-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Si/uYAmHO1jBTnK7u8AW9BrSQ1GqzkP55q2qUdU6WeOiq0zaX+2csdVR1xgIbPvG NBPp9xFHutrA6HrO9r1rMQ== 0000932471-04-000628.txt : 20040617 0000932471-04-000628.hdr.sgml : 20040617 20040617150110 ACCESSION NUMBER: 0000932471-04-000628 CONFORMED SUBMISSION TYPE: N-CSRS PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20040430 FILED AS OF DATE: 20040617 EFFECTIVENESS DATE: 20040617 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VANGUARD WINDSOR FUNDS/ CENTRAL INDEX KEY: 0000107606 IRS NUMBER: 510082711 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-CSRS SEC ACT: 1940 Act SEC FILE NUMBER: 811-00834 FILM NUMBER: 04868656 BUSINESS ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 BUSINESS PHONE: 6106696289 MAIL ADDRESS: STREET 1: PO BOX 2600 STREET 2: V37 CITY: VALLEY FORGE STATE: PA ZIP: 19482 FORMER COMPANY: FORMER CONFORMED NAME: VANGUARD/WINDSOR FUNDS INC DATE OF NAME CHANGE: 19931203 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: WINDSOR FUNDS DATE OF NAME CHANGE: 19851031 N-CSRS 1 windsorncsr.txt WINDSOR FUNDS 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, 2003 - April 30, 2004 Item 1: Reports to Shareholders VANGUARD(R) WINDSOR(TM) FUND APRIL 30, 2004 [GRAPHIC] SEMIANNUAL REPORT THE VANGUARD GROUP(R) LOGO HOW TO READ YOUR FUND REPORT This report contains information that can help you evaluate your investment. It includes details about your fund's return and presents data and analysis that provide insight into the fund's performance and investment approach. By reading the letter from Vanguard's chairman, John J. Brennan, together with the letter from the managers who select securities for your fund, you'll get an understanding of how the fund invests and how the market environment affected its performance. The statistical information that follows can help you understand how the fund's performance and characteristics stack up against those of similar funds and market benchmarks. It's important to keep in mind that the opinions expressed by Vanguard's investment managers are just that: informed opinions. They should not be considered promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. As things change--and in the financial markets you can be certain only of change--an investment manager's job is to evaluate new information and make adjustments, if necessary. Of course, the risks of investing in the fund are spelled out in the prospectus. Frequent updates on the fund's performance and information about some of its holdings are available on Vanguard.com(R). - -------------------------------------------------------------------------------- CONTENTS 1 LETTER FROM THE CHAIRMAN 6 ADVISOR'S REPORT 9 FUND PROFILE 10 GLOSSARY OF INVESTMENT TERMS 11 PERFORMANCE SUMMARY 12 ABOUT YOUR FUND'S EXPENSES 14 FINANCIAL STATEMENTS 26 ADVANTAGES OF VANGUARD.COM - -------------------------------------------------------------------------------- SUMMARY * During the six months ended April 30, 2004, Vanguard Windsor Fund provided a total return of 7.1%, outpacing the broad stock market but falling short of its main competitive measures. * Stock prices began the period with a strong advance, then backed down. * The fund's six-month performance was, in part, the result of the strong performances of several of its biggest holdings--notably, conglomerate Tyco International and several health care companies and retailers. ---------------------------------------------------------------------- Want less clutter in your mailbox? Just register with Vanguard.com and opt to get fund reports online. LETTER FROM THE CHAIRMAN Dear Shareholder, During the first half of its 2004 fiscal year, Vanguard Windsor Fund returned 7.1%--a result that reflected the stock market's strong advance. The table below presents the six-month total returns (capital change plus reinvested distributions) for the fund, its average peer, and two index benchmarks. Information about the fund's net asset values and distributions appear on page 5. [PICTURES OF JOHN J BRENNAN] - -------------------------------------------------------------------------------- TOTAL RETURNS SIX MONTHS ENDED APRIL 30, 2004 - -------------------------------------------------------------------------------- VANGUARD WINDSOR FUND Investor Shares 7.1% Admiral Shares 7.1 Russell 1000 Value Index 8.2 Average Multi-Cap Value Fund* 8.1 Dow Jones Wilshire 5000 Index 6.4 - -------------------------------------------------------------------------------- *Derived from data provided by Lipper Inc. As you can see, although the fund's absolute performance was solid, its return fell short of the results of the Russell 1000 Value Index and the average multi-capitalization value fund. Overall, Windsor's retailing stocks performed well, as did several of its health care holdings. And one of its largest holdings--Tyco International--booked an exceptional six months. STOCKS ROSE EARLY ON, THEN GAVE UP SOME OF THEIR GAINS For most of the fiscal half-year, the broad U.S. stock market advanced. However, in March and April, stock prices retreated somewhat as higher oil prices and reports of robust economic growth provoked fears of inflation. For the six months, the U.S. stock market, as measured by the Dow Jones Wilshire 5000 Composite Index, returned 6.4%. The Russell 2000 Index, a proxy for small-cap stocks, returned 6.5%, slightly surpassing the 6.1% gain of the mid- to large-cap Russell 1000 Index. Across the market-cap spectrum, value-oriented stocks (those that 1 - -------------------------------------------------------------------------------- ADMIRAL[TM]SHARES A lower-cost class of shares available to many longtime shareholders and to those with significant investments in the fund. - -------------------------------------------------------------------------------- generally trade at below-market valuations relative to their book values and other fundamental measures) posted better results than growth stocks (those expected to produce above-average earnings growth). International stock markets continued to provide attractive returns to U.S.-based investors. Although the U.S. dollar's decline relative to major foreign currencies tailed off somewhat, it still enhanced results from European markets, where solid gains looked even better when translated from local currencies into dollars. BOND YIELDS ROSE ON NEWS OF THE STRENGTHENING ECONOMY In the fixed income markets, interest rates remained low through much of the period but rose sharply in April, propelled by the strength of the economy. For the six months, the yield of the benchmark 10-year U.S. Treasury note increased 22 basis points from 4.29% to 4.51%. (Indicative of April's notable increase in interest rates, the benchmark note's yield climbed 67 basis points during the month, from 3.84% to 4.51%.) With investors gravitating toward higher-yielding securities, returns of corporate bonds outpaced those of government bonds with similar maturities. The Lehman Brothers Aggregate Bond Index, a measure of the taxable investment-grade bond market, returned 1.2%. - -------------------------------------------------------------------------------- MARKET BAROMETER TOTAL RETURNS PERIODS ENDED APRIL 30, 2004 ------------------------------ SIX ONE FIVE MONTHS YEAR YEARS* - -------------------------------------------------------------------------------- STOCKS Russell 1000 Index (Large-caps) 6.1% 23.9% -1.7% Russell 2000 Index (Small-caps) 6.5 42.0 6.7 Dow Jones Wilshire 5000 Index 6.4 26.1 -1.2 (Entire market) MSCI All Country World Index ex USA (International) 11.7 41.3 0.4 - -------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index 1.2% 1.8% 6.7% (Broad taxable market) Lehman Municipal Bond Index 1.2 2.7 5.4 Citigroup 3-Month Treasury Bill Index 0.5 1.0 3.3 ================================================================================ CPI Consumer Price Index 1.6% 2.3% 2.5% - -------------------------------------------------------------------------------- *ANNUALIZED. Short-term interest rates remained low and demonstrated little volatility during the period, staying within a tight range of 0.87% to 0.99%. The yield of the 3-month Treasury bill, a proxy for money market rates, was 0.96% on April 30, just 1 basis point higher than its initial 0.95% yield. 2 STOCK SELECTIONS PLAYED A KEY ROLE As is typically the case, Windsor's performance during the half-year was driven by its stock selection. Among the biggest contributors to the fund's 7.1% return were Tyco International, the conglomerate that has rebounded strongly since last year, health care companies Aventis and Oxford Health Plans, and retailers TJX and Ross Stores. Among industry sectors, the financial services, consumer discretionary, and health care groups accounted for a significant portion of the fund's return. (Financial services stocks averaged about 28% of the fund's assets during the period; however, the sector was a lagging performer, particularly during the later stages of the half-year when concerns about rising interest rates dampened investors' appetites for banking stocks.) Overall, more than half of the fund's assets were invested in economically sensitive stocks, such as banks, automakers, retailers, manufacturers, home builders, and technology companies. Of course, the broad market's advance was not uniform. Several of the fund's biggest holdings performed relatively poorly. Citigroup, the financial giant that accounted for nearly 6% of the fund's assets when the period began, gained only about 3%. Comcast, which started the period as Windsor's second-largest holding, sank after it announced its bid to buy Disney; Comcast shares returned - -10%. Health Net, which had problems with pricing and costs, and drugmaker Wyeth, which is facing stiff competition on several key products, registered double-digit declines. - -------------------------------------------------------------------------------- FUND ASSETS MANAGED APRIL 30, 2004 ------------------------ $ MILLION PERCENTAGE - -------------------------------------------------------------------------------- Wellington Management Company, llp $12,881 69% Sanford C. Bernstein & Co., LLC 5,140 27 Cash Investments* 714 4 - -------------------------------------------------------------------------------- Total $18,735 100% - -------------------------------------------------------------------------------- *These short-term reserves are invested by The Vanguard Group in equity index products to simulate investment in stocks; each advisor also may maintain a modest cash position. The relative performance of any actively managed mutual fund is essentially a result of two factors: the investment advisor's selections and the fund's costs. Two advisors, Wellington Management Company and Sanford C. Bernstein & Co., independently manage portions of Windsor Fund's assets. (See the above table for a breakdown.) Combining advisors provides diversification while preserving the benefit of active management--namely, the potential to outperform the broad market. And by maintaining costs at a level far below the average for peer funds, the Windsor Fund gains a significant leg up on its higher-cost competitors. This advantage has 3 been especially powerful over longer periods. (See pages 12 and 13 for details about the fund's expenses.) I'd like to close this examination of the fund's performance with a word of thanks to Charles T. Freeman of Wellington Management Company, who has been Windsor Fund's lead portfolio manager since 1996--and who has served on Windsor's advisory team since 1969. Mr. Freeman will retire on June 30 and will be replaced by the fund's assistant portfolio manager, David R. Fassnacht. Mr. Freeman, who will also be retiring as lead portfolio manager of Vanguard(R) Capital Value Fund, has served Windsor shareholders extremely well. He has earned the gratitude of Vanguard for his hard work and dedication over 35 years, and for the excellent track record he has achieved for our fund's shareholders. We wish him well. REASONABLE EXPECTATIONS CALL FOR DIVERSIFICATION Stocks have delivered generally strong returns since October 2002. While the market--and your fund--have yielded impressive rewards, uninterrupted streaks of strong performance will never be the norm. For actively managed funds such as Windsor, the same strategies that seek to generate market-beating returns can sometimes leave the portfolio on the wrong side of market sentiment. The best tools to moderate market risk are balance and diversification. That's why we advise clients to develop a portfolio of well-diversified stock, bond, and money market mutual funds in allocations suited to their unique financial circumstances. A secondary level of diversification involves combining a well-managed active fund such as Windsor with a broadly diversified index fund. The combination provides some opportunity for outperformance along with some protection against periods of underperformance. Thank you for your ongoing commitment to Vanguard and to the Windsor Fund. Sincerely, /S/JOHN J BRENNAN John J. Brennan CHAIRMAN AND CHIEF EXECUTIVE OFFICER MAY 13, 2004 4 - -------------------------------------------------------------------------------- YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2003-APRIL 30, 2004 DISTRIBUTIONS PER SHARE ----------------------- STARTING ENDING INCOME CAPITAL SHARE PRICE SHARE PRICE DIVIDENDS GAINS - -------------------------------------------------------------------------------- WINDSOR FUND Investor Shares $15.23 $16.22 $0.085 $0.000 Admiral Shares 51.41 54.76 0.319 0.000 - -------------------------------------------------------------------------------- 5 ADVISOR'S REPORT Vanguard Windsor Fund's return for the six months ended April 30 was 7.1%, a bit higher than the 6.3% return of the Standard & Poor's 500 Index, which is dominated by large-capitalization stocks, though a bit lower than the 8.1% turned in by the average multi-cap value mutual fund. (The following comments concern the 69% of fund assets that Wellington Management Company managed as of April 30.) - -------------------------------------------------------------------------------- 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 CONCENTRTE A LARGE PORTION OF ASSETS IN THOSE SECURITIES OR INDUSTRIES THE ADVISORS BELIEVE OFFER THE BEST RETURN POTENTIAL. - -------------------------------------------------------------------------------- The best-contributing sectors to the Wellington portion of the portfolio were consumer discretionary, health care, and industrials. Our biggest detractors were materials, technology, and telecommunication services (cable). In terms of individual stocks, Tyco International, Oxford Health Plans, Aventis, TJX, and Petrobras were our best. Our worst were Washington Mutual, Wyeth, Continental Airlines, Comcast, and Health Net. Oxford is being taken over by UnitedHealth Group, and Aventis by Sanofi-Synthelabo. Comcast sold off after announcing its ill-advised bid for Disney in February, though the bid was withdrawn later. Health Net has twice now reduced earnings guidance for this year; looking out over the next year, however, we believe that the company's problems can be fixed. So we kept the stock, which, in our opinion, is oversold. The stock and bond markets weakened in April (and into May), reflecting a concern that inflation is headed higher. We think this was axiomatic all along, as the current "core" inflation rate of 1.8% is so low to begin with. With the economy improving, one would expect some pickup in inflation. In fact, we expect the core inflation rate, which excludes the volatile food and energy categories, to move up to maybe 2.5% or so. We do not think it will go much higher, as the basic forces of global competition and the strong U.S.