low-cost investments keep a larger portion of their gross returns than the owners of high-cost investments. Over the long term, avoiding costlier mutual funds and brokerage commissions could significantly boost your retirement savings. Our low costs are one reason a Vanguard IRA(R) is such a smart choice. o Request a direct rollover when you change jobs. Don't spend your retirement assets before you've retired. When you change jobs, roll your 401(k) or other employer-sponsored retirement plan assets directly into your IRA. If you have questions about your IRA, want to transfer an IRA from another institution to Vanguard, or need help with any other IRA transaction, call our Retirement Resource Center at 1-800-205-6189 or visit Vanguard.com. You can open or fund your IRA on our website, and have a confirmation in your hand within minutes. 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(R) 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 investments they have made as private individuals. Our independent board members bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of the funds. Among board members' responsibilities are selecting investment advisers for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers. The dates in parentheses below show when each trustee was initially elected. ================================================================================ JOHN J. BRENNAN* Chairman of the Board, Chief Executive Officer, and Director/Trustee of The Vanguard Group, Inc., and of each of the (1987) investment companies served by The Vanguard Group. -------------------------------------------------------------------------------- INDEPENDENT TRUSTEES CHARLES D. ELLIS The Partners of '63 (pro bono ventures in education); Senior Adviser to Greenwich Associates (international business (2001) strategy consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. -------------------------------------------------------------------------------- RAJIV L. GUPTA Chairman and Chief Executive Officer (since October 1999), Vice Chairman (January-September 1999), and Vice (2001) President (prior to 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 Vice President, Chief Information Officer, and Member of the Executive Committee of Johnson & Johnson (1998) (pharmaceuticals/consumer products); Director of the Medical Center at Princeton and Women's Research and Education Institute. -------------------------------------------------------------------------------- BURTON G. MALKIEL Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Vanguard Investment Series plc (1977) (Irish investment fund) (since November 2001), Vanguard Group (Ireland) Limited (Irish investment management firm) (since November 2001), Prudential Insurance Co. of America, BKF Capital (investment management firm), The Jeffrey Co. (holding company), and NeuVis, Inc. (software company). -------------------------------------------------------------------------------- ALFRED M. RANKIN, JR. Chairman, President, Chief Executive Officer, and Director of NACCO Industries, Inc. (forklift trucks/housewares/ (1993) lignite); Director of Goodrich Corporation (industrial products/aircraft systems and services); Director until 1998 of Standard Products Company (a supplier for the automotive industry). -------------------------------------------------------------------------------- J. LAWRENCE WILSON Retired Chairman and Chief Executive Officer of Rohm and Haas Co. (chemicals); Director of Cummins Inc. (diesel (1985) engines), MeadWestvaco Corp. (paper products), and AmerisourceBergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University. ================================================================================ EXECUTIVE OFFICERS* R. GREGORY BARTON Secretary; Managing Director and General Counsel of The Vanguard Group, Inc. (since September 1997); Secretary of The Vanguard Group and of 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 investment companies served by The Vanguard Group. ================================================================================ *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, Client Relationship Group. JAMES H. GATELY, Investment Programs and 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. -------------------------------------------------------------------------------- [SHIP LOGO] THE VANGUARD GROUP[R] POST OFFICE BOX 2600 VALLEY FORGE, PA 19482-2600 Vanguard, The Vanguard Group, Vanguard.com, Admiral, Consolidated View, PlainTalk, Wellington, Windsor, Vanguard IRA, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. ABOUT OUR COVER The photographs 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) 2003 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. Q222 062003 Vanguard(R) Windsor(TM) II Fund SEMIANNUAL REPORT APRIL 30, 2003 THE VANGUARD GROUP (R) Eternal Principles Markets change, but the principles of successful investing do not. During the past few years, radical upheaval in the stock market has displayed the power of this simple truth to dramatic effect. In the late 1990s, stocks experienced one of the greatest bull markets in financial history. Then, in March 2000, the longest downturn since the Great Depression began. In both bull and bear markets, however, the principles of successful investing are identical: balance, diversification, and attention to costs. Balance among stock, bond, and money market funds allows you to pursue long-term growth while moderating your risk. Diversification limits your exposure to the disasters that can befall any one security or sector. Attention to costs means you keep a larger share of any rewards produced by your investments. These principles are timeless. In fact, they're the basis of our very first mutual fund--Vanguard(R) Wellington(TM) Fund, a balanced portfolio established in 1929. Over time, balance, diversification, and attention to costs have proven to be the master keys to investment success. ================================================================================ SUMMARY -------------------------------------------------------------------------------- * Vanguard Windsor II Fund's Investor Shares returned 4.9% during the six months ended April 30, 2003, beating the average return of peer funds. * During the period, the broad U.S. stock market drifted in mostly negative territory before posting a strong April and ending the half-year with a 5.0% gain. * The financial services, utilities, and consumer discretionary stocks selected by the fund's advisers were the biggest contributors to the fund's advance. -------------------------------------------------------------------------------- ================================================================================ CONTENTS -------------------------------------------------------------------------------- 1 Letter from the Chairman 5 Adviser's Report 8 Fund Profile 9 Glossary of Investment Terms 10 Performance Summary 11 Results of Proxy Voting 12 Financial Statements -------------------------------------------------------------------------------- PICTURE OF JOHN J. BRENNAN LETTER FROM THE CHAIRMAN Fellow Shareholder, Vanguard Windsor II Fund's Investor Shares returned 4.9% during the fiscal half-year ended April 30, 2003. That result bested the average return of the fund's peer group and about matched that of the broad market, as measured by the Wilshire 5000 Total Market Index. However, the fund's performance slightly trailed that of its primary benchmark, the Russell 1000 Value Index. The adjacent table shows the total returns-- capital change plus reinvested distributions--for Windsor II's Investor and Admiral Shares and