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: 811-5445 Name of Registrant: Vanguard Fenway 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: September 30 Date of reporting period: October 1, 2003 - March 31, 2004 Item 1: Reports to Shareholders VANGUARD(R) EQUITY INCOME FUND MARCH 31, 2004 [GRAPH SHIP] 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, you'll get an understanding of how the fund invests and how the market environment affected its performance. The statistical information that follows can help you understand how the fund's performance and characteristics stack up against those of similar funds and market benchmarks. It's important to keep in mind that any opinions expressed here are just that: informed opinions. They should not be considered promises or advice. These opinions, like the statistics, cover the period through the date on the cover of this report. 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 fund profile 7 glossary of investment terms 8 performance summary 9 about your fund's expenses 11 financial statements 22 advantages of vanguard.com - -------------------------------------------------------------------------------- SUMMARY * Vanguard Equity Income Fund returned 15.8% during the six months ended March 31, 2004. * The fund slightly outperformed the average competing fund and the broad U.S. stock market but lagged its benchmark, the Russell 1000 Value Index. * Value stocks outpaced growth stocks during the period, but the best-performing value stocks were not necessarily the ones that paid dividends. WANT LESS CLUTTER IN YOUR MAILBOX? JUST REGISTER WITH VANGUARD.COM AND OPT TO GET FUND REPORTS ONLINE. - -------------------------------------------------------------------------------- LETTER FROM THE CHAIRMAN Fellow Shareholder, A market surge that began in early 2003 continued through the first half of Vanguard Equity Income Fund's 2004 fiscal year. Your fund returned 15.8%, an impressive result in absolute terms, especially for a six-month period. [PHOTOS OF JOHN J. BRENNAN] - -------------------------------------------------------------------------------- TOTAL RETURNS SIX MONTHS ENDED MARCH 31, 2004 - -------------------------------------------------------------------------------- VANGUARD EQUITY INCOME FUND Investor Shares 15.8% Admiral Shares 15.8 Russell 1000 Value Index 17.6 Average Equity Income Fund* 15.0 Wilshire 5000 Index 15.3 - -------------------------------------------------------------------------------- *Derived from data provided by Lipper Inc. The fund slightly outpaced the average competing mutual fund and the broad U.S. stock market, as value stocks outperformed growth issues. However, the fund trailed the benchmark Russell 1000 Value Index, which includes securities that pay little or nothing in dividends-- a group not represented in your fund. The adjacent table shows the six-month total returns (capital change plus reinvested distributions) for your fund, the unmanaged benchmark index, the average equity income fund, and the broad market as measured by the Wilshire 5000 Total Market Index. As share prices rose in the period, dividend yields fell. The yield of your fund's Investor Shares as of March 31 was 2.4% (2.5% for Admiral Shares)--0.3 percentage point lower than for each share class at the start of the fiscal period, but still well above the yields of the broad stock market, money market funds, and most short-term bond funds. For details on distributions and changes in the fund's share prices during the period, please see the table on page 5. 1 - -------------------------------------------------------------------------------- ADMIRAL(TM) SHARES A lower-cost class of shares available to many longtime shareholders and to those with significant investments in the fund. - -------------------------------------------------------------------------------- SMALL STOCKS LED THE WAY The U.S. stock market's yearlong rally continued through the six months. Gains were broad-based and were especially powerful among small- capitalization stocks. While the overall equity market, as represented by the Wilshire 5000 Index, gained 15.3% during the fiscal half-year, the small stocks represented by the Russell 2000 Index returned 21.7%, a pattern of relative performance that is fairly typical of the early stages of an economic expansion. Although the economy emerged from recession more than two years ago, the recovery has been halting and lopsided, with remarkable strength in housing and consumer spending, for example, but persistent weakness in corporate investment, manufacturing, and the labor market. During the past six months, however, economic reports began to validate the stock market's optimism, indicating robust economic growth, a pickup in manufacturing, and signs of improvement in employment. International stocks also generated excellent six-month returns. Respectable gains in markets throughout Europe, Asia, and Latin America were enhanced for U.S.-based investors by the dollar's sharp decline relative to most currencies. BOND'S RETURNS REFLECTED THEIR YIELDS Interest rates declined toward 12-month lows, boosting bond prices, but much of the six-month return in the fixed income markets was generated by income. (As of March 31, the yield of the 10-year U.S. Treasury note stood at 3.84%, down 10 basis points--0.10 percentage point--from the start of the period.) Investment-grade taxable bonds, as measured by the Lehman Brothers Aggregate Bond Index, returned 3.0%. In general, bonds issued by companies with shakier balance sheets outperformed better-quality credits as investors sought out higher-yielding securities. Short-term interest rates remained near generational lows. 2 - -------------------------------------------------------------------------------- MARKET BAROMETER TOTAL RETURNS PERIODS ENDED MARCH 31, 2004 ------------------------------- SIX ONE FIVE MONTHS YEAR YEARS* - -------------------------------------------------------------------------------- STOCKS Russell 1000 Index (Large-caps) 14.4% 36.4% -0.6% Russell 2000 Index (Small-caps) 21.7 63.8 9.7 Wilshire 5000 Index (Entire market) 15.3 39.4 0.2 MSCI All Country World Index ex USA (International) 22.8 59.9 2.0 - -------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index 3.0% 5.4% 7.3% (Broad taxable market) Lehman Municipal Bond Index 3.1 5.9 6.0 Citigroup 3-Month Treasury Bill Index 0.5 1.0 3.3 ================================================================================ CPI Consumer Price Index 1.2% 1.7% 2.6% - -------------------------------------------------------------------------------- *Annualized. FINANCIAL STOCKS BOOSTED YOUR FUND'S PERFORMANCE Vanguard Equity Income Fund's investment strategy is to seek undervalued companies that pay higher-than-average dividends and that have the potential for modest capital appreciation over the long run. This "value" strategy was behind your fund's slight outperformance of the broad market during the fiscal half-year, as value stocks--those whose prices are considered cheap relative to earnings, book value, or other measures--outpaced growth stocks. With energy prices surging during the fiscal half-year, some of the fund's better-performing stocks were oil companies, such as top-ten holdings ChevronTexaco (+25%) and ExxonMobil (+15%). Financial services companies, such as Citigroup (+15%), PNC Financial Services Group (+19%), and ACE (+30%), had the largest impact on the fund's performance. Financial services holdings accounted for 30.4% of the fund's assets on average--by far the largest sector commitment. Other sectors that enhanced overall absolute performance included materials & processing, utilities, consumer discretionary, and consumer staples. On a relative basis, the fund lagged the Russell 1000 Value Index by almost 2 percentage points because of stock selection. Within the financial services sector, for example, the fund held XL Capital, which is not included in the index and posted a slight negative return during the six months, but not Bank One, which is in the index and returned 43%. We should note that whether a stock is assigned to a Russell growth index or value index depends on its price/book ratio and earnings growth forecasts, not on its dividend yield. But your fund's mandate 3 is to provide above-average current income. Because of this, stocks that don't pay dividends--such as Lucent Technologies, which surged 90% during the six months, greatly contributing to the index's return-- generally are not suitable for the fund. - -------------------------------------------------------------------------------- FUND ASSETS MANAGED MARCH 31, 2004 ---------------------- $ MILLION PERCENTAGE - -------------------------------------------------------------------------------- Wellington Management Company, llp $1,507 46% Vanguard Quantitative Equity Group 992 31 John A. Levin & Company, Inc. 617 19 Cash Investments* 123 4 - -------------------------------------------------------------------------------- Total $3,239 100% - -------------------------------------------------------------------------------- *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. Your fund fared well relative to other equity income funds, posting a slightly higher return than the average result for the peer group. Credit goes to the three investment advisors--who provide additional diversification through their different management styles--coupled with Vanguard's low-cost advantage. The table above shows the proportion of fund assets managed by each advisor as of March 31. LEARNING FROM THE PAST The past several years have provided a condensed version of a lifetime of investment experience: one of the greatest bull markets in modern history, followed by one of the worst bear markets for stocks, followed in turn by a truly remarkable rebound. Ebbs and flows are inevitable in the financial markets, but--as investors who weathered those years can attest--their timing and magnitude are unpredictable. Because market movements are outside anyone's control, we have always urged investors to concentrate on the factors within their control. First, decide on an allocation among stock, bond, and short-term investments that is appropriate for your goals, time horizon, and risk tolerance. Second, choose diversified, low-cost mutual funds to fulfill that asset allocation. Finally, persevere with your investment plan, making changes only to reestablish your original allocation or to make thoughtful modifications as your goals or time horizon changes. Those who follow such a plan will never be at the top of the heap at any given moment, but they will never be at the bottom either. 