-led productivity gains that rid us of past high inflation are still very much with us. If all this is right, the yield of the benchmark 10-year U.S. Treasury note, which has moved from 3.7% in late March to 4.8% as this is written, should 6 settle out at 5% or so. This is still a very livable level when viewed against the backdrop of the continuing economic recovery. We still think the recovery has "legs," certainly into next year. And we believe that the market will become more comfortable with this outcome, provided that we are proven right in our basic view that core inflation will stay well contained, albeit not at the very low levels that we have been enjoying. This picture will brighten further if we are finally right about the direction of the price of oil and it drops to the mid-$20s per barrel area from its current lofty mark of $40. The market sell-off in April and May, unsurprisingly, has been particularly unkind to economically sensitive, or cyclical, stocks. You may recall that we went into 2003 with a big overweighting in these stocks. This positioning paid off for us last year, as the economy started to improve and the market was quick to factor in this recovery. But as cyclicals outperformed, we sold into that strength, reducing our positions in the likes of Alcoa, Eaton, and Canadian National Railway. By the end of calendar 2003, our portfolio was down to the market weighting in cyclicals, at about 42% of assets. As cyclicals have weakened in the last couple of months--and given our still constructive view of the economy--we have been adding to our cyclical holdings, such that we are now slightly overweighted, at about 45% of assets, versus 42% for the broader market. We note that this overweighting is not nearly as significant as it was when we headed into 2003 and these stocks were, in our view, quite a bit cheaper. We believe that our current portfolio is patently undervalued. It trades at an average price/earnings ratio of 11.1 times projected 2005 earnings--a 28% discount to the S&P 500's market multiple. At the same time, the portfolio's projected earnings growth plus current dividend yield is about the same as the market's. So we believe that we have a portfolio with underlying return dynamics as good as the market's, but at a 28% discount. And yet it is also a high-quality portfolio; the average credit rating of our ten largest holdings--36% of what we own--is a solid "A." We call all this our value proposition. As long as our companies are working, the discount on our portfolio's P/E should tend to close. And as it does, we expect that our returns should be market-beating. We work to keep the portfolio looking this way, with prospects as good as the market's but at a bargain price. We do this by selling our winners once they are no longer undervalued and replacing them with stocks that are. 7 As Jack Brennan mentioned in his letter, I am retiring from Wellington Management Company on June 30. I have derived great enjoyment and satisfaction from my 35 years serving Windsor Fund shareholders--a tenure that includes the last 81<142>2 years as lead manager of the fund. It was a particular pleasure to have been able to continue the long Windsor record of providing returns that were significantly better than the market's. Dave Fassnacht will take over from me as Windsor's lead manager. Dave has been part of the Windsor team for the past 13 years, and has served as the fund's assistant portfolio manager since the spring of 2001--just as I served as John Neff's assistant prior to taking over the fund at the beginning of 1996. Dave will have with him a team of six very experienced and talented analysts with a combined 60 years of Windsor experience. I have great confidence in Dave and this team. My holdings in Windsor and Vanguard Capital Value Fund--the other Vanguard fund for which I serve as lead portfolio manager--are my most important assets, and I definitely intend to continue to hold them. CHARLES T. FREEMAN, PORTFOLIO MANAGER WELLINGTON MANAGEMENT COMPANY, LLP MAY 20, 2004 8 AS OF 4/30/2004 FUND PROFILE This Profile provides a snapshot of the fund's characteristics, compared where indicated with both an appropriate market index and a broad market index. Key terms are defined on page 10. WINDSOR FUND - -------------------------------------------------------------------------------- PORTFOLIO CHARACTERISTICS COMPARATIVE BROAD FUND INDEX* INDEX** - -------------------------------------------------------------------------------- Number of Stocks 154 731 5,128 Median Market Cap $23.3B $26.6B $27.0B Price/Earnings Ratio 16.1x 16.7x 22.6x Price/Book Ratio 2.3x 2.2x 2.8x Yield 2.4% 1.6% Investor Shares 1.2% Admiral Shares 1.3% Return on Equity 19.3% 17.4% 16.0% Earnings Growth Rate 8.8% 5.3% 6.6% Foreign Holdings 9.8% 0.0% 0.9% Turnover Rate 29%+ -- -- Expense Ratio -- -- Investor Shares 0.42%+ Admiral Shares 0.29%+ Short-Term Reserves 1% -- -- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) Citigroup, Inc 5.2% (banking) Bank of America Corp. 3.5 (banking) Tyco International Ltd. 3.4 (conglomerate) Comcast Corp. 2.8 (telecommunications) International Business Machines Corp. 2.3 (computer hardware) TJX Cos., Inc. 2.3 (retail) Fannie Mae 2.0 (financial services) Pfizer Inc. 2.0 (pharmaceuticals) Time Warner, Inc. 1.8 (media) Alcoa Inc. 1.8 (metals and mining) - -------------------------------------------------------------------------------- TOP TEN 27.1% - -------------------------------------------------------------------------------- "Ten Largest Holdings" excludes any temporary cash investments and equity index products. - -------------------------------------------------------------------------------- VOLATILITY MEASURES COMPARATIVE BROAD FUND INDEX* FUND INDEX** - -------------------------------------------------------------------------------- R-Squared 0.96 1.00 0.96 1.00 Beta 1.13 1.00 1.10 1.00 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECTOR DIVERSIFICATION (% OF PORTFOLIO) COMPARATIVE BROAD FUND INDEX* INDEX** - -------------------------------------------------------------------------------- Auto & Transportation 5% 3% 3% Consumer Discretionary 11 11 16 Consumer Staples 2 6 7 Financial Services 28 35 23 Health Care 12 4 13 Integrated Oils 7 9 4 Other Energy 1 2 3 Materials & Processing 5 6 4 Producer Durables 5 4 4 Technology 10 6 13 Utilities 7 12 6 Other 6 2 4 - -------------------------------------------------------------------------------- Short-Term Reserves 1% -- -- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INVESTMENT FOCUS MARKET CAP Medium STYLE Value - -------------------------------------------------------------------------------- *Russell 1000 Value Index. **Dow Jones Wilshire 5000 Index. +Annualized. VISIT OUR WEBSITE AT VANGUARD.COM FOR REGULARLY UPDATED FUND INFORMATION. 9 GLOSSARY OF INVESTMENT TERMS BETA. A measure of the magnitude of a fund's past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. A fund's beta should be reviewed in conjunction with its R-squared (see definition below). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility. - -------------------------------------------------------------------------------- EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the past five years for the stocks now in a fund. - -------------------------------------------------------------------------------- EXPENSE RATIO. The percentage of a fund's average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors. - -------------------------------------------------------------------------------- FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks or depositary receipts of companies based outside the United States. - -------------------------------------------------------------------------------- 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 given index. If a fund's total returns were precisely synchronized with an index's returns, its R-squared would be 1.00. If the fund's returns bore no relationship to the index's returns, its R-squared would be 0. - -------------------------------------------------------------------------------- RETURN ON EQUITY. The annual average rate of return generated by a company during the past five years for each dollar of shareholder's equity (net income divided by shareholder's equity). For a fund, the weighted average return on equity for the companies whose stocks it holds. - -------------------------------------------------------------------------------- SHORT-TERM RESERVES. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash. - -------------------------------------------------------------------------------- TURNOVER RATE. An indication of the fund's trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). - -------------------------------------------------------------------------------- YIELD. A snapshot of a fund's income from interest and dividends. The yield, expressed as a percentage of the fund's net asset value, is based on income earned over the past 30 days and is annualized, or projected forward for the coming year. The index yield is based on the current annualized rate of income provided by securities in the index. - -------------------------------------------------------------------------------- 10 AS OF 4/30/2004 PERFORMANCE SUMMARY All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (For the performance data current to the most recent month-end, which may be higher or lower than that cited, visit our website at www.vanguard.com.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor's shares, when sold, could be worth more or less than their original cost. The returns in this report do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares. - -------------------------------------------------------------------------------- WINDSOR FUND - -------------------------------------------------------------------------------- FISCAL-YEAR TOTAL RETURNS (%) OCTOBER 31, 1993-APRIL 30, 2004 FISCAL YEAR WINDSOR FUND RUSSELL 1000 INVESTOR SHARES VALUE INDEX 1994 6.3 0.8 1995 17.8 24.7 1996 23.2 23.7 1997 27 33.2 1998 -0.8 14.8 1999 13.7 16.5 2000 11.6 5.5 2001 -0.4 -11.9 2002 -14.5 -10 2003 30.7 22.9 2004 7.1 8.2 - -------------------------------------------------------------------------------- *Six months ended April 30, 2004. 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, 2004 This table presents average annual total returns through the latest calendar quarter--rather than through the end of the fiscal period. Securities and Exchange Commission rules require that we provide this information. TEN YEARS ONE FIVE-------------------------- INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL - -------------------------------------------------------------------------------- WINDSOR FUND Investor Shares 10/23/1958 45.93% 7.67% 9.80% 2.07% 11.87% Admiral Shares 11/12/2001 46.16 7.42* -- -- -- - -------------------------------------------------------------------------------- *Return since inception. 11 ABOUT YOUR FUND'S EXPENSES We believe it is important for you to understand the impact of costs on your investment. All mutual funds have operating expenses. As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund's gross income, directly reduce the investment return of the fund. A fund's expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period. The table below illustrates your fund's costs in two ways: * ACTUAL FUND RETURN. This section helps you to estimate the actual expenses that you paid over the period. The "Ending Account Value" shown is derived from the fund's actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading "Expenses Paid During Period." * HYPOTHETICAL 5% RETURN. This section is intended to help you compare your fund's costs with those of other mutual funds. It assumes that the fund had a return of 5% before expenses during the period shown, but that the expense ratio is unchanged. In this case--because the return used is not the fund's actual return--the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund's costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds. - -------------------------------------------------------------------------------- SIX MONTHS ENDED APRIL 30, 2004 BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING WINDSOR FUND 10/31/2003 4/30/2004 PERIOD* - -------------------------------------------------------------------------------- ACTUAL FUND RETURN Investor Shares $1,000 $1,071 $2.17 Admiral Shares 1,000 1,072 1.45 HYPOTHETICAL 5% RETURN Investor Shares $1,000 $1,048 $2.15 Admiral Shares 1,000 1,049 1.43 - -------------------------------------------------------------------------------- *Expenses are equal to the fund's annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 366. Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect any transactional costs or account maintenance fees. They do not include your fund's low-balance fee, which is described in the prospectus. If this fee were applied to your account, your costs would be higher. Your fund does not charge transaction fees, such as purchase or redemption fees, nor does it carry a "sales load." 12 - -------------------------------------------------------------------------------- ANNUALIZED EXPENSE RATIOS: YOUR FUND COMPARED WITH ITS PEER GROUP AVERAGE INVESTOR ADMIRAL MULTI-CAP SHARES SHARES VALUE FUND - -------------------------------------------------------------------------------- WINDSOR FUND 0.42% 0.29% 1.46%* - -------------------------------------------------------------------------------- *Peer-group ratio captures data through year-end 2003. The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions. You can find more information about the fund's expenses, including annual expense ratios for the past five years, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to the appropriate fund prospectus. 