the fund's benchmarks. Information about the per-share components of the fund's returns appears in the table on page 4. ======================================================= TOTAL RETURNS SIX MONTHS ENDED APRIL 30, 2003 ------------------------------------------------------- Vanguard Windsor II Fund Investor Shares 4.9% Admiral Shares 5.0 Average Large-Cap Value Fund* 4.1 Russell 1000 Value Index 5.3 Wilshire 5000 Index 5.0 ------------------------------------------------------- *Derived from data provided by Lipper Inc. STOCKS OPENED AND CLOSED STRONGLY During the six months ended April 30, 2003, the overall U.S. stock market, as represented by the Wilshire 5000 Index, returned 5.0%, a performance reflecting strong rallies at the beginning and end of the period. Inside these bookends, however, stock prices drifted lower, depressed by investor apprehension about geopolitical tensions and the generally glum economic news. Although the U.S. military campaign in Iraq was brief and successful, economic uncertainty remained. Consumer spending remained strong, but the job market deteriorated and red-hot residential real estate prices began to cool. The broad economy registered anemic growth. Small stocks, as represented by the Russell 2000 Index, performed better than the large stocks in the Russell 1000 Index, while growth stocks (those that are expected to produce rapid earnings growth) and value stocks (those that generally trade at below-market valuations) produced similar returns. Overseas, Asian stock markets were hit especially hard, but as a group, international stocks produced a modest positive return for U.S.-based investors. ================================================================================ ADMIRAL(TM) SHARES A LOWER-COST CLASS OF SHARES AVAILABLE TO MANY LONGTIME SHAREHOLDERS AND TO THOSE WITH SIGNIFICANT INVESTMENTS IN THE FUND. ================================================================================ 1 BONDS DEFIED EXPECTATIONS Bonds generated surprisingly strong results, with the Lehman Brothers Aggregate Bond Index--a broad measure of the taxable bond market-- returning 4.3%. Bond yields began the fiscal half-year at their lowest levels in 40 years, which would generally portend unimpressive returns, but the bond market rallied further, in part because of a strong rebound in hard-hit corporate bonds. Long- and intermediate-term interest rates fell somewhat during the period, and the yield of the 3-month U.S. Treasury bill--a fair proxy for money market yields--declined 34 basis points (0.34 percentage point) to 1.11%. ================================================================ MARKET BAROMETER TOTAL RETURNS PERIODS ENDED APRIL 30, 2003 ---------------------------------------------------------------- SIX ONE FIVE MONTHS YEAR YEARS* ---------------------------------------------------------------- STOCKS Russell 1000 Index (Large-caps) 4.8% -13.5% -2.3% Russell 2000 Index (Small-caps) 7.6 -20.8 -2.5 Wilshire 5000 Index (Entire market) 5.0 -13.6 -2.6 MSCI All Country World Index Free ex USA (International) 3.1 -15.2 -4.9 ---------------------------------------------------------------- BONDS Lehman Aggregate Bond Index 4.3% 10.5% 7.6% (Broad taxable market) Lehman Municipal Bond Index 3.6 8.5 6.3 Citigroup 3-Month Treasury Bill Index 0.6 1.5 4.0 ================================================================ CPI Consumer Price Index 1.4% 2.2% 2.5% ================================================================ *Annualized. A STRONG APRIL HELPED TO GENERATE A SIX-MONTH GAIN Like the broad stock market, the Windsor II Fund enjoyed a strong April, enabling the fund to post a solid advance in the first half of its fiscal year. Windsor II's holdings in the financial services sector (the fund's largest sector, with over one-quarter of assets) outperformed the overall sector and contributed most to the fund's positive outcome. The fund also got a nice bounce from companies in the utilities and consumer discretionary sectors, which together account for another 28% of fund assets. Several materials & processing companies also turned in very strong six-month returns, further boosting the fund's performance. Windsor II was slowed down by its holdings in the market's chief laggard for the period, the consumer staples area, whose companies posted a collective negative return for the six months. Your fund overweighted the sector compared with its primary benchmark as its advisers continued to hold perceived bargains that the market failed to appreciate. The "other" sector also deserves mention, owing to the fund's increased investment during the half-year in one of the sector's conglomerate holdings, Tyco International. Windsor II's stake in Tyco underscores the fund's contrarian strategy of finding beaten-down large-capitalization stocks that the advisers believe have the potential to rebound strongly. Tyco's well-publicized 2 management problems have given its shareholders a rough ride, but the stock rallied 21% in April as investors became more confident about the company's future under new leadership. Results from other holdings in this catch-all "other" category were mixed. You'll find more information about the fund's individual holdings in the Adviser's Report on page 5. THE FUND'S RELATIVE PERFORMANCE VERSUS ITS PEERS AND BENCHMARK Helped by its significant cost advantage, Windsor II's six-month return easily outdistanced that of its large-cap value fund peers. In fact, your fund's Investor Shares' annualized expense ratio of 0.44% (0.33% for Admiral Shares) for the period was nearly a full percentage point lower than the 1.41% average expense ratio posted by competitor funds in 2002. Windsor II slightly lagged its benchmark, the Russell 1000 Value Index, in large part due to the fund's higher concentration in the weak consumer staples area. The index also has a higher weighting in technology companies versus that of the fund. True to Windsor II's fundamental value orientation, your fund's advisers continued to underweight tech stocks in the belief that their prices still were not low enough to merit a bigger commitment. While the fund's tech holdings rose a bit in value, the index sector did even better during the past six months. Counteracting this relative drag versus the index, the fund's holdings in the utilities and materials & processing sectors easily outperformed those in the index, bringing the net returns of the fund's positions to near-parity with the index's return. The table below shows the apportionment of assets managed by each of the fund's four advisers. The fund's multimanager arrangement provides an extra measure of diversification while giving the fund flexibility in overseeing its large asset base. YOUR FUND'S TIME-TESTED VALUE APPROACH Since its inception, Windsor II has consistently emphasized out-of-favor, dividend-paying stocks that will ultimately reward patient investors. The market is, of course, anything but consistent--and it has certainly tried investors' patience in recent years. It ================================================================ FUND ASSETS MANAGED APRIL 30, 2003 ----------------------- $ MILLION PERCENTAGE ---------------------------------------------------------------- Barrow, Hanley, Mewhinney & Strauss, Inc. $13,118 63% Tukman Capital Management, Inc. 2,933 14 Equinox Capital Management, LLC 2,909 14 Vanguard Quantitative Equity Group 1,426 7 Cash Investments* 463 2 ---------------------------------------------------------------- Total $20,849 100% ---------------------------------------------------------------- *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 remains to be