4 In the end, reaching your financial objectives is the only important criterion for success, and following a diversified, balanced, low-cost approach provides the best odds of achieving those goals with fewer sleepless nights along the way. Thank you for entrusting your hard-earned dollars to us. Sincerely, /S/JOHN J. BRENNAN John J. Brennan CHAIRMAN AND CHIEF EXECUTIVE OFFICER APRIL 14, 2004 - -------------------------------------------------------------------------------- YOUR FUND'S PERFORMANCE AT A GLANCE SEPTEMBER 30, 2003-MARCH 31, 2004 DISTRIBUTIONS PER SHARE -------------------------- STARTING ENDING INCOME CAPITAL SHARE PRICE SHARE PRICE DIVIDENDS GAINS - -------------------------------------------------------------------------------- Equity Income Fund Investor Shares $20.11 $22.49 $0.275 $0.477 Admiral Shares 42.15 47.14 0.602 1.000 - -------------------------------------------------------------------------------- 5 FUND PROFILE This Profile provides a snapshot of the fund's characteristics, compared where indicated with both an appropriate market index and a broad market index. Key terms are defined on page 7. EQUITY INCOME FUND - -------------------------------------------------------------------------------- PORTFOLIO CHARACTERISTICS COMPARATIVE BROAD FUND INDEX* INDEX** - -------------------------------------------------------------------------------- Number of Stocks 170 734 5,157 Median Market Cap $29.0B $25.2B $27.1B Price/Earnings Ratio 16.9x 18.0x 23.7x Price/Book Ratio 2.4x 2.3x 3.0x Yield 2.3% 1.5% Investor Shares 2.4% Admiral Shares 2.5% Return on Equity 18.8% 17.1% 15.7% Earnings Growth Rate 3.5% 5.4% 5.5% Foreign Holdings 5.2% 0.0% 0.9% Turnover Rate 33%+ -- -- Expense Ratio -- -- Investor Shares 0.34%+ Admiral Shares 0.22%+ Short-Term Reserves 1% -- -- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TEN LARGEST HOLDINGS (% OF TOTAL NET ASSETS) Citigroup, Inc. 3.4% (banking) Bank of America Corp. 2.9 (banking) ExxonMobil Corp. 2.7 (oil) ChevronTexaco Corp. 2.3 (oil) Hewlett-Packard Co. 1.9 (computer technology) Pfizer Inc. 1.8 (pharmaceuticals) General Motors Corp. 1.7 (automotive and transport) Caterpillar, Inc. 1.6 (manufacturing) Shell Transport & Trading Co. ADR 1.5 (energy) PNC Financial Services Group 1.5 (banking) - -------------------------------------------------------------------------------- Top Ten 21.3% - -------------------------------------------------------------------------------- "Ten Largest Holdings" excludes any temporary cash investments and equity index products. - --------------------------------------------------------------------- VOLATILITY MEASURES COMPARATIVE BROAD FUND INDEX* FUND INDEX** - --------------------------------------------------------------------- R-Squared 0.97 1.00 0.86 1.00 Beta 0.89 1.00 0.78 1.00 - --------------------------------------------------------------------- - -------------------------------------------------------------------------------- Sector Diversification (% of portfolio) Comparative Broad Fund Index* Index** - -------------------------------------------------------------------------------- Auto & Transportation 3% 3% 3% Consumer Discretionary 7 11 16 Consumer Staples 8 6 7 Financial Services 30 36 24 Health Care 6 3 13 Integrated Oils 11 9 4 Other Energy 1 2 3 Materials & Processing 8 6 4 Producer Durables 6 4 4 Technology 5 7 14 Utilities 11 13 7 Other 3 0 1 - -------------------------------------------------------------------------------- Short-Term Reserves 1% -- -- - -------------------------------------------------------------------------------- - -------------------------------- INVESTMENT FOCUS STYLE Value MARKET CAP Large - -------------------------------- *Russell 1000 Value Index. **Wilshire 5000 Index. +Annualized. VISIT OUR WEBSITE AT VANGUARD.COM FOR REGULARLY UPDATED FUND INFORMATION. 6 GLOSSARY OF INVESTMENT TERMS - -------------------------------------------------------------------------------- BETA. A measure of the magnitude of a fund's past share-price fluctuations in relation to the ups and downs of a given market index. The index is assigned a beta of 1.00. Compared with a given index, a fund with a beta of 1.20 typically would have seen its share price rise or fall by 12% when the index rose or fell by 10%. A fund's beta should be reviewed in conjunction with its R-squared (see definition below). The lower the R-squared, the less correlation there is between the fund and the index, and the less reliable beta is as an indicator of volatility. - -------------------------------------------------------------------------------- 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. - -------------------------------------------------------------------------------- 7 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. EQUITY INCOME FUND - -------------------------------------------------------------------------------- FISCAL-YEAR TOTAL RETURNS (%) SEPTEMBER 30, 1993-MARCH 31, 2004 EQUITY INCOME FUND RUSSELL 1000 INVESTOR SHARES VALUE INDEX 1994 -2.2 -0.7 1995 24.8 27.7 1996 18.2 17.9 1997 34.2 42.3 1998 9.5 3.6 1999 12.6 18.7 2000 6.3 8.9 2001 -0.8 -8.9 2002 -17.9 -16.9 2003 18.9 24.4 2004* 15.8 17.6 - -------------------------------------------------------------------------------- *Six months ended March 31, 2004. Note: See Financial Highlights tables on pages 17 and 18 for dividend and capital gains information. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED MARCH 31, 2004 TEN YEARS ONE FIVE ------------------------ INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL - -------------------------------------------------------------------------------- EQUITY INCOME FUND Investor Shares 3/21/1988 34.51% 3.69% 8.69% 3.27% 11.96% Admiral Shares 8/13/2001 34.67 2.28* -- -- -- - -------------------------------------------------------------------------------- *Return since inception. 8 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 MARCH 31, 2004 BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING EQUITY INCOME FUND 9/30/2003 3/31/2004 PERIOD* - -------------------------------------------------------------------------------- ACTUAL FUND RETURN Investor Shares $1,000 $1,159 $1.83 Admiral Shares 1,000 1,159 1.19 HYPOTHETICAL 5% RETURN Investor Shares $1,000 $1,048 $1.74 Admiral Shares 1,000 1,049 1.13 - -------------------------------------------------------------------------------- *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. Please 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." 9 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. - -------------------------------------------------------------------------------- ANNUALIZED EXPENSE RATIOS: YOUR FUND COMPARED WITH ITS PEER GROUP AVERAGE EQUITY INVESTOR ADMIRAL INCOME SHARES SHARES FUND - -------------------------------------------------------------------------------- Equity Income Fund 0.34% 0.22% 1.47%* - -------------------------------------------------------------------------------- *Peer-group ratio captures data through year-end 2003. 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. 10 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* EQUITY INCOME FUND SHARES (000) - -------------------------------------------------------------------------------- COMMON STOCKS (94.9%)(1) - -------------------------------------------------------------------------------- AUTO & TRANSPORTATION (2.7%) General Motors Corp. 1,138,000 $ 53,600 Delphi Corp. 1,330,950 13,256 Burlington Northern Santa Fe Corp. 201,000 6,331 Tidewater Inc. 214,600 6,037 Genuine Parts Co. 175,168 5,732 CSX Corp. 122,175 3,701 ---------------- $ 88,657 ---------------- CONSUMER DISCRETIONARY (6.2%) Kimberly-Clark Corp. 458,875 28,955 Newell Rubbermaid, Inc. 1,022,650 23,725 Gannett Co., Inc. 189,100 16,667 Regal Entertainment Group Class A 708,800 15,579 Limited Brands, Inc. 708,855 14,177 Leggett & Platt, Inc. 544,100 12,901 Tribune Co. 232,125 11,708 Eastman Kodak Co. 397,024 10,390 Home Depot, Inc. 261,775 9,780 McDonald's Corp. 311,600 8,902 The Stanley Works 200,200 8,545 May Department Stores Co. 239,304 8,275 R.R. Donnelley & Sons Co. 255,600 7,732 Maytag Corp. 225,200 7,110 Gillette Co. 179,008 6,999 * Accenture Ltd. 214,900 5,330 Viacom Inc. Class B 133,900 5,250 ---------------- $ 202,025 ---------------- CONSUMER STAPLES (7.2%) Altria Group, Inc. 553,650 30,146 Kellogg Co. 572,900 22,481 The Coca-Cola Co. 395,305 19,884 Sara Lee Corp. 796,345 17,408 H.J. Heinz Co. 409,764 15,280 Albertson's, Inc. 664,500 14,719 Carolina Group 536,400 14,670 The Procter & Gamble Co. 137,969 14,470 Kraft Foods Inc. 397,500 12,724 General Mills, Inc. 263,373 12,294 The Clorox Co. 251,197 12,286 Colgate-Palmolive Co. 196,300 10,816 Diageo PLC ADR 170,850 9,035 PepsiCo, Inc. 151,500 8,158 ConAgra Foods, Inc. 287,300 7,740 Campbell Soup Co. 224,366 6,118 Wm. Wrigley Jr. Co. 98,500 5,823 ---------------- $ 234,052 ---------------- FINANCIAL SERVICES (29.2%) BANKS---NEW YORK CITY (1.1%) J.P. Morgan Chase & Co. 451,709 18,949 The Bank of New York Co., Inc. 568,175 17,897 11 - -------------------------------------------------------------------------------- MARKET VALUE* EQUITY INCOME FUND SHARES (000) - -------------------------------------------------------------------------------- BANKS--OUTSIDE NEW YORK CITY (12.5%) Bank of America Corp. 1,150,498 $ 93,167 PNC Financial Services Group 867,969 48,103 Wells Fargo & Co. 669,865 37,961 SunTrust Banks, Inc. 496,700 34,625 National City Corp. 891,900 31,734 Wachovia Corp. 674,624 31,707 U.S. Bancorp 1,084,231 29,979 First Tennessee National Corp. 375,700 17,921 FleetBoston Financial Corp. 307,184 13,793 National Commerce Financial Corp. 406,800 11,638 Fifth Third Bancorp 183,100 10,138 Synovus Financial Corp. 331,100 8,095 BB&T Corp. 202,100 7,134 Comerica, Inc. 125,700 6,828 FirstMerit Corp. 248,000 6,460 City National Corp. 107,100 6,415 KeyCorp 208,770 6,324 Zions Bancorp 105,300 6,023 DIVERSIFIED FINANCIAL SERVICES (6.1%) Citigroup, Inc. 2,103,466 108,749 Morgan Stanley 674,750 38,663 Merrill Lynch & Co., Inc. 495,823 29,531 Marsh & McLennan Cos., Inc. 328,253 15,198 CIT Group Inc. 104,200 3,965 FINANCIAL DATA PROCESSING SERVICES (0.1%) Automatic Data Processing, Inc. 106,125 4,457 FINANCIAL--MISCELLANEOUS (1.8%) Fannie Mae 373,000 27,733 Freddie Mac 271,250 16,020 Fidelity National Financial, Inc. 189,640 7,510 Nationwide Financial Services, Inc. 176,500 6,363 INSURANCE--LIFE (0.1%) Jefferson-Pilot Corp. 67,000 3,686 INSURANCE--MULTILINE (2.8%) St. Paul Cos., Inc. 1,040,833 41,644 American International Group, Inc. 168,400 12,015 Protective Life Corp. 201,300 7,539 Lincoln National Corp. 147,762 6,992 Cincinnati Financial Corp. 145,400 6,318 Allstate Corp. 138,700 6,305 Unitrin, Inc. 100,500 4,311 CIGNA Corp. 71,600 4,226 INSURANCE--PROPERTY-CASUALTY (3.1%) XL Capital Ltd. Class A 524,100 39,853 ACE Ltd. 740,200 31,577 The Chubb Corp. 371,301 25,820 Mercury General Corp. 72,200 3,605 REAL ESTATE INVESTMENT TRUST (0.5%) Regency Centers Corp. REIT 312,200 14,589 SAVINGS & Loan (1.1%) Washington Mutual, Inc. 507,565 21,678 Astoria Financial Corp. 166,900 6,347 Charter One Financial, Inc. 174,000 6,153 ---------------- $ 945,738 ---------------- HEALTH CARE (6.0%) Pfizer Inc. 1,652,355 57,915 Merck & Co., Inc. 721,700 31,892 Baxter International, Inc. 1,015,118 31,357 Wyeth 564,698 21,204 Johnson & Johnson 329,094 16,691 Bristol-Myers Squibb Co. 602,532 14,599 Abbott Laboratories 182,236 7,490 GlaxoSmithKline PLC ADR 154,293 6,164 Eli Lilly & Co. 82,969 5,551 ---------------- $ 192,863 ---------------- INTEGRATED OILS (10.8%) ExxonMobil Corp. 2,087,030 86,800 ChevronTexaco Corp. 834,410 73,245 Shell Transport & Trading Co. ADR 1,249,400 49,864 ConocoPhillips Co. 629,100 43,917 BP PLC ADR 836,986 42,854 Unocal Corp. 480,875 17,927 Amerada Hess Corp. 256,700 16,757 Royal Dutch Petroleum Co. ADR 212,500 10,111 Marathon Oil Corp. 209,200 7,044 ---------------- $ 348,519 ---------------- OTHER ENERGY (0.9%) Diamond Offshore Drilling, Inc. 447,700 10,830 Halliburton Co. 267,700 8,135 Kerr-McGee Corp. 128,400 6,613 Williams Cos., Inc. 426,200 4,079 ---------------- $ 29,657 ---------------- MATERIALS & PROCESSING (8.3%) Alcoa Inc. 1,303,600 45,222 E.I. du Pont de Nemours & Co. 865,902 36,558 Weyerhaeuser Co. 455,800 29,855 Dow Chemical Co. 713,887 28,755 Masco Corp. 832,800 25,342 PPG Industries, Inc. 353,500 20,609 Eastman Chemical Co. 360,900 15,403 12 - -------------------------------------------------------------------------------- MARKET VALUE* EQUITY INCOME FUND SHARES (000) - -------------------------------------------------------------------------------- Archer-Daniels-Midland Co. 795,000 $ 13,412 Nucor Corp. 194,300 11,946 Temple-Inland Inc. 124,800 7,905 Alcan Inc. 162,225 7,266 Avery Dennison Corp. 106,100 6,600 Sonoco Products Co. 251,700 6,111 Lyondell Chemical Co. 403,500 5,988 International Paper Co. 141,620 5,985 Lafarge North America Inc. 46,300 1,882 ---------------- $ 268,839 ---------------- PRODUCER DURABLES (5.6%) Caterpillar, Inc. 673,700 53,269 Emerson Electric Co. 784,559 47,011 Nokia Corp. ADR 838,500 17,005 Lockheed Martin Corp. 319,075 14,563 Pitney Bowes, Inc. 315,635 13,449 Koninklijke (Royal) Philips Electronics N.V. 379,450 10,996 Northrop Grumman Corp. 103,125 10,150 The Boeing Co. 177,432 7,287 Cooper Industries, Inc. Class A 122,100 6,982 ---------------- $ 180,712 ---------------- TECHNOLOGY (4.2%) Hewlett-Packard Co. 2,729,800 62,349 Motorola, Inc. 856,800 15,080 Electronic Data Systems Corp. 752,100 14,553 Rockwell Automation, Inc. 381,800 13,237 Raytheon Co. 402,700 12,621 International Business Machines Corp. 100,000 9,184 Microsoft Corp. 331,950 8,289 ---------------- $ 135,313 ---------------- UTILITIES (11.0%) SBC Communications Inc. 1,785,373 43,813 Verizon Communications Inc. 1,107,182 40,456 FPL Group, Inc. 435,433 29,109 BellSouth Corp. 916,104 25,367 Exelon Corp. 346,000 23,829 Questar Corp. 643,300 23,442 SCANA Corp. 585,025 20,681 Dominion Resources, Inc. 310,885 19,990 Duke Energy Corp. 675,334 15,263 AT&T Corp. 745,970 14,599 Sprint Corp. 776,800 14,316 Entergy Corp. 193,450 11,510 Cinergy Corp. 266,000 10,877 National Fuel Gas Co. 378,200 9,304 PPL Corp. 198,600 9,056 Pinnacle West Capital Corp. 200,400 7,886 Kinder Morgan, Inc. 125,000 7,877 Xcel Energy, Inc. 439,900 7,835 DPL Inc. 370,700 6,951 ALLTEL Corp. 131,200 6,546 NiSource, Inc. 299,500 6,364 NICOR Inc. 7,700 271 ---------------- $ 355,342 ---------------- OTHER (2.8%) General Electric Co. 1,031,824 31,491 Textron, Inc. 415,400 22,079 Honeywell International Inc. 620,637 21,009 Tyco International Ltd. 405,700 11,623 Teleflex Inc. 133,400 6,567 ---------------- $ 92,769 ---------------- - -------------------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $2,457,755) $ 3,074,486 - -------------------------------------------------------------------------------- PREFERRED STOCK (0.4%) - -------------------------------------------------------------------------------- News Corp. Ltd. Pfd. ADR (Cost $12,346) 448,325 14,216 - -------------------------------------------------------------------------------- TEMPORARY INVESTMENTS (6.8%)(1) - -------------------------------------------------------------------------------- Vanguard Index Participation Equity Receipts-- Total Stock Market 370,000 40,434 - -------------------------------------------------------------------------------- FACE AMOUNT (000) ----------------- FEDERAL NATIONAL MORTGAGE ASSN. (2) 1.02%, 4/7/2004 $ 8,000 7,999 REPURCHASE AGREEMENTS BNP-Paribas 1.00%, 4/1/2004 8,241 8,241 (Dated 3/31/2004, Repurchase Value $8,241,000 collateralized by U.S.Treasury Bonds, 12.00%, 5/15/2005) Collateralized by U.S. Government Obligations in a Pooled Cash Account 1.04%, 4/1/2004 86,211 86,211 1.06%, 4/1/2004--Note G 77,212 77,212 - -------------------------------------------------------------------------------- TOTAL TEMPORARY INVESTMENTS (Cost $216,668) 220,097 - -------------------------------------------------------------------------------- TOTAL INVESTMENTS (102.1%) (Cost $2,686,769) $ 3,308,799 - -------------------------------------------------------------------------------- 13 - -------------------------------------------------------------------------------- MARKET VALUE* EQUITY INCOME FUND (000) - -------------------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (-2.1%) - -------------------------------------------------------------------------------- Other Assets--Note C 48,105 Security Lending Collateral Payable to Brokers--Note G (77,212) Other Liabilities (40,279) ---------------- $ (69,386) ---------------- - -------------------------------------------------------------------------------- NET ASSETS (100%) $ 3,239,413 ================================================================================ *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 98.8% and 2.9% respectively, of net assets. See Note E in Notes to Financial Statements. (2)Security segregated as initial margin for open futures contracts. ADR--American Depositary Receipt. REIT--Real Estate Investment Trust. - -------------------------------------------------------------------------------- AMOUNT (000) - -------------------------------------------------------------------------------- AT MARCH 31, 2004, NET ASSETS CONSISTED OF: - -------------------------------------------------------------------------------- Paid-in Capital $ 2,549,085 Overdistributed Net Investment Income (191) Accumulated Net Realized Gains 67,545 Unrealized Appreciation Investment Securities 622,030 Futures Contracts 944 - -------------------------------------------------------------------------------- NET ASSETS $ 3,239,413 ================================================================================ Investor Shares--Net Assets Applicable to 120,541,581 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $ 2,711,290 - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- INVESTOR SHARES $ 22.49 ================================================================================ Admiral Shares--Net Assets Applicable to 11,202,242 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $ 528,123 - -------------------------------------------------------------------------------- NET ASSET VALUE PER SHARE-- ADMIRAL SHARES $ 47.14 ================================================================================ See Note E in Notes to Financial Statements for the tax-basis components of net assets. 14 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. - -------------------------------------------------------------------------------- EQUITY INCOME FUND SIX MONTHS ENDED MARCH 31, 2004 (000) - -------------------------------------------------------------------------------- INVESTMENT INCOME Income Dividends $ 42,015 Interest 796 Security Lending 30 - -------------------------------------------------------------------------------- Total Income $ 42,841 - -------------------------------------------------------------------------------- Expenses The Vanguard Group--Note B Basic Fee 1,477 Performance Adjustment 105 The Vanguard Group--Note C Management and Administrative Investor Shares 2,785 Admiral Shares 248 Marketing and Distribution Investor Shares 153 Admiral Shares 31 Custodian Fees 24 Shareholders' Reports Investor Shares 26 Admiral Shares -- Trustees' Fees and Expenses 1 - -------------------------------------------------------------------------------- Total Expenses $ 4,850 Expenses Paid Indirectly--Note D (295) - -------------------------------------------------------------------------------- Net Expenses $ 4,555 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 38,286 - -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) Investment Securities Sold 75,556 Futures Contracts 8,052 - -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) 83,608 - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) Investment Securities 295,914 Futures Contracts 2,863 - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) $ 298,777 - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 420,671 ================================================================================ 15 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. - -------------------------------------------------------------------------------- EQUITY INCOME FUND ------------------------------ SIX MONTHS YEAR ENDED ENDED MAR. 31, 2004 SEPT. 30, 2003 (000) (000) - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 38,286 $ 61,643 Realized Net Gain (Loss) 83,608 49,610 Change in Unrealized Appreciation (Depreciation) 298,777 277,680 - -------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 420,671 388,933 - -------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income Investor Shares (31,807) (52,982) Admiral Shares (6,278) (9,229) Realized Capital Gain* Investor Shares (53,695) -- Admiral Shares (9,958) -- - -------------------------------------------------------------------------------- Total Distributions (101,738) (62,211) - -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS--NOTE H Investor Shares 221,676 161,440 Admiral Shares 62,165 120,194 - -------------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 283,841 281,634 - -------------------------------------------------------------------------------- Total Increase (Decrease) 602,774 608,356 - -------------------------------------------------------------------------------- NET ASSETS Beginning of Period 2,636,639 2,028,283 - -------------------------------------------------------------------------------- End of Period $3,239,413 $ 2,636,639 ================================================================================ *Includes fiscal 2004 and 2003 short-term gain distributions totaling $7,073,000 and $0, respectively. Short-term gain distributions are treated as ordinary income dividends for tax purposes. 