13 - -------------------------------------------------------------------------------- AS OF 4/30/2004 FINANCIAL STATEMENTS (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 (95.1%)(1) - -------------------------------------------------------------------------------- AUTO & TRANSPORTATION (4.6%) Compagnie Generale des Etablissements Michelin Class B 5,909,738 276,572 Canadian National Railway Co. 4,761,600 179,846 Norfolk Southern Corp. 2,727,650 64,973 Burlington Northern Santa Fe Corp. 1,949,000 63,732 *(2) Continental Airlines, Inc. Class B 5,166,000 55,070 *(2) Northwest Airlines Corp. Class A 5,404,658 50,804 Magna International, Inc. Class A 638,700 50,393 CSX Corp. 1,619,900 49,828 * AMR Corp. 3,276,600 37,189 Lear Corp. 362,500 21,975 BorgWarner, Inc. 234,400 19,207 --------- 869,589 --------- CONSUMER DISCRETIONARY (10.8%) TJX Cos., Inc. 17,470,200 429,243 * Time Warner, Inc. 20,234,400 340,343 (2) Ross Stores, Inc. 10,916,800 332,962 (2) Republic Services, Inc. Class A 7,910,800 227,989 Gannett Co., Inc. 1,909,200 165,489 Staples, Inc. 5,235,700 134,872 * Accenture Ltd. 2,792,700 66,382 * Office Depot, Inc. 3,305,000 57,871 VF Corp. 1,240,100 57,243 Federated Department Stores, Inc. 1,100,300 53,915 May Department Stores Co. 1,626,500 50,096 * Interpublic Group of Cos., Inc. 3,100,000 48,639 Liz Claiborne, Inc. 1,077,000 37,803 Whirlpool Corp. 313,100 20,511 --------- 2,023,358 --------- CONSUMER STAPLES (2.0%) Altria Group, Inc. 2,259,800 125,148 * The Kroger Co. 3,591,350 62,849 * Safeway, Inc. 2,691,600 61,772 The Procter & Gamble Co. 497,000 52,558 PepsiCo, Inc. 850,000 46,317 SuperValu Inc. 942,100 29,007 --------- 377,651 --------- FINANCIAL SERVICES (27.5%) BANKS---NEW YORK CITY (0.5%) J.P. Morgan Chase & Co. 2,615,800 98,354 BANKS---OUTSIDE NEW YORK CITY (7.0%) Bank of America Corp. 8,101,923 652,124 UnionBanCal Corp. 4,204,200 224,630 Wachovia Corp. 2,531,300 115,807 U.S. Bancorp 3,690,121 94,615 14 - -------------------------------------------------------------------------------- MARKET VALUE* WINDSOR FUND SHARES (000) - -------------------------------------------------------------------------------- National City Corp. 2,185,700 75,778 SunTrust Banks, Inc. 980,000 66,689 Regions Financial Corp. 1,533,450 53,226 Wells Fargo & Co. 510,000 28,795 DIVERSIFIED FINANCIAL SERVICES (7.5%) Citigroup, Inc. 20,240,246 973,353 CIT Group Inc. 5,345,900 183,739 Marsh & McLennan Cos., Inc. 1,568,300 70,730 Metropolitan Life Insurance Co. 1,773,100 61,172 Morgan Stanley 1,186,700 60,985 * Promise Co. Ltd. 865,050 57,223 FINANCE COMPANIES (0.2%) Capital One Financial Corp. 712,500 46,690 FINANCIAL---MISCELLANEOUS (2.8%) Fannie Mae 5,529,600 379,994 Freddie Mac 2,162,800 126,308 MBNA Corp. 681,400 16,613 INSURANCE---LIFE (0.5%) Jefferson-Pilot Corp. 1,117,800 55,432 Manulife Financial Corp. 859,300 31,596 INSURANCE---MULTILINE (2.7%) The Hartford Financial Services Group Inc. 3,898,200 238,102 St. Paul Travelers Cos., Inc. 2,060,081 83,783 Allstate Corp. 1,413,100 64,861 Torchmark Corp. 1,182,800 61,553 American International Group, Inc. 725,200 51,961 INSURANCE---PROPERTY-CASUALTY (4.0%) (2) RenaissanceRe Holdings Ltd. 4,375,550 230,548 ACE Ltd. 4,048,700 177,495 PartnerRe Ltd. 1,897,900 108,750 (2) IPC Holdings Ltd. 2,739,200 100,802 The Chubb Corp. 907,500 62,618 XL Capital Ltd. Class A 480,000 36,648 The PMI Group Inc. 618,200 26,601 REAL ESTATE INVESTMENT TRUST (0.3%) Liberty Property Trust REIT 1,505,800 55,037 SAVINGS & LOAN (1.6%) Golden West Financial Corp. 1,661,000 174,588 Washington Mutual, Inc. 3,304,069 130,147 * Dime Bancorp Inc.- Litigation Tracking Warrants 7,457,300 1,119 SECURITIES BROKERS & SERVICES (0.4%) Lehman Brothers Holdings, Inc. 912,900 $ 67,007 ---------- $5,145,473 HEALTH CARE (11.4%) Pfizer Inc. 10,306,685 368,567 Wyeth 8,749,800 333,105 *(2)Health Net Inc. 10,490,960 266,890 (2)Oxford Health Plans, Inc. 4,738,500 257,964 * Aventis SA ADR 2,709,150 204,568 GlaxoSmithKline PLC ADR 3,411,200 143,270 HCA Inc. 3,351,800 136,184 Abbott Laboratories 2,890,300 127,231 * Anthem, Inc. 1,412,400 125,110 Merck & Co., Inc. 2,012,700 94,597 Bristol-Myers Squibb Co. 2,420,000 60,742 Guidant Corp. 263,325 16,592 * Aventis SA Class A 91,771 6,991 ---------- 2,141,811 ---------- INTEGRATED OILS (6.3%) Petrol Brasil ADR 8,449,700 244,196 ExxonMobil Corp. 4,869,008 207,176 ConocoPhillips Co. 1,961,899 139,883 ChevronTexaco Corp. 1,416,739 129,632 Royal Dutch Petroleum Co. ADR 2,639,300 128,428 Petro Canada 1,950,600 86,256 Petrol Brasil Series A ADR 3,343,400 83,418 Occidental Petroleum Corp. 1,588,200 74,963 BP PLC ADR 1,050,000 55,545 Total SA ADR 321,300 29,598 ---------- 1,179,095 ---------- OTHER ENERGY (1.2%) GlobalSantaFe Corp. 3,108,600 81,974 EnCana Corp. 1,990,411 78,064 Valero Energy Corp. 860,000 54,834 ---------- 214,872 ---------- MATERIALS & PROCESSING (5.3%) Alcoa Inc. 10,923,568 335,900 (2 Engelhard Corp. 9,659,200 280,503 Smurfit-Stone Container Corp. 7,242,463 124,498 Georgia Pacific Group 1,939,371 68,072 Praxair, Inc. 1,654,000 60,454 MeadWestvaco Corp. 1,835,400 47,996 Packaging Corp. of America 1,838,000 40,399 Boise Cascade Corp. 473,900 15,985 * Phosphate Resources Partners LP 3,665,500 9,200 CNH Global NV 157,280 3,124 SAPPI Ltd. ADR 137,600 1,874 Aracruz Celulose SA ADR 51,000 1,588 ---------- 989,593 ---------- 15 - -------------------------------------------------------------------------------- MARKET VALUE* WINDSOR FUND SHARES (000) - -------------------------------------------------------------------------------- PRODUCER DURABLES (4.6%) *(2) Toll Brothers, Inc. 4,721,532 186,831 * Applied Materials, Inc. 9,571,500 174,488 KB HOME 2,151,900 148,330 (2) MDC Holdings, Inc. 1,933,183 119,451 * Teradyne, Inc. 2,672,800 54,472 Parker Hannifin Corp. 975,600 53,941 Cooper Industries, Inc. Class A 936,000 51,396 * LAM Research Corp. 1,613,300 35,718 * Varian Semiconductor Equipment Associates, Inc. 585,400 19,061 * Axcelis Technologies, Inc. 1,726,000 18,140 --------- 861,828 --------- TECHNOLOGY (9.2%) International Business Machines Corp. 4,912,500 433,135 Microsoft Corp. 12,002,000 311,692 *(2)Arrow Electronics, Inc. 10,316,700 260,806 * Flextronics International Ltd. 8,697,900 140,036 Hewlett-Packard Co. 5,261,300 103,648 * Avnet, Inc. 4,481,600 96,982 * BearingPoint, Inc. 8,762,500 87,800 Seagate Technology 4,391,600 54,939 * Tellabs, Inc. 3,970,900 34,666 * Vishay Intertechnology, Inc. 1,965,321 34,196 * Corning, Inc. 2,980,400 32,874 * Ingram Micro, Inc. Class A 2,670,500 31,912 * Solectron Corp. 6,392,300 31,322 * Unisys Corp. 2,398,200 31,249 * Nortel Networks Corp. 8,159,500 30,517 * Sanmina-SCI Corp. 1,212,400 12,148 --------- 1,727,922 --------- UTILITIES (6.8%) * Comcast Corp. Special Class A 17,715,000 513,558 Sprint Corp. 6,251,500 111,839 * Cox Communications, Inc. Class A 3,319,200 108,505 * Nextel Communications, Inc. 3,796,500 90,584 FirstEnergy Corp. 1,595,100 62,368 American Electric Power Co., Inc. 1,905,300 57,997 Constellation Energy Group, Inc. 1,506,425 57,967 Entergy Corp. 1,009,600 55,124 PPL Corp. 1,225,000 52,491 Sempra Energy 1,571,700 49,901 Verizon Communications Inc. 1,245,442 47,003 * Qwest Communications International Inc. 9,514,550 38,248 SBC Communications Inc. 1,146,900 28,558 * Comcast Corp. Class A 84,983 2,558 * McLeod USA Inc. 1,712,708 1,524 ---------- 1,278,225 ---------- OTHER (5.4%) Tyco International Ltd. 22,919,500 629,140 Eaton Corp. 4,016,600 238,506 Textron, Inc. 1,142,000 63,016 General Electric Co. 1,600,000 47,920 SPX Corp. 568,300 25,204 ---------- 1,003,786 ---------- - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (COST $14,326,208) 17,813,203 - -------------------------------------------------------------------------------- TEMPORARY INVESTMENTS (5.2%)(1) - -------------------------------------------------------------------------------- Vanguard Index Participation Equity Receipts-- Total Stock Market 2,948,800 315,079 Face Amount (000) ----------- FEDERAL NATIONAL MORTGAGE ASSN. (3) 1.028%, 7/7/2004 $10,000 9,981 (3) 1.048%, 7/14/2004 22,000 21,953 REPURCHASE AGREEMENTS Goldman Sachs & Co. 0.93%, 5/3/2004 56,540 56,540 (Dated 4/30/2004, Repurchase Value $56,544,000, collateralized by U. S. Treasury Bond, 7.125%, 2/15/2023) Collateralized by U.S. Government Obligations in a Pooled Cash Account 1.04%, 5/3/2004 493,184 493,184 1.04%, 5/3/2004---Note G 79,424 79,424 - -------------------------------------------------------------------------------- TOTAL TEMPORARY INVESTMENTS (COST $901,597) 976,161 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.3%) (COST $15,227,805) 18,789,364 - -------------------------------------------------------------------------------- 16 - -------------------------------------------------------------------------------- MARKET VALUE* (000) - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES--NET (-0.3%) $ (54,313) - -------------------------------------------------------------------------------- NET ASSETS (100%) $18,735,051 ================================================================================ *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 98.9% and 1.4%, 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 $2,370,620,000. See Note I in Notes to Financial Statements. (3)Securities with an aggregate value of $31,934,000 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 $18,789,364 Receivables for Investment Securities Sold 44,808 Other Assets--Note C 56,758 ----------- Total Assets 18,890,930 ----------- LIABILITIES Payables for Investment Securities Purchased 25,952 Security Lending Collateral Payable to Brokers--Note G 79,424 Other Liabilities 50,503 ----------- Total Liabilities 155,879 ----------- - -------------------------------------------------------------------------------- NET ASSETS (100%) $18,735,051 ================================================================================ AT APRIL 30, 2004, NET ASSETS CONSISTED OF: Paid-in Capital $15,621,201 Undistributed Net Investment Income 63,506 Accumulated Net Realized Losses (502,682) Unrealized Appreciation (Depreciation) Investment Securities 3,561,559 Futures Contracts (8,533) - -------------------------------------------------------------------------------- NET ASSETS $18,735,051 ================================================================================ Investor Shares--Net Assets Applicable to 907,187,300 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $14,716,085 - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- INVESTOR SHARES $16.22 ================================================================================ Admiral Shares--Net Assets Applicable to 73,389,759 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $4,018,966 - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $54.76 ================================================================================ 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 FUND SIX MONTHS ENDED APRIL 30, 2004 (000) - -------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends* $ 146,521 Interest 4,300 Security Lending 465 - -------------------------------------------------------------------------------- Total Income 151,286 - -------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B Basic Fee 11,554 Performance Adjustment 4,982 The Vanguard Group--Note C Management and Administrative Investor Shares 16,726 Admiral Shares 1,888 Marketing and Distribution Investor Shares 817 Admiral Shares 229 Custodian Fees 137 Shareholders' Reports Investor Shares 128 Admiral Shares 2 Trustees' Fees and Expenses 10 - -------------------------------------------------------------------------------- Total Expenses 36,473 Expenses Paid Indirectly--Note D (1,412) - -------------------------------------------------------------------------------- Net Expenses 35,061 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME 116,225 - -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold* 585,405 Futures Contracts 38,615 - -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) 624,020 - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities 488,518 Futures Contracts (18,800) - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 469,718 - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,209,963 ================================================================================ *Dividend income and realized net gain (loss) from affiliated companies of the fund were $8,160,000 and $(33,878,000), respectively. See Note I in Notes to Financial Statements. 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 FUND --------------------------- SIX MONTHS YEAR ENDED ENDED APR. 30, 2004 OCT. 31, 2003 (000) (000) - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 116,225 $ 184,203 Realized Net Gain (Loss) 624,020 (1,360) Change in Unrealized Appreciation (Depreciation) 469,718 3,749,017 - -------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 1,209,963 3,931,860 - -------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income Investor Shares (76,357) (154,229) Admiral Shares (21,987) (34,937) Realized Capital Gain Investor Shares -- -- Admiral Shares -- -- - -------------------------------------------------------------------------------- Total Distributions (98,344) (189,166) - -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS--NOTE H Investor Shares 90,017 (344,508) Admiral Shares 479,311 430,332 - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) FROM CAPITAL SHARE TRANSACTIONS 569,328 85,824 - -------------------------------------------------------------------------------- TOTAL INCREASE (Decrease) 1,680,943 3,828,518 - -------------------------------------------------------------------------------- NET ASSETS Beginning of Period 17,054,104 13,225,586 - -------------------------------------------------------------------------------- End of Period $18,735,051 $17,054,104 ================================================================================ 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 FUND INVESTOR SHARES - ----------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED OCTOBER 31 APRIL 30,------------------------------------------ FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2004 2003 2002 2001 2000 1999 - ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $15.23 $11.81 $14.27 $16.44 $16.91 $16.34 - ----------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .098 .17 .164 .22 .28 .27 Net Realized and Unrealized Gain (Loss) on Investments .977 3.42 2.143) (.29) 1.44 1.77 - -------------------------------------------------------------------------------- Total from Investment Operations 1.075 3.59 (1.979) (.07) 1.72 2.04 - ----------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.085) (.17) (.169) (.25) (.29) (.24) Distributions from Realized Capital Gains -- -- (.312) (1.85) (1.90) (1.23) - ----------------------------------------------------------------------------------------------------------- Total Distributions (.085) (.17) (.481) (2.10) (2.19) (1.47) - ----------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $16.22 $15.23 $11.81 $14.27 $16.44 $16.91 =========================================================================================================== TOTAL RETURN 7.07% 30.66% -14.55% -0.37% 11.60% 13.74% =========================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period {Millions} $14,716$13,733 $11,012 $15,761 $15,935 $16,824 Ratio of Total Expenses to Average Net Assets* 0.42%** 0.48% 0.45% 0.41% 0.31% 0.28% Ratio of Net Investment Income to Average Net Assets 1.22%** 1.27% 1.16% 1.37% 1.75% 1.56% Portfolio Turnover Rate 29%** 23% 30% 33% 41% 56% =========================================================================================================== *Includes performance-based investment advisory fee increases (decreases) of 0.05%, 0.08%, 0.08%, 0.03%, (0.08%), and (0.08%). **Annualized.