seen whether the recent turnaround represents the end of the historic bear market. But whatever awaits investors through the rest of 2003 and beyond, you can rest assured that Windsor II will maintain its time-tested strategy and cost-efficient operations. Windsor II is most appropriate as just one component of a well-diversified mix of stock, bond, and money market investments best suited to one's circumstances and goals. A balanced and diversified approach to investing is the proven way to build long-term wealth. Thank you for entrusting your assets to us. We look forward to reporting to you near the end of 2003. Sincerely, /s/ John J. Brennan John J. Brennan Chairman and Chief Executive Officer May 9, 2003 ================================================================================ YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2002-APRIL 30, 2003 DISTRIBUTIONS PER SHARE ----------------------- STARTING ENDING INCOME CAPITAL SHARE PRICE SHARE PRICE DIVIDENDS GAINS -------------------------------------------------------------------------------- Windsor II Fund Investor Shares $20.87 $21.62 $0.270 $0.000 Admiral Shares 37.05 38.38 0.495 0.000 ================================================================================ 4 ADVISER'S REPORT The Investor Shares of the Windsor II Fund returned 4.9% for the six months ended April 30, 2003, compared with a 5.3% return for the Russell 1000 Value Index. THE INVESTMENT ENVIRONMENT Despite a relatively stable market, a lot happened in the fund's fiscal half-year: Investors were frightened by the possibility of war, depressed when it was happening, and then elated about the U.S. victory; the saga of corporate greed and malfeasance continued; at one point consumer confidence fell to its lowest level in almost a decade; and the U.S. Congress and the Bush administration discussed a reduction in the taxation of dividends, which could have a significant long-term impact on returns. During the period, money flowed out of most equity funds and poured into bond and money market funds. One might assume that this risk-averse environment would encourage conservative leadership in the stock market, but this was not so. The Nasdaq-100 Index was among the strongest-performing indexes. For the six months, the best-performing equities had the highest price/earnings ratios and the lowest dividend yields. Our guess is that since these stocks declined the most during the bear market, they are now seen as having the greatest recovery potential. Unfortunately, the reality is that, in an economy with significant excess capacity, capital spending will probably be slow in coming back. Most technology companies are either tied to this cycle or to the related telecommunications industry. While investors are returning to the scene of the crime, so to speak, it is not as dangerous as it was in the late 1990s; however, we advise caution, as these stocks are still expensive. Don't rate a stock as cheap after looking at what it used to sell for; instead, decide what it should sell for, considering fundamental factors like earnings, cash flow, book value, and dividends. In the fiscal half-year, investors chose either high-tech stocks with little or no earnings or bonds and money market funds. The consensus of experts and amateurs alike was that interest rates were at or near the bottom and would soon rise. However, it is also a good bet that rates will stay low until consumers and businesses improve their balance sheets, in which case near-zero money ================================================================================ INVESTMENT PHILOSOPHY THE FUND REFLECTS A BELIEF THAT SUPERIOR LONG-TERM INVESTMENT RESULTS CAN BE ACHIEVED BY HOLDING A DIVERSIFIED PORTFOLIO OF OUT-OF-FAVOR STOCKS WITH BELOW-AVERAGE PRICE/EARNINGS RATIOS, ABOVE-AVERAGE DIVIDEND YIELDS, AND THE PROSPECT OF ABOVE-AVERAGE TOTAL RETURNS. ================================================================================ 5 market returns will be the reward for caution. Equities in general are neither expensive nor cheap, but with a bland business outlook, profits are not likely to support a dramatic market advance. OUR SUCCESSES Our better-performing holdings were stocks of companies whose earnings seem to be improving, such as J.P. Morgan Chase, Washington Mutual, Public Service Enterprise Group, and Cendant. OUR SHORTFALLS Our shortfalls centered on our large holdings in the consumer staples sector (primarily food and tobacco stocks) and our lack of holdings in technology (a strongly performing sector for this period). Poor returns from some individual issues, such as ITT Industries and Boeing, also hurt our result. OUR PORTFOLIO POSITIONING The holdings in our portion of the portfolio sell at a weighted P/E ratio of 12.1 times lagging earnings, which is only 68% of the P/E ratio of the Standard & Poor's 500 Index. This is a larger-than-average discount. Our current yield on dividends is 3.2%, which is 178% of the dividend yield of the S&P 500 and higher than money market or even 5-year bond rates. In an environment of significant business uncertainty, these measures of value should allow our portfolio to do well even if difficult times lie ahead, as high concentrations of assets in sectors with low volatility, such as utilities, energy, health care, consumer staples, and financial services, usually improve fund performance in a slow economy. James P. Barrow, Portfolio Manager Barrow, Hanley, Mewhinney & Strauss, Inc. May 13, 2003 6 ================================================================================ PORTFOLIO CHANGES SIX MONTHS ENDED APRIL 30, 2003 COMMENTS -------------------------------------------------------------------------------- ADDITIONS Baxter International* Baxter is a leading medical products manufacturer. The stock fell -60% on concerns regarding several financial liabilities and a slowdown in hemophilia product sales. Baxter has now resolved most of the financial liabilities, and we believe there is a good case to be made for continued growth in the hemophilia treatment market. -------------------------------------------------------------------------------- Duke Energy This company seems to represent good value after suffering a large decline. The P/E ratio of 12 times depressed earnings and a 7% dividend yield make us optimistic about its potential for favorable price action. The company recently decided to get out of proprietary energy trading and repair its balance sheet by issuing a convertible bond. The positive impact of this action should more than offset any potential dilution. ================================================================================ REDUCTIONS Merck We sold the shares we owned, because they were more expensive than the other issues in the portfolio. However, this is a good company, and we would buy it back at a lower price. In the meantime, we can find companies with more upside potential. -------------------------------------------------------------------------------- *New holding in the portfolio. See page 12 for a complete listing of the FUND'S HOLDINGS. 