16 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. EQUITY INCOME FUND INVESTOR SHARES - ------------------------------------------------------------------------------------------------------------------------------ SIX MONTHS YEAR ENDED SEPTEMBER 30, ENDED ---------------------------------------------- FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MAR. 31, 2004 2003 2002 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, BEGINNING OF PERIOD $20.11 $17.36 $22.22 $24.06 $24.14 $22.80 - ------------------------------------------------------------------------------------------------------------------------------ INVESTMENT OPERATIONS Net Investment Income .277 .50 .48 .539 .62 .64 Net Realized and Unrealized Gain (Loss) on Investments 2.855 2.75 (4.26) (.699) .81 2.20 - ------------------------------------------------------------------------------------------------------------------------------ Total from Investment Operations 3.132 3.25 (3.78) (.160) 1.43 2.84 - ------------------------------------------------------------------------------------------------------------------------------ DISTRIBUTIONS Dividends from Net Investment Income (.275) (.50) (.48) (.540) (.64) (.67) Distributions from Realized Capital Gains (.477) -- (.60) (1.140) (.87) (.83) - ------------------------------------------------------------------------------------------------------------------------------ Total Distributions (.752) (.50) (1.08) (1.680) (1.51) (1.50) - ------------------------------------------------------------------------------------------------------------------------------ NET ASSET VALUE, END OF PERIOD $22.49 $20.11 $17.36 $22.22 $24.06 $24.14 ============================================================================================================================== TOTAL RETURN 15.76% 18.87% -17.89% -0.81% 6.28% 12.56% ============================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $2,711 $2,221 $1,776 $2,182 $2,420 $3,009 Ratio of Total Expenses to Average Net Assets* 0.34%** 0.45% 0.46% 0.47% 0.43% 0.41% Ratio of Net Investment Income to Average Net Assets 2.52%** 2.61% 2.21% 2.26% 2.59% 2.59% Portfolio Turnover Rate 33%** 55% 21% 31% 36% 18% ============================================================================================================================== *Includes performance-based investment advisory fee increases (decreases) of 0.01%, 0.03%, 0.03%, 0.02%, (0.02%), and (0.02%). **Annualized. 17 FINANCIAL HIGHLIGHTS (CONTINUED) EQUITY INCOME FUND ADMIRAL SHARES - --------------------------------------------------------------------------------------------------------------------- YEAR ENDED SIX MONTHS SEPTEMBER 30, AUG. 13* TO ENDED ----------------------- SEPT. 30, FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MAR. 31, 2004 2003 2002 2001 - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $42.15 $36.39 $46.57 $50.00 - --------------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income .606 1.078 1.040 .128 Net Realized and Unrealized Gain (Loss) on Investments 5.986 5.770 (8.918) (3.301) - --------------------------------------------------------------------------------------------------------------------- Total from Investment Operations 6.592 6.848 (7.878) (3.173) - --------------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.602) (1.088) (1.044) (.257) Distributions from Realized Capital Gains (1.000) -- (1.258) -- - --------------------------------------------------------------------------------------------------------------------- Total Distributions (1.602) (1.088) (2.302) (.257) - --------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $47.14 $42.15 $36.39 $46.57 ===================================================================================================================== TOTAL RETURN 15.83% 18.98% -17.80% -6.31% ===================================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $528 $416 $253 $162 Ratio of Total Expenses to Average Net Assets** 0.22%+ 0.35% 0.39% 0.39%+ Ratio of Net Investment Income to Average Net Assets 2.65%+ 2.71% 2.29% 2.11%+ Portfolio Turnover Rate 33%+ 55% 21% 31% ===================================================================================================================== *Inception. **Includes performance-based investment advisory fee increases (decreases) of 0.01%, 0.03%, 0.03%, and 0.02%. +Annualized. SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 18 NOTES TO FINANCIAL STATEMENTS Vanguard Equity Income 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. 19 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. OTHER: Dividend income is recorded on the ex-dividend date. Security transactions are accounted for on the date securities are bought or sold. Costs used to determine realized gains (losses) on the sale of investment securities are those of the specific securities sold. Each class of shares has equal rights as to assets and earnings, except that each class separately bears certain class-specific expenses related to maintenance of shareholder accounts (included in Management and Administrative expenses) 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. John A. Levin & Co., Inc., and Wellington Management Company, llp, 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 fee for John A. Levin & Co., Inc., is subject to quarterly adjustments based on performance for the preceding three years relative to the S&P 500 Index. The basic fee for Wellington Management Company, llp, is subject to quarterly adjustments based on performance for the preceding three years relative to the Lipper Equity Income average. 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 $198,000 for the six months ended March 31, 2004. For the six months ended March 31, 2004, the aggregate investment advisory fee represented an effective annual basic rate of 0.10% of the fund's average net assets before an increase of $105,000 (0.01%) 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 March 31, 2004, the fund had contributed capital of $477,000 to Vanguard (included in Other Assets), representing 0.01% of the fund's net assets and 0.48% 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 March 31, 2004, these arrangements reduced expenses by $295,000 (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. At March 31, 2004, net unrealized appreciation of investment securities for tax purposes was $622,030,000, consisting of unrealized gains of $643,660,000 on securities that had risen in value since their purchase and $21,630,000 in unrealized losses on securities that had fallen in value since their purchase. 20 At March 31, 2004, the aggregate settlement value of open futures contracts expiring in June 2004 and the related unrealized appreciation were: - -------------------------------------------------------------------------------- (000) ----------------------- AGGREGATE UNREALIZED NUMBER OF SETTLEMENT APPRECIATION FUTURES CONTRACTS LONG CONTRACTS VALUE (DEPRECIATION) - -------------------------------------------------------------------------------- S&P 500 Index 163 $45,840 $440 S&P MidCap 400 Index 101 30,477 414 E-Mini S&P 500 Index 165 9,280 90 - -------------------------------------------------------------------------------- Unrealized appreciation on open futures contracts is required to be treated as realized gain for tax purposes. F. During the six months ended March 31, 2004, the fund purchased $716,372,000 of investment securities and sold $479,585,000 of investment securities other than temporary cash investments. G. The market value of securities on loan to broker/dealers at March 31, 2004, was $73,869,000, for which the fund held cash collateral of $77,212,000. 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 MARCH 31, 2004 SEPTEMBER 30, 2003 ------------------- -------------------- AMOUNT SHARES AMOUNT SHARES (000) (000) (000) (000) - ------------------------------------------------------------------------------------------------ Investor Shares Issued $357,326 16,180 $468,196 24,298 Issued in Lieu of Cash Distributions 77,396 3,596 46,697 2,417 Redeemed (213,046) (9,673) (353,453) (18,541) ---------------------------------------------------- Net Increase (Decrease)--Investor Shares 221,676 10,103 161,440 8,174 ---------------------------------------------------- Admiral Shares Issued 97,618 2,101 167,849 4,133 Issued in Lieu of Cash Distributions 12,470 276 7,034 173 Redeemed (47,923) (1,039) (54,689) (1,381) ---------------------------------------------------- Net Increase (Decrease)--Admiral Shares 62,165 1,338 72,897 2,925 - ------------------------------------------------------------------------------------------------ 21 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! 22 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. - --------------------------------------------------------------------------------------------------------------------- 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, 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. Q652 052004 VANGUARD GROWTH(R) EQUITY FUND MARCH 31, 2004 [GRAPH SHIP] SEMIANNUAL REPORT [THE VANGUARD GROUP 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 Summary 1 LETTER FROM THE CHAIRMAN o Vanguard Growth Equity Fund returned 12.6% during the six months ended 5 REPORT FROM THE ADVISOR March 31, 2004 8 FUND PROFILE o The fund bested the returns of its comparative benchmarks but trailed 9 GLOSSARY OF INVESTMENT TERMS the gain of the overall U.S. stock market. 