20 WINDSOR FUND ADMIRAL SHARES - -------------------------------------------------------------------------------- SIX MONTHS YEAR NOV. 12, ENDED ENDED 2001* TO APR.30, OCT. 31, OCT. 31, FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD 2004 2003 2002 - -------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $51.41 $39.88 $50.00 - -------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .371 .605 .556 Net Realized and Unrealized Gain (Loss) on Investments 3.298 11.537 (9.030) - -------------------------------------------------------------------------------- Total from Investment Operations 3.669 12.142 (8.474) - -------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.319) (.612) (.592) Distributions from Realized Capital Gains -- -- (1.054) - -------------------------------------------------------------------------------- Total Distributions (.319) (.612) (1.646) - -------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $54.76 $51.41 $39.88 ================================================================================ TOTAL RETURN 7.15% 30.72% -17.61% ================================================================================ RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period {Millions} $4,019 $3,321 $2,214 Ratio of Total Expenses to Average Net Assets** 0.29%+ 0.37% 0.40%+ Ratio of Net Invesstment Income to Average Net Assets 1.36%+ 1.36% 1.22%+ Portfolio Turnover Rate 29%+ 23% 30% ================================================================================ *Inception. **Includes performance-based investment advisory fee increases (decreases) of 0.05%, 0.08%, and 0.08%. +Annualized. SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 21 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 are designed for investors who meet certain administrative, servicing, tenure, and account-size criteria. A. The following significant accounting policies conform to generally accepted accounting principles for U.S. mutual funds. The fund consistently follows such policies in preparing its financial statements. 1. SECURITY VALUATION: Securities are valued as of the close of trading on the New York Stock Exchange (generally 4:00 p.m. Eastern time) on the valuation date. Equity securities are valued at the latest quoted sales prices or official closing prices taken from the primary market in which each security trades; such securities not traded on the valuation date are valued at the mean of the latest quoted bid and asked prices. Securities for which market quotations are not readily available, or whose values have been materially affected by events occurring before the fund's pricing time but after the close of the securities' primary markets, are valued by methods deemed by the board of trustees to represent fair value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value. 2. FUTURES CONTRACTS: The fund uses S&P 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. The fund may also invest directly in repurchase agreements. 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) and shareholder reporting. 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 advisor. The basic fees of each advisor 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, 2004, the aggregate investment advisory fee represented an effective annual basic rate of 0.12% of the fund's average net assets before an increase of $4,982,000 (0.05%) based on performance. C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At April 30, 2004, the fund had contributed capital of $2,803,000 to Vanguard (included in Other Assets), representing 0.01% of the fund's net assets and 2.80% of Vanguard's capitalization. The fund's trustees and officers are also directors and officers of Vanguard. D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund's management and administrative expenses. For the six months ended April 30, 2004, these arrangements reduced the fund's expenses by $1,412,000 (an annual rate of 0.02% of average net assets). E. Distributions are determined on a tax basis and may differ from net investment income and realized capital gains for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified among capital accounts in the financial statements to reflect their tax character. Temporary differences arise when certain items of income, expense, gain, or loss are recognized in different periods for financial statement and tax purposes; these differences will reverse at some time in the future. Differences in classification may also result from the treatment of short-term gains as ordinary income for tax purposes. 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, 2003, the fund had available realized losses of $1,115,022,000 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, 2004; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balance above. At April 30, 2004, net unrealized appreciation of investment securities for tax purposes was $3,561,559,000, consisting of unrealized gains of $4,284,268,000 on securities that had risen in value since their purchase and $722,709,000 in unrealized losses on securities that had fallen in value since their purchase. 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) At April 30, 2004, the aggregate settlement value of open futures contracts expiring in June 2004 and the related unrealized depreciation were: - -------------------------------------------------------------------------------- (000) ----------------------- AGGREGATE UNREALIZED NUMBER OF SETTLEMENT APPRECIATION FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION) - -------------------------------------------------------------------------------- S&P 500 Index 859 $237,535 ($6,081) S&P MidCap 400 Index 459 133,844 (1,915) E-mini S&P 500 Index 460 25,440 (537) - -------------------------------------------------------------------------------- Unrealized depreciation on open futures contracts is required to be treated as realized loss for tax purposes. F. During the six months ended April 30, 2004, the fund purchased $3,413,688,000 of investment securities and sold $2,592,388,000 of investment securities, other than temporary cash investments. G. The market value of securities on loan to broker/dealers at April 30, 2004, was $74,488,000, for which the fund held cash collateral of $79,424,000. 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, 2004 OCTOBER 31, 2003 ----------------------- -------------------------- AMOUNT SHARES AMOUNT SHARES (000) (000) (000) (000) - --------------------------------------------------------------------------------------------------- Investor Shares Issued $984,462 60,035 $1,094,221 82,934 Issued in Lieu of Cash Distributions 71,911 4,520 144,892 11,198 Redeemed (966,356) (59,147) (1,583,621) (124,422) ----------------------------------------------------- Net Increase (Decrease)--Investor Shares 90,017 5,408 (344,508) (30,290) ----------------------------------------------------- Admiral Shares Issued 671,129 12,229 623,754 13,696 Issued in Lieu of Cash Distributions 20,369 379 32,487 742 Redeemed (212,187) (3,830) (225,909) (5,338) ----------------------------------------------------- Net Increase(Decrease)--Admiral Shares 479,311 8,778 430,332 9,100 - ---------------------------------------------------------------------------------------------------
24 I. Certain of the fund's investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company. Transactions during the period in securities of affiliated companies were as follows:
- ---------------------------------------------------------------------------------------------------------- (000) ----------------------------------------------------------------------- CURRENT PERIOD TRANSACTIONS --------------------------- OCT. 31, 2003 COST OF APR. 30, 2004 MARKET PURCHASES SECURITIES DIVIDEND MARKET VALUE AT COST SOLD INCOME VALUE - ---------------------------------------------------------------------------------------------------------- Arrow Electronics, Inc. $ 209,789 $11,789 -- -- $ 260,806 Continental Airlines, Inc. Class B 93,4934,642 -- -- 55,070 Engelhard Corp. 261,573 14,569 -- $2,105 280,503 Health Net Inc. 317,478 13,974 -- -- 266,890 IPC Holdings Ltd. 97,201 5,651 -- 1,085 100,802 MDC Holdings, Inc. 123,466 6,790 $ 9,494 469 119,451 Metris Cos., Inc. 27,773 -- 127,383 -- -- Northwest Airlines Corp. Class A n/a* 17,258 -- -- 50,804 Oxford Health Plans, Inc. 267,413 -- 63,586 1,137 257,964 RenaissanceRe Holdings Ltd. 202,545 9,762 15,907 1,589 230,548 Republic Services, Inc. Class A n/a* 10,737 8,426 980 227,989 Ross Stores, Inc. 266,323 16,165 9,263 795 332,962 Toll Brothers, Inc. 179,618 10,704 13,573 -- 186,831 ------------ -------------------------- $2,046,672 $8,160 $2,370,620 ------------ -------------------------- - ---------------------------------------------------------------------------------------------------------- *At October 31, 2003, the issuer was not an affiliated company of the fund.
25 INVESTING IS FAST, EASY, AND SECURE ON VANGUARD.COM If you're like many Vanguard investors, you believe in planning and taking control of your own investments. VANGUARD.COM was built for you--and it keeps getting better. RESEARCH AND PLAN YOUR INVESTMENTS WITH CONFIDENCE Use our PLANNING & ADVICE and RESEARCH FUNDS & STOCKS sections to: * Determine what asset allocation might best suit your needs--by taking our Investor Questionnaire. * Find out how much to save for retirement and your children's college education-- by using our planning tools. * Learn how to achieve your goals--by reading our PlainTalk(R) investment guides. * Find your next fund--by using the Compare Funds, Compare Costs, and Narrow Your Fund Choices tools. * Look up fund price, performance history, and distribution information--in a snap. INVEST AND MANAGE ACCOUNTS WITH EASE Log on to Vanguard.com to: * See what you own (at Vanguard and elsewhere) and how your investments are doing. * Elect to receive online statements, fund reports (like this one), prospectuses, and tax forms. * Analyze your portfolio's holdings and performance. * Open new accounts, buy and sell shares, and exchange money between funds--securely and easily. * Sign up to receive electronic newsletters from Vanguard informing you of news on our funds, products, and services, as well as on investing and the financial markets. Find out what Vanguard.com can do for you. Log on today! 26 CAPITALIZE ON YOUR IRA Are you taking full advantage of your individual retirement account? You really should be. These tax-deferred accounts are powerful options for retirement savers. Here's how you can exploit your IRA--and improve your chances of having the retirement of your dreams. 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. 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. 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. 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 sizable personal investments they have made as private individuals. Our independent board members bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of
- --------------------------------------------------------------------------------------------------------------------- POSITION(S) HELD WITH NAME FUND (NUMBER OF (YEAR OF BIRTH) VANGUARD FUNDS TRUSTEE/OFFICER OVERSEEN BY SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS - --------------------------------------------------------------------------------------------------------------------- JOHN J. BRENNAN* Chairman of the Chairman of the Board, Chief Executive Officer, and Director/Trustee of (1954) Board, Chief The Vanguard Group, Inc., and of each of the investment companies May 1987 Executive Officer, served by The Vanguard Group. and Trustee (129) - --------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES CHARLES D. ELLIS Trustee The Partners of '63 (pro bono ventures in education); Senior Advisor (1937) (129) to Greenwich Associates (international business strategy consulting); January 2001 Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. - --------------------------------------------------------------------------------------------------------------------- RAJIV L. GUPTA Trustee Chairman and Chief Executive Officer (since October 1999), Vice (1945) (129) Chairman (January-September 1999), and Vice President (prior to December 2001 September 1999) of Rohm and Haas Co. (chemicals); Director of Technitrol, Inc. (electronic components), and Agere Systems (communications components); Board Member of the American Chemistry Council; Trustee of Drexel University. - --------------------------------------------------------------------------------------------------------------------- JOANN HEFFERNAN Trustee Vice President, Chief Information Officer, and Member of the HEISEN (129) Executive Committee of Johnson & Johnson (pharmaceuticals/ (1950) consumer products); Director of the University Medical Center at July 1998 Princeton and Women's Research and Education Institute. - --------------------------------------------------------------------------------------------------------------------- BURTON G. MALKIEL Trustee Chemical Bank Chairman's Professor of Economics, Princeton Malkiel C (1932) (127) University; Director of Vanguard Investment Series plc (Irish invest- May 1977 ment fund) (since November 2001), Vanguard Group (Ireland) Limited (Irish investment management firm) (since November 2001), Prudential Insurance Co. of America, BKF Capital (investment management), The Jeffrey Co. (holding company), and NeuVis, Inc. (software company). - ---------------------------------------------------------------------------------------------------------------------
the funds. Among board members' responsibilities are selecting investment advisors for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers. Each trustee serves a fund until its termination; or until the trustee's retirement, resignation, or death; or otherwise as specified in the fund's organizational documents. Any trustee may be removed at a shareholders' meeting by a vote representing two-thirds of the net asset value of all shares of the fund together with shares of other Vanguard funds organized within the same trust. The table on these two pages shows information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482.
- --------------------------------------------------------------------------------------------------------------------- POSITION(S) HELD WITH NAME FUND (NUMBER OF (YEAR OF BIRTH) VANGUARD FUNDS TRUSTEE/OFFICER OVERSEEN BY SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS - --------------------------------------------------------------------------------------------------------------------- ALFRED M. RANKIN, JR.Trustee Chairman, President, Chief Executive Officer, and Director of NACCO (1941) (129) Industries, Inc. (forklift trucks/housewares/lignite); Director of January 1993 Goodrich Corporation (industrial products/aircraft systems and services); Director of Standard Products Company (supplier for the automotive industry) until 1998. - --------------------------------------------------------------------------------------------------------------------- J. LAWRENCE WILSON Trustee Retired Chairman and Chief Executive Officer of Rohm and Haas Co. (1936) (129) (chemicals); Director of Cummins Inc. (diesel engines), MeadWestvaco April 1985 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.; (1951) (129) Secretary of The Vanguard Group and of each of the investment June 2001 companies served by The Vanguard Group. - --------------------------------------------------------------------------------------------------------------------- THOMAS J. HIGGINS Treasurer Principal of The Vanguard Group, Inc.; Treasurer of each of the (1957) (129) investment companies served by The Vanguard Group. July 1998 - ---------------------------------------------------------------------------------------------------------------------
*Officers of the funds are "interested persons" as defined in the Investment Company Act of 1940. More information about the trustees is in the STATEMENT OF ADDITIONAL INFORMATION, available from The Vanguard Group.