7 ================================================================================ FUND PROFILE As of April 30, 2003 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 9. WINDSOR II FUND --------------------------------------------------------- PORTFOLIO CHARACTERISTICS COMPARATIVE BROAD FUND INDEX* INDEX** --------------------------------------------------------- Number of Stocks 344 744 5,546 Median Market Cap $21.3B $21.8B $28.2B Price/Earnings Ratio 15.5x 17.2x 20.8x Price/Book Ratio 2.1x 2.0x 2.6x Yield 2.5% 1.7% Investor Shares 2.4% Admiral Shares 2.5% Return on Equity 19.5% 18.3% 20.9% Earnings Growth Rate 5.0% 3.9% 8.6% Foreign Holdings 5.2% 0.0% 0.3% Turnover Rate 22%+ -- -- Expense Ratio -- -- Investor Shares 0.44%+ Admiral Shares 0.33%+ Cash Investments 3.1% -- -- --------------------------------------------------------- TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) Cendant Corp. 2.9% (commercial services) Citigroup, Inc. 2.7 (banking) J.P. Morgan Chase & Co. 2.6 (banking) ConocoPhillips 2.5 (oil) Allstate Corp. 2.5 (insurance) Bank of America Corp. 2.3 (banking) Occidental Petroleum Corp. 2.3 (oil) ChevronTexaco Corp. 2.2 (oil) Washington Mutual, Inc. 2.1 (banking) Imperial Tobacco Group ADR 2.1 (food, beverage, and tobacco) --------------------------------------- Top Ten 24.2% --------------------------------------- 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 0.49 1.00 Beta 0.96 1.00 0.58 1.00 --------------------------------------------------------- =================== INVESTMENT FOCUS STYLE: VALUE MARKET CAP: LARGE =================== --------------------------------------------------------- SECTOR DIVERSIFICATION (% OF COMMON STOCKS) COMPARATIVE BROAD FUND INDEX* INDEX** --------------------------------------------------------- Auto & Transportation 0.2% 3.3% 2.6% Consumer Discretionary 15.3 10.5 15.6 Consumer Staples 9.8 4.9 6.8 Financial Services 29.7 34.8 22.5 Health Care 5.1 3.7 14.2 Integrated Oils 9.8 8.8 3.6 Other Energy 1.8 1.8 2.1 Materials & Processing 3.2 5.9 3.7 Producer Durables 5.0 4.4 3.9 Technology 2.8 5.9 13.2 Utilities 12.9 14.6 6.9 Other 4.4 1.4 4.9 --------------------------------------------------------- *Russell 1000 Value Index. **Wilshire 5000 Index. +Annualized. Visit our website at WWW.VANGUARD.COM for regularly updated fund information. 8 ================================================================================ 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 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. However, a fund's beta should be reviewed in conjunction with its R-squared (see definition below). The lower the R-squared, the less correlation there is between the fund and the benchmark, and the less reliable beta is as an indicator of volatility. -------------------------------------------------------------------------------- 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. ================================================================================ 9 ================================================================================ PERFORMANCE SUMMARY As of April 30, 2003 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 -------------------------------------------------------------- Fiscal-Year Total Returns (%) October 31, 1992-April 30, 2003 SCALE RANGE -20% to 40% WINDSOR II FUND RUSSELL 1000 INVESTOR SHARES 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 2003* 4.9 5.3 -------------------------------------------------------------- *Six months ended April 30, 2003. Note: See Financial Highlights tables on pages 20 and 21 for dividend and capital gains information. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS for periods ended March 31, 2003 This table presents average annual total returns through the latest calendar quarter--rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information. TEN YEARS ONE FIVE -------------------------- INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL -------------------------------------------------------------------------------- Windsor II Fund Investor Shares 6/24/1985 -23.46% -2.67% 6.32% 2.68% 9.00% Admiral Shares 5/14/2001 -23.39 -14.58* -- -- -- -------------------------------------------------------------------------------- *Return since inception. 10 ================================================================================ NOTICE TO SHAREHOLDERS At a special meeting of shareholders on December 3, 2002, fund shareholders approved the following proposals: - Elect trustees for the fund.* The individuals listed in the table below were elected as trustees for the fund. All trustees served as trustees to the fund prior to the shareholder meeting. -------------------------------------------------------------------------------- PERCENTAGE TRUSTEE FOR WITHHELD FOR -------------------------------------------------------------------------------- John J. Brennan 21,968,861,577 369,346,637 98.3% Charles D. Ellis 21,957,445,039 380,763,175 98.3 Rajiv L. Gupta 21,915,253,073 422,955,141 98.1 JoAnn Heffernan Heisen 21,954,237,911 383,970,303 98.3 Burton G. Malkiel 21,912,296,197 425,912,017 98.1 Alfred M. Rankin, Jr. 21,967,224,550 370,983,664 98.3 J. Lawrence Wilson 21,924,527,426 413,680,788 98.1 -------------------------------------------------------------------------------- *Results are for all funds within the same trust. - Change the fund's policy on investing in other mutual funds. This change enables the fund to invest its cash reserves in specially created money market and short-term bond funds. This new cash management program, which is similar to those of other large mutual fund complexes, should help the fund to achieve greater diversification and to earn modestly higher returns on its cash reserves. The fund will need Securities and Exchange Commission approval before implementing this new cash management program. -------------------------------------------------------------------------------- BROKER PERCENTAGE FOR AGAINST ABSTAIN NON-VOTES FOR -------------------------------------------------------------------------------- 12,258,400,713 633,582,298 394,834,210 503,839,458 88.9% -------------------------------------------------------------------------------- Note: Vote tabulations are rounded to the nearest whole number. 11 ================================================================================ FINANCIAL STATEMENTS April 30, 2003 (unaudited) 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 (94.6%)(1) -------------------------------------------------------------------------------- AUTO & Transportation (0.2%) FedEx Corp. 119,900 7,180 General Motors Corp. 188,568 6,798 Ford Motor Co. 609,353 6,276 Norfolk Southern Corp. 245,500 5,207 * Lear Corp. 110,300 4,383 PACCAR, Inc. 67,400 3,937 Southwest Airlines Co. 206,000 3,288 Union Pacific Corp. 35,200 2,095 CSX Corp. 49,200 1,573 Delphi Corp. 185,000 1,554 * American Axle & Manufacturing Holdings, Inc. 48,400 1,206 Dana Corp. 121,400 1,128 CNF Inc. 17,000 516 Delta Air Lines, Inc. 35,700 457 -------- 45,598 -------- CONSUMER DISCRETIONARY (14.5%) * Cendant Corp. 42,994,062 613,955 Newell Rubbermaid, Inc. 12,072,300 367,964 Sears, Roebuck & Co. 12,425,000 352,125 Carnival Corp. 12,000,000 331,080 Waste Management, Inc. 14,841,397 322,355 Gannett Co., Inc. 3,656,800 276,893 Wal-Mart Stores, Inc. 4,092,200 230,473 The Walt Disney Co. 5,736,832 107,049 McDonald's Corp. 6,256,250 106,983 ================================================================================ MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- *(2)Service Corp. International 28,414,400 96,041 Eastman Kodak Co. 3,200,000 95,712 * Viacom Inc. Class B 760,299 10,401 * Liberty Media Corp. 872,209 9,594 * AutoNation, Inc. 374,300 5,184 Liz Claiborne, Inc. 156,200 5,081 VF Corp. 124,700 4,906 * Federated Department Stores, Inc. 156,100 4,780 Gillette Co. 145,700 4,437 * USA Interactive 139,876 4,189 J.C. Penney Co., Inc. (Holding Company) 242,800 4,142 * Jones Apparel Group, Inc. 135,600 3,867 * Clear Channel Communications, Inc. 85,800 3,356 Kimberly-Clark Corp. 66,200 3,295 * GTECH Holdings Corp. 96,100 3,236 * Harrah's Entertainment, Inc. 79,800 3,143 * Fox Entertainment Group, Inc. Class A 120,300 3,056 The