10 PERFORMANCE SUMMARY o The advisor's stock selections, 11 ABOUT YOUR FUND'S EXPENSES particularly technology companies, generated the fund's performance edge. 13 FINANCIAL STATEMENTS 21 ADVANTAGES OF VANGUARD.COM WANT LESS CLUTTER IN YOUR MAILBOX? JUST REGISTER WITH VANGUARD.COM AND OPT TO GET FUND REPORTS ONLINE. ================================================================================ LETTER FROM THE CHAIRMAN Fellow Shareholder, Vanguard(R) Growth Equity Fund returned 12.6% during the six months ended March 31, 2004, surpassing the performance of its primary benchmark, the Russell 1000 Growth Index, as well as the average return of its mutual fund peer group. The fund's return modestly lagged the performance of the overall U.S. stock market, as smaller- capitalization stocks generally outperformed larger compa nies. The adjacent table shows the relevant performance figures for your fund and its benchmarks. The components of the fund's return (per-share distributions and change in net asset value) appear in the table on page 4. [PHOTOS OF JOHN J. BRENNAN] - ------------------------------------------ TOTAL RETURNS SIX MONTHS ENDED MARCH 31, 2004 - ------------------------------------------ Vanguard Growth Equity Fund 12.6% Russell 1000 Growth Index 11.3 Average Large-Cap Growth Fund* 10.8 Wilshire 5000 Index 15.3 - ------------------------------------------ *Derived from data provided by Lipper Inc. SMALL STOCKS LED THE WAY The U.S. stock market's yearlong rally continued through the six months ended March 31. Gains were broad-based and were especially powerful among small-capitalization stocks. While the overall equity market, as represented by the Wilshire 5000 Total Market Index, gained 15.3% during the fiscal half-year, the small stocks represented by the Russell 2000 Index returned 21.7%, a pattern of relative performance that is fairly typical of the early stages of an economic expansion. Although the economy emerged from recession more than two years ago, the recovery has been halting and lopsided, with remarkable strength in housing and consumer spending, for example, but persistent weakness in corporate investment, manufacturing, and the labor markets. During the past six months, however, economic reports began to validate the stock market's optimism, indicating robust economic growth, a pickup in manufacturing, and signs of improvement in employment. 1 International stocks also generated excellent six-month returns. Respectable gains in markets throughout Europe, Asia, and Latin America were enhanced for U.S.-based investors by the dollar's sharp decline relative to most currencies. BOND RETURNS REFLECTED THEIR YIELDS Interest rates declined toward 12-month lows, boosting bond prices, but much of the six-month return in the fixed income markets was generated by income. (As of March 31, the yield of the 10-year U.S. Treasury note stood at 3.84%, down 10 basis points--0.10 percentage point--from the start of the period.) Investment-grade taxable bonds, as measured by the Lehman Brothers Aggregate Bond Index, returned 3.0%. In general, bonds issued by companies with shakier balance sheets outperformed better-quality credits as investors sought out higher-yielding securities. Short-term interest rates remained near generational lows. - -------------------------------------------------------------------------------- MARKET BAROMETER TOTAL RETURNS PERIODS ENDED MARCH 31, 2004 - -------------------------------------------------------------------------------- Six One Five Months Year Years* STOCKS Russell 1000 Index (Large-caps) 14.4% 36.4% -0.6% Russell 2000 Index (Small-caps) 21.7 63.8 9.7 Wilshire 5000 Index (Entire market) 15.3 39.4 0.2 MSCI All Country World Index ex USA (International) 22.8 59.9 2.0 - -------------------------------------------------------------------------------- BONDS Lehman Aggregate Bond Index 3.0% 5.4% 7.3% (Broad taxable market) Lehman Municipal Bond Index 3.1 5.9 6.0 Citigroup 3-Month Treasury Bill Index 0.5 1.0 3.3 - -------------------------------------------------------------------------------- CPI Consumer Price Index 1.2% 1.7% 2.6% - -------------------------------------------------------------------------------- *Annualized. THE FUND'S REBOUND CONTINUED, BUT HAS SLOWED The Growth Equity Fund, which rebounded in fiscal 2003 after two very difficult years, continued to gain ground during the first half of fiscal 2004. The lion's share of the fund's 12.6% return for the period came during the last three months of 2003, when the fund advanced 10.6%. During that time, strong stock selection by the investment advisor, Turner Investment Partners, in the producer durables and technology sectors helped the fund to outdistance competitors. In the first calendar quarter of 2004, however, the fund's advance--along with that of the overall market--slowed considerably. Some sectors in the broad market had flat or even negative returns during these three months, but the advisor avoided major setbacks through careful stock selection and by continuing to avoid significantly over- or underweighting any one sector. 2 TECHNOLOGY HOLDINGS MADE THE BIGGEST OVERALL CONTRIBUTION The leading contributor to the fund's six-month performance was its technology portfolio. The overall sector (as represented in the Russell 1000 Growth Index) gained 7.4% during the period, but your fund's advisor amplified results by selecting some of the better tech performers. As a result, the fund's tech holdings, which constituted about a quarter of assets on March 31, advanced a healthy 14.3%. The fund also enjoyed positive results from holdings in the consumer discretionary and financial services sectors, which together accounted for about another quarter of fund assets. Both sectors benefited from the uptick in economic activity, and the advisor's picks in these areas proved to be among the better-performing stocks for the fund. While no sector declined during the six-month period, the fund's holdings in the utilities, auto & transportation, and "other energy" sectors were relative underperformers. However, they did not detract significantly from the fund's performance in comparison with the Russell 1000 Growth Index. THE FUND'S AGGRESSIVE APPROACH TRANSLATES INTO VOLATILITY A year ago, we were pleased to be able to report that the prolonged bear market had finally eased. Now, with the stock market and your fund having performed impressively over the past 12 months, we are grateful that our long-term shareholders' patience was rewarded, but we urge you not to count on seeing the same kind of gains for the foreseeable future. The market will always behave in unpredictable ways, and its recent performance cannot be used to predict what lies ahead. Come what may in the market, the fund's advisor will continue to buy stocks in those large and mid-size companies that it believes have the most promising prospects for strong earnings growth. The advisor also doesn't hesitate to sell holdings that have appreciated significantly or that no longer seem promising. This aggressive approach has typically resulted in performance that is more volatile than that of the overall market. 3 A look at the fund's results over the past five fiscal years underscores the ups and downs its shareholders can face: gains of 38.2% and 51.1% in fiscal 1999 and 2000; losses of -55.9% and -23.1% in fiscal 2001 and 2002, then last year's rebound of 31.8% (see the Performance Summary on page 10). Over the long term, we expect the gains to outweigh the losses for those investors who aren't deterred by the prospect of such a bumpy ride from time to time. Because Vanguard Growth Equity Fund is so aggressive in seeking long-term capital appreciation, we always like to remind our shareholders that the fund serves best as just one part of a well-diversified portfolio. Maintaining a broad mix of stock, bond, and money market investments tailored to your situation is always the best route to reaching your long-term objectives. Thank you for entrusting your assets to us. Sincerely, /S/ JOHN J. BRENNAN John J. Brennan CHAIRMAN AND CHIEF EXECUTIVE OFFICER APRIL 14, 2004 - -------------------------------------------------------------------------------- YOUR FUND'S PERFORMANCE AT A GLANCE SEPTEMBER 30, 2003-MARCH 31, 2004 DISTRIBUTIONS PER SHARE --------------------------------- STARTING ENDING INCOME CAPITAL SHARE PRICE SHARE PRICE DIVIDENDS GAINS - -------------------------------------------------------------------------------- Growth Equity Fund $8.32 $9.35 $0.02 $0.00 - -------------------------------------------------------------------------------- 4 REPORT FROM THE ADVISOR In the six-month period ended March 31, 2004, the stock market rally kept rolling along, and Vanguard Growth Equity Fund followed suit, gaining 12.6%. That return topped the Russell 1000 Growth Index's 11.3% gain but trailed the S&P 500 Index's 14.1% advance. With the exception of a pronounced dip in February and March, just about everything came up positive for stocks in the period. All ten market sectors in the Russell 1000 Growth Index recorded gains, ranging from the energy sector (+24%) to the auto & transportation sector (+7%). Market sentiment remained generally bullish, mainly because of good news about the economy and corporate earnings, both of which exceeded the consensus expectations of economists and Wall Street analysts. We think the fund performed as well as it did in no small part because we remained true to our growth-investment process, which is based on the principle that earnings expectations drive stock prices over time. Since the fourth quarter of 2002, companies with good earnings prospects have been increasingly rewarded with higher stock prices. In contrast, earnings prospects didn't seem to matter much in the bear market that persisted from March 2000 to September 2002; then, valuations were all-important. ======================================= INVESTMENT PHILOSOPHY The advisor believes that superior long-term results can be achieved by emphasizing stocks that have above-average earnings prospects. ======================================= Our investment process led us to generally emphasize semiconductor and related capital-equipment stocks as well as Internet, brokerage, credit card, wireless communications, and telecommunications equipment stocks. All are in industries and sectors that have high earnings expectations and that performed relatively well. The fund's gains were mostly due to the strong returns in the sectors that have significant weightings in the growth indexes: health care, technology, consumer discretionary, and financial services. As you may know, the fund is "sector neutral," which means that we keep its sector weightings close to those of our primary benchmark, the Russell 1000 Growth Index. Given this posture and the size of the four major sectors, it's extremely difficult for the fund to outperform if our holdings in these sectors don't do well. Fortunately, the fund benefited not just from the strong performance of these sectors but also from good stock selection. Six of the fund's ten sector positions outperformed the corresponding index sectors. 