================================================================================================ VANGUARD SENIOR MANAGEMENT TEAM MORTIMER J. BUCKLEY, Information Technology. MICHAEL S. MILLER, Planning and Development. JAMES H. GATELY, Investment Programs and Services. RALPH K. PACKARD, Finance. KATHLEEN C. GUBANICH, Human Resources. GEORGE U. SAUTER, Chief Investment Officer. F. WILLIAM MCNABB, III, Client Relationship Group. - ------------------------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996. [SHIP] (THE VANGUARD GROUP (R) LOGO) Post Office Box 2600 Valley Forge, PA 19482-2600 Vanguard, The Vanguard Group, Vanguard.com, Vanguard IRA, Admiral, PlainTalk, Windsor, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. ABOUT OUR COVER The photographs that appear on the cover of this report are copyrighted by Michael Kahn. FOR MORE INFORMATION This report is intended for the fund's shareholders. It may not be distributed to prospective investors unless it is preceded or accompanied by the current fund prospectus. To receive a free copy of the prospectus or the Statement of Additional Information, or to request additional information about the fund or other Vanguard funds, please contact us at one of the adjacent telephone numbers or by e-mail through vanguard.com. Prospectuses may also be viewed online. You can obtain a free copy of Vanguard's proxy voting guidelines by visiting our website, www.vanguard.com, and searching for "proxy voting guidelines," or by calling 1-800-662-2739. They are also available from the SEC's website, www.sec.gov. 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) 2004 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. Q222 062004 VANGUARD(R) WINDSOR(TM) II FUND APRIL 30, 2004 SEMIANNUAL REPORT THE VANGUARD GROUP(R) HOW TO READ YOUR FUND REPORT This report contains information that can help you evaluate your investment. It includes details about your fund's return and presents data and analysis that provide insight into the fund's performance and investment approach. By reading the letter from Vanguard's chairman, John J. Brennan, together with the letter from the managers who select securities for your fund, you'll get an understanding of how the fund invests and how the market environment affected its performance. The statistical information that follows can help you understand how the fund's performance and characteristics stack up against those of similar funds and market benchmarks. It's important to keep in mind that the opinions expressed by Vanguard's investment managers are just that: informed opinions. They should not be considered promises or advice. The opinions, like the statistics, cover the period through the date on the cover of this report. As things change--and in the financial markets you can be certain ONLY of change--an investment manager's job is to evaluate new information and make adjustments, if necessary. Of course, the risks of investing in the fund are spelled out in the prospectus. Frequent updates on the fund's performance and information about some of its holdings are available on Vanguard.com(R). - -------------------------------------------------------------------------------- CONTENTS 1 LETTER FROM THE CHAIRMAN 6 ADVISOR'S REPORT 9 GLOSSARY OF INVESTMENT TERMS 10 PERFORMANCE SUMMARY 11 ABOUT YOUR FUND'S EXPENSES 13 FINANCIAL STATEMENTS 26 ADVANTAGES OF VANGUARD.COM - -------------------------------------------------------------------------------- SUMMARY * The broad U.S. stock market continued to rise during the six months ended April 30, 2004; however, the pace slowed significantly in April as investors worried about inflationary pressures. * Vanguard Windsor II Fund's Investor Shares returned 12.4%, surpassing the average return of peer funds and exceeding the gain of the fund's benchmark index. * The advisors' selections in three sectors--consumer staples, financial services, and integrated oils--contributed most to the fund's overall return. WANT LESS CLUTTER IN YOUR MAILBOX? JUST REGISTER WITH VANGUARD.COM AND OPT TO GET FUND REPORTS ONLINE. LETTER FROM THE CHAIRMAN Dear Shareholder, Benefiting from ongoing strength in the domestic equity market, the Investor Shares of Vanguard Windsor II Fund returned 12.4% during the six months ended April 30, 2004. This result exceeded the average return of the fund's peer group, and it also topped the gains of the Russell 1000 Value Index and the broad stock market, as measured by the Dow Jones Wilshire 5000 Composite Index. - ----------------------------------------------------- TOTAL RETURNS SIX MONTHS ENDED APRIL 30, 2004 - ----------------------------------------------------- VANGUARD WINDSOR II FUND Investor Shares 12.4% Admiral Shares 12.5 Russell 1000 Value Index 8.2 Average Large-Cap Value Fund* 7.7 Dow Jones Wilshire 5000 Index 6.4 - ----------------------------------------------------- *Derived from data provided by Lipper Inc. The fund's success during the first half of its 2004 fiscal year was a product of strong showings by its portfolio of attractively valued, dividend-rich stocks. On April 30, the yield of Windsor II's Investor Shares was 2.0%, well above that of the broad stock market. The adjacent table shows the total returns--capital change plus reinvested dividends--for Windsor II's Investor and Admiral Shares and the fund's comparative measures. Information about distributions and changes in the fund's share prices appear in the table on page 5. For more information about individual holdings, see the Advisor's Report on page 6. STOCKS ROSE EARLY ON, THEN GAVE UP SOME OF THEIR GAINS For most of the fiscal half-year, the broad U.S. stock market advanced. However, in March and April, stock prices retreated somewhat as higher oil prices and reports of robust economic growth provoked fears of inflation. For the six months, the Dow Jones Wilshire 5000 Index returned 1 - -------------------------------------------------------------------------------- ADMIRAL(TM) SHARES A lower-cost class of shares available to many longtime shareholders and to those with significant investments in the fund. - -------------------------------------------------------------------------------- 6.4%. The Russell 2000 Index, a proxy for small-capitalization stocks, returned 6.5%, slightly surpassing the 6.1% gain of the mid- to large-cap Russell 1000 Index. Across the market-cap spectrum, value-oriented stocks (those that generally trade at below-market valuations relative to their book values and other fundamental measures) posted better results than growth stocks (those expected to produce above-average earnings growth). International stock markets continued to provide attractive returns to U.S.-based investors. Although the U.S. dollar's decline relative to major foreign currencies tailed off somewhat, it still enhanced results from European markets, where solid gains looked even better when translated from local currencies into dollars. Elsewhere, currency fluctuation played only a minor role. BOND YIELDS ROSE ON NEWS OF THE STRENGTHENING ECONOMY - -------------------------------------------------------------------------------- MARKET BAROMETER TOTAL RETURNS PERIODS ENDED APRIL 30, 2004 - -------------------------------------------------------------------------------- SIX ONE FIVE MONTHS YEAR YEARS* - -------------------------------------------------------------------------------- STOCKS Russell 1000 Index (Large-caps) 6.1% 23.9% -1.7% Russell 2000 Index (Small-caps) 6.5 42.0 6.7 Dow Jones Wilshire 5000 Index 6.4 26.1 -1.2 (Entire market) MSCI All Country World Index ex USA (International) 11.7 41.3 0.4 - -------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index 1.2% 1.8% 6.7% (Broad taxable market) Lehman Municipal Bond Index 1.2 2.7 5.4 Citigroup 3-Month Treasury Bill Index 0.5 1.0 3.3 ================================================================================ CPI Consumer Price Index 1.6% 2.3% 2.5% - -------------------------------------------------------------------------------- *Annualized. In the fixed income markets, interest rates remained low through much of the period but rose sharply in April, propelled by the strength of the economy. For the six months, the yield of the benchmark 10-year U.S. Treasury note increased 22 basis points, from 4.29% to 4.51%. (Indicative of April's notable increase in interest rates, the benchmark note's yield climbed 67 basis points during the month, from 3.84% to 4.51%.) With investors gravitating toward higher-yielding securities, returns of corporate bonds outpaced those of government bonds with similar maturities. High-yield corporate bonds continued their strong showing as the Lehman Brothers High Yield Bond Index, a benchmark of below-investment-grade bonds, 2 posted a six-month return of 5.5%. Meanwhile, the Lehman Aggregate Bond Index, a measure of the taxable investment-grade bond market, returned 1.2%. Short-term interest rates remained low and demonstrated little volatility during the period, staying within a tight range of 0.87% to 0.99%. The yield of the 3-month Treasury bill, a proxy for money market rates, was 0.96% on April 30, just 1 basis point higher than its initial 0.95% yield. THE FUND SAW GAINS IN TRADITIONAL VALUE-ORIENTED MARKET SEGMENTS With its return of more than 12%, the Windsor II Fund added to the impressive gains accrued during the 2003 fiscal year. As was the case with the fund's benchmark, all of the industry sectors in which Windsor II held stocks posted positive returns for the half-year. Consumer discretionary stocks helped lead the way. The companies in this group--which includes retailers and restaurants--typically benefit most from growth in consumer spending during an economic recovery. Your fund held some of the sector's better performers, including Cendant (a diversified hospitality and services provider) and cruise-line operator Carnival. - --------------------------------------------------------------------- FUND ASSETS MANAGED APRIL 30, 2004 ---------------- $ MILLION PERCENTAGE - --------------------------------------------------------------------- Barrow, Hanley, Mewhinney & Strauss, Inc. $16,804 59% Equinox Capital Management, LLC 3,749 13 Tukman Capital Management, Inc. 3,360 12 Vanguard Quantitative Equity Group 1,891 7 Hotchkis and Wiley Capital Management, LLC 1,306 5 - --------------------------------------------------------------------- Cash Investments* 1,173 4 - --------------------------------------------------------------------- Total $28,283 100% - --------------------------------------------------------------------- *These short-term reserves are invested by The Vanguard Group in equity index products to simulate investment in stocks. Each advisor also may maintain a modest cash position. The fund also enjoyed a boost from its consumer staples stocks, earning impressive returns from several high-yielding tobacco companies and food and beverage makers. This group made up a bigger proportion of Windsor II than it did of the Russell 1000 Value Index, a factor that helped the fund to top the index return. In the financial services sector, where returns were generally subdued during the period, the fund held some of the stronger performers. The largest contribution to Windsor II's returns came from its holdings in the integrated oils sector. With oil prices climbing--the result of a worldwide increase in demand, coupled with tightening supplies--many 3 of the refiners, distributors, and marketers of oil-related products experienced surges in profits and stock prices. As a result, Windsor II's holdings in this sector saw strong double-digit gains. In keeping with the fund's value mandate, the advisors continued to significantly underweight technology stocks compared with the benchmark index. This aversion spared shareholders some pain during the six months, as the returns of tech stocks, which rebounded sharply in mid- to late 2003, generally flattened near the end of the fiscal half-year. As we noted in our most recent annual report, we augmented the fund's multimanager advisory structure through the addition of Los Angeles-based Hotchkis and Wiley Capital Management in December 2003. The table on page 3 reflects this addition, showing the portion of fund assets that each of the five advisors manages. THE VIRTUES OF A CONSISTENT STRATEGY For 19 years, Windsor II's advisors have followed the same set of investment principles in their search for companies offering an attractive combination of investment value and price. The strategy is not flashy, but it has been quite successful. This kind of steadfast approach can be applied to your personal investment portfolio as well. Choosing a mix of stock, bond, and money market mutual funds that fits your goals and risk tolerance--and then sticking with your plan--allows you to participate in the rewards offered by each asset class while helping to mute the slumps that are sure to occur in each. Windsor II can form the core of a stock portfolio focused on value-oriented issues, or you may wish to use it as just one component of a well-diversified mix. Thank you for your ongoing commitment to Vanguard and to the Windsor II Fund. Sincerely, /S/JOHN J. BRENNAN JOHN J. BRENNAN CHAIRMAN AND CHIEF EXECUTIVE OFFICER MAY 12, 2004 4 - -------------------------------------------------------------------------------- YOUR FUND'S PERFORMANCE AT A GLANCE OCTOBER 31, 2003-APRIL 30, 2004 DISTRIBUTIONS PER SHARE -------------------------- STARTING ENDING INCOME CAPITAL SHARE PRICE SHARE PRICE DIVIDENDS GAINS - -------------------------------------------------------------------------------- Windsor II Fund Investor Shares $24.61 $27.36 $0.280 $0.000 Admiral Shares 43.69 48.59 0.523 0.000 - -------------------------------------------------------------------------------- 5 ADVISOR'S REPORT Vanguard Windsor II Fund's Investor Shares returned 12.4% for the six months ended April 30, 2004, compared with an 8.2% return for the Russell 1000 Value Index. The following comments concern the 59% of fund assets that we managed as of April 30; four additional advisors oversee the remaining assets. THE INVESTMENT ENVIRONMENT In the past six months, stock prices seemed to reflect the significant changes in federal law that greatly reduced taxes on dividends. Our portfolio has a dividend yield well above that of the overall market and also above the yield of "value" benchmarks, a factor we feel is partially responsible for our favorable performance. The hoped-for earnings follow-through of strong-performing technology issues in the last half of 2003 has been disappointing, while operating leverage in "old" industrials continues to push through strong profits. Capital spending has not been robust, as capacity utilization has generally remained modest. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- Interest rate fears are negatively affecting both the bond and stock markets. This is largely because short-term interest rates are at or below 1%. Moving to a more logical level of slightly above 2% (the level of price inflation) would require a significant percentage increase. While this wouldn't be a catastrophe, it could be disruptive in the short term. It seems to us that whatever is the well-advertised focal point for interest rates is likely wrong, because it has already been discounted. All in all, we have been expecting only a modest return for Windsor II for the year. OUR SUCCESSES Strong stock selection in the integrated oils and consumer staples sectors bolstered performance during the fiscal half-year. Occidental Petroleum, ConocoPhillips, and BP were good investments due to higher oil prices. 6 Imperial Tobacco was favored because of good relative earnings. The conglomerate Tyco International, which is included in the "other" sector, was also attractive because of good relative earnings. OUR SHORTFALLS Detractors from performance included Washington Mutual, Mattel, and Newell Rubbermaid, all of which had earnings shortfalls that, although explainable, were disappointing. OUR PORTFOLIO POSITIONING We believe that our portfolio's characteristics are more attractive than those of the market as a whole. Our price/earnings (P/E) ratio is at a 21% discount to the market, while our dividend yield is at a 65% premium to the market. We hope that good company selection and exposure to those industries with pricing power will continue to be rewarding. James P. Barrow, Portfolio Manager Barrow, Hanley, Mewhinney & Strauss, Inc. May 18, 2004 7 - -------------------------------------------------------------------------------- FUND PROFILE This Profile provides a snapshot of the fund's characteristics, compared where indicated with both an appropriate market index and a broad market index. Key terms are defined on page 9. As of 4/30/2004 - -------------------------------------------------------------------------------- WINDSOR II FUND - -------------------------------------------------------------------------------- PORTFOLIO CHARACTERISTICS COMPARATIVE BROAD FUND INDEX* INDEX** - -------------------------------------------------------------------------------- Number of Stocks 274 731 5,128 Median Market Cap $32.3B $26.6B $27.0B Price/Earnings Ratio 16.9x 16.7x 22.6x Price/Book Ratio 2.5x 2.2x 2.8x Yield 2.4% 1.6% Investor Shares 2.0% Admiral Shares 2.1% Return on Equity 20.8% 17.4% 16.0% Earnings Growth Rate 6.1% 5.3% 6.6% Foreign Holdings 7.0% 0.0% 0.9% Turnover Rate 23%+ -- -- Expense Ratio -- -- Investor Shares 0.39%+ Admiral Shares 0.27%+ Short-Term Reserves 1% -- -- - -------------------------------------------------------------------------------- - --------------------------------------------- TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) Cendant Corp. 3.0% (commercial services) Wells Fargo & Co. 3.0 (banking) Altria Group, Inc. 2.9 (tobacco) ConocoPhillips Co. 2.8 (oil) Citigroup, Inc. 2.7 (banking) Occidental Petroleum Corp. 2.7 (oil) Tyco International Ltd. 2.5 (conglomerate) ChevronTexaco Corp. 2.5 (oil) BP PLC ADR 2.3 (oil) J.P. Morgan Chase & Co. 2.2 (banking) - --------------------------------------------- Top Ten 26.6% - --------------------------------------------- "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 0.85 1.00 Beta 0.94 1.00 0.86 1.00 - --------------------------------------------------------- - -------------------------------------------------------------------------------- SECTOR DIVERSIFICATION (% OF PORTFOLIO) COMPARATIVE BROAD FUND INDEX* INDEX** - -------------------------------------------------------------------------------- Auto & Transportation 1% 3% 3% Consumer Discretionary 12 11 16 Consumer Staples 10 6 7 Financial Services 28 35 23 Health Care 10 4 13 Integrated Oils 11 9 4 Other Energy 1 2 3 Materials & Processing 4 6 4 Producer Durables 6 4 4 Technology 3 6 13 Utilities 8 12 6 Other 5 2 4 - -------------------------------------------------------------------------------- Short-Term Reserves 1% -- -- - -------------------------------------------------------------------------------- - ------------------------ INVESTMENT FOCUS MARKET CAP Large STYLE Value - ------------------------ *Russell 1000 Value Index. **Dow Jones Wilshire 5000 Index. +Annualized. VISIT OUR WEBSITE AT 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 given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. A fund's beta should be reviewed in conjunction with its R-squared (see definition below). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility. - -------------------------------------------------------------------------------- EARNINGS GROWTH RATE. The average annual rate of growth in earnings over the past five years for the stocks now in a fund. - -------------------------------------------------------------------------------- EXPENSE RATIO. The percentage of a fund's average net assets used to pay its annual administrative and advisory expenses. These expenses directly reduce returns to investors. - -------------------------------------------------------------------------------- FOREIGN HOLDINGS. The percentage of a fund's equity assets represented by stocks or depositary receipts of companies based outside the United States. - -------------------------------------------------------------------------------- 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 given index. If a fund's total returns were precisely synchronized with an index's returns, its R-squared would be 1.00. If the fund's returns bore no relationship to the index's returns, its R-squared would be 0. - -------------------------------------------------------------------------------- RETURN ON EQUITY. The annual average rate of return generated by a company during the past five years for each dollar of shareholder's equity (net income divided by shareholder's equity). For a fund, the weighted average return on equity for the companies whose stocks it holds. - -------------------------------------------------------------------------------- SHORT-TERM RESERVES. The percentage of a fund invested in highly liquid, short-term securities that can be readily converted to cash. - -------------------------------------------------------------------------------- TURNOVER RATE. An indication of the fund's trading activity. Funds with high turnover rates incur higher transaction costs and may be more likely to distribute capital gains (which may be taxable to investors). - -------------------------------------------------------------------------------- YIELD. A snapshot of a fund's income from interest and dividends. The yield, expressed as a percentage of the fund's net asset value, is based on income earned over the past 30 days and is annualized, or projected forward for the coming year. The index yield is based on the current annualized rate of income provided by securities in the index. - -------------------------------------------------------------------------------- 9 - -------------------------------------------------------------------------------- PERFORMANCE SUMMARY AS OF 4/30/2004 All of the returns in this report represent past performance, which is not a guarantee of future results that may be achieved by the fund. (For the performance data current to the most recent month-end, which may be higher or lower than that cited, visit our website at www.vanguard.com.) Note, too, that both investment returns and principal value can fluctuate widely, so an investor's shares, when sold, could be worth more or less than their original cost. The returns in this report do not reflect taxes that a shareholder would pay on fund distributions or on the sale of fund shares. - -------------------------------------------------------------------------------- WINDSOR II FUND - -------------------------------------------------------------------------------- FISCAL-YEAR TOTAL RETURNS (%) OCTOBER 31, 1993-APRIL 30, 2004 [BAR CHART] - ------------------------------------------------ FISCAL YEAR WINDSOR II FUND RUSSELL 1000 INVESTOR SHARES VALUE INDEX - ------------------------------------------------ 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 20.7 22.9 2004* 12.4 8.2 - ------------------------------------------------ *Six months ended April 30, 2004. 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, 2004 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 42.29% 3.37% 10.03% 2.68% 12.71% Admiral Shares 5/14/2001 42.47 2.03* -- -- -- - ---------------------------------------------------------------------------- *Return since inception. 10 ABOUT YOUR FUND'S EXPENSES We believe it is important for you to understand the impact of costs on your investment. All mutual funds have operating expenses. As a shareholder of the fund, you incur ongoing costs, which include costs for portfolio management, administrative services, and shareholder reports (like this one), among others. Operating expenses, which are deducted from a fund's gross income, directly reduce the investment return of the fund. A fund's expenses are expressed as a percentage of its average net assets. This figure is known as the expense ratio. The following examples are intended to help you understand the ongoing costs (in dollars) of investing in your fund and to compare these costs with those of other mutual funds. The examples are based on an investment of $1,000 made at the beginning of the period shown and held for the entire period. The table below illustrates your fund's costs in two ways: - --------------------------------------------------------------------- SIX MONTHS ENDED APRIL 30, 2004 BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING WINDSOR II FUND 10/31/2003 4/30/2004 PERIOD* - --------------------------------------------------------------------- Actual Fund Return Investor Shares $1,000 $1,124 $2.02 Admiral Shares 1,000 1,125 1.38 Hypothetical 5% Return Investor Shares $1,000 $1,048 $1.95 Admiral Shares 1,000 1,049 1.33 - --------------------------------------------------------------------- *Expenses are equal to the fund's annualized expense ratio multiplied by the average account value over the period, multiplied by the number of days in the most recent fiscal half-year, then divided by 366. * ACTUAL FUND RETURN. This section helps you to estimate the actual expenses that you paid over the period. The "Ending Account Value" shown is derived from the fund's actual return, and the third column shows the dollar amount that would have been paid by an investor who started with $1,000 in the fund. You may use the information here, together with the amount you invested, to estimate the expenses that you paid over the period. To do so, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number given for your fund under the heading "Expenses Paid During Period." * HYPOTHETICAL 5% RETURN. This section is intended to help you compare your fund's costs with those of other mutual funds. It assumes that the fund had a return of 5% before expenses during the period shown, but that the expense ratio is unchanged. In this case--because the return used is not the fund's actual return--the results do not apply to your investment. The example is useful in making comparisons because the Securities and Exchange Commission requires all mutual funds to calculate expenses based on a 5% return. You can assess your fund's costs by comparing this hypothetical example with the hypothetical examples that appear in shareholder reports of other funds. Note that the expenses shown in the table are meant to highlight and help you compare ongoing costs only and do not reflect any transactional costs or account maintenance fees. They do not include your fund's low-balance fee, described in the prospectus. If this fee were applied to your account, your costs would be higher. Your fund does not charge transaction fees, such as purchase or redemption fees, nor does it carry a "sales load." 11 - --------------------------------------------------------------------- ANNUALIZED EXPENSE RATIOS: YOUR FUND COMPARED WITH ITS PEER GROUP AVERAGE INVESTOR ADMIRAL LARGE-CAP SHARES SHARES VALUE FUND - --------------------------------------------------------------------- Windsor II Fund 0.39% 0.27% 1.42%* - --------------------------------------------------------------------- *Peer-group ratio captures data through year-end 2003. The calculations assume no shares were bought or sold during the period. Your actual costs may have been higher or lower, depending on the amount of your investment and the timing of any purchases or redemptions. You can find more information about the fund's expenses, including annual expense ratios for the past five years, in the Financial Statements section of this report. For additional information on operating expenses and other shareholder costs, please refer to the appropriate fund prospectus. 12 AS OF 4/30/2004 FINANCIAL STATEMENTS (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 (95.3%)(1) - -------------------------------------------------------------------------------- AUTO & Transportation (0.6%) Delphi Corp. 9,904,100 101,022 CSX Corp. 1,107,600 34,070 Ford Motor Co. 619,153 9,510 Burlington Northern Santa Fe Corp. 289,800 9,476 PACCAR, Inc. 161,000 9,090 General Motors Corp. 167,368 7,937 Union Pacific Corp. 84,700 4,991 Lear Corp. 68,200 4,134 Dana Corp. 55,900 1,127 ----------------- 181,357 ----------------- CONSUMER DISCRETIONARY (11.3%) Cendant Corp. 35,731,200 846,115 Carnival Corp. 12,132,700 517,702 Gannett Co., Inc. 3,662,500 317,466 Wal-Mart Stores, Inc. 4,548,300 259,253 Mattel, Inc. 12,019,200 203,846 *(2) Service Corp. International 26,080,100 192,732 McDonald's Corp. 5,181,650 141,096 Sears, Roebuck & Co. 3,275,600 131,188 The Walt Disney Co. 5,680,932 130,831 *Office Depot, Inc. 5,919,900 103,657 Newell Rubbermaid, Inc. 3,120,100 73,759 *MGM Mirage, Inc. 639,500 29,296 *Time Warner, Inc. 1,642,999 27,635 Waste Management, Inc. 953,900 27,091 Kimberly-Clark Corp. 382,500 25,035 J.C. Penney Co., Inc. (Holding Co.) 701,000 23,736 Viacom Inc. Class B 539,900 20,867 *Yum! Brands, Inc. 525,300 20,376 Eastman Kodak Co. 586,000 15,113 Target Corp. 288,200 12,499 Foot Locker, Inc. 272,600 6,542 Viad Corp. 253,300 6,322 Whirlpool Corp. 94,369 6,182 Marriott International, Inc. Class A 123,600 5,829 *AutoNation, Inc. 284,800 4,847 Federated Department Stores, Inc. 80,900 3,964 Wendy's International, Inc. 100,900 3,935 The McClatchy Co. Class A 54,600 3,877 Hasbro, Inc. 189,000 3,570 Mandalay Resort Group 62,100 3,568 Republic Services, Inc. Class A 122,400 3,528 Belo Corp. Class A 121,000 3,444 International Flavors & Fragrances, Inc. 73,000 2,646 Nordstrom, Inc. 72,900 2,597 Jones Apparel Group, Inc. 65,400 2,394 13 - -------------------------------------------------------------------------------- MARKET VALUE* WINDSOR II FUND SHARES (000) - -------------------------------------------------------------------------------- Regal Entertainment Group Class A 97,200 2,118 Saks Inc. 101,600 1,463 Blockbuster Inc. Class A 88,300 1,461 *Liberty Media Corp. 125,209 1,370 Sabre Holdings Corp. 39,100 922 May Department Stores Co. 29,000 893 ----------------- 3,190,765 ----------------- CONSUMER STAPLES (9.9%) Altria Group, Inc. 14,651,700 811,411 Imperial Tobacco Group ADR 12,840,000 573,948 ConAgra Foods, Inc. 18,678,300 539,616 The Procter & Gamble Co. 2,275,400 240,624 PepsiCo, Inc. 4,260,300 232,144 Anheuser-Busch Cos., Inc. 3,406,900 174,569 Sara Lee Corp. 4,035,900 93,148 The Coca-Cola Co. 739,300 37,385 Kraft Foods Inc. 991,900 32,643 *Safeway, Inc. 568,400 13,045 Albertson's, Inc. 481,600 11,250 CVS Corp. 281,500 10,874 Tyson Foods, Inc. 374,500 7,018 The Pepsi Bottling Group, Inc. 224,800 6,580 PepsiAmericas, Inc. 315,100 6,311 *The Kroger Co. 264,600 4,631 R.J. Reynolds Tobacco Holdings, Inc. 57,700 3,737 General Mills, Inc. 65,700 3,203 Coca-Cola Enterprises, Inc. 79,800 2,155 SuperValu Inc. 59,400 1,829 Carolina Group 64,400 1,690 ----------------- 2,807,811 ----------------- FINANCIAL SERVICES (27.6%) BANKS--NEW YORK CITY (2.2%) J.P. Morgan Chase & Co. 16,671,704 626,856 The Bank of New York Co., Inc. 212,000 6,178 BANKS--OUTSIDE NEW YORK CITY (8.8%) Wells Fargo & Co. 14,797,300 835,456 Bank of America Corp. 7,356,578 592,131 PNC Financial Services Group 9,588,922 509,172 Wachovia Corp. 3,559,902 162,866 National City Corp. 3,745,200 129,846 Comerica, Inc. 2,481,600 128,125 Bank One Corp. 968,300 47,805 KeyCorp 655,000 19,454 U.S. Bancorp 677,522 17,372 UnionBanCal Corp. 236,574 12,640 Huntington Bancshares Inc. 347,860 7,444 First Horizon National Corp. 162,100 7,126 Zions Bancorp 121,100 6,845 SunTrust Banks, Inc. 88,900 6,050 BB&T Corp. 136,953 4,724 Regions Financial Corp. 102,200 3,547 Union Planters Corp. 121,200 3,369 SouthTrust Corp. 107,238 3,333 City National Corp. 45,400 2,799 Associated Banc-Corp 21,600 885 Popular, Inc. 5,000 210 DIVERSIFIED FINANCIAL SERVICES (4.1%) Citigroup, Inc. 16,146,173 776,469 The Goldman Sachs Group, Inc. 1,568,300 151,733 Merrill Lynch & Co., Inc. 2,314,300 125,504 Metropolitan Life Insurance Co. 1,892,900 65,305 CIT Group Inc. 682,800 23,468 Morgan Stanley 342,860 17,620 Marsh & McLennan Cos., Inc. 88,600 3,996 FINANCIAL--DATA PROCESSING SERVICES (0.7%) Automatic Data Processing, Inc. 4,226,200 185,150 FINANCIAL--MISCELLANEOUS (1.5%) Fannie Mae 2,929,500 201,315 Freddie Mac 3,199,900 186,874 Nationwide Financial Services, Inc. 184,200 6,336 Fidelity National Financial, Inc. 150,867 5,522 MBIA, Inc. 91,600 5,394 MBNA Corp. 149,400 3,642 *Providian Financial Corp. 117,000 1,419 FINANCIAL--SMALL LOAN (1.6%) SLM Corp. 11,707,200 448,503 INSURANCE--LIFE (1.9%) Manulife Financial Corp. 11,703,415 430,334 Prudential Financial, Inc. 1,189,700 52,275 The Principal Financial Group, Inc. 749,800 26,468 *Conseco, Inc. 629,200 12,458 INSURANCE--MULTILINE (4.4%) Allstate Corp. 12,677,144 581,880 American International Group, Inc. 4,004,839 286,947 St. Paul Travelers Cos., Inc. 4,205,240 171,027 The Hartford Financial Services Group Inc. 2,766,127 168,955 *Assurant, Inc. 541,000 13,179 14 - -------------------------------------------------------------------------------- MARKET VALUE* WINDSOR II FUND SHARES (000) - -------------------------------------------------------------------------------- Lincoln National Corp. 186,400 8,366 Loews Corp. 88,900 5,157 Old Republic International Corp. 165,350 3,839 INSURANCE--PROPERTY-CASUALTY (0.4%) XL Capital Ltd. Class A 1,230,600 93,956 ACE Ltd. 145,700 6,387 W.R. Berkley Corp. 126,100 5,107 RenaissanceRe Holdings Ltd. 77,400 4,078 Axis Capital Holdings Ltd. 107,400 2,927 Montpelier Re Holdings Ltd. 73,800 2,524 PartnerRe Ltd. 30,600 1,753 REAL ESTATE INVESTMENT TRUSTS (0.1%) Plum Creek Timber Co. Inc. REIT 131,000 3,872 Equity Office Properties Trust REIT 145,400 3,660 Boston Properties, Inc. REIT 68,800 3,234 Vornado Realty Trust REIT 63,600 3,209 Kimco Realty Corp. REIT 74,000 3,163 Simon Property Group, Inc. REIT 62,100 2,994 Equity Residential REIT 99,800 2,741 Liberty Property Trust REIT 74,300 2,716 iStar Financial Inc. REIT 71,600 2,545 Public Storage, Inc. REIT 60,000 2,507 Avalonbay Communities, Inc. REIT 46,100 2,288 Hospitality Properties Trust REIT 45,400 1,774 Health Care Properties Investors REIT 46,100 1,102 New Plan Excel Realty Trust REIT 39,900 895 SAVINGS & Loan (1.8%) Washington Mutual, Inc. 12,675,849 499,302 Golden West Financial Corp. 45,200 4,751 Charter One Financial, Inc. 105,815 3,531 Sovereign Bancorp, Inc. 101,900 2,036 Green Point Financial Corp. 38,950 1,519 SECURITIES BROKERS & Services (0.1%) Bear Stearns Co., Inc. 100,000 8,014 Countrywide Financial Corp. 134,218 7,959 *E*TRADE Group, Inc. 600,900 6,826 Lehman Brothers Holdings, Inc. 71,700 5,263 A.G. Edwards & Sons, Inc. 72,400 2,649 ----------------- 7,798,650 ----------------- HEALTH