McClatchy Co. Class A 51,800 3,035 Tribune Co. 59,600 2,919 * Office Depot, Inc. 215,300 2,726 * Reebok International Ltd. 64,800 2,013 * Park Place Entertainment Corp. 256,100 1,905 * Republic Services, Inc. Class A 86,600 1,858 ================================================================================ 12 ================================================================================ MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- * Brinker International, Inc. 53,300 1,692 Mattel, Inc. 77,600 1,687 Washington Post Co. Class B 2,200 1,604 * Yum! Brands, Inc. 59,300 1,465 * Toys R Us, Inc. 136,600 1,400 * Big Lots Inc. 103,300 1,293 * Mandalay Resort Group 44,000 1,163 * Rent-A-Center, Inc. 13,300 854 Avon Products, Inc. 14,600 849 Pittston Brink's Group 58,000 740 * Saks Inc. 81,100 726 Outback Steakhouse 19,700 704 * Getty Images, Inc. 18,400 623 Nordstrom, Inc. 35,500 615 * Polo Ralph Lauren Corp. 25,500 598 May Department Stores Co. 23,300 504 * American Greetings Corp. Class A 29,300 427 Belo Corp. Class A 17,900 403 IKON Office Solutions, Inc. 43,500 338 * GameStop Corp. 26,000 311 --------- 3,020,391 --------- CONSUMER STAPLES (9.3%) Imperial Tobacco Group ADR 12,840,000 433,093 ConAgra Foods, Inc. 16,789,300 352,575 Altria Group, Inc. 10,832,600 333,211 Anheuser-Busch Cos., Inc. 5,064,800 252,633 PepsiCo, Inc. 4,311,200 186,589 The Procter & Gamble Co. 2,046,000 183,833 H.J. Heinz Co. 2,276,500 68,022 Sara Lee Corp. 3,407,800 57,183 * Safeway, Inc. 2,557,700 42,509 CVS Corp. 168,000 4,067 The Coca-Cola Co. 69,500 2,808 * The Kroger Co. 165,900 2,372 Albertson's, Inc. 119,200 2,367 SuperValu Inc. 141,000 2,322 Kraft Foods Inc. 69,600 2,151 PepsiAmericas, Inc. 164,600 2,056 The Clorox Co. 35,700 1,614 General Mills, Inc. 35,200 1,588 Hershey Foods Corp. 18,900 1,233 Colgate-Palmolive Co. 21,100 1,206 Carolina Group 61,000 1,121 Coca-Cola Enterprises, Inc. 50,400 982 --------- 1,935,535 --------- FINANCIAL SERVICES (28.0%) BANKS---NEW YORK CITY (2.7%) J.P. Morgan Chase & Co. 18,791,504 551,531 The Bank of New York Co., Inc. 118,500 3,134 BANKS--OUTSIDE NEW YORK CITY (9.1%) Bank of America Corp. 6,609,312 489,420 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- PNC Financial Services Group 9,545,222 419,036 Wells Fargo & Co. 6,339,600 305,949 National City Corp. 8,752,300 262,219 Wachovia Corp. 3,269,502 124,928 FleetBoston Financial Corp. 3,783,842 100,347 KeyCorp 2,816,900 67,915 Comerica, Inc. 900,000 39,159 Bank One Corp. 432,300 15,584 U.S. Bancorp 642,622 14,234 First Tennessee National Corp. 137,500 6,023 Union Planters Corp. 210,300 6,002 AmSouth Bancorp 259,500 5,462 SunTrust Banks, Inc. 83,700 4,789 UnionBanCal Corp. 94,774 3,829 Regions Financial Corp. 96,900 3,267 BB&T Corp. 93,700 3,055 Commerce Bancshares, Inc. 72,664 2,750 Hibernia Corp. Class A 149,700 2,713 Hudson United Bancorp 76,800 2,561 BancorpSouth, Inc. 100,600 2,022 Whitney Holdings Corp. 56,700 1,915 Cullen/Frost Bankers, Inc. 58,100 1,905 First Virginia Banks, Inc. 41,550 1,697 North Fork Bancorp, Inc. 40,500 1,311 Greater Bay Bancorp 81,700 1,307 Doral Financial Corp. 18,900 756 Bank of Hawaii Corp. 21,600 712 Trustmark Corp. 27,200 669 DIVERSIFIED FINANCIAL SERVICES (5.6%) Citigroup, Inc. 14,426,973 566,259 John Hancock Financial Services, Inc. 8,781,900 254,851 The Goldman Sachs Group, Inc. 2,059,000 156,278 Merrill Lynch & Co., Inc. 2,443,100 100,289 Morgan Stanley 1,938,960 86,768 American Express Co. 149,100 5,645 Leucadia National Corp. 99,200 3,780 Metropolitan Life Insurance Co. 99,800 2,867 Marsh & McLennan Cos., Inc. 10,000 477 FINANCIAL--DATA PROCESSING SERVICES (0.5%) Automatic Data Processing, Inc. 3,308,300 111,258 * CheckFree Corp. 78,100 2,153 FINANCIAL--SMALL LOAN (1.2%) SLM Corp. 2,230,100 249,771 FINANCIAL--MISCELLANEOUS (1.4%) Fannie Mae 3,883,400 281,119 Fidelity National Financial, Inc. 154,013 5,298 Radian Group, Inc. 68,800 2,731 ================================================================================ 13 ================================================================================ MARKET VALUE* WINDSOR II FUND SHARES (000) -------------------------------------------------------------------------------- Freddie Mac 33,300 1,928 INSURANCE---LIFE Prudential Financial, Inc. 187,200 5,985 The Principal Financial Group, Inc. 28,400 826 INSURANCE---MULTILINE (4.8%) Allstate Corp. 13,533,444 511,429 American International Group, Inc. 4,426,601 256,523 The Hartford Financial Services Group Inc. 2,524,827 102,912 St. Paul Cos., Inc. 2,727,000 93,645 Old Republic International Corp. 157,000 4,804 SAFECO Corp. 101,000 3,890 Loews Corp. 89,200 3,681 Torchmark Corp. 70,200 2,720 CIGNA Corp. 49,200 2,573 Reinsurance Group of America, Inc. 50,000 1,433 Cincinnati Financial Corp. 37,100 1,367 AFLAC Inc. 41,500 1,357 Protective Life Corp. 46,900 1,347 American Financial Group, Inc. 27,800 617 INSURANCE--PROPERTY-CASUALTY W.R. Berkley Corp. 53,300 2,475 The PMI Group Inc. 69,800 2,151 Progressive Corp. of Ohio 26,300 1,788 Travelers Property Casualty Corp. Class A 84,972 1,379 Travelers Property Casualty Corp. Class B 2,772 45 REAL ESTATE INVESTMENT TRUSTS (0.1%) Equity Office Properties Trust REIT 206,900 5,373 Simon Property Group, Inc. REIT 76,700 2,816 Public Storage, Inc. REIT 74,800 2,405 Boston Properties, Inc. REIT 58,900 2,309 Kimco Realty Corp. REIT 59,700 2,161 Liberty Property Trust REIT 67,600 2,115 Hospitality Properties Trust REIT 59,400 1,711 Duke Realty Corp. REIT 52,200 1,430 ProLogis REIT 54,300 1,398 Archstone-Smith Trust REIT 52,400 1,195 iStar Financial Inc. REIT 39,800 1,191 General Growth Properties Inc. REIT 19,400 1,079 CenterPoint Properties Corp. REIT 15,600 904 Mack-Cali Realty Corp. REIT 21,300 672 ================================================================================ MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- Developers Diversified Realty Corp. REIT 25,800 650 Weingarten Realty Investors REIT 9,700 383 RENT & Lease Services---Commercial Ryder System, Inc. 102,700 2,551 SAVINGS & Loan (2.3%) Washington Mutual, Inc. 11,306,449 446,605 Sovereign Bancorp, Inc. 363,000 5,608 Golden West Financial Corp. 74,100 5,589 Green Point Financial Corp. 115,500 5,516 Charter One Financial, Inc. 157,815 4,585 Roslyn Bancorp, Inc. 113,700 2,169 Washington Federal Inc. 95,404 2,080 Webster Financial Corp. 37,900 1,423 Hudson City Bancorp, Inc. 32,000 741 SECURITIES BROKERS & Services (0.3%) Countrywide Financial Corp. 837,009 56,582 Lehman Brothers Holdings, Inc. 82,200 5,176 Bear Stearns Co., Inc. 33,500 2,239 First American Corp. 52,800 1,399 * E*TRADE Group, Inc. 170,900 940 ---------- 5,851,615 ---------- HEALTH CARE (4.8%) Bristol-Myers Squibb Co. 14,209,600 362,913 Baxter International, Inc. 12,038,700 276,890 Wyeth 5,942,100 258,660 Pfizer Inc. 2,039,200 62,705 Merck & Co., Inc. 344,600 20,049 Schering-Plough Corp. 240,600 4,355 Mylan Laboratories, Inc. 146,400 4,139 Aetna Inc. 75,600 3,765 * Genzyme Corp.