5 Providing the most in extra return were holdings in the technology, consumer discretionary, and materials & processing sectors, which amounted to more than 40% of the portfolio. Our technology holdings were the biggest contributors to the fund's overall results, gaining 14% compared with a 7% rise for the index sector. In terms of absolute returns, our materials & processing holdings--powered by metals stocks--produced the largest total return, gaining 26%. While this return outperformed the index's sector by about five percentage points, the group's small size in the fund meant the positive effect was limited. We did have some areas of underperformance. For example, our 1% weighting in utilities and telecommunication stocks gained 5%, while the index sector rose 18%. That shortfall occurred because the fund owned too many richly valued (and unpopular) telecommunications stocks and too few moderately valued (and popular) utility stocks. Fortunately, because of the sector's small weighting, the poor performance had little effect on the fund's overall result. Looking ahead, we continue to think the stock market will oscillate over the next several years but will tend to move upward, recording total returns of 9%-10% annually. We anticipate that in 2004 cyclical stocks will perform relatively well, benefiting from the Federal Reserve's hesitancy about raising rates. Stocks generally should benefit from an increase in mergers and acquisitions, continuing productivity gains, and double-digit growth in earnings. Indeed, the consensus of Wall Street analysts is that the companies in the Russell 1000 Growth Index will increase their earnings per share by 17.5% over the next 12 months. We are taking pains to make sure the fund holds stocks of companies that are likely to report the strongest earnings going forward. We think those stocks will do best in a market that may be beset by periodic attacks of investor anxiety and mixed economic signals. In our view, companies that offer especially good earnings potential now include retailers of premium-priced goods; software providers; makers of biotechnology products, drugs, broadband-communications 6 systems, and wireless-communications networks; investment managers; financial transaction processors; and firms in cyclical industries such as metals and industrial products, which tend to flourish when the economic cycle is maturing. Bob Turner, CHAIRMAN AND CHIEF INVESTMENT OFFICER TURNER INVESTMENT PARTNERS APRIL 20, 2004 7 - -------------------------------------------------------------------------------- AS OF 3/31/2003 FUND PROFILE This Profile provides a snapshot of the fund's characteristics, compared where indicated with both an appropriate market index and a broad market index. Key terms are defined on page 9. - -------------------------------------------------------------------------------- GROWTH EQUITY FUND - ------------------------------------------------------------------- PORTFOLIO CHARACTERISTICS COMPARATIVE BROAD FUND INDEX* INDEX** - ------------------------------------------------------------------- Number of Stocks 91 582 5,157 Median Market Cap $33.8B $52.4B $27.1B Price/Earnings Ratio 39.4x 26.6x 23.7x Price/Book Ratio 4.0x 4.5x 3.0x Yield 0.0% 1.0% 1.5% Return on Equity 20.0% 23.9% 15.7% Earnings Growth Rate 11.8% 11.5% 5.5% Foreign Holdings 5.2% 0.0% 0.9% Turnover Rate 148%Y -- -- Expense Ratio 0.73%Y -- -- Short-Term Reserves 0% -- -- - ------------------------------------------------------------------- - -------------------------------------------------- Ten Largest Holdings (% of total net assets) Pfizer Inc. 6.0% (pharmaceuticals) Cisco Systems, Inc. 4.0 (computer hardware) General Electric Co. 3.9 (conglomerate) Dell Inc. 2.7 (computer hardware) Amgen, Inc. 2.5 (biotechnology) PepsiCo, Inc. 2.4 (beverage) Wal-Mart Stores, Inc. 2.4 (retail) American International Group, Inc. 2.0 (insurance) EMC Corp. 1.8 (computer hardware) The Procter & Gamble Co. 1.8 (consumer products) - -------------------------------------------------- Top Ten 29.5% - -------------------------------------------------- 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 0.91 1.00 Beta 1.11 1.00 1.24 1.00 - ------------------------------------------------------------------ - ----------------------------------------------------------------------------- Sector Diversification (% of portfolio) Comparative Broad Fund Index* Index** Auto & Transportation 2% 2% 3% Consumer Discretionary 18 18 16 Consumer Staples 8 9 7 Financial Services 11 11 24 Health Care 24 24 13 Integrated Oils 0 0 4 Other Energy 1 1 3 Materials & Processing 2 1 4 Producer Durables 4 4 4 Technology 24 22 14 Utilities 1 2 7 Other 5 6 1 - ----------------------------------------------------------------------------- - -------------------------------------- INVESTMENT FOCUS MARKET CAP LARGE STYLE GROWTH - -------------------------------------- *Russell 1000 Growth Index. **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 - -------------------------------------------------------------------------------- AS OF 3/31/2004 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. - -------------------------------------------------------------------------------- GROWTH EQUITY FUND - -------------------------------------------------------------------------------- Fiscal-Year Total Returns (%) September 30, 1993-March 31, 2004 Scale -75% -- 75% Fiscal Year Growth Equity Russell 1000 Fund* Growth Index 1994 -3 5.8 1995 20.6 32.2 1996 22.9 21.4 1997 32.6 36.3 1998 10.7 11.1 1999 38.2 34.9 2000 51.1 23.4 2001 -55.9 -45.6 2002 -23.1 -22.5 2003 31.8 25.9 2004 12.6 11.3 - -------------------------------------------------------------------------------- * Prior to June 12, 2000, the fund was organized as the Turner Growth Equity Fund. ** Six months ended March 31, 2004. Note: See Financial Highlights table on page 18 for dividend and capital gains information. - -------------------------------------------------------------------------------- AVERAGE ANNUAL TOTAL RETURNS FOR PERIODS ENDED MARCH 31, 2004 TEN YEARS ONE FIVE --------------------------- INCEPTION DATE YEAR YEARS CAPITAL INCOME TOTAL - -------------------------------------------------------------------------------- Growth Equity Fund 3/11/1992 40.70% -5.02% 8.63% 0.20% 8.83% - -------------------------------------------------------------------------------- 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: * 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. Please 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." - -------------------------------------------------------------------------------- SIX MONTHS ENDED MARCH 31, 2004 BEGINNING ENDING EXPENSES ACCOUNT VALUE ACCOUNT VALUE PAID DURING GROWTH EQUITY FUND 9/30/2003 3/31/2004 PERIOD* - -------------------------------------------------------------------------------- Actual Fund Return $1,000 $1,126 $3.93 Hypothetical 5% Return 1,000 1,046 3.79 - -------------------------------------------------------------------------------- * 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. 11 - -------------------------------------------------------------------------------- ANNUALIZED EXPENSE RATIOS: YOUR FUND COMPARED WITH ITS PEER GROUP AVERAGE FUND LARGE-CAP EXPENSE GROWTH FUND RATIO EXPENSE RATIO - -------------------------------------------------------------------------------- Growth Equity Fund 0.73% 1.61%* - -------------------------------------------------------------------------------- * 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 3/31/2004 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* GROWTH EQUITY FUND SHARES (000) - --------------------------------------------------------------------- COMMON STOCKS (99.8%) - --------------------------------------------------------------------- AUTO & Transportation (1.6%) United Parcel Service, Inc. 86,680 6,054 Norfolk Southern Corp. 213,150 4,709 Navistar International Corp. 70,230 3,220 ------ 13,983 ------ CONSUMER DISCRETIONARY (17.7%) Wal-Mart Stores, Inc. 340,770 20,341 Yahoo! Inc. 205,780 9,999 NIKE, Inc. Class B 115,940 9,028 * eBay Inc. 125,680 8,713 Lowe's Cos., Inc. 153,400 8,610 Starbucks Corp. 224,480 8,474 Target Corp. 182,850 8,236 Time Warner, Inc. 456,170 7,691 International Game Technology 169,970 7,642 Univision Communications Inc. 226,000 7,460 * Coach, Inc. 178,140 7,302 * Apollo Group, Inc. Class A 79,830 6,874 Avon Products, Inc. 88,470 6,712 CDW Corp. 81,427 5,505 Starwood Hotels & Resorts Worldwide, Inc. 129,120 5,229 Monster Worldwide Inc. 179,530 4,704 Marvel Enterprises Inc. 230,205 4,418 Tiffany & Co. 113,510 4,333 VeriSign, Inc. 244,930 4,063 * Chico's FAS, Inc. 84,580 3,925 * The Cheesecake Factory 72,300 3,335 -------- 152,594 -------- CONSUMER STAPLES (7.8%) PepsiCo, Inc. 379,200 20,420 The Procter & Gamble Co. 148,390 15,563 Walgreen Co. 453,180 14,932 Sysco Corp. 262,410 10,247 Whole Foods Market, Inc. 80,940 6,067 ------- 67,229 ------- Financial Services (11.0%) American International Group, Inc. 246,980 17,622 American Express Co. 263,740 13,675 The Goldman Sachs Group, Inc. 125,050 13,049 Charles Schwab Corp. 1,021,990 11,865 Citigroup, Inc. 183,780 9,501 T. Rowe Price Group Inc. 147,140 7,921 * Ameritrade Holding Corp. 444,240 6,841 * CheckFree Corp. 191,730 5,648 Knight Trading Group, Inc. 361,190 4,573 Allstate Corp. 