CARE (9.3%) Baxter International, Inc. 15,507,300 490,806 Bristol-Myers Squibb Co. 17,615,300 442,144 Schering-Plough Corp. 25,780,800 431,313 *Anthem, Inc. 2,491,900 220,733 Pfizer Inc. 5,976,300 213,712 *WellPoint Health Networks Inc. Class A 1,769,000 197,580 Johnson & Johnson 3,218,300 173,885 Merck & Co., Inc. 2,786,500 130,966 Wyeth 2,107,100 80,216 *Medco Health Solutions, Inc. 2,217,100 78,485 McKesson Corp. 2,041,800 67,093 Aetna Inc. 353,300 29,236 HCA Inc. 595,000 24,175 *Tenet Healthcare Corp. 1,639,600 19,282 Abbott Laboratories 306,500 13,492 *Health Net Inc. 475,300 12,092 Bausch & Lomb, Inc. 102,900 6,465 Becton, Dickinson & Co. 84,100 4,251 *Humana Inc. 87,200 1,420 ----------------- 2,637,346 ----------------- INTEGRATED OILS (10.7%) ConocoPhillips Co. 11,032,234 786,598 Occidental Petroleum Corp. 15,883,700 749,711 ChevronTexaco Corp. 7,674,943 702,257 BP PLC ADR 12,466,172 659,461 ExxonMobil Corp. 2,324,894 98,924 Royal Dutch Petroleum Co. ADR 277,700 13,513 Unocal Corp. 170,200 6,134 Marathon Oil Corp. 84,100 2,822 Amerada Hess Corp. 13,000 925 ----------------- 3,020,345 ----------------- OTHER ENERGY (1.0%) *(2)Reliant Energy, Inc. 17,690,743 147,010 Williams Cos., Inc. 5,205,800 53,620 Valero Energy Corp. 549,500 35,036 Apache Corp. 192,770 8,071 Burlington Resources, Inc. 114,800 7,723 Sunoco, Inc. 98,800 6,215 Devon Energy Corp. 83,981 5,140 Anadarko Petroleum Corp. 88,100 4,720 ----------------- 267,535 ----------------- MATERIALS & Processing (3.5%) International Paper Co. 7,846,400 316,367 (2)Hanson PLC ADR 7,826,950 299,694 Monsanto Co. 5,411,300 187,177 Weyerhaeuser Co. 1,091,900 64,640 (2)Crompton Corp. 6,238,569 38,804 Alcoa Inc. 880,100 27,063 E.I. du Pont de Nemours & Co. 328,387 14,104 Dow Chemical Co. 340,600 13,518 Georgia Pacific Group 244,500 8,582 Archer-Daniels-Midland Co. 420,900 7,391 15 - -------------------------------------------------------------------------------- MARKET VALUE* WINDSOR II FUND SHARES (000) - -------------------------------------------------------------------------------- Masco Corp. 234,200 6,560 Sherwin-Williams Co. 112,400 4,277 Vulcan Materials Co. 81,500 3,769 Temple-Inland Inc. 59,300 3,663 PPG Industries, Inc. 59,600 3,535 Eagle Materials, Inc. B Shares 34,443 2,201 ----------------- 1,001,345 ----------------- PRODUCER DURABLES (5.6%) The Boeing Co. 12,125,600 517,642 Emerson Electric Co. 7,275,800 438,149 (2)Cooper Industries, Inc. Class A 4,650,800 255,375 Northrop Grumman Corp. 1,415,200 140,459 United Technologies Corp. 1,372,196 118,366 Centex Corp. 797,800 38,254 Lockheed Martin Corp. 719,700 34,329 Caterpillar, Inc. 121,900 9,475 Ingersoll-Rand Co. 143,100 9,237 Deere & Co. 135,700 9,233 Pulte Homes, Inc. 156,100 7,675 D. R. Horton, Inc. 230,400 6,636 Pitney Bowes, Inc. 88,500 3,872 Diebold, Inc. 47,600 2,194 Hubbell Inc. Class B 27,600 1,240 Goodrich Corp. 19,300 556 ----------------- 1,592,692 ----------------- TECHNOLOGY (2.3%) International Business Machines Corp. 1,832,400 161,563 Hewlett-Packard Co. 6,865,172 135,244 Motorola, Inc. 6,737,800 122,965 *Computer Sciences Corp. 2,313,950 94,664 Electronic Data Systems Corp. 2,874,800 52,580 Computer Associates International, Inc. 1,509,300 40,464 Raytheon Co. 436,100 14,069 Scientific-Atlanta, Inc. 174,900 5,665 General Dynamics Corp. 55,600 5,205 *Unisys Corp. 396,500 5,166 *Storage Technology Corp. 87,500 2,299 *Vishay Intertechnology, Inc. 97,500 1,697 *Avaya Inc. 93,400 1,278 *Ingram Micro, Inc. Class A 83,600 999 *NCR Corp. 7,900 353 *Maxtor Corp. 54,200 353 *Compuware Corp. 11,700 90 ----------------- 644,654 ----------------- UTILITIES (8.3%) American Electric Power Co., Inc. 15,353,560 467,362 Verizon Communications Inc. 12,059,054 455,109 Duke Energy Corp. 20,183,000 425,054 Entergy Corp. 7,107,600 388,075 (2)CenterPoint Energy Inc. 18,492,100 199,530 Public Service Enterprise Group, Inc. 2,775,200 119,056 AT&T Corp. 3,552,469 60,924 SBC Communications Inc. 1,093,949 27,239 Dominion Resources, Inc. 394,100 25,148 FirstEnergy Corp. 629,700 24,621 FPL Group, Inc. 294,300 18,723 BellSouth Corp. 650,100 16,779 ALLTEL Corp. 228,500 11,503 Southern Co. 325,000 9,347 *PG&E Corp. 309,800 8,526 PPL Corp. 194,200 8,321 Edison International 353,200 8,265 Constellation Energy Group, Inc. 206,200 7,935 Sempra Energy 247,200 7,849 Exelon Corp. 115,100 7,705 CenturyTel, Inc. 262,700 7,587 TXU Corp. 194,900 6,654 *AES Corp. 629,600 5,459 NiSource, Inc. 229,600 4,629 Pinnacle West Capital Corp. 111,700 4,363 NSTAR 62,900 3,044 Northeast Utilities 124,700 2,288 Xcel Energy, Inc. 129,800 2,172 ----------------- 2,333,267 ----------------- OTHER (5.2%) Tyco International Ltd. 25,949,000 712,299 General Electric Co. 10,923,400 327,156 ITT Industries, Inc. 4,050,500 321,164 Honeywell International Inc. 3,066,900 106,053 Eaton Corp. 100,600 5,974 Textron, Inc. 92,100 5,082 ----------------- 1,477,728 ----------------- - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $20,081,275) 26,953,495 - -------------------------------------------------------------------------------- 16 - -------------------------------------------------------------------------------- MARKET VALUE* SHARES (000) - -------------------------------------------------------------------------------- TEMPORARY INVESTMENTS (4.8%)(1) - -------------------------------------------------------------------------------- Vanguard Index Participation Equity Receipts-- Total Stock Market 1,992,800 212,931 Value 60,000 2,914 FACE AMOUNT (000) --------------------- FEDERAL HOME LOAN BANK (3) 0.997%, 5/5/2004 $ 2,000 2,000 FEDERAL NATIONAL MORTGAGE ASSN. (3) 1.028%, 5/3/2004 5,000 5,000 (3) 1.002%, 5/19/2004 5,000 4,998 (3) 1.048%, 7/14/2004 10,000 9,979 (3) 1.033%, 7/28/2004 32,000 31,919 (3) 1.019%, 8/4/2004 10,000 9,971 REPURCHASE AGREEMENTS Collateralized by U.S. Government Obligations in a Pooled Cash Account 1.04%, 5/3/2004 1,078,539 1,078,539 1.04%, 5/3/2004--Note G 11,581 11,581 - -------------------------------------------------------------------------------- TOTAL TEMPORARY INVESTMENTS (Cost $1,326,298) 1,369,832 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (100.1%) (Cost $21,407,573) 28,323,327 - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-0.1%) - -------------------------------------------------------------------------------- Other Assets 125,204 Liabilities--Note G (165,596) ----------------- (40,392) ----------------- - -------------------------------------------------------------------------------- NET ASSETS (100%) $28,282,935 ================================================================================ *See Note A in NOTES TO FINANCIAL STATEMENTS. *Non-income-producing security. (1)The fund invests a portion of its cash reserves in equity markets through the use of index futures contracts and exchange-traded funds. After giving effect to these investments, the fund's effective common stock and temporary cash investment positions represent 99.4% and 0.7%, respectively, of net assets. See Note E in Notes to Financial Statements. (2)Considered an affiliated company of the fund as the fund owns more than 5% of the outstanding voting securities of such company. The total market value of investments in affiliated companies was $1,133,145,000. See Note I in Notes to Financial Statements. (3)Securities with an aggregate value of $63,867,000 have been segregated as initial margin for open futures contracts. ADR--American Depositary Receipt. REIT--Real Estate Investment Trust. - -------------------------------------------------------------------------------- AMOUNT (000) - -------------------------------------------------------------------------------- AT APRIL 30, 2004, NET ASSETS CONSISTED OF: - -------------------------------------------------------------------------------- Paid-in Capital $22,661,580 Undistributed Net Investment Income 154,349 Accumulated Net Realized Losses (1,432,606) Unrealized Appreciation (Depreciation) Investment Securities 6,915,754 Futures Contracts (16,142) - -------------------------------------------------------------------------------- NET ASSETS $28,282,935 ================================================================================ Investor Shares--Net Assets Applicable to 880,739,253 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $24,101,269 - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- INVESTOR SHARES $27.36 ================================================================================ Admiral Shares--Net Assets Applicable to 86,059,907 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $4,181,666 - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $48.59 ================================================================================ 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, 2004 (000) - -------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends* $ 332,575 Interest 5,128 Security Lending 171 - -------------------------------------------------------------------------------- Total Income 337,874 - -------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B Basic Fee 17,108 Performance Adjustment 3,219 The Vanguard Group--Note C Management and Administrative Investor Shares 25,816 Admiral Shares 2,114 Marketing and Distribution Investor Shares 1,395 Admiral Shares 228 Custodian Fees 193 Shareholders' Reports Investor Shares 254 Admiral Shares 3 Trustees' Fees and Expenses 14 - -------------------------------------------------------------------------------- Total Expenses 50,344 Expenses Paid Indirectly--Note D (1,538) - -------------------------------------------------------------------------------- Net Expenses 48,806 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME 289,068 - -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold* 336,533 Futures Contracts 39,281 - -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) 375,814 - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities 2,393,973 Futures Contracts (36,374) - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 2,357,599 - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $3,022,481 ================================================================================ *Dividend income and realized net gain (loss) from affiliated companies of the fund were $15,198,000 and $(112,923,000), respectively. See Note I in NOTES TO FINANCIAL STATEMENTS. 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 APRIL 30, 2004 OCT. 31, 2003 (000) (000) - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 289,068 $ 501,433 Realized Net Gain (Loss) 375,814 (876,070) Change in Unrealized Appreciation (Depreciation) 2,357,599 4,484,340 - -------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 3,022,481 4,109,703 - -------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income Investor Shares (237,998) (438,682) Admiral Shares (41,824) (67,028) Realized Capital Gain Investor Shares -- -- Admiral Shares -- -- - -------------------------------------------------------------------------------- Total Distributions (279,822) (505,710) - -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS--NOTE H Investor Shares 905,342 (13,104) Admiral Shares 379,752 445,998 - -------------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 1,285,094 432,894 - -------------------------------------------------------------------------------- Total Increase (Decrease) 4,027,754 4,036,887 - -------------------------------------------------------------------------------- NET ASSETS Beginning of Period 24,255,182 20,218,295 - -------------------------------------------------------------------------------- End of Period $28,282,935 $24,255,182 ================================================================================ 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, FOR A SHARE OUTSTANDING APRIL 30, --------------------------------------------------------- THROUGHOUT EACH PERIOD 2004 2003 2002 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $24.61 $20.87 $24.50 $27.58 $29.03 $31.07 - -------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .28 .51 .51 .564 .64 .64 Net Realized and Unrealized Gain (Loss) on Investments 2.75 3.75 (3.47) (1.819) 1.08 .73 - -------------------------------------------------------------------------------------------------------------- Total from Investment Operations 3.03 4.26 (2.96) (1.255) 1.72 1.37 - -------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.28) (.52) (.52) (.585) (.67) (.74) Distributions from Realized Capital Gains -- -- (.15) (1.240) (2.50) (2.67) - -------------------------------------------------------------------------------------------------------------- Total Distributions (.28) (.52) (.67) (1.825) (3.17) (3.41) - -------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $27.36 $24.61 $20.87 $24.50 $27.58 $29.03 ============================================================================================================== TOTAL RETURN 12.38% 20.68% -12.51% -4.89% 7.22% 4.57% ============================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $24,101 $20,843 $17,735 $21,495 $24,070 $30,541 Ratio of Total Expenses to Average Net Assets* 0.39%** 0.43% 0.42% 0.40% 0.37% 0.37% Ratio of Net Investment Income to Average Net Assets 2.13% 2.31% 2.12% 2.10% 2.36% 2.08% Portfolio Turnover Rate 23%** 29% 41% 33% 26% 26% ==============================================================================================================
*Includes performance-based investment advisory fee increases (decreases) of 0.02%, 0.03%, 0.02%, 0.00%, (0.03%), and (0.01%). **Annualized. 20 WINDSOR II FUND ADMIRAL SHARES
- -------------------------------------------------------------------------------------- SIX MONTHS YEAR ENDED ENDED OCTOBER 31, MAY 14* TO FOR A SHARE OUTSTANDING APRIL 30, ----------------------- OCT 31, THROUGHOUT EACH PERIOD 2004 2003 2002 2001 - -------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $43.69 $37.05 $43.50 $50.00 - -------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .529 .95 .944 .408 Net Realized and Unrealized Gain (Loss) on Investments 4.894 6.65 (6.167) (6.433) - -------------------------------------------------------------------------------------- Total from Investment Operations 5.423 7.60 (5.223) (6.025) - -------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.523) (.96) (.962) (.475) Distributions from Realized Capital Gains -- -- (.265) -- - -------------------------------------------------------------------------------------- Total Distributions (.523) (.96) (1.227) (.475) - -------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $48.59 $43.69 $37.05 $43.50 ====================================================================================== TOTAL RETURN 12.48% 20.79% -12.44% -12.16% ====================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $4,182 $3,412 $2,484 $2,039 Ratio of Total Expenses to Average Net Assets** 0.27%+ 0.32% 0.35% 0.35%+ Ratio of Net Investment Income to Average Net Assets 2.25%+ 2.41% 2.18% 1.83% Portfolio Turnover Rate 23%+ 29% 41% 33% ======================================================================================