-General Division 81,500 3,283 Becton, Dickinson & Co. 79,700 2,821 * Health Net Inc. 75,000 1,957 * Anthem, Inc. 18,800 1,290 * Invitrogen Corp. 39,100 1,279 * Renal Care Group, Inc. 39,100 1,267 * STERIS Corp. 51,700 1,174 * WebMD Corp. 74,300 716 Eli Lilly & Co. 10,400 664 * Coventry Health Care Inc. 13,400 547 * Genentech, Inc. 6,900 262 ---------- 1,008,736 ---------- INTEGRATED OILS (9.3%) ConocoPhillips 10,346,534 520,431 Occidental Petroleum Corp. 15,834,800 472,669 ChevronTexaco Corp. 7,375,543 463,258 ================================================================================ 14 ================================================================================ MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- BP PLC ADR 9,473,972 365,127 ExxonMobil Corp. 3,197,956 112,568 Unocal Corp. 101,600 2,814 Amerada Hess Corp. 34,500 1,558 ---------- 1,938,425 ---------- OTHER ENERGY (1.6%) Transocean Inc. 11,940,031 227,458 *(2)Reliant Resources, Inc. 15,837,040 89,004 Texas Genco Holdings, Inc. 461,885 8,037 Apache Corp. 106,785 6,113 Burlington Resources, Inc. 129,900 6,016 Devon Energy Corp. 79,581 3,760 XTO Energy, Inc. 181,466 3,539 Anadarko Petroleum Corp. 60,600 2,691 * Newfield Exploration Co. 32,600 1,121 Equitable Resources, Inc. 25,800 991 --------- 348,730 --------- MATERIALS & Processing (3.1%) (2)Hanson PLC ADR 7,826,950 219,311 Dow Chemical Co. 3,274,000 106,863 Monsanto Co. 5,929,800 103,179 (2)Millennium Chemicals, Inc. 7,368,142 102,491 (2)Crompton Corp. 6,238,569 40,052 E.I. du Pont de Nemours & Co. 333,887 14,200 Weyerhaeuser Co. 128,500 6,372 International Paper Co. 162,300 5,802 Alcoa Inc. 242,500 5,561 Praxair, Inc. 93,900 5,454 * American Standard Cos., Inc. 58,900 4,193 Masco Corp. 152,400 3,211 Sherwin-Williams Co. 112,400 3,134 * Energizer Holdings, Inc. 104,000 2,997 PPG Industries, Inc. 56,500 2,741 * Pactiv Corp. 125,200 2,569 Georgia Pacific Group 122,000 1,884 * Smurfit-Stone Container Corp. 112,400 1,581 Precision Castparts Corp. 53,500 1,481 Lubrizol Corp. 44,500 1,407 Lafarge North America Inc. 37,700 1,201 Newmont Mining Corp. (Holding Company) 42,900 1,159 Cabot Corp. 41,100 1,145 * Owens-Illinois, Inc. 107,800 958 * Shaw Group, Inc. 66,900 779 Ball Corp. 7,000 393 The Timken Co. 21,300 377 ---------- 640,495 ---------- PRODUCER DURABLES (4.8%) The Boeing Co. 14,084,300 384,220 Emerson Electric Co. 5,762,900 292,179 (2)Cooper Industries, Inc. Class A 4,650,800 172,545 United Technologies Corp. 1,572,896 97,221 ================================================================================ MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- Lockheed Martin Corp. 98,300 4,920 * Thermo Electron Corp. 237,700 4,319 Deere & Co. 97,800 4,306 * Xerox Corp. 393,100 3,876 Caterpillar, Inc. 59,800 3,146 Rockwell Collins, Inc. 125,700 2,687 Illinois Tool Works, Inc. 38,500 2,463 KB HOME 48,100 2,370 Pitney Bowes, Inc. 60,400 2,121 Centex Corp. 24,200 1,598 Northrop Grumman Corp. 17,810 1,566 HON Industries, Inc. 51,400 1,520 Pentair, Inc. 38,400 1,480 Goodrich Corp. 59,700 840 Molex, Inc. 21,400 499 York International Corp. 18,900 452 -------- 984,328 -------- TECHNOLOGY (2.7%) International Business Machines Corp. 2,085,900 177,093 Hewlett-Packard Co. 7,406,672 120,729 * Computer Sciences Corp. 2,310,850 76,143 Raytheon Co. 2,067,400 61,877 Texas Instruments, Inc. 3,249,600 60,085 * Corning, Inc. 5,086,100 27,567 * Storage Technology Corp. 185,900 4,595 Rockwell Automation, Inc. 145,600 3,320 Scientific-Atlanta, Inc. 189,700 3,083 * EMC Corp. 328,900 2,990 * Lucent Technologies, Inc. 1,527,900 2,750 * Citrix Systems, Inc. 109,500 2,076 Applera Corp.-Applied Biosystems Group 116,800 2,048 PerkinElmer, Inc. 173,200 1,718 Symbol Technologies, Inc. 144,800 1,583 * Emulex Corp. 71,500 1,465 * Unisys Corp. 113,200 1,177 * BMC Software, Inc. 69,500 1,037 * Jabil Circuit, Inc. 52,700 985 * Sun Microsystems, Inc. 275,500 909 * Macromedia, Inc. 67,500 851 Motorola, Inc. 92,600 732 * Fairchild Semiconductor Corp. 57,300 680 * PanAmSat Corp. 30,600 529 * Arrow Electronics, Inc. 29,500 498 * Perot Systems Corp. 32,100 341 ----------- 556,861 ----------- UTILITIES (12.2%) Public Service Enterprise Group, Inc. 11,007,000 423,439 Verizon Communications 11,215,854 419,249 Entergy Corp. 8,185,700 381,535 ================================================================================ 15 ================================================================================ MARKET VALUE* WINDSOR II FUND SHARES (000) -------------------------------------------------------------------------------- American Electric Power Co., Inc. 13,054,460 344,377 Southern Co. 8,972,500 261,010 Duke Energy Corp. 8,362,600 147,098 (2)CenterPoint Energy Inc. 15,899,700 125,608 *(2)Mirant Corp. 32,631,600 108,011 Exelon Corp. 1,777,200 94,263 * Comcast Corp. Class A 2,734,443 87,256 SBC Communications Inc. 2,529,949 59,100 BellSouth Corp. 630,100 16,061 * Comcast Corp.-;Special Class A 263,800 7,930 Sprint Corp. 598,200 6,885 * Edison International 401,300 5,855 Sempra Energy 211,800 5,685 Constellation Energy Group, Inc. 191,700 5,613 PPL Corp. 124,600 4,511 Dominion Resources, Inc. 74,700 4,421 AT&T Corp. 256,369 4,371 Consolidated Edison Inc. 99,500 3,868 KeySpan Corp. 104,300 3,533 FirstEnergy Corp. 100,100 3,376 Wisconsin Energy Corp. 98,000 2,580 NICOR Inc. 85,000 2,555 FPL Group, Inc. 40,900 2,490 ALLTEL Corp. 51,900 2,432 CMS Energy Corp. 361,100 2,250 * Qwest Communications International Inc. 577,900 2,179 SCANA Corp. 57,000 1,809 * AT&T Wireless Services Inc. 272,900 1,763 National Fuel Gas Co. 72,000 1,689 CenturyTel, Inc. 48,800 1,437 Energy East Corp. 52,600 958 * Cox Communications, Inc. Class A 22,500 745 * Adelphia Communications Corp. Class A 74,500 13 --------- 2,545,955 --------- OTHER (4.1%) Tyco International Ltd. 23,975,100 374,012 ITT Industries, Inc. 4,579,200 266,967 General Electric Co. 6,276,600 184,846 Textron, Inc. 324,800 9,578 Honeywell International Inc. 250,700 5,917 Fortune Brands, Inc. 119,900 5,803 3M Co. 43,400 5,470 Johnson Controls, Inc. 26,100 2,146 Brunswick Corp. 68,000 1,485 Teleflex Inc. 38,400 1,474 ----------- 857,698 ----------- -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $18,403,903) 19,734,367 -------------------------------------------------------------------------------- MARKET VALUE* SHARES (000) -------------------------------------------------------------------------------- TEMPORARY INVESTMENTS (5.6%)(1) -------------------------------------------------------------------------------- Vanguard Index Participation Equity Receipts-- Total Stock Market 1,992,800 171,859 Face Amount (000) --------- Federal National Mortgage Assn. (3) 1.17%, 7/2/2003 $ 28,000 27,945 Repurchase Agreements Collateralized by U.S. Government Obligations in a Pooled Cash Account 1.32%, 5/1/2003 914,594 914,594 1.32%, 5/1/2003--Note G 43,705 43,705 -------------------------------------------------------------------------------- TOTAL TEMPORARY INVESTMENTS (Cost $1,155,600) 1,158,103 -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.2%) (Cost $19,559,503) 20,892,470 -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES---NET (-0.2%) (43,337) -------------------------------------------------------------------------------- NET ASSETS (100%) $20,849,133 ================================================================================ *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 96.9% and 3.3%, respectively, of net assets. See Note E in Notes to Financial Statements. (2)Considered an affiliated company of the fund, as the fund owns more than 5% of the outstanding voting securities of such company. The total market value of investments in affiliated companies was $953,063,000. (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 $20,892,470 Receivables for Investment Securities Sold 128,569 Other Assets--Note C 62,647 ----------- Total Assets 21,083,686 ----------- LIABILITIES Payables for Investment Securities Purchased 129,554 Security Lending Collateral Payable to Brokers---Note G 43,705 Other Liabilities 61,294 ---------- Total Liabilities 234,553 ---------- -------------------------------------------------------------------------------- NET ASSETS (100%) $20,849,133 ================================================================================ 16 AMOUNT (000) ================================================================================ AT APRIL 30, 2003, NET ASSETS CONSISTED OF: -------------------------------------------------------------------------------- Paid-in Capital $20,867,525 Undistributed Net Investment Income 138,799 Accumulated Net Realized Losses (1,513,020) Unrealized Appreciation Investment Securities 1,332,967 Futures Contracts 22,862 -------------------------------------------------------------------------------- NET ASSETS $20,849,133 ================================================================================ Investor Shares--Net Assets Applicable to 837,997,451 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $18,115,673 -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- INVESTOR SHARES $21.62 -------------------------------------------------------------------------------- Admiral Shares---Net Assets Applicable to 71,217,725 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $2,733,460 -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $38.38 ================================================================================ See Note E in Notes to Financial Statements for the tax-basis components of net assets. 17 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 SIX MONTHS ENDED APRIL 30, 2003 (000) -------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends* $ 288,202 Interest 4,682 Security Lending 153 -------------------------------------------------------------------------------- Total Income 293,037 -------------------------------------------------------------------------------- Expenses Investment Advisory Fees--Note B Basic Fee 12,903 Performance Adjustment 2,628 The Vanguard Group--Note C Management and Administrative Investor Shares 23,083 Admiral Shares 2,055 Marketing and Distribution Investor Shares 1,145 Admiral Shares 134 Custodian Fees 212 Shareholders' Reports and Proxies Investor Shares 507 Admiral Shares 6 Trustees' Fees and Expenses 15 -------------------------------------------------------------------------------- Total Expenses 42,688 Expenses Paid Indirectly--Note D (1,521) -------------------------------------------------------------------------------- Net Expenses 41,167 -------------------------------------------------------------------------------- NET INVESTMENT INCOME 251,870 -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold* (565,232) Futures Contracts (15,438) -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) (580,670) -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities 1,274,810 Futures Contracts 23,346 -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 1,298,156 -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 969,356 ================================================================================ *Dividend income and realized net gain (loss) from affiliated companies of the fund were $42,532,000 and $(46,912,000), respectively. 18 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 ------------------------------ Six Months Year Ended Ended Apr. 30, 2003 Oct. 31, 2002 (000) (000) -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations Net Investment Income $ 251,870 $ 502,088 Realized Net Gain (Loss) (580,670) (983,852) Change in Unrealized Appreciation (Depreciation) 1,298,156 (2,528,955) -------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 969,356 (3,010,719) -------------------------------------------------------------------------------- Distributions Net Investment Income Investor Shares (228,924) (454,070) Admiral Shares (33,527) (53,970) Realized Capital Gain Investor Shares -- (130,500) Admiral Shares -- (13,444) -------------------------------------------------------------------------------- Total Distributions (262,451) (651,984) -------------------------------------------------------------------------------- Capital Share Transactions--Note H Investor Shares (231,490) (543,843) Admiral Shares 155,423 890,245 -------------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions (76,067) 346,402 -------------------------------------------------------------------------------- Total Increase (Decrease) 630,838 (3,316,301) -------------------------------------------------------------------------------- Net Assets Beginning of Period 20,218,295 23,534,596 -------------------------------------------------------------------------------- End of Period $20,849,133 $20,218,295 ================================================================================ 19 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
=============================================================================================================== SIX MONTHS ENDED YEAR ENDED OCTOBER 31, APRIL 30, ---------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001 2000 1999 1998 --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $20.87 $24.50 $27.58 $29.03 $31.07 $29.36 --------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .26 .51 .564 .64 .64 .65 Net Realized and Unrealized Gain (Loss) on Investments .76 (3.47) (1.819) 1.08 .73 3.91 --------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.02 (2.96) (1.255) 1.72 1.37 4.56 --------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.27) (.52) (.585) (.67) (.74) (.66) Distributions from Realized Capital Gains -- (.15) (1.240) (2.50) (2.67) (2.19) --------------------------------------------------------------------------------------------------------------- Total Distributions (.27) (.67) (1.825) (3.17) (3.41) (2.85) --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $21.62 $20.87 $24.50 $27.58 $29.03 $31.07 =============================================================================================================== TOTAL RETURN 4.92% -12.51% -4.89% 7.22% 4.57% 16.51% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $18,116 $17,735 $21,495 $24,070 $30,541 $29,639 Ratio of Total Expenses to Average Net Assets 0.44%* 0.42% 0.40% 0.37% 0.37% 0.41% Ratio of Net Investment Income to Average Net Assets 2.51%* 2.12% 2.10% 2.36% 2.08% 2.16% Portfolio Turnover Rate 22% 41% 33% 26% 26% 31% =============================================================================================================== *Annualized.
20 WINDSOR II FUND ADMIRAL SHARES
=============================================================================================================== SIX MONTHS YEAR ENDED ENDED MAY 14* TO APR. 30, OCT. 31, OCT. 31, FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2003 2002 2001 --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $37.05 $43.50 $50.00 --------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .481 .944 .408 Net Realized and Unrealized Gain (Loss) on Investments 1.344 (6.167) (6.433) --------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.825 (5.223) (6.025) --------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.495) (.962) (.475) Distributions from Realized Capital Gains -- (.265) -- --------------------------------------------------------------------------------------------------------------- Total Distributions (.495) (1.227) (.475) --------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $38.38 $37.05 $43.50 =============================================================================================================== TOTAL RETURN 4.96% -12.44% -12.16% =============================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,733 $ 2,484 $2,039 Ratio of Total Expenses to Average Net Assets 0.33%** 0.35% 0.35%** Ratio of Net Investment Income to Average Net Assets 2.62%** 2.18% 1.83%** Turnover Rate 22%** 41% 33% =============================================================================================================== *Inception. **Annualized.