99,430 4,520 ------ 95,215 ------ 13 - --------------------------------------------------------------------- MARKET VALUE* GROWTH EQUITY FUND SHARES (000) - --------------------------------------------------------------------- COMMON STOCKS (99.8%) - --------------------------------------------------------------------- HEALTH CARE (24.3%) BIOTECH RESEARCH & Production (6.1%) * Amgen, Inc. 369,850 21,514 * Genentech, Inc. 127,870 13,531 * Biogen Idec Inc. 158,280 8,800 * Invitrogen Corp. 68,020 4,876 Neurocrine Biosciences, Inc. 61,850 3,655 DRUGS & PHARMACEUTICALS (8.7%) Pfizer Inc. 1,471,759 51,585 * Forest Laboratories, Inc. 120,570 8,635 Teva Pharmaceutical Industries Ltd. Sponsored ADR 121,090 7,678 Watson Pharmaceuticals, Inc. 171,300 7,330 HEALTH & Personal Care (2.1%) * Anthem, Inc. 133,080 12,062 Omnicare, Inc. 147,850 6,554 HEALTH CARE MANAGEMENT SERVICES (1.9%) UnitedHealth Group Inc. 145,730 9,391 * Caremark Rx, Inc. 205,130 6,821 MEDICAL & Dental Instruments & Supplies (5.5%) Guidant Corp. 196,030 12,422 * Boston Scientific Corp. 243,720 10,329 St. Jude Medical, Inc. 141,830 10,226 Zimmer Holdings, Inc. 121,740 8,982 Alcon, Inc. 88,690 5,614 ------- 210,005 ------- MATERIALS & Processing (2.0%) Archer-Daniels-Midland Co. 399,160 6,734 Alcoa Inc. 165,750 5,750 Phelps Dodge Corp. 58,660 4,790 ------ 17,274 ------ OTHER ENERGY (1.3%) Williams Cos., Inc. 712,700 6,821 Smith International, Inc. 78,290 4,189 ------ 11,010 ------ PRODUCER DURABLES (3.8%) * Applied Materials, Inc. 610,870 13,060 Caterpillar, Inc. 97,550 7,713 Deere & Co. 91,010 6,308 Danaher Corp. 58,050 5,420 ------- 32,501 ------- TECHNOLOGY (24.3%) COMMUNICATIONS TECHNOLOGY (8.3%) * Cisco Systems, Inc. 1,474,760 34,686 QUALCOMM Inc. 198,260 13,169 Juniper Networks, Inc. 400,430 10,415 Motorola, Inc. 509,670 8,970 * Comverse Technology, Inc. 228,220 4,140 COMPUTER SERVICES SOFTWARE & Systems (2.7%) SAP AG ADR 380,540 14,959 Symantec Corp. 102,430 4,743 SINA.com 101,550 3,842 COMPUTER TECHNOLOGY (5.4%) * Dell Inc. 692,520 23,283 * EMC Corp. 1,172,190 15,954 NVIDIA Corp. 289,090 7,658 ELECTRONICS (2.4%) Sony Corp. ADR 172,390 7,208 Sanmina-SCI Corp. 633,010 6,970 Vishay Intertechnology, Inc. 303,440 6,475 ELECTRONICS--SEMICONDUCTORS/COMPONENTS (5.5%) Analog Devices, Inc. 265,080 12,726 * Broadcom Corp. 212,650 8,330 National Semiconductor Corp. 175,580 7,801 Xilinx, Inc. 195,190 7,417 PMC Sierra Inc. 351,350 5,962 Silicon Laboratories Inc. 105,990 5,605 ------- 210,313 ------- UTILITIES (1.2%) Vodafone Group PLC ADR 249,760 5,969 * Cablevision Systems NY Group Class A 194,580 4,452 ------- 10,421 ------- OTHER (4.8%) General Electric Co. 1,105,890 33,752 Tyco International Ltd. 286,200 8,200 ------ 41,952 ------ - --------------------------------------------------------------------- TOTAL COMMON STOCKS (Cost $787,089) 862,497 - --------------------------------------------------------------------- TEMPORARY CASH INVESTMENT (0.1%) - --------------------------------------------------------------------- REPURCHASE AGREEMENT Collateralized by U.S. Government Obligations in a Pooled Cash Account 1.04%, 4/1/2004 (Cost $820) $820 820 - --------------------------------------------------------------------- TOTAL INVESTMENTS (99.9%) (Cost $787,909) 863,317 - --------------------------------------------------------------------- 14 - --------------------------------------------------------------------- MARKET VALUE* (000) - --------------------------------------------------------------------- OTHER ASSETS AND LIABILITIES (0.1%) - --------------------------------------------------------------------- Receivables for Investment Securities Sold $ 30,196 Other Assets--Note C 2,210 Payables for Investment Securities Purchased (28,517) Other Liabilities (3,032) ------ 857 ------ - --------------------------------------------------------------------- NET ASSETS (100%) - --------------------------------------------------------------------- Applicable to 92,394,538 outstanding $.001 par value shares of beneficial interest (unlimited authorization) $864,174 ===================================================================== NET ASSET VALUE PER SHARE $9.35 ===================================================================== * See Note A in Notes to Financial Statements. * Non-income-producing security. ADR--American Depositary Receipt. - --------------------------------------------------------------------- MARKET AMOUNT VALUE* (000) (000) - --------------------------------------------------------------------- AT MARCH 31, 2004, NET ASSETS CONSISTED OF: - --------------------------------------------------------------------- Paid-in Capital $1,413,064 $15.29 Overdistributed Net Investment Income (474) (.01) Accumulated Net Realized Losses (623,824) (6.75) Unrealized Appreciation 75,408 .82 - --------------------------------------------------------------------- NET ASSETS $ 864,174 $9.35 ===================================================================== See Note E in Notes to Financial Statements for the tax-basis components of net assets. 15 STATEMENT OF OPERATIONS This Statement shows the types of income earned by the fund during the reporting period, and details the operating expenses charged to the fund. 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. - -------------------------------------------------------------------------------- GROWTH EQUITY FUND SIX MONTHS ENDED MARCH 31, 2004 (000) - -------------------------------------------------------------------------------- INVESTMENT INCOME INCOME Dividends $ 3,199 Interest 27 Security Lending 12 - -------------------------------------------------------------------------------- Total Income 3,238 - -------------------------------------------------------------------------------- EXPENSES Investment Advisory Fees--Note B Basic Fee 1,600 Performance Adjustment (241) The Vanguard Group--Note C Management and Administrative 1,559 Marketing and Distribution 67 Custodian Fees 8 Shareholders' Reports 20 - -------------------------------------------------------------------------------- Total Expenses 3,013 Expenses Paid Indirectly--Note D (471) - -------------------------------------------------------------------------------- Net Expenses 2,542 - -------------------------------------------------------------------------------- NET INVESTMENT INCOME 696 - -------------------------------------------------------------------------------- REALIZED NET GAIN (LOSS) ON INVESTMENT SECURITIES SOLD 53,653 - -------------------------------------------------------------------------------- CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) OF INVESTMENT SECURITIES 38,911 - -------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $93,260 ================================================================================ 16 STATEMENT OF CHANGES IN NET ASSETS This Statement shows how the fund's total net assets changed during the two most recent reporting periods. The Operations section summarizes information detailed in the Statement of Operations. The amounts shown as Distributions to shareholders from the fund's net income and capital gains may not match the amounts shown in the Operations section, because distributions are determined on a tax basis and may be made in a period different from the one in which the income was earned or the gains were realized on the financial statements. The Capital Share Transactions section shows the amount shareholders invested in the fund, either by purchasing shares or by reinvesting distributions, as well as the amounts redeemed. The corresponding numbers of Shares Issued and Redeemed are shown at the end of the Statement. - -------------------------------------------------------------------------------- Growth Equity Fund --------------------------- Six Months Year Ended Ended Mar. 31, 2004 Sept. 30, 2003 (000) (000) - -------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net Investment Income $ 696 $ 1,498 Realized Net Gain (Loss) 53,653 48,104 Change in Unrealized Appreciation (Depreciation) 38,911 113,164 - -------------------------------------------------------------------------------- Net Increase (Decrease) in Net Assets Resulting from Operations 93,260 162,766 - -------------------------------------------------------------------------------- DISTRIBUTIONS Net Investment Income (1,780) (1,480) Realized Capital Gain -- -- - -------------------------------------------------------------------------------- Total Distributions (1,780) (1,480) - -------------------------------------------------------------------------------- CAPITAL SHARE TRANSACTIONS1 Issued 177,330 267,990 Issued in Lieu of Cash Distributions 1,727 1,435 Redeemed (130,757) (206,428) - -------------------------------------------------------------------------------- Net Increase (Decrease) from Capital Share Transactions 48,300 62,997 - -------------------------------------------------------------------------------- Total Increase (Decrease) 139,780 224,283 - -------------------------------------------------------------------------------- NET ASSETS Beginning of Period 724,394 500,111 - -------------------------------------------------------------------------------- End of Period $864,174 $724,394 ================================================================================ 1Shares Issued (Redeemed) Issued 19,336 36,175 Issued in Lieu of Cash Distributions 190 212 Redeemed (14,234) (28,304) - -------------------------------------------------------------------------------- Net Increase (Decrease) in Shares Outstanding 5,292 8,083 ================================================================================ 17 FINANCIAL HIGHLIGHTS This table summarizes the fund's investment results and distributions to shareholders on a per-share basis. 