*Inception. **Includes performance-based investment advisory fee increases (decreases) of 0.02%, 0.03%, 0.02%, and 0.00%. +Annualized. SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 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 the securities' primary markets, are valued by methods deemed by the board of trustees to represent fair value. Temporary cash investments acquired over 60 days to maturity are valued using the latest bid prices or using valuations based on a matrix system (which considers such factors as security prices, yields, maturities, and ratings), both as furnished by independent pricing services. Other temporary cash investments are valued at amortized cost, which approximates market value. 2. FUTURES CONTRACTS: The fund uses S&P 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 into 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) and shareholder reporting. 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; Tukman Capital Management, Inc.; and, beginning December 11, 2003, Hotchkis & Wiley Capital Management, 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 advisor. The basic fees of Barrow, Hanley, Mewhinney & Strauss, Inc., Equinox Capital Management, LLC, and Tukman Capital Management, Inc., 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. In accordance with the advisory contract entered into with Hotchkis & Wiley Capital Management, Inc., in December 2003, the investment advisory fee will be subject to quarterly adjustments based on performance relative to the MSCI US Investable Market 2500 Index beginning November 1, 2004. 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 $290,000 for the six months ended April 30, 2004. For the six months ended April 30, 2004, 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 $3,219,000 (0.02%) based on performance. C. The Vanguard Group furnishes at cost corporate management, administrative, marketing, and distribution services. The costs of such services are allocated to the fund under methods approved by the board of trustees. The fund has committed to provide up to 0.40% of its net assets in capital contributions to Vanguard. At April 30, 2004, the fund had contributed capital of $4,141,000 to Vanguard (included in Other Assets), representing 0.01% of the fund's net assets and 4.14% of Vanguard's capitalization. The fund's trustees and officers are also directors and officers of Vanguard. D. The fund has asked its investment advisors to direct certain security trades, subject to obtaining the best price and execution, to brokers who have agreed to rebate to the fund part of the commissions generated. Such rebates are used solely to reduce the fund's management and administrative expenses. For the six months ended April 30, 2004, these arrangements reduced the fund's expenses by $1,538,000 (an effective 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, 2003, the fund had available realized losses of $1,787,283,000 to offset future net capital gains of $918,354,000 through October 31, 2010, and $868,929,000 through October 31, 2011. The fund will use these capital losses to offset net taxable capital gains, if 23 NOTES TO FINANCIAL STATEMENTS (CONTINUED) any, realized during the year ending October 31, 2004; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balances above. At April 30, 2004, net unrealized appreciation of investment securities for tax purposes was $6,915,754,000, consisting of unrealized gains of $7,807,648,000 on securities that had risen in value since their purchase and $891,894,000 in unrealized losses on securities that had fallen in value since their purchase. At April 30, 2004, the aggregate settlement value of open futures contracts expiring in June 2004 and the related unrealized depreciation were: - -------------------------------------------------------------------------------- (000) ------------------------------- AGGREGATE UNREALIZED NUMBER OF SETTLEMENT APPRECIATION FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION) - -------------------------------------------------------------------------------- S&P 500 Index 2,345 $648,451 $(9,699) S&P MidCap 400 Index 276 80,482 (1,251) E-mini S&P 500 Index 3,815 210,989 (5,192) - -------------------------------------------------------------------------------- Unrealized depreciation on open futures contracts is required to be treated as realized loss for tax purposes. F. During the six months ended April 30, 2004, the fund purchased $4,442,224,000 of investment securities and sold $2,981,323,000 of investment securities, other than temporary cash investments. G. The market value of securities on loan to broker/dealers at April 30, 2004, was $11,257,000, for which the fund held cash collateral of $11,581,000. 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, 2004 OCTOBER 31, 2003 ---------------------- --------------------- AMOUNT SHARES AMOUNT SHARES (000) (000) (000) (000) - -------------------------------------------------------------------------------------- Investor Shares Issued $1,996,959 74,079 $2,445,205 109,975 Issued in Lieu of Cash Distribution 228,823 8,823 421,062 18,851 Redeemed (1,320,214) (49,184) (2,879,371) (131,559) ------------------------------------------------- Net Increase (Decrease)--Investor 905,342 33,718 (13,104) (2,733) ------------------------------------------------- Admiral Shares Issued 650,004 13,609 893,273 22,297 Issued in Lieu of Cash Distribution 37,491 815 59,671 1,502 Redeemed (307,743) (6,464) (506,946) (12,738) ------------------------------------------------- Net Increase (Decrease)-Admiral Shares 379,752 7,960 445,998 11,061 - --------------------------------------------------------------------------------------
24 I. Certain of the fund's investments are in companies that are considered to be affiliated companies of the fund because the fund owns more than 5% of the outstanding voting securities of the company. Transactions during the period in securities of affiliated companies were as follows:
- ---------------------------------------------------------------------------------------------- (000) - ---------------------------------------------------------------------------------------------- CURRENT PERIOD TRANSACTIONS --------------------------- OCT 31, 2003 COST OF APR 30, 2004 MARKET PURCHASES SECURITIES DIVIDEND MARKET VALUE AT COST SOLD INCOME VALUE - ---------------------------------------------------------------------------------------------- CenterPointe Energy Inc. $186,655 $2,580 $24,967 $3,752 $199,530 Cooper Industries, Inc. Class A 246,027 -- -- 3,256 255,375 Crompton Corp. 33,439 -- -- 312 38,804 Hanson PLC ADR 268,856 -- -- 7,878 299,694 Millenium Chemicals, Inc. 73,829 -- 161,446 -- -- Reliant Energy, Inc. 102,419 -- 19,235 -- 147,010 Service Corp. International 137,810 -- 45,275 -- 192,732 ------------------------------------------------------------- $1,049,035 $15,198 $1,133,145 ---------- -------------------------- - ----------------------------------------------------------------------------------------------
25 INVESTING IS FAST, EASY, AND SECURE ON VANGUARD.COM If you're like many Vanguard investors, you believe in planning and taking control of your own investments. VANGUARD.COM was built for you--and it keeps getting better. RESEARCH AND PLAN YOUR INVESTMENTS WITH CONFIDENCE Use our PLANNING & ADVICE and RESEARCH FUNDS & STOCKS sections to: * Determine what asset allocation might best suit your needs--by taking our Investor Questionnaire. * Find out how much to save for retirement and your children's college education-- by using our planning tools. * Learn how to achieve your goals--by reading our PlainTalk(R) investment guides. * Find your next fund--by using the Compare Funds, Compare Costs, and Narrow Your Fund Choices tools. * Look up fund price, performance history, and distribution information--in a snap. INVEST AND MANAGE ACCOUNTS WITH EASE Log on to Vanguard.com to: * See what you own (at Vanguard and elsewhere) and how your investments are doing. * Elect to receive online statements, fund reports (like this one), prospectuses, and tax forms. * Analyze your portfolio's holdings and performance. * Open new accounts, buy and sell shares, and exchange money between funds--securely and easily. * Sign up to receive electronic newsletters from Vanguard informing you of news on our funds, products, and services, as well as on investing and the financial markets. Find out what Vanguard.com can do for you. Log on today! 26 CAPITALIZE ON YOUR IRA Are you taking full advantage of your individual retirement account? You really should be. These tax-deferred accounts are powerful options for retirement savers. Here's how you can exploit your IRA--and improve your chances of having the retirement of your dreams. 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. 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. 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. 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 sizable personal investments they have made as private individuals. Our independent board members bring distinguished backgrounds in business, academia, and public service to their task of working with Vanguard officers to establish the policies and oversee the activities of - --------------------------------------------------------------------------------
POSITION(S) HELD WITH NAME FUND (NUMBER OF (YEAR OF BIRTH) VANGUARD FUNDS TRUSTEE/OFFICER OVERSEEN BY SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS - --------------------------------------------------------------------------------------------------------------------- JOHN J. BRENNAN* Chairman of the Chairman of the Board, Chief Executive Officer, and Director/Trustee of (1954) Board, Chief The Vanguard Group, Inc., and of each of the investment companies May 1987 Executive Officer, served by The Vanguard Group. and Trustee (129) - --------------------------------------------------------------------------------------------------------------------- INDEPENDENT TRUSTEES CHARLES D. ELLIS Trustee The Partners of '63 (pro bono ventures in education); Senior Advisor (1937) (129) to Greenwich Associates (international business strategy consulting); January 2001 Successor Trustee of Yale University; Overseer of the Stern School of Business at New York University; Trustee of the Whitehead Institute for Biomedical Research. - --------------------------------------------------------------------------------------------------------------------- RAJIV L. GUPTA Trustee Chairman and Chief Executive Officer (since October 1999), Vice (1945) (129) Chairman (January-September 1999), and Vice President (prior to December 2001 September 1999) of Rohm and Haas Co. (chemicals); Director of Technitrol, Inc. (electronic components), and Agere Systems (communications components); Board Member of the American Chemistry Council; Trustee of Drexel University. - --------------------------------------------------------------------------------------------------------------------- JOANN HEFFERNAN Trustee Vice President, Chief Information Officer, and Member of the HEISEN (129) Executive Committee of Johnson & Johnson (pharmaceuticals/ (1950) consumer products); Director of the University Medical Center at July 1998 Princeton and Women's Research and Education Institute. - --------------------------------------------------------------------------------------------------------------------- BURTON G. MALKIEL Trustee Chemical Bank Chairman's Professor of Economics, Princeton Malkiel C (1932) (127) University; Director of Vanguard Investment Series plc (Irish invest- May 1977 ment fund) (since November 2001), Vanguard Group (Ireland) Limited (Irish investment management firm) (since November 2001), Prudential Insurance Co. of America, BKF Capital (investment management), The Jeffrey Co. (holding company), and NeuVis, Inc. (software company). - ---------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- the funds. Among board members' responsibilities are selecting investment advisors for the funds; monitoring fund operations, performance, and costs; reviewing contracts; nominating and selecting new trustees/directors; and electing Vanguard officers. Each trustee serves a fund until its termination; or until the trustee's retirement, resignation, or death; or otherwise as specified in the fund's organizational documents. Any trustee may be removed at a shareholders' meeting by a vote representing two-thirds of the net asset value of all shares of the fund together with shares of other Vanguard funds organized within the same trust. The table on these two pages shows information for each trustee and executive officer of the fund. The mailing address of the trustees and officers is P.O. Box 876, Valley Forge, PA 19482. - --------------------------------------------------------------------------------
POSITION(S) HELD WITH NAME FUND (NUMBER OF (YEAR OF BIRTH) VANGUARD FUNDS TRUSTEE/OFFICER OVERSEEN BY SINCE TRUSTEE/OFFICER) PRINCIPAL OCCUPATION(S) DURING THE PAST FIVE YEARS - --------------------------------------------------------------------------------------------------------------------- ALFRED M. RANKIN, JR.Trustee Chairman, President, Chief Executive Officer, and Director of NACCO (1941) (129) Industries, Inc. (forklift trucks/housewares/lignite); Director of January 1993 Goodrich Corporation (industrial products/aircraft systems and services); Director of Standard Products Company (supplier for the automotive industry) until 1998. - --------------------------------------------------------------------------------------------------------------------- J. LAWRENCE WILSON Trustee Retired Chairman and Chief Executive Officer of Rohm and Haas Co. (1936) (129) (chemicals); Director of Cummins Inc. (diesel engines), MeadWestvaco April 1985 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.; (1951) (129) Secretary of The Vanguard Group and of each of the investment June 2001 companies served by The Vanguard Group. - --------------------------------------------------------------------------------------------------------------------- THOMAS J. HIGGINS Treasurer Principal of The Vanguard Group, Inc.; Treasurer of each of the (1957) (129) investment companies served by The Vanguard Group. July 1998 - ---------------------------------------------------------------------------------------------------------------------
*Officers of the funds are "interested persons" as defined in the Investment Company Act of 1940. More information about the trustees is in the STATEMENT OF ADDITIONAL INFORMATION, available from The Vanguard Group.
================================================================================================ VANGUARD SENIOR MANAGEMENT TEAM MORTIMER J. BUCKLEY, Information Technology. MICHAEL S. MILLER, Planning and Development. JAMES H. GATELY, Investment Programs and Services. RALPH K. PACKARD, Finance. KATHLEEN C. GUBANICH, Human Resources. GEORGE U. SAUTER, Chief Investment Officer. F. WILLIAM MCNABB, III, Client Relationship Group. - ------------------------------------------------------------------------------------------------
JOHN C. BOGLE, Founder; Chairman and Chief Executive Officer, 1974-1996. VANGUARD SHIP LOGO THE VANGUARD GROUP(R) POST OFFICE BOX 2600 VALLEY FORGE, PA 19482-2600 VANGUARD, THE VANGUARD GROUP, VANGUARD.COM, VANGUARD IRA, ADMIRAL, PLAINTALK, WINDSOR, and the ship logo are trademarks of The Vanguard Group, Inc. All other marks are the exclusive property of their respective owners. ABOUT OUR COVER The photographs that appear on the cover of this report are copyrighted by Michael Kahn. FOR MORE INFORMATION This report is intended for the fund's shareholders. It may not be distributed to prospective investors unless it is preceded or accompanied by the current fund prospectus. To receive a free copy of the prospectus or the STATEMENT OF ADDITIONAL INFORMATION, or to request additional information about the fund or other Vanguard funds, please contact us at one of the adjacent telephone numbers or by e-mail through VANGUARD.COM. Prospectuses may also be viewed online. You can obtain a free copy of Vanguard's proxy voting guidelines by visiting our website, www.vanguard.com, and searching for "proxy voting guidelines," or by calling 1-800-662-2739. They are also available from the SEC's website, www.sec.gov. 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) 2004 The Vanguard Group, Inc. All rights reserved. Vanguard Marketing Corporation, Distributor. Q732 062004 Item 2: Not applicable. Item 3: Not applicable. Item 4: Not applicable. Item 5: Not applicable. Item 6: Not applicable. Item 7: Not applicable. Item 8: Not applicable. Item 9: Not applicable. Item 10: 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 11: Exhibits. (a) Certifications. Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VANGUARD WINDSOR FUNDS BY: (signature) ---------------------------------------- (HEIDI STAM) JOHN J. BRENNAN* CHIEF EXECUTIVE OFFICER Date: June 14, 2004 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 14, 2004 VANGUARD WINDSOR FUNDS BY: (signature) ---------------------------------------- (HEIDI STAM) THOMAS J. HIGGINS* TREASURER Date: June 14, 2004 *By Power of Attorney. See File Number 2-57689, filed on December 26, 2002. Incorporated by Reference. EX-99.CERT 2 cert302windsor.txt CERT 302 WINDSOR FUNDS CERTIFICATIONS I, John J. Brennan, certify that: 1. I have reviewed this report on Form N-CSR of Vanguard Windsor Funds; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 14, 2004 /S/ JOHN J. BRENNAN ________________________________ John J. Brennan Chief Executive Officer CERTIFICATIONS I, Thomas J. Higgins, certify that: 1. I have reviewed this report on Form N-CSR of Vanguard Windsor Funds; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: June 14, 2004 /S/ THOMAS J. HIGGINS ------------------------- TREASURER EX-99.906 3 cert906windsor.txt 906 CERT WINDSOR FUNDS Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Name of Issuer: Vanguard Windsor Funds In connection with the Report on Form N-CSR of the above-named issuer that is accompanied by this certification, the undersigned hereby certifies, to his knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the issuer. Date: June 14, 2004 /S/ JOHN J. BRENNAN ---------------------------- CHIEF EXECUTIVE OFFICER Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Name of Issuer: Vanguard Windsor Funds In connection with the Report on Form N-CSR of the above-named issuer that is accompanied by this certification, the undersigned hereby certifies, to his knowledge, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the issuer. Date: June 14, 2004 /S/ THOMAS J. HIGGINS ------------------------- TREASURER -----END PRIVACY-ENHANCED MESSAGE-----