21 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 are designed for investors who meet certain administrative, servicing, tenure, and account-size criteria. A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements. 1. SECURITY VALUATION: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund's pricing time but after the close of their primary markets, are valued by methods deemed by the board of trustees to represent fair value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value. 2. FUTURES CONTRACTS: The fund uses S&P 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). 3. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard Group, transfers uninvested cash balances to a pooled cash account, which is invested in repurchase agreements secured by U.S. government securities. Securities pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. 4. FEDERAL INCOME TAXES: The fund intends to continue to qualify as a regulated investment company and distribute all of its taxable income. Accordingly, no provision for federal income taxes is required in the financial statements. 5. DISTRIBUTIONS: Distributions to shareholders are recorded on the ex-dividend date. 6. OTHER: Dividend income is recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. 22 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., each provide investment advisory services to a portion of the fund for a fee calculated at an annual percentage rate of average net assets managed by the adviser. The basic fees of 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 $304,000 for the six months ended April 30, 2003. For the six months ended April 30, 2003, the aggregate investment advisory fee represented an effective annual basic rate of 0.13% of the fund's average net assets before an increase of $2,628,000 (0.03%) 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 April 30, 2003, the fund had contributed capital of $3,640,000 to Vanguard (included in Other Assets), representing 0.02% of the fund's net assets and 3.64% 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 six months ended April 30, 2003, directed brokerage and custodian fee offset arrangements reduced expenses by $1,516,000 and $5,000, respectively. The total expense reduction represented an effective annual rate of 0.02% of the fund's average net assets. E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. The fund's tax-basis capital gains and losses are determined only at the end of each fiscal year. For tax purposes, at October 31, 2002, the fund had available realized losses of $918,354,000 to offset future net capital gains through October 31, 2010. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending October 31, 2003; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balances above. 23 At April 30, 2003, net unrealized appreciation of investment securities for tax purposes was $1,332,967,000, consisting of unrealized gains of $4,148,197,000 on securities that had risen in value since their purchase and $2,815,230,000 in unrealized losses on securities that had fallen in value since their purchase. At April 30, 2003, the aggregate settlement value of open futures contracts expiring in June 2003 and the related unrealized appreciation were: -------------------------------------------------------------------------------- (000) -------------------------------- AGGREGATE UNREALIZED NUMBER OF SETTLEMENT APPRECIATION FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION) -------------------------------------------------------------------------------- S&P 500 Index 1,097 $251,240 $ 19,171 S&P MidCap 400 Index 180 39,488 3,691 -------------------------------------------------------------------------------- Unrealized appreciation on open futures contracts is required to be treated as realized gain for tax purposes. F. During the six months ended April 30, 2003, the fund purchased $2,115,550,000 of investment securities and sold $2,349,612,000 of investment securities, other than temporary cash investments. G. The market value of securities on loan to broker/dealers at April 30, 2003, was $42,079,000, for which the fund held cash collateral of $43,705,000. 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:
----------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED APRIL 30, 2003 OCTOBER 31, 2002 ---------------- --------------------- AMOUNT SHARES AMOUNT SHARES (000) (000) (000) (000) ----------------------------------------------------------------------------------------------- Investor Shares Issued $1,053,851 50,735 $2,838,280 116,530 Issued in Lieu of Cash Distributions 219,576 10,406 561,971 22,591 Redeemed (1,504,917) (72,898) (3,944,094) (166,688) -------------------------------------------------------- Net Increase (Decrease)-- Investor Shares (231,490) (11,757) (543,843) (27,567) -------------------------------------------------------- Admiral Shares Issued 300,608 8,146 1,159,318 26,681 Issued in Lieu of Cash Distributions 29,981 801 60,629 1,376 Redeemed (175,166) (4,768) (329,702) (7,895) -------------------------------------------------------- Net Increase (Decrease)-- Admiral Shares 155,423 4,179 890,245 20,162 -----------------------------------------------------------------------------------------------
24 ================================================================================ 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(R) 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 investments they have made as private individuals. Our independent board members bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of the funds. Among board members' responsibilities are selecting investment advisers for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers. The dates in parentheses below show when each trustee was initially elected.
========================================================================================================================= JOHN J. BRENNAN* Chairman of the Board, Chief Executive Officer, and Director/Trustee of The Vanguard Group, Inc., (1987) and of each of the investment companies served by The Vanguard Group. ------------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES CHARLES D. ELLIS The Partners of '63 (pro bono ventures in education); Senior Adviser to Greenwich Associates (2001) (international business strategy consulting); Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. RAJIV L. GUPTA Chairman and Chief Executive Officer (since October 1999), Vice Chairman (January-September 1999), (2001) and Vice President (prior to 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 Vice President, Chief Information Officer, and Member of the Executive Committee of Johnson & (1998) Johnson (pharmaceuticals/consumer products); Director of the Medical Center at Princeton and Women's Research and Education Institute. BURTON G. MALKIEL Chemical Bank Chairman's Professor of Economics, Princeton University; Director of Vanguard (1977) Investment Series plc (Irish investment fund) (since November 2001), Vanguard Group (Ireland) Limited (Irish investment management firm) (since November 2001), Prudential Insurance Co. of America, BKF Capital (investment management firm), The Jeffrey Co. (holding company), and NeuVis, Inc. (software company). ALFRED M. RANKIN, JR. Chairman, President, Chief Executive Officer, and Director of NACCO Industries, Inc. (forklift (1993) trucks/housewares/lignite); Director of Goodrich Corporation (industrial products/aircraft systems and services); Director until 1998 of Standard Products Company (a supplier for the automotive industry). J. LAWRENCE WILSON Retired Chairman and Chief Executive Officer of Rohm and Haas Co. (chemicals); Director of (1985) Cummins Inc. (diesel engines), MeadWestvaco Corp. (paper products), and AmerisourceBergen Corp. (pharmaceutical distribution); Trustee of Vanderbilt University. ------------------------------------------------------------------------------------------------------------------------- EXECUTIVE OFFICERS* R. GREGORY BARTON Secretary; Managing Director and General Counsel of The Vanguard Group, Inc. (since September 1997); Secretary of The Vanguard Group and of 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 investment companies served by The Vanguard Group. -------------------------------------------------------------------------------------------------------------------------
*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, Client Relationship Group. JAMES H. GATELY, Investment Programs and 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. [SHIP] [THE VANGUARD GROUP LOGO] Post Office Box 2600 Valley Forge, PA 19482-2600 Vanguard, The Vanguard Group, Vanguard.com, Admiral, Windsor, Wellington, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. ABOUT OUR COVER The photographs 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) 2003 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. Q732 062003 Item 2: Code(s) of Ethics - Not applicable to this semi-annual report. Item 3: Audit Committee Financial Expert - Not applicable to this semi-annual report. Item 4: Principal Accountant Fees and Services - Not applicable to this semi-annual report. Item 5: Not Applicable. Item 6: Reserved. Item 7: Not applicable. Item 8: Reserved. Item 9: Controls and Procedures. (a) Disclosure Controls and Procedures. The Principal Executive and Financial Officers concluded that the Registrant's Disclosure Controls and Procedures are effective based on their evaluation of the Disclosure Controls and Procedures as of a date within 90 days of the filing date of this report. (b) Internal Controls. There were no significant changes in Registrant's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Item 10: Exhibits attached hereto. (Attach certifications as exhibits) Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VANGUARD WINDSOR FUNDS BY: (signature) -------------------------------- (HEIDI STAM) JOHN J. BRENNAN* CHIEF EXECUTIVE OFFICER Date: June 16, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. VANGUARD WINDSOR FUNDS BY: (signature) -------------------------------- (HEIDI STAM) JOHN J. BRENNAN* CHIEF EXECUTIVE OFFICER Date: June 16, 2003 VANGUARD WINDSOR FUNDS BY: (signature) -------------------------------- (HEIDI STAM) THOMAS J. HIGGINS* TREASURER Date: June 16, 2003 *By Power of Attorney. See File Number 2-57689, filed on December 26, 2002. Incorporated by Reference.