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. GROWTH EQUITY FUND - -------------------------------------------------------------------------------------------------------------- SIX MONTHS ENDED YEAR ENDED SEPTEMBER 30, FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD MARCH 31, 2004 2003 2002 2001 2000* 1999 - -------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, BEGINNING OF PERIOD $8.32 $6.33 $8.23 $18.68 $15.88 $12.87 - -------------------------------------------------------------------------------------------------------------- INVESTMENT OPERATIONS Net Investment Income (Loss) -- .018 .01 (.01) (.01) (.05) Net Realized and Unrealized Gain (Loss) on Investments 1.05 1.990 (1.91) (10.44) 7.33 4.66 - -------------------------------------------------------------------------------------------------------------- Total from Investment Operations 1.05 2.008 (1.90) (10.45) 7.32 4.61 - -------------------------------------------------------------------------------------------------------------- DISTRIBUTIONS Dividends from Net Investment Income (.02) (.018) -- -- -- -- Distributions from Realized Capital Gains -- -- -- -- (4.52) (1.60) - -------------------------------------------------------------------------------------------------------------- Total Distributions (.02) (.018) -- -- (4.52) (1.60) - -------------------------------------------------------------------------------------------------------------- NET ASSET VALUE, END OF PERIOD $9.35 $8.32 $6.33 $8.23 $18.68 $15.88 ============================================================================================================== TOTAL RETURN 12.63% 31.79% -23.09% -55.94% 51.07% 38.15% ============================================================================================================== RATIOS/SUPPLEMENTAL DATA Net Assets, End of Period (Millions) $864 $724 $500 $625 $918 $143 Ratio of Total Expenses to Average Net Assets 0.73%**+ 0.54+ 0.58%+ 0.77%+ 0.74% 0.96% Ratio of Net Expenses to Average Net Assets-Note D 0.62%**+ 0.42%+ 0.43%+ 0.59%+ 0.72% 0.92% Ratio of Net Investment Income (Loss) to Average Net Assets 0.17%** 0.25% 0.12% (0.10%) (0.19) (0.42%) Portfolio Turnover Rate 148% 220% 273% 357% 303% 328% ============================================================================================================== * Turner Growth Equity Fund reorganized into Vanguard Growth Equity Fund effective June 12, 2000. ** Annualized. + Includes performance-based investment advisory fee increases (decreases) of (0.06%) for 2004, (0.29%) for 2003, (0.20%) for 2002, and (0.05%) for 2001. SEE ACCOMPANYING NOTES, WHICH ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS. 18 NOTES TO FINANCIAL STATEMENTS Vanguard Growth Equity Fund is registered under the Investment Company Act of 1940 as an open-end investment company, or mutual fund. 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. REPURCHASE AGREEMENTS: The fund, along with other members of The Vanguard Group, transfers uninvested cash balances to a pooled cash account, which is invested in repurchase agreements secured by U.S. government securities. Securities pledged as collateral for repurchase agreements are held by a custodian bank until the agreements mature. Each agreement requires that the market value of the collateral be sufficient to cover payments of interest and principal; however, in the event of default or bankruptcy by the other party to the agreement, retention of the collateral may be subject to legal proceedings. 3. 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. 4. DISTRIBUTIONS: Distributions to shareholders are recorded on the ex-dividend date. 5. 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. B. Turner Investment Partners provides investment advisory services to the fund for a fee calculated at an annual percentage rate of average net assets. The basic fee is subject to quarterly adjustments based on the fund's performance for the preceding three years relative to the Russell 1000 Growth Index. For the six months ended March 31, 2004, the investment advisory fee represented an effective annual basic rate of 0.39% of the fund's average net assets before a decrease of $241,000 (0.06%) 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 March 31, 2004, the fund had contributed capital of $130,000 to Vanguard (included in Other Assets), representing 0.02% of the fund's net assets and 0.13% of Vanguard's capitalization. The fund's trustees and officers are also directors and officers of Vanguard. 19 D. The fund has asked its investment advisor 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 March 31, 2004, these arrangements reduced the fund's expenses by $471,000 (an annual rate of 0.11% 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 September 30, 2003, the fund had available realized losses of $677,325,000 to offset future net capital gains of $39,077,000 through September 30, 2009, $495,055,000 through September 30, 2010, $136,482,000 through September 30, 2011, and $6,711,000 through September 30, 2012. The fund will use these capital losses to offset net taxable capital gains, if any, realized during the year ending September 30, 2004; should the fund realize net capital losses for the year, the losses will be added to the loss carryforward balances above. At March 31, 2004, net unrealized appreciation of investment securities for tax purposes was $75,408,000, consisting of unrealized gains of $91,527,000 on securities that had risen in value since their purchase and $16,119,000 in unrealized losses on securities that had fallen in value since their purchase. F. During the six months ended March 31, 2004, the fund purchased $652,152,000 of investment securities and sold $606,647,000 of investment securities other than temporary cash investments. 20 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! capitalize on your ira 21 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 VANGUARD(R)FAMILY OF FUNDS STOCK FUNDS 500 Index Fund Calvert Social Index Fund Capital Opportunity Fund Capital Value Fund Convertible Securities Fund Developed Markets Index Fund Dividend Growth Fund Emerging Markets Stock Index Fund Energy Fund Equity Income Fund European Stock Index Fund Explorer(TM) Fund Extended Market Index Fund Global Equity Fund Growth and Income Fund Growth Equity Fund Growth Index Fund Health Care Fund Institutional Developed Markets Index Fund Institutional Index Fund Institutional Total Stock Market Index Fund International Explorer(TM) Fund International Growth Fund International Value Fund Mid-Cap Growth Fund Mid-Cap Index Fund Morgan(TM) Growth Fund Pacific Stock Index Fund Precious Metals Fund PRIMECAP Fund REIT Index Fund Selected Value Fund Small-Cap Growth Index Fund Small-Cap Index Fund Small-Cap Value Index Fund Strategic Equity Fund Tax-Managed Capital Appreciation Fund Tax-Managed Growth and Income Fund Tax-Managed International Fund Tax-Managed Small-Cap Fund Total International Stock Index Fund Total Stock Market Index Fund U.S. Growth Fund U.S. Value Fund Value Index Fund Windsor(TM) Fund Windsor(TM) II Fund BALANCED FUNDS Asset Allocation Fund Balanced Index Fund LifeStrategy(R) Conservative Growth Fund LifeStrategy(R) Growth Fund LifeStrategy(R) Income Fund LifeStrategy(R) Moderate Growth Fund STAR(R) Fund Target Retirement Funds: Retirement Income Retirement 2005 Retirement 2015 Retirement 2025 Retirement 2035 Retirement 2045 Tax-Managed Balanced Fund Wellesley(R) Income Fund Wellington(TM) Fund BOND FUNDS GNMA Fund High-Yield Corporate Fund High-Yield Tax-Exempt Fund Inflation-Protected Securities Fund Institutional Total Bond Market Index Fund Insured Long-Term Tax-Exempt Fund Intermediate-Term Bond Index Fund Intermediate-Term Corporate Fund Intermediate-Term Tax-Exempt Fund Intermediate-Term Treasury Fund Limited-Term Tax-Exempt Fund Long-Term Bond Index Fund Long-Term Corporate Fund Long-Term Tax-Exempt Fund Long-Term Treasury Fund Short-Term Bond Index Fund Short-Term Corporate Fund Short-Term Federal Fund Short-Term Tax-Exempt Fund Short-Term Treasury Fund State Tax-Exempt Bond Funds (California, Florida, Massachusetts, New Jersey, New York, Ohio, Pennsylvania) Total Bond Market Index Fund MONEY MARKET FUNDS Admiral(TM) Treasury Money Market Fund Federal Money Market Fund Prime Money Market Fund State Tax-Exempt Money Market Funds (California, New Jersey, New York, Ohio, Pennsylvania) Tax-Exempt Money Market Fund Treasury Money Market Fund VARIABLE ANNUITY Balanced Portfolio Capital Growth Portfolio Diversified Value Portfolio Equity Income Portfolio Equity Index Portfolio Growth Portfolio High Yield Bond Portfolio International Portfolio Mid-Cap Index Portfolio Money Market Portfolio REIT Index Portfolio Short-Term Corporate Portfolio Small Company Growth Portfolio Total Bond Market Index Portfolio Total Stock Market Index Portfolio For more information, visit www.vanguard.com, or call 800-662-7447 for Vanguard funds and 800-522-5555 for Vanguard annuity products, to obtain fund and annuity contract prospectuses. Investment objectives, risks, charges, expenses, and other important information are contained in the prospectuses; consider and read them carefully before investing. 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. - --------------------------------------------------------------------------------------------------------------------- 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 LOGO] Post Office Box 2600 Valley Forge, PA 19482-2600 Vanguard, The Vanguard Group, Vanguard.com, Vanguard IRA, Admiral, Explorer, Morgan, LifeStrategy, PlainTalk, STAR, Wellesley, Wellington, Windsor, and the ship logo are trademarks of The Vanguard Group, Inc. S&P 500(R) and 500 are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by The Vanguard Group, Inc. Vanguard mutual funds are not sponsored, endorsed, sold, or promoted by Standard & Poor's, and Standard & Poor's makes no representation regarding the advisability of investing in the funds. Calvert Social Index is a trademark of Calvert Group, Ltd., and has been licensed for use by The Vanguard Group, Inc. Vanguard Calvert Social Index Fund is not sponsored, endorsed, sold, or promoted by Calvert Group, Ltd., and Calvert Group, Ltd., makes no representation regarding the advisability of investing in the fund. All other marks are the exclusive property of their respective owners. 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. Q5442 052004 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 FENWAY FUNDS BY: (signature) ---------------------------------------- (HEIDI STAM) JOHN J. BRENNAN* CHIEF EXECUTIVE OFFICER Date: May 10, 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 FENWAY FUNDS BY: (signature) ---------------------------------------- (HEIDI STAM) JOHN J. BRENNAN* CHIEF EXECUTIVE OFFICER Date: May 10, 2004 VANGUARD FENWAY FUNDS BY: (signature) ---------------------------------------- (HEIDI STAM) THOMAS J. HIGGINS* TREASURER Date: May 10, 2004 *By Power of Attorney. See File Number 2-57689, filed on December 26, 2002. Incorporated by Reference.